UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 6-K

 

 

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May, 2021 Commission File Number: 000-56261

 

Glass House Brands Inc.

 

 

(Translation of registrant’s name into English)

 

3645 Long Beach Blvd.

Long Beach, California 90807

 

 

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F ¨ Form 40-F x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

 

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Glass House Brands Inc.
   
   
Date: October 13, 2021 /s/ Kyle Kazan
  By: Kyle Kazan
  Title: Chief Executive Officer

 

2

 

 

EXHIBIT INDEX

 

Exhibit Number   Description
     
99.1   Notice of the Meeting and Record Date dated May 31, 2021
     
99.2   News Release dated May 21, 2021
     
99.3   News Release dated May 17, 2021
     
99.4   Management’s Discussion and Analysis of the Financial Condition and Results of Operations for the Three Months Ended March 31, 2021 and 2020
     
99.5   Consolidated Interim Financial Statements for the Three Months Ended March 31, 2021 and 2020
     
99.6   Notice of Optional Redemption dated May 14, 2021
     
99.7   News Release dated May 13, 2021
     
99.8   Form of Proxy – Annual and Special Meeting of Holders of Class A Restricted Voting Shares to be held on June 2, 2021
     
99.9   Form of Proxy – Annual and Special Meeting of Holders of Class B Shares to be held on June 2, 2021
     
99.10   Management Information Circular dated May 4, 2021
     
99.11   Notice of Annual and Special Meeting of Shareholders to be held on June 2, 2021
     
99.12   News Release dated May 7, 2021
     
99.13   Final Prospectus Receipt issued on May 7, 2021
     
99.14   Provisional Adult-Use Retailer License - Farmacy SB, Inc.
     
99.15   Provisional Adult-Use and Medicinal Retailer License - Bud and Bloom
     
99.16   Provisional Annual Manufacturing License - CA Manufacturing Solutions LLC
     
99.17   Provisional Adult-Use and Medicinal Distributor License - CA Manufacturing Solutions LLC
     
99.18   Cannabis Cultivation License - G&K Produce LLC (1)
     
99.19   Cannabis Cultivation License - G&K Produce LLC (2)
     
99.20   Cannabis Cultivation License - G&K Produce LLC (3)
     
99.21   Cannabis Cultivation License - G&K Produce LLC (4)
     
99.22   Cannabis Cultivation License - G&K Produce LLC (5)
     
99.23   Cannabis Cultivation License - G&K Produce LLC (6)
     
99.24   Cannabis Cultivation License - G&K Produce LLC (7)

 

3

 

 

99.25   Cannabis Cultivation License - G&K Produce LLC (8)
     
99.26   Cannabis Cultivation License - G&K Produce LLC (9)
     
99.27   Cannabis Cultivation License - G&K Produce LLC (10)
     
99.28   Cannabis Cultivation License - G&K Produce LLC (11)
     
99.29   Cannabis Cultivation License - G&K Produce LLC (12)
     
99.30   Cannabis Cultivation License - G&K Produce LLC (13)
     
99.31   Cannabis Cultivation License - G&K Produce LLC (14)
     
99.32   Cannabis Cultivation License - G&K Produce LLC (15)
     
99.33   Cannabis Cultivation License - G&K Produce LLC (16)
     
99.34   Cannabis Cultivation License - K&G Flowers LLC (1)
     
99.35   Cannabis Cultivation License - K&G Flowers LLC (2)
     
99.36   Cannabis Cultivation License - K&G Flowers LLC (3)
     
99.37   Cannabis Cultivation License - K&G Flowers LLC (4)
     
99.38   Cannabis Cultivation License - K&G Flowers LLC (5)
     
99.39   Cannabis Cultivation License - K&G Flowers LLC (6)
     
99.40   Cannabis Cultivation License - K&G Flowers LLC (7)
     
99.41   Cannabis Cultivation License - K&G Flowers LLC (8)
     
99.42   Cannabis Cultivation License - K&G Flowers LLC (9)
     
99.43   Cannabis Cultivation License - K&G Flowers LLC (10)
     
99.44   Cannabis Cultivation License - K&G Flowers LLC (11)
     
99.45   Cannabis Cultivation License - K&G Flowers LLC (12)
     
99.46   Cannabis Cultivation License - K&G Flowers LLC (13)
     
99.47   Cannabis Cultivation License - K&G Flowers LLC (14)
     
99.48   Provisional Adult-Use and Medicinal Retailer License - iCANN LLC
     
99.49   Provisional Medicinal Distributor Transport Only License - Mission Health Associates, Inc.
     
99.50   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (1)
     
99.51   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (2)
     
99.52   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (3)

 

4

 

 

99.53   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (4)
     
99.54   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (5)
     
99.55   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (6)
     
99.56   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (7)
     
99.57   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (8)
     
99.58   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (9)
     
99.59   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (10)
     
99.60   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (11)
     
99.61   Provisional Cannabis Cultivation License - Mission Health Associates, Inc. (12)
     
99.62   Provisional Adult-Use and Medicinal Distributor License - The Pottery Inc.
     
99.63   Provisional Cannabis Cultivation License - The Pottery Inc.
     
99.64   Provisional Adult-Use and Medicinal Retailer License - The Pottery Inc.
     
99.65   Auditor’s Consent Letter dated May 6, 2021 - Macias Gini & O’Connell LLP (1)
     
99.66   Auditors’ Consent Letter dated May 6, 2021 - Macias Gini & O’Connell LLP (2)
     
99.67   Auditor’s Consent Letter dated May 6, 2021 - Macias Gini & O’Connell LLP (3)
     
99.68   Auditor’s Consent Letter dated May 6, 2021 - Macias Gini & O’Connell LLP (4)
     
99.69   Auditor’s Consent Letter dated May 6, 2021 - MNP LLP
     
99.70   Final Long Form Prospectus dated May 6, 2021
     
99.71   Issuer’s Submission to Jurisdiction and Appointment of Agent for Service of Process dated May 6, 2021
     
99.72   Non-issuer’s Submission to Jurisdiction and Appointment of Agent for Service of Process dated May 6, 2021
     
99.73   Non-issuer’s Submission to Jurisdiction and Appointment of Agent for Service of Process dated May 6, 2021
     
99.74   Non-issuer’s Submission to Jurisdiction and Appointment of Agent for Service of Process dated May 6, 2021
     
99.75   Non-issuer’s Submission to Jurisdiction and Appointment of Agent for Service of Process dated May 6, 2021
     
99.76   Non-issuer’s Submission to Jurisdiction and Appointment of Agent for Service of Process dated May 6, 2021
     
99.77   Lease Agreement dated June 9, 2017 - iCANN, LLC
     
99.78   Lease Agreement dated October 1, 2018 - Lompoc TIC, LLC
     
99.79   Investor Rights Agreement dated April 8, 2021
     
99.80   First Amendment to Camarillo Acquisition Agreement dated March 21, 2021

 

5

 

 

99.81   Second Amendment to Option Agreement dated February 20, 2021
     
99.82   Third Amendment to Option Agreement dated March 21, 2021
     
99.83   Fourth Amendment to Option Agreement dated March 24, 2021
     
99.84   Letter Agreement dated February 13, 2021 - California Option Agreement
     
99.85   Glass Investment Projects, Inc. Exercise Notice dated February 20, 2021
     
99.86   Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions dated March 29, 2021
     
99.87   Fifth Amendment to Option Agreement dated March 26, 2021
     
99.88   Letter of Intent dated January 25, 2021 - Camarillo Agricultural Real Property Acquisition
     
99.89   Reciprocal Nondisclosure and Restricted Use Agreement dated February 18, 2021
     
99.90   Undertaking to File Documents and Material Contracts dated May 6, 2021
     
99.91   Report of Voting Results dated May 5, 2021
     

6

Exhibit 99.1

  

May 31, 2021  

Filed via SEDAR

 

To All Applicable Exchanges and Securities Administrators

 

Subject: Mercer Park Brand Acquisition Corp. (the “Issuer”)
  Notice of Meeting and Record Date

 

Dear Sir/Madam:

 

We are pleased to confirm the following information with respect to the Issuer’s upcoming meeting of securityholders:

  

Meeting Type: Annual and Special Meeting - Revised
Meeting Date: June 2, 2021
Record Date for Notice of Meeting: May 3, 2021
Record Date for Voting (if applicable): May 3, 2021
Beneficial Ownership Determination Date: May 3, 2021
Class of Securities Entitled to Vote: Class A Restricted Voting Shares
  Class B Shares
ISIN: CA58810P1027
  n/a
Issuer sending proxy materials directly to NOBOs: No
Issuer paying for delivery to OBOs: Yes
Notice and Access for Beneficial Holders: No
Notice and Access for Registered Holders: No

 

In accordance with applicable securities regulations we are filing this information with you in our capacity as agent of the Issuer.

 

Yours truly,

 

ODYSSEY TRUST COMPANY

AS AGENT FOR Mercer Park Brand Acquisition Corp.

 

 

 

Exhibit 99.2

 

Mercer Park Brand Acquisition Corp. (“BRND” or the “Company”) Provides Update on

Anticipated Shareholdings of the Company Following Closing of Qualifying Transaction

 

TORONTO, May 21, 2021 -- Mercer Park Brand Acquisition Corp. (NEO: BRND.A.U; OTCQX: MRCQF), special purpose acquisition corporation which has entered into a definitive agreement to merge (the “GH Group Transaction”) with GH Group, Inc. (“GH Group”), California’s leading fully-integrated cannabis business, provided an update in respect of certain anticipated shareholdings following the closing of the GH Group Transaction.

 

Adjustments to Proposed Holdings of Multiple Voting Shares

 

The proposed holdings of multiple voting shares of the Company (“Multiple Voting Shares”) have been modified from that described in BRND’s final prospectus dated May 6, 2021 (the “Prospectus”) and management information circular (the “Circular”), which were filed on SEDAR on May 7, 2021. While the total number of Multiple Voting Shares will remain unchanged, they are proposed to be re-allocated. The result will be to increase the proposed holdings of Kyle D. Kazan, the Chief Executive Officer of GH Group, from 1,704,586 Multiple Voting Shares to 2,025,244 Multiple Voting Shares. BRND has agreed thereto.

 

The Multiple Voting Shares will have 50 votes per share. Following the GH Group Transaction until the expiry of the three-year sunset period, assuming that there are no additional redemptions of Class A Restricted Voting shares of BRND prior to closing, the GH Group founders (i.e., the holders of Multiple Voting Shares) are expected to hold in the aggregate approximately 82% of the voting power of the outstanding voting shares of the Company (and approximately 74% on a diluted basis (i.e., including the applicable Equity Shares issuable on exchange of certain exchangeable shares of a subsidiary of the Company (as further described in the Prospectus), but not including the exercise of any warrants of the Company)), and Kyle D. Kazan will hold approximately 35% of the voting power (and approximately 32.3% on a diluted basis).

 

Update Regarding Founders’ Shares

 

In connection with the negotiation of the previously announced transactions between GH Group and TPCO Holding Corp. (NEO: GRAM.U; OTCQX: GRAMF) (“The Parent Company”), BRND announced today that Mercer Park Brand, L.P. (“Mercer”), BRND’s sponsor, will, contemporaneously with the closing of the GH Group Transaction and the TPCO US$50 million investment, and upon the entry of the Company into the long-term supply agreement with TPCO, transfer 405,405 subordinate, restricted or limited voting shares of the Company (“Equity Shares”) to TPCO. Such Equity Shares will be transferred from the aggregate amount of Equity Shares to be received by Mercer in exchange for its founders’ shares of the Company.

 

About Mercer Park Brand Acquisition Corp.

 

BRND is a special purpose acquisition corporation launched in May 2019 to create the leading branded cannabis company in the U.S. For more information about BRND, please visit the BRND website at www.mercerparkbrand.com.

 

 

 

 

About GH Group, Inc.

 

GH Group is a rapidly growing, vertically integrated, California-focused organization that strives every day to realize its vision of excellence: compelling cannabis brands, produced sustainably, for the benefit of all. Led by a team of expert operators, proven businesspeople, and passionate plant lovers, it is dedicated to delivering rich cannabis experiences with respect for people, for the environment, and for the community, and an abiding commitment to justice, social equity, and sustainability.

 

Risk Factors

 

This investment opportunity involves a high degree of risk. You should carefully consider the risks and uncertainties described under “Risk Factors” in the Prospectus. If any of the risks and uncertainties described thereunder actually occur, alone or together with additional risks and uncertainties not currently known to BRND or GH Group, or that they currently do not deem material, BRND’s and GH Group’s business, financial condition, results of operations and prospects may be materially adversely affected. There can be no assurance that the agreements with The Parent Company will be completed, that the Glass House Group Transaction or the Private Placement will be completed, or, if it is, that the resulting company following closing of the GH Group Transaction will be successful.

 

Additional Information About the Proposed Business Combination and Where to Find It

 

BRND and GH Group urge investors, shareholders and other interested persons to read the documents (including the Prospectus and Circular) filed with Canadian securities regulatory authorities in connection with the Glass House Group Transaction, as these materials contain important information about BRND, GH Group, the resulting company and the Glass House Group Transaction.

 

Company Contact:

 

Megan Kulick

T: (646) 977-7914

Email: IR BRND@mercerparklp.com

 

Investor Relations Contact:

 

Cody Cree or Jackie Keshner

Gateway Investor Relations

T: (949) 574-3860

Email: BRND@GatewayIR.com

 

 

 

Exhibit 99.3

 

Mercer Park Brand Acquisition Corp. Announces $50 Million Equity Investment from The Parent Company

 

Additional Strategic Capital Commitment Complements Total Private Placement of $135 mm and Includes Additional Long-Term Supply and Retail Agreements

 

TORONTO, May 17, 2021 -- Mercer Park Brand Acquisition Corp. (NEO: BRND.A.U; OTCQX: MRCQF; “BRND” or the “Company”), a Special Purpose Acquisition Company (‘SPAC’) which has entered into a definitive agreement to merge (the “Glass House Group Transaction”) with GH Group, Inc. (“GH Group”), California’s leading fully-integrated cannabis business, announced today that it has upsized its previously announced equity private placement to include a US$50 million proposed investment commitment from TPCO Holdings Corp (“The Parent Company”). Including The Parent Company investment, Mercer Park has raised $135 million of private placement capital in connection with the transaction. The commitment is subject to customary approvals and conditions and is expected to close contemporaneously with the closing of the Glass House Group Transaction.

 

In addition, GH Group and The Parent Company (NEO: GRAM.U; OTCQX: GRAMF) have entered into a letter of intent regarding both a long-term supply agreement, whereby The Parent Company will source a variety of premium flower and trim from GH Group, and a retail distribution agreement, which would see The Parent Company’s suite of branded products sold across GH Group retail locations (“the Agreement”). The Agreement, together with the investment by The Parent Company, will accelerate the expansion of GH Group’s Southern California greenhouse project, and creates a strategic partnership between two of the best-funded players in the California cannabis landscape. The agreement is contingent on the investment commitment and is subject to final negotiation of terms and conditions and internal approval.

 

“Glass House is known for its ability to grow high-quality cannabis at scale, and this proposed partnership reflects both its market leadership in California and its ability supply the most discerning of customers,” said Jonathan Sandelman, Chairman of BRND. “This transaction demonstrates the power of the Glass House business model and brand. We are extremely pleased to work with The Parent Company and their family of popular brands, including Monogram, Caliva, Deli and many others. We and look forward to expanding the availability of our cannabis products for customers across California.”

 

Steve Allan, CEO of The Parent Company, added, “California is the largest and most discerning cannabis market in the world. We are thrilled to have sourced an aligned 10-year supply partnership with Glass House, as well as to have our branded products in Glass House retail stores for years to come. With this announcement, The Parent Company and Glass House have created an alliance at a scale unlike any other in California cannabis.”

 

Kyle Kazan, CEO of Glass House Group, added, “We’ve known the senior team at The Parent Company for quite some time and are excited to deepen our relationship with them. We see it as a solid win-win and are excited to shorten the time in growing our increased supply chain at our new 5,500,000 square foot greenhouse facility.”

 

 

 

 

About Mercer Park Brand Acquisition Corp.

 

BRND is a special purpose acquisition corporation launched in May 2019 to create the leading branded cannabis company in the U.S. For more information about BRND, please visit the BRND website at www.mercerparkbrand.com.

 

About GH Group, Inc.

 

GH Group is a rapidly growing, vertically integrated, California-focused organization that strives every day to realize its vision of excellence: compelling cannabis brands, produced sustainably, for the benefit of all. Led by a team of expert operators, proven businesspeople, and passionate plant lovers, it is dedicated to delivering rich cannabis experiences with respect for people, for the environment, and for the community, and an abiding commitment to justice, social equity, and sustainability.

 

Risk Factors

 

This investment opportunity involves a high degree of risk. You should carefully consider the risks and uncertainties described under “Risk Factors” in the Prospectus. If any of the risks and uncertainties described thereunder actually occur, alone or together with additional risks and uncertainties not currently known to BRND or GH Group, or that they currently do not deem material, BRND’s and GH Group’s business, financial condition, results of operations and prospects may be materially adversely affected. There can be no assurance that the agreements with The Parent Company will be completed, or that the Glass House Group Transaction will be completed, or, if it is, that the resulting company will be successful.

 

Additional Information About the Proposed Business Combination and Where to Find It

 

BRND and GH Group urge investors, shareholders and other interested persons to read the documents (including the Prospectus and Circular) filed with Canadian securities regulatory authorities in connection with the Glass House Group Transaction, as these materials contain important information about BRND, GH Group, the resulting company and the Glass House Group Transaction.

 

Company Contact:

 

Megan Kulick

T: (646) 977-7914

Email: IR BRND@mercerparklp.com

 

Investor Relations Contact:

 

Cody Cree or Jackie Keshner

Gateway Investor Relations

T: (949) 574-3860

Email: BRND@GatewayIR.com

 

 

 

Exhibit 99.4

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

(A SPECIAL PURPOSE ACQUISITION CORPORATION)

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

Introduction

 

The following management’s discussion and analysis (“MD&A”) of the financial condition and results of the operations of Mercer Park Brand Acquisition Corp. (“Brand”, the “Corporation”, “we”, “our” or “us”) constitutes management’s review of the factors that affected the Corporation’s financial and operating performance for the three months ended March 31, 2021. This MD&A was written to comply with the requirements of National Instrument 51-102 – Continuous Disclosure Obligations. This discussion should be read in conjunction with the audited financial statements as at December 31, 2020 and for the year ended December 31, 2020, and the related notes thereto, as well as the condensed interim financial statements as at March 31, 2021 and for the three months ended March 31, 2021, and the related notes thereto. Results are reported in United States dollars, unless otherwise noted. In the opinion of management, all adjustments (which consist only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results presented for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for any future period. The financial statements and the financial information contained in this MD&A were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Further information about the Corporation and its operations can be obtained on www.sedar.com.

 

The Corporation intends to focus its search for target businesses that operate branded product businesses in cannabis and/or cannabis-adjacent industries; however, the Corporation is not limited to a particular industry or geographic region for purposes of completing its Qualifying Transaction (as defined below). Please refer to the Corporation’s latest annual information form for risk factors and regulatory information (the “AIF”) regarding the cannabis industry.

 

Cautionary Note Regarding Forward-Looking Information

 

This MD&A contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Corporation’s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of, such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. The following table outlines certain significant forward-looking statements contained in this MD&A and provides the material assumptions used to develop such forward-looking statements and material risk factors that could cause actual results to differ materially from the forward-looking statements.

 

Forward-looking statements   Assumptions   Risk factors

The Corporation expects to complete a Qualifying Transaction (as defined below).

 

The Corporation’s ability to meet its working capital needs at the current level for the twelve-month period ending March 31, 2022.

 

The Corporation expects to identify an asset or business/businesses to acquire and close a Qualifying Transaction, on terms favourable to the Corporation.

 

The operating activities of the Corporation for the twelve-month period ending March 31, 2022, and the costs associated therewith, will be consistent with the Corporation’s current expectations; debt and equity markets, exchange and interest rates and other applicable economic conditions favourable to the Corporation.

 

The Corporation’s inability to find a target to complete a Qualifying Transaction within the Permitted Timeline (as defined below), as it may be extended. If we are unable to consummate our Qualifying Transaction within the Permitted Timeline, we will be required to redeem 100% of the outstanding Class A Restricted Voting Shares (as defined below), as described herein.

 

Changes in debt and equity markets; timing and availability of external financing on acceptable terms; increases in costs; regulatory compliance and changes in regulatory compliance and other local legislation and regulation; interest rate and exchange rate fluctuations; changes in economic conditions; impact of COVID-19 and timing of a Qualifying Transaction.

 

 

Page | 2

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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.

 

 

Page | 3

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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 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.

 

 

Page | 4

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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’.

 

 

Page | 5

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

Overall Performance

 

The Corporation has not conducted commercial operations and it is focused on the identification and evaluation of businesses or assets to acquire and there were no notable events that occurred during the reporting periods presented.

 

For the three months ended March 31, 2021, the Corporation earned interest income of $60,900 (three months ended March 31, 2020 - $1,495,772) and reported a loss of $1,348,294 ($0.13 basic and diluted loss per Class B Share) (three months ended March 31, 2020, income of $1,336,473 ($0.13 basic and diluted income per Class B Share)). The expenses for the three months ended March 31, 2021 primarily related to general and administrative expenses of $1,328,203, foreign exchange loss of $26,199, travel of $54,792, current income tax recovery of $244,184 and deferred income tax of $244,184. The expenses for the three months ended March 31, 2020 primarily related to general and administrative expenses of $164,180, foreign exchange gain of $4,881, travel of $nil, current income tax recovery of $nil and deferred income tax of $nil. Current liabilities as of March 31, 2021 total $1,843,980 (December 31, 2020 - $745,813). Shareholders’ deficiency as of March 31, 2021 is comprised of Class B Shares, unlimited, 10,198,751 issued of $nil (December 31, 2020 - $nil), additional paid-in-capital of ($11,684,284) (December 31, 2020 - ($11,684,284)) and retained earnings of $2,430,543 (December 31, 2020 - $3,778,837) for a net amount of ($9,253,741) (December 31, 2020 – ($7,905,447)) in shareholders’ deficiency.

 

Commitments and contingencies as of March 31, 2021 total $402,500,000 (December 31, 2020 - $402,500,000). It is comprised of Class A Restricted Voting Shares subject to redemption, 40,250,000 shares (at a redemption value of $10.00 per share).

 

Working capital, which consists of current assets less current liabilities, is $3,353,497 (December 31, 2020 - $2,559,062) as of March 31, 2021. Management believes the Corporation’s working capital is sufficient for the Corporation to meet its ongoing obligations and meet its objective of completing a Qualifying Transaction.

 

The weighted average number of Class B Shares outstanding for the three months ended March 31, 2021 was 10,198,751 (three months ended March 31, 2020 – 10,198,751).

 

Liquidity and Capital Resources

 

Restricted cash and marketable securities held in escrow   March 31, 2021  
United States Treasury Bills   $ 203,709,233  
Accrued interest   $ 33,751  
Restricted cash   $ 201,895,527  
Total restricted cash and marketable securities held in escrow   $ 405,638,511  
         
Per Class A Restricted Voting Shares subject to redemption   $ 10.00  
         
Cash held outside the escrow account   $ 3,630,795  

 

 

Page | 6

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

We intend to use substantially all the funds held in the Escrow Account, including interest (which interest shall be net of taxes payable and certain expenses, as well as redemptions) to consummate a Qualifying Transaction. To the extent that, after redemptions, our share capital or debt is used, in whole or in part, as consideration to consummate a Qualifying Transaction, the remaining proceeds held in the Escrow Account may be used as working capital to finance the operations of the target business or businesses, make other acquisitions and/or pursue a growth strategy.

 

As of March 31, 2021, we had cash held outside of our Escrow Account of $3,630,795, which is available to fund our working capital requirements, including any further transaction costs that may be incurred. We expect to generate negative cash flow from operating activities in the future until our Qualifying Transaction is completed and we commence income generation. We intend to employ a proactive acquisition targeting strategy that identifies potential acquisition targets that align with the Corporation’s investment objectives. Consistent with this strategy, we have identified the following general criteria and guidelines that we believe are important in evaluating prospective acquisition targets:

 

Opportunity to consolidate a highly fragmented marketplace where even the largest brands represent less than 10% market share.

 

Ability to build an institutional-quality cannabis corporation focused on brands and branded products.

 

Companies with strong marketing and brand development expertise.

 

Companies that will benefit from a defined branding strategy.

 

Companies with additional, strategic capabilities-such as distribution, manufacturing, or product development-that support brand value.

 

Orphaned or underinvested brands within existing companies.

 

Companies exhibiting growth and profitability performance that could be enhanced through improved access to capital and financial expertise.

 

Opportunity to provide rescue financing for undercapitalized operators.

 

Companies that will benefit from being a public company.

 

Management seeks to ensure that our operational and administrative costs are minimal prior to the completion of a Qualifying Transaction, with a view to preserving the Corporation’s working capital.

 

We do not believe that we will need to raise additional funds to meet expenditures required for operating our business until the consummation of our Qualifying Transaction. We believe that we will have sufficient available funds outside of the Escrow Account to operate the business. However, we cannot be assured that this will be the case. To the extent that the Corporation may require additional funding for general ongoing expenses or in connection with sourcing a proposed Qualifying Transaction, we may seek funding by way of unsecured loans from our Sponsor and/or its affiliates, up to a maximum aggregate principal amount equal to 10% of the escrowed funds, subject to the consent of the Exchange, which loans would, unless approved otherwise by the Exchange, bear interest at no more than the prime rate plus 1%. Our Sponsor will not have recourse under such loans against the amounts in escrow. Such loans will collectively be subject to a maximum principal amount of 10% of the escrowed funds and may be repayable in cash following the closing of a Qualifying Transaction and may only be convertible into Class B Shares and/or Warrants in connection with the closing of a Qualifying Transaction, subject to Exchange consent.

 

 

Page | 7

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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

 

 

Page | 8

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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:

 

                Basic and Diluted  
      Income   Net (Loss) Income   Loss per Class B Share  
      ($)   ($)   ($)(9)  
March 31, 2021       -   $ (1,348,294) (8)   (0.13 )
December 31, 2020       -   $ (144,116) (7)   (0.01 )
September 30, 2020       -   $ (161,569) (6)   (0.02 )
June 30, 2020       -   $ (83,442) (5)   (0.01 )
March 31, 2020       - $ 1,336,473 (4)   0.13  
December 31, 2019       - $ 1,412,880 (3)   0.16  
September 30, 2019       -   $ 1,611,697 (2)   0.16  
Incorporation date to June 30, 2019       -   $ 193,086) (1)   (0.03 )

 

Notes:

 

(1) From the Incorporation date to June 30, 2019, the Corporation earned interest income of $40.00 and reported a loss of $193,086 ($0.03 basic and diluted loss per Class B Share). The loss in the current period primary related to general and administrative expenses of $191,614 and foreign exchange of $1,512;

 

(2) For the three months ended September 30, 2019, the Corporation earned interest income of $1,695,696 and reported income of $1,611,697 ($0.16 basic and diluted income per Class B Share). The income in the current period primary related to general and administrative expenses of $89,125 and foreign exchange gain of $5,126;

 

(3) For the three months ended December 31, 2019, the Corporation earned interest income of $1,601,241 and reported income of $1,412,880 ($0.16 basic and diluted income per Class B Share). The income in the current period primary related to general and administrative expenses of $100,398, travel of $85,000, foreign exchange loss of $2,963, current income tax of $713,425 and deferred income tax recovery of $713,425;

 

(4) For the three months ended March 31, 2020, the Corporation earned interest income of $1,495,772 and reported income of $1,336,473 ($0.13 basic and diluted income per Class B Share). The income in the current period primary related to general and administrative expenses of $164,180 and foreign exchange income of $4,881;

 

 

Page | 9

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

(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.

 

 

Page | 10

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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”.

 

 

Page | 11

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

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.

 

 

Page | 12

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

The following table presents information about the Corporation’s assets that are measured at fair value on a recurring basis on March 31, 2021, and indicates the fair value hierarchy of the valuation inputs the Corporation utilized to determine such fair value:

 

    Carrying value as of                    
    March 31, 2021     Level 1 (*)     Level 2 (*)     Level 3 (*)  
    ($)     ($)     ($)     ($)  
Assets                                
Restricted cash and marketable securities held in escrow     405,638,511       405,638,511       nil       nil  

 

(*) Fair values as of March 31, 2021

 

The Corporation is exposed to financial risks due to the nature of its business and the financial assets and liabilities that it holds. The Corporation’s overall risk management strategy seeks to minimize potential adverse effects of the Corporation’s financial performance. In particular, the Corporation intends to only invest the proceeds deposited in the Escrow Account in instruments that are the obligation of, or guaranteed by, the federal government of the United States of America or Canada. The Corporation believes this to be a low-risk strategy until the Corporation completes a Qualifying Transaction.

 

Market risk

 

Market risk is the risk that a material loss may arise from fluctuations in the fair value of a financial instrument. For purposes of this disclosure, the Corporation segregates market risk into three categories: fair value risk, interest rate risk and currency risk.

 

Fair value risk

 

Fair value risk is the potential for loss from an adverse movement, excluding movements relating to changes in interest rates and foreign exchange rates, because of changes in market prices. The Corporation is exposed to minimal fair value risk.

 

Interest rate risk

 

Interest rate risk relates to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Due to the fixed interest rate on the Corporation’s restricted cash and short-term balance held in escrow, its exposure to interest rate risk is nominal.

 

Currency risk

 

Currency risk relates to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates relative to the Corporation’s presentation currency of the United States dollar. The Corporation does not currently have any exposure risk as the Corporation transacts minimally in any currency other than the United States dollar.

 

 

Page | 13

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

Capital Management

 

(a) The Corporation defines the capital that it manages as its shareholders’ deficiency, net of its Class A Restricted Voting Shares subject to redemption. The following table summarizes the carrying value of the Corporation’s capital as of March 31, 2021:

 

    $  
Shareholders’ deficiency     (9,253,741 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Balance, March 31, 2021     393,246,259  

 

The Corporation’s primary objective in managing capital is to ensure capital preservation to benefit from acquisition opportunities as they arise.

 

(b) Liquidity

 

As of March 31, 2021, the Corporation had $3,630,795 (December 31, 2020 - $2,095,023) in cash and cash equivalents. The Corporation expects to incur significant costs in pursuit of its acquisition plans.

 

To the extent that the Corporation may require additional funding for general ongoing expenses or in connection with sourcing a proposed Qualifying Transaction, the Corporation may obtain such funding by way of unsecured loans from the Sponsor and/or its affiliates, subject to consent of the Exchange, which loans would, unless approved otherwise by the Exchange, bear interest at no more than the prime rate plus 1%. The Sponsor would not have recourse under such loans against the Escrow Account, and thus the loans would not reduce the value of such Escrow Account. Such loans would collectively be subject to a maximum principal amount of 10% of the escrowed funds and may be repayable in cash following the closing of a Qualifying Transaction and may only be convertible into Class B Shares and/or Warrants in connection with the closing of a Qualifying Transaction subject to Exchange consent.

 

Otherwise, and subject to any relief granted by the Exchange, the Corporation may seek to raise additional funds through a rights offering in respect of shares available to its shareholders, in accordance with the requirements of applicable securities legislation, and subject to placing the required funds raised in the Escrow Account in accordance with applicable Exchange rules.

 

Outlook

 

For the immediate future, the Corporation intends to identify and evaluate potential Qualifying Transactions. The Corporation continues to monitor its spending and will amend its plans based on business opportunities that may arise in the future.

 

Share Capital

 

As of the date of this MD&A, the Corporation had 17,843,851 Class A Restricted Voting Shares of the Corporation issued and outstanding. In addition, the Corporation had an aggregate of 10,089,751 Class B Shares issued and outstanding.

 

Risk Factors

 

Please refer to the Corporation’s AIF for information on the risk factors to which the Corporation is subject. In addition, see “Cautionary Note Regarding Forward-Looking Information” above.

 

 

Page | 14

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Three Months Ended March 31, 2021

Discussion dated: May 14, 2021

 

 

COVID-19

 

The outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. It is uncertain what impact this volatility and weakness will have on the Corporation’s securities held at fair value and short-term investments. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 pandemic is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Corporation in future periods, including the ability of the Corporation to complete a Qualifying Transaction.

 

Subsequent Events

 

(a) On April 8, 2021, the Corporation announced that it had entered into a definitive agreement to merge with GH Group, Inc. (the “Glass House Group Transaction”), a fully-integrated cannabis business in California, with the right to combine with a state-of-the-art greenhouse and up to 17 additional dispensary locations that are in the process of applying for licenses.

 

(b) On May 5, 2021, the Corporation obtained shareholder approval for a brief extension in its permitted timeline, from May 13, 2021 to July 30, 2021, in order to enable the Glass House Group Transaction to be completed.

 

(c) On May 7, 2021, the Corporation received a receipt for a final non-offering prospectus from the applicable Canadian securities regulatory authorities in connection with the completion of the Glass House Group Transaction. On the same date, the Corporation filed a management information circular in connection with the shareholders’ meeting scheduled to be held on June 2, 2021 to approve the Glass House Group Transaction and related matters.

 

(d) Effective May 13, 2021, in connection with the extension in the permitted timeline described above, 22,406,149 of the Corporation’s Class A Restricted Voting Shares were redeemed for US$10.11 per share. An additional right to redeem the Corporation’s Class A Restricted Voting Shares will be available to the holders thereof in connection with the closing of the Glass House Group Transaction. Subject to the satisfaction or waiver of the applicable conditions of closing, the Glass House Group Transaction is currently anticipated to close in the first half of June 2021.

 

 

Page | 15

 

 

Exhibit 99.5

 

 

MERCER PARK BRAND ACQUISITION CORP.

CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2021 AND 2020

(EXPRESSED IN UNITED STATES DOLLARS)

(UNAUDITED)

 

 

 

 

 

Mercer Park Brand Acquisition Corp.

Condensed Interim Consolidated Balance Sheets

(Expressed in United Stated Dollars)

(Unaudited)

 

    March 31,     December 31,  
    2021     2020  
ASSETS                
                 
Current                
Cash   $ 3,630,795     $ 2,095,023  
Income tax recoverable     1,566,682       1,209,852  
      5,197,477       3,304,875  
                 
Restricted cash and marketable securities held in escrow (note 5)     405,638,511       407,537,056  
Deferred tax asset     354,251       598,435  
Total assets   $ 411,190,239     $ 411,440,366  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY                
                 
Current                
Accounts payable and accrued liabilities   $ 1,405,651     $ 396,779  
Due to related parties (note 12)     438,329       349,034  
      1,843,980       745,813  
Deferred underwriters’ commission (note 9)     16,100,000       16,100,000  
Total liabilities     17,943,980       16,845,813  
                 
Commitments and contingencies                
Class A Restricted Voting Shares subject to redemption, 40,250,000 shares (at a redemption value of $10.00 per share) (note 6)     402,500,000       402,500,000  
                 
Shareholders’ deficiency                
Class B shares, unlimited authorized, 10,198,751 issued (note 8(a))     -       -  
Additional paid-in-capital     (11,684,284 )     (11,684,284 )
Retained earnings     2,430,543       3,778,837  
Total shareholders’ deficiency     (9,253,741 )     (7,905,447 )
Total liabilities and shareholders’ deficiency   $ 411,190,239     $ 411,440,366  

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

Description of organization and business operations and going concern (note 1)

Subsequent events (note 14)

 

Approved on behalf of the Board:

 

“Jonathan Sandelman”, Director  
   
“Charles Miles”, Director  
   

 

- 1 -

 

 

Mercer Park Brand Acquisition Corp.

Condensed Interim Consolidated Statements of Operations and Comprehensive (loss) Income

(Expressed in United States Dollars)

(Unaudited)

 

Three Months Ended March 31,   2021     2020  
Income                
Interest income   $ 60,900     $ 1,495,772  
                 
Expenses (income)                
General and administrative (note 11)     1,328,203       164,180  
Travel     54,792       -  
Foreign exchange loss (gain)     26,199       (4,881 )
      1,409,194       159,299  
Net (loss) income before income taxes     (1,348,294 )     1,336,473  
                 
Income taxes                
Current tax recovery     (244,184 )     -  
Deferred tax expense     244,184       -  
      -       -  
Net (loss) income and comprehensive (loss) income for the period   $ (1,348,294 )   $ 1,336,473  
                 
Basic and diluted net (loss) income per Class B share   $ (0.13 )   $ 0.13  
Weighted average number of Class B Shares outstanding (basic and diluted)     10,198,751       10,198,751  

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

- 2 -

 

 

Mercer Park Brand Acquisition Corp.

Condensed Interim Consolidated Statements of Cash Flows

(Expressed in United States Dollars)

(Unaudited)

 

Three Months Ended March 31,   2021     2020  
Operating activities                
Net (loss) income for the period   $ (1,348,294 )   $ 1,336,473  
Items not affecting cash:                
Deferred tax expense     244,184       -  
Changes in non-cash working capital items:                
Prepaid expenses     -       (9,800 )
Accounts payable and accrued liabilities     1,008,872       43,536  
Due to related parties     89,295       29,833  
Income tax recoverable     (356,830 )     -  
Net cash (used in) provided by operating activities     (362,773 )     1,400,042  
                 
Investing activity                
Investment in marketable securities held in a escrow account, net     1,898,545       (1,495,110 )
Net cash provided by (used in) investing activity     1,898,545       (1,495,110 )
Net change in cash during the period     1,535,772       (95,068 )
Balance, beginning of period     2,095,023       4,127,262  
Balance, end of period   $ 3,630,795     $ 4,032,194  
                 
Supplementary information                
Income taxes paid   $ 112,646     $ -  
Interest received in cash     60,900       1,575,347  

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

- 3 -

 

 

Mercer Park Brand Acquisition Corp.

Condensed Interim Consolidated Statement of Changes in Shareholders’ Deficiency

(Expressed in United States Dollars)

(Unaudited)

 

                      Total  
    Class B shares     Additional Paid-in capital     Retained     Shareholder’s  
    Number     Amount     Number     Amount     Earnings     Deficiency  
Balance, December 31, 2019     10,198,751     $ -       29,989,500     $ (11,684,284 )   $ 2,831,491     $ (8,852,793 )
Net income and comprehensive income for the period     -               -       -       1,336,473       1,336,473  
Balance, March 31, 2020     10,198,751     $ -       29,989,500     $ (11,684,284 )   $ 4,167,964     $ (7,516,320 )
                                                 
Balance, December 31, 2020     10,198,751     $ -       29,989,500     $ (11,684,284 )   $ 3,778,837     $ (7,905,447 )
Net loss and comprehensive loss for the period     -               -       -       (1,348,294 )     (1,348,294 )
Balance, March 31, 2021     10,198,751     $ -       29,989,500     $ (11,684,284 )   $ 2,430,543     $ (9,253,741 )

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

- 4 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

1. Description of organization and business operations and going concern

 

Mercer Park Brand Acquisition Corp. (the “Corporation”) 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.

 

The Corporation’s ability to continue as a going concern is dependent on the continued support of its Sponsor, Mercer Park Brand, L.P. (formerly Mercer Park CB II, L.P.), and/or upon the completion of the Qualifying Transaction within the permitted timeline which is prior to May 13, 2021. Subsequent to quarter-end, the Company has sought an extension to the permitted timeline, (see note 14). There can be no assurance that the Corporation will be successful in completing its Qualifying Transaction. Under the NEO rules, the Corporation is able to borrow funds from the Sponsor (see Note 10). In the event the Corporation’s Qualifying Transaction does not occur the escrowed cash will be returned to the Class A restricted voting shareholders and the Sponsor will have no recourse against the escrowed cash.

 

These uncertainties cast significant doubt upon the Corporation’s ability to continue as a going concern and the ultimate appropriateness of using accounting principles applicable to a going concern. These unaudited condensed interim consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Corporation be unable to continue as a going concern. If the Corporation is not able to continue as a going concern, the Corporation may be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in these unaudited condensed interim consolidated financial statements. These differences could be material.

 

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, now 24 months (“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, 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”), own an aggregate of 10,089,750 Class B Shares, together with 109,000 Class B Units and 9,810,000 Founders’ Warrants.

 

- 5 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

1. Description of organization and business operations (continued)

 

Concurrent with the completion of the Offering, the Founders purchased an aggregate of 10,089,750 Class B Shares (“Founders’ 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 and purchased 109,000 Class B Units.

 

Upon closing of the Qualifying Transaction, the Class B Shares will, 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 or 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.

 

- 6 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

1. Description of organization and business operations (continued)

 

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. 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 (note 14(a)(b)). 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. Subsequent to quarter-end, the Company has sought an extension to the permitted timeline, (see note 14).

 

On March 24, 2021, the Corporation began trading on the OTCQX® Best Market, under the ticker ‘MRCQF’.

 

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 outbreak 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.

 

2. Summary of significant accounting policies

 

The significant accounting policies adopted by the Corporation in the preparation of its unaudited condensed interim consolidated financial statements are set out below.

 

Basis of presentation

 

The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information. They do not include all of the information and footnotes required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal accruals) considered for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

 

The accompanying unaudited condensed interim consolidated financial statements should be read in conjunction with the December 31, 2020 audited financial statements and notes.

 

- 7 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

2. Summary of significant accounting policies (continued)

 

Basis of consolidation

 

The unaudited condensed interim consolidated financial statements incorporate the financial statements of the Corporation and its wholly owned subsidiaries as outlined below:

 

• MPB Acquisition Corp.

• MPB Mergersub Corp. (a wholly owned subsidiary of MPB Acquisition Corp).

• Mercer Park Brand Pipe Inc.

 

Use of estimates

 

The preparation of these unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the reporting date and the reported amounts of income and expenses during the reporting period.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the unaudited condensed interim consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.

 

Cash and cash equivalents

 

The Corporation considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Corporation did not have any cash equivalents as of March 31, 2021 and December 31, 2020.

 

Restricted cash and marketable securities held in escrow

 

At March 31, 2021 and December 31, 2020, the assets held in the Escrow Account were substantially held in U.S. Treasury Bills and cash.

 

Common stock subject to possible redemption

 

The Corporation accounts for its Class A Restricted Voting Shares subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares subject to mandatory redemption are classified as a liability instrument and is measured at fair value. Conditionally redeemable shares (including shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Corporation’s control) is classified as temporary equity. At all other times, shares are classified as shareholders’ equity. The Corporation’s Class A Restricted Voting Shares features certain redemption rights that are considered to be outside of the Corporation’s control and subject to occurrence of uncertain future events. Accordingly, Class A Restricted Voting Shares subject to possible redemption is presented at redemption value as temporary equity, outside of the shareholders’ deficiency section of the Corporation’s consolidated balance sheets.

 

- 8 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

2. Summary of significant accounting policies (continued)

 

Income Taxes

 

The Corporation complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Corporation recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. As of March 31, 2021 and December 31, 2020, there were no unrecognized tax benefits and no amounts accrued for interest and penalties. The Corporation is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

 

Net Income (Loss) Per Share

 

The Corporation complies with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net income per share is computed by dividing net income by the weighted average number of Class B Shares outstanding during the period. At March 31, 2021 and March 31, 2020, the Corporation did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into Class B Shares and then share in the (loss) income of the Corporation. As a result, diluted (loss) income per share is the same as basic (loss) income per share for the periods presented.

 

Concentration of credit risk

 

Financial instruments that potentially subject the Corporation to concentration of credit risk consist of cash accounts in a financial institution. At March 31, 2021 and December 31, 2020, the Corporation had not experienced losses on these accounts and management believes the Corporation is not exposed to significant risks on such accounts.

 

Fair value of financial instruments

 

The fair value of the Corporation’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the accompanying balance sheets, primarily due to their short-term nature.

 

Recently issued accounting standards

 

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Corporation’s unaudited condensed interim consolidated financial statements.

 

- 9 -

 

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

3. Critical accounting judgments, estimates and assumptions

 

The preparation of these unaudited condensed interim consolidated financial statements requires the Corporation to make judgments in applying its accounting policies and estimates and assumptions about the future. These judgments, estimates and assumptions affect the Corporation’s reported amounts of assets, liabilities, and items in net income or loss, and the related disclosure of contingent assets and liabilities, if any. The Corporation evaluates its estimates on an ongoing basis. Such estimates are based on various 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 amounts 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. The following discusses the most significant accounting judgments, estimates and assumptions that the Corporation has made in the preparation of its March 31, 2021 unaudited condensed interim consolidated financial statements.

 

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 in order 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.

 

4. The Offering

 

Pursuant to the Offering, the Corporation sold 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 of the Corporation and one-half of a Warrant. See note 1.

 

5. Restricted cash and marketable securities held in escrow

 

    March 31,     December 31,  
    2021     2020  
Restricted cash   $ 201,895,527     $ 981  
Investments in United States Treasury Bills     203,709,233       407,509,774  
Accrued interest     33,751       26,301  
Restricted cash and marketable securities held in escrow   $ 405,638,511     $ 407,537,056  

 

- 10 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

6. Class A Restricted Voting Shares Subject to Redemption

 

Authorized

 

The Corporation is authorized to issue an unlimited number of Class A Restricted Voting Shares. Following closing of the Qualifying Transaction, the Corporation will not issue any further Class A Restricted Voting Shares. The holders of Class A Restricted Voting Shares have no preemptive rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Prior to the consummation of a Qualifying Transaction, holders of Class A Restricted Voting Shares are not entitled to vote at, or receive notice of or meeting materials in respect of meetings, held only to consider the election and/or removal of directors and auditors. The holders of Class A Restricted Voting Shares are, however, entitled to vote on and receive notice of meeting materials on all other matters requiring shareholder approval, including approval of an extension of the Permitted Timeline, if applicable, and of a proposed Qualifying Transaction.

 

Redemption rights

 

The holders of Class A Restricted Voting Shares are entitled to redeem their shares, subject to certain conditions, and are entitled to receive the escrow proceeds, net of applicable taxes and other permitted deductions, from the Escrow Account: (i) in the event that the Corporation does not complete a Qualifying Transaction within the Permitted Timeline; (ii) in the event of a Qualifying Transaction; and (iii) in the event of an extension to the Permitted Timeline. Upon such redemption, the rights of holders of Class A Restricted Voting Shares as shareholders will be completely extinguished.

 

Value of Class A Restricted Voting Shares Subject to Redemption

 

The redemption rights embedded in the terms of the Corporation’s Class A Restricted Voting Shares are considered by the Corporation to be outside of the Corporation’s control and subject to uncertain future events. Accordingly, the Corporation has classified its “Class A Restricted Voting Shares subject to redemption” as commitments and contingencies at redemption value.

 

Fair value of Class A restricted voting shares subject to redemption -- issued and outstanding

 

    Number     Amount  
Balance, December 31, 2020 and March 31, 2021     40,250,000     $ 402,500,000  

 

7. Warrants

 

As at March 31, 2021 and December 31, 2020, the Corporation had 29,989,500 Warrants issued and outstanding, comprised of 20,125,000 Warrants forming part of the Class A Restricted Voting Units, 9,810,000 Founders’ Warrants, and 54,500 Warrants forming part of the Class B Units.

 

- 11 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

7. Warrants (continued)

 

All Warrants will become exercisable only commencing 65 days after the completion of our Qualifying Transaction. Each 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) at a price of $11.50 per share. The Warrant Agreement provides that the exercise price and number of Subordinate Voting Shares issuable on exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. The Warrants will not, however, be adjusted for issuances of Subordinate Voting Shares at a price below their exercise price. Once the Warrants become exercisable, the Corporation may accelerate the expiry date of the outstanding Warrants (excluding the Founders’ Warrants but only to the extent still held by our Sponsor at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by our Sponsor of material undisclosed information which could limit their flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Subordinate Voting Shares equals or exceeds $18.00 per Subordinate Voting Share (as adjusted for stock splits or combinations, stock dividends, extraordinary dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30 trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice if provided.

 

The Warrants will not be entitled to the proceeds from the Escrow Account. The Warrant holders do not have the rights or privileges of holders of shares and any voting rights until they exercise their Warrants and receive corresponding Subordinate Voting Shares of the Corporation. After the issuance of corresponding Subordinate Voting Shares upon exercise of the Warrants, each holder is expected to be entitled to one vote for each Subordinate Voting Share held of record on all matters to be voted on by such shareholders.

 

Restrictions on Transfer of Founders’ Warrants

 

The Founders have agreed not to transfer any of their Founders’ Warrants until after the closing of the Qualifying Transaction without the prior consent of the Exchange, except for transfers required due to the structuring of the Qualifying Transaction or to permitted transferees, with the Exchange’s consent, in which case such restriction will apply to the securities received in connection with the Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Founders’ Warrants, including Subordinate Voting Shares issuable on exercise of the Founders’ Warrants, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

8. Shareholders’ deficiency

 

a) Class B Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of Class B Shares without nominal or par value. Following closing of the Qualifying Transaction, the Corporation will not issue any further Class B Shares. The holders of Founders’ Shares have no pre-emptive rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Holders of Class B Shares are entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, with the exception of (i) meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia), and (ii) meetings to approve an extension of the Permitted Timeline within which the Corporation is required to complete its Qualifying Transaction, which will only be voted upon by holders of Class A Restricted Voting Shares.

 

- 12 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

8. Shareholders’ deficiency (continued)

 

a) Class B Shares (continued)

 

Redemption rights

 

Holders of Class B Shares do not have any redemption rights, or rights to distributions from the Escrow Account if the Corporation fails to complete a Qualifying Transaction within the Permitted Timeline.

 

Restrictions on transfer, assignment or sale of Founders’ Shares

 

The holders of the Class B Shares have agreed not to transfer, assign or sell any of their Class B Shares, unless transferred, assigned or sold to permitted transferees with the Exchange’s consent, prior to completion of the Corporation’s Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Multiple-Voting Shares into which the Class B Shares are converted, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

b) Subordinate Voting Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of subordinate voting shares (“Subordinate Voting Shares”) without nominal or par value. No Subordinate Voting Shares may be issued prior to the closing of a Qualifying Transaction, except in connection with such closing.

 

Voting rights

 

Holders of Subordinate Voting Shares will be entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Subordinate Voting Shares are entitled to vote, each Subordinate Voting Share will be entitled to one vote per Subordinate Voting Share.

 

Dividend rights

 

See Note 8 – Multiple Voting Shares – Dividend rights.

 

Redemption rights

 

Holders of Subordinate Voting Shares will not have any redemption rights.

 

- 13 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

8. Shareholders’ deficiency (continued)

 

c) Multiple Voting Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of multiple voting shares (“Multiple Voting Shares”) without nominal or par value. No Multiple Voting Shares may be issued prior to the closing of a Qualifying Transaction, except in connection with such closing.

 

Voting rights

 

Holders of Multiple Voting Shares will be entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Multiple Voting Shares are entitled to vote, each Multiple Voting Share will be entitled to 2,500 votes per Multiple Voting Share.

 

Dividend rights

 

Holders of Subordinate Voting Shares will be entitled to receive dividends out of the assets available for the payment or distribution of dividends at such times and in such amount and form as the board of directors of the Corporation may from time to time determine on the following basis, and otherwise without preference or distinction among or between the Subordinate Voting Shares and Multiple Voting Shares: each Multiple Voting Share will be entitled to 100 times the amount paid or distributed per Subordinate Voting Share (including by way of share dividends, which holders of Multiple Voting Shares will receive in Multiple Voting Shares, unless otherwise determined by the board of directors of the Corporation) and each fraction of a Multiple Voting Share will be entitled to the applicable fraction thereof.

 

Redemption rights

 

Holders of Multiple Voting Shares will not have any redemption rights.

 

9. Transaction costs

 

Transaction costs consist principally of legal, accounting and underwriting costs incurred through to date of the balance sheet. Transaction costs incurred amounted to $22,609,294 (including $22,137,500 in underwriters’ commission of which $16,100,000 is deferred and payable only upon completion of a Qualifying Transaction) were charged to shareholder’s equity upon completion of the Offering.

 

Underwriter’s commission

 

In consideration for its services in connection with the Offering, the Corporation has agreed to pay the underwriter a commission equal to 5.5% of the gross proceeds of the Class A Restricted Voting Units issued under the Offering. The Corporation paid $ $6,037,500, representing $0.15 per Class A Restricted Voting Unit, to the underwriter upon closing of the Offering. Upon completion of a Qualifying Transaction, the remaining $16,100,000 (representing $0.40 per Class A Restricted Voting Unit) will be payable, 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).

 

- 14 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

10. 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 at March 31, 2021 and December 31, 2020:

 

Balance, March 31, 2021      
Shareholders’ deficiency   $ (9,253,741 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Total   $ 393,246,259  
         
Balance, December 31, 2020        
Shareholders’ deficiency   $ (7,905,447 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Total   $ 394,594,553  

 

The Corporation’s primary objective in managing capital is to ensure capital preservation in order to benefit from acquisition opportunities as they arise.

 

(b) Liquidity

 

As at March 31, 2021, the Corporation had $3,630,795 (December 31, 2020 - $2,095,023) in cash. 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 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.

 

- 15 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

11. General and administrative expenses

 

Three months ended March 31, 2021      
Professional fees   $ 1,074,971  
Public company filing and listing costs     253,035  
General office expenses     197  
    $ 1,328,203  
         
Three months ended March 31, 2020        
Public company filing and listing costs   $ 93,274  
General office expenses     70,906  
    $ 164,180  

 

12. 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.

 

- 16 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

13. Fair value measurements

 

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 Company’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 at March 31, 2021, and indicates the fair value hierarchy of the valuation inputs the Corporation utilized to determine such fair value:

 

    Carrying value                    
    as at     Fair value as at March 31, 2021  
    March 31, 2021     Level 1     Level 2     Level 3  
      ($)       ($)       ($)       ($)  
Assets                                
Restricted cash and marketable securities held in escrow     405,638,511       405,638,511       -       -  

 

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.

 

- 17 -

 

 

Mercer Park Brand Acquisition Corp.

Notes to Condensed Interim Consolidated Financial Statements

Three Months Ended March 31, 2021 and 2020

(Expressed in United States Dollars)

 

13. Fair value measurements (continued)

 

Market risk (continued)

 

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 to currency risk as the Corporation transacts minimally in any currency other than the United States dollar.

 

14. Subsequent events

 

(a) On April 8, 2021, the Corporation announced that it had entered into a definitive agreement to merge with GH Group, Inc. (the “Glass House Group Transaction”), a fully-integrated cannabis business in California, with the right to combine with a state-of-the-art greenhouse and up to 17 additional dispensary locations that are in the process of applying for licenses.

 

(b) On May 5, 2021, the Corporation obtained shareholder approval for a brief extension in its permitted timeline, from May 13, 2021 to July 30, 2021, in order to enable the Glass House Group Transaction to be completed.

 

(c) On May 7, 2021, the Corporation received a receipt for a final non-offering prospectus from the applicable Canadian securities regulatory authorities in connection with the completion of the Glass House Group Transaction. On the same date, the Corporation filed a management information circular in connection with the shareholders’ meeting scheduled to be held on June 2, 2021 to approve the Glass House Group Transaction and related matters.

 

(d) Effective May 13, 2021, in connection with the extension in the permitted timeline described above, 22,406,149 of the Corporation’s Class A Restricted Voting Shares were redeemed for US$10.11 per share. An additional right to redeem the Corporation’s Class A Restricted Voting Shares will be available to the holders thereof in connection with the closing of the Glass House Group Transaction. Subject to the satisfaction or waiver of the applicable conditions of closing, the Glass House Group Transaction is currently anticipated to close in the first half of June 2021.

 

- 18 -

 

Exhibit 99.6

 

NOTICE OF OPTIONAL REDEMPTION

 

MERCER PARK BRAND ACQUISITION CORP.

 

(“BRND”)

 

TO: HOLDERS OF THE CLASS A RESTRICTED VOTING SHARES OF BRND (“Restricted Voting Shares”)

 

AND TO: ODYSSEY TRUST COMPANY (the “TRANSFER AGENT”)

 

DATE: May 14, 2021

 

Right of Redemption

 

BRND hereby gives notice to holders of the Restricted Voting Shares (each a “Holder”), in accordance with Section 29.4(1) of BRND’s articles dated as of May 10, 2019 (the “Articles”), of their right to redeem all or a portion of their Restricted Voting Shares (the “Redemption”) in connection with BRND’s proposed qualifying transaction (the “Transaction”), pursuant to which, among other things, BRND proposes to merge with GH Group, Inc. (“GH Group”) pursuant to the terms of the definitive merger agreement in respect thereof and as further described below. To redeem their Restricted Voting Shares, Holders must deposit their Restricted Voting Shares for redemption prior to 5:00 p.m. (Toronto time) on June 2, 2021 (the “Redemption Deposit Deadline”) in accordance with the instructions contained in this notice. Holders who do not wish to redeem their Restricted Voting Shares are not required to take any further action.

 

The Transaction

 

On April 8, 2021, BRND announced that it had entered into a definitive purchase agreement (the “Definitive Agreement”) pursuant to which, among other things, BRND proposes to merge with GH Group for a value (payable to sellers of GH Group that are non-accredited investors in cash and payable to all other such sellers in shares) of US$325 million pursuant to the terms of the definitive merger agreement in respect thereof (as it may be amended). The transactions contemplated by the Definitive Agreement are intended to constitute BRND’s qualifying transaction.

 

For more information on the Transaction and the Redemption, please see BRND’s management information circular dated May 4, 2021 (the “Circular”), which is available on BRND’s profile at SEDAR at www.sedar.com. All capitalized terms used herein that are not otherwise defined have the meanings ascribed to them in the Circular.

 

Redemption

 

The details of the Redemption are as follows:

 

Redemption Deposit Deadline June 2, 2021
   
Transaction Redemption Price per Restricted Voting Share Approximately
  US$10.11

 

Upon payment in cash of the Transaction Redemption Price, the Holders of the Restricted Voting Shares so redeemed will have no further rights in respect of the Restricted Voting Shares. The Transaction Redemption Price shall be paid to redeeming Holders no later than 30 calendar days following closing of the Transaction.

 

If the redemption of all of the Restricted Voting Shares of BRND to be redeemed in connection with the Redemption would be contrary to any provisions of the Business Corporations Act (British Columbia) or any other applicable law, BRND will be obligated to redeem only the maximum number of Restricted Voting Shares which BRND determines it is then permitted to redeem, such redemptions to be made pro-rata (disregarding fractions of shares) according to the number of Restricted Voting Shares required by each electing Holder to be redeemed by BRND, and BRND will either issue new certificates representing the Restricted Voting Shares not redeemed by BRND, or will otherwise confirm such Restricted Voting Shares as issued and deposited in book-entry form.

 

 

 

- 2 -

 

In the event a Holder deposits their Restricted Voting Shares for redemption and the Transaction is not completed, the Restricted Voting Shares so deposited will be returned to such Holder (or re-deposited with CDS, as applicable) and the rights of such Holder of such Restricted Voting Shares will continue in accordance with the provisions of the Articles.

 

Instructions for Redemption – Non-Registered Holders

 

A non-registered Holder who desires to exercise its redemption rights in connection with the Transaction must do so by causing a participant (a “CDS Participant”) in the depository, trading, clearing and settlement systems administered by CDS to deliver to CDS (at its office in the City of Toronto) on behalf of the owner, a written notice (the “Redemption Notice”) of the owner’s intention to redeem Restricted Voting Shares in connection with the Transaction. Such Holder should ensure that the CDS Participant is provided with notice of his, her or its intention to exercise his, her or its redemption privilege sufficiently in advance of the Redemption Deposit Deadline so as to permit the CDS Participant to deliver notice to CDS and so as to permit CDS to deliver notice to the Transfer Agent in advance of the required time. The form of Redemption Notice will be available from a CDS Participant or the Transfer Agent.

 

By causing a CDS Participant to deliver to CDS a notice of the Holder’s intention to redeem Restricted Voting Shares, a Holder shall, subject to the Withdrawal Right (as defined below), be deemed to have irrevocably surrendered his, her, or its Restricted Voting Shares for redemption and appointed such CDS Participant to act as his, her, or its exclusive settlement agent with respect to the exercise of the redemption right and the receipt of payment in connection with the settlement of obligations arising from such exercise.

 

Any Redemption Notice delivered by a CDS Participant regarding a Holder’s intent to redeem which CDS determines to be incomplete, not in proper form, or not duly executed shall for all purposes be void and of no effect and the redemption right to which it relates shall be considered for all purposes not to have been exercised. A failure by a CDS Participant to exercise redemption rights or to give effect to the settlement thereof in accordance with the Holder’s instructions will not give rise to any obligations or liability on the part of BRND to the CDS Participant or to the Holder.

 

A Holder whose Restricted Voting Shares are held through an intermediary may have a redemption deadline that is earlier than the Redemption Deposit Deadline. If the deadline for depositing Restricted Voting Shares held through an intermediary is not met by a Holder, such Holder’s Restricted Voting Shares may not be eligible for redemption.

 

Withdrawal Right

 

Holders who have deposited their Restricted Voting Shares for redemption may by written notice (to the Corporation or the applicable CDS Participant, as applicable) withdraw (the “Withdrawal Right”) all or a portion of such Restricted Voting Shares at any time prior to 5:00 p.m. (Toronto time) on June 7, 2021. Previously deposited Restricted Voting Shares in respect of which the Withdrawal Right has been exercised will be returned to the Holder (or re-deposited with CDS, as applicable) and the rights of such Holder of such Restricted Voting Shares will continue in accordance with the provisions of the Articles and the terms of the Transaction, as applicable.

 

Questions

 

Holders who have questions regarding the process for Redemption should immediately contact the CDS Participant through which they hold their Restricted Voting Shares.

 

 

 

Exhibit 99.7

 

Mercer Park Brand Acquisition Corp. Announces Extension and Expected Cash Amount

 

TORONTO, May 13, 2021 -- Mercer Park Brand Acquisition Corp. (NEO: BRND.A.U; OTCQX: MRCQF; “BRND” or the “Company”), a Special Purpose Acquisition Company (SPAC) which has entered into a definitive agreement to merge (the “Glass House Group Transaction”) with GH Group, Inc. (“GH Group”), California’s leading fully-integrated cannabis business, is updating the status of its proposed merger with GH Group.

 

To facilitate the closing of the Glass House Group Transaction, the holders of the Company’s class A restricted voting shares have approved an extension of the Company’s permitted timeline to complete a qualifying transaction to July 30, 2021 (the “Extension”). The Company’s board of directors has also approved the Extension, which is effective as of May 13, 2021. After processing notices of redemption received with respect to the Extension, BRND expects that immediately prior to the closing of the Glass House Group Transaction it will have an aggregate of approximately US$266 million (assuming no additional redemptions and including the previously announced private placement expected to close concurrently with the Glass House Transaction) to fund its growth strategy and pay transaction expenses.

 

22,406,149 class A restricted voting shares were redeemed in connection with the Extension.

 

As previously announced, the Company and GH Group announced a business combination to create the largest cannabis brand-building platform in California, the world’s largest cannabis market.

 

GH Group will support its existing and future portfolio of brands with unmatched capacity and distribution in the state. The combined company has planned expansions to reach 6 million ft2 of cultivation in state-of-the-art greenhouses, representing by far the largest capacity of any cannabis operator in California and an anticipated retail footprint of 21 operational dispensaries by Q1 2022, more than double the next largest retail operator in the state.

 

“We view successful cannabis brand-building as a combination of four factors: the ability to control quality biomass at a large scale; produce at the most competitive costs; offer the highest quality products; and deliver the best value proposition to consumers. Glass House has a track record of excellence across all four of these drivers. Combined with the proposed combination with the Southern California Greenhouse asset and 17 proposed Element 7 retail licenses, Glass House Group is poised to become the largest, vertically integrated brand-building platform in California, the world’s largest cannabis market,” said BRND Chairman Jonathan Sandelman.

 

Commenting on the transaction, Glass House’s co-founder and CEO, Kyle Kazan, stated: “We have established a strong retail and wholesale network and best-in-class cultivation processes, all anchored by a scaled and highly efficient cost structure. I am incredibly proud of the robust operation we have built over the past five years, and we look forward to augmenting these strengths to further capitalize on the growing statewide and national CPG opportunity.”

 

About Mercer Park Brand Acquisition Corp.

 

BRND is a special purpose acquisition corporation launched in May 2019 to create the leading branded cannabis company in the U.S. For more information about BRND, please visit the BRND website at www.mercerparkbrand.com.

 

 

About GH Group, Inc.

 

GH Group is a rapidly growing, vertically integrated, California-focused organization that strives every day to realize its vision of excellence: compelling cannabis brands, produced sustainably, for the benefit of all. Led by a team of expert operators, proven businesspeople, and passionate plant lovers, it is dedicated to delivering rich cannabis experiences with respect for people, for the environment, and for the community, and an abiding commitment to justice, social equity, and sustainability.

 

Risk Factors

 

This investment opportunity involves a high degree of risk. You should carefully consider the risks and uncertainties described under “Risk Factors” in the Prospectus. If any of the risks and uncertainties described thereunder actually occur, alone or together with additional risks and uncertainties not currently known to BRND or GH Group, or that they currently do not deem material, BRND’s and GH Group’s business, financial condition, results of operations and prospects may be materially adversely affected. There can be no assurance that the Glass House Group Transaction will be completed, or, if it is, that the resulting company will be successful.

 

Additional Information About the Proposed Business Combination and Where to Find It

 

BRND and GH Group urge investors, shareholders and other interested persons to read the documents (including the Prospectus and Circular) filed with Canadian securities regulatory authorities in connection with the Glass House Group Transaction, as these materials contain important information about BRND, GH Group, the resulting company and the Glass House Group Transaction.

 

Company Contact:

 

Megan Kulick

T: (646) 977-7914

Email: IR_BRND@mercerparklp.com

 

Investor Relations Contact:

 

Cody Cree or Jackie Keshner

Gateway Investor Relations

T: (949) 574-3860

Email: BRND@GatewayIR.com

 

 

Exhibit 99.8

GRAPHIC

MERCER PARK BRAND ACQUISITION CORP. Form of Proxy – Annual and Special Meeting of Holders of Class A Restricted Voting Shares to be held on June 2, 2021 702-67 Yonge St. Toronto ON M5E 1J8 Appointment of Proxyholder I/We being the undersigned shareholder(s) of Mercer Park Brand Acquisition Corp. (the “Corporation”) hereby appoint Jonathan Sandelman or, failing this person, Louis Karger. OR Print the name of the person you are appointing if this person is someone other than the Management Nominees listed herein: To register a proxyholder, shareholders MUST send an email to BRND@odysseytrust.com and provide Odyssey Trust Company with their proxyholder’s contact information, amount of shares appointed, name in which the shares are registered if they are a registered shareholder, or name of broker where the shares are held if a beneficial shareholder so that Odyssey may provide the proxyholder with a Username via email. as my/our proxyholder with full power of substitution and to attend, act, and to vote for and on behalf of the holder in accordance with the following direction (or if no directions have been given, as the proxyholder sees fit) and all other matters that may properly come before the Special Meeting of holders of Class B shares of the Corporation to be held virtually at https://web.lumiagm.com/207586819 at 11:00 a.m. (Toronto time), June 2, 2021, or at any adjournment or postponement thereof. MANAGEMENT RECOMMENDS VOTING FOR THE TRANSACTION RESOLUTION AND THE EQUITY INCENTIVE PLAN RESOLUTION AND THE NOMINEES TO THE RESULTING ISSUER BOARD 1. Transaction Resolution. To consider, and, if thought advisable, to pass a special separate resolution (the “Transaction Resolution”), the full text of which is set forth in Appendix “A” to the accompanying management information circular dated May 12, 2021 (the “Circular”) For Against 2. Equity Incentive Plan Resolution. To consider, and, if thought advisable, to pass an ordinary resolution (the “Equity Incentive Plan Resolution”), the full text of which is set forth in Appendix “B” to the accompanying Circular, to approve, conditional on the closing of the Transaction, the proposed equity incentive plan of the Corporation, which includes authorizing the grant of rights to acquire up to 16,406,629 Subordinate, Restricted or Limited Voting shares of the Corporation. For Against 3. Election of Directors. (conditional upon and effective as of the closing of the Transaction (as defined in the Circular)). For Withhold For Withhold For Withhold a. Kyle Kazan b. Graham Farrar c. Jamie Mendola d. Jocelyn Rosenwald e. Lameck Humble Lukanga f. George Raveling g. Bob Hoban h. Hector De Le Torre Authorized Signature(s) – This section must be completed for your instructions to be executed. I/we authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Special Meeting. If no voting instructions are indicated above, this Proxy will be voted as recommended by Management. Signature(s): Date / / MM / DD / YY

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This form of proxy is solicited by and on behalf of Management. Proxies must be received by 11:00 a.m., Toronto time, on May 31, 2021. Notes to Proxy 1. Each holder has the right to appoint a person, who need not be a holder, to attend and represent him or her at the Special Meeting. If you wish to appoint a person other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided on the reverse. 2. If the securities are registered in the name of more than one holder (for example, joint ownership, trustees, executors, etc.) then all of the registered owners must sign this proxy in the space provided on the reverse. If you are voting on behalf of a corporation or another individual, you may be required to provide documentation evidencing your power to sign this proxy with signing capacity stated. 3. This proxy should be signed in the exact manner as the name appears on the proxy. 4. If this proxy is not dated, it will be deemed to bear the date on which it is mailed by Management to the holder. 5. The securities represented by this proxy will be voted as directed by the holder; however, if such a direction is not made in respect of any matter, this proxy will be voted as recommended by Management. 6. The securities represented by this proxy will be voted or withheld from voting, in accordance with the instructions of the holder, on any ballot that may be called for and, if the holder has specified a choice with respect to any matter to be acted on, the securities will be voted accordingly. 7. This proxy confers discretionary authority in respect of amendments to matters identified in the Notice of Meeting or other matters that may properly come before the meeting. 8. This proxy should be read in conjunction with the accompanying documentation provided by Management. INSTEAD OF MAILING THIS PROXY, YOU MAY SUBMIT YOUR PROXY USING SECURE ONLINE VOTING AVAILABLE ANYTIME: To Vote Your Proxy Online please visit: https://login.odysseytrust.com/pxlogin and click on VOTE. You will require the CONTROL NUMBER printed with your address to the right. If you vote by Internet, do not mail this proxy. To Virtually Attend the Meeting: You can attend the meeting virtually by visiting https://web.lumiagm.com and entering the meeting ID 207-586-819. For further information on the virtual Special Meeting and how to attend it, please refer to the Circular. The password to join the meeting is “brnd2021”. To request the receipt of future documents via email and/or to sign up for Securityholder Online services, you may contact Odyssey Trust Company at www.odysseycontact.com Voting by mail may be the only method for securities held in the name of a corporation or securities being voted on behalf of another individual. A return envelope has been enclosed for voting by mail. Shareholder Address and Control Number Here

Exhibit 99.9

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MERCER PARK BRAND ACQUISITION CORP. Form of Proxy – Annual and Special Meeting of Holders of Class B Shares to be held on June 2, 2021 702-67 Yonge St. Toronto ON M5E 1J8 Appointment of Proxyholder I/We being the undersigned shareholder(s) of Mercer Park Brand Acquisition Corp. (the “Corporation”) hereby appoint Jonathan Sandelman or, failing this person, Louis Karger. OR Print the name of the person you are appointing if this person is someone other than the Management Nominees listed herein: To register a proxyholder, shareholders MUST send an email to BRND@odysseytrust.com and provide Odyssey Trust Company with their proxyholder’s contact information, amount of shares appointed, name in which the shares are registered if they are a registered shareholder, or name of broker where the shares are held if a beneficial shareholder so that Odyssey may provide the proxyholder with a Username via email. as my/our proxyholder with full power of substitution and to attend, act, and to vote for and on behalf of the holder in accordance with the following direction (or if no directions have been given, as the proxyholder sees fit) and all other matters that may properly come before the Special Meeting of holders of Class B shares of the Corporation to be held virtually at https://web.lumiagm.com/207586819 at 11:00 a.m. (Toronto time), June 2, 2021, or at any adjournment or postponement thereof. MANAGEMENT RECOMMENDS VOTING FOR THE TRANSACTION RESOLUTION AND THE EQUITY INCENTIVE PLAN RESOLUTION AND THE NOMINEES TO THE RESULTING ISSUER BOARD 1. Transaction Resolution. To consider, and, if thought advisable, to pass a special separate resolution (the “Transaction Resolution”), the full text of which is set forth in Appendix “A” to the accompanying management information circular dated May 12, 2021 (the “Circular”) For Against 2. Equity Incentive Plan Resolution. To consider, and, if thought advisable, to pass an ordinary resolution (the “Equity Incentive Plan Resolution”), the full text of which is set forth in Appendix “B” to the accompanying Circular, to approve, conditional on the closing of the Transaction, the proposed equity incentive plan of the Corporation, which includes authorizing the grant of rights to acquire up to 16,406,629 Subordinate, Restricted or Limited Voting shares of the Corporation. For Against 3. Election of Directors. (conditional upon and effective as of the closing of the Transaction (as defined in the Circular)). For Withhold For Withhold For Withhold a. Kyle Kazan b. Graham Farrar c. Jamie Mendola d. Jocelyn Rosenwald e. Lameck Humble Lukanga f. George Raveling g. Bob Hoban h. Hector De Le Torre Authorized Signature(s) – This section must be completed for your instructions to be executed. I/we authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Special Meeting. If no voting instructions are indicated above, this Proxy will be voted as recommended by Management. Signature(s): Date / / MM / DD / YY

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This form of proxy is solicited by and on behalf of Management. Proxies must be received by 11:00 a.m., Toronto time, on May 31, 2021. Notes to Proxy 1. Each holder has the right to appoint a person, who need not be a holder, to attend and represent him or her at the Special Meeting. If you wish to appoint a person other than the persons whose names are printed herein, please insert the name of your chosen proxyholder in the space provided on the reverse. 2. If the securities are registered in the name of more than one holder (for example, joint ownership, trustees, executors, etc.) then all of the registered owners must sign this proxy in the space provided on the reverse. If you are voting on behalf of a corporation or another individual, you may be required to provide documentation evidencing your power to sign this proxy with signing capacity stated. 3. This proxy should be signed in the exact manner as the name appears on the proxy. 4. If this proxy is not dated, it will be deemed to bear the date on which it is mailed by Management to the holder. 5. The securities represented by this proxy will be voted as directed by the holder; however, if such a direction is not made in respect of any matter, this proxy will be voted as recommended by Management. 6. The securities represented by this proxy will be voted or withheld from voting, in accordance with the instructions of the holder, on any ballot that may be called for and, if the holder has specified a choice with respect to any matter to be acted on, the securities will be voted accordingly. 7. This proxy confers discretionary authority in respect of amendments to matters identified in the Notice of Meeting or other matters that may properly come before the meeting. 8. This proxy should be read in conjunction with the accompanying documentation provided by Management. INSTEAD OF MAILING THIS PROXY, YOU MAY SUBMIT YOUR PROXY USING SECURE ONLINE VOTING AVAILABLE ANYTIME: To Vote Your Proxy Online please visit: https://login.odysseytrust.com/pxlogin and click on VOTE. You will require the CONTROL NUMBER printed with your address to the right. If you vote by Internet, do not mail this proxy. To Virtually Attend the Meeting: You can attend the meeting virtually by visiting https://web.lumiagm.com and entering the meeting ID 207-586-819. For further information on the virtual Special Meeting and how to attend it, please refer to the Circular. The password to join the meeting is “brnd2021”. To request the receipt of future documents via email and/or to sign up for Securityholder Online services, you may contact Odyssey Trust Company at www.odysseycontact.com Voting by mail may be the only method for securities held in the name of a corporation or securities being voted on behalf of another individual. A return envelope has been enclosed for voting by mail. Shareholder Address and Control Number Here

 

Exhibit 99.10

 

No securities regulatory authority has in any way passed upon the merits of the transactions described in this management information circular.

 

These materials are important and require your immediate attention. The shareholders (“BRND Shareholders”) of Mercer Park Brand Acquisition Corp. (“BRND”) are required to make important decisions. If you have any doubt as to how to make such decisions, please contact your tax, financial, legal or other professional advisors.

 

MERCER PARK BRAND ACQUISITION CORP.

 

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

scheduled to be held on June 2, 2021

 

and

 

MANAGEMENT INFORMATION CIRCULAR

 

with respect to

 

A DEFINITIVE MERGER AGREEMENT AND RELATED MATTERS

 

involving, among others,

 

GH GROUP, INC.

 

and

 

MERCER PARK BRAND ACQUISITION CORP.

(to be renamed “Glass House Brands Inc.” (or such other name as may be selected by the Board of Directors))

 

and also with respect to the

 

AMENDMENT OF THE ARTICLES OF MERCER PARK BRAND ACQUISITION CORP.

 

and the

 

ELECTION OF THE BOARD OF DIRECTORS OF MERCER PARK BRAND ACQUISITION CORP.

 

THE BOARD OF DIRECTORS OF BRND RECOMMENDS THAT BRND SHAREHOLDERS VOTE FOR (I) THE TRANSACTION RESOLUTION, (II) THE EQUITY INCENTIVE PLAN RESOLUTION, AND (III) THE ELECTION OF THE NOMINEES TO THE RESULTING ISSUER BOARD (EACH AS DEFINED HEREIN).

 

As a result of the proposed Transaction (as defined herein), BRND will derive all or substantially all of its revenues from the cannabis industry in the State of California, which industry is illegal under United States federal law. BRND will be directly involved (through its licensed subsidiaries) in the cannabis industry in the United States where local state laws permit such activities. Currently, its proposed subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and medicinal cannabis marketplace in the State of California. See “Risk Factors – Risks Relating to the Legality of Cannabis” below in BRND’s information statement attached as Appendix “D” to the Circular for additional information on this risk.

 

 

 

 

THE BOARD OF DIRECTORS OF BRND UNANIMOUSLY RECOMMENDS THAT BRND SHAREHOLDERS VOTE FOR (I) THE TRANSACTION RESOLUTION, (II) THE EQUITY INCENTIVE PLAN RESOLUTION, AND (III) THE ELECTION OF THE NOMINEES TO THE RESULTING ISSUER BOARD. THE PATH AHEAD FOR BRND SHAREHOLDERS IN RESPECT OF THE TRANSACTION

 

 

Creates the most expansive, fully-integrated cannabis brand-building business in the world’s largest cannabis market

Unmatched cost structure to ensure low cost, high-quality cannabis production at scale

Significant growth opportunities both organically and via accretive M&A in California’s highly fragmented market

A compelling valuation, strong balance sheet and the capital resources needed to ensure success

Superior management team with financial management and cannabis operating expertise

 

i 

 

 

May 4, 2021

 

Dear Shareholder:

 

It is my pleasure to extend to you, on behalf of the board of directors (the “BRND Board”) of Mercer Park Brand Acquisition Corp. (“BRND”, the “Corporation” or “our”), an invitation to attend an annual and special meeting (the “ShareholdersMeeting”) of shareholders (the “BRND Shareholders”) scheduled to be held via live audio webcast at https://web.lumiagm.com/207586819 in order to vote on our proposed merger with GH Group, Inc. (“GH Group”) and related matters (including the election of the directors of the Corporation following completion of the proposed merger). We believe that the proposed merger, which is expected to occur pursuant to a definitive merger agreement between the Corporation and the equity holders of GH Group (the “Definitive Agreement”), and which will constitute our qualifying transaction (the “Transaction”), represents a unique opportunity to invest in a leading vertically-integrated cannabis company in the United States with high quality vertically-integrated operations in the State of California, and is entirely consistent with our stated strategy at the time of BRND’s initial public offering (the “IPO”).

 

Out of an abundance of caution, to proactively deal with the unprecedented public health impact of the novel coronavirus disease, also known as COVID-19, and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, we will hold the Shareholders’ Meeting in a virtual-only format, which will be conducted via live audio webcast. All BRND Shareholders, regardless of their geographic location, will have an equal opportunity to participate in the Shareholders’ Meeting and engage with directors and management of BRND as well as with other BRND Shareholders. BRND Shareholders will not be able attend the Shareholders’ Meeting in person. At the Shareholders’ Meeting, if you virtually attend, you will have the opportunity to ask questions and vote on the Transaction and important related matters. Alternatively, you may vote by proxy (if you are a registered shareholder) or by following the instructions on the voting information form (if you are a beneficial shareholder), in each case, by following the applicable directions.

 

Registered holders of the BRND Class A Restricted Voting Shares have the right to redeem all or a portion of their BRND Class A Restricted Voting Shares in accordance with their terms, provided that they deposit (or, in the case of non-registered shareholders, instruct the applicable CDS Participant to cause CDS (each as defined in the Circular) to deposit) their shares for redemption prior to 5:00 p.m. (Toronto time) on June 2, 2021. Notwithstanding the foregoing redemption right, no registered holder of BRND Class A Restricted Voting Shares, together with any affiliate of such holder or other person with whom such holder or affiliate is acting jointly or in concert, will be permitted to redeem more than an aggregate of 15% of the number of BRND Class A Restricted Voting Shares issued and outstanding. Redemptions of BRND Class A Restricted Voting Shares shall be funded out of BRND’s escrow account, which, as of April 29, 2021, consisted of US$407,590,197 or approximately US$10.11 per Class A Restricted Voting Share (net of applicable taxes).

 

In order to receive the Equity Shares (as defined in the Circular) to which they are entitled, registered BRND Shareholders should complete and return a letter of transmittal (available upon request from the Corporation) together with the certificate(s) or DRS advice(s) representing their shares and any other required documents and instruments to the depositary for the Transaction in the enclosed return envelope in accordance with the instructions set out in the letter of transmittal.

 

Increasingly, Canadian public companies with U.S. cannabis businesses that are going public in Canada are using multiple voting share structures. The GH Group Founders (as defined in the Circular) wish to be able to continue to build the business of the Resulting Issuer (as defined in the Circular) during the current and expected future volatile period in the industry. Accordingly, subject to obtaining applicable consents and approvals, including under Ontario Securities Commission Rule 56-501 – Restricted Shares, which requires majority of minority approval by a majority of votes cast by the holders of BRND Class A Restricted Voting Shares, excluding any votes attached to BRND Class A Restricted Voting Shares held directly or indirectly by (i) the GH Group Founders1, and (ii) persons who also hold BRND Class B Shares (as defined in the Circular), BRND intends to issue Multiple Voting Shares (as defined in the Circular) to the GH Group Founders in connection with the closing of the Transaction. The Multiple Voting Shares are expected to be nominal value preferred shares with a US$0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carry 50 votes per share (voting together with the other classes of Equity Shares as if they were a single class except where otherwise required by law or stock exchange requirements), and have no entitlement to dividends and no conversion rights. In addition, unless redeemed earlier by a holder, the Multiple Voting Shares would be subject to a three (3)-year sunset provision, at which time they would be automatically redeemed. The Multiple Voting Shares will not be transferable except to controlled affiliates. See Schedule “A” – Amended and Restated Articles to the Transaction Resolution attached as Appendix “A” to the Circular for a description of the structure.

 

 

 

1 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class

 

ii 

 

 

The Circular, including the appendices thereto (especially the information statement attached as Appendix “D” to the Circular), contains a detailed description of the Transaction and other information relating to BRND and GH Group. We urge you to consider carefully all of the information in the Circular. BRND Shareholders that have any questions or need additional information with respect to the voting of their BRND Class A Restricted Voting Shares should consult their financial, legal, tax or other professional advisors.

 

On behalf of BRND, I would like to thank all of our BRND Shareholders for their ongoing support as we prepare to undertake our qualifying transaction.

 

Yours very truly,

 

(Signed) “Jonathan Sandelman”

 

Jonathan Sandelman

Chairman and Director

 

 

A Restricted Voting Shares.

 

iii 

 

 

REASONS TO SUPPORT THE PROPOSED MERGER WITH

GH GROUP, INC. (THE “TRANSACTION”)

 

POTENTIAL FOR SIGNIFICANT SHAREHOLDER VALUE CREATION

 

BRND believes there is meaningful potential for value creation for its shareholders following completion of the Transaction. BRND, following completion of the Transaction (the “Resulting Issuer”), has the opportunity to grow significantly and generate meaningful cash flow from its existing operating assets, and to acquire complementary assets.

 

THE BOARD OF DIRECTORS OF BRND (THE “BRND BOARD”) HAS UNANIMOUSLY SUPPORTED
THE TRANSACTION RESOLUTION AND THE EQUITY INCENTIVE PLAN RESOLUTION.

 

The BRND Board carefully evaluated the terms of the proposed Transaction and unanimously: (i) determined that the Transaction is in the best interests of the Corporation; (ii) determined that the Transaction is fair to BRND Shareholders; (iii) approved the Transaction and the entering into of the Definitive Agreement; and (iv) resolved to recommend that the BRND Shareholders vote in favour of the Transaction Resolution and the Equity Incentive Plan Resolution (each as defined in the Circular (as defined herein)).

 

In reaching these determinations and approvals, the BRND Board considered, among other things, the following factors and potential benefits and risks of the Transaction:

 

· Strong, competitive position within an attractive industry.

 

· Strong, experienced and well-aligned management team. Upon completion of the Transaction, BRND will have a strong management team and board of directors comprised of individuals who have significant experience in the cannabis industry, and who intend to implement a clear strategy going forward.

 

· Strong current Adjusted EBITDA generation, with potential for growth by virtue of the Transaction and positive industry momentum. GH Group’s operating assets have significant momentum and cash flow potential. Adjusted EBITDA is a non-U.S. GAAP measure, see “Non-U.S. GAAP Measures” in BRND’s information statement (the “Information Statement”) attached to the Circular as Appendix “D”.

 

· Attractive return on investment relative to risk profile. GH Group represents an early opportunity to invest in a high-growth business at an attractive valuation. See “Forward-Looking Statements” in the management information circular attached hereto (the “Circular”) and “Caution Regarding Forward-Looking Statements” in the Information Statement attached to the Circular as Appendix “D”.

 

· Opportunities for platform growth through acquisitions. We believe that there is opportunity for further consolidation within the U.S. cannabis industry and that, following completion of the Transaction, the Corporation will be well-positioned to engage in such accretive acquisitions.

 

· Benefit from being a public company in Canada. The Resulting Issuer is expected to benefit from BRND’s Canadian listing on the NEO Exchange for a number of reasons, including access to Canadian and international capital.

 

· Concurrent private placement. Certain private investors have committed to a US$85 million private investment in public equity to close concurrently with the Transaction.

 

See “The Transaction”.

 

a

 

 

Other considerations that we believe demonstrate the attractiveness of the Transaction, and that provide protection to BRND Shareholders include the following:

 

· Shareholder Approval. The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of the Class B shares of BRND (the “BRND Class B Shares” and together with the BRND Class A Restricted Voting Shares, the “BRND Shares”); (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by holders of BRND Class B Shares and other persons not permitted to vote thereon under Ontario Securities Commission Rule 56-501 – Restricted Shares (“OSC Rule 56-501”)); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class. As noted above, the Transaction Resolution will be used to approve amendments to the BRND articles as well as a “restricted security reorganization” pursuant to National Instrument 41-101 – General Prospectus Requirements (“NI 41-101”) and OSC Rule 56-501, which requires that a restricted security reorganization receive prior majority approval of the holders of BRND Class A Restricted Voting Shares in accordance with applicable law, excluding any votes attaching to BRND Class A Restricted Voting Shares held, directly or indirectly, by (A) the GH Group Founders (as defined in the Circular)2, and (B) affiliates of BRND or control persons of BRND or holders of BRND Class A Restricted Voting Shares that are also holders of BRND Class B Shares. Mercer (as defined in the Circular), BRND’s sponsor and a founder of BRND, is an affiliate or control person of BRND, and therefore any BRND Class A Restricted Voting Shares held by Mercer will be excluded from voting in the class vote of the BRND Class A Restricted Voting Shares in respect of the Transaction Resolution under NI 41-101 and OSC Rule 56-501. Any BRND Class A Restricted Voting Shares of Charles Miles and Sean Goodrich, the other founders of BRND, will also be excluded from voting in the class vote of the BRND Class A Restricted Voting Shares on the Transaction Resolution.

 

· Redemption Rights. Registered holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, provided that they deposit (and do not validly withdraw) their BRND Class A Restricted Voting Shares for redemption prior to the Redemption Deposit Deadline (as defined in the Circular) and, subject to applicable law, upon the closing of the Transaction, for an amount per BRND Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion, per BRND Class A Restricted Voting Share, of (i) the escrowed funds available in BRND’s escrow account (the “Escrow Account”) at the time of the Shareholders’ Meeting, including interest and other amounts earned thereon; less (ii) an amount equal to the total of (A) applicable taxes payable by BRND on such interest and other amounts earned in the Escrow Account, and (B) actual and expected direct expenses related to the redemption, each as reasonably determined by BRND; for greater certainty, such amount will not be reduced by the amount of any tax payable by BRND under Part VI.1 of the Income Tax Act (Canada) or the deferred underwriting commission per BRND Class A Restricted Voting Share held in the Escrow Account. The redemption price per BRND Class A Restricted Voting Share is expected to be approximately US$10.11, assuming a redemption date of June 4, 2021. Registered holders of BRND Class A Restricted Voting Shares may elect to redeem their BRND Class A Restricted Voting Shares irrespective of whether they vote for or against, or do not vote on, the Transaction. See “Redemption Rights” in the Circular.

 

WORLD-CLASS MANAGEMENT TEAM AND BOARD OF DIRECTORS

 

Upon completion of the Transaction, the Resulting Issuer will have a strong management team and, assuming they are elected at the meeting, board of directors comprised of individuals who have significant experience in the cannabis industry, and who intend to implement a clear strategy going forward. The members of management listed below whose names are marked with a “*” are expected to sit on the board of directors of the Resulting Issuer following completion of the Transaction (the “Resulting Issuer Board”).

 

 

 

2 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

b

 

 

Management Team

 

Kyle Kazan, Executive Chairman, Chief Executive Officer*. A seasoned investor and expert manager of private equity funds with over two (2) decades of domestic and international experience, Kyle has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. In 1991 he began investing in real estate, eventually launching a total of 23 private equity funds with a current estimated value of owned and managed properties that stands above US$2.75 billion. Kyle also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the vertically integrated GH Group. Since his early service as a special education teacher and law enforcement officer, Kyle has been a vocal advocate for police reform and ending the War on Drugs and its injustices, speaking on behalf of Law Enforcement Against Prohibition (LEAP) and appearing in many media outlets ranging from CNN to Fox. He is a frequent guest professor at NYU Stern School of Business, USC Marshall Business School, and UCLA Anderson School of Management, and Kyle is a graduate of the University of Southern California, where he played varsity basketball for Hall of Fame Coach George Raveling.

 

Graham Farrar, President*. Graham is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Graham served as a board member for Heal the Ocean, was a founder and partner of ebook publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry. Graham currently sits on the Board of Directors of The Santa Barbara Bowl Foundation.

 

Derrek Higgins, Chief Financial Officer. Derrek serves as Chief Financial Officer for GH Group. Derrek has day to day responsibility managing the financial actions and planning of GH Group, overseeing cash flow, leading capital raises, analyzing mergers and acquisitions, and implementing growth strategies. He has more than 20 years of public and private company financial expertise in preparing venture-backed startups for public listings, representing shareholders and implementing comprehensive profitability and working capital plans. Derrek has held various key roles throughout his career, including most recently as the Chief Financial Officer and board member of FLRish Inc., the parent company of Harborside Inc, where he helped lead the completion of Harborside’s reverse takeover of FLRish, Inc., recapitalized the business and implemented public reporting frameworks, accounting policies and operational transformation initiatives across Harborside, its subsidiaries and controlled entities. Prior to FLRish/Harborside, Derrek served as a consultant for The Brenner Group LLC, where he provided Chief Financial Officer advisory services to venture-backed startups and mid-size companies, developed and executed strategic plans, raised capital and managed shareholder representation. Derrek also served as a strategic consultant at Alvarez & Marsal, a global professional services firm known for its work in turnaround management and performance improvement of large, high-profile businesses both in the U.S. and internationally, providing critical assistance to companies in crisis situations and helping to stabilize financial and operational performance by developing and implementing comprehensive profitability and working capital plans. Derrek holds a B.S. degree in Accounting from Arizona State University, an MBA from the USC Marshall School of Business, and a CPA (inactive) in the state of California.

 

Jamin Horn, General Counsel and Corporate Secretary. Jamin has over a decade of legal experience in counseling high-growth private and public companies, principally in the medical and digital technology sectors, and over six years of experience advising California and multi-state cannabis operators and associated technology service providers. Prior to becoming an attorney, he worked on investor-side early-stage financing and intellectual property commercialization planning and analysis. Jamin joined FLRish, Inc., the parent company of Harborside, in 2017 as Associate Counsel, where he was responsible for corporate and commercial transactions through the company’s growth and public listing before departing at the end of 2020 as VP of Corporate Affairs. He is a member of the California bar, the Association of Corporation Counsel, and the International Cannabis Bar Association, and he holds a JD from UC Davis School of Law and a BS in Molecular, Cellular and Developmental Biology from UC Santa Cruz.

 

c

 

 

Daryl Kato, Chief Operating Officer. Daryl is a seasoned leader with over 20 years of experience in operations, finance, accounting, and technology across multiple industry sectors and consumer packaged goods categories. Most recently, he served as the Chief Financial Officer and Board Director at Nissin Foods USA. Prior to that, he co-founded and sold a digital out-of-home advertising company and completed several business transformation projects while with Nestlé USA, Global Nestle Professional, Farmer Brothers (NASDAQ: FARM), and Mitsubishi UFJ Financial Group (NYSE: MUFG). Daryl began his career in Deloitte’s audit practice where he earned his CPA license. He holds a BA in Business Economics & minor in Accounting from the University of California at Los Angeles and an MBA from USC Marshall School of Business.

 

Joe Andreae, Vice President, Business Development. Joe is a true veteran of legal cannabis markets, having spent over a decade as a serial cannabis entrepreneur. With multiple endeavors spanning 3 states, he has acquired a range of expertise that encompasses nearly every aspect of the cannabis business, beginning in the cultivation supply sector with lighting and hydroponic equipment for the medical market. From there, he dove ever-deeper into the industry, as a pioneer of the extraction sector in Colorado, co-owner of a medical cannabis dispensary in California, founder/owner of Madrone Oregon, which held 11 state cultivation licenses, and President of the ceramic accessories brand, Hive. Most recently, he served as the CEO of a premium California concentrates brand for three years, before bringing his extensive industry knowledge and leadership to GH Group.

 

Board of Directors

 

Jocelyn Rosenwald. Jocelyn began her career as a Teach for America Corps member in New York City. She began her career in real estate investment in 2013 with Beach Front Properties LLC and managed a US$500 million portfolio of opportunistic real estate investments. In November of 2016, Rosenwald began supervising the operations of 4 funds in the regulated cannabis industry which would eventually be consolidated to form GH Group. Today, Jocelyn sits on the board of GH Group as a director. She holds a BA from the University of Pennsylvania, an MA in Education from Hunter College, and an MBA from UCLA Anderson School of Business. She is a co-founder and current director of GH Group.

 

Jamie Mendola. Jamie Mendola is the Head of Strategy and M&A for Mercer Park, L.P., which is a family office focused on the cannabis sector that controls Mercer Park Brand, L.P., the Corporation’s sponsor. Mercer Park, L.P. provides management services to Ayr Wellness Inc., a U.S. multi-state operator with key assets in 7 states. Jamie has nearly 20 years of experience as a public and private equity investor and has been an active investor in the cannabis industry for several years. Prior to joining Mercer, Jamie was the CEO and Portfolio Manager of Pacific Grove Capital, a San Francisco-based hedge fund focused primarily on investments in consumer, technology and cannabis. He also managed the Pacific Grove Opportunity Fund, which focused on special purpose acquisition companies (SPACs), and was one of the top performing hedge funds during its tenure. Pacific Grove was named the best new hedge fund by Hedge Funds Review in 2015 and Jamie received accolades from Institutional Investor as a Hedge Fund Rising Star and was named as one of Tomorrow’s Titans by The Hedge Fund Journal. Prior to founding Pacific Grove in 2014, Jamie was a Partner at Scout Capital, which had assets under management of approximately US$7 billion. He was a senior member of the firm’s Investment and Risk Committees and helped to build Scout’s west coast office. Previously, Jamie worked as a Principal of Watershed Asset Management, a private equity analyst at JLL Partners and an investment banking analyst at J.P. Morgan Chase. Jamie graduated with a B.S. in Management, summa cum laude, from Binghamton University in 1999, where he was also a 4-year letter-winner in baseball, and earned his M.B.A. from Stanford’s Graduate School of Business in 2005. He resides in San Francisco with his wife and four sons.

 

Lameck Humble Lukanga. Lameck Humble Lukanga was born in a small village in Uganda, where he spent the first decade of his life enduring genocide, famine and extreme poverty. At the age of 11, he and his family were granted a political asylum, allowing them to come to the United States to seek refuge, which he calls “the biggest blessing of my life.” Since, Humble has gone on to become a venerable young leader in finance. Humble owns Life Line Financial Group, a wealth management firm servicing world-class performers and leaders in business, sports and entertainment. In addition to Life Line Financial, Humble serves on the board of trustees for the University of New Mexico and the board of directors for various companies. He holds both a Bachelors and Masters in Business Administration from the Anderson School of Management at the University of New Mexico, received a Personal Finance Planning degree from UCLA and holds the CFP credential. Humble is passionate about social entrepreneurship, financial literacy, freedom and the orphans of Uganda. He is a philanthropist, teacher and self-proclaimed “ambassador of hope”.

 

d

 

 

George Raveling. One of basketball’s most impactful Hall of Fame coaches, George has defined his career, from basketball to business, by his relentless dedication to leadership and mentoring. In 1964, he joined the coaching staff at his alma mater, Villanova, before becoming the first African American basketball coach in the Pacific-8 Conference (now the Pac-12), the head coach at Washington State, the University of Iowa and USC, and an assistant coach of the medal-winning U.S. Olympic teams of 1984 and 1988. While coaching, he published two books and afterwards became a broadcaster for Fox Sports and CBS. Nike subsequently named George Director of International Basketball, kicking off his life as an executive; he would go on to key positions on the boards of the NCAA, NABC, USA Basketball, and Nike, Inc. He was the recipient of the Naismith Memorial Hall of Fame’s John W. Bunn Lifetime Achievement Award and the co-founder, with former NFL GM Michael Lombardi, of leadership program The Daily Coach. As a result of his dedication to civil rights and service as additional security during 1963’s famed March on Washington, George is the current guardian of the original draft of Martin Luther King’s “I Have a Dream” speech.

 

Hector De La Torre. Hector’s career has been defined by his public service and outstanding record of leadership. From 2004-10, Hector represented the 50th District in southeast Los Angeles County to the California State Assembly, where he focused on health care, the environment, and good governance. Previously, he was a member of the South Gate City Council for 8 years, including serving 2 years as Mayor. In 2011, Hector became the Assembly- Appointed Member of the California Air Resources Board, a position he still holds, where he focuses on goods movement, environmental justice, and green technologies. He served as the executive director of the Transamerica Center for Health Studies, a national non-profit focused on helping people better understand health coverage, and today is chair of the board at L.A. Care, the largest public health plan in America, as well as a trustee of Occidental College, where he received his B.A. He did his graduate studies at the Elliott School of International Affairs at the George Washington University. Hector has been an early and vocal advocate for cannabis policy reform and remains dedicated to serving the industry.

 

Bob Hoban. Bob Hoban sits at the center of a large commercial cannabis industry network, a cannabis industry ecosystem that he has cultivated since 2008 as an attorney, an entrepreneur, and an executive. Bob has earned a reputation as a cannabis industry dealmaker representing start-ups, entrepreneurs, governments, and companies in all stages of development. He is a visionary industry leader, who has founded, created, bought, and sold over fifteen of his own cannabis companies. He has served as a C-Suite executive in multiple companies and as a director on a number of boards. He is Co-Founder of Gateway Proven Strategies, a leading global cannabis industry consulting firm. He constructed the Hoban Law Group to become a leading full-service commercial cannabis industry law firm. And Bob served as a cannabis policy instructor at the University of Denver, where he lectured regarding cannabis regulation and policy. He has crafted cannabis policy solutions for over thirty different countries around the world and has consistently been recognized as one of the most influential people in the global cannabis industry by a variety of organizations and publications over the course of the past twelve years. Bob received his Ph.D. in Public Affairs from the University of Colorado, his J.D. from the University of Wyoming and his B.A. from Rutgers University.

 

BRND NEGOTIATED THE TRANSACTION

 

BRND was introduced to GH Group through GH Group President, Graham Farrar, in 2019. BRND and GH Group began a formal dialogue regarding a potential transaction in June 2020. BRND conducted extensive due diligence on GH Group, including in respect of its business plan in order to seek to ascertain the fundamental value of GH Group’s business.

 

BRND signed a letter of intent and entered into exclusivity with GH Group in December, 2020, in order to conduct due diligence and negotiate transaction documentation.

 

As part of its due diligence process, the BRND team and its advisors travelled to California on several occasions to evaluate GH Group’s operating assets.

 

See “The Transaction – Background to the Transaction” for additional information.

 

e

 

 

MULTI-CLASS SHARE STRUCTURE DESIGNED TO MITIGATE INDUSTRY VOLATILITY

 

Increasingly, Canadian public companies with U.S. cannabis businesses that are going public in Canada are using multiple voting share structures. The GH Group Founders wish to be able to continue to build the business of the Corporation following completion of the Transaction during the current and expected future volatile period in the industry. Accordingly, subject to obtaining applicable consents and approvals, including under Ontario Securities Commission Rule 56-501 – Restricted Shares, which requires majority of minority approval by a majority of votes cast by the holders of BRND Class A Restricted Voting Shares, excluding any votes attached to BRND Class A Restricted Voting Shares held directly or indirectly by (i) the GH Group Founders3, and (ii) persons who also hold BRND Class B Shares (as defined in the Circular), BRND intends to issue Multiple Voting Shares (as defined in the Circular) to the GH Group Founders in connection with the closing of the Transaction. The Multiple Voting Shares are expected to be nominal value preferred shares with a US$0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carry 50 votes per share (voting together with the other classes of Equity Shares as if they were a single class except where otherwise required by law or stock exchange requirements), and have no entitlement to dividends and no conversion rights. In addition, unless redeemed earlier by a holder, the Multiple Voting Shares would be automatically subject to a three (3)-year sunset provision, at which time they would be redeemed. The Multiple Voting Shares will not be transferable except to controlled affiliates. See Schedule “A” – Proposed Amended and Restated Articles to the Transaction Resolution attached as Appendix “A” to the Circular for a description of the structure.

 

See “The Transaction – Amendments to Notice of Articles and Articles” for additional information.

 

 

 

3 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

f

 

 

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that an annual and special meeting (the “Shareholders’ Meeting”) of the holders (collectively, the “BRND Shareholders”) of (i) Class A restricted voting shares of BRND (the “BRND Class A Restricted Voting Shares”) and (ii) Class B shares of BRND (the “BRND Class B Shares”, and together with the BRND Class A Restricted Voting Shares, the “BRND Shares”) of Mercer Park Brand Acquisition Corp. (“BRND”, the “Corporation” or “our”) is scheduled to be held via live webcast on June 2, 2021 at 11:00 a.m. (Toronto time), for the following purposes:

 

1. To consider, and, if thought advisable, to pass a special separate resolution (the “Transaction Resolution”), the full text of which is set forth in Appendix “A” attached to the accompanying management information circular (the “Circular”), to:

 

· approve BRND’s qualifying transaction (the “Transaction”), pursuant to which, among other things, BRND proposes to merge with GH Group, Inc. (“GH Group”) for a value (payable to sellers of GH Group that are non-accredited investors in cash and payable to all other such sellers in shares) of US$325 million pursuant to the terms of the definitive merger agreement in respect thereof (as it may be amended), which includes authorizing the issuance of: (i) subordinate, restricted or limited voting shares of BRND (“Equity Shares”) issuable upon the exchange of certain exchangeable shares; (ii) nominal value multiple voting shares of BRND (“Multiple Voting Shares”) to the founders of GH Group for nominal consideration; (iii) US$85 million in Equity Shares (priced at US$10.00 per share) upon the conversion of certain private placement shares of a wholly-owned subsidiary of BRND; (iv) US$175 million in Equity Shares (US$100 million of which shall be priced at US$10.00 per share and US$75 million of which shall be priced based on the volume weighted average price of the Equity Shares for twenty (20) consecutive trading days immediately prior to October 31, 2024 and which shall vest pursuant to a defined formula) pursuant to a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm complex located in southern California; and (v) up to US$24 million in Equity Shares (priced at US$10.00 per share) pursuant to a Merger and Exchange Agreement dated as of February 23, 2021 between GH Group and Element 7, LLC (“Element 7”), whereby GH Group has the right, subject to satisfactory completion of due diligence, to merge with up to 17 subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California, by way of a separate merger for each entity;

 

· approve the amendment of the notice of articles and articles of BRND (the “Articles”), as set out in Schedule “A” to the Transaction Resolution attached as Appendix “A” to the Circular, to:

 

· create two new share classes of the Corporation, being the restricted voting shares (“Restricted Voting Shares”) and the limited voting shares (“Limited Voting Shares”), and to attach special rights and restrictions to those shares, including applying coattail terms to such shares similar to those applicable to the existing subordinate voting shares of the Corporation (“Subordinate Voting Shares”);

· amend the special rights and restrictions attached to the existing Subordinate Voting Shares, including without limitation, by amending the requirements on who may hold Subordinate Voting Shares;

· amend the special rights and restrictions attached to the existing Multiple Voting Shares in order to convert the terms of such class of shares into nominal value preferred shares with a US$0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carrying 50 votes per share, having limited transferability and being subject to a three (3)-year sunset provision, at which time they would be automatically redeemed;

 

I

 

 

· amend the special rights and restrictions attached to the BRND Class A Restricted Voting Shares and BRND Class B Shares so that, effective simultaneously with the closing of the acquisition of GH Group, the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares shall be converted on a one-for-one basis into Equity Shares (with the result that, immediately following the closing of the Transaction, the non-redeemed BRND Class A Restricted Voting Shares and BRND Class B Shares will be converted into Equity Shares); and

· create a new class of shares of the Corporation, being the preferred shares, which will be unlimited in number and be issuable in series with such terms as are determined by the board of directors of the Corporation from time to time (it is not intended that such preferred shares will be used for anti-takeover purposes);

 

· approve a second amendment of the notice of articles and Articles, following the redemption and/or conversion of the BRND Class A Restricted Voting Shares and BRND Class B Shares, as applicable, to:

 

· alter the authorized share structure of BRND to remove the BRND Class A Restricted Voting Shares and BRND Class B Shares; and

· adopt amended and restated articles substantially in the form set out in Schedule “B” to the Transaction Resolution attached as Appendix “A” to the Circular.

 

The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by (A) the GH Group Founders4, and (B) the holders of BRND Class B Shares and other persons not permitted to vote thereon under Ontario Securities Commission Rule 56-501 – Restricted Shares); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class.

 

The Transaction Resolution will also provide that, upon closing of the Transaction, the initial auditors of the Corporation will be Macias, Gini and O’Connell LLP and that the directors are authorized to fix the remuneration thereof.

 

2. To consider, and, if thought advisable, to pass an ordinary resolution (the “Equity Incentive Plan Resolution”), the full text of which is set forth in Appendix “B” attached to the accompanying Circular, to approve, conditional on the closing of the Transaction, the proposed Equity Incentive Plan, which includes authorizing the grant of rights to acquire up to 16,406,629 Equity Shares.

 

The Equity Incentive Plan Resolution will be required to be approved by an ordinary resolution of all BRND Shareholders, voting together as if they were a single class of shares.

 

3. To elect Kyle Kazan, Graham Farrar, Jamie Mendola, Jocelyn Rosenwald, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De Le Torre, on an individual basis, as directors of the Corporation (the “Resulting Issuer Board”) to hold office conditional upon closing of the Transaction.

 

The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares.

 

4. To transact such further or other business as may properly come before the Shareholders’ Meeting or any adjournment(s) or postponement(s) thereof.

 

 

4 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

II

 

 

Out of an abundance of caution, to proactively deal with the unprecedented public health impact of the novel coronavirus disease, also known as COVID-19, and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, we will hold the Shareholders’ Meeting in a virtual-only format, which will be conducted via live audio webcast. All BRND Shareholders, regardless of their geographic location, will have an equal opportunity to participate in the Shareholders’ Meeting and engage with directors and management of BRND as well as with other BRND Shareholders. BRND Shareholders will not be able attend the Shareholders’ Meeting in person. At the Shareholders’ Meeting, if you virtually attend, you will have the opportunity to ask questions and vote on the Transaction and a number of important related matters. Alternatively, you may vote by proxy (if you are a registered shareholder) or by following the instructions on the voting information form (if you are a beneficial shareholder), in each case, by following the applicable directions.

 

The record date for the determination of registered BRND Shareholders entitled to receive notice of and to vote at the Shareholders’ Meeting is the close of business on May 3, 2021 (the “Record Date”). Only BRND Shareholders whose names are entered in the register of BRND Shareholders as of the close of business on the Record Date will be entitled to receive notice of, and to vote their shares at, the Shareholders’ Meeting. Registered BRND Shareholders and duly appointed proxyholders will be able to virtually attend, participate, vote and ask questions at the Shareholders’ Meeting online at https://web.lumiagm.com/207586819. Beneficial shareholders of BRND (being shareholders who hold their shares through a securities dealer or broker, bank, trust company or trustee, custodian, nominee or other intermediary), who have not duly appointed themselves as their proxy will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting. This notice of annual and special meeting of BRND Shareholders is accompanied by (i) the Circular, (ii) a form of proxy (for registered shareholders), and/or (iii) a voting instruction form (for beneficial shareholders). A letter of transmittal will be available upon a request being made to the Corporation.

 

As a result of the foregoing, among other things, all BRND Class A Restricted Voting Shares in respect of which valid notices of redemption in respect of the Transaction have been deposited by the Redemption Deposit Deadline (as defined in the Circular) and not withdrawn will be redeemed by BRND effective immediately prior to the closing of the Transaction (the “Effective Time”), and, upon receipt by each such BRND Shareholder of the redemption amount for their BRND Class A Restricted Voting Shares in accordance with the constating documents of BRND, each such redeeming BRND Shareholder shall cease to have any rights as a registered BRND Shareholder, and such BRND Class A Restricted Voting Shares shall be cancelled and cease to be outstanding.

 

The specific details of the matters proposed to be put before the Shareholders Meeting are set forth in the Circular accompanying this Notice. The full text of the Transaction Resolution and the Equity Incentive Plan Resolution are set out in Appendices “A” and “B”, respectively, to the Circular. A form of proxy or voting instruction form also accompanies this Notice.

 

If the Transaction Resolution is not approved by the registered BRND Shareholders at the Shareholders’ Meeting, the Equity Incentive Plan Resolution will not be proceeded with at the Shareholders’ Meeting.

 

A registered BRND Shareholder may virtually attend the Shareholders’ Meeting or may be represented by proxy. If you are a registered BRND Shareholder and you are unable to virtually attend the Shareholders’ Meeting, we encourage you to vote by completing the enclosed form of proxy or, alternatively, electronically or by telephone, in each case in accordance with the enclosed instructions. Voting by proxy will not prevent you from voting virtually at the Shareholders’ Meeting if you virtually attend the Shareholders’ Meeting and will ensure that your vote will be counted if you are unable to virtually attend. A proxy will not be valid for use at the Shareholders’ Meeting unless the completed form of proxy is delivered to the offices of BRND’s transfer agent, Odyssey Trust Company, at Suite 702, 67 Yonge St., Toronto, Ontario, Canada M5E 1J8, Attention: Proxy Department prior to 11:00 a.m. on May 31, 2021 or, if the Shareholders’ Meeting is adjourned, at least 48 hours (excluding Saturdays, Sundays and holidays) prior to the time set for the reconvening of the Shareholders’ Meeting. A person appointed as a proxyholder need not be a shareholder.

 

If you are a non-registered BRND Shareholder, please refer to the section in the Circular entitled “General Proxy Information — Advice to Beneficial BRND Shareholders” as well as the instructions set out in the voting instruction form or other instructions received from your financial intermediary for information on how to vote your BRND Shares.

 

III

 

 

Registered holders of BRND Class A Restricted Voting Shares have the right to redeem all or a portion of their BRND Class A Restricted Voting Shares in accordance with their terms, provided that they deposit or, in the case of non-registered shareholders, instruct the applicable participant in the depository, trading, clearing and settlement systems administered by CDS Clearing and Depositary Services Inc. (“CDS”) to cause CDS to deposit their shares for redemption prior to 5:00 p.m. (Toronto time) on June 2, 2021. Notwithstanding the foregoing redemption right, no registered holder of BRND Class A Restricted Voting Shares, together with any affiliate of such holder or other person with whom such holder or affiliate is acting jointly or in concert, will be permitted to redeem more than an aggregate of 15% of the number of BRND Class A Restricted Voting Shares issued and outstanding. Redemptions of BRND Class A Restricted Voting Shares shall be funded out of BRND’s escrow account, which, as of April 29, 2021, consisted of US$407,590,197 or approximately US$10.11 per Class A Restricted Voting Share (net of applicable taxes).

 

DATED at New York, New York, this 12th day of May, 2021.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

(Signed) “Jonathan Sandelman”

 

Jonathan Sandelman

Chairman and Director

 

IV

 

 

FREQUENTLY ASKED QUESTIONS

 

The following questions and answers about the Shareholders’ Meeting, voting thereat, and the Transaction, as applicable, are designed to help you understand such matters in more detail. All capitalized terms not otherwise defined have the meanings ascribed to them in the Circular.

 

About the Shareholders’ Meeting

 

Why did I receive this package of information?

 

The Transaction and the related matters described in the Circular are subject to, among other things, obtaining BRND Shareholder approval, as further described below. As a registered or beneficial BRND Shareholder as of the close of business on May 3, 2021, you are entitled to receive notice of and vote at the Shareholders’ Meeting.

 

What is this document?

 

This document is an information circular furnished to registered BRND Shareholders in connection with the solicitation of proxies by and on behalf of the management of BRND for use at the Shareholders’ Meeting or at any adjournment(s) or postponement(s) thereof. The Circular provides additional information respecting the Transaction, among other things. References in this Circular to the Shareholders’ Meeting include any adjournment(s) or postponement(s) thereof that may occur.

 

Who is soliciting my proxy?

 

Your proxy is being solicited by and on behalf of BRND’s management for use at the Shareholders’ Meeting or any adjournment(s) or postponement(s) thereof. While it is expected that the solicitation will be primarily by mail, proxies may be solicited personally or by telephone by the regular employees of BRND at nominal cost. All costs of solicitation by management will be borne by BRND.

 

BRND will not be using the notice-and-access mechanism under National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer for distribution of the Notice of Meeting of Shareholders and the Circular to registered BRND Shareholders.

 

See “General Proxy Information – Solicitation of Proxies”.

 

When and where is the Shareholders’ Meeting?

 

The Shareholders’ Meeting is scheduled to be held virtually. The Shareholders’ Meeting will be held via live audio webcast on June 2, 2021 at 11:00 a.m. (Toronto time) at https://web.lumiagm.com/207586819.

 

Who is entitled to vote at the Shareholders’ Meetings and how will votes be counted?

 

All registered BRND Shareholders as of the close of business on May 3, 2021 (the “Record Date”) are entitled to vote on the Transaction Resolution, and should the Transaction Resolution be approved, all registered BRND Shareholders as of the close of business on May 3, 2021 are entitled to vote on the Equity Incentive Plan Resolution.

 

Odyssey Trust Company (“Odyssey”), the transfer agent and registrar of the Corporation, will count the votes.

 

What if I acquired ownership of BRND Shares after May 3, 2021?

 

Only registered BRND Shareholders as of the close of business on the Record Date are entitled to receive notice of, attend, be heard and vote at the Shareholders’ Meeting online at https://web.lumiagm.com/207586819.

 

When is voting recommended?

 

In order to ensure that your proxy is received in time for the Shareholders’ Meeting, to be held on June 2, 2021 at 11:00 a.m. (Toronto time), we recommend that you vote as soon as possible.

 

A

 

 

What am I being asked to vote on?

 

You are being asked to vote on the Transaction Resolution to approve the Transaction, pursuant to which, among other things:

 

· BRND proposes to merge with GH Group, Inc. pursuant to the terms of the definitive merger agreement in respect thereof (as it may be amended as of or prior to at the closing of the Transaction), which includes the issuance of (i) Equity Shares upon the exchange of the Exchangeable Shares of one of BRND’s subsidiaries, and (ii) Multiple Voting Shares to the GH Group Founders;

 

· BRND proposes to amend its notice of articles and articles in order to:

 

· create two new share classes of the Corporation, being the Restricted Voting Shares and the Limited Voting Shares, and to attach special rights and restrictions to those shares, including applying coattail terms to such shares similar to those applicable to the existing Subordinate Voting Shares;

· amend the special rights and restrictions attached to the existing Subordinate Voting Shares, including without limitation, by amending the requirements on who may hold Subordinate Voting Shares;

· amend the special rights and restrictions attached to the existing Multiple Voting Shares in order to convert the terms of such class of shares into nominal value preferred shares with a US$0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carrying 50 votes per share, having limited transferability and being subject to a three (3)- year sunset provision, at which time they would be automatically redeemed;

· amend the special rights and restrictions attached to the BRND Class A Restricted Voting Shares and BRND Class B Shares so that, effective simultaneously with the closing of the acquisition of GH Group, the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares shall be converted on a one-for-one basis into Equity Shares (with the result that, immediately following the closing of the acquisition of GH Group, the non-redeemed BRND Class A Restricted Voting Shares and BRND Class B Shares will be converted into Equity Shares); and

· create a new class of shares of the Corporation, being the preferred shares, which will be unlimited in number and be issuable in series with such terms as are determined by the board of directors of the Corporation from time to time (it is not intended that such preferred shares will be used for anti-takeover purposes);

 

all of the foregoing as set out in Schedule “A” to the Transaction Resolution attached as Appendix “A” to the Circular; and

 

· following the redemption and/or conversion of the BRND Class A Restricted Voting Shares and BRND Class B Shares, to:

 

· alter the authorized share structure of BRND to remove the BRND Class A Restricted Voting Shares and BRND Class B Shares; and

· adopt amended and restated articles substantially in the form set out in Schedule “B” to the Transaction Resolution attached as Appendix “A” to the Circular; and

 

· BRND proposes that its auditors following closing of the Transaction shall be Macias, Gini & O’Connell LLP.

 

Additionally, you are being asked to vote on the Equity Incentive Plan Resolution authorizing the adoption of the proposed equity incentive plan of BRND and the election of the directors of the Corporation to hold office conditional upon closing of the Transaction.

 

B

 

 

If the Transaction is not approved by the registered BRND Shareholders at the Shareholders’ Meeting, the Equity Incentive Plan Resolution will not be proceeded with at the Shareholders’ Meeting.

 

Does the board of directors of BRND (the “BRND Board”) support the Transaction and the Equity Incentive Plan Resolution?

 

Yes. After careful consideration by the BRND Board, the BRND Board has unanimously concluded that the Transaction and the Equity Incentive Plan Resolution are in the best interests of BRND. Moreover, the BRND Board has unanimously determined that the Transaction is fair to BRND Shareholders. Accordingly, the BRND Board has unanimously approved the Transaction and unanimously recommends that registered BRND Shareholders vote FOR the Transaction Resolution and the Equity Incentive Plan Resolution.

 

What is the quorum for the Shareholders’ Meeting?

 

For all purposes contemplated by this Circular, the quorum for the transaction of business at the Shareholders’ Meeting is one person who is, or who represents by proxy, shareholders who, in the aggregate, hold at least 25% of the issued shares entitled to be voted at the Shareholders’ Meeting.

 

How many BRND Shares are entitled to vote?

 

The authorized capital of the Corporation consists of an unlimited number of (i) BRND Class A Restricted Voting Shares and (ii) BRND Class B Shares. Each holder of BRND Shares is entitled to one vote for each BRND Class A Restricted Voting Share and/or each BRND Class B Share registered in his, her or its name at the close of business on the Record Date. At the close of business on the Record Date, there were 40,250,000 BRND Class A Restricted Voting Shares outstanding and 10,198,751 BRND Class B Shares outstanding.

 

What if amendments are made to these matters or other business is brought before the Shareholders’ Meeting?

 

The accompanying form of proxy or voting instruction form confers discretionary authority on the persons named therein as proxies with respect to any amendments or variations to the matters identified in each of the Notice of Meeting contained in this Circular, or other matters that may properly come before the Shareholders’ Meeting, and the named proxies in your properly executed proxy or voting instruction form will vote on such matters in accordance with their judgment. At the date of this Circular, management of BRND is not aware of any such amendments, variations or other matters which are to be presented for action at the Shareholders’ Meeting.

 

How can I vote my BRND Shares?

 

If you are a non-registered holder of BRND Class A Restricted Voting Shares (meaning that your BRND Class A Restricted Voting Shares are held beneficially on your behalf, or for your account, by a broker, investment dealer, bank, trust company or other intermediary), please carefully follow the instructions provided by such intermediary in order to vote.

 

If you were a registered BRND Shareholder as of the close of business on the Record Date, you can virtually attend and vote at the Shareholders’ Meeting. If you cannot virtually attend the Shareholders’ Meeting, please carefully follow the instructions provided in the enclosed form of proxy in order to vote. You can vote your BRND Shares either by virtually attending and voting your BRND Shares at the Shareholders’ Meeting or, if you cannot virtually attend the Shareholders’ Meeting, by having your BRND Shares voted by proxy in accordance with the instructions set out on the accompanying form of proxy.

 

See “General Proxy Information” in this Circular for more information on voting your BRND Shares.

 

C

 

 

How do I vote at the Shareholders’ Meeting?

 

Registered shareholders may vote at the Shareholders’ Meeting by completing a ballot online during the Shareholders’ Meeting, as further described below. See “How do I virtually attend and participate at the Shareholders’ Meeting?”.

 

Beneficial shareholders who have not duly appointed themselves as proxyholder will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting. This is because the Corporation and its transfer agent do not have a record of the beneficial shareholders of the Corporation, and, as a result, will have no knowledge of your shareholdings or entitlement to vote, unless you appoint yourself as proxyholder. If you are a beneficial shareholder and wish to vote at the Shareholders’ Meeting, you have to appoint yourself as proxyholder, by inserting your own name in the space provided on the voting instruction form sent to you and must follow all of the applicable instructions provided by your intermediary. See “How do I appoint a third-party as proxy” and “How do I virtually attend and participate at the Shareholders’ Meeting?”.

 

How do I appoint a third-party as proxy?

 

The following applies to BRND Shareholders who wish to appoint a person (a “third-party proxyholder”) other than the management nominees set forth in the form of proxy or voting instruction form as proxyholder, including beneficial shareholders who wish to appoint themselves as proxyholder to participate or vote at the Shareholders’ Meeting.

 

BRND Shareholders who wish to appoint a third-party proxyholder to vote at the Shareholders’ Meeting as their proxy and vote their BRND Shares MUST submit their proxy or voting instruction form (as applicable) appointing such third-party proxyholder AND register the third-party proxyholder, as described below. Registering your proxyholder is an additional step to be completed AFTER you have submitted your proxy or voting instruction form. Failure to register the proxyholder will result in the proxyholder not receiving a username to virtually attend, participate or vote at the Shareholders’ Meeting.

 

· Step 1: Submit your proxy or voting instruction form: To appoint a third-party proxyholder, insert such person’s name in the blank space provided in the form of proxy or voting instruction form and follow the instructions for submitting such form of proxy or voting instruction form. This must be completed prior to registering such proxyholder, which is an additional step to be completed once you have submitted your form of proxy or voting instruction form.

 

· Step 2: Register your proxyholder: To register a proxyholder, shareholders MUST send an email to brnd@odysseytrust.com by 11:00 a.m. (Toronto time) on May 31, 2021, and provide Odyssey with the required proxyholder contact information, number of shares appointed, name in which the shares are registered if they are a registered shareholder, or name of broker where the shares are held if a beneficial shareholder, so that Odyssey may provide the proxyholder with a username via email. Without a username, proxyholders will not be able to virtually attend, participate or vote at the Shareholders’ Meeting.

 

If you are a beneficial shareholder and wish to virtually participate or vote at the Shareholders’ Meeting, you have to insert your own name in the space provided on the voting instruction form sent to you by your intermediary, follow all of the applicable instructions provided by your intermediary AND register yourself as your proxyholder, as described above. By doing so, you are instructing your intermediary to appoint you as proxyholder. It is important that you comply with the signature and return instructions provided by your intermediary. Please also see further instructions below under the heading “How do I virtually attend and participate at the Shareholders’ Meeting?”.

 

How do I virtually attend and participate at the Shareholders’ Meeting?

 

The Corporation is holding the Shareholders’ Meeting in a virtual-only format, which will be conducted via live audio webcast. BRND Shareholders will not be able to attend the Shareholders’ Meeting in person. In order to participate or vote at the Shareholders’ Meeting (including for voting and asking questions at the Shareholders’ Meeting), BRND Shareholders must have a valid username. Registered BRND Shareholders and duly appointed proxyholders will be able to virtually attend, participate and vote at the Shareholders’ Meeting online at https://web.lumiagm.com/207586819. Such persons may then enter the Shareholders’ Meeting by clicking “I have a login” and entering a username and password before the start of the Shareholders’ Meeting.

 

D

 

 

· Registered shareholders: The 12-digit control number located on the form of proxy is the username. The password to the Shareholders’ Meeting is “brnd2021” (case sensitive). If, as a registered BRND Shareholder, you are using your control number to login to the Shareholders’ Meeting and have previously voted, you do not need to vote again when the polls are opened. Should you choose to vote at the Shareholders’ Meeting, you will be revoking any and all previously submitted votes.

 

· Duly appointed proxyholders: Odyssey, the transfer agent and registrar of the Corporation, will provide the proxyholder with a username by e-mail after the voting deadline has passed. The password to the Shareholders’ Meeting is “brnd2021” (case sensitive). Only registered BRND Shareholders and duly appointed proxyholders will be entitled to participate and vote at the Shareholders’ Meeting. Beneficial BRND Shareholders who have not duly appointed themselves as proxyholder will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting. BRND Shareholders who wish to appoint a third-party proxyholder to represent them at the Shareholders’ Meeting (including beneficial BRND Shareholders who wish to appoint themselves as proxyholder to participate or vote at the Shareholders’ Meeting) MUST submit their duly completed proxy or voting instruction form AND register the proxyholder. See “How do I appoint a third-party as proxy?”.

 

BRND Shareholders will be allowed to log in as early as 30 minutes before the start time on June 2, 2021. The virtual Shareholders’ Meeting platform is supported across internet browsers (e.g., Edge, Firefox, Chrome, and Safari) and devices (e.g., desktops, laptops, tablets, and cell phones). If you intend to join the live audio webcast, you should ensure that you have a strong Internet connection from wherever you intend to join and participate in the virtual Shareholders’ Meeting. We encourage you to access the virtual Shareholders’ Meeting before it begins, and you should give yourself plenty of time to log in and ensure that you can hear streaming audio prior to the start of the Shareholders’ Meeting.

 

What do I do as a U.S. beneficial shareholder?

 

If you are a beneficial shareholder located in the United States and wish to participate or vote at the Shareholders’ Meeting or, if permitted, appoint a third-party as your proxyholder, in addition to the steps described above under “How do I virtually attend and participate at the Shareholders’ Meeting?”, you must obtain a valid legal proxy from your intermediary. Follow the instructions from your intermediary included with the legal proxy form and the voting information form sent to you or contact your intermediary to request a legal proxy form or a legal proxy if you have not received one. After obtaining a valid legal proxy from your intermediary, you must then submit such legal proxy to Odyssey. Requests for registration from beneficial shareholders located in the United States that wish to participate or vote at the Shareholders’ Meeting or, if permitted, appoint a third-party as their proxyholder must be sent by e-mail to brnd@odysseytrust.com and received by no later than 11:00 a.m. (Toronto time) on the second business day preceding the day of the Shareholders’ Meeting (being May 31, 2021) or not less than 48 hours (excluding Saturdays, Sundays and holidays) before the time for holding any adjournment(s) or postponement(s) thereof.

 

How do I ask questions prior to or at the Shareholders’ Meeting?

 

If you want to ask questions during the Shareholders’ Meeting, log into the virtual meeting platform at https://web.lumiagm.com/207586819, click on the double chat bubble icon, type your question into the chat field, and click the send arrow button.

 

Questions pertinent to Shareholders’ Meeting matters will be answered during the Shareholders’ Meeting, subject to time constraints of two-minute limits per question and two questions per BRND Shareholder. Questions that are unrelated to the proposals under discussion, use blatantly offensive language or are regarding personal matters, including those related to employment, product or service issues, or suggestions for product innovations, will not be answered by the chair of the Shareholders’ Meeting or management.

 

E

 

 

 

Am I entitled to dissent rights?

 

Registered BRND Shareholders are not entitled to any dissent rights in respect of the Transaction Resolution or the Equity Incentive Plan Resolution.

 

How can I redeem my BRND Class A Restricted Voting Shares?

 

Registered holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, provided that they deposit (and do not validly withdraw) their BRND Class A Restricted Voting Shares for redemption prior to the Redemption Deposit Deadline and, subject to applicable law, upon the closing of the Transaction, for an amount per BRND Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion, per BRND Class A Restricted Voting Share, of (i) the escrowed funds available in the BRND’s escrow account (the “Escrow Account”) at the time of the Shareholders’ Meeting, including interest and other amounts earned thereon; less (ii) an amount equal to the total of (A) applicable taxes payable by BRND on such interest and other amounts earned in the Escrow Account, and (B) actual and expected direct expenses related to the redemption, each as reasonably determined by BRND; for greater certainty, such amount will not be reduced by the amount of any tax payable by BRND under Part VI.1 of the Income Tax Act (Canada) or the deferred underwriting commission per BRND Class A Restricted Voting Share held in the Escrow Account. The redemption price per BRND Class A Restricted Voting Share is expected to be approximately US$10.11, assuming a redemption date of June 4, 2021. Registered holders of BRND Class A Restricted Voting Shares may elect to redeem their BRND Class A Restricted Voting Shares irrespective of whether they vote for or against, or do not vote on, the Transaction.

 

A non-registered holder of BRND Class A Restricted Voting Shares who desires to exercise its redemption rights in connection with the BRND articles must do so by causing a participant (a “CDS Participant”) in the depository, trading, clearing and settlement systems administered by CDS Clearing and Depositary Services Inc. (“CDS”) to deliver to CDS (at its office in the City of Toronto) on behalf of the owner a written notice (a “Redemption Notice”) of the owner’s intention to redeem BRND Class A Restricted Voting Shares in connection with the BRND articles. A non-registered holder of BRND Class A Restricted Voting Shares who desires to redeem BRND Class A Restricted Voting Shares should ensure that the CDS Participant is provided with notice of his or her intention to exercise his or her redemption privilege sufficiently in advance of the notice date described above so as to permit the CDS Participant to deliver notice to CDS and so as to permit CDS to deliver notice to BRND’s transfer agent in advance of the required time.

 

Notwithstanding the foregoing redemption right, no registered holder of BRND 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, is permitted to redeem more than an aggregate of 15% of the number of issued and outstanding BRND Class A Restricted Voting Shares.

 

Redemptions of BRND Class A Restricted Voting Shares shall be funded out of BRND’s escrow account, which, as of April 29, 2021, consisted of US$407,590,197 or approximately US$10.11 per Class A Restricted Voting Share (net of applicable taxes).

 

See “Redemption Rights” for more information on your redemption rights in connection with the Shareholders’ Meeting.

 

About the Transaction

 

I own BRND Class A Restricted Voting Shares. What will I receive if the Transaction is completed?

 

Upon consummation of the Transaction, each unredeemed BRND Class A Restricted Voting Share will convert into one Equity Share in accordance with BRND’s notice of articles and articles, as amended in connection with the Transaction Resolution.

 

F

 

 

Why is the Corporation proposing the Transaction?

 

The BRND Board and BRND’s management were mandated to seek out and consummate a transaction that constitutes BRND’s qualifying transaction under Part X of the NEO Exchange Manual within a 24-month period from the closing of BRND’s IPO (the “Permitted Timeline”). The Permitted Timeline may be extended to up to 36 months from the closing of BRND’s IPO with approval of only the holders of the BRND Class A Restricted Voting Shares, by ordinary resolution, with approval of the board of directors of BRND, and with the consent of the NEO Exchange, if required. Since BRND’s IPO in May 2019, the BRND Board and BRND’s management reviewed several potential qualifying transactions and have negotiated the terms of the Transaction and related matters. On May 5, 2021, the holders of the BRND Class A Restricted Voting Shares approved an ordinary resolution to extend the Permitted Timeline to July 30, 2021.

 

What is GH Group?

 

GH Group is a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in the State of California. GH Group has been cultivating cannabis since 2015 and was one of the first three recipients of a license to open a retail dispensary in Santa Barbara, California. It possesses (i) an aggregate of 550,000 sq. ft. in two operating greenhouse facilities in 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. GH Group owns three operating retail dispensaries in Santa Barbara, Los Angeles and Berkeley, California and partially owns and manages a fourth located in Los Angeles that includes a specialty indoor cultivation facility. GH Group is brand-focused with cannabis products including flower, oil and concentrate, tinctures, and vaporizer products. GH Group’s brands include Forbidden Flowers and Glass House Farms, which is the second largest cannabis flower brand in California according to data from BDS Analytics. See “The Business of the GH Group” in the Information Statement attached as Appendix “D” to the Circular.

 

In addition, GH Group has executed a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire SoCal Greenhouse (as defined in the Circular) a large greenhouse farm complex located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. See “SoCal Greenhouse Acquisition” in the Information Statement attached as Appendix “D” to this Circular.

 

GH Group has also executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California. In addition, GH Group has agreed, subject to certain conditions, to appoint Element 7 as a consultant to assist with the obtaining of additional permits, licenses and operations in California. See “Element 7” in the Information Statement attached as Appendix “D” to this Circular.

 

How do I deposit my BRND Shares?

 

Registered BRND Shareholders: A letter of transmittal is available upon request from the Corporation, which, when properly completed and duly executed and returned together with the certificate(s) or DRS advice(s) representing BRND Shares and all additional documents as Odyssey may reasonably require, will enable each holder of BRND Shares to obtain the Equity Shares to which such holder of BRND Shares is entitled under the Transaction. The details for the surrender of BRND Shares certificates to Odyssey and the address of Odyssey will be set out in the letter of transmittal.

 

Beneficial BRND Shareholders: If the Transaction is completed, CDS is expected to effect a one-for-one share exchange of the non-redeemed BRND Class A Restricted Voting Shares held in CDS for Equity Shares. Beneficial owners of BRND Class A Restricted Voting Shares are not required to take any further action to receive the Equity Shares which they are entitled to receive.

 

See “Procedure for the Exchange of BRND Shares”.

 

G

 

 

When will the Transaction be completed?

 

On May 5, 2021, the holders of the BRND Class A Restricted Voting Shares approved an ordinary resolution to extend the Permitted Timeline to July 30, 2021. Subject to receipt of applicable regulatory and other approvals, and the satisfaction or waiver of all closing conditions, it is presently anticipated that the Transaction will be completed in the first half of June 2021. There can be no assurance that the Transaction will be completed.

 

What will I have to do as a BRND Shareholder to receive the Equity Shares for my BRND Class A Restricted Voting Shares?

 

Registered BRND Shareholders: If you are a registered holder of BRND Shares, you must complete and send the letter of transmittal (available upon request from the Corporation) with the certificate(s) or DRS advice(s) (if applicable) representing your BRND Shares to the Depositary. The Depositary is required to mail you evidence of ownership of Equity Shares as soon as practicable after the closing of the Transaction or upon receipt of your completed letter of transmittal and of BRND Share certificate(s) or DRS advice(s) following closing of the Transaction.

 

Beneficial BRND Shareholders: If you are a beneficial holder of BRND Class A Restricted Voting Shares, your non-redeemed BRND Class A Restricted Voting Shares and will automatically convert into Equity Shares on a one-for-one basis upon the consummation of the Transaction, and you will receive such Equity Shares through your account with your broker, investment dealer, bank, trust company or other intermediary that holds BRND Shares on your behalf. You should contact your intermediary if you have questions about this process.

 

About Approval of the Transaction

 

What approvals are required for the Transaction to become effective?

 

Completion of the Transaction is subject to, among other things, the receipt of (i) BRND Shareholder approval of the Transaction Resolution, (ii) the approval of the NEO Exchange, and (iii) the required approvals and consents from applicable regulatory authorities.

 

What is the required BRND Shareholder approval level in respect of the Transaction Resolution, the Equity Incentive Plan Resolution and the election of the nominees to the Resulting Issuer Board?

 

The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by (A) the GH Group Founders5, and (B) holders of BRND Class B Shares, as well as other persons not permitted to vote thereon under OSC Rule 56-501); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class.

 

The Equity Incentive Plan Resolution will be required to be approved by an ordinary resolution of the BRND Shareholders, voting together as if they were a single class of shares.

 

The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares.

 

 

5 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares. 

 

H

 

 

What happens if the BRND Shareholders do not approve the Transaction Resolution?

 

If the Corporation does not receive the required vote by the registered BRND Shareholders in favour of the Transaction Resolution, the Transaction will likely not become effective. If the Transaction is not completed, the Corporation may pursue another qualifying transaction. Further, if the Transaction is not completed, the Corporation may be unable to seek out and consummate a transaction that constitutes the Corporation’s qualifying transaction under Part X of the NEO Exchange Manual within the time period required. See “Risks Associated with the Transaction” in the Circular.

 

About BRND Shares

 

Will the BRND Equity Shares and the BRND Warrants continue to be listed on the NEO Exchange after the Transaction?

 

It is a condition of closing the Transaction that the Equity Shares, into which the Class A Restricted Voting Shares will be converted, are approved to be listed on the NEO Exchange.

 

Assuming the Equity Shares are listed on the NEO Exchange, the BRND Warrants will continue to be listed on the NEO Exchange upon completion of the Transaction.

 

Tax Consequences to BRND Shareholders

 

What are the tax consequences of the Transaction to me as a BRND Shareholder?

 

This Circular contains a summary of the principal Canadian federal income tax considerations relevant to BRND Shareholders. Please see the discussions under the headings “Certain Canadian Federal Income Tax Considerations”. This summary is of a general nature only and is not, and is not intended to be, nor should it be construed to be, legal or tax advice or representations to any particular BRND Shareholder. This summary is not exhaustive of all income tax considerations. Accordingly, BRND Shareholders, and, in particular, BRND Shareholders that are United States residents and/or citizens, are urged to consult their own legal and tax advisors with respect to the tax consequences to them having regard to their particular circumstances, including the application and effect of the income and other tax laws of any country, province, state or other jurisdiction that may be applicable to the BRND Shareholder.

 

Who to Call with Questions

 

Who can I contact if I have questions?

 

If you have any questions or require any assistance in executing your proxy or voting instruction form, please call Odyssey Trust Company, BRND’s transfer agent, at 1-833-394-7716 or your tax, financial, legal or other professional advisors.

 

I

 

TABLE OF CONTENTS  
   
INTRODUCTION 1
   
FORWARD-LOOKING STATEMENTS 2
   
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES 3
   
GLOSSARY OF TERMS 3
   
SUMMARY 8
   
GENERAL PROXY INFORMATION 1
Solicitation of Proxies 1
Participation in the Shareholders’ Meeting 1
Appointment and Revocation of Proxies 2
Virtual Attendance and Participation in the Shareholders’ Meeting 4
Asking Questions 4
Advice to Beneficial BRND Shareholders 5
   
INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON 5
Founders’ Shares 5
   
INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS 6
   
VOTING SHARES AND THE PRINCIPAL HOLDERS THEREOF 6
   
THE TRANSACTION 7
Background to the Transaction 9
The Definitive Agreement 10
Exchangeable Shares and Exchange Rights Agreement 10
Amendments to Notice of Articles and Articles 11
Recommendation of the BRND Board 15
Reasons for the Recommendation of the BRND Board 15
Qualifying Transaction Fair Market Value Threshold 17
Transaction Steps 17
BRND Founders and GH Group Founders 18
BRND Shareholder Approval of the Transaction 19
Post-Transaction Structure 19
Interests of Certain Persons in the Transaction 19
   
PROCEDURE FOR THE EXCHANGE OF BRND SHARES 21
   
REDEMPTION RIGHTS 21
   
EQUITY INCENTIVE PLAN 23
   
ELECTION OF DIRECTORS 23
Cease Trade Orders, Bankruptcies, Penalties or Sanctions 27
Conflicts of Interest 28
   
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION 28
   
STOCK EXCHANGE LISTINGS 28
   
CANADIAN SECURITIES LAW MATTERS 28
   
UNITED STATES SECURITIES LAWS MATTERS 28
   
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS 30
   
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS 34
   
RISKS ASSOCIATED WITH THE TRANSACTION 35

 

 

 

INFORMATION CONCERNING BRND AND GH GROUP 37
   
CONTRACTUAL RIGHTS OF RESCISSION AND DAMAGES 37
   
OTHER BUSINESS 38
   
DOCUMENTS INCORPORATED BY REFERENCE 38
   
ADDITIONAL INFORMATION 38
   
SECURITIES LAW EXEMPTIONS 39

 

  ADDENDA  
     
APPENDIX “A” TRANSACTION RESOLUTION  
SCHEDULE “A” PARTS 27 AND 29-32 OF ARTICLES  
SCHEDULE “B” AMENDED AND RESTATED ARTICLES  
APPENDIX “B” EQUITY INCENTIVE PLAN RESOLUTION  
APPENDIX “C” PROPOSED EQUITY INCENTIVE PLAN  
APPENDIX “D” INFORMATION STATEMENT  

 

 

 

MANAGEMENT INFORMATION CIRCULAR 

(Containing information as at May 4, 2021, unless indicated otherwise)

 

INTRODUCTION

 

This management information circular (the Circular) is furnished in connection with the solicitation of proxies by the management of Mercer Park Brand Acquisition Corp. (“BRND”, Corporationor “our”) for use at the annual and special meeting of the holders (collectively, the “BRND Shareholders”) of Class A restricted voting shares of the Corporation (“BRND Class A Restricted Voting Shares”) and Class B shares (“BRND Class B Shares”, and together with BRND Class A Restricted Voting Shares, the “BRND Shares”) (and any adjournment(s) or postponement(s) thereof) scheduled to be held on June 2, 2021 (the “Shareholders’ Meeting”) at the time and place and for the purposes set forth in the accompanying Notice of Meeting of Shareholders. No person has been authorized to give any information or make any representation in connection with the Transaction (as defined herein) nor any other matters to be considered at the Shareholders’ Meeting other than those contained in this Circular and, if given or made, any such information or representation must not be relied upon as having been authorized.

 

All summaries of, and references to, the Transaction in this Circular are qualified in their entirety by reference to the complete text of the Definitive Agreement (as defined herein). You are urged to carefully read the full text of the Definitive Agreement. All capitalized terms used in this Circular but not otherwise defined herein have the meanings set forth under the heading “Glossary of Terms”.

 

The information concerning GH Group, SoCal Greenhouse and Element 7 contained in this Circular, including the appendices, has been provided by GH Group, the principals of SoCal Greenhouse and Element 7, respectively, for inclusion in this Circular. Although the Corporation has no knowledge that any statements contained herein taken from or based on such documents, records or information provided by GH Group, the principals of SoCal Greenhouse and Element 7 are untrue or incomplete, the Corporation assumes no responsibility for the accuracy of the information contained in such documents, records or information or for any failure by GH Group, the principals of SoCal Greenhouse or Element 7, as applicable, to disclose events which may have occurred or may affect the significance or accuracy of any such information but which are unknown to the Corporation, except as expressly herein provided.

 

This Circular does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities to be issued under or in connection with the Transaction, or the solicitation of a proxy, in any jurisdiction, to or from any person to whom it is unlawful to make such offer, solicitation of an offer or proxy solicitation in such jurisdiction. Neither the delivery of this Circular nor any distribution of the securities to be issued under or in connection with the Transaction will, under any circumstances, create any implication or be treated as a representation that there has been no change in the information set forth herein since the date of this Circular.

 

As a result of the Transaction, BRND will derive a substantial portion of its revenues from the cannabis industry in the State of California, which industry is illegal under United States federal law. BRND will be directly involved (through its licensed subsidiaries) in the cannabis industry in the United States where local State laws permit such activities. Currently, its proposed subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and medicinal cannabis marketplace in the State of California. See “Risk Factors – Risks Relating to the Legality of Cannabis” below in the Information Statement attached as Appendix “D” to this Circular for additional information on this risk.

 

Due to the COVID-19 pandemic, the Shareholders’ Meeting will be held as a completely virtual meeting conducted via live audio webcast. BRND Shareholders will not be able to attend the Shareholders’ Meeting in person. A summary of the information BRND Shareholders will need to virtually attend the Shareholders’ Meeting online is provided below.

 

1

 

 

THE SECURITIES ISSUABLE PURSUANT TO THE DEFINITIVE AGREEMENT HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY CANADIAN SECURITIES REGULATORY AUTHORITY, THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES REGULATORY AUTHORITY, NOR HAS ANY CANADIAN SECURITIES REGULATORY AUTHORITY, THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES REGULATORY AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.

 

Unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “$” or “US$” are to United States dollars. References to “C$” are to Canadian dollars.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements in this Circular, including the appendices hereto, are forward-looking statements within the meaning of applicable securities laws, including, but not limited to, those statements relating to the proposed Transaction, the timing of the closing of the proposed Transaction, the listing of the Equity Shares on the NEO Exchange, information concerning GH Group and the parties and their financial capacity and availability of capital and other statements that are not historical facts. These statements are based upon certain material factors, assumptions and analyses that were applied in drawing a conclusion or making a forecast or projection, including experience of the Corporation and GH Group, and perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be reasonable in the circumstances. Forward-looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements may include, without limitation, statements regarding the operations, business, financial condition, expected financial results, performance, prospects, opportunities, priorities, targets, goals, ongoing objectives, strategies and outlook of the Corporation and GH Group following the Transaction. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as “pro forma”, “expects”, “anticipates”, “plans”, “believes”, “estimates”, “intends”, “targets”, “projects”, “forecasts”, “seeks”, “likely” or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”.

 

By their nature, forward-looking statements are subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of material factors, many of which are beyond the parties’ control, could affect operations, business, financial condition, performance and results of the parties that may be expressed or implied by such forward-looking statements and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. These factors include, but are not limited to the following:

 

· anticipated approval of each of Transaction Resolution and the Equity Incentive Plan Resolution by the BRND Shareholders;

 

· completion and timing of the Transaction;

 

· receipt and timing of required approvals and consents from applicable regulatory authorities to complete the Transaction;

 

· satisfaction or waiver of closing conditions in accordance with the Definitive Agreement;

 

· expectation that no change or other circumstance will occur that could cause the termination of or a material change to the Definitive Agreement;

 

· the anticipated acquisition of SoCal Greenhouse by GH Group:

 

· the anticipated merger of GH Group with certain subsidiary entities of Element 7 that are in the process of applying for up to 17 State and local retail cannabis licenses in California;

 

· receipt and timing of new licenses and license transfers;

 

· no unforeseen changes in legislative and operating frameworks for the business of GH Group;

 

· general economic, industry and market segment conditions;

 

· changes in applicable environmental, taxation and other laws and regulations, as well as how such laws and regulations are interpreted and enforced;

 

· stock market volatility;

 

· ability to obtain and maintain current and additional financings;

 

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· the execution of strategic growth plans;

 

· the ability of GH Group to continue to develop and grow; and

 

· management’s success in anticipating and managing the foregoing factors, as well as the risks described under the heading Risk Factors” in this Circular and in the Information Statement attached as Appendix “D” to this Circular.

 

In making these statements, the parties have made assumptions with respect to expected cash provided by continuing operations, future capital expenditures, including the amount and nature thereof, trends and developments in the telecommunications industry, business strategy and outlook, expansion and growth of business and operations, accounting policies, credit risks, anticipated acquisitions, opportunities available to or pursued by the parties, and other matters.

 

The reader is cautioned that the foregoing list of factors is not exhaustive of the factors that may affect forward-looking statements. The reader is also cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. Although the forward-looking statements contained in this Circular are based upon what management of the Corporation and GH Group currently believes to be reasonable assumptions, actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what benefits will be derived therefrom. These forward-looking statements are made as of the date of this Circular and, other than as specifically required by law, neither the Corporation nor GH Group assumes any obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results, or otherwise.

 

GH Group report certain non-US GAAP measures that are used to evaluate the performance of its business and the performance of its respective segments, as well as to manage its capital structures. As non-US GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulators require such measures to be clearly defined and reconciled with their most directly comparable US GAAP measure. See “The Business of BRND – Definition and Reconciliation of Non-US GAAP Measures” in the Information Statement attached as Appendix “D” of this Circular for a definition and reconciliation of certain of the foregoing non-US GAAP measures to their most directly comparable measures calculated in accordance with US GAAP.

 

BRND and GH Group believe that such non-US GAAP financial measures and operating metrics provide meaningful supplemental information regarding GH Group performance and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. These financial measures and operating metrics are intended to provide investors with supplemental measures of GH Group’s operating performance and thus highlight trends in GH Group’s core business that may not otherwise be apparent when solely relying on the US GAAP measures.

 

REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES

 

The historical and pro forma consolidated financial statements of, and the summaries of historical financial information contained in the Information Statement attached as Appendix “D” to this Circular are reported in U.S. dollars and have been prepared in accordance with US GAAP.

 

GLOSSARY OF TERMS

 

Unless the context otherwise requires or where otherwise provided, the following words and terms will have the meanings set forth below when read in this Circular, including the following summary. These terms are not always used herein and may not conform to the defined terms used in schedules and appendices to this Circular.

 

3(a)(9) Transactions” has the meaning ascribed to it under the heading “United States Securities Laws Matters”;

 

Accounting Standards Relief” has the meaning ascribed to it under the heading “Securities Law Exemptions”;

 

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Adjusted EBITDA” has the meaning ascribed to it under the heading “Non-U.S. GAAP Measures – Adjusted EBITDA” in the Information Statement attached as Appendix “D” to this Circular;

 

allowable capital loss” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Taxation of Holders Resident in Canada”;

 

Amended and Restated Articles” has the meaning ascribed to it under the heading “The Transaction – Amendments to Notice of Articles and Articles”;

 

Amendments” has the meaning ascribed to it under the heading “The Transaction – Amendments to Notice of Articles and Articles”;

 

BCBCA” means the Business Corporations Act (British Columbia), as it may be amended from time to time;

 

BRND” means Mercer Park Brand Acquisition Corp., and shall include, when appropriate, its subsidiaries from time to time;

 

BRND Board” means the board of directors of Mercer Park Brand Acquisition Corp.;

 

BRND Class A Restricted Voting Shares” means the Class A restricted voting shares in the capital of BRND, and each a “BRND Class A Restricted Voting Share”;

 

BRND Class A Restricted Voting Units” means the Class A restricted voting units offered to the public under BRND’s initial public offering at an offering price of $10.00 per BRND Class A Restricted Voting Unit, each comprised of one (1) BRND Class A Restricted Voting Share and one-half (0.5) of a BRND Warrant, and each a “BRND Class A Restricted Voting Unit”;

 

BRND Class B Shares” means the Class B shares in the capital of BRND (and for greater certainty, includes the BRND Founders’ Shares), and each a “BRND Class B Share”;

 

BRND Class B Units” means the Class B units of BRND, each comprised of one BRND Class B Share and one-half of a BRND Warrant, and each a “BRND Class B Unit”;

 

BRND Founders” means, collectively, Mercer, Charles Miles and Sean Goodrich (or persons or companies controlled by them), as the collective holders of the BRND Founders’ Shares and of the BRND Founders’ Warrants (each as defined herein);

 

BRND Founders’ Shares” means the Class B shares in the capital of BRND issued to the BRND Founders (other than as part of the BRND Class B Units), and each a “BRND Founders’ Share”;

 

BRND Founders’ Warrants” means the share purchase warrants in the capital of BRND issued to Mercer, and each a “BRND Founders’ Warrant”;

 

BRND Shareholders” means the registered or beneficial holders of the BRND Class A Restricted Voting Shares and/or the BRND Class B Shares, as the context requires;

 

BRND Shares” means BRND Class B Shares together with BRND Class A Restricted Voting Shares;

 

BRND Warrants” means, collectively, (A) the 20,125,000 share purchase warrants underlying the BRND Class A Restricted Voting Units, (B) the 9,810,000 BRND Founders’ Warrants, and (C) the 54,500 share purchase warrants underlying the BRND Class B Units, each of which having been issued under the Warrant Agreement and in respect of which, 65 days following the completion of the Transaction, will each entitle the holder thereof to purchase one BRND Class A Restricted Voting Share (which, at such time, will represent one Equity Share) at a price of $11.50 and each a “BRND Warrant”;

 

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Canaccord” means Canaccord Genuity Corp.;

 

CDS” means CDS Clearing and Depository Services Inc.;

 

CDS Participant” has the meaning ascribed to it under the heading “Redemption Rights”;

 

Circular” has the meaning ascribed to it under the heading “Introduction”;

 

Code” means the United States Internal Revenue Code of 1986, as amended;

 

Company Stock” has the meaning ascribed to it under the heading “The Transaction”;

 

Compliance Provisions” has the meaning ascribed to it under the heading “The Transaction – Equity Share/Multiple Voting Share Structure – Multiple Voting Shares – Compliance Provisions”;

 

Corporation” means Mercer Park Brand Acquisition Corp.;

 

Definitive Agreement” has the meaning ascribed to it under the heading “The Transaction – The Definitive Agreement”;

 

Effective Date” means the closing date of the Transaction;

 

Element 7” means Element 7, LLC;

 

Element 7 Consulting Agreement” has the meaning ascribed to it under the heading “The Transaction”;

 

Element 7 Merger” has the meaning ascribed to it under the heading “The Transaction”;

 

Equity Incentive Plan” means the new equity incentive plan to be approved by BRND Shareholders at the BRND Shareholders’ Meeting and adopted by BRND;

 

Equity Incentive Plan Resolution” means the special resolution of the BRND Shareholders approving the Equity Incentive Plan, as presented at the Shareholders’ Meeting, in the form of Appendix “B” to this Circular;

 

Equity Shares” means, collectively, subordinate, restricted and/or limited voting shares of the Resulting Issuer;

 

Escrow Account” means BRND’s escrow account;

 

Exchange Agreement and Undertaking” means the exchange agreement and undertaking dated May 7, 2019, entered into by each of the BRND Founders in favour of BRND;

 

Exchange Rights Agreement” has the meaning ascribed to it under the heading “The Transaction – Exchangeable Shares and Exchange Rights Agreement – Exchangeable Share Procedures”;

 

Exchangeable Shares” means the exchangeable common stock of MPB AcquisitionCo which, pursuant to the Exchange Rights Agreement, are exchangeable on a one-for-one basis into Equity Shares;

 

forward-looking statements” has the meaning ascribed to it under the heading “Forward-Looking Statements”;

 

GH Group” means GH Group, Inc.;

 

GH Group Founders” means, collectively, Kyle Kazan, Graham Farrar, Jamie Rosenwald, Benjamin Persky, Kris Hulgreen, Steven Persky, Hans Tiedemann and certain of their respective trusts and affiliates;

 

Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

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Information Statement” means the information statement attached as Appendix “D” to this Circular;

 

Investor Rights Agreement” has the meaning ascribed to it under the heading “The Transaction – BRND Founders and GH Group Founders”;

 

IPO” means BRND’s initial public offering;

 

Limited Voting Shares” means limited voting shares of the Corporation;

 

License Transfer Fees” has the meaning ascribed to it under the heading “The Transaction”;

 

MD&A” means management’s discussion and analysis;

 

Mercer” means Mercer Park Brand, L.P. (formerly Mercer Park CB II, L.P.), a limited partnership formed under the laws of the State of Delaware, and BRND’s sponsor;

 

Merger Sub” means MPB Mergersub Corp.;

 

MPB AcquisitionCo” means MPB Acquisition Corp.;

 

MPB PipeCo” means Mercer Park Brand Pipe Inc.;

 

Multiple Voting Shares” means multiple voting shares of the Resulting Issuer;

 

NEO Exchange” means the Neo Exchange Inc.;

 

NI 41-101” means National Instrument 41-101 – General Prospectus Requirements;

 

NI 58-101” means National Instrument 58-101 – Disclosure of Corporate Governance Practices;

 

Non-Resident Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Taxation of Holders Not Resident in Canada”;

 

non-U.S. GAAP” has the meaning ascribed to it under the heading “Non-U.S. GAAP Measures” in the Information Statement attached as Appendix “D” to this Circular;

 

OSC” means the Ontario Securities Commission;

 

OSC Rule 56-501” means Ontario Securities Commission Rule 56-501 – Restricted Shares;

 

our” means Mercer Park Brand Acquisition Corp.;

 

Owning or Controlling” or “Own or Control” has the meaning ascribed to it under the heading “The Transaction – Equity Share/Multiple Voting Share Structure – Multiple Voting Shares – Compliance Provisions”;

 

Private Placement” has the meaning ascribed to it under the heading “The Transaction”;

 

Private Placement Shares” has the meaning ascribed to it under the heading “The Transaction”;

 

Prospectus” has the meaning ascribed to it under the heading “Contractual Rights of Rescission and Damages”;

 

qualifying transaction” has the meaning ascribed to it under Part X of the NEO Exchange Listing Manual;

 

Record Date” has the meaning ascribed to it under the heading “Voting Shares and the Principal Holders Thereof”;

 

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Redemption Deposit Date” means the date for redemption as established in accordance with the terms of the Exchangeable Shares;

 

Redemption Deposit Deadline” means 5:00 p.m. (Toronto time) on June 2, 2021;

 

Redemption Notice” has the meaning ascribed to it under the heading “Redemption Rights”;

 

Resident Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Taxation of Holders Resident in Canada”;

 

Restricted Voting Shares” means restricted voting shares of the Corporation;

 

Resulting Issuer” means BRND immediately following completion of the Transaction;

 

Resulting Issuer Board” means the board of directors of BRND immediately following the closing of the Transaction;

 

SEDAR” means Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval;

 

Share Exchange” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Taxation of Holders Resident in Canada”;

 

Shareholders’ Meeting” means the annual and special meeting of BRND Shareholders scheduled to be held on June 2, 2021 to vote on the proposed acquisition of GH Group, Inc. and related matters;

 

signatories” has the meaning ascribed to it under the heading “Contractual Rights of Rescission and Damages”;

 

SoCal Greenhouse” has the meaning ascribed to it under the heading “The Transaction”;

 

SPAC Closing Cash” has the meaning ascribed to it under the heading “The Transaction – The Definitive Agreement”;

 

State” means a state of the United States, as the context requires;

 

Subordinate Voting Shares” means subordinate voting shares of the Corporation;

 

Tax Act” means the Income Tax Act (Canada), as amended from time to time, including the regulations thereunder;

 

Tax Proposals” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

taxable capital gain” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Taxation of Holders Resident in Canada”;

 

third-party proxyholder” has the meaning ascribed to it under the heading “General Proxy Information – Appointment and Revocation of Proxies”;

 

Transaction” has the meaning ascribed to it under the Notice of Meeting attached to this Circular;

 

Transaction Resolution” means the special resolution of the BRND Shareholders approving the Transaction as presented at the Shareholders’ Meeting, in the form of Appendix “A” to this Circular;

 

U.S. Securities Act” means the United States Securities Act of 1933, as amended;

 

United States” or “U.S.” means the United States of America, its territories and possessions, any State of the United States and the District of Columbia; and

 

Unsuitable Person” has the meaning ascribed to it under the heading “The Transaction – Equity Share/Multiple Voting Share Structure – Multiple Voting Shares – Compliance Provisions”.

 

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SUMMARY

 

The following is a summary of certain information contained in this Circular. This summary is not intended to be complete and is qualified in its entirety by the more detailed information and financial statements, including the notes thereto contained elsewhere in this Circular and the attached Appendices all of which are important and should be reviewed carefully. Capitalized terms used in this summary without definition have the meanings ascribed to them in the Glossary of Terms appearing elsewhere in this Circular. All dollar amounts refer to U.S. dollars unless indicated otherwise.

 

The Shareholders’ Meeting

 

At the Shareholders’ Meeting, BRND Shareholders will be asked to consider, and if deemed advisable, approve the Transaction Resolution (the full text of which is set out in Appendix “A” to this Circular) and the Equity Incentive Plan Resolution (the full text of which is set out in Appendix “B” to this Circular). In addition, BRND Shareholders will be asked to elect the directors of the Corporation who will take office conditional upon closing of the Transaction.

 

The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by (A) the GH Group Founders6, and (B) the holders of BRND Class B Shares, as well as other persons not permitted to vote thereon under OSC Rule 56-501); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class. The Equity Incentive Plan Resolution will be required to be approved by an ordinary resolution of the holders of the BRND Class A Restricted Voting Shares and the BRND Class B Shares, voting together as if they were a single class of shares. The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares. See “The Transaction – BRND Shareholder Approval of the Transaction”, “Equity Incentive Plan” and “Election of Directors”.

 

Date, Time and Place

 

The Shareholders’ Meeting is scheduled to be held via live audio webcast at https://web.lumiagm.com/207586819, on June 2, 2021 at 11:00 a.m. (Toronto time).

 

Only BRND Shareholders of record at 5:00 pm (Toronto time) on May 3, 2021 will be entitled to receive notice of and vote at the Shareholders’ Meeting, or any adjournment(s) or postponement(s) thereof.

 

Information Concerning BRND and GH Group

 

Please refer to the sections entitled “Corporate Structure – Mercer Park Brand Acquisition Corp.”, “Mercer Park Brand Acquisition Corp.” and “The Business of GH Group” of the Information Statement attached as Appendix “D” to this Circular for information concerning BRND and GH Group.

 

The Transaction

 

BRND proposes to merge with GH Group, a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in the State of California, for a value (payable to sellers of GH Group that are non-accredited investors in cash and payable to all other such sellers in Exchangeable Shares valued at $10.00 each) of $325 million pursuant to the terms of the definitive merger agreement in respect thereof (as it may be amended as at or prior to the closing of the Transaction).

 

 

6 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

  

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GH Group has also executed a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire SoCal Greenhouse, a large greenhouse farm located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis.

 

As well, GH Group has executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California.

 

In addition, GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional licenses in California.

 

On April 8, 2021, BRND also announced a private placement in connection with the Transaction of $85 million of non-voting shares of MPB PipeCo, a wholly-owned subsidiary of BRND, at a price of $10.00 per share. The closing of the Private Placement is scheduled to occur contemporaneously with the closing of the Transaction and the Private Placement Shares issued will be exchanged for Equity Shares on a one-for-one basis upon closing of the Transaction. The Private Placement is subject to customary conditions, including the closing of the Transaction.

 

The Transaction Resolution will be in the form set forth in Appendix “A” of this Circular.

 

See “The Transaction”.

 

The Definitive Agreement

 

On April 8, 2021, BRND, and its wholly-owned subsidiary MPB AcquisitionCo, and its wholly-owned subsidiary Merger Sub, entered into an Agreement and Plan of Merger with GH Group, the sellers listed on the signature page thereto and Kyle Kazan, as sellers’ representative, whereby BRND intends to effectuate a merger of Merger Sub with and into GH Group, with GH Group continuing as the surviving corporation and a subsidiary of MPB AcquisitionCo.

 

See “The Transaction – The Definitive Agreement”.

 

Amendments to Notice of Articles and Articles

 

Pursuant to the Transaction Resolution, BRND proposes to amend its notice of articles and Articles in order to:

 

· create two new share classes of the Corporation, being the Restricted Voting Shares and the Limited Voting Shares, and to attach special rights and restrictions to those shares, including applying coattail terms to such shares similar to those applicable to the existing Subordinate Voting Shares;

 

· amend the special rights and restrictions attached to the existing Subordinate Voting Shares, including without limitation, by amending the requirements on who may hold Subordinate Voting Shares;

 

· amend the special rights and restrictions attached to the existing Multiple Voting Shares in order to convert the terms of such class of shares into nominal value preferred shares with a $0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carrying 50 votes per share, having limited transferability and being subject to a three (3)- year sunset provision, at which time they would be automatically redeemed;

 

· amend the special rights and restrictions attached to the BRND Class A Restricted Voting Shares and BRND Class B Shares so that, effective simultaneously with the closing of the acquisition of GH Group, the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares shall be converted on a one-for-one basis into Equity Shares (with the result that, immediately following the closing of the Transaction, the non-redeemed BRND Class A Restricted Voting Shares and BRND Class B Shares will be converted into Equity Shares); and

 

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· create a new class of shares of the Corporation, being the preferred shares, which will be unlimited in number and be issuable in series with such terms as are determined by the board of directors of the Corporation from time to time (it is not intended that such preferred shares will be used for anti-takeover purposes);

 

all of the foregoing as set out in Schedule “A” to the Transaction Resolution attached as Appendix “A” to the Circular; and

 

· following the redemption and/or conversion of the BRND Class A Restricted Voting Shares and BRND Class B Shares, to:

 

· alter the authorized share structure of BRND to remove the BRND Class A Restricted Voting Shares and BRND Class B Shares; and

 

· adopt amended and restated articles substantially in the form set out in Schedule “B” to the Transaction Resolution attached as Appendix “A” to the Circular.

 

See “ The Transaction – Amendments to Notice of Articles and Articles”.

 

Advance Notice Provisions

 

The Amended and Restated Articles will include advance notice provisions. The purpose of the advance notice provisions is to provide the registered BRND Shareholders, the Resulting Issuer Board and the management of the Corporation with a clear framework for nominating directors. The advance notice provisions fix a deadline by which registered BRND Shareholders must submit director nominations to the Corporation prior to any annual or special meeting of shareholders, and set forth the information to be provided and other procedures to be followed, in respect of such nomination.

 

Recommendation of the BRND Board

 

The BRND Board has unanimously determined that the Transaction is in the best interests of the Corporation and has unanimously determined that the Transaction is fair to BRND Shareholders. Accordingly, the BRND Board has unanimously approved the Transaction and unanimously recommends that the BRND Shareholders vote FOR the Transaction Resolution.

 

In addition, the Transaction was unanimously approved by all members of the BRND Board none of whom are related to the Transaction.

 

Reasons for the Recommendation of the BRND Board

 

In reaching these determinations and approvals, the BRND Board considered, among other things, the following factors and potential benefits and risks of the Transaction:

 

· strong, competitive position within an attractive industry;

 

· strong, experienced and well-aligned management team;

 

· strong current Adjusted EBITDA generation, with potential for growth by virtue of the Transaction and positive industry momentum;

 

· attractive return on investment relative to risk profile;

 

· opportunities for platform growth through acquisitions;

 

· benefit from being a public company in Canada; and

 

· concurrent private placement.

 

In making its recommendation to the registered BRND Shareholders, the BRND Board also considered a number of elements of the Transaction that provide protection to BRND Shareholders, including shareholder approval and redemption rights considerations.

 

In the course of their deliberations, the BRND Board also identified and considered a variety of risks, including:

 

· risks of the business being acquired;

 

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· risks if the Transaction is not completed;

 

· the Definitive Agreement may be terminated in certain circumstances; and

 

· no certainty that all conditions precedent to the Transaction will be satisfied.

 

Transaction Steps

 

At the Effective Time, among other things:

 

(a) any BRND Class A Restricted Voting Shares held by a registered BRND Shareholder who duly exercised his, her or its redemption rights in accordance with the articles of BRND shall be redeemed by BRND effective immediately prior to the Effective Time, and, upon receipt by each such BRND Shareholder of the redemption amount for their BRND Class A Restricted Voting Shares in accordance with the constating documents of BRND, as amended, each such redeeming BRND Shareholder shall cease to have any rights as a registered BRND Shareholder, and such BRND Class A Restricted Voting Shares shall be cancelled and cease to be outstanding;

 

(b) BRND’s notice of articles and articles will be amended, ultimately resulting in:

 

(i) the conversion of each non-redeemed BRND Class A Restricted Voting and each BRND Class B Share then outstanding into one Equity Share; and

 

(ii) the amendment of the terms of the existing class of Multiple Voting Shares (none of which are currently issued and outstanding) to provide for redeemable and retractable preferred shares carrying 50 votes per share with no dividend or conversion rights, a $0.001 redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), limited transferability and a three (3)-year sunset provision (at which time they would be automatically redeemed),

 

in each case as more specifically set out under “The Transaction – Equity Shares and Multiple Voting Shares Structure”;

 

(c) BRND will, if it is approved by the registered BRND Shareholders, adopt the Equity Incentive Plan;

 

(d) the merger with GH Group is expected to occur;

 

(e) Macias, Gini & O’Connell LLP shall be appointed the auditors of the Corporation; and

 

(f) BRND will change its name from “Mercer Park Brand Acquisition Corp.” to “Glass House Brands Inc.” (or such other name as may be selected by the board of directors of BRND prior to closing).

 

See “The Transaction – Transaction Steps”.

 

Procedure for the Exchange of BRND Shares

 

If the Transaction is completed, CDS is expected to affect a share exchange of the non-redeemed BRND Class A Restricted Voting Shares for the Equity Shares. Beneficial owners of BRND Class A Restricted Voting Shares are not required to take any further action to receive the Equity Shares which they are entitled to receive.

 

If you are a registered BRND Shareholder, a letter of transmittal is available upon request from the Corporation, which, when properly completed and duly executed and returned together with the certificate(s) or DRS advice(s) representing BRND Shares and all additional documents as Odyssey may reasonably require, will enable each holder of BRND Shares to obtain the Equity Shares to which such holder of BRND Shares is entitled under the Transaction. The details for the surrender of BRND Share certificates to Odyssey and the address of Odyssey will be set out in the letter of transmittal.

 

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Redemption Rights

 

Registered holders of BRND Class A Restricted Voting Shares have a redemption right.

 

Registered holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, provided that they deposit (and do not validly withdraw) their BRND Class A Restricted Voting Shares for redemption prior to the Redemption Deposit Deadline and, subject to applicable law, upon the closing of the Transaction, for an amount per BRND Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion, per BRND Class A Restricted Voting Share, of (i) the escrowed funds available in the Escrow Account at the time of the Shareholders’ Meeting, including interest and other amounts earned thereon; less (ii) an amount equal to the total of (A) applicable taxes payable by BRND on such interest and other amounts earned in the Escrow Account, and (B) actual and expected direct expenses related to the redemption, each as reasonably determined by BRND; for greater certainty, such amount will not be reduced by the amount of any tax payable by BRND under Part VI.1 of the Tax Act or the deferred underwriting commission per BRND Class A Restricted Voting Share held in the Escrow Account. The redemption price per BRND Class A Restricted Voting Share is expected to be approximately $10.11, assuming a redemption date of June 4, 2021. Registered holders of BRND Class A Restricted Voting Shares may elect to redeem their BRND Class A Restricted Voting Shares irrespective of whether they vote for or against, or do not vote on, the Transaction. Participants through CDS may have earlier deadlines for accepting deposits of BRND Class A Restricted Voting Shares pursuant to the redemption right. If a CDS Participant’s (as defined herein) deadline is not met by a holder of BRND Class A Restricted Voting Shares, such holder’s BRND Class A Restricted Voting Shares will not be eligible for redemption.

 

Following the redemption, each of the remaining BRND Class A Restricted Voting Shares will be automatically converted immediately following closing of the Transaction into one Equity Share, and the residual Escrow Account balance would be available to the Corporation to pay tax liabilities on amounts earned on the escrowed funds, to pay the underwriters their deferred underwriting commissions in connection with the Corporation’s IPO, and to otherwise use at its discretion.

 

Notwithstanding the foregoing redemption right, no registered holder of BRND 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, is permitted to redeem more than an aggregate of 15% of the number of issued and outstanding BRND Class A Restricted Voting Shares.

 

A non-registered holder of BRND Class A Restricted Voting Shares who desires to exercise its redemption rights in connection with the BRND articles must do so by causing a participant (a “CDS Participant”) in the depository, trading, clearing and settlement systems administered by CDS to deliver to CDS (at its office in the City of Toronto) on behalf of the owner a written notice (a “Redemption Notice”) of the owner’s intention to redeem BRND Class A Restricted Voting Shares in connection with the BRND articles. A non-registered holder of BRND Class A Restricted Voting Shares who desires to redeem BRND Class A Restricted Voting Shares should ensure that the CDS Participant is provided with notice of his or her intention to exercise his or her redemption privilege sufficiently in advance of the notice date described above so as to permit the CDS Participant to deliver notice to CDS and so as to permit CDS to deliver notice to the Corporation’s transfer agent in advance of the required time. The form of Redemption Notice will be available from a CDS Participant or the Corporation’s transfer agent.

 

By causing a CDS Participant to deliver to CDS a notice of the owner’s intention to redeem BRND Class A Restricted Voting Shares, an owner shall be deemed (subject to any withdrawal rights that may be made available) to have irrevocably surrendered his, her or its BRND Class A Restricted Voting Shares for redemption (conditional on closing occurring) and appointed such CDS Participant to act as his, her or its exclusive settlement agent with respect to the exercise of the redemption right and the receipt of payment in connection with the settlement of obligations arising from such exercise.

 

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Any Redemption Notice delivered by a CDS Participant regarding an owner’s intent to redeem which CDS determines to be incomplete, not in proper form or not duly executed shall for all purposes be void and of no effect and the redemption right to which it relates shall be considered for all purposes not to have been exercised. A failure by a CDS Participant to exercise redemption rights or to give effect to the settlement thereof in accordance with the owner’s instructions will not give rise to any obligations or liability on the part of the Corporation to the CDS Participant or to the owner.

 

Redemptions of BRND Class A Restricted Voting Shares shall be funded out of the Escrow Account, which, as of April 29, 2021, consists of $407,590,197 or approximately $10.11 per share (net of applicable taxes).

 

If the deadline for depositing BRND Class A Restricted Voting Shares held through an intermediary is not met by a holder of BRND Class A Restricted Voting Shares, such holder’s BRND Class A Restricted Voting Shares will not be eligible for redemption.

 

Equity Incentive Plan

 

Conditional upon the approval of the Transaction Resolution, registered BRND Shareholders will be asked to consider and, if thought advisable, pass an ordinary resolution authorizing the adoption by BRND of the Equity Incentive Plan substantially in the form set forth in Appendix “C” of this Circular authorizing the grant of rights to acquire up to 16,406,629 Equity Shares thereunder. The Equity Incentive Plan Resolution will be in the form set forth in Appendix “B” of this Circular.

 

The BRND Board recommends that you vote FOR the Equity Incentive Plan Resolution.

 

Election of Directors

 

Conditional upon the approval of the Transaction Resolution, a Resulting Issuer Board of eight is to be elected at the Shareholders’ Meeting. If, prior to the Shareholders’ Meeting, any of the nominees shall be unable or, for any reason, become unwilling to serve as a director, it is intended that the discretionary power granted by the form of proxy or voting instruction form shall be used to vote for any other person or persons as directors. Subject to and conditional upon closing of the Transaction, each director will be elected for a one-year term (commencing upon the closing of the Transaction) ending at the next annual meeting of shareholders or when his or her successor is elected, unless he or she resigns or his or her office otherwise becomes vacant. The BRND Board and management of the Corporation have no reason to believe that any of the said nominees will be unable or will refuse to serve, for any reason, if elected to office.

 

The BRND Board recommends that you vote FOR the election as director of each proposed member of the Resulting Issuer Board.

 

See “Election of Directors”.

 

Founders’ Shares

 

Since the BRND Founders will lose their investment in the Corporation if a qualifying transaction is not completed, they may have a different interest in determining whether a proposed qualifying transaction, such as the Transaction, is appropriate. The BRND Founders will not be entitled to redeem their BRND Founders’ Shares in connection with a qualifying transaction or be entitled to access to the Escrow Account in respect thereof upon the Corporation’s winding-up. The personal and financial interests of the BRND Founders may influence the identifying and selecting of the qualifying transaction, the voting on the qualifying transaction and the operation of the business following the qualifying transaction.

 

In the aggregate, the BRND Founders hold 10,198,751 BRND Class B Shares which represents 20% of the issued and outstanding BRND Shares as of the date hereof. As the BRND Founders control a significant proportion of the issued and outstanding BRND Shares, the BRND Founders may influence the direction of vote to be held at the Shareholders’ Meeting. All of the issued and outstanding BRND Class B Shares will be converted into Equity Shares upon closing of the Transaction, though 50% of such Equity Shares are subject to forfeiture pursuant to the terms of the Investor Rights Agreement (as defined herein).

 

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See “Interest of Certain Persons in Matters to be Acted Upon”.

 

Summary Pro Forma Consolidated Financial Information

 

Unaudited pro forma financial statements of BRND, after giving effect to the Transaction and other matters, as of and for the twelve months ended December 31, 2020, together with the notes thereto, are contained in the Information Statement attached to this Circular as Appendix “D”.

 

Stock Exchange Listings

 

The Corporation is a reporting issuer in each of the provinces and territories of Canada, other than Quebec, and the BRND Class A Restricted Voting Shares and BRND Warrants currently trade on the NEO Exchange under the symbols “BRND.A.U” and “BRND.WT”, respectively. It is a condition of closing of the Transaction that the Equity Shares and BRND Warrants be listed and posted for trading on the NEO Exchange.

 

The NEO Exchange has conditionally approved the listing of the Equity Shares and the BRND Warrants under the symbols “GLAS.A.U”, and “GLAS.WT.U”, respectively.

 

Canadian Securities Laws Matters

 

The distribution of the Equity Shares pursuant to the Amended and Restated Articles in connection with the Transaction contemplated herein, will constitute a distribution of securities which is exempt from the prospectus requirements of Canadian securities laws. The Equity Shares received by holders of non-redeemed BRND Shareholders pursuant to the Amended and Restated Articles in connection with the completion of the Transaction will not be legended in accordance with Canadian securities laws and may be resold through registered dealers in each of the provinces and territories of Canada provided that: (i) the trade is not a “control distribution” as defined in National Instrument 45-102 — Resale of Securities of the Canadian Securities Administrators, (ii) no unusual effort is made to prepare the market or to create a demand for the Equity Shares, (iii) no extraordinary commission or consideration is paid to a person in respect of such sale, and (iv) if the selling BRND Shareholder is an insider or officer of BRND, the selling BRND Shareholder has no reasonable grounds to believe that BRND is in default of applicable Canadian securities laws.

 

THE TRANSACTION AND THE SECURITIES TO BE ISSUED IN CONNECTION THEREWITH HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY CANADIAN SECURITIES REGULATORY AUTHORITY, NOR HAS ANY CANADIAN SECURITIES REGULATORY AUTHORITY PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS AN OFFENCE.

 

United States Securities Laws Matters

 

The Equity Shares issuable to BRND Shareholders in the United States in exchange for BRND Shares pursuant to the Transaction (collectively, the “3(a)(9) Transactions”) have not been and will not be registered under the U.S. Securities Act or any State securities laws, and such 3(a)(9) Transactions will be effected in reliance upon the exemption from the registration requirements of the U.S. Securities Act set forth in Section 3(a)(9) thereof. Section 3(a)(9) of the U.S. Securities Act provides for an exemption from the registration requirements of the U.S. Securities Act for any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

 

Accordingly, the Equity Shares issued in the 3(a)(9) Transactions in exchange for any BRND Shares that are “restricted securities” within the meaning of Rule 144(a)(3) of the U.S. Securities Act (i) will continue to be “restricted securities” within the meaning of Rule 144(a)(3) of the U.S. Securities Act, (ii) may not be offered or sold within the United States except in transactions exempt from the registration requirements of the U.S. Securities Act and applicable State securities laws, and (iii) will contain a restriction or legend to the effect that such securities have not been registered under the U.S. Securities Act and may only be offered, sold or otherwise transferred pursuant to certain exemptions from the registration requirements of the U.S. Securities Act.

 

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The enforcement by investors of civil liabilities under the United States federal and State securities laws may be affected adversely by the fact that BRND is incorporated or organized under the laws of a jurisdiction other than the United States. As a result, it may be difficult or impossible for BRND Shareholders resident in the United States to effect service of process within the United States upon BRND, or to realize against it, upon judgments of courts of the United States predicated upon civil liabilities under the federal securities laws of the United States or “blue sky” laws of any State within the United States. In addition, BRND Shareholders resident in the United States should not assume that the courts of Canada: (i) would enforce judgments of United States courts obtained in actions against BRND predicated upon civil liabilities under the federal securities laws of the United States or “blue sky” laws of any State within the United States; or (ii) would enforce, in original actions, liabilities against BRND predicated upon civil liabilities under the federal securities laws of the United States or “blue sky” laws of any State within the United States.

 

THE TRANSACTION AND THE SECURITIES TO BE ISSUED IN CONNECTION THEREWITH HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE OF THE UNITED STATES, NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES REGULATORY AUTHORITY PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.

 

See “United States Securities Laws Matters”.

 

Certain Canadian Income Tax Considerations

 

This Circular contains a summary of the principal Canadian federal income tax considerations applicable to certain BRND Shareholders in respect of the proposed Transaction.

 

See “Certain Canadian Federal Income Tax Considerations”.

 

Certain United States Federal Income Tax Considerations

 

BRND Shareholders should be aware that the Transaction described in this Circular may have tax consequences in both the United States and Canada. BRND Shareholders who are resident in, or citizens of, the United States are advised to consult their own tax advisors to determine the particular United States tax consequences to them of the Transaction in light of their particular situation, as well as any tax consequences that may arise under the laws of any other relevant foreign, State, local, or other taxing jurisdiction.

 

Risks Associated with the Transaction

 

BRND Shareholders should carefully consider the risk factors relating to the Transaction. Some of these risks include, but are not limited to: (i) the Definitive Agreement may be terminated in certain circumstances; (ii) there can be no certainty that all conditions precedent to the Transaction will be satisfied in a timely manner or at all, and failure to complete the Transaction could adversely affect the business of the Corporation; (iii) if the Transaction is not completed it is unlikely that BRND will be able to find another attractive qualifying transaction; (iv) the Corporation’s multi-class structure will have the effect of concentrating voting control and the ability to influence corporate matters with the GH Group Founders; (v) BRND will incur costs even if the Transaction is not completed; (vi) the unaudited pro forma financial information included in the Information Statement attached as Appendix “D” to this Circular may not be indicative of what the actual financial position or results of operations would have been; (vii) certain persons may have interests in the Transaction that are different from those of the BRND Shareholders; (viii) it is anticipated that the Corporation will be treated as a U.S. domestic corporation for U.S. federal income tax purposes as well as a Canadian tax resident for Canadian income tax purposes and will accordingly be subject to both U.S. and Canadian income tax; (ix) risks related to cannabis; and (x) risks relating to the GH Group, SoCal Greenhouse and Element 7.

 

See “Risks Associated with the Transaction”.

 

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GENERAL PROXY INFORMATION

 

Virtual-Only Meeting

 

Out of an abundance of caution, to proactively deal with the unprecedented public health impact of the novel coronavirus disease, also known as COVID-19, and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, we will hold our Shareholders’ Meeting in a virtual-only format, which will be conducted via live audio webcast. All BRND Shareholders, regardless of their geographic location, will have an equal opportunity to participate in the Shareholders’ Meeting and engage with directors and management of the BRND as well as with other BRND Shareholders.

 

Solicitation of Proxies

 

This Circular is sent in connection with the solicitation by the management of the Corporation of proxies to be used at the annual and special meeting of the BRND Shareholders’ to be held on June 2, 2021 at 11:00 a.m. (Toronto time), in a virtual-only format which will be conducted via live audio webcast at https://web.lumiagm.com/207586819, and for the purposes set forth in the Notice of Meeting, and at any adjournment(s) or postponement(s) thereof. The solicitation is being made primarily by mail, but proxies may also be solicited by telephone, facsimile or other personal contact by officers or other employees of BRND. The cost of the solicitation will be borne by the Corporation other than the cost of solicitation of the objecting beneficial BRND Shareholders. See the section entitled “Advice to Beneficial BRND Shareholders” below.

 

A form of proxy is a document that authorizes someone to attend the Shareholders’ Meeting and cast your vote(s) for you. If you are a registered BRND Shareholder, the Corporation has included a form of proxy with this Circular. It should be used to appoint a proxyholder.

 

This Circular is furnished in connection with the solicitation of proxies by management of the Corporation for use at the Shareholders’ Meeting and at any adjournment(s) or postponement(s) of the Shareholders’ Meeting. While it is expected that the solicitation will be primarily by mail, proxies may be solicited personally or by telephone by the regular employees of the Corporation at nominal cost. All costs of solicitation by management are expected to be borne by the Corporation.

 

The contents and the sending of this Circular have been approved by the BRND Board.

 

No person is authorized to give any information or to make any representations other than these contained in this Circular and if given or made, such information or representations must not be relied upon as having been authorized to be given or made.

 

The Corporation will not be using the notice-and-access mechanism under National Instrument 54-101- Communication with Beneficial Owners of Securities of a Reporting Issuer for distribution of the Notice of Meeting of Shareholders and this Circular to registered BRND Shareholders.

 

Participation in the Shareholders’ Meeting

 

Registered BRND Shareholders and duly appointed proxyholders who participate in the Shareholders’ Meeting online will be able to listen to the Shareholders’ Meeting, ask questions and vote, all in real time, provided they are connected to the Internet and comply with all of the requirements set out in the sections below entitled “Voting of Proxies”, “Virtual attendance and Participation in the Shareholders’ Meeting” and “Asking Questions”. Beneficial BRND Shareholders who have not duly appointed themselves as their proxy will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting.

 

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Appointment and Revocation of Proxies

 

The individuals named in the accompanying form of proxy are Jonathan Sandelman, Chairman of the BRND Board, and Louis F. Karger, Chief Executive Officer of the Corporation.

 

A BRND Shareholder wishing to appoint some other person (who need not be a BRND Shareholder) to represent him or her at the Shareholders’ Meeting has the right to do so by inserting the desired person’s name in the blank space provided in the form of proxy or by completing another form of proxy. In order to appoint such other person (a “third-party proxyholder”), the BRND Shareholder must submit his, her or its proxy or voting instruction form (as applicable) appointing such third-party proxyholder and register the third-party proxyholder, as described below. Registering your proxyholder is an additional step to be completed after you have submitted your proxy or voting instruction form. Failure to register the proxyholder will result in the proxyholder not receiving a username to virtually attend, participate or vote at the Shareholders’ Meeting. Failure to register the proxyholder will result in the proxyholder not receiving a username to virtually attend, participate or vote at the Shareholders’ Meeting.

 

·      Step 1: Submit your proxy or voting instruction form:

 

To appoint a third-party proxyholder, insert such person’s name in the blank space provided in the form of proxy or voting instruction form and follow the instructions for submitting such form of proxy or voting instruction form. This must be completed prior to registering such proxyholder, which is an additional step to be completed once you have submitted your form of proxy or voting instruction form.

 

If you are a beneficial BRND Shareholder and wish to virtually participate or vote at the Shareholders’ Meeting, you have to insert your own name in the space provided on the voting instruction form sent to you by your intermediary, follow all of the applicable instructions provided by your intermediary and register yourself as your proxyholder, as described below. By doing so, you are instructing your intermediary to appoint you as proxyholder. It is important that you comply with the signature and return instructions provided by your intermediary.

 

If you are a beneficial shareholder located in the United States and wish to participate or vote at the Shareholders’ Meeting or, if permitted, appoint a third-party as your proxyholder, in addition to the steps described below under the section entitled “Virtual Attendance and Participation in the Shareholders’ Meeting”, you must obtain a valid legal proxy from your intermediary. Follow the instructions from your intermediary included with the legal proxy form and the voting information form sent to you or contact your intermediary to request a legal proxy form or a legal proxy if you have not received one. After obtaining a valid legal proxy from your intermediary, you must then submit such legal proxy to Odyssey Trust Company, BRND’s transfer agent and registrar. Requests for registration from beneficial shareholders located in the United States that wish to participate or vote at the Shareholders’ Meeting or, if permitted, appoint a third-party as their proxyholder must be sent by e-mail to brnd@odysseytrust.com and received by no later than 11:00 a.m. (Toronto time) on the second business day preceding the day of the Shareholders’ Meeting (being May 31, 2021) not less than 48 hours (excluding Saturdays, Sundays and holidays) before the time for holding any adjournment(s) or postponement(s) thereof.

 

A proxy will not be valid unless the completed form of proxy is received by Odyssey Trust Company, Suite 702, 67 Yonge St., Toronto, Ontario, Canada M5E 1J8, Attention: Proxy Department by no later than 11:00 a.m. (Toronto time) on the second business day preceding the Shareholders’ Meeting (being May 31, 2021) or not less than 48 hours (excluding Saturdays, Sundays and holidays) before the time for holding any adjournment(s) or postponement(s) thereof. Proxies delivered after that time will not be accepted. The deadline for deposit of proxies may be waived or extended by the chair of the Shareholders’ Meeting at his discretion, without notice.

 

·     Step 2: Register your proxyholder:

 

To register a proxyholder, shareholders must send an email to brnd@odysseytrust.com by 11:00 a.m. (Toronto time) on May 31, 2021, and provide Odyssey with the required proxyholder contact information, number of shares appointed, name in which the shares are registered if they are a registered BRND Shareholder, or name of broker where the shares are held if a beneficial shareholder, so that Odyssey may provide the proxyholder with a username via email. Without a username, proxyholders will not be able to virtually attend, participate or vote at the Shareholders’ Meeting.

 

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A BRND Shareholder who has given a proxy may revoke it by delivering an instrument in writing executed by the BRND Shareholder or by his attorney authorized in writing or, where the BRND Shareholder is a corporation, by a duly authorized officer or attorney of the corporation, and delivered to the office of Odyssey Trust Company, Suite 702, 67 Yonge St., Toronto, Ontario, Canada M5E 1J8, Attention: Proxy Department at any time up to and including the last business day preceding the day of the Shareholders’ Meeting, or if adjourned or postponed, any reconvening thereof, or to the chair of the Shareholders’ Meeting, on the day of the Shareholders’ Meeting or, if adjourned or postponed, any reconvening thereof or in any other manner provided by law. A revocation of a proxy does not affect any matter on which a vote has been taken prior to the revocation.

 

Voting of Proxies

 

A BRND Shareholder may indicate on the form of proxy how the BRND Shareholder wishes the proxyholder to vote his, her or its BRND Shares. To do this you may simply mark the appropriate boxes on the form of proxy. If you do this, your proxyholder must vote your BRND Shares in accordance with the instructions you have given.

 

Beneficial BRND Shareholders who have not duly appointed themselves as their proxy will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting. This is because the Corporation and Odyssey, our transfer agent, do not have a record of the beneficial BRND Shareholders of the Corporation, and, as a result, will have no knowledge of your shareholdings or entitlement to vote unless you appoint yourself as your proxy. If you are a beneficial BRND Shareholder and wish to vote at the Shareholders’ Meeting, you have to appoint yourself as your proxy, by inserting your own name in the space provided on the voting instruction form sent to you and you must follow all of the applicable instructions, including the deadline, provided by your intermediary.

 

IF YOU DO NOT GIVE ANY INSTRUCTIONS AS TO HOW TO VOTE ON A PARTICULAR ISSUE TO BE DECIDED AT THE SHAREHOLDERS’ MEETING, YOUR PROXYHOLDER CAN VOTE YOUR BRND SHARES AS HE OR SHE THINKS FIT. IF YOU HAVE APPOINTED THE PERSONS DESIGNATED IN THE FORM OF PROXY AS YOUR PROXYHOLDER THEY WILL, UNLESS YOU GIVE CONTRARY INSTRUCTIONS, VOTE YOUR BRND SHARES AT THE SHAREHOLDERS’ MEETING FOR THE TRANSACTION RESOLUTION, FOR THE EQUITY INCENTIVE PLAN RESOLUTION AND FOR THE ELECTION OF THE NOMINEES TO THE RESULTING ISSUER BOARD.

 

Registered BRND Shareholders may vote at the Shareholders’ Meeting by completing a ballot online during the Shareholders’ Meeting, as further described below. See the section entitled “Virtual Attendance and Participation in the Shareholders’ Meeting”.

 

BRND SHARES WILL BE VOTED IN FAVOUR OF EACH MATTER FOR WHICH NO CHOICE IS SPECIFIED OR FOR WHICH BOTH CHOICES HAVE BEEN SPECIFIED BY THE BRND SHAREHOLDER.

 

The enclosed form of proxy when properly completed and delivered and not revoked confers discretionary authority upon the person appointed proxyholder thereunder to vote with respect to amendments or variations of matters identified in the applicable Notice of Meeting, and with respect to other matters which may properly come before the Shareholders’ Meeting. In the event that amendments or variations to matters identified in the Notice of Meeting are properly brought before the Shareholders’ Meeting or any further or other business is properly brought before the Shareholders’ Meeting, it is the intention of the persons designated in the enclosed form of proxy to vote in accordance with their best judgment on such matters or business. At the time of the printing of this Circular, the management of the Corporation knows of no such amendment, variation or other matter which may be presented to the Shareholders’ Meeting.

 

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Virtual Attendance and Participation in the Shareholders’ Meeting

 

The Corporation is holding the Shareholders’ Meeting in a virtual-only format, which will be conducted via live audio webcast. BRND Shareholders will not be able to virtually attend the Shareholders’ Meeting in person. Virtually attending the Shareholders’ Meeting online enables registered BRND Shareholders and duly appointed proxyholders, including beneficial shareholders who have duly appointed themselves as their proxy, to participate in the Shareholders’ Meeting and ask questions, all in real time. Registered BRND Shareholders and duly appointed proxyholders can vote at the appropriate times during the Shareholders’ Meeting.

 

In order to participate or vote at the Shareholders’ Meeting (including for voting and asking questions at the Shareholders’ Meeting), BRND Shareholders must have a valid username. Registered BRND Shareholders and duly appointed proxyholders will be able to virtually attend, participate and vote at the Shareholders’ Meeting online at https://web.lumiagm.com/207586819. Such persons may then enter the Shareholders’ Meeting by clicking “I have a login” and entering a username and password before the start of the Shareholders’ Meeting.

 

· Registered BRND Shareholders: The 12-digit control number located on the form of proxy is the username. The password to the Shareholders’ Meeting is “brnd2021” (case sensitive). If, as a registered shareholder, you are using your control number to log in to the Shareholders’ Meeting and you have previously voted prior to voting cut-off, you do not need to vote again at the Shareholders’ Meeting. Should you wish to vote at the Shareholders’ Meeting, you will be revoking any and all previously submitted proxies for the Shareholders’ Meeting.

 

· Duly appointed proxyholders: Odyssey will provide the proxyholder with a username by e-mail after the voting deadline has passed. The password to the Shareholders’ Meeting is “brnd2021” (case sensitive). Only registered BRND Shareholders and duly appointed proxyholders will be entitled to participate and vote at the Shareholders’ Meeting. Beneficial BRND Shareholders who have not duly appointed themselves as proxyholder will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting. BRND Shareholders who wish to appoint a third-party proxyholder to represent them at the Shareholders’ Meeting (including beneficial BRND Shareholders who wish to appoint themselves as proxyholder to participate or vote at the Shareholders’ Meeting) MUST submit their duly completed proxy or voting instruction form AND register the proxyholder. See “Appointment and Revocation of Proxies”.

 

BRND Shareholders will be allowed to log in as early as 30 minutes before the start time on June 2, 2021. The virtual Shareholders’ Meeting platform is supported across internet browsers (e.g., Edge, Firefox, Chrome, and Safari) and devices (e.g., desktops, laptops, tablets, and cell phones). If you intend to join the live audio webcast, you should ensure that you have a strong Internet connection from wherever you intend to join and participate in the virtual Shareholders’ Meeting. We encourage you to access the virtual Shareholders’ Meeting before it begins, and you should give yourself plenty of time to log in and ensure that you can hear streaming audio prior to the start of the Shareholders’ Meeting.

 

Asking Questions

 

If you want to ask questions during the Shareholders’ Meeting, log into the virtual meeting platform at https://web.lumiagm.com/207586819, click on the double chat bubble icon, type your question into the chat field, and click the send arrow button.

 

Questions pertinent to Shareholders’ Meeting matters will be answered during the Shareholders’ Meeting, subject to time constraints of two-minute limits per question and two questions per shareholder. Questions that are unrelated to the proposals under discussion, use blatantly offensive language or are regarding personal matters, including those related to employment, product or service issues, or suggestions for product innovations, will not be answered by the chair of the Shareholders’ Meeting or management.

 

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Advice to Beneficial BRND Shareholders

 

Only registered BRND Shareholders or duly appointed proxyholders are permitted to vote at the Shareholders Meeting. Beneficial BRND Shareholders who do not hold their BRND Shares in their own name are advised that only proxies from BRND Shareholders of record can be recognized and voted at the Shareholders’ Meeting. Beneficial BRND Shareholders who complete and return an instrument of proxy must indicate thereon the person (usually a brokerage house) who holds their BRND Shares as a registered BRND Shareholder. Every intermediary (broker) has its own mailing procedure, and provides its own return instructions, which should be carefully followed. The instrument of proxy supplied to beneficial BRND Shareholders is identical to that provided to registered BRND Shareholders. However, its purpose is limited to instructing the registered BRND Shareholder how to vote on behalf of the beneficial BRND Shareholder.

 

If BRND Shares are listed in an account statement provided to a BRND Shareholder by a broker, then in almost all cases those BRND Shares will not be registered in such BRND Shareholder’s name on the records of the Corporation. Such BRND Shares will more likely be registered under the name of the BRND Shareholder’s broker or an agent of that broker. In Canada, the vast majority of such BRND Shares are registered under the name of CDS & Co. (the registration name for CDS, which company acts as nominee for many Canadian brokerage firms). BRND Shares held by brokers or their nominees can only be voted (for or against resolutions) upon the instructions of the beneficial BRND Shareholder. Without specific instructions, brokers/nominees are prohibited from voting shares for their clients. The directors and officers of the Corporation do not know for whose benefit the BRND Shares registered in the name of CDS & Co. are held.

 

In accordance with National Instrument 54-101 – Communication with Beneficial Owners of Securities of a Reporting Issuer of the Canadian Securities Administrators, the Corporation has distributed copies of the Notice of Meeting, this Circular and the form of proxy to the clearing agencies and intermediaries for onward distribution to non-registered BRND Shareholders. Applicable regulatory policy requires intermediaries/brokers to seek voting instructions from beneficial BRND Shareholders in advance of meetings unless the beneficial holders have waived the right to receive meeting materials. Every intermediary/broker has its own mailing procedures and provides its own return instructions, which should be carefully followed by beneficial BRND Shareholders in order to ensure that their BRND Shares are voted at the Shareholders’ Meeting. Often the form of proxy supplied to a beneficial BRND Shareholder by its broker is identical to the form of proxy provided by the Corporation to the registered BRND Shareholders. However, its purpose is limited to instructing the registered BRND Shareholder how to vote on behalf of the beneficial BRND Shareholder.

 

INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON

 

Except as disclosed in this Circular, no person who has been a director or officer of the Corporation at any time since the beginning of the Corporation’s most recently completed fiscal year ended December 31, 2020, no person, who to the knowledge of the directors or officers of the Corporation, beneficially owns or exercises control or direction over BRND Shares carrying more than 10% of the votes attached to the BRND Shares, and no associate or affiliate of any of such persons has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted upon at the Shareholders’ Meeting.

 

Founders’ Shares

 

Since the BRND Founders will lose their investment in the Corporation if a qualifying transaction is not completed, they may have a different interest in determining whether a proposed qualifying transaction, such as the Transaction, is appropriate. The BRND Founders will not be entitled to redeem their BRND Founders’ Shares in connection with a qualifying transaction or be entitled to access to the Escrow Account in respect thereof upon the Corporation’s winding-up. The personal and financial interests of the BRND Founders may influence the identifying and selecting of the qualifying transaction, the voting on the qualifying transaction and the operation of the business following the qualifying transaction.

 

In the aggregate, the BRND Founders hold 10,198,751 BRND Class B Shares which represents 20% of the issued and outstanding BRND Shares as of the date hereof. As the BRND Founders control a significant proportion of the issued and outstanding BRND Shares, the BRND Founders may influence the direction of vote to be held at the Shareholders’ Meeting. All of the issued and outstanding BRND Class B Shares will be converted into Equity Shares upon closing of the Transaction, though 50% of such Equity Shares are subject to forfeiture pursuant to the terms of the Investor Rights Agreement (as defined herein) (see “ The Transaction – BRND Founders and GH Group Founders”).

 

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INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

 

Other than as disclosed in this Circular, no informed person of BRND, nor any associate or affiliate of any informed person, has had any material interest, direct or indirect, in any transaction since BRND’s incorporation on April 16, 2019, or any proposed transaction which has materially affected or would materially affect BRND. An “informed person” means (i) any of BRND’s directors or executive officers, (ii) any director or executive officer of a person or company that is itself an informed person or a subsidiary of BRND, or (iii) any person or company who beneficially owns, or controls or directs, directly or indirectly, voting securities of BRND or a combination of both carrying more than 10% of the voting rights attached to all of BRND’s outstanding voting securities.

 

VOTING SHARES AND THE PRINCIPAL HOLDERS THEREOF

 

The authorized capital of the Corporation consists of an unlimited number of (i) BRND Class A Restricted Voting Shares, (ii) BRND Class B Shares, (iii) Subordinate Voting Shares, and (iv) Multiple Voting Shares, all without par or nominal value. Each holder of BRND Shares is entitled to one vote for each BRND Class A Restricted Voting Share and/or each BRND Class B Share registered in his or her name at the close of business on May 3, 2021 (the “Record Date”), the date fixed by the BRND Board as the record date for determining who is entitled to receive notice of and to vote at the Shareholders’ Meeting. At the close of business on the Record Date, there were 40,250,000 BRND Class A Restricted Voting Shares outstanding (representing an approximately 79.8% voting interest prior to closing) and 10,198,751 BRND Class B Shares outstanding (representing a 20% voting interest prior to closing). Following closing of the Transaction, the holders of the Multiple Voting Shares (i.e., the GH Group Founders) will hold approximately 81% of the voting power of the outstanding voting shares of BRND (see “Principal Shareholders” in the Information Statement attached as Appendix “D” to this Circular) and would therefore have significant influence over the management and affairs of BRND and over all matters requiring shareholder approval, including the election of directors and significant corporate transactions.

 

Only BRND Shareholders of record at the close of business on the Record Date who either virtually attend the Shareholders’ Meeting or who have completed and delivered a form of proxy in the manner and subject to the provisions described above shall be entitled to vote or to have their BRND Shares voted at the Shareholders’ Meeting.

 

On a “show of hands” vote, every BRND Shareholder present at the Shareholders’ Meeting virtually or by proxy will have one vote, and on a ballot, every BRND Shareholder present virtually or represented by a proxy and every person who is a representative of one or more corporate BRND Shareholders will have one vote for each BRND Class A Restricted Voting Share and/or each BRND Class B Share held.

 

At the Shareholders’ Meeting, BRND Shareholders will be asked to consider and, if deemed advisable, approve the Transaction Resolution, the Equity Incentive Plan Resolution and the election of the nominees to the Resulting Issuer Board.

 

The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by (A) the GH Group Founders7, and (B) the holders of BRND Class B Shares, as well as other persons not permitted to vote thereon under OSC Rule 56-501); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class.

 

 

 

7 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

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The Equity Incentive Plan Resolution will be required to be approved by an ordinary resolution of the holders of (i) the BRND Class A Restricted Voting Shares, and (ii) the BRND Class B Shares, voting together as if they were a single class of shares.

 

The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares.

 

Other than as disclosed in the table below, to the knowledge of the directors and executive officers of the Corporation, there are no persons or companies that beneficially own, control or direct, directly or indirectly, voting securities of the Corporation carrying 10% or more of the voting rights attached to any outstanding class of BRND Shares:

 

        Percentage of Class of   Percentage of All
Name of Shareholder   Number and Type of   Outstanding BRND   Outstanding BRND
    brnd Shares   Shares   Shares
             
Mercer Park Brand, L.P.   10,178,751 BRND Class B
Shares
  Approximately 99.5%
of all issued and
outstanding BRND
Class B Shares
  20% of all issued and
outstanding BRND Shares

 

THE TRANSACTION

 

BRND proposes to merge with GH Group, a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in the State of California, for a value (payable to sellers of GH Group that are non-accredited investors in cash and payable to all other such sellers in Exchangeable Shares at $10.00 each) of $325 million pursuant to the terms of the definitive merger agreement in respect thereof (as it may be amended as at or prior to the closing of the Transaction).

 

In addition, GH Group has executed a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm complex located in southern California (“SoCal Greenhouse”) which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. The total purchase price payable for the fee simple interest of SoCal Greenhouse (i.e., the real property and existing improvements) is $118,890,000, cash, payable upon the closing of the Transaction. A further $100 million in Equity Shares, priced at $10.00 per Equity Share, is payable to the sellers of SoCal Greenhouse upon closing of the Transaction, and up to a further $75 million in Equity Shares, priced based on the volume weighted average price of the Equity Shares for twenty (20) consecutive trading days immediately prior to October 31, 2024, can be earned by the sellers of SoCal Greenhouse over a period of 12 consecutive months commencing August 1, 2023 and ending July 31, 2024, which vest pursuant to a defined formula. See “SoCal Greenhouse Acquisition” in the Information Statement attached as Appendix “D” to this Circular.

 

As well, GH Group has executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7, LLC which are in the process of applying for up to 17 State and local retail cannabis licenses in California (each an “Element 7 Merger”). For each 1% of the membership interests of a wholly-owned licensed entity owned by Element 7 or partially owned licensed entity owned by Element 7 at the closing of an Element 7 Merger, GH Group will issue $15,000 in stock (“Company Stock”) at a price per share of: (i) Company Stock at a GH Group valuation of $325 million; plus (ii) any amount of equity financing completed prior to the closing of the Element 7 Merger and excluding all in-the-money options (or in the event that the Transaction is completed, $10.00 per Equity Share). The Company Stock will be issued at $10.00 per share for up to $24,000,000 in consideration. See “Element 7” in the Information Statement attached as Appendix “D” to this Circular.

 

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Pursuant to a License Development Consulting Agreement dated February 23, 2021 by and between Element 7 and GH Group (the “Element 7 Consulting Agreement”), GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional permits, licenses and operations in localities within the State of California in addition to those contemplated under the Element 7 Merger Agreement. The Element 7 Consulting Agreement is conditional on the closing of the Transaction.

 

In consideration of the provision of the services by Element 7 and the rights granted to GH Group under the Element 7 Consulting Agreement, GH Group will be obliged to pay: (i) cash fees in the amount of $155,000 per month, the total not to exceed $5,580,000 (which monthly payments have been made to date); (ii) a one (1)-time payment $375,000 payable within three (3) business days of the execution of the Element 7 Consulting Agreement (which has been paid); and (iii) for each local permit in a specific jurisdiction for which a local authorization for cannabis activities is going to be filed, a cash fee of $30,000 (the total amount not to exceed, without written waiver by GH Group, $1,800,000). GH Group will also pay to Element 7 $15,000 for each 1% of membership interests acquired from Element 7 of either: (i) a limited liability company formed for purposes of applying for the local authorization for cannabis activities; or (ii) an entity for which a option or other purchase arrangement has been entered into that meets the Conditions for Transfer (as defined in the Element 7 Consulting Agreement), or with respect to any specific condition the requirement has been waived, and for which a transfer of ownership is completed, such amount to be payable in newly created and issuable shares of GH Group, or its successor in interest, or the Resulting Issuer after the close of the Transaction, at a deemed value of $10.00 per share. All such shares will be subject to resale restrictions imposed by securities laws or stock exchange rules, and in any event a minimum six (6) months resale restriction. Element 7 will pay and be responsible for any taxes imposed on, or with respect to, Element 7’s income, revenues, gross receipts, personnel, or real or personal property or other assets. No fee is payable and no credit will apply in respect of the Element 7 Merger Agreement, any license or entity to which it relates, or any work related to the Element 7 Merger Agreement or any work or obligation related thereto. There is no guarantee that Element 7 will be granted any local licenses. Even if Element 7 is granted a local license, a license from the State of California must be obtained before the licensed entity can begin selling cannabis. BRND is not a party to the Element 7 Consulting Agreement.

 

On April 8, 2021, BRND announced a private placement in connection with the Transaction of $85 million of non-voting shares of MPB PipeCo (as defined herein), a wholly-owned subsidiary of BRND (the “Private Placement Shares”) at a price of $10.00 per share (the “Private Placement”). Canaccord, the underwriter in respect of BRND’s initial public offering and the sole agent in respect of the Private Placement, has subscribed for $4.9 million of Private Placement Shares under the Private Placement, which subscription is expected to be funded by Canaccord directing to BRND an equal amount from the non-discretionary portion of deferred underwriting fees that will be owed by BRND to Canaccord in connection with the closing of the Transaction. Canaccord is currently expected to assign its subscription agreement to an affiliate. Canaccord shall be 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 Private Placement subscriber that has subscribed for $20.1 million of Private Placement Shares will be 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. The closing of the Private Placement is to occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares so issued will be exchanged for Equity Shares on a one-for-one basis. The Private Placement is subject to customary conditions, including the closing of the Transaction. The funds from the Private Placement will be used to fund the Corporation’s growth strategy, for working capital and for general corporate purposes, and may be used in connection with the acquisition of SoCal Greenhouse, the Element 7 Merger and/or the Element 7 Consulting Agreement.

 

The Transaction involves the issuance of: (i) Equity Shares issuable upon the exchange of exchangeable shares of a wholly-owned subsidiary of the Corporation; (ii) Multiple Voting Shares to the GH Group Founders; (iii) $85 million in Equity Shares (priced at $10.00 per share) issuable upon exchange of the Private Placement Shares; (iv) $175 million in Equity Shares ($100 million of which shall be priced at $10.00 per share and $75 million of which shall be priced based on the volume weighted average price of the Equity Shares for twenty (20) consecutive trading days immediately prior to October 31, 2024 and which shall vest pursuant to a defined formula) pursuant to the acquisition of SoCal Greenhouse; and (v) $24 million in Equity Shares (priced at $10.00 per share) pursuant to the Element 7 Merger.

 

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In connection with the completion of the Transaction and pursuant to BRND’s notice of articles and articles, as amended in connection with the Transaction Resolution, all BRND Class A Restricted Voting Shares held by registered BRND Shareholders (other than BRND Shareholders properly exercising redemption rights) and all BRND Class B Shares held by registered BRND Shareholders will automatically convert into Equity Shares at a ratio of one Equity Share for every such BRND Class A Restricted Voting Share or BRND Class B Share at the Effective Time. As well, in connection with the closing of the Transaction, all BRND Warrants outstanding immediately prior to the Transaction will remain outstanding and thereafter will each represent the right to acquire one Equity Share for $11.50 coming 65 days after closing.

 

On May 5, 2021, the holders of the BRND Class A Restricted Voting Shares approved an ordinary resolution to extend the Permitted Timeline to July 30, 2021. Subject to receipt of applicable regulatory and other approvals, and the satisfaction or waiver of all closing conditions, it is presently anticipated that the Transaction will be completed in the first half of June 2021. There can be no assurance that the Transaction will be completed.

 

The Transaction will be carried out pursuant to the Definitive Agreement and related documents. A summary of the principal terms of the Definitive Agreement is provided in this section. This summary does not purport to be complete and is qualified in its entirety by reference to the Definitive Agreement, which is available on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) under the Corporation’s profile at www.sedar.com.

 

Background to the Transaction

 

BRND was introduced to GH Group through GH Group President Graham Farrar in 2019. BRND and GH Group began a formal dialogue regarding a potential transaction in June 2020. BRND conducted extensive due diligence on GH Group, including in respect of its business plan in order to seek to ascertain the fundamental value of GH Group’s business.

 

In October 2020 certain executives from BRND and GH Group met telephonically to discuss the GH Group business and explore a potential transaction whereby BRND would merge with GH Group. BRND made a formal proposal to GH Group in late October 2020 and senior executives from both groups met again to discuss the proposal, as well as diligence and timing around a potential transaction. Throughout November 2020 teams from both BRND and GH Group continued to negotiate the terms of a potential transaction both by email and telephonically while both parties, along with their respective legal advisors, continued to conduct mutual legal and business diligence. Over the course of December 2020, the parties and their respective legal and financial advisors finalized a proposal for BRND to merge with GH Group. A letter of intent, which included an exclusivity period, was executed in late December 2020 and both teams began working jointly to complete all due diligence and definitive documentation required for the transaction.

 

In January 2021 the principals of BRND traveled to California to meet the principals of GH Group in person to discuss additional assets that would be part of the Transaction. During that trip, the BRND and GH Group teams met with the owners of the option to purchase the SoCal Greenhouse and reached an agreement in principal for GH Group, as part of the Transaction, to acquire and exercise the option to purchase SoCal Greenhouse. A letter of intent was executed by all parties in late January 2021.

 

In mid-January 2021 the principals of GH Group introduced the BRND team to the principals of Element 7. Throughout January and February 2021, the BRND and GH Group teams negotiated the terms of the merger into Glass House of certain Element 7 in-process license applications, and a consulting agreement with Element 7. The final agreements between GH Group and Element 7 were executed at the end of February 2021.

 

On April 8, 2021, BRND signed the Definitive Agreement with GH Group and announced the Transaction.

 

9

 

 

The Definitive Agreement

 

On April 8, 2021, BRND, and its wholly-owned subsidiary MPB AcquisitionCo, and its wholly-owned subsidiary MPB Mergersub Corp. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Definitive Agreement”) with GH Group, the sellers listed on the signature page thereto and Kyle Kazan as sellers’ representative, whereby BRND intends to effectuate a merger of Merger Sub with and into GH Group, with GH Group continuing as the surviving corporation and a subsidiary of MPB AcquisitionCo.

 

The Definitive GH Group Agreement contains customary closing conditions and other conditions that are specific to the transaction, including, without limitation: (i) receipt of all required consents and approvals; (ii) BRND will have received shareholder approval from the shareholders of BRND in respect of the Transaction; (iii) no governmental authority making the transactions contemplated in the Definitive GH Group Agreement illegal (other than existing federal cannabis laws); (iv) the U.S. Hart-Scott-Rodino Antitrust Improvements Act waiting period applicable to the transactions contemplated by the Definitive Agreement will have expired; (v) the approval of the NEO Exchange will have been obtained by BRND to enable the merger to qualify as BRND’s qualifying transaction and the listing of the Equity Shares on the NEO Exchange after the closing date of the Transaction; (vi) at the closing of the Transaction, the Corporation will have a minimum of $185,000,000 in cash: (A) before any cash consideration, as applicable, is payable for any Other Transactions (as such term is defined in the Definitive Agreement); (B) after any payments due and payable for the expenses of the Corporation, MPB AcquisitionCo and Merger Sub related to the closing of the Transaction, including all costs, fees, expenses and payments contingent on the closing of the Transaction; (C) after reduction for the aggregate amount of payments required to be made in connection with the exercise by one or more BRND shareholders of their rights to redeem BRND Class A Restricted Voting Shares held by them in accordance with BRND’s organizational documents; (D) plus the cash proceeds actually received by BRND in respect of the Private Placement or certain other equity or debt offerings; and (E) after taking into account any estimated debt or payables on BRND’s balance sheet as of the closing of the Transaction, and the GH Group Shareholders (as such term is defined in the Definitive GH Group Agreement) will have received a certificate signed on behalf of Buyer, Merger Sub and BRND such effect (“SPAC Closing Cash”); and (vii) on or prior to the effective time of the Transaction, all of the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares outstanding immediately prior to the Closing will have been converted directly or indirectly into Equity Shares. It is also condition of closing under the Definitive Agreement that if the SPAC Closing Cash (as such term is defined in the Definitive GH Group Agreement) is less than $250,000,000, the holders of at least two-thirds (2/3rds) of the then outstanding shares of Class B common stock of GH Group shall have approved the closing of the Transaction.

 

Any or all of the closing conditions of the Definitive Agreement, other than in respect of required shareholder, regulatory and stock exchange approvals, may be waived by the Corporation or the sellers of GH Group, as applicable.

 

Please refer to the section entitled “Corporate Structure – Definitive GH Group Agreement” of the Information Statement attached as Appendix “D” to this Circular for a summary of the material terms of the Definitive Agreement, which summary is subject to, and qualified in its entirety by, the full text of the Definitive Agreement, which is filed on SEDAR under the Corporation’s profile at www.sedar.com. BRND Shareholders are urged to read the Definitive Agreement in its entirety.

 

Exchangeable Shares and Exchange Rights Agreement

 

The terms of the Exchange Rights Agreement and the share terms of MPB AcquisitionCo governing the Exchangeable Shares are summarized below.

 

For tax reasons, rather than receiving Equity Shares, the sellers of GH Group (other than those who are non-accredited investors) will receive Exchangeable Shares as their consideration in connection with the Transaction.

 

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Broadly speaking, the Exchangeable Shares will entitle their holders to dividends and other economic rights that are, as nearly as practical, economically equivalent (without taking into account tax consequences) to those rights attaching to the Equity Shares. Until the Exchangeable Shares are exchanged for Equity Shares pursuant to the Exchange Rights Agreement, holders of Exchangeable Shares will not have the right to vote at meetings of BRND Shareholders, but will have 1.1 votes per share at meetings of the shareholders of MPB AcquisitionCo, Upon the one-year anniversary of the closing of the Transaction, each Exchangeable Share will thereafter have one vote per share. At no time will the aggregate voting power of the Exchangeable Shares exceed 49.9% of the total voting power of all classes of shares of MPB AcquisitionCo. The Exchangeable Shares will be exchangeable at any time, on a one-for-one basis, for Equity Shares at the option of the holder, subject to certain contractual lock-up restrictions. Certain ancillary rights, as further described in the Information Statement, will be provided to the holders of the Exchangeable Shares pursuant to the terms of the Exchange Rights Agreement.

 

Exchangeable Share Procedures

 

In connection with the Definitive Agreement, at the Effective Date, BRND will enter into an exchange rights agreement with MPB AcquisitionCo and Kyle Kazan as sellers’ representative (an “Exchange Rights Agreement”) for the benefit of the sellers under the Definitive Agreement, whereby BRND has agreed to make certain covenants in favour of the sellers to protect their rights as holders of Exchangeable Shares. BRND agrees to reserve an amount of Equity Shares for issuance upon exchange of the Exchangeable Shares. Upon notice to BRND and MPB AcquisitionCo, BRND will issue such number of Equity Shares to a holder of Exchangeable Shares in exchange for the Exchangeable Shares of such holder, subject to the terms specified in the Exchange Rights Agreement. Additionally, BRND has an overriding liquidation call right under the Exchange Agreements to purchase all, but not less than all, of the Exchangeable Shares from the holders thereof upon a proposed liquidation, dissolution or winding-up of MPB AcquisitionCo, as well as a redemption call right and retraction call right on the Exchangeable Shares, in each case for the consideration set forth in such agreements.

 

Please refer to the section entitled “Corporate Structure – Exchangeable Shares and Exchange Rights Agreement” of the Information Statement attached as Appendix “D” to this Circular for a summary of the material terms of the Exchangeable Shares and the Exchange Rights Agreement.

 

Amendments to Notice of Articles and Articles

 

Pursuant to the Transaction Resolution, BRND proposes to amend its notice of articles and articles (the “Amendments”) in order to:

 

· create two new share classes of the Corporation, being the Restricted Voting Shares and the Limited Voting Shares, and to attach special rights and restrictions to those shares, including applying coattail terms to such shares similar to those applicable to the existing Subordinate Voting Shares;

 

· amend the special rights and restrictions attached to the existing Subordinate Voting Shares, including without limitation, by amending the requirements on who may hold Subordinate Voting Shares;

 

· amend the special rights and restrictions attached to the existing Multiple Voting Shares in order to convert the terms of such class of shares into nominal value preferred shares with a $0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carrying 50 votes per share, having limited transferability and being subject to a three (3)- year sunset provision, at which time they would be automatically redeemed;

 

· amend the special rights and restrictions attached to the BRND Class A Restricted Voting Shares and BRND Class B Shares so that, effective simultaneously with the closing of the acquisition of GH Group, the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares shall be converted on a one-for-one basis into Equity Shares (with the result that, immediately following the closing of the acquisition of GH Group, the non-redeemed BRND Class A Restricted Voting Shares and BRND Class B Shares will be converted into Equity Shares); and

 

· create a new class of shares of the Corporation, being the preferred shares, which will be unlimited in number and be issuable in series with such terms as are determined by the board of directors of the Corporation from time to time (it is not intended that such preferred shares will be used for anti-takeover purposes);

 

all of the foregoing as set out in Schedule “A” to the Transaction Resolution attached as Appendix “A” to the Circular; and

 

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· following the redemption and/or conversion of the BRND Class A Restricted Voting Shares and BRND Class B Shares, to:

 

· alter the authorized share structure of BRND to remove the BRND Class A Restricted Voting Shares and BRND Class B Shares; and

 

· adopt amended and restated articles (the “Amended and Restated Articles”) substantially in the form set out in Schedule “B” to the Transaction Resolution attached as Appendix “A” to the Circular.

 

Equity Share/Multiple Voting Share Structure

 

Increasingly, Canadian public companies with U.S. cannabis businesses that are going public in Canada are using multiple voting share structures. The GH Group Founders wish to be able to continue to build the business of the Corporation following completion of the Transaction during the current and expected future volatile period in the industry. Accordingly, subject to obtaining applicable consents and approvals, including under OSC Rule 56-501, which requires majority of minority approval by a majority of votes cast by the holders of BRND Class A Restricted Voting Shares, excluding any votes attached to BRND Class A Restricted Voting Shares held directly or indirectly by (i) the GH Group Founders8, and (ii) persons who also hold BRND Class B Shares, BRND intends to issue Multiple Voting Shares to the GH Group Founders in connection with the closing of the Transaction. It is intended that, pursuant to the amendments to the Corporation’s notice of articles and articles as reflected in the Transaction Resolution, the Multiple Voting Shares will be changed into nominal value preferred shares with a $0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carrying 50 votes per share (voting together with the other classes of Equity Shares as if they were a single class except where otherwise required by law or stock exchange requirements), and having no entitlement to dividends and no conversion rights. In addition, unless redeemed earlier, the holder, the Multiple Voting Shares would be subject to a three (3)-year sunset provision, at which time they would be automatically redeemed. The Multiple Voting Shares will not be transferable, except to controlled affiliates, nor will they be listed on the NEO Exchange.

 

Equity Shares

 

If the Transaction Resolution is approved, the Equity Shares will have the following features:

 

· one vote per Subordinate Voting Share;

 

· one vote per Restricted Voting Share;

 

· one vote per Limited Voting Share, other than in respect of the election of directors of the Resulting Issuer, where the Limited Voting Shares will not have any entitlement to vote;

 

· equivalent dividends among the Subordinate, Restricted and Limited Voting Shares on a per share basis;

 

· equal rights on liquidation among the Subordinate, Restricted and Limited Voting Shares on a per share basis;

 

· no entitlement to a right of first refusal to subscribe for, purchase or receive any issue of shares, bonds, debentures or other securities of the Corporation;

 

· the Subordinate Voting Shares can only be held of record by non-United States residents; and

 

· the Restricted Voting Shares and Limited Voting Shares can only be held of record by United States residents.

 

Upon the closing of the Transaction, any non-redeemed BRND Class A Restricted Voting Shares will be converted into Equity Shares.

 

Multiple Voting Shares

 

 

 

8 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

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If the Transaction Resolution is approved, the Multiple Voting Shares will have the following features:

 

· 50 votes per Multiple Voting Shares;

· no entitlement to receive any dividends;

· a liquidation preference of $0.001 per Multiple Voting Shares (rounded down to the nearest cent taking into account all Multiple Voting Shares being liquidated at the relevant time by the applicable holder);

· no entitlement to a right of first refusal to subscribe for, purchase or receive any issue of shares, bonds, debentures or other securities of the Corporation;

· retractable by the holders thereof at any time for $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being retracted at the applicable time);

· automatically redeemed by the Corporation for $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed at the applicable time) on the earliest of (i) the third (3rd) anniversary of the Transaction, and (ii) the date on which such Multiple Voting Shares are held or controlled by a person who is not a Permitted Holder (as defined in the Articles to be in effect a controlled affiliate); and

· not be transferable except to Permitted Holders.

 

See Schedule “A” – Amended and Restated Articles to the Transaction Resolution attached as Appendix “A” to this Circular for a full description of the terms of the Equity Shares and the Multiple Voting Shares.

 

Name Change

 

In connection with the closing of the Transaction, BRND will change its name from “Mercer Park Brand Corp.” to “Glass House Brands Inc.” (or such other name as may be selected by the board of directors of BRND prior to closing).

 

Compliance Provisions

 

In connection with the Transaction, BRND is proposing an amendment to its notice of articles and articles to, among other things, facilitate compliance with applicable regulatory and/or licensing regulations. In particular, BRND is proposing to add certain provisions (the “Compliance Provisions”), including a combination of certain remedies such as an automatic suspension of voting and/or dividend rights, a discretionary right to force a share transfer to a third-party and/or a discretionary redemption right in favour of BRND, in each case to seek to ensure that BRND and its subsidiaries are able to comply with applicable regulatory and licensing regulations. The purpose of the Compliance Provisions is to provide the Corporation with a means of protecting itself from having a shareholder, or, as determined by the Resulting Issuer Board, a group of shareholders acting jointly or in concert, with an ownership interest of, whether of record or beneficially (or having the power to exercise control or direction over) (“Owning or Controlling”), five percent (5%) or more of the issued and outstanding Equity Shares, or such other number as is determined by the Resulting Issuer Board from time to time, and: (i) who a governmental authority granting licenses to, or otherwise governing the operations of, the Corporation or its subsidiaries has determined to be unsuitable to own Equity Shares; (ii) whose ownership of Equity Share may reasonably result in the loss, suspension or revocation (or similar action) with respect to any licenses or permits relating to the Corporation’s or its subsidiaries’ conduct of business (being the conduct of any activities relating to the cultivation, manufacturing, distributing and dispensing of cannabis and cannabis-derived products in the United States, which include the owning and operating of cannabis licenses) or in the Corporation being unable to obtain any new licenses or permits in the normal course, all as determined by the Resulting Issuer Board; or (iii) who have not been determined by the applicable regulatory authority to be an acceptable person or otherwise have not received the requisite consent of such regulatory authority to own the Equity Shares, as applicable, in each case within a reasonable time period acceptable to the Resulting Issuer Board or prior to acquiring any Equity Shares (in each case, an “Unsuitable Person”). The ownership restrictions in the Corporation’s notice of articles and Articles will also be (and the notice of articles and articles of BRND currently are) subject to an exemption for applicable depositaries and clearing houses as well as underwriters (as defined in the Securities Act (Ontario)) in the course of a distribution of securities.

 

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Notwithstanding the foregoing, the Compliance Provisions will provide that any shareholder (or group of shareholders acting jointly or in concert) proposing to Own or Control five percent (5%) or more of the issued and outstanding shares of the Corporation (or such other number as is determined by the Resulting Issuer Board from time to time) will be required to provide not less than 30 days’ advance written notice to the Corporation by mail sent to the Corporation’s registered office to the attention of the Corporate Secretary and to obtain all necessary regulatory approvals. Upon any such shareholder(s) Owning or Controlling five percent (5%) or more of the issued and outstanding shares of the Corporation (or such other number as is determined by the Resulting Issuer Board from time to time), and having not received the requisite approval of any applicable regulatory authority to own the Equity Shares, the Compliance Provisions will provide: (i) that such shareholder(s) may, in the discretion of the Resulting Issuer Board, be prohibited from exercising any voting rights and/or receiving any dividends from the Corporation, unless and until all requisite regulatory approvals are obtained; and (ii) the Corporation with a right, but not the obligation, at its option, upon notice to the Unsuitable Person, to: (A) redeem any or all Equity Shares directly or indirectly held by an Unsuitable Person; and/or (B) forcibly transfer any or all Equity Shares directly or indirectly held directly or indirectly by an Unsuitable Person to a third-party. Such rights are required in order for the Corporation to comply with regulations in various jurisdictions where the Corporation or its subsidiaries are expected to conduct business.

 

Upon receipt by the holder of a notice to redeem or to transfer any or all of its Equity Shares, the holder will be entitled to receive, as consideration therefor, (i) if the Equity Shares are then listed for trading on a stock exchange, no less than 95% of the lesser of (A) the closing price of the Equity Shares on the NEO Exchange (or the then principal exchange on which the Corporation’s securities are listed for trading) on the trading day immediately prior to the closing of the redemption or transfer (or the average of the last bid and last asking prices if there was no trading on the specified date), and (B) the five-day volume weighted average price of the Equity Shares on the NEO Exchange (or the then principal exchange on which the Corporation’s securities are quoted for trading) for the five trading days immediately prior to the closing of the redemption or transfer (or the average of the last bid and last asking prices if there was no trading on the specified dates), or (ii) if the Equity Shares are not then listed for trading on a stock exchange, a price per share to be determined by the Resulting Issuer Board, acting reasonably.

 

The foregoing restriction will not apply to the ownership, acquisition or disposition of Equity Shares as a result of: (i) transfer of Equity Shares occurring by operation of law including, inter alia, the transfer of Equity Shares to a trustee in bankruptcy, (ii) an acquisition or proposed acquisition by one or more underwriters who hold Equity Shares for the purposes of distribution to the public or for the benefit of a third-party provided that such third-party is in compliance with the foregoing restriction, or (iii) conversion, exchange or exercise of securities issued by the Corporation or a subsidiary into or for Equity Shares in accordance with their respective terms. If the Resulting Issuer Board reasonably believes that any such holder of the Equity Shares may have failed to comply with the foregoing restrictions, the Corporation may apply to the Supreme Court of British Columbia, or any other court of competent jurisdiction, for an order directing that such shareholder disclose the number of Equity Shares directly or indirectly held.

 

Notwithstanding the adoption of the Compliance Provisions, the Corporation may not be able to exercise such rights in full or at all, including its redemption rights. Under the BCBCA, a corporation may not make any payment to redeem shares if there are reasonable grounds for believing that the Corporation is unable to pay its liabilities as they become due in the ordinary course of its business or if making the payment of the redemption price or providing the consideration would cause the Corporation to be unable to pay its liabilities as they become due in the ordinary course of its business. Furthermore, the Corporation may become subject to contractual restrictions on its ability to redeem its Equity Shares by, for example, entering into a secured credit facility subject to such restrictions. In the event that restrictions prohibit the Corporation from exercising its redemption rights in part or in full, the Corporation will not be able to exercise its redemption rights absent a waiver of such restrictions, which the Corporation may not be able to obtain on acceptable terms or at all.

 

The Compliance Provisions will be effected through the adoption of the Amended and Restated Articles. See Schedule “B” – Amended and Restated Articles to the Transaction Resolution attached as Appendix “A” to this Circular for a full description of the Compliance Provisions.

 

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Advance Notice Provisions

 

The Amended and Restated Articles will include advance notice provisions. The purpose of the advance notice provisions is to provide the registered BRND Shareholders, the Resulting Issuer Board and the management of the Corporation with a clear framework for nominating directors. The advance notice provisions fix a deadline by which registered BRND Shareholders must submit director nominations to the Corporation prior to any annual or special meeting of shareholders, and sets forth the information to be provided and other procedures to be followed, in respect of such nomination. See Schedule “B” – Amended and Restated Articles to the Transaction Resolution attached as Appendix “A” to this Circular for additional information in respect of such advance notice provisions.

 

Recommendation of the BRND Board

 

The BRND Board has unanimously determined that the Transaction is in the best interests of the Corporation and has unanimously determined that the Transaction is fair to BRND Shareholders. Accordingly, the BRND Board has unanimously approved the Transaction and unanimously recommends that the BRND Shareholders vote FOR the Transaction Resolution.

 

In addition, the Transaction was unanimously approved by all members of the BRND Board, none of whom are related to the Transaction.

 

Reasons for the Recommendation of the BRND Board

 

In reaching these determinations and approvals, the BRND Board considered, among other things, the following factors and potential benefits and risks of the Transaction:

 

· Strong, competitive position within an attractive industry.

 

· Strong, experienced and well-aligned management team. Upon completion of the Transaction, BRND will have a strong management team and board of directors comprised of individuals who have significant experience in the cannabis industry, and who intend to implement a clear strategy going forward.

 

· Strong current Adjusted EBITDA generation, with potential for growth by virtue of the Transaction and positive industry momentum. GH Group’s operating assets have significant momentum and cash flow potential. Adjusted EBITDA is a non-U.S. GAAP measure, see “Non-U.S. GAAP Measures” in the Information Statement attached to this Circular as Appendix “D”.

 

· Attractive return on investment relative to risk profile. GH Group represents an early opportunity to invest in a high-growth business at an attractive valuation. See “Forward-Looking Statements” in this Circular and “Caution Regarding Forward-Looking Statements” in the Information Statement attached to this Circular as Appendix “D”.

 

· Opportunities for platform growth through acquisitions. We believe that there is opportunity for further consolidation within the U.S. cannabis industry and that, following completion of the Transaction, the Corporation will be well-positioned to engage in such accretive acquisitions.

 

· Benefit from being a public company in Canada. The Resulting Issuer is expected to benefit from BRND’s Canadian listing on the NEO Exchange for a number of reasons, including access to Canadian and international capital.

 

· Concurrent private placement. Certain private investors have committed to a $85 million private investment in public equity to close concurrently with the Transaction.

 

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In making its recommendation to the registered BRND Shareholders, the BRND Board also considered a number of elements of the Transaction that provide protection to BRND Shareholders, including the following:

 

· Shareholder Approval. The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by holders of BRND Class B Shares and other persons not permitted to vote thereon under OSC Rule 56-501); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class. As noted above, the Transaction Resolution will be used to approve a “restricted security reorganization” pursuant to NI 41-101 and OSC Rule 56-501, which requires that a restricted security reorganization receive prior majority approval of the holders of BRND Class A Restricted Voting Shares in accordance with applicable law, excluding any votes attaching to BRND Class A Restricted Voting Shares held, directly or indirectly, by (A) the GH Group Founders9, and (B) affiliates of BRND or control persons of BRND or holders of BRND Class A Restricted Voting Shares that are also holders of BRND Class B Shares. Mercer, BRND’s sponsor and a BRND Founder, is an affiliate or control person of BRND, and therefore any BRND Class A Restricted Voting Shares held by Mercer will be excluded from voting in the class vote of the BRND Class A Restricted Voting Shares in respect of the Transaction Resolution under NI 41-101 and OSC Rule 56-501. Any BRND Class A Restricted Voting Shares of Charles Miles and Sean Goodrich, the other BRND Founders, will also be excluded from voting in the class vote of the BRND Class A Restricted Voting Shares on the Transaction Resolution.

 

· Redemption Rights. Registered holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, provided that they deposit (and do not validly withdraw) their BRND Class A Restricted Voting Shares for redemption prior to the Redemption Deposit Deadline and, subject to applicable law, upon the closing of the Transaction, for an amount per BRND Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion, per BRND Class A Restricted Voting Share, of (i) the escrowed funds available in the Escrow Account at the time of the meeting, including interest and other amounts earned thereon; less (ii) an amount equal to the total of (A) applicable taxes payable by BRND on such interest and other amounts earned in the Escrow Account, and (B) actual and expected direct expenses related to the redemption, each as reasonably determined by BRND; for greater certainty, such amount will not be reduced by the amount of any tax payable by BRND under Part VI.1 of the Tax Act or the deferred underwriting commission per BRND Class A Restricted Voting Share held in the Escrow Account. The redemption price per BRND Class A Restricted Voting Share is expected to be approximately $10.11, assuming a redemption date of June 4, 2021. Registered holders of BRND Class A Restricted Voting Shares may elect to redeem their BRND Class A Restricted Voting Shares irrespective of whether they vote for or against, or do not vote on, the Transaction.

 

In the course of their deliberations, the BRND Board also identified and considered a variety of risks, including:

 

· Risks of the Businesses being Acquired. The risks faced by GH Group and, upon completion of the Transaction, to be faced by the Corporation with respect to their respective affairs, business and operations and future prospects.

 

· Risks if Transaction is Not Completed. The risks to the Corporation if the Transaction is not completed, including the costs to the Corporation in pursuing the Transaction and the inability to pursue other opportunities as a result.

 

· The Definitive Agreement may be Terminated in Certain Circumstances. The Corporation and the sellers of GH Group each have the right to terminate the Definitive Agreement in certain circumstances. There is no certainty, nor can the Corporation provide any assurance, that the Definitive Agreement will not be terminated by either the Corporation or GH Group before the completion of the Transaction. Accordingly, there is no certainty, nor can the Corporation provide any assurance, that the Corporation will complete the acquisition of GH Group pursuant to the Transaction.

 

· No Certainty that All Conditions Precedent to the Transaction will be Satisfied. The completion of the Transaction is subject to a number of conditions precedent, certain of which are outside the control of the Corporation, including approval of the Transaction Resolution. There can be no certainty, nor can the Corporation provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. If the Transaction is not completed, the market price of the currently trading BRND Class A Restricted Voting Shares and BRND Warrants may decline. If the Transaction is not completed and the BRND Board decides to seek another transaction, there can be no assurance that it will be able to find another attractive qualifying transaction.

 

 

 

9 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

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See “Risks Associated with the Transaction” in this Circular and “Risk Factors” in the Information Statement attached as Appendix “D” to this Circular.

 

Qualifying Transaction Fair Market Value Threshold

 

Under the NEO Exchange rules, the assets acquired as part of a qualifying transaction must have a fair market value equal to at least 80% of the funds held in the Escrow Account (excluding the deferred underwriting commissions and taxes payable on interest and other amounts earned on the funds in the Escrow Account). This must be satisfied at the time of the execution of the definitive agreement(s) for the qualifying transaction. As of the date of the execution of the Definitive Agreement, the balance of the funds in the Escrow Account was $407,590,197 (excluding approximately $16,100,000 of deferred underwriting commissions and 80% thereof represents approximately $312,300,000). In reaching its conclusion that the Transaction meets the 80% test, the BRND Board looked at the enterprise value of the GH Group business. Based on the transaction value, which was the result of arm’s length negotiations, it was determined that enterprise value is $352,900,000, before taking into account any value attributable to the SoCal Greenhouse or the Element 7 license applications. As a result, the BRND Board concluded that the fair market value of the businesses and assets being acquired was in excess of the 80% requirement. In light of the financial background and experience of the members of the Corporation’s management team and the BRND Board, the BRND Board believes that the members of its management team and the BRND Board are qualified to make such determination.

 

Transaction Steps

 

The following summarizes the steps which will occur under the terms of the Transaction on the Effective Date and at the Effective Time, if all conditions of the Transaction have been satisfied or waived. The following description is a summary of the principal steps of the Transaction and is qualified in its entirety by reference to the full text of the Definitive Agreement, which is available on SEDAR under the Corporation’s profile at www.sedar.com:

 

At the Effective Time, among other things:

 

(a) any BRND Class A Restricted Voting Shares held by a registered BRND Shareholder who duly exercised his, her or its redemption rights in accordance with the articles of BRND shall be redeemed by BRND effective immediately prior to the Effective Time, and, upon receipt by each such BRND Shareholder of the redemption amount for their BRND Class A Restricted Voting Shares in accordance with the constating documents of BRND, as amended, each such redeeming BRND Shareholder shall cease to have any rights as a registered BRND Shareholder, and such BRND Class A Restricted Voting Shares shall be cancelled and cease to be outstanding;

 

(b) BRND’s notice of articles and articles will be amended, ultimately resulting in:

 

(i) the conversion of each non-redeemed BRND Class A Restricted Voting Share and each BRND Class B Share then outstanding into one Equity Share; and

 

(ii) the amendment of the terms of the existing class of Multiple Voting Shares (none of which are currently issued and outstanding) to provide for redeemable and retractable preferred shares carrying 50 votes per share with no dividend or conversion rights, a $0.001 redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), limited transferability and a three (3)-year sunset provision (at which time they would be automatically redeemed);

 

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in each case as more specifically set out under “The Transaction – Equity Shares and Multiple Voting Shares Structure”;

 

(c) BRND will, if it is approved by the registered BRND Shareholders, adopt the Equity Incentive Plan;

 

(d) the merger with GH Group is expected to occur;

 

(e) Macias, Gini & O’Connell LLP will be appointed the auditors of the Corporation; and

 

(f) BRND will change its name from “Mercer Park Brand Acquisition Corp.” to “Glass House Brands Inc.” (or such other name as may be selected by the board of directors of BRND prior to closing).

 

BRND Founders and GH Group Founders

 

On the closing of BRND’s initial public offering, the BRND Founders entered into the Exchange Agreement and Undertaking pursuant to which each BRND Founder agreed to certain transfer restrictions in respect of their: (i) aggregate 10,089,750 BRND Founders’ Shares (which were acquired for nominal consideration); (ii) 9,810,000 BRND Founders’ Warrants (which were acquired for $1.00 per BRND Warrant); and (iii) 109,000 BRND Class B Units (which were acquired for $10.00 per BRND Class B Unit). Pursuant to the Exchange Agreement and Undertaking, the BRND Founders agreed not to transfer any of their BRND Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the BRND Class B Units), BRND Founders’ Shares or BRND Founders’ Warrants, or any securities of BRND received in exchange therefor, prior to the closing of BRND’s qualifying transaction without the prior consent of the NEO Exchange. Such transfer restrictions only apply to BRND Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the BRND Class B Units), BRND Founders’ Shares and BRND Founders’ Warrants and do not apply to any BRND Class A Restricted Voting Shares of the BRND Founders (if any).

 

In connection with the Definitive Agreement, the BRND Founders and the GH Group Founders have entered into an investor rights agreement dated April 8, 2021 (the “Investor Rights Agreement”), pursuant to which, among other things, 50% of the ultimate number of Equity Shares to be issued to the BRND Founders on closing of the Transaction in exchange for the BRND Founders’ Shares will be subject to forfeiture in certain circumstances. In addition, in connection with closing of the Transaction the BRND Founders and GH Group Founders will enter into a lock-up agreement pursuant to which (i) 50% of the Exchangeable Shares issued to the GH Group Founders on closing of the Transaction (and any Equity Shares exchangeable therefor) will be subject to a six-month lock-up period and the remaining 50% of the Exchangeable Shares issued to the GH Group Founders (and any Equity Shares exchangeable therefor) will be subject to a 12-month lock-up period, and (ii) the Equity Shares issued to the BRND Founders at Closing will be subject, in addition to certain forfeiture-based restrictions, to similar lock-up restrictions.

 

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BRND Shareholder Approval of the Transaction

 

The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by holders of BRND Class B Shares and other persons not permitted to vote thereon under OSC Rule 56-501); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class. As noted above, the Transaction Resolution will be used to approve a “restricted security reorganization” pursuant to NI 41-101 and OSC Rule 56-501, which requires that a restricted security reorganization receive prior majority approval of the holders of BRND Class A Restricted Voting Shares in accordance with applicable law, excluding any votes attaching to BRND Class A Restricted Voting Shares held, directly or indirectly, by (i) the GH Group Founders10, and (ii) affiliates of BRND or control persons of BRND or holders of BRND Class A Restricted Voting Shares that are also holders of BRND Class B Shares. Mercer, BRND’s sponsor and a BRND Founder, is an affiliate or control person of BRND, and therefore any BRND Class A Restricted Voting Shares held by Mercer will be excluded from voting in the class vote of the BRND Class A Restricted Voting Shares in respect of the Transaction Resolution under NI 41-101 and OSC Rule 56-501. Any BRND Class A Restricted Voting Shares of Charles Miles and Sean Goodrich, the other BRND Founders, will also be excluded from voting in the class vote of the BRND Class A Restricted Voting Shares on the Transaction Resolution. The Transaction Resolution will be in the form set forth in Appendix “A” of this Circular.

 

The Equity Incentive Plan Resolution will be required to be approved by an ordinary resolution of the holders of (i) the BRND Class A Restricted Voting Shares, and (ii) the BRND Class B Shares, voting together as if they were a single class of shares. The Equity Incentive Plan Resolution will be substantially in the form set forth in Appendix “B” of this Circular.

 

The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares.

 

A quorum at the Shareholders’ Meeting is one person who is, or who represents by proxy, shareholders who, in the aggregate, hold at least 25% of the issued shares entitled to be voted at the Shareholders’ Meeting.

 

Post-Transaction Structure

 

Please refer to “Corporate Structure – Inter-Corporate Relationships” in the Information Statement attached as Appendix “D” to this Circular for the proposed corporate structure of the Corporation following completion of the Transaction.

 

Interests of Certain Persons in the Transaction

 

In considering the recommendation of the BRND Board with respect to the Transaction, BRND Shareholders should be aware that Mercer, which is controlled by Jonathan Sandelman, the Chairman of the BRND Board, has certain interests in connection with the Transaction that may be different from those of BRND Shareholders generally in connection with the Transaction. The BRND Board is aware of these interests and considered them along with the other matters described under the heading “The Transaction – Background to the Transaction”. For details on such interest, see “Interest of Certain Persons in Matters to be Acted Upon”.

 

Nominees to the Resulting Issuer Board

 

Upon completion of the Transaction, the proposed directors of the Corporation are expected to hold, directly or indirectly, in the aggregate, 3,930,570 Exchangeable Shares and 3,161,629 Multiple Voting Shares.

 

The following table sets out the number of Equity Shares, BRND Warrants, Exchangeable Shares and Multiple Voting Shares expected to be beneficially owned by, or for which control or direction is exercised by, the nominees to the Resulting Issuer Board as of the Effective Date.

 

 

 

10 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

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          Exchangeable     Multiple Voting  
Name   Equity Shares     BRND Warrants     Shares(4)     Shares  
Kyle Kazan(1)(5)     0       0       2,197,654       1,704,586  
Graham Farrar(1)(6)     0       0       1,456,749       1,321,087  
Jamie Mendola(2)     0       0       0       0  
Jocelyn Rosenwald(3)(7)     0       0       276,167       135,956  
Lameck Humble Lukanga(3)     0       0       0       0  
George Raveling(3)     0       0       0       0  
Bob Hoban(3)     0       0       0       0  
Hector De La Torre(3)     0       0       0       0  
Total     0       0       3,930,570       3,161,629  

 

 

 

Notes:

(1) Kyle Kazan and Graham Farrar are not considered independent for the purposes of NI 58-101 because (i) they will be part of management of the Corporation, and (ii) they were, prior to the Effective Date, executive officers of GH Group.

(2) Jamie Mendola is not considered independent for the purposes of NI 58-101 due to his position as Head of Strategy and M&A of Mercer Park, L.P., which controls the Sponsor.

(3) Independent director.

(4) Subject to adjustment pursuant to the terms of the Definitive GH Group Agreement.

(5) In addition, Kyle Kazan is expected to hold (i) 84,187 options to purchase Equity Shares, (ii) 1,013,218 restricted Exchangeable Share units, and (iii) 423,894 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(6) In addition, Graham Farrar is expected to hold (i) 88,320 options to purchase Equity Shares, (ii) 824,250 restricted Exchangeable Share units, and (iii) 151,092 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(7) In addition, Jocelyn Rosenwald is expected to hold 114,311 restricted Exchangeable Share units.

 

Executive Officers

 

Upon completion of the Transaction, the executive officers of the Corporation are expected to hold, in the aggregate, 0 Equity Shares, 0 BRND Warrants, 5,423,457 Exchangeable Shares and 3,025,673 Multiple Voting Shares.

 

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The following table sets out the number of Equity Shares, BRND Warrants, Exchangeable Shares and Multiple Voting Shares expected to be beneficially owned by, or for which control or direction is exercised by, the executive officers of the Corporation as of the Effective Date.

 

  Equity     BRND     Exchangeable     Multiple Voting  
Name   Shares     Warrants     Shares(1)     Shares  
Kyle Kazan(2)     0       0       2,197,654       1,704,586  
Executive Chairman and Chief                                
Executive Officer                                
Graham Farrar(3)     0       0       1,456,749       1,321,087  
President and Director                                
Derrek Higgins(4)     0       0       253,927       0  
Chief Financial Officer                                
Jamin Horn(5)     0       0       15,300       0  
General Counsel and Corporate                                
Secretary                                
Daryl Kato(6)     0       0       251,855       0  
Chief Operating Officer                                
Joe Andreae(7)     0       0       1,247,973       0  
Vice President, Business                                
Development                                
Total     0       0       5,423,457       3,025,673  

 

 

 

Notes:

(1) Subject to adjustment pursuant to the terms of the Definitive GH Group Agreement.

(2) In addition, Kyle Kazan is expected to hold (i) 84,187 options to purchase Equity Shares, (ii) 1,013,218 restricted Exchangeable Share units, and (iii) 423,894 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(3) In addition, Graham Farrar is expected to hold (i) 88,320 options to purchase Equity Shares, (ii) 824,250 restricted Exchangeable Share units, and (iii) 151,092 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(4) In addition, Derrek Higgins is expected to hold (i) 57,004 options to purchase Equity Shares, (ii) 483,888 restricted Exchangeable Share units, and (iii) 660,996 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(5) In addition, Jamin Horn is expected to hold (i) 83,246 options to purchase Equity Shares, (ii) 228,169 restricted Exchangeable Share units, and (iii) 5,000 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(6) In addition, Daryl Kato is expected to hold (i) 56,117 options to purchase Equity Shares, (ii) 480,860 restricted Exchangeable Share units, and (iii) 5,000 unlisted warrants to purchase Equity Shares at an exercise price of $10.00 per share.

(7) In addition, Joe Andreae is expected to hold (i) 48,331 options to purchase Equity Shares, and (ii) 66,472 restricted Exchangeable Share units.

 

PROCEDURE FOR THE EXCHANGE OF BRND SHARES

 

If the Transaction is completed, CDS is expected to affect a share exchange of the non-redeemed BRND Class A Restricted Voting Shares for Equity Shares. Beneficial owners of BRND Class A Restricted Voting Shares are not required to take any further action to receive the Equity Shares which they are entitled to receive.

 

If you are a registered BRND Shareholder, a letter of transmittal is available upon request from the Corporation, which, when properly completed and duly executed and returned together with the certificate(s) or DRS advice(s) representing BRND Shares and all additional documents as Odyssey may reasonably require, will enable each holder of BRND Shares to obtain the Equity Shares to which such holder of BRND Shares is entitled under the Transaction. The details for the surrender of BRND Share certificates to Odyssey and the address of Odyssey will be set out in the letter of transmittal.

 

REDEMPTION RIGHTS

 

Registered holders of BRND Class A Restricted Voting Shares have a redemption right.

 

Registered holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, provided that they deposit (and do not validly withdraw) their BRND Class A Restricted Voting Shares for redemption prior to the Redemption Deposit Deadline and, subject to applicable law, upon the closing of the Transaction, for an amount per BRND Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion, per BRND Class A Restricted Voting Share, of (i) the escrowed funds available in the Escrow Account at the time of the Shareholders’ Meeting, including interest and other amounts earned thereon; less (ii) an amount equal to the total of (A) applicable taxes payable by BRND on such interest and other amounts earned in the Escrow Account, and (B) actual and expected direct expenses related to the redemption, each as reasonably determined by BRND; for greater certainty, such amount will not be reduced by the amount of any tax payable by BRND under Part VI.1 of the Tax Act or the deferred underwriting commission per BRND Class A Restricted Voting Share held in the Escrow Account. The redemption price per BRND Class A Restricted Voting Share is expected to be approximately $10.11, assuming a redemption date of June 4, 2021. Registered holders of BRND Class A Restricted Voting Shares may elect to redeem their BRND Class A Restricted Voting Shares irrespective of whether they vote for or against, or do not vote on, the Transaction. Participants through CDS may have earlier deadlines for accepting deposits of BRND Class A Restricted Voting Shares pursuant to the redemption right. If a CDS Participant’s (as defined herein) deadline is not met by a holder of BRND Class A Restricted Voting Shares, such holder’s BRND Class A Restricted Voting Shares will not be eligible for redemption.

 

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Following the redemption, each of the remaining BRND Class A Restricted Voting Shares will be automatically converted immediately following closing of the Transaction into one Equity Share, and the residual Escrow Account balance would be available to the Corporation to pay tax liabilities on amounts earned on the escrowed funds, to pay the underwriters their deferred underwriting commissions in connection with the Corporation’s IPO, and to otherwise use at its discretion.

 

Notwithstanding the foregoing redemption right, no registered holder of BRND 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, is permitted to redeem more than an aggregate of 15% of the number of issued and outstanding BRND Class A Restricted Voting Shares.

 

A non-registered holder of BRND Class A Restricted Voting Shares who desires to exercise its redemption rights in connection with the BRND articles must do so by causing a participant (a “CDS Participant”) in the depository, trading, clearing and settlement systems administered by CDS to deliver to CDS (at its office in the City of Toronto) on behalf of the owner a written notice (a “Redemption Notice”) of the owner’s intention to redeem BRND Class A Restricted Voting Shares in connection with the BRND articles. A non-registered holder of BRND Class A Restricted Voting Shares who desires to redeem BRND Class A Restricted Voting Shares should ensure that the CDS Participant is provided with notice of his or her intention to exercise his or her redemption privilege sufficiently in advance of the notice date described above so as to permit the CDS Participant to deliver notice to CDS and so as to permit CDS to deliver notice to the Corporation’s transfer agent in advance of the required time. The form of Redemption Notice will be available from a CDS Participant or the Corporation’s transfer agent.

 

By causing a CDS Participant to deliver to CDS a notice of the owner’s intention to redeem BRND Class A Restricted Voting Shares, an owner shall be deemed (subject to any withdrawal rights that may be made available) to have irrevocably surrendered his, her or its BRND Class A Restricted Voting Shares for redemption (conditional on closing occurring) and appointed such CDS Participant to act as his, her or its exclusive settlement agent with respect to the exercise of the redemption right and the receipt of payment in connection with the settlement of obligations arising from such exercise.

 

Any Redemption Notice delivered by a CDS Participant regarding an owner’s intent to redeem which CDS determines to be incomplete, not in proper form or not duly executed shall for all purposes be void and of no effect and the redemption right to which it relates shall be considered for all purposes not to have been exercised. A failure by a CDS Participant to exercise redemption rights or to give effect to the settlement thereof in accordance with the owner’s instructions will not give rise to any obligations or liability on the part of the Corporation to the CDS Participant or to the owner.

 

Redemptions of BRND Class A Restricted Voting Shares shall be funded out of the Escrow Account, which, as of April 29, 2021, consisted of $407,590,197 or approximately $10.11 per share (net of applicable taxes).

 

If the deadline for depositing BRND Class A Restricted Voting Shares held through an intermediary is not met by a holder of BRND Class A Restricted Voting Shares, such holder’s BRND Class A Restricted Voting Shares will not be eligible for redemption.

 

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EQUITY INCENTIVE PLAN

 

Conditional upon the approval of the Transaction Resolution, registered BRND Shareholders will be asked to consider and, if thought advisable, pass an ordinary resolution authorizing the adoption by BRND of the Equity Incentive Plan substantially in the form set forth in Appendix “C” of this Circular authorizing the grant of rights to acquire up to 16,406,629 Equity Shares thereunder. The Equity Incentive Plan Resolution will be in the form set forth in Appendix “B” of this Circular.

 

Unless otherwise directed in properly completed forms of proxy, it is the intention of individuals named in the accompanying form of proxy to vote FOR the Equity Incentive Plan Resolution. The BRND Board has approved the Equity Incentive Plan and recommends that the BRND Shareholders vote FOR the Equity Incentive Plan Resolution.

 

ELECTION OF DIRECTORS

 

The articles of the Corporation provide that the Board shall consist of a minimum of three (3) and a maximum of twenty (20) directors, with the number between such limits to be determined by the Board from time to time. Conditional upon the approval of the Transaction Resolution, a Resulting Issuer Board of eight is to be elected at the Shareholders’ Meeting. If, prior to the Shareholders’ Meeting, any of the nominees shall be unable or, for any reason, become unwilling to serve as a director, it is intended that the discretionary power granted by the form of proxy or voting instruction form shall be used to vote for any other person or persons as directors. Subject to and conditional upon closing of the Transaction, each director will be elected for a one-year term (commencing upon the closing of the Transaction) ending at the next annual meeting of shareholders or when his or her successor is elected, unless he or she resigns or his or her office otherwise becomes vacant. The BRND Board and management of the Corporation have no reason to believe that any of the said nominees will be unable or will refuse to serve, for any reason, if elected to office.

 

The disclosure provided in the section entitled “Nominees for Election” provides the profile of the nominees proposed for election to the Resulting Issuer Board. Included in this disclosure is information relating to each nominee’s experience, qualifications, areas of expertise and expected ownership of securities of the Resulting Issuer following closing of the Transaction. As you will note from the enclosed form of proxy or voting instruction form, shareholders may vote for each director individually.

 

The BRND Board recommends that you vote FOR the election as director of each nominee whose name is set out below.

 

Unless a proxy specifies that the BRND shares it represents should be withheld from voting for the election of a particular nominee as director, the management appointees named in the accompanying form of proxy and voting instruction form intend to vote FOR such election.

 

The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares.

 

Kyle Kazan, Executive Chairman and Chief Executive Officer

 

Biography: A seasoned investor and expert manager of private equity funds with over two (2) decades of domestic and international experience, Kyle has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. In 1991 he began investing in real estate, eventually launching a total of 23 private equity funds with a current estimated value of owned and managed properties that stands above $2.75 billion. Kyle also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the vertically integrated GH Group. Since his early service as a special education teacher and law enforcement officer, Kyle has been a vocal advocate for police reform and ending the War on Drugs and its injustices, speaking on behalf of Law Enforcement Against Prohibition (LEAP) and appearing in many media outlets ranging from CNN to Fox. He is a frequent guest professor at NYU Stern School of Business, USC Marshall Business School, and UCLA Anderson School of Management, and Kyle is a graduate of the University of Southern California, where he played varsity basketball for Hall of Fame Coach George Raveling.

 

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Residency: Palos Verdes Peninsula, CA, USA.

 

Present Principal Occupation: Chief Executive Officer, GH Group.

 

Independence: Not independent.

 

Expected Committee Memberships: None.

 

Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

Graham Farrar

 

Biography: Graham is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Graham served as a board member for Heal the Ocean, was a founder and partner of ebook publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry. Graham currently sits on the Board of Directors of The Santa Barbara Bowl Foundation.

 

Residency: Santa Barbara, CA, USA.

 

Present Principal Occupation: President, GH Group.

 

Independence: Not independent.

 

Expected Committee Memberships: None.

 

Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

Jocelyn Rosenwald

 

Biography: Jocelyn began her career as a Teach for America Corps member in New York City. She began her career in real estate investment in 2013 with Beach Front Properties LLC and managed a $500 million portfolio of opportunistic real estate investments. In November of 2016, Rosenwald began supervising the operations of 4 funds in the regulated cannabis industry which would eventually be consolidated to form GH Group. Today, Jocelyn sits on the board of GH Group as a director. She holds a BA from the University of Pennsylvania, an MA in Education from Hunter College, and an MBA from UCLA Anderson School of Business. She is a co-founder and current director of GH Group.

 

Residency: Costa Mesa, CA, USA.

 

Present Principal Occupation: Director of Acquisitions and Asset Management, Beach Front Property Management.

 

Independence: Independent.

 

Expected Committee Memberships: Audit Committee, Compensation, Nominating and Corporate Governance Committee.

 

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Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

Jamie Mendola

 

Biography: Jamie Mendola is the Head of Strategy and M&A for Mercer Park, L.P., which is a family office focused on the cannabis sector that controls Mercer. Mercer provides management services to Ayr Wellness Inc., a U.S. multi-State operator with key assets in 7 States. Jamie has nearly 20 years of experience as a public and private equity investor and has been an active investor in the cannabis industry for several years. Prior to joining Mercer, Jamie was the CEO and Portfolio Manager of Pacific Grove Capital, a San Francisco-based hedge fund focused primarily on investments in consumer, technology and cannabis. He also managed the Pacific Grove Opportunity Fund, which focused on special purpose acquisition companies (SPACs), and was one of the top performing hedge funds during its tenure. Pacific Grove was named the best new hedge fund by Hedge Funds Review in 2015 and Jamie received accolades from Institutional Investor as a Hedge Fund Rising Star and was named as one of Tomorrow’s Titans by The Hedge Fund Journal. Prior to founding Pacific Grove in 2014, Jamie was a Partner at Scout Capital, which had assets under management of approximately $7 billion. He was a senior member of the firm’s Investment and Risk Committees and helped to build Scout’s west coast office. Previously, Jamie worked as a Principal of Watershed Asset Management, a private equity analyst at JLL Partners and an investment banking analyst at J.P. Morgan Chase. Jamie graduated with a B.S. in Management, summa cum laude, from Binghamton University in 1999, where he was also a 4-year letter-winner in baseball, and earned his M.B.A. from Stanford’s Graduate School of Business in 2005. He resides in San Francisco with his wife and four sons.

 

Residency: San Francisco, CA, USA.

 

Present Principal Occupation: Head of Strategy and M&A, Mercer Park L.P.

 

Independence: Not independent.

 

Expected Committee Memberships: None.

 

Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

Lameck Humble Lukanga

 

Biography: Lameck Humble Lukanga was born in a small village in Uganda, where he spent the first decade of his life enduring genocide, famine and extreme poverty. At the age of 11, he and his family were granted a political asylum, allowing them to come to the United States to seek refuge, which he calls “the biggest blessing of my life.” Since, Humble has gone on to become a venerable young leader in finance. Humble owns Life Line Financial Group, a wealth management firm servicing world-class performers and leaders in business, sports and entertainment. In addition to Life Line Financial, Humble serves on the board of trustees for the University of New Mexico and the board of directors for various companies. He holds both a Bachelors and Masters in Business Administration from the Anderson School of Management at the University of New Mexico, received a Personal Finance Planning degree from UCLA and holds the CFP credential. Humble is passionate about social entrepreneurship, financial literacy, freedom and the orphans of Uganda. He is a philanthropist, teacher and self-proclaimed “ambassador of hope”.

 

Residency: Los Angeles, CA, USA.

 

Present Principal Occupation: Principal, Life Line Financial Group.

 

Independence: Independent.

 

Expected Committee Memberships: Audit Committee, Compensation, Nominating and Corporate Governance Committee.

 

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Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

George Raveling

 

Biography: One of basketball’s most impactful Hall of Fame coaches, George has defined his career, from basketball to business, by his relentless dedication to leadership and mentoring. In 1964, he joined the coaching staff at his alma mater, Villanova, before becoming the first African American basketball coach in the Pacific-8 Conference (now the Pac-12), the head coach at Washington State, the University of Iowa and USC, and an assistant coach of the medal-winning U.S. Olympic teams of 1984 and 1988. While coaching, he published two books and afterwards became a broadcaster for Fox Sports and CBS. Nike subsequently named George Director of International Basketball, kicking off his life as an executive; he would go on to key positions on the boards of the NCAA, NABC, USA Basketball, and Nike, Inc. He was the recipient of the Naismith Memorial Hall of Fame’s John W. Bunn Lifetime Achievement Award and the co-founder, with former NFL GM Michael Lombardi, of leadership program The Daily Coach. As a result of his dedication to civil rights and service as additional security during 1963’s famed March on Washington, George is the current guardian of the original draft of Martin Luther King’s “I Have a Dream” speech.

 

Residency: Los Angeles, CA, USA.

 

Present Principal Occupation: Self-Employed Consultant, Coaching for Success.

 

Independence: Independent.

 

Expected Committee Memberships: None.

 

Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

Bob Hoban

 

Biography: Bob Hoban sits at the center of a large commercial cannabis industry network, a cannabis industry ecosystem that he has cultivated since 2008 as an attorney, an entrepreneur, and an executive. Bob has earned a reputation as a cannabis industry dealmaker representing start-ups, entrepreneurs, governments, and companies in all stages of development. He is a visionary industry leader, who has founded, created, bought, and sold over fifteen of his own cannabis companies. He has served as a C-Suite executive in multiple companies and as a director on a number of boards. He is Co-Founder of Gateway Proven Strategies, a leading global cannabis industry consulting firm. He constructed the Hoban Law Group to become a leading full-service commercial cannabis industry law firm. And Bob served as a cannabis policy instructor at the University of Denver, where he lectured regarding cannabis regulation and policy. He has crafted cannabis policy solutions for over thirty different countries around the world and has consistently been recognized as one of the most influential people in the global cannabis industry by a variety of organizations and publications over the course of the past twelve years. Bob received his Ph.D. in Public Affairs from the University of Colorado, his J.D. from the University of Wyoming and his B.A. from Rutgers University.

 

Residency: Denver, CO, USA.

 

Present Principal Occupation: Principal Attorney of Hoban Law Group and Global Proven Strategies.

 

Independence: Independent.

 

Expected Committee Memberships: None.

 

Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

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Hector De La Torre

 

Biography: Hector’s career has been defined by his public service and outstanding record of leadership. From 2004-10, Hector represented the 50th District in southeast Los Angeles County to the California State Assembly, where he focused on health care, the environment, and good governance. Previously, he was a member of the South Gate City Council for 8 years, including serving 2 years as Mayor. In 2011, Hector became the Assembly-Appointed Member of the California Air Resources Board, a position he still holds, where he focuses on goods movement, environmental justice, and green technologies. He served as the executive director of the Transamerica Center for Health Studies, a national non-profit focused on helping people better understand health coverage, and today is chair of the board at L.A. Care, the largest public health plan in America, as well as a trustee of Occidental College, where he received his B.A. He did his graduate studies at the Elliott School of International Affairs at the George Washington University. Hector has been an early and vocal advocate for cannabis policy reform and remains dedicated to serving the industry.

 

Residency: Los Angeles, CA, USA.

 

Present Principal Occupation: Director, California Air Resources Board.

 

Independence: Independent.

 

Expected Committee Memberships: Audit Committee, Compensation, Nominating and Corporate Governance Committee.

 

Securities of the Corporation Expected to be Held Upon Closing of the Transaction: See “The Transaction – Proposed Directors”.

 

None of the nominees for election to the Resulting Issuer Board currently hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares, BRND Class B Shares or BRND Warrants.

 

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

 

To the knowledge of BRND and GH Group, no proposed nominee for election as a director or proposed executive officer of the Resulting Issuer has been, at the date of this Circular or within the last 10 years: (a) a director, chief executive officer or chief financial officer of any company that, while that person was acting in that capacity, (i) was the subject of a cease trade or similar order or an order that denied BRND access to any exemption under securities legislation, for a period of more than 30 consecutive days, or (ii) was the subject of an event that resulted, after that person ceased to be a director or chief executive officer or chief financial officer, in BRND being the subject of such an order; or (b) a director or executive of a company that, while that person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or was subject to or instituted any proceedings, transaction or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

 

No proposed director or executive officer of the Resulting Issuer has been subject to (a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in making an investment decision.

 

To the knowledge of BRND, no proposed director or executive officer of the Resulting Issuer has, within the 10 years before the date of this Circular, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, transaction or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.

 

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Conflicts of Interest

 

Certain of the proposed directors and executive officers of the Resulting Issuer 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 Resulting Issuer from time to time. The BCBCA requires, among other things, that the directors and executive officers of the Resulting Issuer act honestly and in good faith with a view to the best interest of the Resulting Issuer, to disclose any personal interest which they may have in any material contract or transaction which is proposed to be entered into with the Resulting Issuer 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.

 

SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

Unaudited pro forma financial statements of BRND, after giving effect to the Transaction and other matters, and as of and for the 12 months ended December 31, 2020, together with the notes thereto, are contained in the Information Statement attached to this Circular as Appendix “D”.

 

STOCK EXCHANGE LISTINGS

 

The Corporation is a reporting issuer in each of the provinces and territories of Canada, other than Quebec, and the BRND Class A Restricted Voting Shares and BRND Warrants currently trade on the NEO Exchange under the symbols “BRND.A.U” and “BRND.WT”, respectively. It is a condition of closing of the Transaction that the Equity Shares and BRND Warrants be listed and posted for trading on the NEO Exchange.

 

The NEO Exchange has conditionally approved the listing of the Equity Shares and the BRND Warrants under the symbols “GLAS.A.U”, and “GLAS.WT.U”, respectively.

 

CANADIAN SECURITIES LAW MATTERS

 

The distribution of the Equity Shares pursuant to the Amended and Restated Articles in connection with the Transaction contemplated herein, will constitute a distribution of securities which is exempt from the prospectus requirements of Canadian securities legislation and is exempt from or otherwise is not subject to the registration requirements under applicable securities laws. The Equity Shares received by holders of non-redeemed BRND Shareholders pursuant to the Amended and Restated Articles, in connection with the completion of the Transaction will not be legended in accordance with Canadian securities laws and may be resold through registered dealers in each of the provinces and territories of Canada provided that: (i) the trade is not a “control distribution” as defined in National Instrument 45-102 — Resale of Securities of the Canadian Securities Administrators, (ii) no unusual effort is made to prepare the market or to create a demand for the Equity Shares, (iii) no extraordinary commission or consideration is paid to a person in respect of such sale, and (iv) if the selling BRND Shareholder is an insider or officer of BRND, the selling BRND Shareholder has no reasonable grounds to believe that BRND is in default of applicable Canadian securities laws.

 

THE TRANSACTION AND THE SECURITIES TO BE ISSUED IN CONNECTION THEREWITH HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY CANADIAN SECURITIES REGULATORY AUTHORITY, NOR HAS ANY CANADIAN SECURITIES REGULATORY AUTHORITY PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS AN OFFENCE.

 

UNITED STATES SECURITIES LAWS MATTERS

 

The Equity Shares issuable pursuant to the 3(a)(9) Transactions have not been and will not be registered under the U.S. Securities Act or any State securities laws, and such 3(a)(9) Transactions will be effected in reliance upon the exemption from the registration requirements of the U.S. Securities Act set forth in Section 3(a)(9) thereof. Section 3(a)(9) of the U.S. Securities Act provides for an exemption from the registration requirements of the U.S. Securities Act for any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

 

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Accordingly, the Equity Shares issued in the 3(a)(9) Transactions in exchange for any BRND Shares that are “restricted securities” within the meaning of Rule 144(a)(3) of the U.S. Securities Act (i) will continue to be “restricted securities” within the meaning of Rule 144(a)(3) of the U.S. Securities Act, (ii) may not be offered or sold within the United States except in transactions exempt from the registration requirements of the U.S. Securities Act and applicable State securities laws, and (iii) will contain a restriction or legend to the effect that such securities have not been registered under the U.S. Securities Act and may only be offered, sold or otherwise transferred pursuant to certain exemptions from the registration requirements of the U.S. Securities Act.

 

The enforcement by investors of civil liabilities under the United States federal and State securities laws may be affected adversely by the fact that BRND is incorporated or organized under the laws of a jurisdiction other than the United States. As a result, it may be difficult or impossible for BRND Shareholders resident in the United States to effect service of process within the United States upon BRND, or to realize against it, upon judgments of courts of the United States predicated upon civil liabilities under the federal securities laws of the United States or “blue sky” laws of any State within the United States. In addition, BRND Shareholders resident in the United States should not assume that the courts of Canada: (i) would enforce judgments of United States courts obtained in actions against BRND predicated upon civil liabilities under the federal securities laws of the United States or “blue sky” laws of any State within the United States; or (ii) would enforce, in original actions, liabilities against BRND predicated upon civil liabilities under the federal securities laws of the United States or “blue sky” laws of any State within the United States.

 

THE TRANSACTION AND THE SECURITIES TO BE ISSUED IN CONNECTION THEREWITH HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES REGULATORY AUTHORITY OF ANY STATE OF THE UNITED STATES, NOR HAS THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY SUCH STATE SECURITIES REGULATORY AUTHORITY PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THIS CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.

 

EXECUTIVE COMPENSATION AND OTHER PAYMENTS

 

Compensation Discussion and Analysis

 

There will be no salaries, consulting fees, management contract fees or directors’ fees, finder’s fees, loans, bonuses, deposits or similar payments to the Corporation’s officers, directors or special advisors directly or indirectly, for services rendered to the Corporation prior to or in connection with the completion of the Corporation’s initial qualifying transaction, or other payments to insiders prior to or in connection with the completion of the Corporation’s initial qualifying transaction, other than (i) repayment of unsecured loans, and any interest thereon, which may be made by Mercer, (ii) the payment of $10,000 (plus applicable taxes) per month for administrative and related services pursuant to an administrative services agreement entered into with Mercer which, if applicable, may include payment for services of related parties or qualified affiliates of related parties, for, but not limited to, various administrative, managerial or operational services or to help effect our qualifying transaction, reimbursement of reasonable out-of-pocket expenses incurred by the above noted persons in connection with certain activities performed on our behalf, such as identifying possible business targets and qualifying transactions, performing business due diligence on suitable target businesses and qualifying transactions as well as traveling to and from the offices, plants or similar locations of prospective target businesses to examine their operations, (iii) payment to certain consultants and investor relation professionals, and (iv) if approved by a majority of our unconflicted directors (being the other directors who do not have a conflict of interest in respect of the proposed acquisition), and subject to any required NEO Exchange consent, payment of a customary finder’s fee, consulting fee or other similar compensation to members of our board of directors who are not employees of the Corporation or Mercer for services rendered in order to effect a qualifying transaction, none of which will be made from the funds in the Escrow Account prior to the completion of the qualifying transaction.

 

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There is no limit on the amount of out-of-pocket expenses reimbursable by the Corporation; provided, however, that to the extent such expenses exceed the available proceeds not deposited in the Escrow Account such expenses would not be reimbursed by the Corporation unless the Corporation consummates a qualifying transaction.

 

The BRND Board will review and be required to approve all payments made to the Corporation by the BRND Founders, the Corporation’s officers, directors or special advisors, or the Corporation’s affiliates or associates or their respective affiliates or associates, with any interested director abstaining from such review and approval, except for certain exceptions.

 

Following completion of the Corporation’s qualifying transaction, it is anticipated that the Corporation will pay compensation to the Resulting Issuer’s directors and officers as outlined in the Information Statement attached as Appendix “D” to this Circular.

 

CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 

The following is, as of the date hereof, a summary of the principal Canadian federal income tax considerations in respect of the Amendments and the Transaction that will be generally applicable to (i) a holder of BRND Class A Restricted Voting Shares whose BRND Class A Restricted Voting Shares are redeemed by the Corporation, and (ii) a holder of BRND Class A Restricted Voting Shares who acquires Equity Shares in connection with the Transaction (each, a “Holder”). This summary is applicable to a Holder who, at all relevant times, for the purposes of the Tax Act, deals at arm’s length with the Corporation and GH Group, is not affiliated with the Corporation or GH Group, and holds or will hold, as applicable, BRND Class A Restricted Voting Shares and Equity Shares as capital property. Generally, the BRND Class A Restricted Voting Shares and Equity Shares will be considered to be capital property to a Holder provided the Holder does not hold such shares in the course of carrying on a business of trading or dealing in securities and has not acquired them in one or more transactions considered to be an adventure or concern in the nature of trade.

 

This summary is not applicable to a Holder (i) that is a “financial institution” as defined in the Tax Act for the purpose of the “mark-to-market” rules, (ii) that is a “specified financial institution” as defined in the Tax Act, (iii) that has elected to report its Canadian tax results in a currency other than Canadian currency, (iv) an interest in which is a “tax shelter investment” as defined in the Tax Act, (v) that has entered or will enter into a “derivative forward agreement”, as such term is defined in the Tax Act, in respect of any of the BRND Class A Restricted Voting Shares or Equity Shares, or (vi) that is a BRND Founder or Mercer. Any such Holder should consult its own tax advisors with respect to the consequences of the Amendments and the Transaction.

 

This summary does not address the possible application of the “foreign affiliate dumping” rules in section 212.3 of the Tax Act to a Holder that (i) is a corporation resident in Canada and (ii) is or becomes (or does not deal at arm’s length for purposes of the Tax Act with a corporation resident in Canada that is or becomes), as part of a transaction or event or series of transactions or events that includes the acquisition of an Equity Share, controlled by a non-resident corporation, non-resident individual, non-resident trust, or group of any of the foregoing who do not deal at arm’s length with each other for purposes of such rules. Such Holders should consult their own tax advisors with respect to the possible application of these rules.

 

This summary is based on the current provisions of the Tax Act, the current published administrative policies and assessing practices of the Canada Revenue Agency, and all specific proposals to amend the Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (the “Tax Proposals”). This summary assumes that the Tax Proposals will be enacted as proposed. There can be no assurance that the Tax Proposals will be enacted in their current form, or at all. This summary does not otherwise take into account or anticipate any changes in law, whether by legislative, governmental or judicial action, nor does it take into account other federal, provincial, territorial or foreign income tax legislation or considerations.

 

This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular holder and no representations with respect to the income tax consequences to any particular holder are made. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, holders should consult their own tax advisors with respect to their own particular circumstances.

 

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Currency Conversion

 

For purposes of the Tax Act, all amounts relating to the ownership or disposition of BRND Class A Restricted Voting Shares and Equity Shares must be expressed in Canadian dollars. Amounts denominated in a currency other than the Canadian dollar generally must be converted into Canadian dollars using the applicable rate of exchange quoted by the Bank of Canada on the date such amounts arose, or such other rate of exchange as is acceptable to the Minister of National Revenue (Canada).

 

Taxation of Holders Resident in Canada

 

The following portion of the summary applies to a Holder who, for the purposes of the Tax Act and any applicable income tax treaty or convention, is resident in Canada (a “Resident Holder”).

 

Certain Resident Holders who might not otherwise be considered to hold their BRND Class A Restricted Voting Shares or Equity Shares as capital property may, in certain circumstances, be entitled to have such shares, and all other “Canadian securities” owned or subsequently owned by such Resident Holder, treated as capital property by making an irrevocable election in accordance with the Tax Act. Resident Holders should consult their own tax advisors to determine whether an election is available and advisable in their particular circumstances.

 

The Amendments

 

As part of the Amendments, the Articles are being amended to, among other things, convert unredeemed BRND Class A Restricted Voting Shares on a one-for-one basis into Equity Shares (the “Share Exchange”). Consistent with the published administrative position of the Canada Revenue Agency, the Share Exchange should be considered to occur “in the course of a reorganization of capital” of the Corporation within the meaning of section 86 of the Tax Act. Accordingly, a Resident Holder whose BRND Class A Restricted Voting Share is exchanged for an Equity Share under the Amendments will be deemed under the Tax Act to have (i) disposed of the BRND Class A Restricted Voting Share for proceeds of disposition equal to the adjusted cost base of such share immediately before the Share Exchange and (ii) acquired the Equity Share at a cost equal to the adjusted cost base to such Resident Holder of the BRND Class A Restricted Voting Share immediately before the Share Exchange. As a result, a Holder will not realize a capital gain or capital loss under the Tax Act in connection with the Share Exchange.

 

Redemptions of BRND Class A Restricted Voting Shares

 

A Resident Holder who elects to deposit its BRND Class A Restricted Voting Shares for redemption and whose BRND Class A Restricted Voting Shares are redeemed by the Corporation will be deemed to have received a dividend equal to the amount, if any, by which the aggregate BRND Class A Restricted Voting Share redemption price paid to such Resident Holder exceeds the aggregate of the paid-up capital (as determined for purposes of the Tax Act) of such Resident Holder’s BRND Class A Restricted Voting Shares that are redeemed by the Corporation. The tax treatment of dividends (which include deemed dividends) is discussed below under “- Dividends”.

 

The amount of any deemed dividend arising on the redemption by the Corporation of BRND Class A Restricted Voting Shares will not be included in computing the Resident Holder’s proceeds of disposition for purposes of computing the capital gain (or capital loss) arising on the redemption of such BRND Class A Restricted Voting Shares. A Resident Holder will realize a capital gain (or capital loss) equal to the amount by which such proceeds of disposition exceed (or are less than) the aggregate adjusted cost base to the Resident Holder of its BRND Class A Restricted Voting Shares immediately before such disposition and any reasonable costs of disposition. See “– Taxation of Capital Gains and Losses” below.

 

Dividends

 

Dividends received on BRND Class A Restricted Voting Shares or Equity Shares by a Resident Holder who is an individual (and certain trusts) will be included in the Resident Holder’s income and be subject to the gross-up and dividend tax credit rules applicable to taxable dividends received by an individual from taxable Canadian corporations, including the enhanced gross-up and dividend tax credit for “eligible dividends” properly designated as such by the Corporation.

 

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Dividends received on BRND Class A Restricted Voting Shares or Equity Shares by a Resident Holder that is a corporation will be included in the Resident Holder’s income and will generally be deductible in computing such Resident Holder’s taxable income. In certain circumstances, subsection 55(2) of the Tax Act will treat a taxable dividend received by a Resident Holder that is a corporation as proceeds of disposition or a capital gain. Resident Holders that are corporations should consult their own tax advisors having regard to their own circumstances.

 

A Resident Holder that is a “private corporation” (as defined in the Tax Act) or any other corporation resident in Canada and controlled, whether by reason of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts), may be liable to pay a refundable tax under Part IV of the Tax Act on dividends received on the BRND Class A Restricted Voting Shares or Equity Shares to the extent that such dividends are deductible in computing the Resident Holder’s taxable income. Dividends received by a Resident Holder that is an individual or a trust, other than certain specified trusts, may give rise to minimum tax under the Tax Act.

 

The BRND Class A Restricted Voting Shares are “short-term preferred shares” and “taxable preferred shares”, each as defined in the Tax Act, and as a result, Resident Holders will not be subject to tax under Part IV.1 of the Tax Act on any dividend deemed to be received on the BRND Class A Restricted Voting Shares.

 

A Resident Holder may be subject to United States withholding tax on dividends received on the Equity Shares. Any United States withholding tax paid by or on behalf of a Resident Holder in respect of dividends received on the Equity Shares by a Resident Holder may be eligible for foreign tax credit or deduction treatment where applicable under the Tax Act. Generally, a foreign tax credit in respect of a tax paid to a particular foreign country is limited to the Canadian tax otherwise payable in respect of income sourced in that country. Dividends received on the Equity Shares by a Resident Holder may not be treated as income sourced in the United States for these purposes. Resident Holders should consult their own tax advisors with respect to the availability of any foreign tax credits or deductions under the Tax Act in respect of any United States withholding tax applicable to dividends on the Equity Shares.

 

Dispositions of Equity Shares

 

A Resident Holder who disposes of or is deemed to have disposed of an Equity Share (other than a disposition arising on the Share Exchange) will generally realize a capital gain (or incur a capital loss) in the year of disposition equal to the amount by which the proceeds of disposition in respect of such Equity Share exceed (or are exceeded by) the aggregate of the adjusted cost base of such Equity Share and any reasonable expenses associated with the disposition. The tax treatment of capital gains and capital losses is discussed below under “- Taxation of Capital Gains and Capital Losses”.

 

Taxation of Capital Gains and Capital Losses

 

Generally, one-half of any capital gain (a “taxable capital gain”) realized by a Resident Holder must be included in computing the Resident Holder’s income for the taxation year in which the disposition occurs. Subject to and in accordance with the provisions of the Tax Act, one-half of any capital loss incurred by a Resident Holder (an “allowable capital loss”) may be used to offset taxable capital gains realized by the Resident Holder in the taxation year of disposition. Allowable capital losses in excess of taxable capital gains for the taxation year of disposition may be applied to reduce net taxable capital gains realized by the Resident Holder in the three preceding taxation years or in any subsequent year in the circumstances and to the extent provided in the Tax Act.

 

The amount of any capital loss realized on the disposition of a BRND Class A Restricted Voting Share or Equity Share by a Resident Holder that is a corporation may, in certain circumstances, be reduced by the amount of dividends which have been previously received or deemed to have been received by the Resident Holder on such share. Similar rules may apply where a corporation is, directly or through a trust or partnership, a member of a partnership or a beneficiary of a trust that owns BRND Class A Restricted Voting Shares or Equity Shares.

 

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A Resident Holder that is, throughout the relevant taxation year, a “Canadian-controlled private corporation” (as defined in the Tax Act) may be subject to pay a refundable tax on its “aggregate investment income”, which is defined in the Tax Act to include capital gains.

 

In general terms, a Holder who is an individual (other than certain trusts) that realizes a capital gain on the disposition or deemed disposition of BRND Class A Restricted Voting Shares or Equity Shares may be liable for alternative minimum tax under the Tax Act.

 

Conversions of Equity Shares

 

The conversion of shares of a class of Equity Shares into shares of a different class of Equity Shares will be deemed not to constitute a disposition of property for purposes of the Tax Act and, accordingly, will not give rise to a capital gain or capital loss. The cost to a Resident Holder of the Equity Shares received on such conversion will be deemed to be equal to the Resident Holder’s adjusted cost base of the converted shares immediately before the conversion. For the purpose of computing the adjusted cost base to a Resident Holder of each Equity Share of a particular class acquired on such conversion, the cost of such Equity Share must be averaged with the adjusted cost base to such Resident Holder of all other shares of that class (if any) held by the Resident Holder as capital property immediately prior to the conversion.

 

Taxation of Holders Not Resident in Canada

 

The following portion of this summary is applicable to a Holder who, for the purposes of the Tax Act and at all relevant times, is not resident nor deemed to be resident in Canada and does not use or hold, and is not deemed to use or hold, the BRND Class A Restricted Voting Shares or Equity Shares in connection with carrying on a business in Canada (a “Non-Resident Holder”). Special rules, which are not discussed in this summary, may apply to a non-resident that is an insurer carrying on business in Canada and elsewhere.

 

The Amendments

 

The tax consequences of the Amendments to a Non-Resident Holder are the same as those described above under “Taxation of Holders Resident in Canada – The Amendments”.

 

Redemptions of BRND Class A Restricted Voting Shares

 

Non-Resident Holders who elect to deposit their BRND Class A Restricted Voting Shares for redemption and whose BRND Class A Restricted Voting Shares are redeemed by the Corporation will be deemed to have received a dividend equal to the amount, if any, by which the aggregate BRND Class A Restricted Voting Share redemption price paid to such Non-Resident Holder exceeds the aggregate of the paid-up capital (as determined for purposes of the Tax Act) of such Non-Resident Holder’s BRND Class A Restricted Voting Shares that are redeemed by the Corporation. The tax treatment of dividends (which include deemed dividends) is discussed below under “-Dividends”.

 

The amount of any deemed dividend arising on the redemption by the Corporation of BRND Class A Restricted Voting Shares will not be included in computing the Non-Resident Holder’s proceeds of disposition for purposes of computing the capital gain (or capital loss) arising on the redemption of such BRND Class A Restricted Voting Shares. Non-Resident Holders will not be subject to tax on any capital gain or capital loss that arises with respect to the disposition of BRND Class A Restricted Voting Shares provided that such shares are not “taxable Canadian property” of the Non-Resident Holder. See “Disposition of Shares” below.

 

Dividends

 

Any dividends (including deemed dividends) on BRND Class A Restricted Voting Shares or Equity Shares paid or credited or deemed to be paid or credited to a Non-Resident Holder will be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividends, subject to any reduction in the rate of withholding to which the Non-Resident Holder is entitled under any applicable income tax treaty or convention between Canada and the country in which the Non-Resident Holder is resident. For example, where a Non-Resident Holder is a resident of the United States, is fully entitled to the benefits under the Canada-United States Income Tax Convention (1980), as amended, and is the beneficial owner of the dividend, the applicable rate of Canadian withholding tax is generally reduced to 15% of the amount of such dividend.

 

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Dispositions of Shares

 

A Non-Resident Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a BRND Class A Restricted Voting Share or an Equity Share unless the BRND Class A Restricted Voting Share or the Equity Share, as applicable, constitutes “taxable Canadian property” (as defined in the Tax Act) of the Non-Resident Holder at the time of disposition and the Non-Resident Holder is not entitled to relief under an applicable income tax treaty or convention.

 

As long as the BRND Class A Restricted Voting Shares or Equity Shares, as applicable, are then listed on a designated stock exchange (which currently includes the NEO Exchange), the BRND Class A Restricted Voting Shares or Equity Shares, as applicable, generally will not constitute taxable Canadian property of a Non-Resident Holder, unless (a) at any time during the 60-month period immediately preceding the disposition or deemed disposition of the BRND Class A Restricted Voting Shares or Equity Shares, as applicable: (i) 25% or more of the issued shares of any class or series of the share capital of the Corporation was owned by, or belonged to, one or any combination of (x) the Non-Resident Holder, (y) persons with whom the Non-Resident Holder did not deal at arm’s length (within the meaning of the Tax Act) and (z) partnerships in which the Non-Resident Holder or a person referred to in (y) holds a membership interest directly or indirectly through one or more partnerships; and (ii) more than 50% of the fair market value of the BRND Class A Restricted Voting Shares or Equity Shares, as applicable, was derived directly or indirectly from one or any combination of: (A) real or immovable property situated in Canada, (B) Canadian resource property (as defined in the Tax Act), (C) timber resource property (as defined in the Tax Act), or (D) options in respect of, or interests in, or for civil law rights in, property described in any of (A) through (C) above, whether or not such property exists; or (b) the BRND Class A Restricted Voting Shares or Equity Shares, as applicable, are otherwise deemed under the Tax Act to be taxable Canadian property. A BRND Class A Restricted Voting Share or Equity Share may be deemed to be taxable Canadian property in certain circumstances where it was acquired in exchange for property that was itself taxable Canadian property.

 

If the BRND Class A Restricted Voting Shares or Equity Shares are taxable Canadian property to a Non-Resident Holder, any capital gain realized on the disposition or deemed disposition of such BRND Class A Restricted Voting Shares or Equity Shares (as the case may be) may not be subject to Canadian federal income tax pursuant to the terms of an applicable income tax treaty or convention between Canada and the country of residence of a Non-Resident Holder. Non-Resident Holders whose BRND Class A Restricted Voting Shares or Equity Shares are taxable Canadian property should consult their own tax advisors.

 

Conversions of Equity Shares

 

The tax consequences to a Non-Resident Holder of the conversion of shares of a class of Equity Shares into a different class of Equity Shares are the same as those described above under the heading “Taxation of Holders Resident in Canada – Conversions of Equity Shares”.

 

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

BRND Shareholders should be aware that the Transaction described in this Circular may have tax consequences in both the United States and Canada. BRND Shareholders who are resident in, or citizens of, the United States are advised to consult their own tax advisors to determine the particular United States tax consequences to them of the Transaction in light of their particular situation, as well as any tax consequences that may arise under the laws of any other relevant foreign, State, local, or other taxing jurisdiction.

 

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RISKS ASSOCIATED WITH THE TRANSACTION

 

In evaluating the Transaction, BRND Shareholders should carefully consider the following risk factors relating to the Transaction. The following risk factors are not a definitive list of all risk factors associated with the Transaction. Additional risks and uncertainties, including those currently unknown or considered immaterial by the Corporation, may also adversely affect the business of BRND following the Transaction. In addition to the risk factors relating to the Transaction set out below, BRND Shareholders should also carefully consider the risk factors provided in the section entitled “Risk Factors” of the Information Statement attached as Appendix “D” to this Circular. If any of the risk factors materialize, the expectations, and the predictions based on them, may need to be re-evaluated. The risks associated with the Transaction include:

 

The Definitive Agreement may be terminated in certain circumstances.

 

Each of the Corporation and the sellers of GH Group have the right to terminate the Definitive Agreement to which they are a party, in certain circumstances. There is no certainty, nor can the Corporation provide any assurance, that the Definitive Agreement will not be terminated by either the Corporation or GH Group before the completion of the Transaction. Accordingly, there is no certainty, nor can the Corporation provide any assurance, that the Corporation will complete the acquisition of GH Group pursuant to the Transaction.

 

There can be no certainty that all conditions precedent to the Transaction will be satisfied in a timely manner or at all. Failure to complete the Transaction could adversely affect the business of the Corporation.

 

The completion of the Transaction is subject to a number of conditions precedent, certain of which are outside the control of the Corporation, including receipt of approval of the Transaction Resolution. There can be no certainty, nor can the Corporation provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. If the Transaction is not completed, the market price of the currently trading BRND Class A Restricted Voting Shares and BRND Warrants may decline. If the Transaction is not completed and the BRND Board decides to seek another transaction, there can be no assurance that it will be able to find another attractive qualifying transaction.

 

If the Transaction is not completed, it is unlikely that BRND will be able to find another attractive qualifying transaction.

 

If the Transaction is not completed, the BRND Board and the Corporation’s management may seek out and consummate a transaction that constitutes the Corporation’s qualifying transaction under Part X of the NEO Exchange Manual within the 24-month period from the closing of the Corporation’s IPO with approval of only the holders of BRND Class A Restricted Voting Shares, by ordinary resolution, with approval of the board of directors of BRND, and with the consent of the NEO Exchange, if required. If the Transaction is not completed, any potential target business with which the Corporation enters into negotiations concerning its qualifying transaction will be aware that the Corporation must consummate our qualifying transaction within such a restricted time period. Consequently, such target businesses may obtain leverage over the Corporation in negotiating the qualifying transaction, knowing that if the Corporation does not complete its qualifying transaction with that particular target business, it may be unable to complete a qualifying transaction with any target business. This risk will increase as the Corporation gets closer to the timeframe described above. In addition, the Corporation may have limited time to conduct due diligence and may enter into its qualifying transaction on terms that it would have rejected upon a more comprehensive investigation.

 

On May 5, 2021, the holders of the BRND Class A Restricted Voting Shares approved an ordinary resolution to extend the Permitted Timeline to July 30, 2021. Subject to receipt of applicable regulatory and other approvals, and the satisfaction or waiver of all closing conditions, it is presently anticipated that the Transaction will be completed in the first half of June 2021. There can be no assurance that the Transaction will be completed.

 

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The Corporation’s multi-class structure will have the effect of concentrating voting control and the ability to influence corporate matters with the GH Group Founders.

 

The Multiple Voting Shares will have 50 votes per share, whereas the Equity Shares are expected to have one vote per share (other than in respect of the election of directors of the Resulting Issuer, for which the Limited Voting Shares will not have any entitlement to vote). Following the Transaction until the expiry of the three-year sunset period, the GH Group Founders will hold approximately 81% of the voting power of the outstanding voting shares of the Corporation (and approximately 70% on a diluted basis (i.e., including the applicable Equity Shares issuable on exchange of the Exchangeable Shares but not including the exercise of any warrants of the Resulting Issuer)). Accordingly, each GH Group Founder would therefore have significant influence over the management and affairs of the Resulting Issuer 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 will control a majority of the combined voting power of the Corporation’s voting shares even though the Multiple Voting Shares will represent a nominal economic interest in the Corporation. The concentrated voting control of the holders of Multiple Voting Shares will limit 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 Corporation’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, while the transferability of the Multiple Voting Shares will be limited to controlled affiliates, holders of Multiple Voting Shares will have the ability to influence or control many matters affecting the Corporation 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. See “Description of the Securities – Equity Shares and Multiple Voting Shares” in the Information Statement attached as Appendix “D” to this Circular.

 

BRND will incur costs even if the Transaction is not completed.

 

Subject to certain exceptions, all out-of-pocket third-party transaction expenses incurred in connection with the Transaction, including all costs, expenses and fees incurred prior to or after the Effective Date in connection with, or incidental to, the Transaction, shall be paid by the party incurring such expenses, whether or not the Transaction is consummated.

 

The unaudited pro forma financial information included in the Information Statement attached as Appendix “D” to this Circular may not be indicative of what the actual financial position or results of operations would have been.

 

The unaudited pro forma financial information included in the Information Statement attached as Appendix “D” to this Circular may not be indicative of what the actual financial position or results of operations would have been. The unaudited pro forma financial information incorporated herein is presented for illustrative purposes only and is not necessarily indicative of what the actual financial position or results of operations would have been had the Transaction been completed on the dates indicated.

 

Certain persons may have interests in the Transaction that are different from those of the BRND Shareholders.

 

In considering the recommendation of the BRND Board to vote in favour of the Transaction Resolution, BRND Shareholders should be aware that certain persons may have interests in the Transaction that differ from, or are in addition to, those of BRND Shareholders generally.

 

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The BRND Founders hold 10,198,751 BRND Class B Shares which represents 100% of the issued and outstanding BRND Class B Shares and a 20% voting interest in respect to the Transaction Resolution on the Record Date. Given the transfer restrictions placed on the BRND Class B Shares held by BRND Founders until the completion of the Corporation’s qualifying transaction and the lack of redemption rights attached to the BRND Class B Shares, BRND Founders may be incentivized to support and vote for a transaction even if not the most commercially beneficial to the Corporation. For the foregoing reasons, BRND Founders may significantly influence the vote on the Transaction, which it may be inclined to do given the difference in economic interests of the BRND Founders as compared to the holders of BRND Class A Restricted Voting Shares. However, 50% of the ultimate number of Equity Shares to be issued to the BRND Founders on closing of the Transaction in exchange for the BRND Class B Shares that were issued to them for nominal consideration in connection with BRND’s initial public offering shall be subject to forfeiture in connection with (i) the volume weighted average price of the Equity Shares for the two (2) years following closing of the Transaction, and (ii) the Corporation’s cash amount at closing of the Transaction plus any net proceeds from equity or equity-linked financings (e.g., issuance of convertible debt, sale of common or preferred stock, etc.) closed within one (1) year following the closing of the Transaction, in each case pursuant to a defined formula set out in the Definitive Agreement (see “Corporate Structure – Definitive GH Group Agreement” in the Information Statement attached at Appendix “D” to this Circular).

 

See “The Transaction — Interests of Certain Persons in the Transaction”.

 

It is anticipated that the Corporation will be treated as a U.S. domestic corporation for U.S. federal income tax purposes as well as a Canadian tax resident for Canadian income tax purposes and will accordingly be subject to both U.S. and Canadian income tax

 

It is anticipated that the Corporation will be treated as a U.S. domestic corporation for U.S. federal income tax purposes under Code Section 7874. As a result, it is anticipated that the Corporation will be subject to U.S. income tax on its worldwide income and that this treatment will continue indefinitely. In addition, regardless of any application of Code Section 7874, the Corporation will be treated as a Canadian tax resident for Canadian income tax purposes and therefore will be subject to Canadian income tax on its worldwide income. Consequently, it is anticipated that the Corporation will be subject to both U.S. and Canadian income tax, which could have a material adverse effect on its financial condition and results of operations.

 

Risks relating to the Corporation, GH Group, SoCal Greenhouse and Element 7.

 

For a discussion of risks faced in respect of the GH Group, SoCal Greenhouse and Element 7 transactions and, upon completion of the Transaction, the risks to be faced by the Corporation and to its affairs, business and operations and future prospects, please refer to the section entitled “Risk Factors” of the Information Statement attached as Appendix “D” to this Circular.

 

INFORMATION CONCERNING BRND AND GH GROUP

 

Please refer to the sections entitled “Corporate Structure – Mercer Park Brand Acquisition Corp.”, “The Business of GH Group”, “SoCal Greenhouse Acquisition” and “Element 7” of the Information Statement attached as Appendix “D” to this Circular for information concerning BRND, GH Group, SoCal Greenhouse and Element 7.

 

CONTRACTUAL RIGHTS OF RESCISSION AND DAMAGES

 

Original purchasers of BRND Class A Restricted Voting Shares from the underwriters in BRND’s IPO who continue to hold BRND Class A Restricted Voting Shares up to the Redemption Deposit Date will have a contractual right of action for rescission or damages against BRND (as well as a contractual right of action for damages alone against: (a) the BRND directors, and (b) every person or company who signs BRND’s non-offering prospectus (the “Prospectus”), which, for greater certainty, includes Mercer Park, Brand, L.P. as promoter of BRND (collectively, the “signatories”)).

 

In the event that BRND’s qualifying transaction is completed and if the Prospectus or any amendment thereto contains a misrepresentation (as defined in the Securities Act), provided that such claims for rescission or damages are commenced by the purchaser not later than: (a) in the case of an action for rescission, 180 days after the Redemption Deposit Date, or (b) in the case of an action for damages, the earlier of: (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or (ii) three years after the Redemption Deposit Date, a purchaser who purchased BRND Class A Restricted Voting Shares from BRND in its IPO shall, in respect of its BRND Class A Restricted Voting Shares, as converted to Equity Shares, be entitled to, in addition to any other remedy available at the time to such holder, (i) as against BRND, in the case of rescission, the amount paid for such BRND Class A Restricted Voting Shares, as applicable, upon surrender of such securities, and (ii) as against BRND, the BRND directors and the signatories, in the case of a damages election, their proven damages.

 

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In addition, the following additional provisions apply to actions against the BRND directors or the signatories:

 

(a) each has a due diligence defence and the other defences and rights contemplated in section 130 of the Securities Act and at law; and

 

(b) each is entitled to be indemnified by BRND and GH Group to the maximum extent permitted by law.

 

This contractual right of action for rescission or damages will, subject to the foregoing, be consistent with the statutory right of rescission or damages described under section 130 of the Securities Act. In no case shall the amount recoverable exceed the original purchase price of the BRND Class A Restricted Voting Units issued pursuant to BRND’s IPO. In addition, for non-residents of Canada, the contractual right shall be subject to the same interpretational or constitutional defences, if any, as would apply to a claim against a resident Canadian issuer under section 130 of the Securities Act, and, as a result, the argument that non-residents are not entitled to take advantage of the contractual right shall not be precluded.

 

OTHER BUSINESS

 

Management of the Corporation knows of no other matters to come before the Shareholders’ Meeting other than those referred to in the Notice of Meetings accompanying this Circular. However, if any other matters properly come before the Shareholders’ Meeting, it is the intention of the persons named in the form of proxy accompanying this Circular to vote on the same in accordance with their best judgment of such matters.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Any amendment to the attached Information Statement that, prior to the Redemption Deposit Date, is filed with the OSC and other securities regulatory authorities in Canada, shall be deemed to be incorporated by reference in this Circular. Copies of any such amendment may be obtained on request without charge from Mercer Park via its investor relations team at ir_brnd@mercerparklp.com or by accessing the disclosure documents available through the internet on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com.

 

Any statement contained in this Circular or the Information Statement attached as Appendix “D” to this Circular, or deemed to be incorporated by reference herein, shall be deemed to be modified or superseded, for purposes of this Circular and the attached Information Statement, to the extent that a statement contained in this Circular or the attached Information Statement or in any subsequently filed amendment to the attached Information Statement (or part thereof) that also is, or is deemed to be, attached to or incorporated by reference in this Circular modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this Circular or the attached Information Statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document which it modifies or supersedes. The making of a modifying or superseding statement shall not be deemed an admission for any purpose that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made.

 

ADDITIONAL INFORMATION

 

Additional information relating to the Corporation is available on SEDAR at www.sedar.com. Financial information is provided in the Corporation’s comparative financial statements and management discussion and analysis (“MD&A”) for its most recently completed fiscal year. To request copies of the Corporation’s financial statements and MD&A, please contact the Corporation via email at ir_brnd@mercerparklp.com.

 

38

 

 

SECURITIES LAW EXEMPTIONS

 

The Corporation has applied for exemptive relief from the Canadian securities regulatory authorities such that, inter alia, upon closing of the Transaction, each class of Equity Shares may be aggregated for the purposes of certain securities law reporting thresholds, including in respect of certain take-over bid and issuer bid rules and the early warning requirements under National Instrument 62-104 – Take-Over Bid and Issuer Bids.

 

BRND has applied for exemptive relief from the applicable Canadian securities regulatory authorities from the requirement in sections 3.2 and 3.3 of National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards that the financial statements (other than those of BRND) included in this Circular be prepared in accordance with International Financial Reporting Standards and audited as required in accordance with Canadian generally accepted auditing standards, respectively (the “Accounting Standards Relief”). The Accounting Standards Relief is expected to allow this Circular and the Prospectus to include financial statements prepared in accordance with U.S. generally accepted accounting principles and audited in accordance with the standards of the U.S. Public Company Accounting Oversight Board.

 

The contents and sending of this Circular have been approved by the BRND Board.

 

DATED: In Toronto, Ontario this 12th day of May, 2021.

 

MERCER PARK BRAND ACQUISITION CORP.

 

Jonathan Sandelman

 

Chairman of the Board of Directors

 

39

 

 

APPENDIX “A”

TRANSACTION RESOLUTION

 

(See attached)

 

A - 1

 

 

TRANSACTION RESOLUTION

of

MERCER PARK BRAND ACQUISITION CORP.

(the “Corporation”)

 

RESOLVED AS SPECIAL RESOLUTIONS THAT:

 

GH Group, SoCal Greenhouse and Element 7

 

1. The transactions (the “Transaction”) involving the Corporation, GH Group, SoCal Greenhouse and Element 7 (each as defined in the Circular), all as more particularly described and set forth in the management information circular (the “Circular”) of the Corporation dated May 4, 2021 (as the Transaction may be, or may have been, modified or amended in accordance with its terms), is hereby authorized, approved and adopted.

 

2. The Definitive Agreement (as defined in the Circular) (as it may be, or may have been, modified or amended in accordance with its terms) is hereby ratified, approved and certified and all related transactions contemplated therein, the actions of the directors of the Corporation in approving executing and delivering the Definitive Agreement, and any amendments, modifications or supplements thereto, are ratified, approved and certified.

 

3. The directors of the Corporation are authorized and empowered to, without notice to or approval of the shareholders of the Corporation: (a) amend, modify or supplement the Definitive Agreement to the extent permitted by the Definitive Agreement; and (b) subject to the terms of the Definitive Agreement, not to proceed with the Transaction and related transactions.

 

First Amendment of Notice of Articles and Articles (the “First Amendment”)

 

4. The authorized share structure of the Corporation is authorized to be altered by:

 

(a) creating (i) an unlimited number of restricted voting shares of the Corporation (“Restricted Voting Shares”), (ii) an unlimited number of limited voting shares of the Corporation (“Limited Voting Shares”, and collectively with the Subordinate Voting Shares (as defined below) and Restricted Voting Shares, the “Equity Shares”), and (iii) an unlimited number of preferred shares (“Preferred Shares”), issuable in series, each without par value; and

 

(b) changing the designation of the subordinating voting shares of the Corporation as set out in the notice of articles of the Corporation (the “Notice of Articles”) to subordinate voting shares.

 

5. There be created and attached to the Restricted Voting Shares, the Limited Voting Shares and the Preferred Shares the special rights and restrictions to be set out in Parts 27.3, 27.4 and 31 of the articles of the Corporation (the “Articles”) attached as Schedule “A” hereto.

 

6. The special rights and restrictions attached to the existing classes of (i) subordinate voting shares of the Corporation (“Subordinate Voting Shares”), (ii) multiple voting shares of the Corporation (“Multiple Voting Shares”), (iii) Class A restricted voting shares of the Corporation (“BRND Class A Restricted Voting Shares”) and (iv) Class B shares of the Corporation (“BRND Class B Shares”), be deleted and replaced with the special rights and restrictions set out in Parts 27.1 and 27.2 of the Articles attached as Schedule “A” hereto.

 

7. The Articles of the Corporation be altered by deleting Parts 27 and 29-31 in their entirety and replacing them with Parts 27 and 29-32 in the form attached hereto as Schedule “A”.

 

8. The Notice of Articles of the Corporation be altered to reflect the above alterations and the directors of the Corporation are authorized to instruct its agents to file a Notice of Alteration to the Notice of Articles reflecting the above alterations.

 

A - 2

 

 

9. Pursuant to section 259(4) of the Business Corporations Act (British Columbia) (the “Act”), the above alterations shall not take effect until the Notice of Articles of the Corporation is altered to reflect the alterations to the Articles.

 

Second Amendment of Notice of Articles and Articles (the “Second Amendment”)

 

10. Following the redemption of the applicable BRND Class A Restricted Voting Shares and the conversion of all of the non-redeemed BRND Class A Restricted Voting Shares and BRND Class B Shares into Equity Shares, the authorized share structure of the Corporation be altered by eliminating the BRND Class A Restricted Voting Shares and BRND Class B Shares once there are no longer any BRND Class A Restricted Voting Shares or BRND Class B Shares outstanding.

 

11. The Articles of the Corporation be replaced in their entirety with amended and restated articles substantially in the form set out as Schedule “B” hereto (the “Amended and Restated Articles”), with such amendments as any one director or officer of the Corporation may approve, and all amendments to the aforesaid Amended and Restated Articles, as amended, reflected therein are approved.

 

12. The Notice of Articles of the Corporation be altered to reflect the above alterations and the directors of the Corporation are authorized to instruct its agents to file a Notice of Alteration to the Notice of Articles reflecting the above alterations.

 

13. Pursuant to section 259(4) of the Business Corporations Act (British Columbia) (the “Act”), the above alterations shall not take effect until the Notice of Articles of the Corporation is altered to reflect the alterations to the Articles.

 

14. Macias, Gini and O’Connell LLP shall be the auditors following the Second Amendment, and the board of directors of the Corporation shall be authorized to fix the remuneration thereof.

 

15. The directors of the Corporation are authorized, in their discretion, by resolution, to abandon the above amendments without further approval, ratification or confirmation by the shareholders of the Corporation.

 

Private Placement

 

16. The private placement of up to 8,500,000 Equity Shares at a price of $10.00 per share (the “Private Placement”), as more particularly described in the Circular, is hereby authorized, approved and adopted.

 

17. The directors of the Corporation are authorized, in their discretion, by resolution, to abandon the Private Placement without further approval, ratification or confirmation by the shareholders of the Corporation.

 

General

 

18. Any one or more of the directors or officers of the Corporation is hereby authorized and directed, acting for, in the name of and on behalf of the Corporation, to execute or cause to be executed, under the seal of the Corporation or otherwise, and to deliver or cause to be delivered, such other documents and instruments, and to do or cause to be done all such other acts and things, as may in the opinion of such director or officer of the Corporation be necessary or desirable to carry out the intent of the foregoing resolution (including, without limitation, the execution and filing of the aforementioned Notices of Alteration to the Notice of Articles, applications and of certificates or other assurances that the First Amendment or the Second Amendment will not adversely affect creditors or shareholders of the Corporation), the execution of any such document or the doing of any such other act or thing by any director or officer of the Corporation being conclusive evidence of such determination.

 

A - 3

 

 

SCHEDULE “A”

PARTS 27 AND 29-32 OF ARTICLES

 

(See attached)

 

 

 

 

27 SPECIAL RIGHTS AND RESTRICTIONS – SUBORDINATE, RESTRICTED AND LIMITED VOTING SHARES AND MULTIPLE VOTING SHARES

 

27.1 Subordinate Voting Shares

 

(1) For the purposes of this Article 27.1, the following terms will have the meanings specified below:

 

Change of Control Transaction” means an amalgamation, arrangement, recapitalization, business combination or similar transaction of the Company, other than an amalgamation, arrangement, recapitalization, business combination or similar transaction that would result in (i) the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the continuing entity or its direct or indirect parent) more than 50% of the total voting power of the voting securities of the Company, the continuing entity or its direct or indirect parent, and more than 50% of the total number of outstanding shares of the Company, the continuing entity or its direct or indirect parent, in each case as outstanding immediately after such transaction, and (ii) the shareholders of the Company immediately prior to the transaction owning voting securities of the Company, the continuing entity or its direct or indirect parent immediately following the transaction in substantially the same proportions (vis-a-vis each other) as such shareholders owned the voting securities of the Company immediately prior to the transaction (provided that in neither event shall the exercise of any exchangeable shares of a subsidiary of the Company that are exchangeable into shares of the Company be taken into account in such determination);

 

Equity Shares” means, collectively, the subordinate, restricted and limited voting shares of the Company and “Equity Share” shall mean any of them;

 

held of record” has the meaning set forth in Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

Non-U.S. Person” means any Person or entity that is not a U.S. Person;

 

Preferred Shares” means the preferred shares in the capital of the Company;

 

Restricted Voting Shares” means the restricted voting shares in the capital of the Company;

 

Specified Exceptions” has the meaning ascribed thereto in Article 27.1(2)(g)(3); and

 

U.S. Person” means a resident of the United States of America (including its territories and possessions).

 

(2) An unlimited number of Subordinate Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Subordinate Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Subordinate Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to one (1) vote in respect of each Subordinate Voting Share held, except for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are equal in all respects and shall vote together, and with the Multiple Voting Shares, as if they were shares of a single class. In connection with any Change of Control Transaction requiring approval of the holders of all classes of Equity Shares under the Business Corporations Act, holders of all Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of each such class is approved by a majority of the votes cast by the holders of outstanding Subordinate Voting Shares in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of that class called and held for such purpose.

 

Notwithstanding the provisions of the second paragraph of this Article 27.1(2)(a), the holders of Subordinate Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the Subordinate Voting Shares; (ii) affect the holders of any class of Equity Shares differently on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of outstanding Subordinate Voting Shares.

 

(b) Constraints on Ownership.

 

Subject to the Specified Exceptions, the Subordinate Voting Shares may only be held of record by Non-U.S. Persons.

 

(c) Dividends.

 

Holders of Subordinate Voting Shares shall be entitled to receive, as and when declared by the board of directors, dividends in cash or property of the Company. No dividend will be declared or paid on any other class of Equity Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on the Subordinate Voting Shares. The Subordinate Voting Shares shall rank equally with the other Equity Shares as to dividends on a share-for-share basis, without preference or distinction. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares shall receive Subordinate Voting Shares, unless otherwise determined by the board of directors, provided an equal number of shares is declared as a dividend or distribution on a then outstanding per-Equity Share basis, without preference or distinction, in each case.

 

(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Subordinate Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Subordinate Voting Shares (including any liquidation preference on any issued and outstanding Multiple Voting Shares and/or Preferred Shares), be entitled to participate ratably in the remaining property of the Company along with all holders of the other classes of Equity Shares (on a per share basis).

 

(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Subordinate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

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(f) Subdivision or Consolidation.

 

No subdivision or consolidation of the Subordinate Voting Shares shall occur unless, simultaneously, the other classes of Equity Shares are subdivided or consolidated or otherwise adjusted so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Subject to Article 27.1(2)(g), the Subordinate Voting Shares cannot be converted into any other class of shares.

 

(g) Conversion of Subordinate Voting Shares.

 

(1) Automatic

 

Subject to the Specified Exceptions, each issued and outstanding Subordinate Voting Share shall be automatically converted into one Restricted Voting Share, without any further act on the part of the Company or of the holder, if such Subordinate Voting Share becomes held of record by a U.S. Person.

 

(2) Upon an Offer

 

(i) For the purposes of this Article 27.1(2)(g)(2):

 

Affiliate” has the meaning specified in National Instrument 45-106 – Prospectus Exemptions as, from time to time, amended, re-enacted or replaced;

 

Associate” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced;

 

Conversion Period” means the period of time commencing on the eighth day after the Offer Date and terminating on the Expiry Date;

 

Converted Shares” means Subject Equity Shares resulting from the conversion of Subordinate Voting Shares into the Subject Equity Shares pursuant to subparagraph (ii);

 

Exclusionary Offer” means an offer to purchase Subject Equity Shares that:

 

(i) is a General Offer; and

 

(ii) is not made concurrently with an offer to purchase Subordinate Voting Shares that is identical to the offer to purchase the Subject Equity Shares in terms of price per share and percentage of outstanding shares to be taken up exclusive of shares owned immediately prior to the offer by the Offeror, and in all other material respects, and that has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Subject Equity Shares;

 

and for the purposes of this definition, if an offer to purchase Subject Equity Shares is a General Offer but not an Exclusionary Offer, the varying of any term of such offer shall be deemed to constitute the making of a new offer unless a variation identical in all material respects concurrently is made to the corresponding offer to purchase Subordinate Voting Shares;

 

Expiry Date” means the last date on which holders of the Subject Equity Shares may accept an Exclusionary Offer;

 

- 4 -

 

General Offer” means an offer to purchase Subject Equity Shares that must, by reason of applicable securities legislation or the requirements of any stock exchange on which the Subject Equity Shares are listed, be made to all or substantially all holders of Subject Equity Shares who are in a province of Canada to which any such legislation or requirement applies (assuming that the offeree was resident in Ontario);

 

Offer Date” means the date on which an Exclusionary Offer is made;

 

Offeror” means a Person that makes an offer to purchase the Subject Equity Shares (the “bidder”), and includes any Associate or Affiliate of the bidder or any Person that is disclosed in the offering document to be acting jointly or in concert with the bidder,

 

Person” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced and includes a company or other body corporate wherever or however incorporated;

 

Subject Equity Shares” means any one or more classes of Equity Shares that are subject to an Exclusionary Offer, other than Subordinate Voting Shares; and

 

Transfer Agent” means the transfer agent of the Company at the relevant time for any of the Subject Equity Shares (and if there is no such transfer agent,

 

Transfer Agent” means the Company);

 

(ii) subject to subparagraph (v), if an Exclusionary Offer is made, each outstanding Subordinate Voting Share shall, at the option of each holder of Subordinate Voting Shares during the Conversion Period, be convertible on a one-for-one basis into the class of Equity Shares that are subject to such Exclusionary Offer (and if more than one class of Equity Shares are subject to such Exclusionary Offer, or different Exclusionary Offers are made for separate classes of Subject Equity Shares, on a one-for-one basis into any class of Equity Shares that are subject to any such Exclusionary Offer, at the holder’s election, or failing such election, into any class of Equity Shares that are subject to any such Exclusionary Offer at the board of directors’ discretion). The conversion right may be exercised by notice in writing given to the Transfer Agent prior to the Expiry Date accompanied by the share certificate(s) representing the Subordinate Voting Shares which the holder desires to convert, together with any letter of transmittal or other documentation, including any medallion signature guarantee, as may be required by the Transfer Agent or pursuant to the Exclusionary Offer, in either case in duly executed or completed form, and such notice shall be executed by such holder, or by his attorney duly authorized in writing, and shall specify the number of Subordinate Voting Shares which the holder desires to have converted and the class of Equity Shares which are desired to be converted into. The Company shall pay any governmental stamp, transfer or similar tax (but for greater certainty, no income or capital gains tax) imposed on or in respect of such conversion. If less than all of the Subordinate Voting Shares represented by any share certificate are to be converted, the holder shall be entitled to receive a new share certificate representing in the aggregate the number of Subordinate Voting Shares represented by the original share certificate, which are not to be converted. Upon any conversion of any shares of any class into shares of another class, the Company shall adjust the capital accounts maintained for the respective classes of shares as provided in the Business Corporations Act. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Subject Equity Shares pursuant to such offer and for no other reason;

 

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(iii) an election by a holder of Subordinate Voting Shares to exercise the conversion right provided for in subparagraph (ii) shall be deemed to also constitute irrevocable elections by such holder (a) to deposit the Converted Shares pursuant to the Exclusionary Offer (subject to such holder’s right to subsequently withdraw the shares from the offer), and (b) to exercise the right to convert back into Subordinate Voting Shares all Converted Shares (on a one-for-one basis) in respect of which such holder exercises his, her or its right of withdrawal from the Exclusionary Offer or which are not otherwise ultimately taken up under the Exclusionary Offer. Any conversion of Converted Shares back into Subordinate Voting Shares in respect of which the holder exercises his, her or its right of withdrawal from the Exclusionary Offer shall become effective at the time such right of withdrawal is exercised. If the right of withdrawal is not exercised, any conversion of Converted Shares back into Subordinate Voting Shares pursuant to a deemed election shall become effective:

 

(A) for Converted Shares not taken up in accordance with the terms of an Exclusionary Offer which is nonetheless completed, on the day that the Offeror has taken up and paid for all shares to be acquired by the Offeror under the Exclusionary Offer; and

 

(B) in respect of an Exclusionary Offer which is abandoned or withdrawn, at the time at which the Exclusionary Offer is abandoned or withdrawn;

 

(iv) no share certificates representing Converted Shares shall be delivered to the holders of such shares before such shares are deposited pursuant to the Exclusionary Offer. The Transfer Agent, on behalf of the holders of the Converted Shares, shall deposit pursuant to the Exclusionary Offer the certificates representing all Subordinate Voting Shares for which the certificates, notices and other documents have been duly delivered to the Transfer Agent pursuant to subparagraph (ii) and shall advise the Offeror of the extent that such certificates so deposited represent Subject Equity Shares of the Company. Upon completion of the Exclusionary Offer, the Transfer Agent shall deliver to the holders of the shares purchased pursuant to the Exclusionary Offer all consideration paid by the Offeror pursuant to the Exclusionary Offer. If Converted Shares are converted back into Subordinate Voting Shares pursuant to subparagraph (iii), the Transfer Agent shall deliver to the holders entitled thereto share certificates representing the Subordinate Voting Shares resulting from the conversion. Provided however that if no Subordinate Voting Shares of a shareholder were acquired by the Offeror pursuant to the Exclusionary Offer, the Transfer Agent shall return the original share certificate (if not duly endorsed for transfer to a named transferee) evidencing such Subordinate Voting Shares tendered pursuant to subparagraph (ii) in satisfaction of its obligations under this subparagraph (iv). The Company shall make all arrangements with the Transfer Agent necessary or desirable to give effect to this subparagraph (iv);

 

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(v) subject to subparagraph (vi), the conversion right provided for in subparagraph (ii) shall not come into effect with respect to a class of Subject Equity Shares if:

 

(A) prior to the time at which the Exclusionary Offer is made there is or has been delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate, as at the time the Exclusionary Offer is made, more than 50% of the then outstanding Subject Equity Shares of each class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each such shareholder that made such certification, that such shareholder shall not:

 

(i) accept any Exclusionary Offer without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least 7 days prior to the Expiry Date;

 

(ii) make any Exclusionary Offer;

 

(iii) act jointly or in concert with any Person that makes any Exclusionary Offer; or

 

(iv) transfer any Subject Equity Shares, directly or indirectly, during the time any Exclusionary Offer is outstanding without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee; or

 

(B) within seven (7) days after the Offer Date there is delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate more than 50% of the then outstanding Subject Equity Shares of such class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each shareholder who made such certification:

 

(i) the number of Subject Equity Shares owned by the shareholder;

 

(ii) that such shareholder is not making the Exclusionary Offer and is not an Associate or Affiliate of, or acting jointly or in concert with, the Person making such offer;

 

(iii) that such shareholder shall not accept the Exclusionary Offer, including any varied form of the offer, without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least seven (7) days prior to the Expiry Date; and

 

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(iv) that such shareholder shall not transfer any Subject Equity Shares, directly or indirectly, prior to the Expiry Date without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee if this information is known to the transferor;

 

(vi) if a notice (the “Notice”) referred to in sub-clause (v)(A)(i), (v)(A)(iv), (v)(B)(iii) or (v)(B)(iv) is given to the Transfer Agent and to the corporate secretary of the Company and the conversion right provided for in subparagraph (ii) has not, because of the giving of such Notice, come into effect, the Company shall, either forthwith upon receipt of the Notice or forthwith after the seventh (7th) day following the Offer Date, whichever is later, make a good faith determination as to whether there are subsisting certifications that comply with either clause (v)(A) or (v)(B) from shareholders of the Company who own in the aggregate more than 50% of the then outstanding Subject Equity Shares, exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror. If the Company determines that there are not such subsisting certifications, subparagraph (v) shall cease to apply and the conversion right provided for in subparagraph (ii) shall be in effect for the remainder of the Conversion Period;

 

(vii) as soon as reasonably possible after the seventh (7th) day after the Offer Date, the Company shall send to each holder of Subordinate Voting Shares a written notice advising the holders as to whether they are entitled to convert their Subordinate Voting Shares into Subject Equity Shares and the reasons therefor. If such notice discloses that they are not so entitled, but it is subsequently determined that they are so entitled by virtue of subparagraph (vi) or otherwise, the Company shall forthwith send another notice to them advising them of that fact and the reasons therefor;

 

(viii) if a notice referred to in subparagraph (vii) discloses that the conversion right set forth in subparagraph (ii) has come into effect, the notice shall:

 

(i) include a description of the procedure to be followed to effect the conversion and to have the Converted Shares tendered under the Exclusionary Offer;

 

(ii) include the information set out in subparagraph (vii) hereof; and

 

(iii) be accompanied by a copy of the Exclusionary Offer and all other materials sent to any holders of Subject Equity Shares in respect of such offer; and as soon as reasonably possible after any additional material, including any notice of variation, is sent to any holders of Subject Equity Shares in respect of such offer, the Company shall send a copy of such additional materials to each holder of Subordinate Voting Shares;

 

(ix) prior to or forthwith after sending any notice referred to in subparagraph (vii), the Company shall cause a news release to be issued to a Canadian national news service, describing the contents of the notice; and

 

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(x) references to share certificates shall include, as applicable, the equivalent in any non-certificated inventory system (such as, for example, a Direct Registration System or electronic position), with appropriate changes.

 

(3) Specified Exceptions

 

The following circumstances will be disregarded in determining whether Equity Shares are held of record by a U.S. Person or by a Non-U.S. Person (collectively, the “Specified Exceptions”):

 

(i) where Equity Shares are held of record by one or more underwriters solely for the purposes of a distribution to the public, that fact will be disregarded; and

 

(ii) where Equity Shares are held of record a Person acting solely in the capacity of an intermediary in connection with either the payment of funds and/or the delivery of securities and that provides centralized facilities for the deposit, clearing or settlement of trades in securities (including CDS Clearing and Depositary Services Inc., or any successor or assign) without general discretionary authority over the voting or disposition of such Equity Shares, that fact will be disregarded.

 

(h) Renaming as Common Shares.

 

At the effective time that no Multiple Voting Shares remain issued and outstanding, the Subordinate Voting Shares may in the discretion of the board of directors henceforward be named “Common Shares”, and in such case all references in these Articles to “Subordinate Voting Share(s)” shall thereinafter refer to “Common Share(s)”.

 

27.2 Multiple Voting Shares

 

(1) For the purposes of this Article 27.2, the following terms will have the meanings specified below:

 

held of record” has the meaning set forth in Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

Non-U.S. Person” means any Person or entity that is not a U.S. Person;

 

Permitted Holder” has the meaning assigned in Article 27.2(2)(h);

 

Restricted Voting Shares” means the restricted voting shares in the capital of the Company; and

 

U.S. Person” means a resident of the United States of America (including its territories and possessions).

 

(2) An unlimited number of Multiple Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Multiple Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Multiple Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to fifty (50) votes in respect of each Multiple Voting Share held, except for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Multiple Voting Shares, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares shall vote together as if they were shares of a single class.

 

(b) Constraints on Ownership.

 

The Multiple Voting Shares may be held of record by U.S. Persons and/or Non-U.S. Persons.

 

(c) No Dividends.

 

Holders of Multiple Voting Shares shall not be entitled to receive dividends.

 

(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Multiple Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Multiple Voting Shares, be entitled to receive their redemption price per share and no more.

 

(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Multiple Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

(f) Redemption.

 

All issued and outstanding Multiple Voting Shares will be automatically redeemed by the Company for U.S. $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed by the Company from the applicable holder at the relevant time) on the third (3rd) anniversary of their first date of issuance. In addition, the applicable Multiple Voting Shares will be automatically redeemed by the Company for U.S. $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed by the Company from the applicable holder at the relevant time) on the date on which such Multiple Voting Shares are held or controlled by a person who is not a Permitted Holder of the original holder upon the first issuance thereof.

 

Before redeeming any Multiple Voting Shares the Company shall mail to each person who, at the date of such mailing, is a registered holder of the shares to be redeemed, notice of the intention of the Company to redeem such shares held by such registered holder; such notice shall be mailed by ordinary prepaid post addressed to the last address of such holder as it appears on the records of the Company or, in the event of the address of any such holder not appearing on the records of the Company, then to the last known address of such holder, at least 10 days before the date specified for redemption; such notice shall set out the date on which redemption is to take place; on or after the date so specified for redemption the Company shall pay or cause to be paid the redemption price to the registered holder of the shares to be redeemed, on presentation and surrender of the certificates for the shares so called for redemption at such place or places as may be specified in such notice, and the certificates for such shares shall thereupon be cancelled, and the shares represented thereby shall thereupon be redeemed. From and after the date specified for redemption in such notice, the holder of the shares called for redemption shall not be entitled to any rights in respect thereof, except to receive the redemption price therefor. On or before the date specified for redemption the Company shall have the right to set aside the redemption price of the shares called for redemption, such redemption price to be paid to or to the order of the holder of such shares called for redemption upon presentation and surrender of the certificates representing the same and, upon such deposit being made, the applicable shares shall be redeemed and the rights of the holder thereof shall be limited to receiving, out of the moneys so set aside, without interest, the redemption price against presentation and surrender of the certificates representing such shares.

 

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(g) Rights of Retraction.

 

A holder of Multiple Voting Shares shall be entitled to require the Company to redeem at any time and from time to time after the date of issue of such shares, upon giving notice as hereinafter provided, all or any number of the Multiple Voting Shares registered in the name of such holder on the books of the Company at a price of U.S. $0.001 per share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed from the applicable holder at the relevant time by the applicable holder thereof). A holder of Multiple Voting Shares exercising this option to have the Company redeem, shall give notice to the Company, which notice shall set out the date on which the Company is to redeem, which date shall not be less than 30 days nor more than 90 days from the date of mailing of the notice, and if the holder desires to have less than all of the Multiple Voting Shares registered in his, her or its name redeemed by the Company, the number of the holder’s shares to be redeemed. The date on which the redemption at the option of the holder is to occur is hereafter referred to as the “option redemption date”. The holder of any Multiple Voting Shares may, with the consent of the Company, revoke such notice prior to the option redemption date. Upon delivery to the Company of a share certificate or certificates representing the Multiple Voting Shares which the holder desires to have the Company redeem, the Company shall, on the option redemption date, redeem such Multiple Voting Shares by paying to the holder the redemption price therefor. Upon payment of the redemption price of the Multiple Voting Shares to be redeemed by the Company, the holders thereof shall cease to be entitled to exercise any rights of holders in respect thereof. If the redemption by the Company on any option redemption date of all of the Multiple Voting Shares to be redeemed on such date would be contrary to any provisions of the Business Corporations Act or any other applicable law, the Company shall be obligated to redeem only the maximum number of Multiple Voting Shares which the Company determines it is then permitted to redeem, such redemptions to be made pro rata (disregarding fractions of shares) according to the number of Multiple Voting Shares required by each such holder to be redeemed by the Company and the Company shall issue new certificates representing the Multiple Voting Shares not redeemed by the Company; the Company shall, before redeeming any other Multiple Voting Shares, redeem in the manner contemplated by Article 29.5 on the first day of each month thereafter the maximum number of such Multiple Voting Shares so required by holders to be redeemed as would not then by contrary to any provisions of the Business Corporations Act or any other applicable law, until all of such shares have been redeemed, provided that the Company shall be under no obligation to give any notice to the holders of the Multiple Voting Shares in respect of such redemption or redemptions as provided for in Article 29.5.

 

(h) Transfer of Multiple Voting Shares.

 

Except as expressly provided herein, including upon redemption, no Multiple Voting Share may be sold, transferred, assigned, pledged or otherwise disposed of, except to a Permitted Holder of the holder thereof. For the purposes hereof, “Permitted Holder” means a Person controlled, directly or indirectly by the transferor which remains as such, and the applicable Multiple Voting Shares shall be automatically redeemed if the Permitted Holder ceases to be so controlled.

 

(i) Ownership of Restricted Voting Shares and Limited Voting Shares.

 

Notwithstanding any other provision of these Articles, any holder of Multiple Voting Shares that holds at least two (2) Restricted Voting Shares and/or Limited Voting Shares shall be deemed to hold (A) at least one (1) Restricted Voting Share, and (B) at least one (1) Limited Voting Share.

 

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27.3 Restricted Voting Shares

 

(1) For the purposes of this Article 27.3, the following terms will have the meanings specified below:

 

Change of Control Transaction” means an amalgamation, arrangement, recapitalization, business combination or similar transaction of the Company, other than an amalgamation, arrangement, recapitalization, business combination or similar transaction that would result in (i) the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the continuing entity or its direct or indirect parent) more than 50% of the total voting power of the voting securities of the Company, the continuing entity or its direct or indirect parent, and more than 50% of the total number of outstanding shares of the Company, the continuing entity or its direct or indirect parent, in each case as outstanding immediately after such transaction, and (ii) the shareholders of the Company immediately prior to the transaction owning voting securities of the Company, the continuing entity or its direct or indirect parent immediately following the transaction in substantially the same proportions (vis-a-vis each other) as such shareholders owned the voting securities of the Company immediately prior to the transaction (provided that in neither event shall the exercise of any exchangeable shares of a subsidiary of the Company that are exchangeable into shares of the Company be taken into account in such determination);

 

Equity Shares” means, collectively, the subordinate, restricted and limited voting shares of the Company and “Equity Share” shall mean any of them;

 

FPI Threshold” has the meaning ascribed to such term in Article 27.3(2)(g)(2);

 

held of record” has the meaning set forth in Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

Non-U.S. Person” means any Person or entity that is not a U.S. Person;

 

Preferred Shares” means the preferred shares in the capital of the Company;

 

Restricted Voting Shares” means the restricted voting shares in the capital of the Company;

 

Specified Exceptions” has the meaning ascribed thereto in Article 27.1(2)(g)(3)27.3(2)(g)(3); and

 

U.S. Person” means a resident of the United States of America (including its territories and possessions).

 

(2) An unlimited number of Restricted Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Restricted Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Restricted Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to one (1) vote in respect of each Restricted Voting Share held, except for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are equal in all respects and shall vote together, and with the Multiple Voting Shares, as if they were shares of a single class. In connection with any Change of Control Transaction requiring approval of the holders of all classes of Equity Shares under the Business Corporations Act, holders of each class of Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of any such class is approved by a majority of the votes cast by the holders of outstanding Restricted Voting Shares in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of Restricted Voting Shares called and held for such purpose.

 

Notwithstanding the provisions of the second paragraph of this Article 27.3(2)(a), the holders of Restricted Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the Restricted Voting Shares; (ii) affect the holders of any class of Equity Shares differently on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of outstanding Restricted Voting Shares.

 

(b) Constraints on Ownership.

 

Subject to the Specified Exceptions, the Restricted Voting Shares may only be held of record by U.S. Persons.

 

(c) Dividends.

 

Holders of Restricted Voting Shares shall be entitled to receive, as and when declared by the board of directors, dividends in cash or property of the Company. No dividend will be declared or paid on any other class of Equity Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on the Restricted Voting Shares. The Restricted Voting Shares shall rank equally with the other Equity Shares as to dividends on a share-for-share basis, without preference or distinction. In the event of the payment of a dividend in the form of shares, holders of Restricted Voting Shares shall receive Restricted Voting Shares, unless otherwise determined by the board of directors, provided an equal number of shares is declared as a dividend or distribution on a then outstanding per-Equity Share basis, without preference or distinction, in each case.

 

(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Restricted Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Restricted Voting Shares, be entitled to participate ratably in the remaining property of the Company along with all holders of the other classes of Equity Shares (on a per share basis).

 

(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Restricted Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

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(f) Subdivision or Consolidation.

 

No subdivision or consolidation of the Restricted Voting Shares shall occur unless, simultaneously, the other classes of Equity Shares are subdivided or consolidated or otherwise adjusted so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Subject to Article 27.3(2)(g), the Restricted Voting Shares cannot be converted into any other class of shares.

 

(g) Conversion of Restricted Voting Shares.

 

(1) Automatic

 

Subject to the Specified Exceptions, each issued and outstanding Restricted Voting Share shall be automatically converted into one Subordinate Voting Share, without any further act on the part of the Company or of the holder, if such Restricted Voting Share becomes held of record by a Non-U.S. Person.

 

(2) Conversion into Limited Voting Shares

 

Subject to the Specified Exceptions, if, at any given time, the total number of Restricted Voting Shares becomes equal to or in excess of the FPI Threshold, the minimum number of Restricted Voting Shares required to stay within the FPI Threshold shall be automatically converted, without further act or formality, on a pro-rata basis across all registered holders of Restricted Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Limited Voting Shares. For purposes of these Articles, “FPI Threshold” means:

 

(0.50 x Aggregate Number of Multiple Voting Shares, Subordinate Voting Shares and Restricted Voting Shares) – (Aggregate Number of Multiple Voting Shares held, of record by U.S. Persons)

 

Notwithstanding the foregoing, in connection with a formal bid for all Equity Shares on identical terms made in compliance with Canadian securities laws that results in the bidder owning or controlling more than fifty percent (50%) of the total voting power of the voting securities of the Company for the election of directors (assuming the Limited Voting Shares each have one (1) vote per share for the election of directors), the bidder may elect, by way of written notice to the Company, that the Restricted Voting Shares it so acquires not be automatically converted into Limited Voting Shares.

 

(3) Upon an Offer

 

(i) For the purposes of this 27.3(2)(g)(3):

 

(A) Affiliate” has the meaning specified in National Instrument 45-106 – Prospectus Exemptions as, from time to time, amended, re-enacted or replaced;

 

(B) Associate” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced;

 

(C) Conversion Period” means the period of time commencing on the eighth day after the Offer Date and terminating on the Expiry Date;

 

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(D) Converted Shares” means the Subject Equity Shares resulting from the conversion of Restricted Voting Shares into the Subject Equity Shares pursuant to subparagraph (ii);

 

(E) Exclusionary Offer” means an offer to purchase Subject Equity Shares that:

 

(i) is a General Offer; and

 

(ii) is not made concurrently with an offer to purchase Restricted Voting Shares that is identical to the offer to purchase the Subject Equity Shares in terms of price per share and percentage of outstanding shares to be taken up exclusive of shares owned immediately prior to the offer by the Offeror, and in all other material respects, and that has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Subject Equity Shares;
     
    and for the purposes of this definition, if an offer to purchase Subject Equity Shares is a General Offer but not an Exclusionary Offer, the varying of any term of such offer shall be deemed to constitute the making of a new offer unless a variation identical in all material respects concurrently is made to the corresponding offer to purchase Restricted Voting Shares;

 

(F) Expiry Date” means the last date on which holders of the Subject Equity Shares may accept an Exclusionary Offer;

 

(G) General Offer” means an offer to purchase Subject Equity Shares that must, by reason of applicable securities legislation or the requirements of any stock exchange on which the Subject Equity Shares are listed, be made to all or substantially all holders of Subject Equity Shares who are in a province of Canada to which any such legislation or requirement applies (assuming that the offeree was resident in Ontario);

 

(H) Offer Date” means the date on which an Exclusionary Offer is made;

 

(I) Offeror” means a Person that makes an offer to purchase the Subject Equity Shares (the “bidder”), and includes any Associate or Affiliate of the bidder or any Person that is disclosed in the offering document to be acting jointly or in concert with the bidder;

 

(J) Person” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced and includes a company or other body corporate wherever or however incorporated;

 

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(K) Subject Equity Shares” means any one or more classes of Equity Shares that are subject to an Exclusionary Offer, other than Restricted Voting Shares; and

 

(L) Transfer Agent” means the transfer agent of the Company at the relevant time for any of the Subject Equity Shares (and if there is no such transfer agent, “Transfer Agent” means the Company);

 

(ii) subject to subparagraph (v), if an Exclusionary Offer is made, each outstanding Restricted Voting Share shall, at the option of each holder of Restricted Voting Shares during the Conversion Period, be convertible on a one-for-one basis into the class of Equity Shares that are subject to such Exclusionary Offer (and if more than one class of Equity Shares are subject to such Exclusionary Offer, or different Exclusionary Offers are made for separate classes of Subject Equity Shares, on a one-for-one basis into any class of Equity Shares that are subject to any such Exclusionary Offer, at the holder’s election, or failing such election, into any class of Equity Shares that are subject to any such Exclusionary Offer at the board of directors’ discretion). The conversion right may be exercised by notice in writing given to the Transfer Agent prior to the Expiry Date accompanied by the share certificate(s) representing the Restricted Voting Shares which the holder desires to convert, together with any letter of transmittal or other documentation, including any medallion signature guarantee, as may be required by the Transfer Agent or pursuant to the Exclusionary Offer, in either case, in duly executed or completed form, and such notice shall be executed by such holder, or by his attorney duly authorized in writing, and shall specify the number of Restricted Voting Shares which the holder desires to have converted and the class of Equity Shares which are desired to be converted into. The Company shall pay any governmental stamp, transfer or similar tax (but for greater certainty, no income or capital gains tax) imposed on or in respect of such conversion. If less than all of the Restricted Voting Shares represented by any share certificate are to be converted, the holder shall be entitled to receive a new share certificate representing in the aggregate the number of Restricted Voting Shares represented by the original share certificate, which are not to be converted. Upon any conversion of any shares of any class into shares of another class, the Company shall adjust the capital accounts maintained for the respective classes of shares as provided in the Business Corporations Act. The conversion right may only be exercised in respect of Restricted Voting Shares for the purpose of depositing the resulting Subject Equity Shares pursuant to such offer and for no other reason;

 

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(iii) an election by a holder of Restricted Voting Shares to exercise the conversion right provided for in subparagraph (ii) shall be deemed to also constitute irrevocable elections by such holder (a) to deposit the Converted Shares pursuant to the Exclusionary Offer (subject to such holder’s right to subsequently withdraw the shares from the offer), and (b) to exercise the right to convert back into Restricted Voting Shares all Converted Shares (on a one-for-one basis) in respect of which such holder exercises his, her or its right of withdrawal from the Exclusionary Offer or which are not otherwise ultimately taken up under the Exclusionary Offer. Any conversion of Converted Shares back into Restricted Voting Shares in respect of which the holder exercises his, her or its right of withdrawal from the Exclusionary Offer shall become effective at the time such right of withdrawal is exercised. If the right of withdrawal is not exercised, any conversion of Converted Shares back into Restricted Voting Shares pursuant to a deemed election shall become effective:

 

(A) for Converted Shares not taken up in accordance with the terms of an Exclusionary Offer which is nonetheless completed, on the day that the Offeror has taken up and paid for all shares to be acquired by the Offeror under the Exclusionary Offer; and

 

(B) in respect of an Exclusionary Offer which is abandoned or withdrawn, at the time at which the Exclusionary Offer is abandoned or withdrawn;

 

(iv) no share certificates representing Converted Shares shall be delivered to the holders of such shares before such shares are deposited pursuant to the Exclusionary Offer. The Transfer Agent, on behalf of the holders of the Converted Shares, shall deposit pursuant to the Exclusionary Offer the share certificates representing all Restricted Voting Shares for which the certificates, notices and other documents have been duly delivered to the Transfer Agent pursuant to subparagraph (ii) and shall advise the Offeror of the extent that such certificates so deposited represent Subject Equity Shares of the Company. Upon completion of the Exclusionary Offer, the Transfer Agent shall deliver to the holders of the shares purchased pursuant to the Exclusionary Offer all consideration paid by the Offeror pursuant to the Exclusionary Offer. If Converted Shares are converted back into Restricted Voting Shares pursuant to subparagraph (iii), the Transfer Agent shall deliver to the holders entitled thereto share certificates representing the Restricted Voting Shares resulting from the conversion. Provided however that if no Restricted Voting Shares of a shareholder were acquired by the Offeror pursuant to the Exclusionary Offer, the Transfer Agent shall return the original share certificate (if not duly endorsed for transfer to a named transferee) evidencing such Restricted Voting Shares tendered pursuant to subparagraph (ii) in satisfaction of its obligations under this subparagraph (iv). The Company shall make all arrangements with the Transfer Agent necessary or desirable to give effect to this subparagraph (iv);

 

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(v) subject to subparagraph (vi), the conversion right provided for in subparagraph (ii) shall not come into effect with respect to a class of Subject Equity Shares if:

 

(A) prior to the time at which the Exclusionary Offer is made there is or has been delivered to the transfer agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate, as at the time the Exclusionary Offer is made, more than 50% of the then outstanding Subject Equity Shares of each class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each such shareholder, that made such certification, that such shareholder shall not:

 

(i) accept any Exclusionary Offer without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least 7 days prior to the Expiry Date;

 

(ii) make any Exclusionary Offer;

 

(iii) act jointly or in concert with any Person that makes any Exclusionary Offer; or

 

(iv) transfer any Subject Equity Shares, directly or indirectly, during the time any Exclusionary Offer is outstanding without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee; or

 

(B) within seven (7) days after the Offer Date there is delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate more than 50% of the then outstanding Subject Equity Shares of such class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each shareholder who made such certification:

 

(i) the number of Subject Equity Shares owned by the shareholder;

 

(ii) that such shareholder is not making the Exclusionary Offer and is not an Associate or Affiliate of, or acting jointly or in concert with, the Person making such offer;

 

(iii) that such shareholder shall not accept the Exclusionary Offer, including any varied form of the offer, without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least seven (7) days prior to the Expiry Date; and

 

(iv) that such shareholder shall not transfer any Subject Equity Shares, directly or indirectly, prior to the Expiry Date without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee if this information is known to the transferor;

 

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(vi) if a notice (the “Notice”) referred to in sub-clause (v)(A)(i), (v)(A)(iv), (v)(B)(iii) or (v)(B)(iv) is given to the Transfer Agent and to the corporate secretary of the Company and the conversion right provided for in subparagraph (ii) has not, because of the giving of such Notice, come into effect, the Company shall, either forthwith upon receipt of the Notice or forthwith after the seventh (7th) day following the Offer Date, whichever is later, make a good faith determination as to whether there are subsisting certifications that comply with either clause (v)(A) or (v)(B) from shareholders of the Company who own in the aggregate more than 50% of the then outstanding Subject Equity Shares of each class, exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror. If the Company determines that there are not such subsisting certifications, subparagraph (v) shall cease to apply and the conversion right provided for in subparagraph (ii) shall be in effect for the remainder of the Conversion Period;

 

(vii) as soon as reasonably possible after the seventh (7th) day after the Offer Date, the Company shall send to each holder of Restricted Voting Shares a written notice advising the holders as to whether they are entitled to convert their Restricted Voting Shares into Subject Equity Shares and the reasons therefor. If such notice discloses that they are not so entitled, but it is subsequently determined that they are so entitled by virtue of subparagraph (vi) or otherwise, the Company shall forthwith send another notice to them advising them of that fact and the reasons therefor;

 

(viii) if a notice referred to in subparagraph (vii) discloses that the conversion right set forth in subparagraph (ii) has come into effect, the notice shall:

 

(A) include a description of the procedure to be followed to effect the conversion and to have the Converted Shares tendered under the Exclusionary Offer;

 

(B) include the information set out in subparagraph (vii) hereof; and

 

(C) be accompanied by a copy of the Exclusionary Offer and all other materials sent to any holders of Subject Equity Shares in respect of such offer; and as soon as reasonably possible after any additional material, including any notice of variation, is sent to any holders of Subject Equity Shares in respect of such offer, the Company shall send a copy of such additional materials to each holder of Restricted Voting Shares;

 

(ix) prior to or forthwith after sending any notice referred to in subparagraph (vii), the Company shall cause a news release to be issued to a Canadian national news service, describing the contents of the notice; and

 

(x) references to share certificates shall include, as applicable, the equivalent in any non-certificated inventory system (such as, for example, a Direct Registration System or an electronic position), with appropriate changes.

 

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27.4         Limited Voting Shares

 

(1)            For the purposes of this Article 27.4, the following terms will have the meanings specified below:

 

Change of Control Transaction” means an amalgamation, arrangement, recapitalization, business combination or similar transaction of the Company, other than an amalgamation, arrangement, recapitalization, business combination or similar transaction that would result in (i) the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the continuing entity or its direct or indirect parent) more than 50% of the total voting power of the voting securities of the Company, the continuing entity or its direct or indirect parent, and more than 50% of the total number of outstanding shares of the Company, the continuing entity or its direct or indirect parent, in each case as outstanding immediately after such transaction, and (ii) the shareholders of the Company immediately prior to the transaction owning voting securities of the Company, the continuing entity or its direct or indirect parent immediately following the transaction in substantially the same proportions (vis-a-vis each other) as such shareholders owned the voting securities of the Company immediately prior to the transaction (provided that in neither event shall the exercise of any exchangeable shares of a subsidiary of the Company that are exchangeable into shares of the Company be taken into account in such determination);

 

Equity Shares” means, collectively, the subordinate, restricted and limited voting shares of the Company and “Equity Share” shall mean any of them;

 

FPI Threshold” has the meaning ascribed to such term in Article 27.3(2)(g)(2);

 

held of record” has the meaning set forth in Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

Non-U.S. Person” means any Person or entity that is not a U.S. Person;

 

Preferred Shares” means the preferred shares in the capital of the Company;

 

Restricted Voting Shares” means the restricted voting shares in the capital of the Company;

 

Specified Exceptions” has the meaning ascribed thereto in Article 27.1(2)(g)(3); and

 

U.S. Person” means a resident of the United States of America (including its territories and possessions).

 

(2) An unlimited number of Limited Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Limited Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Limited Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to one (1) vote in respect of each Limited Voting Share held, except that holders shall not have an entitlement to vote (i) in respect of the election for directors of the board of directors or (ii) for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are equal in all respects and shall vote together, and with the Multiple Voting Shares, as if they were shares of a single class. In connection with any Change of Control Transaction requiring approval of the holders of all classes of Equity Shares under the Business Corporations Act, holders of each class of Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of any such class is approved by a majority of the votes cast by the holders of outstanding Limited Voting Shares in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of Limited Voting Shares called and held for such purpose.

 

Notwithstanding the provisions of the second paragraph of this Article 27.4(2)(a), the holders of Limited Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the Limited Voting Shares; (ii) affect the holders of any class of Equity Shares differently on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of outstanding Limited Voting Shares.

 

(b) Constraints on Ownership.

 

Subject to the Specified Exceptions, the Limited Voting Shares may only be held of record by U.S. Persons.

 

(c) Dividends.

 

Holders of Limited Voting Shares shall be entitled to receive, as and when declared by the board of directors, dividends in cash or property of the Company. No dividend will be declared or paid on any other class of Equity Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on the Limited Voting Shares. The Limited Voting Shares shall rank equally with the other Equity Shares as to dividends on a share-for-share basis, without preference or distinction. In the event of the payment of a dividend in the form of shares, holders of Limited Voting Shares shall receive Limited Voting Shares, unless otherwise determined by the board of directors, provided an equal number of shares is declared as a dividend or distribution on a then outstanding per-Equity Share basis, without preference or distinction, in each case.

 

(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Limited Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Limited Voting Shares, be entitled to participate ratably in the remaining property of the Company along with all holders of the other classes of Equity Shares (on a per share basis).

 

(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Limited Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

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(f) Subdivision or Consolidation.

 

No subdivision or consolidation of the Limited Voting Shares shall occur unless, simultaneously, the other classes of Equity Shares are subdivided or consolidated or otherwise adjusted so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Subject to Article 27.4(2)(g), the Limited Voting Shares cannot be converted into any other class of shares.

 

(g) Conversion of Limited Voting Shares.

 

(1) Automatic

 

Subject to the Specified Exceptions, each issued and outstanding Limited Voting Share shall be automatically converted into one Subordinate Voting Share, without any further act on the part of the Company or of the holder, if at any given time, such Limited Voting Share becomes held of record by a Non-U.S. Person.

 

(2) Conversion into Restricted Voting Shares

 

Subject to the Specified Exceptions, if, at any given time, the total number of Restricted Voting Shares represents a number below the FPI Threshold, the number of Limited Voting Shares shall be automatically converted, without further act or formality, on a pro-rata basis across all registered holders of Limited Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Restricted Voting Shares, to the maximum extent possible such that the Limited Voting Shares then represent a number of Equity Shares that is one share less than the FPI Threshold.

 

Notwithstanding the foregoing, in connection with a formal bid for all Equity Shares on identical terms made in compliance with Canadian securities laws that results in the bidder owning or controlling more than fifty percent (50%) of the total voting power of the voting securities of the Company for the election of directors (assuming the Limited Voting Shares each have one (1) vote per share for the election of directors), the bidder may elect, by way of written notice to the Company, that the Limited Voting Shares it so acquires not be automatically converted into Restricted Voting Shares.

 

(3) Upon an Offer

 

(i) For the purposes of this Article 27.4(2)(g)(3):

 

(A) Affiliate” has the meaning specified in National Instrument 45-106 – Prospectus Exemptions as, from time to time, amended, re-enacted or replaced;

 

(B) Associate” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced;

 

(C) Conversion Period” means the period of time commencing on the eighth day after the Offer Date and terminating on the Expiry Date;

 

(D) Converted Shares” means the Subject Equity Shares resulting from the conversion of Limited Voting Shares into the Subject Equity Shares pursuant to subparagraph (ii);

 

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(E) Exclusionary Offer” means an offer to purchase Subject Equity Shares that:

 

(i) is a General Offer; and

 

(ii) is not made concurrently with an offer to purchase Limited Voting Shares that is identical to the offer to purchase the Subject Equity Shares in terms of price per share and percentage of outstanding shares to be taken up exclusive of shares owned immediately prior to the offer by the Offeror, and in all other material respects, and that has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Subject Equity Shares;

 

and for the purposes of this definition, if an offer to purchase Subject Equity Shares is a General Offer but not an Exclusionary Offer, the varying of any term of such offer shall be deemed to constitute the making of a new offer unless a variation identical in all material respects concurrently is made to the corresponding offer to purchase Limited Voting Shares;

 

(F) Expiry Date” means the last date on which holders of the Subject Equity Shares may accept an Exclusionary Offer;

 

(G) General Offer” means an offer to purchase Subject Equity Shares that must, by reason of applicable securities legislation or the requirements of any stock exchange on which the Subject Equity Shares are listed, be made to all or substantially all holders of Subject Equity Shares who are in a province of Canada to which any such legislation or requirement applies (assuming that the offeree was resident in Ontario);

 

(H) Offer Date” means the date on which an Exclusionary Offer is made;

 

(I) Offeror” means a person that makes an offer to purchase the Subject Equity Shares (the “bidder”), and includes any Associate or Affiliate of the bidder or any person that is disclosed in the offering document to be acting jointly or in concert with the bidder,

 

(J) Person” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced and includes a company or other body corporate wherever or however incorporated;

 

(K) Subject Equity Shares” means any one or more classes of Equity Shares that are subject to an Exclusionary Offer, other than Limited Voting Shares; and

 

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(L) Transfer Agent” means the transfer agent of the Company at the relevant time for any of the Subject Equity Shares (and if there is no such transfer agent, “Transfer Agent” means the Company);

 

(ii) subject to subparagraph (v), if an Exclusionary Offer is made, each outstanding Limited Voting Share shall, at the option of each holder of Limited Voting Shares during the Conversion Period, be convertible on a one-for-one basis into the class of Equity Shares that are subject to such Exclusionary Offer (and if more than one class of Equity Shares are subject to such Exclusionary Offer, or different Exclusionary Offers are made for separate classes of Subject Equity Shares, on a one-for-one basis into any class of Equity Shares that are subject to any such Exclusionary Offer, at the holder’s election, or failing such election, into any class of Equity Shares that are subject to any such Exclusionary Offer at the board of directors’ discretion). The conversion right may be exercised by notice in writing given to the Transfer Agent prior to the Expiry Date accompanied by the share certificate(s) representing the Limited Voting Shares which the holder desires to convert, together with any letter of transmittal or other documentation, including any medallion signature guarantee, as may be required by the Transfer Agent or pursuant to the Exclusionary Offer, in either case, in duly executed or completed form, and such notice shall be executed by such holder, or by his attorney duly authorized in writing, and shall specify the number of Limited Voting Shares which the holder desires to have converted and the class of Equity Shares which are desired to be converted into. The Company shall pay any governmental stamp, transfer or similar tax (but for greater certainty, no income or capital gains tax) imposed on or in respect of such conversion. If less than all of the Limited Voting Shares represented by any share certificate are to be converted, the holder shall be entitled to receive a new share certificate representing in the aggregate the number of Limited Voting Shares represented by the original share certificate, which are not to be converted. Upon any conversion of any shares of any class into shares of another class, the Company shall adjust the capital accounts maintained for the respective classes of shares as provided in the Business Corporations Act. The conversion right may only be exercised in respect of Limited Voting Shares for the purpose of depositing the resulting Subject Equity Shares pursuant to such offer and for no other reason;

 

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(iii) an election by a holder of Limited Voting Shares to exercise the conversion right provided for in subparagraph (ii) shall be deemed to also constitute irrevocable elections by such holder (a) to deposit the Converted Shares pursuant to the Exclusionary Offer (subject to such holder’s right to subsequently withdraw the shares from the offer), and (b) to exercise the right to convert back into Limited Voting Shares all Converted Shares (on a one-for-one basis) in respect of which such holder exercises his, her or its right of withdrawal from the Exclusionary Offer or which are not otherwise ultimately taken up under the Exclusionary Offer. Any conversion of Converted Shares back into Limited Voting Shares in respect of which the holder exercises his, her or its right of withdrawal from the Exclusionary Offer shall become effective at the time such right of withdrawal is exercised. If the right of withdrawal is not exercised, any conversion of Converted Shares back into Limited Voting Shares pursuant to a deemed election shall become effective:

 

(A) for Converted Shares not taken up in accordance with the terms of an Exclusionary Offer which is nonetheless completed, on the day that the Offeror has taken up and paid for all shares to be acquired by the Offeror under the Exclusionary Offer; and

 

(B) in respect of an Exclusionary Offer which is abandoned or withdrawn, at the time at which the Exclusionary Offer is abandoned or withdrawn;

 

(iv) no share certificates representing Converted Shares shall be delivered to the holders of such shares before such shares are deposited pursuant to the Exclusionary Offer. The Transfer Agent, on behalf of the holders of the Converted Shares, shall deposit pursuant to the Exclusionary Offer the share certificates representing all Limited Voting Shares for which the certificates, notices and other documents have been duly delivered to the Transfer Agent pursuant to subparagraph (ii) and shall advise the Offeror of the extent that such certificates so deposited represent Subject Equity Shares of the Company. Upon completion of the Exclusionary Offer, the Transfer Agent shall deliver to the holders of the shares purchased pursuant to the Exclusionary Offer all consideration paid by the Offeror pursuant to the Exclusionary Offer. If Converted Shares are converted back into Limited Voting Shares pursuant to subparagraph (iii), the Transfer Agent shall deliver to the holders entitled thereto share certificates representing the Limited Voting Shares resulting from the conversion. Provided however that if no Limited Voting Shares of a shareholder were acquired by the Offeror pursuant to the Exclusionary Offer, the Transfer Agent shall return the original share certificate (if not duly endorsed for transfer to a named transferee) evidencing such Limited Voting Shares tendered pursuant to subparagraph (ii) in satisfaction of its obligations under this subparagraph (iv). The Company shall make all arrangements with the Transfer Agent necessary or desirable to give effect to this subparagraph (iv);

 

(v) subject to subparagraph (vi), the conversion right provided for in subparagraph (ii) shall not come into effect with respect to a class of Subject Equity Shares if:

 

(A) prior to the time at which the Exclusionary Offer is made there is or has been delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate, as at the time the Exclusionary Offer is made, more than 50% of the then outstanding Subject Equity Shares of each class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each such shareholder, that made such certification, that such shareholder shall not:

 

(i) accept any Exclusionary Offer without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least 7 days prior to the Expiry Date;

 

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(ii) make any Exclusionary Offer;

 

(iii) act jointly or in concert with any Person that makes any Exclusionary Offer; or

 

(iv) transfer any Subject Equity Shares, directly or indirectly, during the time any Exclusionary Offer is outstanding without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee; or

 

(B) within seven (7) days after the Offer Date there is delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate more than 50% of the then outstanding Subject Equity Shares of such class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each shareholder who made such certification:

 

(i) the number of Subject Equity Shares owned by the shareholder;

 

(ii) that such shareholder is not making the Exclusionary Offer and is not an Associate or Affiliate of, or acting jointly or in concert with, the Person making such offer;

 

(iii) that such shareholder shall not accept the Exclusionary Offer, including any varied form of the offer, without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least seven (7) days prior to the Expiry Date; and

 

(iv) that such shareholder shall not transfer any Subject Equity Shares, directly or indirectly, prior to the Expiry Date without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee if this information is known to the transferor;

 

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(vi) if a notice (the Notice) referred to in sub-clause (v)(A)(i), (v)(A)(iv), (v)(B)(iii) or (v)(B)(iv) is given to the Transfer Agent and to the corporate secretary of the Company and the conversion right provided for in subparagraph (ii) has not, because of the giving of such Notice, come into effect, the Company shall, either forthwith upon receipt of the Notice or forthwith after the seventh (7th) day following the Offer Date, whichever is later, make a good faith determination as to whether there are subsisting certifications that comply with either clause (v)(A) or (v)(B) from shareholders of the Company who own in the aggregate more than 50% of the then outstanding Subject Equity Shares of each class, exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror. If the Company determines that there are not such subsisting certifications, subparagraph (v) shall cease to apply and the conversion right provided for in subparagraph (ii) shall be in effect for the remainder of the Conversion Period;

 

(vii) as soon as reasonably possible after the seventh (7th) day after the Offer Date, the Company shall send to each holder of Limited Voting Shares a written notice advising the holders as to whether they are entitled to convert their Limited Voting Shares into Subject Equity Shares and the reasons therefor. If such notice discloses that they are not so entitled, but it is subsequently determined that they are so entitled by virtue of subparagraph (vi) or otherwise, the Company shall forthwith send another notice to them advising them of that fact and the reasons therefor;

 

(viii) if a notice referred to in subparagraph (vii) discloses that the conversion right set forth in subparagraph (ii) has come into effect, the notice shall:

 

(A) include a description of the procedure to be followed to effect the conversion and to have the Converted Shares tendered under the Exclusionary Offer;

 

(B) include the information set out in subparagraph (vii) hereof; and

 

(C) be accompanied by a copy of the Exclusionary Offer and all other materials sent to any holders of Subject Equity Shares in respect of such offer; and as soon as reasonably possible after any additional material, including any notice of variation, is sent to any holders of Subject Equity Shares in respect of such offer, the Company shall send a copy of such additional materials to each holder of Limited Voting Shares;

 

(ix) prior to or forthwith after sending any notice referred to in subparagraph (vii), the Company shall cause a news release to be issued to a Canadian national news service, describing the contents of the notice; and

 

(x) references to share certificates shall include, as applicable, the equivalent in any non-certificated inventory system (such as, for example, a Direct Registration System or an electronic position), with appropriate changes.

 

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27.5 Additional Rights, Privileges, Restrictions and Conditions Applicable to Equity Shares

 

(1)            Redemption, Transfer and Other Limiting Provisions

 

(a)           For the purposes of this Article 27.5, the following terms will have the meanings specified below:

 

Applicable Price” means a price per Equity Share determined by the board, but not less than 95% of the lesser of: (i) the Closing Market Price of the Subordinate Voting Shares on the Exchange (or the then principal marketplace on which the Subordinate Voting Shares are listed or quoted for trading) on the trading day immediately prior to the closing of the Redemption or Transfer (or the average of the last bid and last asking prices if there was no trading on the specified date); and (ii) the five-day volume weighted average price of the Subordinate Voting Shares on the Exchange (or the then principal marketplace on which the Subordinate Voting Shares are listed or quoted for trading) for the five trading days immediately prior to the closing of the Redemption or Transfer (or the average of the last bid and last asking prices if there was no trading on the specified dates). Notwithstanding the foregoing, if the Subordinate Voting Shares are not traded or quoted for trading on the Exchange or any other marketplace, the Applicable Price may be determined by the Board in its sole discretion, and if at such time of determination there are no Subordinate Voting Shares issued and outstanding, then all references in this definition to “Subordinate Voting Shares” shall be to “Restricted Voting Shares” or “Limited Voting Shares”, as applicable;

 

Business” means the conduct of any activities relating to the cultivation, manufacturing and dispensing of cannabis and cannabis-derived products, including in the United States or elsewhere, which include the owning and operating of cannabis licenses;

 

Closing Market Price” shall be: (i) an amount equal to the closing price of the Subordinate Voting Shares on the trading day immediately prior to the closing of the Redemption or Transfer or exchange if there was a trade on the specified date and the applicable exchange or market provides a closing price; or (ii) an amount equal to the average of the last bid and last asking prices if there was no trading on the applicable date; and notwithstanding the foregoing, if at such time of determination there are no Subordinate Voting Shares issued and outstanding, then all references in this definition to “Subordinate Voting Shares” shall be to “Restricted Voting Shares” or “Limited Voting Shares”, as applicable;

 

Determination Date” means the date on which the Company provides written notice to any shareholder that the board has determined that such shareholder is an Unsuitable Person;

 

Equity Shares” means, collectively, the subordinate, restricted and limited voting shares of the Company and “Equity Share” shall mean any of them;

 

Exchange” means the NEO Exchange or any other stock exchange on which the Subordinate Voting Shares are then listed;

 

Governmental Authority” or “Governmental Authorities” means any United States or foreign, federal, provincial, state, county, regional, local or municipal government, any agency, administration, board, bureau, commission, department, service, or other instrumentality or political subdivision of the foregoing, and any Person with jurisdiction exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government or monetary policy (including any court or arbitration authority) and any Exchange;

 

held of record” has the meaning set forth in Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

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Licenses” means all licenses, permits, approvals, orders, authorizations, registrations, findings of suitability, franchises, exemptions, waivers and entitlements issued by a Governmental Authority to or for the benefit of the Company or any affiliate required for, or relating to, the conduct of the Business;

 

Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

Non-U.S. Person” means any Person or entity that is not a U.S. Person;

 

Ownership” (and derivatives thereof) means (i) ownership of record as evidenced in the Company’s central securities register, (ii) “beneficial ownership” as defined in Section 1 of the Business Corporations Act, or (iii) the power to exercise control or direction over a security;

 

Person” means an individual, partnership, corporation, company, limited or unlimited liability company, trust or any other entity;

 

Redemption” has the meaning ascribed thereto in Article 27.5(1)(h);

 

Redemption Date” means the date on which the Company will redeem and pay for the Equity Shares pursuant to Article 27.5. The Redemption Date will be not less than thirty (30) Trading Days following the date of the Redemption Notice unless a Governmental Authority requires that the Equity Shares be redeemed as of an earlier date, in which case, the Redemption Date will be such earlier date and if there is an outstanding Redemption Notice, the Company will issue an amended Redemption Notice reflecting the new Redemption Date forthwith;

 

Redemption Notice” has the meaning ascribed thereto in Article 27.5(1)(i);

 

Restricted Voting Shares” means the restricted voting shares in the capital of the Company;

 

Significant Interest” means Ownership of five percent (5%) or more of all of the issued and outstanding shares of the Company, including through acting jointly or in concert with another shareholder, or such other number of Equity Shares as is determined by the Board from time to time;

 

Subject Shareholder” means a Person, a group of Persons acting jointly or in concert or a group of Persons who the board reasonably determines are acting jointly or in concert;

 

Trading Day” means a day on which trades of any class of the Equity Shares are executed on the Exchange or any other stock exchange on which the Equity Shares are listed or quoted for trading;

 

Transfer” has the meaning ascribed thereto in Article 27.5(1)(h);

 

Transfer Date” means the date on which a Transfer of Equity Shares required by the Company is required to be completed by the Company;

 

Transfer Notice” has the meaning ascribed thereto in Article 27.5(1)(l);

 

Transferred Share” has the meaning ascribed thereto in Article 27.5(1)(h); and

 

Unsuitable Person” means:

 

(i) any Person (including a Subject Shareholder) with a Significant Interest who a Governmental Authority granting the Licenses has determined to be unsuitable to own Equity Shares;

 

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(ii) any Person (including a Subject Shareholder) with a Significant Interest whose ownership of Equity Shares may result in the loss, suspension or revocation (or similar action) with respect to any Licenses or in the Company or any affiliate being unable to obtain any new Licenses in the normal course, including, but not limited to, as a result of such Person’s failure to apply for a suitability review from or to otherwise fail to comply with the requirements of a Governmental Authority, all as determined by the board; or

 

(iii) who have not been determined by the applicable Governmental Authority to be an acceptable Person or otherwise have not received the requisite consent of such Governing Authority to own the Equity Shares within a reasonable period of time acceptable to the board or prior to acquiring any Equity Shares, as applicable.

 

U.S. Person” means a resident of the United States of America (including its territories and possessions).

 

(b) Subject to Article 27.5(1)(d), no Subject Shareholder may acquire Equity Shares that would result in the holding of a Significant Interest, directly or indirectly, in one or more transactions, without providing not less than 30 days’ advance written notice (or such shorter period as the board may approve) to the Company by written notice to the Company’s head office to the attention of the corporate secretary and without having received all required approvals from all Governmental Authorities.

 

(c) If the board reasonably believes that a Subject Shareholder may have failed to comply with any of the provisions of Article 27.5(1)(b), the Company may, without prejudice to any other remedy hereunder, apply to the Supreme Court of British Columbia or another court of competent jurisdiction for an order directing that the Subject Shareholder disclose the number of Equity Shares owned.

 

(d) The provisions of Article 27.5(1)(b) and Article 27.5(1)(c) will not apply to the Ownership, acquisition or disposition of Equity Shares as a result of:

 

(1) any transfer of Equity Shares occurring by operation of bankruptcy or insolvency law including, inter alia, the transfer of Equity Shares of the Company to a trustee in bankruptcy;

 

(2) an acquisition or proposed acquisition by one or more underwriters or portfolio managers who hold Equity Shares for the purposes of distribution to the public or for the benefit of a third party provided that such third party is in compliance with Article 27.5(1)(b);

 

(3) the holding by a recognized clearing agency or recognized depositary in the ordinary course of its business; or

 

(4) the conversion, exchange or exercise of securities of the Company or an affiliate (other than the Equity Shares) duly issued or granted by the Company or an affiliate, into or for Equity Shares, in accordance with their respective terms.

 

(e) At the option of the Company and upon determination by the board that an Unsuitable Person has not received the requisite approval of any Government Authority to own the Equity Shares, the Company may issue a notice prohibiting any Unsuitable Person owning Equity Shares from exercising any voting rights with respect to such Equity Shares and on and after the Determination Date specified therein, and/or providing that such holder will cease to have any rights whatsoever with respect to such Equity Shares, including any rights to the receipt of dividends from the Company, other than the right to receive the Applicable Price, without interest, on the Redemption Date or the Transfer Date, as applicable; provided, however, that if any such Equity Shares come to be owned solely by Persons other than an Unsuitable Person (such as by transfer of such Equity Shares to a liquidating trust, subject to the approval of the board and any applicable Governmental Authority), such Persons may, in the discretion of the board, exercise the voting and/or other rights attached to such Equity Shares and the board may determine, in its sole discretion, not to Redeem or require the Transfer of such Equity Shares.

 

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(f) Notwithstanding anything to the contrary contained herein, all transfers of Multiple Voting Shares are subject to the terms of these Articles.

 

(g) Following any Redemption in accordance with the terms of this Article 27.5, the redeemed Equity Shares will be cancelled.

 

(h) At the option, but not obligation, of the Company, and at the discretion of the board, any Equity Shares directly or indirectly owned by an Unsuitable Person may be (i) redeemed by the Company (for the Applicable Price) out of funds lawfully available on the Redemption Date (a “Redemption”), or (ii) required to be transferred to a third party for the Applicable Price and on such terms and conditions as the board may direct (a “Transfer”, and each Equity Share subject to a Transfer, a “Transferred Share”). Equity Shares to be redeemed or mandatorily transferred pursuant to this Article will be redeemed or mandatorily transferred at any time and from time to time pursuant to the terms hereof.

 

(i) In the case of a Redemption, the Company will send a written notice to the holder of the Equity Shares called for Redemption, which will set forth: (i) the Redemption Date, (ii) the number of Equity Shares to be redeemed on the Redemption Date, (iii) the Applicable Price or the formula pursuant to which the Applicable Price will be determined and the manner of payment therefor, (iv) the place where such Equity Shares (or certificate therefor, as applicable) must be surrendered, or accompanied by proper instruments of transfer (and if so determined by the board, together with a medallion signature guarantee), and (v) any other requirement of surrender of the Equity Shares to be redeemed (the “Redemption Notice”). The Redemption Notice may be conditional such that the Company need not redeem the Equity Shares owned by an Unsuitable Person on the Redemption Date if the board determines, in its sole discretion, that such Redemption is no longer advisable or necessary on or before the Redemption Date. If applicable, the Company will send a written notice confirming the amount of the Applicable Price promptly following the determination of such Applicable Price.

 

(j) Upon receipt by the Unsuitable Person of a Redemption Notice in accordance with Article 27.5(1)(i) and surrender of the relevant Equity Share certificate, if applicable, the holder of the Equity Shares tendered for redemption (together with the applicable transfer documents) shall be entitled to receive the Applicable Price per redeemed Equity Share.

 

(k) The Applicable Price payable in respect of the Equity Shares surrendered for Redemption during any calendar month shall be satisfied by way of cash payment no later than the last day of the calendar month following the month in which the Equity Shares were tendered for Redemption. Payments made by the Company of the cash portion of the Applicable Price, less any applicable taxes and any costs to the Company of the Redemption, are conclusively deemed to have been made upon the mailing of a cheque in a postage prepaid envelope addressed to the Unsuitable Person unless such cheque is dishonoured upon presentment. Upon such payment, the Company shall be discharged from all liability to the former Unsuitable Person in respect of the redeemed Equity Shares.

 

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(l) In the case of a required Transfer, the Company will send a written notice to the holder of the Equity Shares in question, which will set forth: (i) the Transfer Date, (ii) the number of Equity Shares to be Transferred on the Transfer Date, (iii) the Applicable Price or the formula pursuant to which the Applicable Price will be determined and the manner of payment therefor, (iv) the place where such Equity Shares (or certificate therefor, as applicable) must be surrendered, accompanied by proper instruments of transfer (and if so determined by the board, together with a medallion signature guarantee), and (v) any other requirement in respect of the Equity Shares to be Transferred, which may without limitation include a requirement to dispose of the Equity Shares via the Exchange to a Person who would not be in violation of the provisions of this Article 27.5(1)(l) (the “Transfer Notice”). The Transfer Notice may be conditional such that the Company need not require the Transfer of the Equity Shares owned by an Unsuitable Person on the Transfer Date if the board determines, in its sole discretion, that such Transfer is no longer advisable or necessary on or before the Transfer Date. If applicable, the Company will send a written notice confirming the amount of the Applicable Price promptly following the determination of such Applicable Price.

 

(m) Upon receipt by the Unsuitable Person of a Transfer Notice in accordance with Article 27.5(1)(l) and surrender of the relevant Equity Share certificate, if applicable (together with applicable Transfer documents), the holder of the Equity Shares tendered for Transfer shall be entitled to receive the Applicable Price per Transferred Share.

 

(n) The Applicable Price payable in respect of the Equity Shares surrendered for Transfer during any calendar month shall be satisfied, less any costs to the Company of the Transfer, by way of cash payment no later than the last day of the calendar month following the month in which the Equity Shares were tendered for Transfer. Payments made by the Company of the cash portion of the Applicable Price, less any applicable taxes and any costs to the Company of the Transfer, are conclusively deemed to have been made upon the mailing of a cheque in a postage prepaid envelope addressed to the Unsuitable Person unless such cheque is dishonoured upon presentment. Upon such payment, the Company shall be discharged from all liability to the former Unsuitable Person in respect of the Transferred Shares.

 

(o) If Equity Shares are required to be Transferred under Article 27.5(1)(l), the former owner of the Equity Shares immediately before the Transfer shall by that Transfer be divested of their interest or right in the Equity Shares, and the Person who, but for the Transfer, would be the registered owner of the Equity Shares or a Person who satisfies the Company that, but for the Transfer, they could properly be treated as the registered owner or registered holder of the Equity Shares shall, from the time of the Transfer, be entitled to receive only the Applicable Price per Transferred Share, without interest, less any applicable taxes and any costs to the Company of the Transfer.

 

(p) Following the sending of any Redemption Notice or Transfer Notice, and prior to the completion of the Redemption or Transfer specified therein, the Company may refuse to recognize any other disposition of the Equity Shares in question.

 

(q) If the Company does not know the address of the former holder of Equity Shares Transferred or Redeemed hereunder, it may retain the amount payable to the former holder thereof, title to which shall revert to the Company if not claimed within two (2) years (and at that time all rights thereto shall belong to the Company).

 

(r) To the extent required by applicable laws, the Company may deduct and withhold any tax from the Applicable Price. To the extent any amounts are so withheld and are timely remitted to the applicable Governmental Authority, such amounts shall be treated for all purposes herein as having been paid to the Person in respect of which such deduction and withholding was made.

 

(s) All notices given by the Company to holders of Equity Shares pursuant to this Schedule, including a Redemption Notice or Transfer Notice, will be in writing and will be deemed given when delivered by personal service, overnight courier or first-class mail, postage prepaid, to the holder’s registered address as shown on the Company’s share register.

 

(t) The Company’s right to Redeem or Transfer Equity Shares pursuant to this Article 27.5 will not be exclusive of any other right the Company may have or hereafter acquire under any agreement or any provision of the notice of articles or the articles of the Company or otherwise with respect to the Equity Shares or any restrictions on holders thereof.

 

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(u) In connection with the conduct of its or its affiliates’ Business, the Company may require that a Subject Shareholder provide to one or more Governmental Authorities, if and when required, information and fingerprints for a criminal background check, individual history form(s), and other information required in connection with applications for Licenses.

 

(v) The board can waive any provision of this Article 27.5.

 

(w) In the event that any provision (or portion of a provision) of this Article 27.5 or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of Article 27.5 (including the remainder of such provision, as applicable) will continue in full force and effect.

 

(2) Board Powers, Declarations and Deeming Provisions

 

(a) Where an Equity Share is held of record, directly or indirectly, or jointly by (i) one or more U.S. Persons and (ii) one or more Non-U.S. Persons, such Equity Share shall be deemed to be held of record by a U.S. Person.

 

(b) So long as they are publicly listed, the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares may, in the Company’s discretion and subject to regulatory approval, trade under a single stock symbol on the Exchange.

 

(c) Subject to the Business Corporations Act, the board of directors may, in its sole discretion, in order to administer the constrained share provisions of the Equity Shares set out in these Articles:

 

(1) require any Person in whose name Equity Shares are registered or any beneficial holder or controller, whether direct or indirect, of the Equity Shares to furnish a statutory declaration declaring whether:

 

(i) the shareholder holds, is the beneficial owner of and/or has control over the Equity Shares of the Company (and if the Person is not also the beneficial owner and in control of the Equity Shares, the Person must make reasonable inquiries of the beneficial owner(s) or persons in control of such Equity Shares to confirm that the statements made in the statutory declaration as they pertain to the beneficial owner and controller are true); and

 

(ii) the Equity Shares are held of record by a U.S. Person or a Non-U.S. Person;

 

and declaring any further facts or provide any other documents that the directors consider relevant;

 

(2) require any Person seeking to have a transfer of an Equity Share registered in such Person’s name or to have an Equity Share issued to him or her or it to furnish a declaration similar to the declaration a shareholder may be required to furnish under paragraph (a) above; and

 

(3) determine the circumstances in which any declarations are required, their form and the times when they are to be furnished.

 

(d) Where a Person fails to furnish a declaration pursuant to a by-law or other document made under this Article 27.5 in accordance with the requested timeline, the directors may, in their sole discretion, deem such shareholder to be a U.S. Person.

 

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(e) Notwithstanding Article 27.5(1)(d), where a Person is required to furnish a declaration pursuant to a by-law or other document made under this Article 27.5 the directors may refuse to register a transfer of an Equity Share in such Person’s name or to issue an Equity Share to such Person until that Person has furnished the declaration.

 

(3) Administration by the Board

 

(a) In the administration of the provisions of these Articles, the board of directors shall have, in addition to the powers set forth herein, all of the powers necessary or desirable, in their opinion, to carry out the intent and purpose of these Articles.

 

(b) In administering the provisions of these Articles, including for the purpose of determining the shareholder’s or transferee’s status as a U.S. Person or Non-U.S. Person, the board of directors may rely on:

 

(1) a statement made in a declaration referred to in Article 27.5(1)(w); and

 

(2) any information received from Broadridge Investor Communications Corporation, or any affiliate, successor or assign thereof;

 

(3) any information received from CDS Clearing and Depositary Services Inc., or any affiliate, successor or assign thereof; and/or

 

(4) the knowledge of any director, officer, employee or agent (including the Transfer Agent) of the Company.

 

(c) Where the directors are required to determine the number of any class or classes of Equity Shares of the Company held of record by or on behalf of Persons who are U.S. Persons or Non-U.S. Person, as applicable, the directors may rely upon (i) the share register of the Company or (ii) any other register held, or any declaration collected by, the transfer agent of the Company or any depositary, such as CDS Clearing and Depositary Services Inc. (or any affiliate, successor or assign thereof), or by Broadridge Investor Communications Corporation (or any affiliate, successor or assign thereof), in each case, as of any date.

 

(d) Wherever in these Articles it is necessary to determine the opinion of the board of directors, such opinion shall be expressed and conclusively evidenced by a resolution of the board of directors duly adopted, including a resolution in writing executed pursuant these Articles and the Business Corporations Act.

 

(e) No shareholder of the Company nor any other Person claiming an interest in shares of the Company shall have any claim or action against the Company or against any director or officer of the Company, and the Company shall have no claim or action against any director or officer of the Company, arising out of any act (including any omission to act) taken by any such director or officer pursuant to, or in intended pursuance of, the provisions of these articles or any breach or alleged breach of such provisions.

 

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29 SPECIAL RIGHTS AND RESTRICTIONS TO CLASS A RESTRICTED VOTING SHARES

 

The Class A Restricted Voting Shares of the Company shall consist of an unlimited number of shares designated as “Class A Restricted Voting Shares”. The special rights and restrictions attaching to the Class A Restricted Voting Shares are as follows:

 

29.1         Definitions.

 

In this Article 29:

 

(1) Class A Automatic Redemption Price” means an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion of: (A) the escrowed funds available in the Escrow Account, including any interest and other amounts earned thereon, less (B) an amount equal to the total of (i) any applicable taxes payable by the Company on such interest and other amounts earned in the Escrow Account, (ii) any taxes of the Company (including under Part VI.1 of the Tax Act) 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 in the Escrow Account to pay actual and expected Winding-Up expenses and certain other related costs, each as reasonably determined by the Company;

 

(2) Class A Extension Redemption Price” means an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion of: (A) the escrowed funds available in the Escrow Account at the time of the meeting of the shareholders of the Company at which an Extension is approved, including any interest and other amounts earned thereon, less (B) an amount equal to the total of (i) any applicable taxes payable by the Company on such interest and other amounts earned in the Escrow Account, (ii) any taxes of the Company (including under Part VI.1 of the Tax Act) arising in connection with the redemption of the Class A Restricted Voting Shares, and (iii) actual and expected expenses directly related to the redemption, each as reasonably determined by the Company. For greater certainty, such amount will not be reduced by the deferred underwriting commission per Class A Restricted Voting Share held in the Escrow Account;

 

(3) Class A Qualifying Transaction Redemption Price” means an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion of: (A) the escrowed funds available in the Escrow Account at the time immediately prior to the redemption deposit deadline, including interest and other amounts earned thereon, less (B) an amount equal to the total of (i) applicable taxes payable by the Company on such interest and other amounts earned in the Escrow Account, and (iii) actual and expected expenses directly related to the redemption, each as reasonably determined by the Company. For greater certainty, such amount will not be reduced by the amount of any tax of the Company under Part VI.1 of the Tax Act or the deferred underwriting commission per Class A Restricted Voting Share held in the Escrow Account;

 

(4) Class A Restricted Voting Shares” means the Class A restricted voting shares of the Company;

 

(5) Class B Shares” means the Class B shares of the Company;

 

(6) Escrow Account” means an escrow account established with the Escrow Agent pursuant to the Escrow Agreement to be used by the Company to pay amounts to, inter alia, applicable tax authorities, the holders of Class A Restricted Voting Shares, the underwriter of the IPO and/or the vendors in connection with a Qualifying Transaction;

 

(7) Escrow Agreement” means the escrow agreement entered into on or before the IPO Closing Date among the Company, the underwriter in connection with the IPO, and the Escrow Agent as it may be amended, restated and/or assigned;

 

(8) Exchange” means the Neo Exchange Inc. or any successor, assign or replacement exchange on which any of the Company’s securities are listed from time to time;

 

(9) Extension” means one or more extensions to the Permitted Timeline, to up to a maximum of 36 months from the IPO Closing Date, that has been approved by ordinary resolution of the holders of the Class A Restricted Voting Shares and that is also approved by the board of directors of the Company (and with the consent of the Exchange, if required), in which case the redemption rights in subsection 29.4(2) shall apply;

 

(10) Extraordinary Dividend” means any dividend, together with all other dividends payable in the same calendar year, that has an aggregate absolute dollar value which is greater than $0.25 per share, with the adjustment to the applicable price (as the context may require) being a reduction equal to the amount of the excess;

 

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(11) IPO” means the Company’s initial public offering of its Class A restricted voting units, each Class A restricted voting unit consisting of one Class A Restricted Voting Share and one-half of a share purchase warrant of the Company;

 

(12) IPO Closing Date” means the closing date of the IPO;

 

(13) Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

(14) Permitted Timeline” means the allowable time period within which the Company must consummate its Qualifying Transaction, being 21 months from the IPO Closing Date (or 24 months from the IPO Closing Date if the Company has executed a letter of intent, agreement in principle or definitive agreement for a Qualifying Transaction within 21 months from the IPO Closing Date but has not completed the Qualifying Transaction within such 21-month period), as it may be extended pursuant to an Extension, and provided that, with 10 days’ advance notice by way of a news release, as it may be shortened with the approval of the board of directors of the Company, following the IPO Closing Date;

 

(15) Qualifying Transaction” means a Qualifying Transaction within the meaning of the Exchange Listing Manual (as amended from time to time, and subject to any exemptive relief granted by the Exchange);

 

(16) Redemption Limitation” means an aggregate of 15% of the Class A restricted voting units issued and outstanding immediately following the closing of the IPO (including, if applicable, following the closing of the IPO over-allotment option granted by the Company to the underwriter);

 

(17) Restricted Voting Shares” means the restricted voting shares in the capital of the Company;

 

(18) Sponsor” means Mercer Park Brand, L.P., a limited partnership formed under the laws of the State of Delaware;

 

(19) Tax Act” means Income Tax Act (Canada) and the regulations thereunder; and

 

(20) Winding-Up” means the liquidation and cessation of the business of the Company, and includes the related automatic redemption of Class A Restricted Voting Shares, its applications to cease to be a reporting issuer and its Winding-Up, and winding-up and/or dissolution expenses, each as reasonably determined by the Company.

 

29.2 Voting.

 

(1) Subject to Section 29.2(5) below, the holders of the Class A Restricted Voting Shares shall be entitled to receive notice of, and to attend and vote at all meetings of, the shareholders of the Company (except where solely the holders of another specified class of shares (other than the Class A Restricted Voting Shares) shall be entitled to vote at a meeting, in which case, only such holders shall be entitled to receive notice of, and attend and vote at, such meeting), including, for greater certainty, for an Extension, which shall be voted upon, by ordinary resolution, by only the holders of Class A Restricted Voting Shares

 

(2) The holders of the Class A Restricted Voting Shares shall vote together with the holders of the Class B Shares (as if a single class of shares) upon all matters submitted to a vote of shareholders, excluding those matters required to be submitted solely to the holders of the holders of Class A Restricted Voting Shares or the Class B Shares and those matters required to be submitted to a class vote pursuant to the Business Corporations Act or other applicable law. Subject to the foregoing sentence and subsection 29.2(5) below, each Class A Restricted Voting Share shall confer the right to one vote.

 

(3) Subject to the Business Corporations Act, the holders of the Class A Restricted Voting Shares shall not be entitled to vote separately as a class or to dissent upon a proposal to amend the articles of the Company to effect an exchange, reclassification or cancellation of Class A Restricted Voting Shares carried out in connection with a Qualifying Transaction that affects both the Class A Restricted Voting Shares and the Class B Shares and that preserves economically the redemption rights in respect of a Qualifying Transaction of, and the conversion features of, the Class A Restricted Voting Shares.

 

 

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(4) Notwithstanding the above restrictions, conditions or prohibitions on the right to vote, the holders of the Class A Restricted Voting Shares shall be entitled to notice of meetings of shareholders called for the purpose of authorizing the winding-up or dissolution of the Company or the sale, lease or exchange of all or substantially all the property of the Company other than in the ordinary course of business of the Company under subsection 301(1) of the Business Corporations Act, as such subsection may be amended from time to time.

 

(5) Notwithstanding the foregoing, prior to a Qualifying Transaction, the holders of Class A Restricted Voting Shares shall not be entitled to vote at, or receive notice of or attend, meetings held only to consider the election and/or removal of directors and/or auditors of the Company.

 

(6) For greater certainty, notice shall not be required to be provided to the holders of Class A Restricted Voting Shares in the event a written resolution of all the holders of Class B Shares in lieu of a meeting of shareholders of the Company under section 180 of the Business Corporations Act is approved.

 

29.3 Dividends.

 

The holders of the Class A Restricted Voting Shares shall be entitled to receive, and the Company shall pay in equal amounts per share on all Class A Restricted Voting Shares and Class B Shares at the time outstanding, without preference or distinction, such non-cumulative dividends as the directors of the Company may from time to time declare in their absolute discretion.

 

29.4 Redemption.

 

(1) In seeking to complete a Qualifying Transaction on or before the expiration of the Permitted Timeline, and subject to subsection 29.4(3), subsection 29.4(4) and subsection 29.4(5), each of the holders of Class A Restricted Voting Shares, will be provided the opportunity to redeem all or a portion of their Class A restricted voting units, provided that they deposit (and do not validly withdraw) their units for redemption prior to the deadline specified by the Company, following public disclosure of the details of the Qualifying Transaction and prior to the closing of the Qualifying Transaction, of which prior notice had been provided to the holders of the Class A restricted voting units by any means permitted by the Exchange, not less than 21 days nor more than 60 days in advance of such deadline, in each case, with effect, subject to applicable law, immediately prior to the closing of the Qualifying Transaction for the Class A Qualifying Transaction Redemption Price per Class A Restricted Voting Share redeemed in accordance with the procedures set forth in this section 29.4.

 

(2) In the event that the Permitted Timeline is extended by way of an Extension then, subject to subsection 29.4(3), subsection 29.4(4) and subsection 29.4(5), each of the holders of Class A Restricted Voting Shares, irrespective of whether such holders voted for or against, or did not vote on, the Extension, will be entitled, provided that they deposit (and do not validly withdraw) their shares (or share certificate(s), as applicable) for redemption prior to 5:00 p.m. (Toronto time) on the fifth business day before the meeting of holders of Class A Restricted Voting Shares to consider the Extension, to require the Company, effective immediately prior to the effective date of the Extension, to redeem all or a portion of such holder’s Class A Restricted Voting Shares for the Class A Extension Redemption Price per Class A Restricted Voting Share redeemed in accordance with the procedures set forth in this section 29.4.

 

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(3) Subject to subsection 29.4(4) and subsection 29.4(5) below, a holder of Class A Restricted Voting Shares that is entitled, in accordance with subsection 29.4(1) or subsection 29.4(2) above to require the Company to redeem any or all of such holder’s Class A Restricted Voting Shares, may do so by depositing such holder’s shares (or share certificate(s), as applicable), as provided in subsection 29.4(1) or subsection 29.4(2) above, as applicable, in respect of all or any number of the Class A Restricted Voting Shares registered in the name of such holder on the securities register of the Company. A holder of Class A Restricted Voting Shares electing to have the Company redeem his, her or its Class A Restricted Voting Shares shall, at the time of deposit, give notice to the Company, in a form acceptable to the Company, of the number of the holder’s Class A Restricted Voting Shares to be redeemed (failing which, all of the holder’s Class A Restricted Voting Shares deposited shall be deemed to have been deposited to be redeemed). The holder of any Class A Restricted Voting Shares may, with the consent of the Company, revoke any such notices or deposits, as applicable, prior to the redemption date (being immediately prior to the closing of the Qualifying Transaction or immediately prior to the effective date of the Extension, as applicable). Upon payment in cash of the Class A Qualifying Transaction Redemption Price or the Class A Extension Redemption Price, as applicable, in respect of the Class A Restricted Voting Shares to be redeemed by the Company, the rights of the holders in respect of such Class A Restricted Voting Shares being redeemed, as shareholders, shall be extinguished in their entirety (including, but not limited to, the right to receive dividends), subject to applicable law.

  

(4) If the redemption by the Company pursuant to this section 29.4 of all of the Class A Restricted Voting Shares to be redeemed would be contrary to any provisions of the Business Corporations Act or any other applicable law, the Company shall be obligated to redeem only the maximum number of Class A Restricted Voting Shares which the Company determines it is then permitted to redeem, such redemptions to be made pro-rata (disregarding fractions of shares) according to the number of Class A Restricted Voting Shares required by each such holder to be redeemed by the Company, and the Company shall either issue new certificates representing the Class A Restricted Voting Shares not redeemed by the Company, or shall otherwise confirm such shares as issued and deposited in book-entry form.

 

(5) Notwithstanding anything to the contrary in these share provisions including this section 29.4, no registered or beneficial holder of Class A Restricted Voting Shares (other than CDS Clearing and Depositary Services Inc.) that, together with any affiliate thereof or any person acting jointly or in concert therewith (within the meaning of section 1.9 of Multilateral Instrument 62-104 – Takeover Bids and Special Transactions as in effect on the IPO Closing Date), shall be entitled to require the Company to redeem Class A Restricted Voting Shares in excess of the Redemption Limitation, and such excess Class A Restricted Voting Shares shall be deemed not to have been required to be redeemed. For greater certainty, the Redemption Limitation shall not affect the voting rights of the holders of Class A Restricted Voting Shares and shall not apply in the event of an Extension or the winding-up or dissolution of the Company or the application of section 29.5 hereof.

 

(6) In the event a holder deposits his, her or its Class A Restricted Voting Shares (or share certificate(s), as applicable) for redemption in accordance with subsection 29.4(1) or subsection 29.4(2), and the Qualifying Transaction is not approved or completed, or the Extension to the Permitted Timeline is not approved or proceeded with, then such shares (or share certificate(s), as applicable) so deposited will be returned to their respective registered holders (or re-deposited with CDS Clearing and Depositary Services Inc., as applicable), and the rights of the holders of the Class A Restricted Voting Shares so deposited, for the avoidance of doubt, shall continue in accordance with the provisions herein.

 

29.5 Automatic Redemption.

 

(1) In the event that a Qualifying Transaction is not completed within the Permitted Timeline, then all of the then issued and outstanding Class A Restricted Voting Shares will, on an automatic redemption date specified by the Company (such date to be within 10 days following the last day of the Permitted Timeline), be automatically redeemed for the Class A Automatic Redemption Price per Class A Restricted Voting Share. On such automatic redemption date, the Company shall pay or cause to be paid such amount to the holders of the Class A Restricted Voting Shares to be redeemed, on deposit of the certificates for the shares so redeemed and the certificates (if any) for such shares shall thereupon be cancelled, or on presentation of evidence of a book-entry deposit thereof, and the shares represented thereby shall thereupon be redeemed, as applicable. From and after the automatic redemption date, the rights of the holders of the Class A Restricted Voting Shares so redeemed shall be extinguished in their entirety (including, but not limited to, the right to receive further dividends), subject to applicable law, except the right to receive the Class A Automatic Redemption Price for each Class A Restricted Voting Share so redeemed, in cash, unless payment of the Class A Automatic Redemption Price shall not be made by the Company in accordance with the foregoing provisions, in which case the rights of the holders of such Class A Restricted Voting Shares shall remain unimpaired.

 

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(2) On or before the automatic redemption date, the Company shall have the right to deposit the Class A Automatic Redemption Price of any Class A Restricted Voting Share(s) called for redemption in a special account with any chartered bank or trust company in Canada, such amount to be paid to, or to the order of, the respective holders of such shares called for redemption upon deposit of the certificates representing the same, or upon evidence of a book-entry deposit thereof (or other documents reasonably requested by the Company or the Company’s transfer agent for the Class A Restricted Voting Shares properly completed), and, upon such deposit being made, the Class A Restricted Voting Shares in respect of which such deposit shall have been made shall be redeemed and the rights of the several holders thereof, after such deposit, shall be limited to receiving, out of the moneys so deposited, without interest on such deposited moneys, the Class A Automatic Redemption Price applicable to their respective Class A Restricted Voting Shares against deposit of the certificates representing such Class A Restricted Voting Shares (or via a book-entry) transfer and other documents reasonably requested by the Company or the Company’s transfer agent for the Class A Restricted Voting Shares, properly completed.

 

(3) If the redemption by the Company pursuant to this section 29.5 of all of the Class A Restricted Voting Shares to be redeemed would be contrary to any provisions of the Business Corporations Act or any other applicable law, the Company shall be obligated to redeem only the maximum number of Class A Restricted Voting Shares which the Company determines it is then permitted to redeem, such redemptions to be made pro-rata (disregarding fractions of shares) according to the number of Class A Restricted Voting Shares to be redeemed by the Company, and the Company shall issue new certificates representing the Class A Restricted Voting Shares not redeemed by the Company, or otherwise confirm such shares as issued and deposited in book-entry form.

 

29.6 Winding-Up or Dissolution.

 

(1) In the event of the winding-up or dissolution of the Company, whether voluntary or involuntary, and whether prior to or following the Permitted Timeline, the holders of the Class A Restricted Voting Shares shall be entitled to receive, before any distribution of any part of the assets of the Company among the holders of any other shares, for each Class A Restricted Voting Share then outstanding, if any, an amount equal to the Class A Automatic Redemption Price, and no more.

 

(2) Payments to holders of Class A Restricted Voting Shares shall be made as provided in section 29.5, mutatis mutandis.

 

29.7 Anti-Dilution.

 

In the event that the Class B Shares are at any time sub-divided, consolidated or changed into a greater or lesser number of shares of the same or another class, or a stock dividend or Extraordinary Dividend is paid on the Class B Shares, an appropriate adjustment, as determined by the board of directors of the Company, shall be made in the rights and conditions attached to the Class A Restricted Voting Shares so as to maintain the relative rights of the holders of those shares.

 

29.8 Conversion

 

(1) Any Class A Restricted Voting Shares not required to be redeemed in accordance with this Article 29 (and any unredeemed Class A Restricted Voting Shares) will be automatically converted upon the closing of the Qualifying Transaction into Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares on a one-for-one basis, as applicable, for each Class A Restricted Voting Share converted.

 

(2) This shall not prevent the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares from being further affected under the terms of a Qualifying Transaction. Subordinate Voting Shares, 113319951 v3 Restricted Voting Shares and Limited Voting Shares may be subject to forfeiture and/or transfer restrictions as agreed to by the holders thereof.

 

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30 SPECIAL RIGHTS AND RESTRICTIONS ATTACHING TO CLASS B SHARES

 

The Class B Shares of the Company shall consist of an unlimited number of shares designated as “Class B Shares”. The special rights and restrictions attaching to the Class B Shares are as follows:

 

30.1 Definitions.

 

The definitions set forth in Section 29.1 shall apply to this Article 30.

 

30.2 Voting.

 

(1) The holders of the Class B Shares shall be entitled to receive notice of, and to attend and vote at, all meetings of the shareholders of the Company (except where solely the holders of another specified class of shares (other than the Class B Shares) shall be entitled to vote at a meeting, in which case, only such holders shall be entitled to receive notice of, and attend and vote at, such meeting, including, for greater certainty, for an Extension, which shall be voted upon, by ordinary resolution, by only the holders of Class A Restricted Voting Shares).

 

(2) The holders of the Class B Shares shall vote together with the holders of the Class A Restricted Voting Shares (as if a single class of shares) upon all matters submitted to a vote of shareholders, excluding those matters required to be submitted solely to the holders of Class A Restricted Voting Shares, those matters that the Class A Restricted Voting Shares are not entitled to vote on, and those matters required to be submitted to a class vote pursuant to the Business Corporations Act or other applicable law. Subject to the foregoing sentence, each Class B Share shall confer the right to one vote.

 

(3) The holders of the Class B Shares shall not be entitled to vote separately as a class or to dissent upon a proposal to amend the articles of the Company to effect an exchange, reclassification or cancellation of Class B Shares carried out in connection with a Qualifying Transaction that affects both classes of shares.

 

(4) Notwithstanding the above restrictions, conditions or prohibitions on the right to vote, the holders of the Class B Shares shall be entitled to notice of meetings of shareholders called for the purpose of authorizing the winding-up or dissolution of the Company or the sale, lease or exchange of all or substantially all the property of the Company other than in the ordinary course of business of the Company under subsection 301(1) of the Business Corporations Act, as such subsection may be amended from time to time.

 

30.3 Dividends.

 

The holders of the Class B Shares shall be entitled to receive, and the Company shall pay in equal amounts per share on all Class B Shares and Class A Restricted Voting Shares at the time outstanding, without preference or distinction, such non-cumulative dividends as the directors of the Company may from time to time declare in their absolute discretion.

 

30.4 Winding-Up.

 

Subject to the prior rights of the holders of the Class A Restricted Voting Shares and applicable law, in the event of the winding-up or dissolution of the Company, whether voluntary or involuntary, and whether prior to or following the Permitted Timeline, the holders of the Class B Shares shall be entitled to receive the remaining property of the Company pro-rata.

 

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30.5 Anti-Dilution.

 

In the event that the Class A Restricted Voting Shares are at any time sub-divided, consolidated or changed into a greater or lesser number of shares of the same or another class, or a stock dividend or Extraordinary Dividend is paid on the Class A Restricted Voting Shares, an appropriate adjustment, as determined by the board of directors of the Company, shall be made in the rights and conditions attached to the Class B Shares so as to maintain the relative rights of the holders of those shares.

 

30.6 Conversion

 

(1) Class B Shares will be automatically converted upon the closing of the Qualifying Transaction into Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares on a one-for-one basis, as applicable, for each Class B Share converted.

 

(2) This shall not prevent the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares from being further affected under the terms of a Qualifying Transaction. Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares may be subject to forfeiture and/or transfer restrictions as agreed to by the holders thereof.

 

31 SPECIAL RIGHTS AND RESTRICTIONS OF PREFERRED SHARES

 

31.1 Definitions.

 

(1) In this Article 31:

 

Preferred Shares” means the preferred shares in the capital of the Company.

 

31.2 Issuable in Series.

 

(1) Subject to the Business Corporations Act, from time to time, the directors by resolution may, if none of the

 

Preferred Shares of any particular series are issued, alter these Articles and authorize the alteration of the Notice of Articles of the Company, as the case may be, to do one or more of the following:

 

(a) determine the maximum number of shares of any of those series of Preferred Shares that the Company is authorized to issue, determine that there is no such maximum number, or alter any determination made under this paragraph (a) or otherwise in relation to a maximum number of those shares;

 

(b) create an identifying name by which the shares of any of those series of Preferred Shares may be identified, or alter any identifying name created for those shares; and

 

(c) attach or alter special rights or restrictions to the shares of any of those series of Preferred Shares, including, but without limiting or restricting the generality of the foregoing, special rights or restrictions with respect to:

 

(i) the rate, amount or method of calculation of any dividends, and whether such rate, amount or method of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof and the date or dates from which any such dividends shall accrue;

 

(ii) any right of redemption and/or purchase and the redemption or purchase prices and terms and conditions of any such right;

 

(iii) any right of retraction or conversion vested in the holders of Preferred Shares of such series and the prices and terms and conditions of any such rights;

 

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(iv) any rights upon dissolution, liquidation or winding-up of the Company;

 

(v) any voting rights; and

 

(vi) any other provisions attaching to any such series of Preferred Shares.

 

31.3 Priority.

 

No rights, privileges, restrictions or conditions attached to any series of Preferred Shares shall confer upon the shares of such series a priority in respect of dividends or distribution of assets or return of capital in the event of the liquidation, dissolution or winding up of the Company over the shares of any other series of Preferred Shares. The Preferred Shares of each series shall, with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, rank on a parity with the Preferred Shares of every other series.

 

31.4 Notices and Voting.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 31.2 of the conditions attaching to the Preferred Shares as a class, the holders of a series of Preferred Shares shall not, as such, be entitled to receive notice of or to attend meetings of the shareholders of the Company nor shall they have any voting rights for the election of directors or for any other purpose (except where the holders of the Preferred Shares as a class or of a specified series are entitled to vote separately as a class as provided in the Act). The holders of the class or a series of Preferred Shares shall not be entitled to vote separately as a class or series or to dissent upon a proposal to amend the articles of the Company to:

 

(a) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series;

 

(b) effect an exchange, reclassification or cancellation of the shares of such class or series; or

 

(c) create a new class or series of shares equal or superior to the shares of such class or series.

 

31.5 Purchase for Cancellation.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 31.2, the Company may at any time or from time to time by agreement with the holder(s) purchase for cancellation the whole or any part of the Preferred Shares outstanding at such time at the lowest price at which, in the opinion of the board, such shares are then obtainable but such price or prices shall not in any case exceed the redemption price, if any, current at the time of purchase for the shares of the particular series purchased plus costs of purchase together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. In the case of the purchase for cancellation by private contract, the Company shall not be required to purchase Preferred Shares from all holders of Preferred Shares of the class or series in question or to offer to purchase the shares of any other class or any series of shares before proceeding to purchase from any one holder of Preferred Shares nor shall it be required to make purchases from holders of Preferred Shares on a pro rata basis.

 

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31.6 Redemption.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 31.2, the Company may, at its option, redeem all or from time to time any part of the outstanding Preferred Shares on payment to the holders thereof, for each share to be redeemed, the redemption price per share, together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. Before redeeming any Preferred Shares the Company shall mail to each person who, at the date of such mailing, is a registered holder of the shares to be redeemed, notice of the intention of the Company to redeem such shares held by such registered holder; such notice shall be mailed by ordinary prepaid post addressed to the last address of such holder as it appears on the records of the Company or, in the event of the address of any such holder not appearing on the records of the Company, then to the last known address of such holder, at least 10 days before the date specified for redemption; such notice shall set out the date on which redemption is to take place and, if part only of the shares held by the person to whom it is addressed is to be redeemed, the number thereof so to be redeemed; on or after the date so specified for redemption the Company shall pay or cause to be paid the redemption price together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid to the registered holders of the shares to be redeemed, on presentation and surrender of the certificates for the shares so called for redemption at such place or places as may be specified in such notice, and the certificates for such shares shall thereupon be cancelled, and the shares represented thereby shall thereupon be redeemed. In case a part only of the outstanding Preferred Shares is at any time to be redeemed, the shares to be redeemed shall be selected, at the option of the board, either by lot in such manner as the board in their sole discretion shall determine or as nearly as may be pro rata (disregarding fractions) according to the number of Preferred Shares held by each holder. In case a part only of the Preferred Shares represented by any certificate shall be redeemed, a new certificate for the balance shall be issued at the expense of the Company. From and after the date specified for redemption in such notice, the holders of the shares called for redemption shall cease to be entitled to dividends and shall not be entitled to any rights in respect thereof, except to receive the redemption price together with all dividends declared (or accrued in the case of cumulative dividends) thereon prior to the date specified for redemption and unpaid, unless payment of the redemption price and such dividends shall not be made by the Company in accordance with the foregoing provisions, in which case the rights of the holders of such shares shall remain unimpaired. On or before the date specified for redemption the Company shall have the right to deposit the redemption price of the shares called for redemption, together with all dividends declared (or accrued in the case of cumulative dividends) thereon prior to the date specified for redemption and unpaid, in a special account with any chartered bank or trust company in Canada named in the notice of redemption, such redemption price and dividends to be paid to or to the order of the respective holders of such shares called for redemption upon presentation and surrender of the certificates representing the same and, upon such deposit being made, the shares in respect whereof such deposit shall have been made shall be redeemed and the rights of the several holders thereof, after such deposit, shall be limited to receiving, out of the moneys so deposited, without interest, the redemption price together with all dividends declared (or accrued in the case of cumulative dividends) thereon prior to the date specified for redemption and unpaid, applicable to their respective shares against presentation and surrender of the certificates representing such shares.

 

31.7 Retraction.

 

(1) Rights of Retraction.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 31.2 and to Article 31.7(2) below, a holder of Preferred Shares shall be entitled to require the Company to redeem at any time and from time to time after the date of issue of any Preferred Shares, upon giving notice as hereinafter provided, all or any number of the Preferred Shares registered in the name of such holder on the books of the Company at the redemption price per share, together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. A holder of Preferred Shares exercising this option to have the Company redeem, shall give notice to the Company, which notice shall set out the date on which the Company is to redeem, which date shall not be less than 30 days nor more than 90 days from the date of mailing of the notice, and if the holder desires to have less than all of the Preferred Shares registered in his, her or its name redeemed by the Company, the number of the holder’s shares to be redeemed. The date on which the redemption at the option of the holder is to occur is hereafter referred to as the “option redemption date”. The holder of any Preferred Shares may, with the consent of the Company, revoke such notice prior to the option redemption date. Upon delivery to the Company of a share certificate or certificates representing the Preferred Shares which the holder desires to have the Company redeem, the Company shall, on the option redemption date, redeem such Preferred Shares by paying to the holder the redemption price therefor together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. Upon payment of the redemption price of the Preferred Shares to be redeemed by the Company together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid, the holders thereof shall cease to be entitled to dividends or to exercise any rights of holders in respect thereof.

 

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(2) Partial Redemptions.

 

If the redemption by the Company on any option redemption date of all of the Preferred Shares to be redeemed on such date would be contrary to any provisions of the Act or any other applicable law, or any credit arrangement to which the Company is a party, the Company shall be obligated to redeem only the maximum number of Preferred Shares which the Company determines it is then permitted to redeem, such redemptions to be made pro rata (disregarding fractions of shares) according to the number of Preferred Shares required by each such holder to be redeemed by the Company and the Company shall issue new certificates representing the Preferred Shares not redeemed by the Company; the Company shall, before redeeming any other Preferred Shares, redeem in the manner contemplated by Article 31.6 on the first day of each month thereafter the maximum number of such Preferred Shares so required by holders to be redeemed as would not then by contrary to any provisions of the Act or any other applicable law, or any credit arrangement to which the Company is a party, until all of such shares have been redeemed, provided that the Company shall be under no obligation to give any notice to the holders of the Preferred Shares in respect of such redemption or redemptions as provided for in Article 31.6

 

31.8 Liquidation, Dissolution and Winding-up.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 31.2, in the event of the liquidation, dissolution or winding-up of the Company, or any other distribution of assets of the Company among its shareholders for the purpose of winding up the affairs of the Company, whether voluntary or involuntary, the holders of the Preferred Shares shall be entitled to receive, before any distribution of any part of the assets of the Company among the holders of any other shares ranking junior to the Preferred Shares, for each Preferred Share, an amount equal to the redemption price of such share and any dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid (if applicable) and no more.

 

32 RESTRICTIONS REGARDING THE QUALIFYING TRANSACTION

 

(1) For the purposes of this Article 32, the following terms will have the meanings specified below:

 

Limited Voting Shares” means the limited voting shares in the capital of the Company; and

 

Restricted Voting Shares” means the restricted voting shares in the capital of the Company.

 

(2) No further Class A Restricted Voting Shares or Class B Shares may be issued commencing on the day following the closing of the Qualifying Transaction. No Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares may be issued prior to the closing of the Qualifying Transaction except in connection with such closing.

 

     
     

 

SCHEDULE “B”

AMENDED AND RESTATED ARTICLES

 

(See attached)

 

     
     

 

AMENDED AND RESTATED ARTICLES

OF

GLASS HOUSE BRANDS INC.

(the “Company”)

 

The Company has as its articles the following articles.

 

Incorporation number:

 

TABLE OF CONTENTS
   
1. INTERPRETATION 7
1.1 Definitions 7
1.2 Business Corporations Act and Interpretation Act Definitions Applicable 8
1.3 Deeming Provision – Directly or Indirectly 8
2. SHARES AND SHARE CERTIFICATES 8
2.1 Authorized Share Structure 8
2.2 Form of Share Certificate 9
2.3 Shareholder Entitled to Certificate or Acknowledgment 9
2.4 Delivery by Mail 9
2.5 Replacement of Worn Out or Defaced Certificate or Acknowledgement 9
2.6 Replacement of Lost, Destroyed or Wrongfully Taken Certificate 9
2.7 Recovery of New Share Certificate 10
2.8 Splitting Share Certificates 10
2.9 Certificate Fee 10
2.10 Recognition of Trusts 10
3. ISSUE OF SHARES 10
3.1 Directors Authorized 10
3.2 Commissions and Discounts 10
3.3 Brokerage 10
3.4 Conditions of Issue 11
3.5 Share Purchase Warrants and Rights, etc. 11
4. SHARE REGISTERS 11
4.1 Central Securities Register 11
4.2 Closing Register 11
5. SHARE TRANSFERS 11
5.1 Registering Transfers 11
5.2 Form of Instrument of Transfer 12
5.3 Transferor Remains Shareholder 12
5.4 Signing of Instrument of Transfer 12
5.5 Enquiry as to Title Not Required 12
5.6 Subject to Special Rights and Restrictions; Waiver 12
     

     
  - 2 -  

 

6. TRANSMISSION OF SHARES 12
6.1 Legal Personal Representative Recognized on Death 12
6.2 Rights of Legal Personal Representative 13
7. ACQUISITION OF COMPANY’S SHARES 13
7.1 Company Authorized to Purchase or Otherwise Acquire Shares 13
7.2 No Purchase, Redemption or Other Acquisition When Insolvent 13
7.3 Sale and Voting of Purchased, Redeemed or Otherwise Acquired Shares 13
8. BORROWING POWERS 13
8.1 Borrowing Powers 13
8.2 Banking Arrangements 14
9. ALTERATIONS 14
9.1 Alteration of Authorized Share Structure 14
9.2 Special Rights or Restrictions 15
9.3 No Interference with Class or Series Rights without Consent 15
9.4 Change of Name 15
9.5 Other Alterations 15
10. MEETINGS OF SHAREHOLDERS 15
10.1 Annual General Meetings 15
10.2 Resolution Instead of Annual General Meeting 15
10.3 Calling of Meetings of Shareholders 15
10.4 Notice for Meetings of Shareholders 16
10.5 Record Date for Notice 16
10.6 Record Date for Voting 16
10.7 Failure to Give Notice and Waiver of Notice 16
10.8 Notice of Special Business at Meetings of Shareholders 16
10.9 Electronic Meetings 17
11. PROCEEDINGS AT MEETINGS OF SHAREHOLDERS 17
11.1 Special Business 17
11.2 Special Majority 17
11.3 Quorum 18
11.4 One Shareholder May Constitute Quorum 18
11.5 Persons Entitled to Attend Meeting 18
11.6 Requirement of Quorum 18
11.7 Lack of Quorum 18
11.8 Lack of Quorum at Succeeding Meeting 18
11.9 Chair 18
11.10 Selection of Alternate Chair 19

 

     
  - 3 -  

 

11.11 Adjournments and Postponements 19
11.12 Notice of Adjourned Meeting 19
11.13 Electronic Voting 19
11.14 Decisions by Show of Hands or Poll 19
11.15 Declaration of Result 19
11.16 Motion Need Not be Seconded 19
11.17 Casting Vote 20
11.18 Manner of Taking Poll 20
11.19 Chair Must Resolve Dispute 20
11.20 Casting of Votes 20
11.21 Demand for Poll Not to Prevent Continuance of Meeting 20
11.22 Retention of Ballots and Proxies 20
11.23 Class Meetings and Series Meetings 20
12. VOTES OF SHAREHOLDERS 20
12.1 Number of Votes by Shareholder or by Shares 20
12.2 Votes of Persons in Representative Capacity 21
12.3 Votes by Joint Holders 21
12.4 Legal Personal Representatives as Joint Shareholders 21
12.5 Representative of a Corporate Shareholder 21
12.6 Proxy Holder Need Not Be Shareholder 22
12.7 When Proxy Provisions Do Not Apply to the Company 22
12.8 Appointment of Proxy Holders 22
12.9 Deposit of Proxy 22
12.10 Validity of Proxy Vote 22
12.11 Form of Proxy 22
12.12 Revocation of Proxy 23
12.13 Revocation of Proxy Must Be Signed 23
12.14 Chair May Determine Validity of Proxy 23
12.15 Production of Evidence of Authority to Vote 23
13. DIRECTORS 24
13.1 First Directors; Number of Directors 24
13.2 Change in Number of Directors 24
13.3 Directors’ Acts Valid Despite Vacancy 24
13.4 Qualifications of Directors 24
13.5 Remuneration of Directors 24
13.6 Reimbursement of Expenses of Directors 24
13.7 Special Remuneration for Directors 24
13.8 Subject to Article 29 24

 

     
  - 4 -  

 

14. ELECTION AND REMOVAL OF DIRECTORS 25
14.1 Election at Annual General Meeting 25
14.2 Consent to be a Director 25
14.3 Failure to Elect or Appoint Directors 25
14.4 Directors May Fill Casual Vacancies 25
14.5 Remaining Directors’ Power to Act 25
14.6 Shareholders May Fill Vacancies 26
14.7 Additional Directors 26
14.8 Ceasing to be a Director 26
14.9 Removal of Director by Shareholders 26
14.10 Removal of Director by Directors 26
15. ADVANCE NOTICE PROVISIONS 27
15.1 Nomination Procedures 27
15.2 Timely Notice 27
15.3 Manner of Timely Notice 27
15.4 Proper Form of Notice 27
15.5 Notice to be Updated 28
15.6 Power of the Chair 28
15.7 Delivery of Notice 28
15.8 Waiver 28
15.9 Definitions 28
16. POWERS AND DUTIES OF DIRECTORS 29
16.1 Powers of Management 29
16.2 Appointment of Attorney of Company 29
17. INTERESTS OF DIRECTORS AND OFFICERS 29
17.1 Obligation to Account for Profits 29
17.2 Restrictions on Voting by Reason of Interest 30
17.3 Interested Director Counted in Quorum 30
17.4 Disclosure of Conflict of Interest or Property 30
17.5 Director Holding Other Office in the Company 30
17.6 No Disqualification 30
17.7 Professional Services by Director or Officer 30
17.8 Director or Officer in Other Corporations 30
17.9 Subject to Article 29 30
18. PROCEEDINGS OF DIRECTORS 31
18.1 Meetings of Directors 31
18.2 Voting at Meetings 31
18.3 Chair of Meetings 31
18.4 Meetings by Telephone or Other Communications Medium 31
18.5 Calling of Meetings 31

 

     
  - 5 -  

 

18.6 Notice of Meetings 32
18.7 When Notice Not Required 32
18.8 Meeting Valid Despite Failure to Give Notice 32
18.9 Waiver of Notice of Meetings 32
18.10 Quorum 32
18.11 Validity of Acts Where Appointment Defective 32
18.12 Consent Resolutions in Writing 32
19. EXECUTIVE AND OTHER COMMITTEES 33
19.1 Appointment and Powers of Executive Committee 33
19.2 Appointment and Powers of Other Committees 33
19.3 Obligations of Committees 33
19.4 Powers of Board 34
19.5 Committee Meetings 34
20. OFFICERS 34
20.1 Directors May Appoint Officers 34
20.2 Functions, Duties and Powers of Officers 34
20.3 Qualifications 34
20.4 Remuneration and Terms of Appointment 34
21. INDEMNIFICATION 35
21.1 Definitions 35
21.2 Mandatory Indemnification of Directors and officers; Advancement of Expenses 35
21.3 Permitted Indemnification 35
21.4 Non-Compliance with Business Corporations Act 35
21.5 Company May Purchase Insurance 35
22. DIVIDENDS 36
22.1 Payment of Dividends Subject to Special Rights 36
22.2 Declaration of Dividends 36
22.3 No Notice Required 36
22.4 Record Date 36
22.5 Manner of Paying Dividend 36
22.6 Settlement of Difficulties 36
22.7 When Dividend Payable 37
22.8 Dividends to be Paid in Accordance with Number of Shares 37
22.9 Receipt by Joint Shareholders 37
22.10 Dividend Bears No Interest 37
22.11 Fractional Dividends 37
22.12 Payment of Dividends 37
22.13 Capitalization of Retained Earnings or Surplus 37

 

     
  - 6 -  

 

23. ACCOUNTING RECORDS AND AUDITOR 37
23.1 Recording of Financial Affairs 37
23.2 Inspection of Accounting Records 37
24. NOTICE 38
24.1 Method of Giving Notice 38
24.2 Deemed Receipt 38
24.3 Certificate of Sending 39
24.4 Notice to Joint Shareholders 39
24.5 Notice to Legal Personal Representatives and Trustees 39
24.6 Undelivered Notices 39
25. SEAL 39
25.1 Who May Attest Seal 39
25.2 Sealing Copies 40
25.3 Mechanical Reproduction of Seal 40
26. FORUM FOR ADJUDICATION OF CERTAIN DISPUTES 40
27. SPECIAL RIGHTS AND RESTRICTIONS – SUBORDINATE, RESTRICTED AND LIMITED VOTING SHARES AND MULTIPLE 40
VOTING SHARES  
27.1 Subordinate Voting Shares 40
27.2 Multiple Voting Shares 47
27.3 Restricted Voting Shares 49
27.4 Limited Voting Shares 56
27.5 Additional Rights, Privileges, Restrictions and Conditions Applicable to Equity Shares 63
28. Special Rights and Restrictions of Preferred Shares 69
28.1 Issuable in Series 69
28.2 Priority 70
28.3 Notices and Voting 70
28.4 Purchase for Cancellation 70
28.5 Redemption 71
28.6 Retraction 72
28.7 Liquidation, Dissolution and Winding-up 72
29. Corporate Opportunities 72
29.1 Excluded Opportunities 72
29.2 Allocation of Opportunities 72

 

     
  - 7 -  

 

1. INTERPRETATION

 

1.1 Definitions

 

In these Articles, unless the context otherwise requires:

 

(1) appropriate person” has the meaning assigned in the Securities Transfer Act;

 

(2) board of directors”, “directors” and “board” mean the directors or sole director of the Company from time to time;

 

(3) Business Corporations Act” means the Business Corporations Act (British Columbia) from time to time in force and all amendments thereto and includes all regulations and amendments thereto made pursuant to that Act;

 

(4) Change of Control Transaction” means an amalgamation, arrangement, recapitalization, business combination or similar transaction of the Company, other than an amalgamation, arrangement, recapitalization, business combination or similar transaction that would result in (i) the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the continuing entity or its direct or indirect parent) more than 50% of the total voting power of the voting securities of the Company, the continuing entity or its direct or indirect parent, and more than 50% of the total number of outstanding shares of the Company, the continuing entity or its direct or indirect parent, in each case as outstanding immediately after such transaction, and (ii) the shareholders of the Company immediately prior to the transaction owning voting securities of the Company, the continuing entity or its direct or indirect parent immediately following the transaction in substantially the same proportions (vis-a-vis each other) as such shareholders owned the voting securities of the Company immediately prior to the transaction (provided that in neither event shall the exercise of any exchangeable shares of a subsidiary of the Company that are exchangeable into shares of the Company be taken into account in such determination).

 

(5) Equity Shares” means, collectively, the subordinate, restricted and limited voting shares of the Company, and “Equity Share” shall mean any of them;

 

(6) FPI Threshold” has the meaning ascribed to such term in Article 27.3(1)(g)(2);

 

(7) held of record” has the meaning set forth in Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

(8) Interpretation Act” means the Interpretation Act (British Columbia) from time to time in force and all amendments thereto and includes all regulations and amendments thereto made pursuant to that Act;

 

(9) legal personal representative” means the personal or other legal representative of a shareholder;

 

(10) Limited Voting Shares” means the limited voting shares in the capital of the Company;

 

(11) Multiple Voting Shares” means the multiple voting shares in the capital of the Company;

 

(12) Non -U.S. Person” means any Person or entity that is not a U.S. Person;

 

(13) Permitted Holder” has the meaning assigned in Article 27.2(1)(h);

 

(14) Person” means any individual, partnership, corporation, company, association, trust, joint venture or limited or unlimited liability company, and for greater certainty, shall include any U.S. Person or Non-U.S. Person;

 

     
  - 8 -  

 

(15) Preferred Shares” means the preferred shares in the capital of the Company;

 

(16) protected purchaser” has the meaning assigned in the Securities Transfer Act;

 

(17) registered address” of a shareholder means the shareholder’s address as recorded in the central securities register;

 

(18) Restricted Voting Shares” means the restricted voting shares in the capital of the Company;

 

(19) seal” means the seal of the Company, if any;

 

(20) securities legislation” means statutes concerning the regulation of securities markets and trading in securities and the regulations, rules, forms and schedules under those statutes, all as amended from time to time, and the blanket rulings and orders, as amended from time to time, issued by the securities commissions or similar regulatory authorities appointed under or pursuant to those statutes; “Canadian securities legislation” means the securities legislation in Canada or any province or territory of Canada (if applicable, excluding Quebec) and includes the Securities Act (British Columbia); and “U.S. securities legislation” means the securities legislation in the federal jurisdiction of the United States and in any state of the United States and includes the Securities Act of 1933 and the Securities Exchange Act of 1934;

 

(21) Securities Transfer Act” means the Securities Transfer Act (British Columbia) from time to time in force and all amendments thereto and includes all regulations and amendments thereto made pursuant to that Act;

 

(22) Specified Exceptions” has the meaning ascribed thereto in Article 27.1(1)(g)(3);

 

(23) Subordinate Voting Shares” means the subordinate voting shares in the capital of the Company;

 

(24) U.S. Person” means a resident of the United States of America (including its territories and possessions); and

 

(25) U.S. Securities Act” means the United States Securities Act of 1933, as amended.

 

1.2 Business Corporations Act and Interpretation Act Definitions Applicable

 

The definitions in the Business Corporations Act and the definitions and rules of construction in the Interpretation Act, with the necessary changes, so far as applicable, and unless the context requires otherwise, apply to these Articles as if they were an enactment. If there is a conflict or inconsistency between a definition in the Business Corporations Act and a definition or rule in the Interpretation Act relating to a term used in these Articles, the definition in the Business Corporations Act will prevail in relation to the use of the term in these Articles. If there is a conflict or inconsistency between these Articles and the Business Corporations Act, the Business Corporations Act will prevail.

 

1.3 Deeming Provision – Directly or Indirectly

 

For purposes of these Articles, any reference to any of the Equity Shares that are “held”, “held of record” or “beneficially owned or controlled” by a Person shall refer to and include such Equity Shares held, held of record or beneficially owned or controlled, directly or indirectly, by such Person.

 

2. SHARES AND SHARE CERTIFICATES

 

2.1 Authorized Share Structure

 

The authorized share structure of the Company consists of shares of the class or classes and series, if any, described in the Notice of Articles (as amended) of the Company.

 

     
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2.2 Form of Share Certificate

 

Each share certificate issued by the Company must comply with, and be signed as required by, the Business Corporations Act.

 

2.3 Shareholder Entitled to Certificate or Acknowledgment

 

Unless the shares of which the shareholder is the registered owner are uncertificated shares, each shareholder is entitled, upon request and without charge, to (a) one share certificate representing the shares of each class or series of shares registered in the shareholder’s name or (b) a non-transferable written acknowledgment (an “Acknowledgment”) of the shareholder’s right to obtain such a share certificate, provided that in respect of a share held jointly by several persons, the Company is not bound to issue more than one share certificate or Acknowledgment and delivery of a share certificate or Acknowledgment to one of several joint shareholders or to a duly authorized agent of one of the joint shareholders will be sufficient delivery to all.

 

2.4 Delivery by Mail

 

Any share certificate or Acknowledgment of a shareholder’s right to obtain a share certificate may be sent to the shareholder by mail at the shareholder’s registered address and neither the Company nor any director, officer or agent of the Company is liable for any loss to the shareholder because the share certificate or Acknowledgement is lost in the mail or stolen.

 

2.5 Replacement of Worn Out or Defaced Certificate or Acknowledgement

 

If the directors or officers of the Company are satisfied that a share certificate or Acknowledgment of the shareholder’s right to obtain a share certificate is worn out or defaced, they must, on production to them of the share certificate or Acknowledgment, as the case may be, and on such other terms, if any, as they think fit:

 

(1) order the share certificate or Acknowledgment, as the case may be, to be cancelled; and

 

(2) issue a replacement share certificate or Acknowledgment, as the case may be.

 

2.6 Replacement of Lost, Destroyed or Wrongfully Taken Certificate

 

If a person entitled to a share certificate claims that the share certificate has been lost, destroyed or wrongfully taken, the Company must issue a new share certificate, if that person:

 

(1) so requests before the Company has notice that the share certificate has been acquired by a protected purchaser;

 

(2) provides the Company and its transfer agent with an indemnity bond sufficient in the Company’s or its transfer agent’s judgment to protect the Company and its transfer agent from any loss that the Company or its transfer agent may suffer by issuing a new certificate; and

 

(3) satisfies any other reasonable requirements imposed by the directors or officers of the Company.

 

A person entitled to a share certificate may not assert against the Company a claim for a new share certificate where a share certificate has been lost, apparently destroyed or wrongfully taken if that person fails to notify the Company of that fact within a reasonable time after that person has notice of it and the Company registers a transfer of the shares represented by the certificate before receiving a notice of the loss, apparent destruction or wrongful taking of the share certificate.

 

     
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2.7 Recovery of New Share Certificate

 

If, after the issue of a new share certificate, a protected purchaser of the original share certificate presents the original share certificate for the registration of transfer, then in addition to any rights on the indemnity bond, the Company may recover the new share certificate from a person to whom it was issued or any person taking under that person other than a protected purchaser.

 

2.8 Splitting Share Certificates

 

If a shareholder surrenders a share certificate to the Company with a written request that the Company issue in the shareholder’s name two or more share certificates, each representing a specified number of shares and in the aggregate representing the same number of shares as represented by the share certificate so surrendered, the Company must cancel the surrendered share certificate and issue replacement share certificates in accordance with that request.

 

2.9 Certificate Fee

 

There must be paid to the Company, in relation to the issue of any share certificate under Articles 2.5, 2.6 or 2.8, the amount, if any and which must not exceed the amount prescribed under the Business Corporations Act, determined by the directors.

 

2.10 Recognition of Trusts

 

Except as required by law or statute or these Articles, no person will be recognized by the Company as holding any share upon any trust, and the Company is not bound by or compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or fraction of a share or (except as required by law or statute or these Articles or as ordered by a court of competent jurisdiction) any other rights in respect of any share except an absolute right to the entirety thereof in the shareholder.

 

3. ISSUE OF SHARES

 

3.1 Directors Authorized

 

Subject to the Business Corporations Act and the rights, if any, of the holders of issued shares of the Company, the Company may issue, allot, sell or otherwise dispose of the unissued shares, and issued shares held by the Company, at the times, to the persons, including directors, in the manner, on the terms and conditions and for the issue prices (including any premium at which shares with par value may be issued) that the directors, or a committee of directors so empowered by the directors, may determine. The issue price for a share with par value must be equal to or greater than the par value of the share.

 

3.2 Commissions and Discounts

 

The Company may at any time pay a reasonable commission or allow a reasonable discount to any person in consideration of that person purchasing or agreeing to purchase shares of the Company from the Company or any other person or procuring or agreeing to procure purchasers for shares of the Company.

 

3.3 Brokerage

 

The Company may pay such brokerage fee or other consideration as may be lawful for or in connection with the sale or placement of its securities.

 

     
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3.4 Conditions of Issue

 

Except as provided for by the Business Corporations Act, no share may be issued until it is fully paid. A share is fully paid when:

 

(1) consideration is provided to the Company for the issue of the share by one or more of the following:

 

(a) past services performed for the Company;

 

(b) property;

 

(c) money; and

 

(2) the value of the consideration received by the Company equals or exceeds the issue price set for the share under Article 3.1.

 

3.5 Share Purchase Warrants and Rights, etc.

 

Subject to the Business Corporations Act, the Company may issue share purchase warrants, options, performance share units, deferred share units, restricted stock units and rights upon such terms and conditions as the directors determine, which share purchase warrants, options, units and rights may be issued alone or in conjunction with debentures, bonds, shares or any other securities issued or created by the Company from time to time.

 

4. SHARE REGISTERS

 

4.1 Central Securities Register

 

As required by and subject to the Business Corporations Act, the Company must maintain a central securities register. The directors may, subject to the Business Corporations Act, appoint an agent to maintain the central securities register. The directors may also appoint one or more agents, including the agent which keeps the central securities register, as transfer agent for its shares or any class or series of its shares, as the case may be, and the same or another agent as registrar for its shares or such class or series of its shares, as the case may be. The directors may terminate such appointment of any agent at any time and may appoint another agent in its place.

 

4.2 Closing Register

 

The Company must not at any time close its central securities register.

 

5. SHARE TRANSFERS

 

5.1 Registering Transfers

 

Subject to the Business Corporations Act and the Securities Transfer Act, a transfer of a share of the Company must not be registered unless the Company or the transfer agent or registrar for the class or series of share to be transferred has received:

 

(1) in the case of a share certificate that has been issued by the Company in respect of the share to be transferred, that share certificate and a written instrument of transfer (which may be on a separate document or endorsed on the share certificate) made by the shareholder or other appropriate person or by an agent who has actual authority to act on behalf of that person;

 

(2) in the case of an Acknowledgment as defined in Article 2.3, in respect of the share to be transferred, a written instrument of transfer that directs that the transfer of the shares be registered, made by the shareholder or other appropriate person or by an agent who has actual authority to act on behalf of that person;

 

(3) in the case of a share that is an uncertificated share, a written instrument of transfer that directs that the transfer of the share be registered, made by the shareholder or other appropriate person or by an agent who has actual authority to act on behalf of that person; and

 

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(4) such other evidence, if any, as the Company or the transfer agent or registrar for the class or series of share to be transferred may require to prove the title of the transferor or the transferor’s right to transfer the share, that the written instrument of transfer is genuine and authorized and that the transfer is rightful or to a protected purchaser (which may include a medallion or similar signature guarantee).

 

5.2 Form of Instrument of Transfer

 

The instrument of transfer in respect of any share of the Company must be either in the form, if any, on the back of the Company’s share certificates or in any other form that may be approved by the directors or the transfer agent for the class or series of shares to be transferred.

 

5.3 Transferor Remains Shareholder

 

Except to the extent that the Business Corporations Act otherwise provides, the transferor of shares is deemed to remain the holder of the shares until the name of the transferee is entered in a securities register of the Company in respect of the transfer.

 

5.4 Signing of Instrument of Transfer

 

If a shareholder, or his or her duly authorized attorney, signs an instrument of transfer in respect of shares registered in the name of the shareholder, subject to the Company or its transfer agent requiring a medallion or similar signature guarantee and/or other evidence of authority, the signed instrument of transfer constitutes a complete and sufficient authority to the Company and its directors, officers and agents to register the number of shares specified in the instrument of transfer or specified in any other manner, or, if no number is specified, all the shares represented by the share certificates or set out in the Acknowledgment, as defined in Article 2.3, deposited with the instrument of transfer:

 

(1) in the name of the person named as transferee in that instrument of transfer; or

 

(2) if no person is named as transferee in that instrument of transfer, in the name of the person on whose behalf the instrument is deposited for the purpose of having the transfer registered.

 

5.5 Enquiry as to Title Not Required

 

Neither the Company nor any director, officer or agent of the Company is bound to inquire into the title of the person named in the instrument of transfer as transferee or, if no person is named as transferee in the instrument of transfer, of the person on whose behalf the instrument is deposited for the purpose of having the transfer registered or is liable for any claim related to registering the transfer by the shareholder or by any intermediate owner or holder of the shares, of any interest in the shares, of any share certificate representing such shares or of any Acknowledgment, as defined in Article 2.3, in respect of a share certificate for such shares.

 

5.6 Subject to Special Rights and Restrictions; Waiver

 

This Article 5 is subject to the special rights and restrictions attaching to any class or series of shares. In addition, the Company may waive any of the requirements set out in this Article 5.

 

6. TRANSMISSION OF SHARES

 

6.1 Legal Personal Representative Recognized on Death

 

In the case of the death of a shareholder, the legal personal representative of the shareholder, or in the case of shares registered in the shareholder’s name and the name of another person in joint tenancy, the surviving joint holder, will be the only person recognized by the Company as having any title to the shareholder’s interest in the shares. Before recognizing a person as a legal personal representative of a shareholder, the directors may require the original grant of probate or letters of administration or a court certified copy of them or the original or a court certified or authenticated copy of the grant of representation, will, order or other instrument or other evidence of the death under which title to the shares or securities is claimed to vest.

 

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6.2 Rights of Legal Personal Representative

 

The legal personal representative of a shareholder has the same rights, privileges and obligations that attach to the shares held by the shareholder, including the right to transfer the shares in accordance with these Articles, if appropriate evidence of appointment or incumbency within the meaning of s. 87 of the Securities Transfer Act has been deposited with the Company. This Article 6.2 does not apply in the case of the death of a shareholder with respect to shares registered in the shareholder’s name and the name of another person in joint tenancy.

 

7. ACQUISITION OF COMPANY’S SHARES

 

7.1 Company Authorized to Purchase or Otherwise Acquire Shares

 

Subject to Article 7.2, the special rights or restrictions attached to the shares of any class or series of shares, the Business Corporations Act and securities legislation, the Company may, if authorized by the directors, purchase or otherwise acquire any of its shares at the price and upon the terms determined by the directors.

 

7.2 No Purchase, Redemption or Other Acquisition When Insolvent

 

The Company must not make a payment or provide any other consideration to purchase, redeem or otherwise acquire any of its shares if there are reasonable grounds for believing that:

 

(1) the Company is insolvent; or

 

(2) making the payment or providing the consideration would render the Company insolvent.

 

7.3 Sale and Voting of Purchased, Redeemed or Otherwise Acquired Shares

 

If the Company retains a share redeemed, purchased or otherwise acquired by it, the Company may sell, cancel, gift or otherwise dispose of the share, but, while such share is held by the Company, it:

 

(1) is not entitled to vote the share at a meeting of its shareholders;

 

(2) must not pay a dividend in respect of the share; and

 

(3) must not make any other distribution in respect of the share.

 

8. BORROWING POWERS

 

8.1 Borrowing Powers

 

The Company, if authorized by the directors, may:

 

(1) borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that the directors consider appropriate;

 

(2) issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person and at such discounts or premiums and on such other terms as the directors consider appropriate;

 

(3) guarantee the repayment of money by any other person or the performance of any obligation of any other person; and

 

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(4) mortgage, charge, whether by way of specific or floating charge, grant a security interest in, or give other security on, the whole or any part of the present and future assets and undertaking of the Company.

 

8.2 Banking Arrangements

 

The banking business of the Company including, without limitation, the borrowing powers set forth in Article 8.1 above, shall be transacted with such banks, trust companies or other bodies corporate or organizations as may from time to time be designated by or under the authority of the board. Such banking business or any part thereof shall be transacted under such agreements, instructions and delegations of powers as the board may from time to time prescribe.

 

9. ALTERATIONS

 

9.1 Alteration of Authorized Share Structure

 

Subject to Article 9.2, the special rights or restrictions attached to the shares of any class or series of shares and the Business Corporations Act, the Company may:

 

(1) by ordinary resolution:

 

(a) create one or more classes or series of shares or, if none of the shares of a class or series of shares are allotted or issued, eliminate that class or series of shares;

 

(b) increase, reduce or eliminate the maximum number of shares that the Company is authorized to issue out of any class or series of shares or establish a maximum number of shares that the Company is authorized to issue out of any class or series of shares for which no maximum is established;

 

(c) subdivide or consolidate all or any of its unissued, and/or fully paid issued, shares;

 

(d) if the Company is authorized to issue shares of a class of shares with par value:

 

(1) decrease the par value of those shares; or

 

(2) if none of the shares of that class of shares are allotted or issued, increase the par value of those shares;

 

(e) change all or any of its unissued, and/or fully paid issued, shares with par value into shares without par value or any of its unissued shares without par value into shares with par value;

 

(f) alter the identifying name of any of its shares; or

 

(g) otherwise alter its shares or authorized share structure when required or permitted to do so by the Business Corporations Act;

 

and, if applicable, alter its Notice of Articles, and if applicable its Articles accordingly; and/or

 

(2) by directors’ resolution:

 

(a) subdivide or consolidate all or any of its unissued, and/or fully paid issued, shares;

 

(b) alter the identifying name of any of its shares; or

 

(c) create one or more series of Preferred Shares;

 

and if applicable, alter its Notice of Articles, and if applicable its Articles accordingly.

 

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9.2 Special Rights or Restrictions

 

Subject to the special rights or restrictions attached to the shares of any class or series of shares and the Business Corporations Act, the Company may by ordinary resolution:

 

(1) create special rights or restrictions for, and attach those special rights or restrictions to, the shares of any class or series of shares, whether or not any or all of those shares have been issued; or

 

(2) vary or delete any special rights or restrictions attached to the shares of any class or series of shares, whether or not any or all of those shares have been issued;

 

and alter its Articles and Notice of Articles accordingly.

 

9.3 No Interference with Class or Series Rights without Consent

 

A right or special right attached to issued shares must not be prejudiced or interfered with under the Business Corporations Act, the Notice of Articles or these Articles unless the holders of shares of the class or series of shares to which the right or special right is attached consent by a special separate resolution of the holders of such class or series of shares.

 

9.4 Change of Name

 

The Company may by directors’ resolution or ordinary resolution authorize an alteration to its Notice of Articles in order to change its name.

 

9.5 Other Alterations

 

If the Business Corporations Act does not specify the type of resolution and these Articles do not specify another type of resolution, the Company may by ordinary resolution alter these Articles.

 

10. MEETINGS OF SHAREHOLDERS

 

10.1 Annual General Meetings

 

Subject to Article 10.2, unless an annual general meeting is deferred or waived in accordance with the Business Corporations Act, the Company must hold its first annual general meeting within 18 months after the date on which it was incorporated or otherwise recognized, and after that must hold an annual general meeting at least once in each calendar year and not more than 15 months after the last annual reference date at such time and place as may be determined by the directors.

 

10.2 Resolution Instead of Annual General Meeting

 

If all the shareholders who are entitled to vote at an annual general meeting consent by a unanimous resolution to all of the business that is required to be transacted at that annual general meeting, the annual general meeting is deemed to have been held on the date of the unanimous resolution. The shareholders must, in any unanimous resolution passed under this Article 10.2, select as the Company’s annual reference date a date that would be appropriate for the holding of the applicable annual general meeting.

 

10.3 Calling of Meetings of Shareholders

 

Any two directors may, at any time, call a meeting of shareholders to be held at such time and place as may be determined by such directors, including for greater certainty, a location outside of British Columbia.

 

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10.4 Notice for Meetings of Shareholders

 

Except for a resolution passed pursuant to Article 10.2, the Company must send notice of the date, time and location of any meeting of shareholders (including, without limitation, any notice specifying the intention to propose a resolution as an exceptional resolution, a special resolution or a special separate resolution and any notice to consider approving an amalgamation into a foreign jurisdiction, an arrangement or the adoption of an amalgamation agreement, and any notice of a general meeting, class meeting or series meeting), in the manner provided in these Articles, or in such other manner, if any, as may be prescribed by ordinary resolution (whether previous notice of the resolution has been given or not), to each shareholder entitled to attend the meeting, to each director and to the auditor of the Company, unless these Articles otherwise provide, at least the following number of days before the meeting:

 

(1) if and for so long as the Company is a public company, 21 days;

 

(2) otherwise, 10 days.

 

10.5 Record Date for Notice

 

The Company may set a date as the record date for the purpose of determining shareholders entitled to notice of any meeting of shareholders. The record date must not precede the date on which the meeting is to be held by more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. The record date must not precede the date on which the meeting is held by fewer than:

 

(1) if and for so long as the Company is a public company, 21 days;

 

(2) otherwise, 10 days.

 

If no record date is set, the record date is 5:00 p.m. (Vancouver time) on the day immediately preceding the first date on which the notice is sent or, if no notice is sent, the beginning of the meeting.

 

10.6 Record Date for Voting

 

The Company may set a date as the record date for the purpose of determining shareholders entitled to vote at any meeting of shareholders. The record date must not precede the date on which the meeting is to be held by more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. If no record date is set, the record date is 5:00 p.m. (Vancouver time) on the day immediately preceding the first date on which the notice is sent or, if no notice is sent, the beginning of the meeting.

 

10.7 Failure to Give Notice and Waiver of Notice

 

The accidental omission to send notice of any meeting of shareholders to, or the non-receipt of any notice by, any of the persons entitled to notice does not invalidate any proceedings at that meeting. Any person entitled to notice of a meeting of shareholders may, in writing or otherwise, waive that entitlement or agree to reduce the period of that notice. Attendance of a person at a meeting of shareholders is a waiver of entitlement to notice of the meeting unless that person attends the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called.

 

10.8 Notice of Special Business at Meetings of Shareholders

 

If a meeting of shareholders is to consider special business within the meaning of Article 11.1, the notice of meeting must:

 

(1) state the general nature of the special business; and

 

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(2) if the special business includes considering, approving, ratifying, adopting or authorizing any document or the signing of or giving of effect to any document, have attached to it a copy of the document or state that a copy of the document will be available for inspection by shareholders:

 

(a) at the Company’s records office, or at such other reasonably accessible location in British Columbia as is specified in the notice; and

 

(b) during statutory business hours on any one or more specified days before the day set for the holding of the meeting.

 

10.9 Electronic Meetings

 

Subject to the Business Corporations Act, the directors may determine that a meeting of shareholders shall be held entirely by means of telephonic, electronic or other communication facilities that permit all participants to communicate with each other during the meeting. A meeting of shareholders may also be held at which some, but not necessarily all, persons entitled to attend may participate by means of such communications facilities, if the directors determine to make them available. A person participating in a meeting by such means is deemed to be present at the meeting.

 

11. PROCEEDINGS AT MEETINGS OF SHAREHOLDERS

 

11.1 Special Business

 

At a meeting of shareholders, the following business is special business:

 

(1) at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting;

 

(2) at an annual general meeting, all business is special business except for the following:

 

(a) business relating to the conduct of or voting at the meeting;

 

(b) consideration of any financial statements of the Company presented to the meeting;

 

(c) consideration of any reports of the directors or auditor;

 

(d) the setting or changing of the number of directors;

 

(e) the election or appointment of directors;

 

(f) the appointment of an auditor;

 

(g) the setting of the remuneration of an auditor;

 

(h) business arising out of a report of the directors not requiring the passing of a special resolution or a special separate resolution; and

 

(i) any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders.

 

11.2 Special Majority

 

The majority of votes required for the Company to pass a special resolution at a meeting of shareholders is two-thirds of the votes cast on the resolution and, unless otherwise required by the Business Corporations Act, securities legislation or applicable stock exchange rules, with all classes of shares entitled to vote thereon voting together as if they were a single class.

 

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11.3 Quorum

 

Subject to the special rights or restrictions attached to the shares of any class or series of shares and to Article 11.4, the quorum for the transaction of business at a meeting of shareholders is two shareholders who are present in person or represented by proxy and who represent at least 25% of the applicable class or series of shares (and, for greater certainty, where more than one class or series of shares are voting together, at least 25% of the total issued and outstanding shares of such classes or series).

 

11.4 One Shareholder May Constitute Quorum

 

If there is only one shareholder entitled to vote at a meeting of shareholders:

 

(1) the quorum is one person who is, or who represents by proxy, that shareholder, and

 

(2) that shareholder, present in person or by proxy, may constitute the meeting.

 

11.5 Persons Entitled to Attend Meeting

 

In addition to those persons who are entitled to vote at a meeting of shareholders, the only other persons entitled to be present at the meeting are the directors, the president (if any), the secretary (if any), the assistant secretary (if any), any lawyer for the Company, the auditor of the Company, any persons invited to be present at the meeting by the chair of the meeting and any persons entitled or required under the Business Corporations Act or these Articles to be present at the meeting; but if any of those persons does attend the meeting, that person is not to be counted in the quorum and is not entitled to vote at the meeting unless that person is a shareholder or proxy holder entitled to vote at the meeting.

 

11.6 Requirement of Quorum

 

No business, other than the election of a chair of the meeting and the adjournment or postponement of the meeting, may be transacted at any meeting of shareholders unless a quorum of shareholders entitled to vote is present at the commencement of the meeting, but such quorum need not be present throughout the meeting.

 

11.7 Lack of Quorum

 

If, within one-half hour from the time set for the holding of a meeting of shareholders, a quorum is not present:

 

(1) in the case of a general meeting requisitioned by shareholders, the meeting is dissolved, and

 

(2) in the case of any other meeting of shareholders, the meeting stands adjourned to the same day in the next week at the same time and place (or such other time or place as the chair of the adjourned meeting may specify).

 

11.8 Lack of Quorum at Succeeding Meeting

 

If, at the meeting to which the meeting referred to in Article 11.7(2) was adjourned, a quorum is not present within one-half hour from the time set for the holding of the meeting, the person or persons present and being, or representing by proxy, one or more shareholders entitled to attend and vote at the meeting constitute a quorum.

 

11.9 Chair

 

The following individual is entitled to preside as chair at a meeting of shareholders:

 

(1) the chair of the board, if any; or

 

(2) if the chair of the board is absent or unwilling to act as chair of the meeting, the president, if any.

 

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11.10 Selection of Alternate Chair

 

If, at any meeting of shareholders, there is no chair of the board or president present within 15 minutes after the time set for holding the meeting, or if the chair of the board and the president are unwilling to act as chair of the meeting, or if the chair of the board and the president have advised the secretary, if any, or any director present at the meeting, that they will not be present at the meeting, the directors present must choose one of their number to be chair of the meeting or if all of the directors present decline to take the chair or fail to so choose or if no director is present, the shareholders entitled to vote at the meeting who are present in person or by proxy may by ordinary resolution choose any person present at the meeting to chair the meeting.

 

11.11 Adjournments and Postponements

 

The chair of a meeting of shareholders may, and if so directed by the meeting must, adjourn or postpone the meeting from time to time and from place to place, but no business may be transacted at any adjourned or postponed meeting other than the business left unfinished at the meeting from which the adjournment or postponement took place.

 

11.12 Notice of Adjourned Meeting

 

It is not necessary to give any notice of an adjourned or postponed meeting of shareholders or of the business to be transacted at an adjourned or postponed meeting of shareholders except that, when a meeting is adjourned or postponed for 30 days or more, notice of the adjourned or postponed meeting must be given as in the case of the original meeting.

 

11.13 Electronic Voting

 

Any vote at a meeting of shareholders may be held entirely or partially by means of telephonic, electronic or other communications facilities, if the directors determine to make telephonic, electronic or other communications facilities available for that purpose.

 

11.14 Decisions by Show of Hands or Poll

 

Subject to the Business Corporations Act, every motion put to a vote at a meeting of shareholders will be decided on a show of hands or the functional equivalent of a show of hands by means of electronic, telephonic or other communications facility, unless a poll, before or on the declaration of the result of the vote by show of hands or the functional equivalent of a show of hands, is directed by the chair or demanded by at least one shareholder entitled to vote who is present in person or by proxy.

 

11.15 Declaration of Result

 

The chair of a meeting of shareholders must declare to the meeting the decision on every question in accordance with the result of the show of hands (or its functional equivalent) or the poll, as the case may be, and that decision must be entered in the minutes of the meeting. A declaration of the chair that a resolution is carried by the necessary majority or is defeated is, unless a poll is directed by the chair or demanded under Article 11.14, conclusive evidence without proof of the number or proportion of the votes recorded in favour of or against the resolution.

 

11.16 Motion Need Not be Seconded

 

No motion proposed at a meeting of shareholders need be seconded unless the chair of the meeting rules otherwise, and the chair of any meeting of shareholders is entitled to propose or second a motion.

 

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11.17 Casting Vote

 

In the case of an equality of votes, the chair of a meeting of shareholders does not, either on a show of hands or on a poll, have a second or casting vote in addition to the vote or votes to which the chair may be entitled as a shareholder.

 

11.18 Manner of Taking Poll

 

Subject to Article 11.19, if a poll is duly demanded at a meeting of shareholders:

 

(1) the poll must be taken at the meeting or an adjournment or postponement thereof in the manner, at the time and at the place that the chair of the meeting directs;

 

(2) the result of the poll is deemed to be the decision of the meeting at which the poll is demanded; and

 

(3) the demand for the poll may be withdrawn by the person who demanded it.

 

11.19 Chair Must Resolve Dispute

 

In the case of any dispute as to the admission or rejection of a vote given on a poll, the chair of the meeting must determine the dispute, and his or her determination made in good faith is final and conclusive.

 

11.20 Casting of Votes

 

On a poll, a shareholder entitled to more than one vote need not cast all the votes in the same way.

 

11.21 Demand for Poll Not to Prevent Continuance of Meeting

 

The demand for a poll at a meeting of shareholders does not, unless the chair of the meeting so rules, prevent the continuation of the meeting for the transaction of any business other than the question on which a poll has been demanded.

 

11.22 Retention of Ballots and Proxies

 

The Company must, for at least three months after a meeting of shareholders, keep each ballot cast on a poll and each proxy voted at the meeting, and, during that period, make them available for inspection during normal business hours by any shareholder or proxyholder entitled to vote at the meeting. At the end of such three-month period, the Company may destroy such ballots and proxies.

 

11.23 Class Meetings and Series Meetings

 

Unless otherwise specified in these Articles, the provisions of these Articles relating to a meeting of shareholders will apply, with the necessary changes and as far as they are applicable, to a class meeting or series meeting of shareholders holding a particular class or series of shares.

 

12. VOTES OF SHAREHOLDERS

 

12.1 Number of Votes by Shareholder or by Shares

 

Subject to any special rights or restrictions attached to any shares and to the restrictions imposed on joint shareholders under Article 12.3:

 

(1) on a vote by show of hands, every person present who is a shareholder or proxy holder and entitled to vote on the matter has one vote; and

 

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(2) on a poll, every shareholder entitled to vote on the matter is entitled, in respect of each share entitled to be voted on the matter and held by that shareholder, to that number of votes provided by these Articles or the Business Corporations Act, and may exercise that vote either in person or by proxy.

 

12.2 Votes of Persons in Representative Capacity

 

A person who is not a shareholder may vote at a meeting of shareholders, whether on a show of hands or on a poll, and may appoint a proxy holder to act at the meeting, if, before doing so, the person satisfies the chair of the meeting, or the directors, that the person is a legal personal representative or a trustee in bankruptcy for a shareholder who is entitled to vote at the meeting.

 

12.3 Votes by Joint Holders

 

If there are joint shareholders registered in respect of any share:

 

(1) any one of the joint shareholders may vote at any meeting of shareholders, personally or by proxy, in respect of the share as if that joint shareholder were solely entitled to it; or

 

(2) if more than one of the joint shareholders is present at any meeting of shareholders, personally or by proxy, and more than one of them votes in respect of that share, then only the vote of the joint shareholder present whose name stands first on the central securities register in respect of the share will be counted.

 

12.4 Legal Personal Representatives as Joint Shareholders

 

Two or more legal personal representatives of a shareholder in whose sole name any share is registered are, for the purposes of Article 12.3, deemed to be joint shareholders registered in respect of that share.

 

12.5 Representative of a Corporate Shareholder

 

If a corporation that is not a subsidiary of the Company is a shareholder, that corporation may appoint a person to act as its representative at any meeting of shareholders of the Company, and:

 

(1) for that purpose, the instrument appointing a representative must be received at the registered office of the Company or at any other place specified, in the notice calling the meeting, for the receipt of proxies, at least the number of business days specified in the notice for the receipt of proxies, or if no number of days is specified, two business days before the day set for the holding of the meeting or any adjourned or postponed meeting, or may be provided at the meeting to the chair of the meeting or to a person designated by the chair of the meeting;

 

(2) if a representative is appointed under this Article 12.5:

 

(a) the representative is entitled to exercise in respect of and at that meeting the same rights on behalf of the corporation that the representative represents as that corporation could exercise if it were a shareholder who is an individual, including, without limitation, the right to appoint a proxy holder; and

 

(b) the representative, if present at the meeting, is to be counted for the purpose of forming a quorum and is deemed to be a shareholder present in person at the meeting.

 

Evidence of the appointment of any such representative may be sent to the Company by written instrument, fax, electronic mail or any other method of transmitting legibly recorded messages.

 

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12.6 Proxy Holder Need Not Be Shareholder

 

A person who is not a shareholder may be appointed as a proxy holder.

 

12.7 When Proxy Provisions Do Not Apply to the Company

 

If and for so long as the Company is a public company, Articles 12.8 to 12.15 (except Article 12.11) apply only insofar as they are not inconsistent with any Canadian securities legislation applicable to the Company, any U.S. securities legislation applicable to the Company or any rules of an exchange on which any securities of the Company are listed. If and for so long as the Company is a public company, Article 12.11 shall not apply to the Company.

 

12.8 Appointment of Proxy Holders

 

Every shareholder of the Company, including a corporation that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders may, by proxy, appoint one or more proxy holders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy.

 

12.9 Deposit of Proxy

 

A proxy for a meeting of shareholders must:

 

(1) be received at the registered office of the Company or at any other place specified, in the notice calling the meeting, for the receipt of proxies, at least the number of business days specified in the notice, or if no number of days is specified, two business days before the day set for the holding of the meeting or any adjourned or postponed meeting; or

 

(2) unless the notice provides otherwise, be received at the meeting or any adjourned or postponed meeting, by the chair of the meeting or adjourned or postponed meeting or by a person designated by the chair of the meeting or adjourned or postponed meeting.

 

A proxy may be sent to the Company by written instrument, fax, electronic mail or any other method of transmitting legibly recorded messages.

 

12.10 Validity of Proxy Vote

 

A vote given in accordance with the terms of a proxy is valid notwithstanding the death or incapacity of the shareholder giving the proxy and despite the revocation of the proxy or the revocation of the authority under which the proxy is given, unless notice in writing of that death, incapacity or revocation is received:

 

(1) at the registered office of the Company, at any time up to and including the last business day before the day set for the holding of the meeting or any adjourned or postponed meeting at which the proxy is to be used; or

 

(2) at the meeting or any adjourned or postponed meeting, by the chair of the meeting or adjourned or postponed meeting, before any vote in respect of which the proxy has been given has been taken.

 

12.11 Form of Proxy

 

A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting:

 

[name of company] (the “Company”)

 

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The undersigned, being a shareholder of the Company, hereby appoints [name] or, failing that person, [name], as proxy holder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders of the Company to be held on [month, day, year] and at any adjournment or postponement of that meeting.

 

Number of shares in respect of which this proxy is given (if no number is specified, then this proxy is given in respect of all shares registered in the name of the undersigned):

 

  Signed [month, day, year]
   
   
   
  [Signature of shareholder]
   
   
   
  [Name of shareholder—printed]

 

12.12 Revocation of Proxy

 

Subject to Article 12.14, every proxy may be revoked by an instrument in writing that is received:

 

(1) at the registered office of the Company at any time up to and including the last business day before the day set for the holding of the meeting or any adjourned or postponed meeting at which the proxy is to be used; or

 

(2) at the meeting or any adjourned or postponed meeting by the chair of the meeting or adjourned or postponed meeting, before any vote in respect of which the proxy has been given has been taken.

 

12.13 Revocation of Proxy Must Be Signed

 

An instrument referred to in Article 12.12 must be signed as follows:

 

(1) if the shareholder for whom the proxy holder is appointed is an individual, the instrument must be signed by the shareholder or his or her legal personal representative or trustee in bankruptcy;

 

(2) if the shareholder for whom the proxy holder is appointed is a corporation, the instrument must be signed by the corporation or by a representative appointed for the corporation under Article 12.5.

 

12.14 Chair May Determine Validity of Proxy

 

The chair of any meeting of shareholders may determine whether or not a proxy deposited for use at the meeting, which may not strictly comply with the requirements of this Article 12 as to form, execution, accompanying documentation, time of filing or otherwise, shall be valid for use at such meeting and any such determination made in good faith shall be final, conclusive and binding upon such meeting.

 

12.15 Production of Evidence of Authority to Vote

 

The chair of any meeting of shareholders may, but need not, inquire into the authority of any person to vote at the meeting and may, but need not, demand from that person production of evidence as to the existence of the authority to vote.

 

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13. DIRECTORS

 

13.1 First Directors; Number of Directors

 

The minimum number of directors is three (3) and the maximum number of directors is twenty (20). The number of directors, excluding additional directors appointed under Article 14.7, is set by directors’ resolution.

 

13.2 Change in Number of Directors

 

If the number of directors is set under Articles 13.1:

 

(1) the shareholders may elect the directors needed to fill any vacancies in the board of directors up to that number; and/or

 

(2) the directors, subject to Article 14.7, may appoint directors to fill those vacancies.

 

No decrease in the number of directors will shorten the term of an incumbent director.

 

13.3 Directors’ Acts Valid Despite Vacancy

 

An act or proceeding of the directors is not invalid merely because fewer than the number of directors set or otherwise required under these Articles is in office.

 

13.4 Qualifications of Directors

 

A director is not required to hold a share of the Company as qualification for his or her office but must be qualified as required by the Business Corporations Act to become, act or continue to act as a director.

 

13.5 Remuneration of Directors

 

The directors are entitled to the remuneration for acting as directors, if any, as the directors may from time to time determine. If the directors so decide, the remuneration of the directors, if any, will be determined by the shareholders. That remuneration may be in addition to any salary or other remuneration paid to any officer or employee of the Company as such, who is also a director.

 

13.6 Reimbursement of Expenses of Directors

 

The Company may reimburse each director for the reasonable expenses that he or she may incur in and about the business of the Company.

 

13.7 Special Remuneration for Directors

 

If any director performs any professional or other services for the Company that in the opinion of the directors are outside the ordinary duties of a director, or if any director is otherwise specially occupied in or about the Company’s business, he or she may be paid remuneration fixed by the directors, or, at the option of that director, fixed by ordinary resolution, and such remuneration may be either in addition to, or in substitution for, any other remuneration that he or she may be entitled to receive.

 

13.8 Subject to Article 29.

 

This Article 13 is subject to Article 29 to the maximum extent permitted by law.

 

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14. ELECTION AND REMOVAL OF DIRECTORS

 

14.1 Election at Annual General Meeting

 

At every annual general meeting and in every unanimous resolution contemplated by Article 10.2:

 

(1) the shareholders entitled to vote at the annual general meeting for the election of directors must elect, or in the unanimous resolution appoint, a board of directors consisting of the number of directors for the time being set under these Articles; and

 

(2) all the directors cease to hold office upon the termination of the next annual general meeting at which the election or appointment of directors under paragraph 14.1(1), but are eligible for re-election or re-appointment, subject to being nominated in accordance with these Articles.

 

14.2 Consent to be a Director

 

No election, appointment or designation of an individual as a director is valid unless:

 

(1) that individual consents to be a director in the manner provided for in the Business Corporations Act;

 

(2) that individual is elected or appointed at a meeting at which the individual is present, and the individual does not refuse, at the meeting, to be a director; or

 

(3) with respect to first directors, the designation is otherwise valid under the Business Corporations Act.

 

14.3 Failure to Elect or Appoint Directors

 

If:

 

(1) the Company fails to hold an annual general meeting, and all the shareholders who are entitled to vote at an annual general meeting fail to pass the unanimous resolution contemplated by Article 10.2, on or before the date by which the annual general meeting is required to be held under the Business Corporations Act; or

 

(2) the shareholders fail, at the annual general meeting or in the unanimous resolution contemplated by Article 10.2, to elect or appoint any directors;

 

then each director then in office continues to hold office until the earlier of:

 

(3) the date on which his or her successor is elected or appointed; and

 

(4) when he or she otherwise ceases to hold office under the Business Corporations Act or these Articles.

 

14.4 Directors May Fill Casual Vacancies

 

Any casual vacancy occurring in the board of directors may be filled by the directors.

 

14.5 Remaining Directors’ Power to Act

 

The directors may act notwithstanding any vacancy in the board of directors, but if the Company has fewer directors in office than the number set pursuant to these Articles as the quorum of directors, the directors may only act for the purpose of appointing directors up to that number or of calling a meeting of shareholders for the purpose of filling any vacancies on the board of directors or, subject to the Business Corporations Act, for any other purpose.

 

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14.6 Shareholders May Fill Vacancies

 

If the Company has no directors or fewer directors in office than the number set pursuant to these Articles as the quorum of directors, the shareholders may elect or appoint directors to fill any vacancies on the board of directors.

 

14.7 Additional Directors

 

Notwithstanding Articles 13.1 and 13.2, between annual general meetings or unanimous resolutions contemplated by Article 10.2, the directors may appoint one or more additional directors, but the number of additional directors appointed under this Article 14.7 must not at any time exceed:

 

(1) one-third of the number of first directors, if, at the time of the appointments, one or more of the first directors have not yet completed their first term of office; or

 

(2) in any other case, one-third of the number of the current directors who were elected or appointed as directors other than under this Article 14.7.

 

Any director so appointed ceases to hold office immediately following the next annual general meeting at which the election or appointment of directors under Article 14.1(1) occurs, but is eligible for re-election or re-appointment, subject to being nominated in accordance with these Articles.

 

14.8 Ceasing to be a Director

 

A director ceases to be a director when:

 

(1) the term of office of the director expires;

 

(2) the director dies;

 

(3) the director resigns as a director by notice in writing provided to the Company or a lawyer for the Company;

 

or

 

(4) the director is removed from office pursuant to Articles 14.9 or 14.10.

 

14.9 Removal of Director by Shareholders

 

The Company may remove any director before the expiration of his or her term of office by special resolution. In that event, the shareholders may elect, or appoint by ordinary resolution, a director to fill the resulting vacancy. If the shareholders do not elect or appoint a director to fill the resulting vacancy contemporaneously with the removal, then the directors may appoint or the shareholders may elect, or appoint by ordinary resolution, a director to fill that vacancy.

 

14.10 Removal of Director by Directors

 

The directors may remove any director before the expiration of his or her term of office if: (i) the director is convicted of an indictable or similar offence, convicted by a court of an office under or found in breach and sanctioned by a securities regulatory authority in Canada or the United States; (ii) the director is unacceptable to an applicable governmental authority; or (iii) the director ceases to be qualified to act as a director of a company and does not promptly resign, and the directors may appoint a director to fill the resulting vacancy.

 

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15. ADVANCE NOTICE PROVISIONS

 

15.1 Nomination Procedures

 

(1) Subject only to the Business Corporations Act, regulations, Applicable Securities Laws and the articles of the Company, only Persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Company. Nominations of Persons for election to the board may be made at any annual meeting of shareholders, or at any special meeting of shareholders if the election of directors is a matter specified in the notice of meeting,

 

(a) by or at the direction of the board, including pursuant to a notice of meeting;

 

(b) by or at the direction or request of one or more shareholders pursuant to a proposal made in accordance with the provisions of the Business Corporations Act, or a requisition of the shareholders made in accordance with the provisions of the Business Corporations Act; or

 

(c) by any Person (a “Nominating Shareholder”) who (A) at the close of business on the date of the giving of the notice provided for in this Article 15 and on the record date for notice of such meeting, is entered in the central securities register as a holder of one or more shares carrying the right to vote at such meeting or who beneficially owns shares that are entitled to be voted at such meeting and provides evidence of such beneficial ownership to the Company, and (B) complies with the notice procedures set forth below in this Article.

 

15.2 Timely Notice

 

In addition to any other applicable requirements, for a nomination to be made by a Nominating Shareholder, the Nominating Shareholder must have given timely notice thereof in proper written form to the corporate secretary of the Company in accordance with this Article 15.

 

15.3 Manner of Timely Notice

 

(1) To be timely, a Nominating Shareholder’s notice under this Article 15 must be given:

 

(a) in the case of an annual meeting (including an annual and special meeting) of shareholders, not less than 30 days prior to the date of the meeting; provided, however, that in the event that the meeting is to be held on a date that is less than 50 days after the date (the “Notice Date”) on which the first public announcement of the date of the meeting was made, notice by the Nominating Shareholder may be made not later than the close of business on the tenth (10th) day following the Notice Date; and

 

(b) in the case of a special meeting (which is not also an annual meeting) of shareholders called for the purpose of electing directors (whether or not called for other purposes), not later than the close of business on the fifteenth (15th) day following the day on which the first public announcement of the date of the meeting was made.

 

15.4 Proper Form of Notice

 

(1) To be in proper written form, a Nominating Shareholder’s notice under this Article 15 must set forth:

 

(a) as to each Person whom the Nominating Shareholder proposes to nominate for election as a director: (A) the name, age, province or state, and country of residence of the Person, (B) the principal occupation, business or employment of the Person, both present and within the five years preceding the notice, (C) the number of securities of each class of voting securities of the Company or any of its subsidiaries beneficially owned, or controlled or directed, directly or indirectly, by such Person, as of the record date for the meeting of shareholders (if such date shall then have been made publicly available and shall have occurred) and as of the date of such notice, and (D) any other information relating to the Person that would be required to be disclosed in a dissident’s proxy circular in connection with solicitations of proxies for election of directors pursuant to the Business Corporations Act or any Applicable Securities Laws; and

 

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(b) as to the Nominating Shareholder: (A) the number of securities of each class of voting securities of the Company or any of its subsidiaries beneficially owned, or controlled or directed, directly or indirectly, by such Person or any joint actors, as of the record date for the meeting (if such date shall then have been made publicly available and shall have occurred) and as of the date of such notice, (B) full particulars regarding any proxy, contract, arrangement, agreement, understanding or relationship pursuant to which such Nominating Shareholder has a right to vote or to direct or to control the voting of any shares of the Company, and (C) any other information relating to such Nominating Shareholder that would be required to be made in a dissident’s proxy circular in connection with solicitations of proxies for election of directors pursuant to the Business Corporations Act or any Applicable Securities Laws.

 

(2) References to “Nominating Shareholder” in this Article 15 shall be deemed to refer to each shareholder that nominates a Person for election as director in the case of a nomination proposal where more than one shareholder is involved in making such nomination proposal.

 

15.5 Notice to be Updated

 

In addition, to be considered timely and in proper written form, a Nominating Shareholder’s notice shall be promptly updated and supplemented, if necessary, so that the information provided or required under this Article 15 to be provided in such notice shall be true and correct as of the record date for the meeting.

 

15.6 Power of the Chair

 

The chair of the meeting shall have the power and duty to determine whether a nomination was made in accordance with the procedures set forth in the foregoing provisions and, if any proposed nomination is not in compliance with such foregoing provisions, to declare that such defective nomination shall be disregarded.

 

15.7 Delivery of Notice

 

Notwithstanding any other provision of these articles, notice given to the corporate secretary of the Company pursuant to this Article 15 may only be given by personal delivery, facsimile transmission or by email (provided that the corporate secretary of the Company has stipulated an email address for purposes of this notice), and shall be deemed to have been given and made only at the time it is served by personal delivery, email (at the address as aforesaid) or sent by facsimile transmission (provided that receipt of the confirmation of such transmission has been received) to the corporate secretary of the Company at the address of the principal executive offices of the Company; provided that if such delivery or electronic communication is made on a day which is not a business day or later than 5:00 p.m. (Vancouver time) on a day which is a business day, then such delivery or electronic communication shall be deemed to have been made on the subsequent day that is a business day.

 

15.8 Waiver

 

Notwithstanding the foregoing, the board may, in its sole discretion, waive any or all requirements in this Article 15.

 

15.9 Definitions

 

(1) For purposes of this Article 15,

 

(a) Applicable Securities Laws” means the applicable securities legislation of each relevant province and territory of Canada, as amended from time to time, the written rules, regulations and forms made or promulgated under any such statute and the published national instruments, multilateral instruments, policies, bulletins and notices of the securities commissions and similar regulatory authorities of each province and territory of Canada;

 

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(b) beneficially owns” or “beneficially owned” means, in connection with the ownership of shares in the capital of the Company by a Person, (i) any such shares as to which such Person or any of such Person’s affiliates (as defined in the Business Corporations Act) owns at law or in equity, or has the right to acquire or become the owner at law or in equity, where such right is exercisable immediately or after the passage of time and whether or not on condition or the happening of any contingency or the making of any payment, upon the exercise of any conversion right, exchange right or purchase right attaching to any securities, or pursuant to any agreement, arrangement, pledge or understanding whether or not in writing; (ii) such shares as to which such Person or any of such Person’s affiliates (as defined in the Business Corporations Act) has the right to vote, or the right to direct the voting, where such right is exercisable immediately or after the passage of time and whether or not on condition or the happening of any contingency or the making of any payment, pursuant to any agreement, arrangement, pledge or understanding whether or not in writing; and (iii) any such shares which are owned beneficially within the meaning of this definition by any other Person with whom such Person is acting jointly or in concert with respect to the Company or any of its securities;

 

(c) close of business” means 5:00 p.m. (Vancouver time) on a business day in British Columbia, Canada; and

 

(d) public announcement” shall mean disclosure in a press release reported by a national news service in Canada, or in a document publicly filed by the Company under its profile on the System for Electronic Document Analysis and Retrieval at www.sedar.com (or any successor or replacement thereto).

 

16. POWERS AND DUTIES OF DIRECTORS

 

16.1 Powers of Management

 

The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.

 

16.2 Appointment of Attorney of Company

 

The directors may from time to time, by power of attorney or other instrument, under seal if so required by law, appoint any person to be the attorney of the Company for such purposes, and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles and excepting the power to fill vacancies in the board of directors, to remove a director, to change the membership of, or fill vacancies in, any committee of the directors, to appoint or remove officers appointed by the directors and to declare dividends) and for such period, and with such remuneration and subject to such conditions as the directors may think fit. Any such power of attorney may contain such provisions for the protection or convenience of persons dealing with such attorney as the directors think fit. Any such attorney may be authorized by the directors to sub-delegate all or any of the powers, authorities and discretions for the time being vested in him or her.

 

17. INTERESTS OF DIRECTORS AND OFFICERS

 

17.1 Obligation to Account for Profits

 

A director or senior officer who holds a disclosable interest (as that term is used in the Business Corporations Act) in a contract or transaction into which the Company has entered or proposes to enter is liable to account to the Company for any profit that accrues to the director or senior officer under or as a result of the contract or transaction only if and to the extent provided in the Business Corporations Act.

 

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17.2 Restrictions on Voting by Reason of Interest

 

A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter is not entitled to vote on any directors’ resolution to approve that contract or transaction, unless all the directors have a disclosable interest in that contract or transaction, in which case any or all of those directors may vote on such resolution.

 

17.3 Interested Director Counted in Quorum

 

A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter and who is present at the meeting of directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the director votes on any or all of the resolutions considered at the meeting.

 

17.4 Disclosure of Conflict of Interest or Property

 

A director or senior officer who holds any office or possesses any property, right or interest that could result, directly or indirectly, in the creation of a duty or interest that materially conflicts with that individual’s duty or interest as a director or senior officer, must disclose the nature and extent of the conflict as required by the Business Corporations Act.

 

17.5 Director Holding Other Office in the Company

 

A director may hold any office or employment with the Company, other than the office of auditor of the Company, in addition to his or her office of director for the period and on the terms (as to remuneration or otherwise) that the directors may determine.

 

17.6 No Disqualification

 

No director or intended director is disqualified by his or her office from contracting with the Company either with regard to the holding of any office or place of profit the director holds with the Company or as vendor, purchaser or otherwise, and no contract or transaction entered into by or on behalf of the Company in which a director is in any way interested is liable to be voided for that reason.

 

17.7 Professional Services by Director or Officer

 

Subject to the Business Corporations Act, a director or officer, or any person in which a director or officer has an interest, may act in a professional capacity for the Company, except as auditor of the Company, and the director or officer or such person is entitled to remuneration for professional services as if that director or officer were not a director or officer.

 

17.8 Director or Officer in Other Corporations

 

A director or officer may be or become a director, officer or employee of, or otherwise interested in, any person in which the Company may be interested as a shareholder or otherwise, and, subject to the Business Corporations Act, the director or officer is not accountable to the Company for any remuneration or other benefits received by him or her as director, officer or employee of, or from his or her interest in, such other person.

 

17.9 Subject to Article 29

 

This Article 13 is subject to Article 29 to the maximum extent permitted by law.

 

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18. PROCEEDINGS OF DIRECTORS

 

18.1 Meetings of Directors

 

The directors may meet together for the conduct of business, adjourn and otherwise regulate their meetings as they think fit, and meetings of the directors held at regular intervals may be held at the place, at the time and on the notice, if any, as the directors may from time to time determine.

 

18.2 Voting at Meetings

 

Questions arising at any meeting of directors are to be decided by a majority of votes and, in the case of an equality of votes, the chair of the meeting does not have a second or casting vote.

 

18.3 Chair of Meetings

 

The following individual is entitled to preside as chair at a meeting of directors:

 

(1) the chair of the board, if any;

 

(2) in the absence of the chair of the board, the president, if any, if the president is a director; or

 

(3) any other director chosen by the directors if:

 

(a) neither the chair of the board nor the president, if a director, is present at the meeting within 15 minutes after the time set for holding the meeting;

 

(b) neither the chair of the board nor the president, if a director, is willing to chair the meeting; or

 

(c) the chair of the board and the president, if a director, have advised the secretary, if any, or any other director, that they will not be present at the meeting.

 

18.4 Meetings by Telephone or Other Communications Medium

 

A director may participate in a meeting of the directors or of any committee of the directors:

 

(1) in person;

 

(2) by telephone; or

 

(3) with the consent of all directors who wish to participate in the meeting, by other communications medium;

 

if all directors participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other. A director who participates in a meeting in a manner contemplated by this Article 18.4 is deemed for all purposes of the Business Corporations Act and these Articles to be present at the meeting and to have agreed to participate in that manner.

 

18.5 Calling of Meetings

 

A director may, and the secretary or an assistant secretary of the Company, if any, on the request of a director must, call a meeting of the directors at any time.

 

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18.6 Notice of Meetings

 

Other than for meetings held at regular intervals as determined by the directors pursuant to Article 18.1 or as provided in Article 18.7, not less than 24 hours notice of each meeting of the directors, specifying the place, day and time of that meeting must be given to each of the directors by any method set out in Article 24.1 or orally or by telephone.

 

18.7 When Notice Not Required

 

It is not necessary to give notice of a meeting of the directors to a director if:

 

(1) the meeting is to be held immediately following a meeting of shareholders at which that director was elected or appointed, or is the meeting of the directors at which that director is appointed; or

 

(2) the director has waived notice of the meeting.

 

18.8 Meeting Valid Despite Failure to Give Notice

 

The accidental omission to give notice of any meeting of directors to, or the non-receipt of any notice by, any director, does not invalidate any proceedings at that meeting.

 

18.9 Waiver of Notice of Meetings

 

A director may in any manner and at any time waive notice of or otherwise consent to a meeting of the board, including by sending an electronic document to that effect. Attendance of a director at a meeting of the board shall constitute a waiver of notice of that meeting, except where a director attends for the express purpose of objecting to the transaction of any business on the grounds that the meeting has not been properly called.

 

18.10 Quorum

 

The quorum for the transaction of business at any meeting of the board shall consist of a majority of the directors or such other number as the directors may determine from time to time. If, however, the Company has fewer than three directors, all directors must be present at any meeting of the board to constitute a quorum.

 

18.11 Validity of Acts Where Appointment Defective

 

Subject to the Business Corporations Act, an act of a director or officer is not invalid merely because of an irregularity in the election or appointment or a defect in the qualification of that director or officer.

 

18.12 Consent Resolutions in Writing

 

A resolution of the directors or of any committee of the directors may be passed without a meeting:

 

(1) in all cases, if each of the directors entitled to vote on the resolution consents to it in writing; or

 

(2) in the case of a resolution to approve a contract or transaction in respect of which a director has disclosed that he or she has or may have a disclosable interest, if each of the other directors who have not made such a disclosure consents in writing to the resolution.

 

A consent in writing under this Article 18.12 may be by any written instrument, fax, electronic mail or any other method of transmitting legibly recorded messages in which the consent of the director is evidenced, whether or not the signature of the director is included in the record. A consent in writing may be in two or more counterparts which together are deemed to constitute one consent in writing. A resolution of the directors or of any committee of the directors passed in accordance with this Article 18.12 is effective on the date stated in the consent in writing or on the latest date stated on any counterpart and is deemed to be a proceeding at a meeting of the directors or of the committee of the directors and to be as valid and effective as if it had been passed at a meeting of the directors or of the committee of the directors that satisfies all the requirements of the Business Corporations Act and all the requirements of these Articles relating to meetings of the directors or of a committee of the directors.

 

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19. EXECUTIVE AND OTHER COMMITTEES

 

19.1 Appointment and Powers of Executive Committee

 

The directors may, by resolution, appoint an executive committee consisting of the director or directors that they consider appropriate, and during the intervals between meetings of the board of directors all of the directors’ powers are delegated to the executive committee, except:

 

(1) the power to fill vacancies in the board of directors;

 

(2) the power to remove a director;

 

(3) the power to change the membership of, or fill vacancies in, any committee of the directors; and

 

(4) such other powers, if any, as may be set out in the resolution or any subsequent directors’ resolution.

 

19.2 Appointment and Powers of Other Committees

 

The directors may, by resolution:

 

(1) appoint one or more committees (other than the executive committee) consisting of the director or directors that they consider appropriate;

 

(2) delegate to a committee appointed under paragraph 19.2(1) any of the directors’ powers, except:

 

(a) the power to fill vacancies in the board of directors;

 

(b) the power to remove a director;

 

(c) the power to change the membership of, or fill vacancies in, any committee of the directors; and

 

(d) the power to appoint or remove officers appointed by the directors; and

 

(3) make any delegation referred to in paragraph 19.2(2) subject to the conditions set out in the resolution or any subsequent directors’ resolution.

 

19.3 Obligations of Committees

 

Any committee appointed under Articles 19.1 or 19.2, in the exercise of the powers delegated to it, must:

 

(1) conform to any rules that may from time to time be imposed on it by the directors; and

 

(2) report every act or thing done in exercise of those powers at such times as the directors may require.

 

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19.4 Powers of Board

 

The directors may, at any time, with respect to a committee appointed under Articles 18.1 or 18.2, and subject to securities legislation:

 

(1) revoke or alter the authority given to the committee, or override a decision made by the committee, except as to acts done before such revocation, alteration or overriding;

 

(2) terminate the appointment of, or change the membership of, the committee; and

 

(3) fill vacancies in the committee.

 

19.5 Committee Meetings

 

Subject to Article 19.3(1) and unless the directors otherwise provide in the resolution appointing the committee or in any subsequent resolution, with respect to a committee appointed under Articles 19.1 or 19.2:

 

(1) the committee may meet and adjourn as it thinks proper;

 

(2) the committee may elect a chair of its meetings but, if no chair of a meeting is elected, or if at a meeting the chair of the meeting is not present within 15 minutes after the time set for holding the meeting, the directors present who are members of the committee may choose one of their number to chair the meeting;

 

(3) a majority of the members of the committee constitutes a quorum of the committee; and

 

(4) questions arising at any meeting of the committee are determined by a majority of votes of the members present, and in the case of an equality of votes, the chair of the meeting does not have a second or casting vote.

 

20. OFFICERS

 

20.1 Directors May Appoint Officers

 

The directors may, from time to time, appoint such officers, if any, as the directors determine and the directors may, at any time, terminate any such appointment.

 

20.2 Functions, Duties and Powers of Officers

 

The directors may, for each officer:

 

(1) determine the functions and duties of the officer;

 

(2) delegate to the officer any of the powers exercisable by the directors on such terms and conditions and with such restrictions as the directors think fit; and

 

(3) revoke, withdraw, alter or vary all or any of the functions, duties and powers of the officer.

 

20.3 Qualifications

 

No officer may be appointed unless that officer is qualified in accordance with the Business Corporations Act. One person may hold more than one position as an officer of the Company. Any person appointed as the chair of the board or as a managing director must be a director. Any other officer need not be a director.

 

20.4 Remuneration and Terms of Appointment

 

All appointments of officers are to be made on the terms and conditions and at the remuneration (whether by way of salary, fee, commission, participation in profits or otherwise) that the directors or their delegate(s) think fit and are subject to termination at the pleasure of the directors, and an officer may in addition to such remuneration be entitled to receive, after he or she ceases to hold such office or leaves the employment of the Company, a pension or gratuity.

 

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21. INDEMNIFICATION

 

21.1 Definitions

 

In this Article 21:

 

(1) eligible penalty” means a judgment, penalty or fine awarded or imposed in, or an amount paid in settlement of, an eligible proceeding;

 

(2) eligible proceeding” means a legal proceeding or investigative action, whether current, threatened, pending or completed, in which a director or former director of the Company (an “eligible party”) or any of the heirs and legal personal representatives of the eligible party, by reason of the eligible party being or having been a director of the Company:

 

(a) is or may be joined as a party; or

 

(b) is or may be liable for or in respect of a judgment, penalty or fine in, or expenses related to, the proceeding; and

 

(3) expenses” has the meaning set out in the Business Corporations Act.

 

21.2 Mandatory Indemnification of Directors and officers; Advancement of Expenses

 

Subject to the Business Corporations Act, the Company must indemnify a director or officer or former director or officer of the Company and his or her heirs and legal personal representatives against all eligible penalties to which such person is or may be liable, and the Company must, after the final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by such person in respect of that proceeding. Each director, officer, former director and former officer is deemed to have contracted with the Company on the terms of the indemnity contained in this Article 21.2.

 

The Company must pay, as they are incurred in advance of the final disposition of an eligible proceeding, the expenses actually and reasonably incurred by a director or officer or former director or officer of the Company in respect of that proceeding, but the Company must first receive from such person a written undertaking that, if it is ultimately determined that the payment of expenses is prohibited by the Business Corporations Act, the person will repay the amounts advanced.

 

21.3 Permitted Indemnification

 

Subject to any restrictions in the Business Corporations Act, the Company may indemnify any person.

 

21.4 Non-Compliance with Business Corporations Act

 

The failure of a director or officer of the Company to comply with the Business Corporations Act or these Articles or, if applicable, any former Articles, does not invalidate any indemnity to which he or she is entitled under this Article 20.

 

21.5 Company May Purchase Insurance

 

The Company may purchase and maintain insurance for the benefit of any person (or his or her heirs or legal personal representatives) who:

 

(1) is or was a director, officer, employee or agent of the Company;

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(2) is or was a director, officer, employee or agent of a corporation at a time when the corporation is or was an affiliate of the Company;

 

(3) at the request of the Company, is or was a director, officer, employee or agent of a corporation or of a partnership, trust, joint venture or other unincorporated entity;

 

(4) at the request of the Company, holds or held a position equivalent to that of a director or officer of a partnership, trust, joint venture or other unincorporated entity;

 

against any liability incurred by him or her as such director, officer, employee or agent or person who holds or held such equivalent position.

 

22. DIVIDENDS

 

22.1 Payment of Dividends Subject to Special Rights

 

The provisions of this Article 22 are subject to the rights, if any, of shareholders holding shares with special rights as to dividends.

 

22.2 Declaration of Dividends

 

Subject to the Business Corporations Act, the directors may from time to time declare and authorize payment of such dividends as they may consider appropriate.

 

22.3 No Notice Required

 

The directors need not give notice to any shareholder of any declaration under Article 22.2.

 

22.4 Record Date

 

The directors may set a date as the record date for the purpose of determining shareholders entitled to receive payment of a dividend. The record date must not precede the date on which the dividend is to be paid by more than two months. If no record date is set, the record date is 5:00 p.m. (Vancouver time) on the date on which the directors pass the resolution declaring the dividend.

 

22.5 Manner of Paying Dividend

 

A resolution declaring a dividend may direct payment of the dividend wholly or partly in money or by the distribution of specific assets or of fully paid shares or of bonds, debentures or other securities of the Company or any other corporation, or in any one or more of those ways.

 

22.6 Settlement of Difficulties

 

If any difficulty arises in regard to a distribution under Article 22.5, the directors may settle the difficulty as they deem advisable, and, in particular, may:

 

(1) set the value for distribution of specific assets;

 

(2) determine that money in substitution for all or any part of the specific assets to which any shareholders are entitled may be paid to any shareholders on the basis of the value so fixed in order to adjust the rights of all parties; and

 

(3) vest any such specific assets in trustees for the persons entitled to the dividend.

 

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22.7 When Dividend Payable

 

Any dividend may be made payable on such date as is fixed by the directors.

 

22.8 Dividends to be Paid in Accordance with Number of Shares

 

All dividends on shares of any class or series of shares must be declared and paid according to the number of such shares held.

 

22.9 Receipt by Joint Shareholders

 

If several persons are joint shareholders of any share, any one of them may give an effective receipt for any dividend, bonus or other money payable in respect of the share.

 

22.10 Dividend Bears No Interest

 

No dividend bears interest against the Company.

 

22.11 Fractional Dividends

 

If a dividend to which a shareholder is entitled includes a fraction of the smallest monetary unit of the currency of the dividend, that fraction may be disregarded in making payment of the dividend and that payment represents full payment of the dividend.

 

22.12 Payment of Dividends

 

Any dividend or other distribution payable in money in respect of shares may be paid by cheque, made payable to the order of the person to whom it is sent, and mailed to the registered address of the shareholder, or in the case of joint shareholders, to the registered address of the joint shareholder who is first named on the central securities register, or to the person and to the address the shareholder or joint shareholders may direct in writing. The mailing of such cheque will, to the extent of the sum represented by the cheque (plus the amount of the tax required by law to be deducted), discharge all liability for the dividend unless such cheque is not paid on presentation or the amount of tax so deducted is not paid to the appropriate taxing authority.

 

22.13 Capitalization of Retained Earnings or Surplus

 

Notwithstanding anything contained in these Articles, the directors may from time to time capitalize any retained earnings or surplus of the Company and may from time to time issue, as fully paid, shares or any bonds, debentures or other securities of the Company as a dividend representing the retained earnings or surplus so capitalized or any part thereof.

 

23. ACCOUNTING RECORDS AND AUDITOR

 

23.1 Recording of Financial Affairs

 

The directors must cause adequate accounting records to be kept to properly record the financial affairs and condition of the Company and to comply with the Business Corporations Act.

 

23.2 Inspection of Accounting Records

 

Unless the directors determine otherwise, or unless otherwise determined by ordinary resolution, no shareholder of the Company is entitled to inspect or obtain a copy of any accounting records of the Company.

 

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24. NOTICE

 

24.1 Method of Giving Notice

 

Unless the Business Corporations Act or these Articles provide otherwise, a notice, statement, report or other record required or permitted by the Business Corporations Act or these Articles to be sent by or to a person may be sent by any one of the following methods:

 

(1) mail addressed to the person at the applicable address for that person as follows:

 

(a) for a record mailed to a shareholder, the shareholder’s registered address;

 

(b) for a record mailed to a director or officer, the prescribed address for mailing shown for the director or officer in the records kept by the Company or the mailing address provided by the recipient for the sending of that record or records of that class;

 

(c) in any other case, the mailing address of the intended recipient;

 

(2) delivery at the applicable address for that person as follows, addressed to the person:

 

(a) for a record delivered to a shareholder, the shareholder’s registered address;

 

(b) for a record delivered to a director or officer, the prescribed address for delivery shown for the director or officer in the records kept by the Company or the delivery address provided by the recipient for the sending of that record or records of that class;

 

(c) in any other case, the delivery address of the intended recipient;

 

(3) by fax to the fax number provided by the intended recipient for the sending of that record or records of that class;

 

(4) by electronic mail to the electronic mail address provided by the intended recipient for the sending of that record or records of that class;

 

(5) physical delivery to the intended recipient;

 

(6) creating and providing a record posted on or made available through a general accessible electronic source and providing written notice by any of the foregoing methods as to the availability of such record; or

 

(7) as otherwise permitted by applicable securities legislation.

 

24.2 Deemed Receipt

 

A notice, statement, report or other record that is:

 

(1) mailed to a person by ordinary mail to the applicable address for that person referred to in Article 24.1 is deemed to be received by the person to whom it was mailed on the day (Saturdays, Sundays and holidays excepted) following the date of mailing;

 

(2) faxed to a person to the fax number provided by that person referred to in Article 24.1 is deemed to be received by the person to whom it was faxed on the day it was faxed;

 

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(3) electronically mailed to a person to the electronic mail address provided by that person referred to in Article 24.1 is deemed to be received by the person to whom it was electronically mailed on the day it was e-mailed; and

 

(4) a record that is delivered in accordance with Article 24.1(6) is deemed to be received by the person on the day such written notice is sent.

 

24.3 Certificate of Sending

 

A certificate signed by the secretary, if any, or other officer of the Company or of any other corporation acting in that capacity on behalf of the Company stating that a notice, statement, report or other record was sent in accordance with Article 24.1 is conclusive evidence of that fact.

 

24.4 Notice to Joint Shareholders

 

A notice, statement, report or other record may be provided by the Company to the joint shareholders of a share by providing such record to the joint shareholder first named in the central securities register in respect of the share.

 

24.5 Notice to Legal Personal Representatives and Trustees

 

A notice, statement, report or other record may be provided by the Company to the persons entitled to a share in consequence of the death, bankruptcy or incapacity of a shareholder by:

 

(1) mailing the record, addressed to them:

 

(a) by name, by the title of the legal personal representative of the deceased or incapacitated shareholder, by the title of trustee of the bankrupt shareholder or by any similar description; and

 

(b) at the address, if any, supplied to the Company for that purpose by the persons claiming to be so entitled; or

 

(2) if an address referred to in paragraph 24.5(1)(b) has not been supplied to the Company, by giving the notice in a manner in which it might have been given if the death, bankruptcy or incapacity had not occurred.

 

24.6 Undelivered Notices

 

If on two consecutive occasions, a notice, statement, report or other record is sent to a shareholder pursuant to Article 24.1 and on each of those occasions any such record is returned because the shareholder cannot be located, the Company shall not be required to send any further records to the shareholder until the shareholder informs the Company in writing of his or her new address.

 

25. SEAL

 

25.1 Who May Attest Seal

 

Except as provided in Articles 24.2 and 24.3, the Company’s seal, if any, must not be impressed on any record except when that impression is attested by the signatures of:

 

(1) any one director or officer; or

 

(2) any one or more directors or officers or persons as may be determined by any director or officer.

 

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25.2 Sealing Copies

 

For the purpose of certifying under seal a certificate of incumbency of the directors or officers of the Company or a true copy of any resolution or other document, despite Article 25.1, the impression of the seal may be attested by the signature of any director or officer or the signature of any other person as may be determined by the directors.

 

25.3 Mechanical Reproduction of Seal

 

The directors may authorize the seal to be impressed by third parties on share certificates or bonds, debentures or other securities of the Company as they may determine appropriate from time to time. To enable the seal to be impressed on any share certificates or bonds, debentures or other securities of the Company, whether in definitive or interim form, on which facsimiles of any of the signatures of the directors or officers of the Company are, in accordance with the Business Corporations Act or these Articles, printed or otherwise mechanically reproduced, there may be delivered to the person employed to engrave, lithograph or print such definitive or interim share certificates or bonds, debentures or other securities one or more unmounted dies reproducing the seal and such persons as are authorized under Article 25.1 to attest the Company’s seal may in writing authorize such person to cause the seal to be impressed on such definitive or interim share certificates or bonds, debentures or other securities by the use of such dies. Share certificates or bonds, debentures or other securities to which the seal has been so impressed are for all purposes deemed to be under and to bear the seal impressed on them.

 

26. FORUM FOR ADJUDICATION OF CERTAIN DISPUTES

 

Unless the Company consents in writing to the selection of an alternative forum, the Supreme Court of British Columbia, Canada and the appellate courts therefrom (collectively, the “Courts”) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer of the Company to the Company, (iii) any action asserting a claim arising pursuant to any provision of the Business Corporations Act or the notice of articles or articles of the Company (as either may be amended from time to time); or (iv) any action asserting a claim otherwise related to the relationships among the Company, its affiliates and their respective shareholders, directors and/or officers, but this paragraph (iv) does not include claims related to the business carried on by the Company or such affiliates. If any action or proceeding the subject matter of which is within the scope of the preceding sentence is filed in a court other than a court located within the Province of British Columbia (a “Foreign Action”) in the name of any registered or beneficial shareholder, such registered or beneficial shareholder shall be deemed to have consented to (i) the personal jurisdiction of the Courts in connection with any action brought in any such Courts to enforce the foregoing exclusive forum provision (an “Enforcement Action”), and (ii) having service of process made upon such registered or beneficial shareholder in such Enforcement Action by service upon such registered or beneficial shareholder’s counsel in the Foreign Action as agent of the shareholder.

 

27. SPECIAL RIGHTS AND RESTRICTIONS – SUBORDINATE, RESTRICTED AND LIMITED VOTING SHARES AND MULTIPLE VOTING SHARES

 

27.1 Subordinate Voting Shares

 

(1) An unlimited number of Subordinate Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Subordinate Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Subordinate Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to one (1) vote in respect of each Subordinate Voting Share held, except for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are equal in all respects and shall vote together, and with the Multiple Voting Shares, as if they were shares of a single class. In connection with any Change of Control Transaction requiring approval of the holders of all classes of Equity Shares under the Business Corporations Act, holders of all Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of each such class is approved by a majority of the votes cast by the holders of outstanding Subordinate Voting Shares in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of that class called and held for such purpose.

 

Notwithstanding the provisions of the second paragraph of this Article 27.1(1)(a), the holders of Subordinate Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the Subordinate Voting Shares; (ii) affect the holders of any class of Equity Shares differently on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of outstanding Subordinate Voting Shares.

 

(b) Constraints on Ownership.

 

Subject to the Specified Exceptions, the Subordinate Voting Shares may only be heldof record by Non-U.S. Persons.

 

(c) Dividends.

 

Holders of Subordinate Voting Shares shall be entitled to receive, as and when declared by the board of directors, dividends in cash or property of the Company. No dividend will be declared or paid on any other class of Equity Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on the Subordinate Voting Shares. The Subordinate Voting Shares shall rank equally with the other Equity Shares as to dividends on a share-for-share basis, without preference or distinction. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares shall receive Subordinate Voting Shares, unless otherwise determined by the board of directors, provided an equal number of shares is declared as a dividend or distribution on a then outstanding per-Equity Share basis, without preference or distinction, in each case.

 

(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Subordinate Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Subordinate Voting Shares (including any liquidation preference on any issued and outstanding Multiple Voting Shares and/or Preferred Shares), be entitled to participate ratably in the remaining property of the Company along with all holders of the other classes of Equity Shares (on a per share basis).

 

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(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Subordinate Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

(f) Subdivision or Consolidation.

 

No subdivision or consolidation of the Subordinate Voting Shares shall occur unless, simultaneously, the other classes of Equity Shares are subdivided or consolidated or otherwise adjusted so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Subject to Article 27.1(1)(g), the Subordinate Voting Shares cannot be converted into any other class of shares.

 

(g) Conversion of Subordinate Voting Shares.

 

(1) Automatic

 

Subject to the Specified Exceptions, each issued and outstanding Subordinate Voting Share shall be automatically converted into one Restricted Voting Share, without any further act on the part of the Company or of the holder, if such Subordinate Voting Share becomes held of record by a U.S. Person.

 

(2) Upon an Offer

 

(i) For the purposes of this Article 27.1(1)(g)(2):

 

Affiliate” has the meaning specified in National Instrument 45-106 – Prospectus Exemptions as, from time to time, amended, re-enacted or replaced;

 

Associate” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced;

 

Conversion Period” means the period of time commencing on the eighth day after the Offer Date and terminating on the Expiry Date;

 

Converted Shares” means Subject Equity Shares resulting from the conversion of Subordinate Voting Shares into the Subject Equity Shares pursuant to subparagraph (ii);

 

Exclusionary Offer” means an offer to purchase Subject Equity Shares that:

 

(i) is a General Offer; and

 

(ii) is not made concurrently with an offer to purchase Subordinate Voting Shares that is identical to the offer to purchase the Subject Equity Shares in terms of price per share and percentage of outstanding shares to be taken up exclusive of shares owned immediately prior to the offer by the Offeror, and in all other material respects, and that has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Subject Equity Shares;

 

and for the purposes of this definition, if an offer to purchase Subject Equity Shares is a General Offer but not an Exclusionary Offer, the varying of any term of such offer shall be deemed to constitute the making of a new offer unless a variation identical in all material respects concurrently is made to the corresponding offer to purchase Subordinate Voting Shares;

 

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Expiry Date” means the last date on which holders of the Subject Equity Shares may accept an Exclusionary Offer;

 

General Offer” means an offer to purchase Subject Equity Shares that must, by reason of applicable securities legislation or the requirements of any stock exchange on which the Subject Equity Shares are listed, be made to all or substantially all holders of Subject Equity Shares who are in a province of Canada to which any such legislation or requirement applies (assuming that the offeree was resident in Ontario);

 

Offer Date” means the date on which an Exclusionary Offer is made;

 

Offeror” means a Person that makes an offer to purchase the Subject Equity Shares (the “bidder”), and includes any Associate or Affiliate of the bidder or any Person that is disclosed in the offering document to be acting jointly or in concert with the bidder,

 

Person” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced and includes a company or other body corporate wherever or however incorporated;

 

Subject Equity Shares” means any one or more classes of Equity Shares that are subject to an Exclusionary Offer, other than Subordinate Voting Shares; and

 

Transfer Agent” means the transfer agent of the Company at the relevant time for any of the Subject Equity Shares (and if there is no such transfer agent, “Transfer Agent” means the Company);

 

(ii) subject to subparagraph (v), if an Exclusionary Offer is made, each outstanding Subordinate Voting Share shall, at the option of each holder of Subordinate Voting Shares during the Conversion Period, be convertible on a one-for-one basis into the class of Equity Shares that are subject to such Exclusionary Offer (and if more than one class of Equity Shares are subject to such Exclusionary Offer, or different Exclusionary Offers are made for separate classes of Subject Equity Shares, on a one-for-one basis into any class of Equity Shares that are subject to any such Exclusionary Offer, at the holder’s election, or failing such election, into any class of Equity Shares that are subject to any such Exclusionary Offer at the board of directors’ discretion). The conversion right may be exercised by notice in writing given to the Transfer Agent prior to the Expiry Date accompanied by the share certificate(s) representing the Subordinate Voting Shares which the holder desires to convert, together with any letter of transmittal or other documentation, including any medallion signature guarantee, as may be required by the Transfer Agent or pursuant to the Exclusionary Offer, in either case in duly executed or completed form, and such notice shall be executed by such holder, or by his attorney duly authorized in writing, and shall specify the number of Subordinate Voting Shares which the holder desires to have converted and the class of Equity Shares which are desired to be converted into. The Company shall pay any governmental stamp, transfer or similar tax (but for greater certainty, no income or capital gains tax) imposed on or in respect of such conversion. If less than all of the Subordinate Voting Shares represented by any share certificate are to be converted, the holder shall be entitled to receive a new share certificate representing in the aggregate the number of Subordinate Voting Shares represented by the original share certificate, which are not to be converted. Upon any conversion of any shares of any class into shares of another class, the Company shall adjust the capital accounts maintained for the respective classes of shares as provided in the Business Corporations Act. The conversion right may only be exercised in respect of Subordinate Voting Shares for the purpose of depositing the resulting Subject Equity Shares pursuant to such offer and for no other reason;

 

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(iii) an election by a holder of Subordinate Voting Shares to exercise the conversion right provided for in subparagraph (ii) shall be deemed to also constitute irrevocable elections by such holder (a) to deposit the Converted Shares pursuant to the Exclusionary Offer (subject to such holder’s right to subsequently withdraw the shares from the offer), and (b) to exercise the right to convert back into Subordinate Voting Shares all Converted Shares (on a one-for-one basis) in respect of which such holder exercises his, her or its right of withdrawal from the Exclusionary Offer or which are not otherwise ultimately taken up under the Exclusionary Offer. Any conversion of Converted Shares back into Subordinate Voting Shares in respect of which the holder exercises his, her or its right of withdrawal from the Exclusionary Offer shall become effective at the time such right of withdrawal is exercised. If the right of withdrawal is not exercised, any conversion of Converted Shares back into Subordinate Voting Shares pursuant to a deemed election shall become effective:

 

(A) for Converted Shares not taken up in accordance with the terms of an Exclusionary Offer which is nonetheless completed, on the day that the Offeror has taken up and paid for all shares to be acquired by the Offeror under the Exclusionary Offer; and

 

(B) in respect of an Exclusionary Offer which is abandoned or withdrawn, at the time at which the Exclusionary Offer is abandoned or withdrawn;

 

(iv) no share certificates representing Converted Shares shall be delivered to the holders of such shares before such shares are deposited pursuant to the Exclusionary Offer. The Transfer Agent, on behalf of the holders of the Converted Shares, shall deposit pursuant to the Exclusionary Offer the certificates representing all Subordinate Voting Shares for which the certificates, notices and other documents have been duly delivered to the Transfer Agent pursuant to subparagraph (i)(ii) and shall advise the Offeror of the extent that such certificates so deposited represent Subject Equity Shares of the Company. Upon completion of the Exclusionary Offer, the Transfer Agent shall deliver to the holders of the shares purchased pursuant to the Exclusionary Offer all consideration paid by the Offeror pursuant to the Exclusionary Offer. If Converted Shares are converted back into Subordinate Voting Shares pursuant to subparagraph (iii), the Transfer Agent shall deliver to the holders entitled thereto share certificates representing the Subordinate Voting Shares resulting from the conversion. Provided however that if no Subordinate Voting Shares of a shareholder were acquired by the Offeror pursuant to the Exclusionary Offer, the Transfer Agent shall return the original share certificate (if not duly endorsed for transfer to a named transferee) evidencing such Subordinate Voting Shares tendered pursuant to subparagraph (ii) in satisfaction of its obligations under this subparagraph (iv). The Company shall make all arrangements with the Transfer Agent necessary or desirable to give effect to this subparagraph (iv);

 

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(v) subject to subparagraph (vi), the conversion right provided for in subparagraph (3)(ii) shall not come into effect with respect to a class of Subject Equity Shares if:

 

(A) prior to the time at which the Exclusionary Offer is made there is or has been delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate, as at the time the Exclusionary Offer is made, more than 50% of the then outstanding Subject Equity Shares of each class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each such shareholder that made such certification, that such shareholder shall not:

 

(i) accept any Exclusionary Offer without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least 7 days prior to the Expiry Date;

 

(ii) make any Exclusionary Offer;

 

(iii) act jointly or in concert with any Person that makes any Exclusionary Offer; or

 

(iv) transfer any Subject Equity Shares, directly or indirectly, during the time any Exclusionary Offer is outstanding without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee; or

 

(B) within seven (7) days after the Offer Date there is delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate more than 50% of the then outstanding Subject Equity Shares of such class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each shareholder who made such certification:

 

(i) the number of Subject Equity Shares owned by the shareholder;

 

(ii) that such shareholder is not making the Exclusionary Offer and is not an Associate or Affiliate of, or acting jointly or in concert with, the Person making such offer;

 

(iii) that such shareholder shall not accept the Exclusionary Offer, including any varied form of the offer, without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least seven (7) days prior to the Expiry Date; and

 

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(iv) that such shareholder shall not transfer any Subject Equity Shares, directly or indirectly, prior to the Expiry Date without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee if this information is known to the transferor;

 

(vi) if a notice (the “Notice”) referred to in sub-clause (v)(A)(i), (v)(A)(iv), (v)(B)(iii) or (v)(B)(iv) is given to the Transfer Agent and to the corporate secretary of the Company and the conversion right provided for in subparagraph (ii) has not, because of the giving of such Notice, come into effect, the Company shall, either forthwith upon receipt of the Notice or forthwith after the seventh (7th) day following the Offer Date, whichever is later, make a good faith determination as to whether there are subsisting certifications that comply with either clause (v)(A) or (v)(B) from shareholders of the Company who own in the aggregate more than 50% of the then outstanding Subject Equity Shares, exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror. If the Company determines that there are not such subsisting certifications, subparagraph (v) shall cease to apply and the conversion right provided for in subparagraph (ii) shall be in effect for the remainder of the Conversion Period;

 

(vii) as soon as reasonably possible after the seventh (7th) day after the Offer Date, the Company shall send to each holder of Subordinate Voting Shares a written notice advising the holders as to whether they are entitled to convert their Subordinate Voting Shares into Subject Equity Shares and the reasons therefor. If such notice discloses that they are not so entitled, but it is subsequently determined that they are so entitled by virtue of subparagraph (vi) or otherwise, the Company shall forthwith send another notice to them advising them of that fact and the reasons therefor;

 

(viii) if a notice referred to in subparagraph (vii) discloses that the conversion right set forth in subparagraph (ii) has come into effect, the notice shall:

 

include a description of the procedure to be followed to effect the conversion and to have the Converted Shares tendered under the Exclusionary Offer;

 

include the information set out in subparagraph (vii) hereof; and

 

be accompanied by a copy of the Exclusionary Offer and all other materials sent to any holders of Subject Equity Shares in respect of such offer; and as soon as reasonably possible after any additional material, including any notice of variation, is sent to any holders of Subject Equity Shares in respect of such offer, the Company shall send a copy of such additional materials to each holder of Subordinate Voting Shares;

 

(ix) prior to or forthwith after sending any notice referred to in subparagraph (vii), the Company shall cause a news release to be issued to a Canadian national news service, describing the contents of the notice; and

 

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(x) references to share certificates shall include, as applicable, the equivalent in any non-certificated inventory system (such as, for example, a Direct Registration System or electronic position), with appropriate changes.

 

(3) Specified Exceptions

 

The following circumstances will be disregarded in determining whether Equity Shares are held of record by a U.S. Person or by a Non-U.S. Person (collectively, the “Specified Exceptions”):

 

(i) where Equity Shares are held of record by one or more underwriters solely for the purposes of a distribution to the public, that fact will be disregarded; and

 

(ii) where Equity Shares are held of record a Person acting solely in the capacity of an intermediary in connection with either the payment of funds and/or the delivery of securities and that provides centralized facilities for the deposit, clearing or settlement of trades in securities (including CDS Clearing and Depositary Services Inc., or any successor or assign) without general discretionary authority over the voting or disposition of such Equity Shares, that fact will be disregarded.

 

(h) Renaming as Common Shares.

 

At the effective time that no Multiple Voting Shares remain issued and outstanding, the Subordinate Voting Shares may in the discretion of the board of directors henceforward be named “Common Shares”, and in such case all references in these Articles to “Subordinate Voting Share(s)” shall thereinafter refer to “Common Share(s)”.

 

27.2 Multiple Voting Shares

 

(1) An unlimited number of Multiple Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Multiple Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Multiple Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to fifty (50) votes in respect of each Multiple Voting Share held, except for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Multiple Voting Shares, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares shall vote together as if they were shares of a single class.

 

(b) Constraints on Ownership.

 

The Multiple Voting Shares may be held of record by U.S. Persons and/or Non-U.S. Persons.

 

(c) No Dividends.

 

Holders of Multiple Voting Shares shall not be entitled to receive dividends.

 

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(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Multiple Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Multiple Voting Shares, be entitled to receive their redemption price per share and no more.

 

(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Multiple Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

(f) Redemption.

 

All issued and outstanding Multiple Voting Shares will be automatically redeemed by the Company for U.S. $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed by the Company from the applicable holder at the relevant time) on the third (3rd) anniversary of their first date of issuance. In addition, the applicable Multiple Voting Shares will be automatically redeemed by the Company for U.S. $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed by the Company from the applicable holder at the relevant time) on the date on which such Multiple Voting Shares are held or controlled by a person who is not a Permitted Holder of the original holder upon the first issuance thereof.

 

Before redeeming any Multiple Voting Shares the Company shall mail to each person who, at the date of such mailing, is a registered holder of the shares to be redeemed, notice of the intention of the Company to redeem such shares held by such registered holder; such notice shall be mailed by ordinary prepaid post addressed to the last address of such holder as it appears on the records of the Company or, in the event of the address of any such holder not appearing on the records of the Company, then to the last known address of such holder, at least 10 days before the date specified for redemption; such notice shall set out the date on which redemption is to take place; on or after the date so specified for redemption the Company shall pay or cause to be paid the redemption price to the registered holder of the shares to be redeemed, on presentation and surrender of the certificates for the shares so called for redemption at such place or places as may be specified in such notice, and the certificates for such shares shall thereupon be cancelled, and the shares represented thereby shall thereupon be redeemed. From and after the date specified for redemption in such notice, the holder of the shares called for redemption shall not be entitled to any rights in respect thereof, except to receive the redemption price therefor. On or before the date specified for redemption the Company shall have the right to set aside the redemption price of the shares called for redemption, such redemption price to be paid to or to the order of the holder of such shares called for redemption upon presentation and surrender of the certificates representing the same and, upon such deposit being made, the applicable shares shall be redeemed and the rights of the holder thereof shall be limited to receiving, out of the moneys so set aside, without interest, the redemption price against presentation and surrender of the certificates representing such shares.

 

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(g) Rights of Retraction.

 

A holder of Multiple Voting Shares shall be entitled to require the Company to redeem at any time and from time to time after the date of issue of such shares, upon giving notice as hereinafter provided, all or any number of the Multiple Voting Shares registered in the name of such holder on the books of the Company at a price of U.S. $0.001 per share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed from the applicable holder at the relevant time by the applicable holder thereof). A holder of Multiple Voting Shares exercising this option to have the Company redeem, shall give notice to the Company, which notice shall set out the date on which the Company is to redeem, which date shall not be less than 30 days nor more than 90 days from the date of mailing of the notice, and if the holder desires to have less than all of the Multiple Voting Shares registered in his, her or its name redeemed by the Company, the number of the holder’s shares to be redeemed. The date on which the redemption at the option of the holder is to occur is hereafter referred to as the “option redemption date”. The holder of any Multiple Voting Shares may, with the consent of the Company, revoke such notice prior to the option redemption date. Upon delivery to the Company of a share certificate or certificates representing the Multiple Voting Shares which the holder desires to have the Company redeem, the Company shall, on the option redemption date, redeem such Multiple Voting Shares by paying to the holder the redemption price therefor. Upon payment of the redemption price of the Multiple Voting Shares to be redeemed by the Company, the holders thereof shall cease to be entitled to exercise any rights of holders in respect thereof. If the redemption by the Company on any option redemption date of all of the Multiple Voting Shares to be redeemed on such date would be contrary to any provisions of the Business Corporations Act or any other applicable law, the Company shall be obligated to redeem only the maximum number of Multiple Voting Shares which the Company determines it is then permitted to redeem, such redemptions to be made pro rata (disregarding fractions of shares) according to the number of Multiple Voting Shares required by each such holder to be redeemed by the Company and the Company shall issue new certificates representing the Multiple Voting Shares not redeemed by the Company; the Company shall, before redeeming any other Multiple Voting Shares, redeem in the manner contemplated by Article 28.5 on the first day of each month thereafter the maximum number of such Multiple Voting Shares so required by holders to be redeemed as would not then by contrary to any provisions of the Business Corporations Act or any other applicable law, until all of such shares have been redeemed, provided that the Company shall be under no obligation to give any notice to the holders of the Multiple Voting Shares in respect of such redemption or redemptions as provided for in Article 28.5.

 

(h) Transfer of Multiple Voting Shares.

 

Except as expressly provided herein, including upon redemption, no Multiple Voting Share may be sold, transferred, assigned, pledged or otherwise disposed of, except to a Permitted Holder of the holder thereof. For the purposes hereof, “Permitted Holder” means a Person controlled, directly or indirectly by the transferor which remains as such, and the applicable Multiple Voting Shares shall be automatically redeemed if the Permitted Holder ceases to be so controlled.

 

(i) Ownership of Restricted Voting Shares and Limited Voting Shares.

 

Notwithstanding any other provision of these Articles, any holder of Multiple Voting Shares that holds at least two (2) Restricted Voting Shares and/or Limited Voting Shares shall be deemed to hold (A) at least one (1) Restricted Voting Share, and (B) at least one (1) Limited Voting Share.

 

27.3 Restricted Voting Shares

 

(1) An unlimited number of Restricted Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a) Voting Rights.

 

Holders of Restricted Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Restricted Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to one (1) vote in respect of each Restricted Voting Share held, except for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are equal in all respects and shall vote together, and with the Multiple Voting Shares, as if they were shares of a single class. In connection with any Change of Control Transaction requiring approval of the holders of all classes of Equity Shares under the Business Corporations Act, holders of each class of Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of any such class is approved by a majority of the votes cast by the holders of outstanding Restricted Voting Shares in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of Restricted Voting Shares called and held for such purpose.

 

Notwithstanding the provisions of the second paragraph of this Article 27.3(1)(a), the holders of Restricted Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the Restricted Voting Shares; (ii) affect the holders of any class of Equity Shares differently on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of outstanding Restricted Voting Shares.

 

(b) Constraints on Ownership.

 

Subject to the Specified Exceptions, the Restricted Voting Shares may only be held of record by U.S. Persons.

 

(c) Dividends.

 

Holders of Restricted Voting Shares shall be entitled to receive, as and when declared by the board of directors, dividends in cash or property of the Company. No dividend will be declared or paid on any other class of Equity Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on the Restricted Voting Shares. The Restricted Voting Shares shall rank equally with the other Equity Shares as to dividends on a share-for-share basis, without preference or distinction. In the event of the payment of a dividend in the form of shares, holders of Restricted Voting Shares shall receive Restricted Voting Shares, unless otherwise determined by the board of directors, provided an equal number of shares is declared as a dividend or distribution on a then outstanding per-Equity Share basis, without preference or distinction, in each case.

 

(d) Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Restricted Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Restricted Voting Shares, be entitled to participate ratably in the remaining property of the Company along with all holders of the other classes of Equity Shares (on a per share basis).

 

(e) Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Restricted Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

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(f) Subdivision or Consolidation.

 

No subdivision or consolidation of the Restricted Voting Shares shall occur unless, simultaneously, the other classes of Equity Shares are subdivided or consolidated or otherwise adjusted so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Subject to Article 27.3(1)(g), the Restricted Voting Shares cannot be converted into any other class of shares.

 

(g) Conversion of Restricted Voting Shares.

 

(1) Automatic

 

Subject to the Specified Exceptions, each issued and outstanding Restricted Voting Share shall be automatically converted into one Subordinate Voting Share, without any further act on the part of the Company or of the holder, if such Restricted Voting Share becomes held of record by a Non-U.S. Person.

 

(2) Conversion into Limited Voting Shares

 

Subject to the Specified Exceptions, if, at any given time, the total number of Restricted Voting Shares becomes equal to or in excess of the FPI Threshold, the minimum number of Restricted Voting Shares required to stay within the FPI Threshold shall be automatically converted, without further act or formality, on a pro-rata basis across all registered holders of Restricted Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Limited Voting Shares. For purposes of these Articles, “FPI Threshold” means:

 

(0.50 x Aggregate Number of Multiple Voting Shares, Subordinate Voting Shares and Restricted Voting Shares) – (Aggregate Number of Multiple Voting Shares held, of record by U.S. Persons)

 

Notwithstanding the foregoing, in connection with a formal bid for all Equity Shares on identical terms made in compliance with Canadian securities laws that results in the bidder owning or controlling more than fifty percent (50%) of the total voting power of the voting securities of the Company for the election of directors (assuming the Limited Voting Shares each have one (1) vote per share for the election of directors), the bidder may elect, by way of written notice to the Company, that the Restricted Voting Shares it so acquires not be automatically converted into Limited Voting Shares.

 

(3) Upon an Offer

 

(i) For the purposes of this 27.3(1)(g)(3):

 

(A) Affiliate” has the meaning specified in National Instrument 45-106 – Prospectus Exemptions as, from time to time, amended, re-enacted or replaced;

 

(B) Associate” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced;

 

(C) Conversion Period” means the period of time commencing on the eighth day after the Offer Date and terminating on the Expiry Date;

 

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(D) Converted Shares” means the Subject Equity Shares resulting from the conversion of Restricted Voting Shares into the Subject Equity Shares pursuant to subparagraph (ii);

 

(E) Exclusionary Offer” means an offer to purchase Subject Equity Shares that:

 

(i) is a General Offer; and

 

(ii) is not made concurrently with an offer to purchase Restricted Voting Shares that is identical to the offer to purchase the Subject Equity Shares in terms of price per share and percentage of outstanding shares to be taken up exclusive of shares owned immediately prior to the offer by the Offeror, and in all other material respects, and that has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Subject Equity Shares;

 

and for the purposes of this definition, if an offer to purchase Subject Equity Shares is a General Offer but not an Exclusionary Offer, the varying of any term of such offer shall be deemed to constitute the making of a new offer unless a variation identical in all material respects concurrently is made to the corresponding offer to purchase Restricted Voting Shares;

 

(F) Expiry Date” means the last date on which holders of the Subject Equity Shares may accept an Exclusionary Offer;

 

(G) General Offer” means an offer to purchase Subject Equity Shares that must, by reason of applicable securities legislation or the requirements of any stock exchange on which the Subject Equity Shares are listed, be made to all or substantially all holders of Subject Equity Shares who are in a province of Canada to which any such legislation or requirement applies (assuming that the offeree was resident in Ontario);

 

(H) Offer Date” means the date on which an Exclusionary Offer is made;

 

(I) Offeror” means a Person that makes an offer to purchase the Subject Equity Shares (the “bidder”), and includes any Associate or Affiliate of the bidder or any Person that is disclosed in the offering document to be acting jointly or in concert with the bidder;

 

(J) Person” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced and includes a company or other body corporate wherever or however incorporated;

 

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(K) Subject Equity Shares” means any one or more classes of Equity Shares that are subject to an Exclusionary Offer, other than Restricted Voting Shares; and

 

(L) Transfer Agent” means the transfer agent of the Company at the relevant time for any of the Subject Equity Shares (and if there is no such transfer agent, “Transfer Agent” means the Company);

 

(ii) subject to subparagraph (v), if an Exclusionary Offer is made, each outstanding Restricted Voting Share shall, at the option of each holder of Restricted Voting Shares during the Conversion Period, be convertible on a one-for-one basis into the class of Equity Shares that are subject to such Exclusionary Offer (and if more than one class of Equity Shares are subject to such Exclusionary Offer, or different Exclusionary Offers are made for separate classes of Subject Equity Shares, on a one-for-one basis into any class of Equity Shares that are subject to any such Exclusionary Offer, at the holder’s election, or failing such election, into any class of Equity Shares that are subject to any such Exclusionary Offer at the board of directors’ discretion). The conversion right may be exercised by notice in writing given to the Transfer Agent prior to the Expiry Date accompanied by the share certificate(s) representing the Restricted Voting Shares which the holder desires to convert, together with any letter of transmittal or other documentation, including any medallion signature guarantee, as may be required by the Transfer Agent or pursuant to the Exclusionary Offer, in either case, in duly executed or completed form, and such notice shall be executed by such holder, or by his attorney duly authorized in writing, and shall specify the number of Restricted Voting Shares which the holder desires to have converted and the class of Equity Shares which are desired to be converted into. The Company shall pay any governmental stamp, transfer or similar tax (but for greater certainty, no income or capital gains tax) imposed on or in respect of such conversion. If less than all of the Restricted Voting Shares represented by any share certificate are to be converted, the holder shall be entitled to receive a new share certificate representing in the aggregate the number of Restricted Voting Shares represented by the original share certificate, which are not to be converted. Upon any conversion of any shares of any class into shares of another class, the Company shall adjust the capital accounts maintained for the respective classes of shares as provided in the Business Corporations Act. The conversion right may only be exercised in respect of Restricted Voting Shares for the purpose of depositing the resulting Subject Equity Shares pursuant to such offer and for no other reason;

 

(iii) an election by a holder of Restricted Voting Shares to exercise the conversion right provided for in subparagraph (ii) shall be deemed to also constitute irrevocable elections by such holder (a) to deposit the Converted Shares pursuant to the Exclusionary Offer (subject to such holder’s right to subsequently withdraw the shares from the offer), and (b) to exercise the right to convert back into Restricted Voting Shares all Converted Shares (on a one-for-one basis) in respect of which such holder exercises his, her or its right of withdrawal from the Exclusionary Offer or which are not otherwise ultimately taken up under the Exclusionary Offer. Any conversion of Converted Shares back into Restricted Voting Shares in respect of which the holder exercises his, her or its right of withdrawal from the Exclusionary Offer shall become effective at the time such right of withdrawal is exercised. If the right of withdrawal is not exercised, any conversion of Converted Shares back into Restricted Voting Shares pursuant to a deemed election shall become effective:

 

(A) for Converted Shares not taken up in accordance with the terms of an Exclusionary Offer which is nonetheless completed, on the day that the Offeror has taken up and paid for all shares to be acquired by the Offeror under the Exclusionary Offer; and

 

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(B) in respect of an Exclusionary Offer which is abandoned or withdrawn, at the time at which the Exclusionary Offer is abandoned or withdrawn;

 

(iv) no share certificates representing Converted Shares shall be delivered to the holders of such shares before such shares are deposited pursuant to the Exclusionary Offer. The Transfer Agent, on behalf of the holders of the Converted Shares, shall deposit pursuant to the Exclusionary Offer the share certificates representing all Restricted Voting Shares for which the certificates, notices and other documents have been duly delivered to the Transfer Agent pursuant to subparagraph (ii) and shall advise the Offeror of the extent that such certificates so deposited represent Subject Equity Shares of the Company. Upon completion of the Exclusionary Offer, the Transfer Agent shall deliver to the holders of the shares purchased pursuant to the Exclusionary Offer all consideration paid by the Offeror pursuant to the Exclusionary Offer. If Converted Shares are converted back into Restricted Voting Shares pursuant to subparagraph (iii), the Transfer Agent shall deliver to the holders entitled thereto share certificates representing the Restricted Voting Shares resulting from the conversion. Provided however that if no Restricted Voting Shares of a shareholder were acquired by the Offeror pursuant to the Exclusionary Offer, the Transfer Agent shall return the original share certificate (if not duly endorsed for transfer to a named transferee) evidencing such Restricted Voting Shares tendered pursuant to subparagraph (ii) in satisfaction of its obligations under this subparagraph (iv). The Company shall make all arrangements with the Transfer Agent necessary or desirable to give effect to this subparagraph (iv);

 

(v) subject to subparagraph (vi), the conversion right provided for in subparagraph (ii) shall not come into effect with respect to a class of Subject Equity Shares if:

 

(A) prior to the time at which the Exclusionary Offer is made there is or has been delivered to the transfer agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate, as at the time the Exclusionary Offer is made, more than 50% of the then outstanding Subject Equity Shares of each class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each such shareholder, that made such certification, that such shareholder shall not:

 

(i) accept any Exclusionary Offer without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least 7 days prior to the Expiry Date;

 

(ii) make any Exclusionary Offer;

 

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(iii) act jointly or in concert with any Person that makes any Exclusionary Offer; or

 

(iv) transfer any Subject Equity Shares, directly or indirectly, during the time any Exclusionary Offer is outstanding without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee; or

 

(B) within seven (7) days after the Offer Date there is delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate more than 50% of the then outstanding Subject Equity Shares of such class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each shareholder who made such certification:

 

(i) the number of Subject Equity Shares owned by the shareholder;

 

(ii) that such shareholder is not making the Exclusionary Offer and is not an Associate or Affiliate of, or acting jointly or in concert with, the Person making such offer;

 

(iii) that such shareholder shall not accept the Exclusionary Offer, including any varied form of the offer, without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least seven (7) days prior to the Expiry Date; and

 

(iv) that such shareholder shall not transfer any Subject Equity Shares, directly or indirectly, prior to the Expiry Date without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee if this information is known to the transferor;

 

(vi) if a notice (the “Notice”) referred to in sub-clause (v)(A)(i), (v)(A)(iv), (v)(B)(iii) or (v)(B)(iv) is given to the Transfer Agent and to the corporate secretary of the Company and the conversion right provided for in subparagraph (ii) has not, because of the giving of such Notice, come into effect, the Company shall, either forthwith upon receipt of the Notice or forthwith after the seventh (7th) day following the Offer Date, whichever is later, make a good faith determination as to whether there are subsisting certifications that comply with either clause (v)(A) or (v)(B) from shareholders of the Company who own in the aggregate more than 50% of the then outstanding Subject Equity Shares of each class, exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror. If the Company determines that there are not such subsisting certifications, subparagraph (v) shall cease to apply and the conversion right provided for in subparagraph (ii) shall be in effect for the remainder of the Conversion Period;

 

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(vii) as soon as reasonably possible after the seventh (7th) day after the Offer Date, the Company shall send to each holder of Restricted Voting Shares a written notice advising the holders as to whether they are entitled to convert their Restricted Voting Shares into Subject Equity Shares and the reasons therefor. If such notice discloses that they are not so entitled, but it is subsequently determined that they are so entitled by virtue of subparagraph (vi) or otherwise, the Company shall forthwith send another notice to them advising them of that fact and the reasons therefor;

 

(viii) if a notice referred to in subparagraph (vii) discloses that the conversion right set forth in subparagraph (ii) has come into effect, the notice shall:

 

(A) include a description of the procedure to be followed to effect the conversion and to have the Converted Shares tendered under the Exclusionary Offer;

 

(B) include the information set out in subparagraph (vii) hereof; and

 

(C) be accompanied by a copy of the Exclusionary Offer and all other materials sent to any holders of Subject Equity Shares in respect of such offer; and as soon as reasonably possible after any additional material, including any notice of variation, is sent to any holders of Subject Equity Shares in respect of such offer, the Company shall send a copy of such additional materials to each holder of Restricted Voting Shares;

 

(ix) prior to or forthwith after sending any notice referred to in subparagraph (vii), the Company shall cause a news release to be issued to a Canadian national news service, describing the contents of the notice; and

 

(x) references to share certificates shall include, as applicable, the equivalent in any non-certificated inventory system (such as, for example, a Direct Registration System or an electronic position), with appropriate changes.

 

27.4            Limited Voting Shares

 

(1) An unlimited number of Limited Voting Shares, without nominal or par value, are authorized for issuance, having attached thereto the special rights and restrictions as set forth below:

 

(a)            Voting Rights.

 

Holders of Limited Voting Shares shall be entitled to notice of and to attend (if applicable, virtually) any meeting of the shareholders of the Company. Holders of Limited Voting Shares shall be entitled to vote at any meeting of the shareholders of the Company, and at each such meeting, shall be entitled to one (1) vote in respect of each Limited Voting Share held, except that holders shall not have an entitlement to vote (i) in respect of the election for directors of the board of directors or (ii) for a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote.

 

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Except as otherwise provided in these Articles (including without limitation the restrictions on voting rights for directors in the case of the Limited Voting Shares) or except as provided in the Business Corporations Act, Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares are equal in all respects and shall vote together, and with the Multiple Voting Shares, as if they were shares of a single class. In connection with any Change of Control Transaction requiring approval of the holders of all classes of Equity Shares under the Business Corporations Act, holders of each class of Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of any such class is approved by a majority of the votes cast by the holders of outstanding Limited Voting Shares in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of Limited Voting Shares called and held for such purpose.

 

Notwithstanding the provisions of the second paragraph of this Article 27.4(1)(a), the holders of Limited Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the Limited Voting Shares; (ii) affect the holders of any class of Equity Shares differently on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of outstanding Limited Voting Shares.

 

(b)          Constraints on Ownership.

 

Subject to the Specified Exceptions, the Limited Voting Shares may only be held of record by U.S. Persons.

 

(c)           Dividends.

 

Holders of Limited Voting Shares shall be entitled to receive, as and when declared by the board of directors, dividends in cash or property of the Company. No dividend will be declared or paid on any other class of Equity Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on the Limited Voting Shares. The Limited Voting Shares shall rank equally with the other Equity Shares as to dividends on a share-for-share basis, without preference or distinction. In the event of the payment of a dividend in the form of shares, holders of Limited Voting Shares shall receive Limited Voting Shares, unless otherwise determined by the board of directors, provided an equal number of shares is declared as a dividend or distribution on a then outstanding per-Equity Share basis, without preference or distinction, in each case.

 

(d)          Liquidation, Dissolution or Winding-Up.

 

In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Limited Voting Shares shall, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Limited Voting Shares, be entitled to participate ratably in the remaining property of the Company along with all holders of the other classes of Equity Shares (on a per share basis).

 

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(e)           Rights to Subscribe; Pre-Emptive Rights.

 

The holders of Limited Voting Shares are not entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Company now or in the future.

 

(f)           Subdivision or Consolidation.

 

No subdivision or consolidation of the Limited Voting Shares shall occur unless, simultaneously, the other classes of Equity Shares are subdivided or consolidated or otherwise adjusted so as to maintain and preserve the relative rights of the holders of the shares of each of the said classes. Subject to Article 27.4(1)(g), the Limited Voting Shares cannot be converted into any other class of shares.

 

(g)          Conversion of Limited Voting Shares.

 

(1)           Automatic

 

Subject to the Specified Exceptions, each issued and outstanding Limited Voting Share shall be automatically converted into one Subordinate Voting Share, without any further act on the part of the Company or of the holder, if at any given time, such Limited Voting Share becomes held of record by a Non-U.S. Person.

 

(2)           Conversion into Restricted Voting Shares

 

Subject to the Specified Exceptions, if, at any given time, the total number of Restricted Voting Shares represents a number below the FPI Threshold, the number of Limited Voting Shares shall be automatically converted, without further act or formality, on a pro-rata basis across all registered holders of Limited Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Restricted Voting Shares, to the maximum extent possible such that the Limited Voting Shares then represent a number of Equity Shares that is one share less than the FPI Threshold.

 

Notwithstanding the foregoing, in connection with a formal bid for all Equity Shares on identical terms made in compliance with Canadian securities laws that results in the bidder owning or controlling more than fifty percent (50%) of the total voting power of the voting securities of the Company for the election of directors (assuming the Limited Voting Shares each have one (1) vote per share for the election of directors), the bidder may elect, by way of written notice to the Company, that the Limited Voting Shares it so acquires not be automatically converted into Restricted Voting Shares.

 

(3)           Upon an Offer

 

(i)           For the purposes of this Article 27.4(1)(g)(3):

 

(A) Affiliate” has the meaning specified in National Instrument 45-106 – Prospectus Exemptions as, from time to time, amended, re-enacted or replaced;

 

(B) Associate” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced;

 

(C) Conversion Period” means the period of time commencing on the eighth day after the Offer Date and terminating on the Expiry Date;

 

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(D) Converted Shares” means the Subject Equity Shares resulting from the conversion of Limited Voting Shares into the Subject Equity Shares pursuant to subparagraph (ii);

 

(E) Exclusionary Offer” means an offer to purchase Subject Equity Shares that:

 

(i) is a General Offer; and

 

(ii) is not made concurrently with an offer to purchase Limited Voting Shares that is identical to the offer to purchase the Subject Equity Shares in terms of price per share and percentage of outstanding shares to be taken up exclusive of shares owned immediately prior to the offer by the Offeror, and in all other material respects, and that has no condition attached other than the right not to take up and pay for shares tendered if no shares are purchased pursuant to the offer for Subject Equity Shares;

 

and for the purposes of this definition, if an offer to purchase Subject Equity Shares is a General Offer but not an Exclusionary Offer, the varying of any term of such offer shall be deemed to constitute the making of a new offer unless a variation identical in all material respects concurrently is made to the corresponding offer to purchase Limited Voting Shares;

 

(F) Expiry Date” means the last date on which holders of the Subject Equity Shares may accept an Exclusionary Offer;

 

(G) General Offer” means an offer to purchase Subject Equity Shares that must, by reason of applicable securities legislation or the requirements of any stock exchange on which the Subject Equity Shares are listed, be made to all or substantially all holders of Subject Equity Shares who are in a province of Canada to which any such legislation or requirement applies (assuming that the offeree was resident in Ontario);

 

(H) Offer Date” means the date on which an Exclusionary Offer is made;

 

(I) Offeror” means a person that makes an offer to purchase the Subject Equity Shares (the “bidder”), and includes any Associate or Affiliate of the bidder or any person that is disclosed in the offering document to be acting jointly or in concert with the bidder,

 

(J) Person” has the meaning assigned by the Securities Act (Ontario) as, from time to time, amended, re-enacted or replaced and includes a company or other body corporate wherever or however incorporated;

 

(K) Subject Equity Shares” means any one or more classes of Equity Shares that are subject to an Exclusionary Offer, other than Limited Voting Shares; and

 

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(L) Transfer Agent” means the transfer agent of the Company at the relevant time for any of the Subject Equity Shares (and if there is no such transfer agent, “Transfer Agent” means the Company);

 

(ii) subject to subparagraph (v), if an Exclusionary Offer is made, each outstanding Limited Voting Share shall, at the option of each holder of Limited Voting Shares during the Conversion Period, be convertible on a one-for-one basis into the class of Equity Shares that are subject to such Exclusionary Offer (and if more than one class of Equity Shares are subject to such Exclusionary Offer, or different Exclusionary Offers are made for separate classes of Subject Equity Shares, on a one-for-one basis into any class of Equity Shares that are subject to any such Exclusionary Offer, at the holder’s election, or failing such election, into any class of Equity Shares that are subject to any such Exclusionary Offer at the board of directors’ discretion). The conversion right may be exercised by notice in writing given to the Transfer Agent prior to the Expiry Date accompanied by the share certificate(s) representing the Limited Voting Shares which the holder desires to convert, together with any letter of transmittal or other documentation, including any medallion signature guarantee, as may be required by the Transfer Agent or pursuant to the Exclusionary Offer, in either case, in duly executed or completed form, and such notice shall be executed by such holder, or by his attorney duly authorized in writing, and shall specify the number of Limited Voting Shares which the holder desires to have converted and the class of Equity Shares which are desired to be converted into. The Company shall pay any governmental stamp, transfer or similar tax (but for greater certainty, no income or capital gains tax) imposed on or in respect of such conversion. If less than all of the Limited Voting Shares represented by any share certificate are to be converted, the holder shall be entitled to receive a new share certificate representing in the aggregate the number of Limited Voting Shares represented by the original share certificate, which are not to be converted. Upon any conversion of any shares of any class into shares of another class, the Company shall adjust the capital accounts maintained for the respective classes of shares as provided in the Business Corporations Act. The conversion right may only be exercised in respect of Limited Voting Shares for the purpose of depositing the resulting Subject Equity Shares pursuant to such offer and for no other reason;

 

(iii) an election by a holder of Limited Voting Shares to exercise the conversion right provided for in subparagraph (ii) shall be deemed to also constitute irrevocable elections by such holder (a) to deposit the Converted Shares pursuant to the Exclusionary Offer (subject to such holder’s right to subsequently withdraw the shares from the offer), and (b) to exercise the right to convert back into Limited Voting Shares all Converted Shares (on a one-for-one basis) in respect of which such holder exercises his, her or its right of withdrawal from the Exclusionary Offer or which are not otherwise ultimately taken up under the Exclusionary Offer. Any conversion of Converted Shares back into Limited Voting Shares in respect of which the holder exercises his, her or its right of withdrawal from the Exclusionary Offer shall become effective at the time such right of withdrawal is exercised. If the right of withdrawal is not exercised, any conversion of Converted Shares back into Limited Voting Shares pursuant to a deemed election shall become effective:

 

(A) for Converted Shares not taken up in accordance with the terms of an Exclusionary Offer which is nonetheless completed, on the day that the Offeror has taken up and paid for all shares to be acquired by the Offeror under the Exclusionary Offer; and

 

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(B) in respect of an Exclusionary Offer which is abandoned or withdrawn, at the time at which the Exclusionary Offer is abandoned or withdrawn;

 

(iv) no share certificates representing Converted Shares shall be delivered to the holders of such shares before such shares are deposited pursuant to the Exclusionary Offer. The Transfer Agent, on behalf of the holders of the Converted Shares, shall deposit pursuant to the Exclusionary Offer the share certificates representing all Limited Voting Shares for which the certificates, notices and other documents have been duly delivered to the Transfer Agent pursuant to subparagraph (ii) and shall advise the Offeror of the extent that such certificates so deposited represent Subject Equity Shares of the Company. Upon completion of the Exclusionary Offer, the Transfer Agent shall deliver to the holders of the shares purchased pursuant to the Exclusionary Offer all consideration paid by the Offeror pursuant to the Exclusionary Offer. If Converted Shares are converted back into Limited Voting Shares pursuant to subparagraph (iii), the Transfer Agent shall deliver to the holders entitled thereto share certificates representing the Limited Voting Shares resulting from the conversion. Provided however that if no Limited Voting Shares of a shareholder were acquired by the Offeror pursuant to the Exclusionary Offer, the Transfer Agent shall return the original share certificate (if not duly endorsed for transfer to a named transferee) evidencing such Limited Voting Shares tendered pursuant to subparagraph (ii) in satisfaction of its obligations under this subparagraph (iv). The Company shall make all arrangements with the Transfer Agent necessary or desirable to give effect to this subparagraph (iv);

 

(v) subject to subparagraph (vi), the conversion right provided for in subparagraph (ii) shall not come into effect with respect to a class of Subject Equity Shares if:

 

(A) prior to the time at which the Exclusionary Offer is made there is or has been delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate, as at the time the Exclusionary Offer is made, more than 50% of the then outstanding Subject Equity Shares of each class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each such shareholder, that made such certification, that such shareholder shall not:

 

(i) accept any Exclusionary Offer without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least 7 days prior to the Expiry Date;

 

(ii) make any Exclusionary Offer;

 

(iii) act jointly or in concert with any Person that makes any Exclusionary Offer; or

 

(iv) transfer any Subject Equity Shares, directly or indirectly, during the time any Exclusionary Offer is outstanding without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee; or

 

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(B) within seven (7) days after the Offer Date there is delivered to the Transfer Agent and to the corporate secretary of the Company a certification or certifications signed by or on behalf of one or more shareholders of the Company owning in the aggregate more than 50% of the then outstanding Subject Equity Shares of such class (exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror), which certification or certifications shall confirm, in the case of each shareholder who made such certification:

 

(i) the number of Subject Equity Shares owned by the shareholder;

 

(ii) that such shareholder is not making the Exclusionary Offer and is not an Associate or Affiliate of, or acting jointly or in concert with, the Person making such offer;

 

(iii) that such shareholder shall not accept the Exclusionary Offer, including any varied form of the offer, without giving the Transfer Agent and the corporate secretary of the Company written notice of such acceptance or intended acceptance at least seven (7) days prior to the Expiry Date; and

 

(iv) that such shareholder shall not transfer any Subject Equity Shares, directly or indirectly, prior to the Expiry Date without giving the Transfer Agent and the corporate secretary of the Company written notice of such transfer or intended transfer at least seven (7) days prior to the Expiry Date, which notice shall state, if known to the transferor, the names of the transferees and the number of Subject Equity Shares transferred or to be transferred to each transferee if this information is known to the transferor;

 

(vi) if a notice (the “Notice”) referred to in sub-clause (v)(A)(i), (v)(A)(iv), (v)(B)(iii) or (v)(B)(iv) is given to the Transfer Agent and to the corporate secretary of the Company and the conversion right provided for in subparagraph (ii) has not, because of the giving of such Notice, come into effect, the Company shall, either forthwith upon receipt of the Notice or forthwith after the seventh (7th) day following the Offer Date, whichever is later, make a good faith determination as to whether there are subsisting certifications that comply with either clause (v)(A) or (v)(B) from shareholders of the Company who own in the aggregate more than 50% of the then outstanding Subject Equity Shares of each class, exclusive of shares owned immediately prior to the Exclusionary Offer by the Offeror. If the Company determines that there are not such subsisting certifications, subparagraph (v) shall cease to apply and the conversion right provided for in subparagraph (ii) shall be in effect for the remainder of the Conversion Period;

 

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(vii) as soon as reasonably possible after the seventh (7th) day after the Offer Date, the Company shall send to each holder of Limited Voting Shares a written notice advising the holders as to whether they are entitled to convert their Limited Voting Shares into Subject Equity Shares and the reasons therefor. If such notice discloses that they are not so entitled, but it is subsequently determined that they are so entitled by virtue of subparagraph (vi) or otherwise, the Company shall forthwith send another notice to them advising them of that fact and the reasons therefor;

 

(viii) if a notice referred to in subparagraph (vii) discloses that the conversion right set forth in subparagraph (ii) has come into effect, the notice shall:

 

(A) include a description of the procedure to be followed to effect the conversion and to have the Converted Shares tendered under the Exclusionary Offer;

 

(B) include the information set out in subparagraph (vii) hereof; and

 

(C) be accompanied by a copy of the Exclusionary Offer and all other materials sent to any holders of Subject Equity Shares in respect of such offer; and as soon as reasonably possible after any additional material, including any notice of variation, is sent to any holders of Subject Equity Shares in respect of such offer, the Company shall send a copy of such additional materials to each holder of Limited Voting Shares;

 

(ix) prior to or forthwith after sending any notice referred to in subparagraph (vii), the Company shall cause a news release to be issued to a Canadian national news service, describing the contents of the notice; and

 

(x) references to share certificates shall include, as applicable, the equivalent in any non-certificated inventory system (such as, for example, a Direct Registration System or an electronic position), with appropriate changes.

 

27.5            Additional Rights, Privileges, Restrictions and Conditions Applicable to Equity Shares

 

(A)            Redemption, Transfer and Other Limiting Provisions

 

(1)            For the purposes of this Article 27.5, the following terms will have the meaning specified below:

 

Applicable Price” means a price per Equity Share determined by the board, but not less than 95% of the lesser of: (i) the Closing Market Price of the Subordinate Voting Shares on the Exchange (or the then principal marketplace on which the Subordinate Voting Shares are listed or quoted for trading) on the trading day immediately prior to the closing of the Redemption or Transfer (or the average of the last bid and last asking prices if there was no trading on the specified date); and (ii) the five-day volume weighted average price of the Subordinate Voting Shares on the Exchange (or the then principal marketplace on which the Subordinate Voting Shares are listed or quoted for trading) for the five trading days immediately prior to the closing of the Redemption or Transfer (or the average of the last bid and last asking prices if there was no trading on the specified dates). Notwithstanding the foregoing, if the Subordinate Voting Shares are not traded or quoted for trading on the Exchange or any other marketplace, the Applicable Price may be determined by the Board in its sole discretion, and if at such time of determination there are no Subordinate Voting Shares issued and outstanding, then all references in this definition to “Subordinate Voting Shares” shall be to “Restricted Voting Shares” or “Limited Voting Shares”, as applicable;

 

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Business” means the conduct of any activities relating to the cultivation, manufacturing and dispensing of cannabis and cannabis-derived products, including in the United States or elsewhere, which include the owning and operating of cannabis licenses;

 

Closing Market Price” shall be: (i) an amount equal to the closing price of the Subordinate Voting Shares on the trading day immediately prior to the closing of the Redemption or Transfer or exchange if there was a trade on the specified date and the applicable exchange or market provides a closing price; or (ii) an amount equal to the average of the last bid and last asking prices if there was no trading on the applicable date; and notwithstanding the foregoing, if at such time of determination there are no Subordinate Voting Shares issued and outstanding, then all references in this definition to “Subordinate Voting Shares” shall be to “Restricted Voting Shares” or “Limited Voting Shares”, as applicable;

 

Determination Date” means the date on which the Company provides written notice to any shareholder that the board has determined that such shareholder is an Unsuitable Person;

 

Exchange” means the NEO Exchange or any other stock exchange on which the Subordinate Voting Shares are then listed;

 

Governmental Authority” or “Governmental Authorities” means any United States or foreign, federal, provincial, state, county, regional, local or municipal government, any agency, administration, board, bureau, commission, department, service, or other instrumentality or political subdivision of the foregoing, and any Person with jurisdiction exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government or monetary policy (including any court or arbitration authority) and any Exchange;

 

Licenses” means all licenses, permits, approvals, orders, authorizations, registrations, findings of suitability, franchises, exemptions, waivers and entitlements issued by a Governmental Authority to or for the benefit of the Company or any affiliate required for, or relating to, the conduct of the Business;

 

Ownership” (and derivatives thereof) means (i) ownership of record as evidenced in the Company’s central securities register, (ii) “beneficial ownership” as defined in Section 1 of the Business Corporations Act, or (iii) the power to exercise control or direction over a security;

 

Person” means an individual, partnership, corporation, company, limited or unlimited liability company, trust or any other entity;

 

Redemption” has the meaning ascribed thereto in Article 27.5(8);

 

Redemption Date” means the date on which the Company will redeem and pay for the Equity Shares pursuant to Article 27.5. The Redemption Date will be not less than thirty (30) Trading Days following the date of the Redemption Notice unless a Governmental Authority requires that the Equity Shares be redeemed as of an earlier date, in which case, the Redemption Date will be such earlier date and if there is an outstanding Redemption Notice, the Company will issue an amended Redemption Notice reflecting the new Redemption Date forthwith;

 

Redemption Notice” has the meaning ascribed thereto in Article 27.5(9);

 

Significant Interest” means Ownership of five percent (5%) or more of all of the issued and outstanding shares of the Company, including through acting jointly or in concert with another shareholder, or such other number of Equity Shares as is determined by the Board from time to time;

 

Subject Shareholder” means a Person, a group of Persons acting jointly or in concert or a group of Persons who the board reasonably determines are acting jointly or in concert;

 

Trading Day” means a day on which trades of any class of the Equity Shares are executed on the Exchange or any other stock exchange on which the Equity Shares are listed or quoted for trading;

 

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Transfer” has the meaning ascribed thereto in Article 27.5(8);

 

Transfer Date” means the date on which a Transfer of Equity Shares required by the Company is required to be completed by the Company;

 

Transfer Notice” has the meaning ascribed thereto in Article 27.5(12);

 

Transferred Share” has the meaning ascribed thereto in Article 27.5(8); and

 

Unsuitable Person” means:

 

(i) any Person (including a Subject Shareholder) with a Significant Interest who a Governmental Authority granting the Licenses has determined to be unsuitable to own Equity Shares;

 

(ii) any Person (including a Subject Shareholder) with a Significant Interest whose ownership of Equity Shares may result in the loss, suspension or revocation (or similar action) with respect to any Licenses or in the Company or any affiliate being unable to obtain any new Licenses in the normal course, including, but not limited to, as a result of such Person’s failure to apply for a suitability review from or to otherwise fail to comply with the requirements of a Governmental Authority, all as determined by the board; or

 

(iii) who have not been determined by the applicable Governmental Authority to be an acceptable Person or otherwise have not received the requisite consent of such Governing Authority to own the Equity Shares within a reasonable period of time acceptable to the board or prior to acquiring any Equity Shares, as applicable.

 

(2) Subject to Article 27.5(4), no Subject Shareholder may acquire Equity Shares that would result in the holding of a Significant Interest, directly or indirectly, in one or more transactions, without providing not less than 30 days’ advance written notice (or such shorter period as the board may approve) to the Company by written notice to the Company’s head office to the attention of the corporate secretary and without having received all required approvals from all Governmental Authorities.

 

(3) If the board reasonably believes that a Subject Shareholder may have failed to comply with any of the provisions of Article 27.5(2), the Company may, without prejudice to any other remedy hereunder, apply to the Supreme Court of British Columbia or another court of competent jurisdiction for an order directing that the Subject Shareholder disclose the number of Equity Shares owned.

 

(4) The provisions of Article 27.5(2) and Article 27.5(3) will not apply to the Ownership, acquisition or disposition of Equity Shares as a result of:

 

(a) any transfer of Equity Shares occurring by operation of bankruptcy or insolvency law including, inter alia, the transfer of Equity Shares of the Company to a trustee in bankruptcy;

 

(b) an acquisition or proposed acquisition by one or more underwriters or portfolio managers who hold Equity Shares for the purposes of distribution to the public or for the benefit of a third party provided that such third party is in compliance with Article 27.5(2);

 

(c) the holding by a recognized clearing agency or recognized depositary in the ordinary course of its business; or

 

(d) the conversion, exchange or exercise of securities of the Company or an affiliate (other than the Equity Shares) duly issued or granted by the Company or an affiliate, into or for Equity Shares, in accordance with their respective terms.

 

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(5) At the option of the Company and upon determination by the board that an Unsuitable Person has not received the requisite approval of any Government Authority to own the Equity Shares, the Company may issue a notice prohibiting any Unsuitable Person owning Equity Shares from exercising any voting rights with respect to such Equity Shares and on and after the Determination Date specified therein, and/or providing that such holder will cease to have any rights whatsoever with respect to such Equity Shares, including any rights to the receipt of dividends from the Company, other than the right to receive the Applicable Price, without interest, on the Redemption Date or the Transfer Date, as applicable; provided, however, that if any such Equity Shares come to be owned solely by Persons other than an Unsuitable Person (such as by transfer of such Equity Shares to a liquidating trust, subject to the approval of the board and any applicable Governmental Authority), such Persons may, in the discretion of the board, exercise the voting and/or other rights attached to such Equity Shares and the board may determine, in its sole discretion, not to Redeem or require the Transfer of such Equity Shares.

 

(6) Notwithstanding anything to the contrary contained herein, all transfers of Multiple Voting Shares are subject to the terms of these Articles.

 

(7) Following any Redemption in accordance with the terms of this Article 27.5, the redeemed Equity Shares will be cancelled.

 

(8) At the option, but not obligation, of the Company, and at the discretion of the board, any Equity Shares directly or indirectly owned by an Unsuitable Person may be (i) redeemed by the Company (for the Applicable Price) out of funds lawfully available on the Redemption Date (a “Redemption”), or (ii) required to be transferred to a third party for the Applicable Price and on such terms and conditions as the board may direct (a “Transfer”, and each Equity Share subject to a Transfer, a “Transferred Share”). Equity Shares to be redeemed or mandatorily transferred pursuant to this Article will be redeemed or mandatorily transferred at any time and from time to time pursuant to the terms hereof.

 

(9) In the case of a Redemption, the Company will send a written notice to the holder of the Equity Shares called for Redemption, which will set forth: (i) the Redemption Date, (ii) the number of Equity Shares to be redeemed on the Redemption Date, (iii) the Applicable Price or the formula pursuant to which the Applicable Price will be determined and the manner of payment therefor, (iv) the place where such Equity Shares (or certificate therefor, as applicable) must be surrendered, or accompanied by proper instruments of transfer (and if so determined by the board, together with a medallion signature guarantee), and (v) any other requirement of surrender of the Equity Shares to be redeemed (the “Redemption Notice”). The Redemption Notice may be conditional such that the Company need not redeem the Equity Shares owned by an Unsuitable Person on the Redemption Date if the board determines, in its sole discretion, that such Redemption is no longer advisable or necessary on or before the Redemption Date. If applicable, the Company will send a written notice confirming the amount of the Applicable Price promptly following the determination of such Applicable Price.

 

(10) Upon receipt by the Unsuitable Person of a Redemption Notice in accordance with Article 27.5(9) and surrender of the relevant Equity Share certificate, if applicable, the holder of the Equity Shares tendered for redemption (together with the applicable transfer documents) shall be entitled to receive the Applicable Price per redeemed Equity Share.

 

(11) The Applicable Price payable in respect of the Equity Shares surrendered for Redemption during any calendar month shall be satisfied by way of cash payment no later than the last day of the calendar month following the month in which the Equity Shares were tendered for Redemption. Payments made by the Company of the cash portion of the Applicable Price, less any applicable taxes and any costs to the Company of the Redemption, are conclusively deemed to have been made upon the mailing of a cheque in a postage prepaid envelope addressed to the Unsuitable Person unless such cheque is dishonoured upon presentment. Upon such payment, the Company shall be discharged from all liability to the former Unsuitable Person in respect of the redeemed Equity Shares.

 

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(12) In the case of a required Transfer, the Company will send a written notice to the holder of the Equity Shares in question, which will set forth: (i) the Transfer Date, (ii) the number of Equity Shares to be Transferred on the Transfer Date, (iii) the Applicable Price or the formula pursuant to which the Applicable Price will be determined and the manner of payment therefor, (iv) the place where such Equity Shares (or certificate therefor, as applicable) must be surrendered, accompanied by proper instruments of transfer (and if so determined by the board, together with a medallion signature guarantee), and (v) any other requirement in respect of the Equity Shares to be Transferred, which may without limitation include a requirement to dispose of the Equity Shares via the Exchange to a Person who would not be in violation of the provisions of this Article 27.5(12) (the “Transfer Notice”). The Transfer Notice may be conditional such that the Company need not require the Transfer of the Equity Shares owned by an Unsuitable Person on the Transfer Date if the board determines, in its sole discretion, that such Transfer is no longer advisable or necessary on or before the Transfer Date. If applicable, the Company will send a written notice confirming the amount of the Applicable Price promptly following the determination of such Applicable Price.

 

(13) Upon receipt by the Unsuitable Person of a Transfer Notice in accordance with Article 27.5(12) and surrender of the relevant Equity Share certificate, if applicable (together with applicable Transfer documents), the holder of the Equity Shares tendered for Transfer shall be entitled to receive the Applicable Price per Transferred Share.

 

(14) The Applicable Price payable in respect of the Equity Shares surrendered for Transfer during any calendar month shall be satisfied, less any costs to the Company of the Transfer, by way of cash payment no later than the last day of the calendar month following the month in which the Equity Shares were tendered for Transfer. Payments made by the Company of the cash portion of the Applicable Price, less any applicable taxes and any costs to the Company of the Transfer, are conclusively deemed to have been made upon the mailing of a cheque in a postage prepaid envelope addressed to the Unsuitable Person unless such cheque is dishonoured upon presentment. Upon such payment, the Company shall be discharged from all liability to the former Unsuitable Person in respect of the Transferred Shares.

 

(15) If Equity Shares are required to be Transferred under Article 27.5(12), the former owner of the Equity Shares immediately before the Transfer shall by that Transfer be divested of their interest or right in the Equity Shares, and the Person who, but for the Transfer, would be the registered owner of the Equity Shares or a Person who satisfies the Company that, but for the Transfer, they could properly be treated as the registered owner or registered holder of the Equity Shares shall, from the time of the Transfer, be entitled to receive only the Applicable Price per Transferred Share, without interest, less any applicable taxes and any costs to the Company of the Transfer.

 

(16) Following the sending of any Redemption Notice or Transfer Notice, and prior to the completion of the Redemption or Transfer specified therein, the Company may refuse to recognize any other disposition of the Equity Shares in question.

 

(17) If the Company does not know the address of the former holder of Equity Shares Transferred or Redeemed hereunder, it may retain the amount payable to the former holder thereof, title to which shall revert to the Company if not claimed within two (2) years (and at that time all rights thereto shall belong to the Company).

 

(18) To the extent required by applicable laws, the Company may deduct and withhold any tax from the Applicable Price. To the extent any amounts are so withheld and are timely remitted to the applicable Governmental Authority, such amounts shall be treated for all purposes herein as having been paid to the Person in respect of which such deduction and withholding was made.

 

(19) All notices given by the Company to holders of Equity Shares pursuant to this Schedule, including a Redemption Notice or Transfer Notice, will be in writing and will be deemed given when delivered by personal service, overnight courier or first-class mail, postage prepaid, to the holder’s registered address as shown on the Company’s share register.

 

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(20) The Company’s right to Redeem or Transfer Equity Shares pursuant to this Article 27.5 will not be exclusive of any other right the Company may have or hereafter acquire under any agreement or any provision of the notice of articles or the articles of the Company or otherwise with respect to the Equity Shares or any restrictions on holders thereof.

 

(21) In connection with the conduct of its or its affiliates’ Business, the Company may require that a Subject Shareholder provide to one or more Governmental Authorities, if and when required, information and fingerprints for a criminal background check, individual history form(s), and other information required in connection with applications for Licenses.

 

(22) The board can waive any provision of this Article 27.5.

 

(23) In the event that any provision (or portion of a provision) of this Article 27.5 or the application thereof becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of Article 27.5 (including the remainder of such provision, as applicable) will continue in full force and effect.

 

(B) Board Powers, Declarations and Deeming Provisions

 

(1) Where an Equity Share is held of record, directly or indirectly, or jointly by (i) one or more U.S. Persons and (ii) one or more Non-U.S. Persons, such Equity Share shall be deemed to be held of record by a U.S. Person.

 

(2) So long as they are publicly listed, the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares may, in the Company’s discretion and subject to regulatory approval, trade under a single stock symbol on the Exchange.

 

(3) Subject to the Business Corporations Act, the board of directors may, in its sole discretion, in order to administer the constrained share provisions of the Equity Shares set out in these Articles:

 

(a) require any Person in whose name Equity Shares are registered or any beneficial holder or controller, whether direct or indirect, of the Equity Shares to furnish a statutory declaration declaring whether:

 

(i) the shareholder holds, is the beneficial owner of and/or has control over the Equity Shares of the Company (and if the Person is not also the beneficial owner and in control of the Equity Shares, the Person must make reasonable inquiries of the beneficial owner(s) or persons in control of such Equity Shares to confirm that the statements made in the statutory declaration as they pertain to the beneficial owner and controller are true); and

 

(ii) the Equity Shares are held of record by a U.S. Person or a Non-U.S. Person;

 

and declaring any further facts or provide any other documents that the directors consider relevant;

 

(b) require any Person seeking to have a transfer of an Equity Share registered in such Person’s name or to have an Equity Share issued to him or her or it to furnish a declaration similar to the declaration a shareholder may be required to furnish under paragraph (a) above; and

 

(c) determine the circumstances in which any declarations are required, their form and the times when they are to be furnished.

 

(4) Where a Person fails to furnish a declaration pursuant to a by-law or other document made under this Article 27.5(23)(B) in accordance with the requested timeline, the directors may, in their sole discretion, deem such shareholder to be a U.S. Person.

 

(5) Notwithstanding Article 27.5(4), where a Person is required to furnish a declaration pursuant to a by-law or other document made under this Article 27.5(23)(B) the directors may refuse to register a transfer of an Equity Share in such Person’s name or to issue an Equity Share to such Person until that Person has furnished the declaration.

 

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(C) Administration by the Board

 

(1) In the administration of the provisions of these Articles, the board of directors shall have, in addition to the powers set forth herein, all of the powers necessary or desirable, in their opinion, to carry out the intent and purpose of these Articles.

 

(2) In administering the provisions of these Articles, including for the purpose of determining the shareholder’s or transferee’s status as a U.S. Person or Non-U.S. Person, the board of directors may rely on:

 

(a) a statement made in a declaration referred to in Article 27.5(23)(B); and

 

(b) any information received from Broadridge Investor Communications Corporation, or any affiliate, successor or assign thereof;

 

(c) any information received from CDS Clearing and Depositary Services Inc., or any affiliate, successor or assign thereof; and/or

 

(d) the knowledge of any director, officer, employee or agent (including the Transfer Agent) of the Company.

 

(3) Where the directors are required to determine the number of any class or classes of Equity Shares of the Company held of record by or on behalf of Persons who are U.S. Persons or Non-U.S. Person, as applicable, the directors may rely upon (i) the share register of the Company or (ii) any other register held, or any declaration collected by, the transfer agent of the Company or any depositary, such as CDS Clearing and Depositary Services Inc. (or any affiliate, successor or assign thereof), or by Broadridge Investor Communications Corporation (or any affiliate, successor or assign thereof), in each case, as of any date.

 

(4) Wherever in these Articles it is necessary to determine the opinion of the board of directors, such opinion shall be expressed and conclusively evidenced by a resolution of the board of directors duly adopted, including a resolution in writing executed pursuant these Articles and the Business Corporations Act.

 

(5) No shareholder of the Company nor any other Person claiming an interest in shares of the Company shall have any claim or action against the Company or against any director or officer of the Company, and the Company shall have no claim or action against any director or officer of the Company, arising out of any act (including any omission to act) taken by any such director or officer pursuant to, or in intended pursuance of, the provisions of these articles or any breach or alleged breach of such provisions.

 

28. SPECIAL RIGHTS AND RESTRICTIONS OF PREFERRED SHARES

 

28.1 Issuable in Series.

 

Subject to the Business Corporations Act, from time to time, the directors by resolution may, if none of the Preferred Shares of any particular series are issued, alter these Articles and authorize the alteration of the Notice of Articles of the Company, as the case may be, to do one or more of the following:

 

(a) determine the maximum number of shares of any of those series of Preferred Shares that the Company is authorized to issue, determine that there is no such maximum number, or alter any determination made under this paragraph (a) or otherwise in relation to a maximum number of those shares;

 

(b) create an identifying name by which the shares of any of those series of Preferred Shares may be identified, or alter any identifying name created for those shares; and

 

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(c) attach or alter special rights or restrictions to the shares of any of those series of Preferred Shares, including, but without limiting or restricting the generality of the foregoing, special rights or restrictions with respect to:

 

(i) the rate, amount or method of calculation of any dividends, and whether such rate, amount or method of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment, the date or dates and place or places of payment thereof and the date or dates from which any such dividends shall accrue;

 

(ii) any right of redemption and/or purchase and the redemption or purchase prices and terms and conditions of any such right;

 

(iii) any right of retraction or conversion vested in the holders of Preferred Shares of such series and the prices and terms and conditions of any such rights;

 

(iv) any rights upon dissolution, liquidation or winding-up of the Company;

 

(v) any voting rights; and

 

(vi) any other provisions attaching to any such series of Preferred Shares.

 

28.2 Priority.

 

No rights, privileges, restrictions or conditions attached to any series of Preferred Shares shall confer upon the shares of such series a priority in respect of dividends or distribution of assets or return of capital in the event of the liquidation, dissolution or winding up of the Company over the shares of any other series of Preferred Shares. The Preferred Shares of each series shall, with respect to the payment of dividends and the distribution of assets or return of capital in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, rank on a parity with the Preferred Shares of every other series.

 

28.3 Notices and Voting.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 28.1 of the conditions attaching to the Preferred Shares as a class, the holders of a series of Preferred Shares shall not, as such, be entitled to receive notice of or to attend meetings of the shareholders of the Company nor shall they have any voting rights for the election of directors or for any other purpose (except where the holders of the Preferred Shares as a class or of a specified series are entitled to vote separately as a class as provided in the Act). The holders of the class or a series of Preferred Shares shall not be entitled to vote separately as a class or series or to dissent upon a proposal to amend the articles of the Company to:

 

(a) increase or decrease any maximum number of authorized shares of such class or series, or increase any maximum number of authorized shares of a class or series having rights or privileges equal or superior to the shares of such class or series;

 

(b) effect an exchange, reclassification or cancellation of the shares of such class or series; or

 

(c) create a new class or series of shares equal or superior to the shares of such class or series.

 

28.4 Purchase for Cancellation.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 28.1, the Company may at any time or from time to time by agreement with the holder(s) purchase for cancellation the whole or any part of the Preferred Shares outstanding at such time at the lowest price at which, in the opinion of the board, such shares are then obtainable but such price or prices shall not in any case exceed the redemption price, if any, current at the time of purchase for the shares of the particular series purchased plus costs of purchase together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. In the case of the purchase for cancellation by private contract, the Company shall not be required to purchase Preferred Shares from all holders of Preferred Shares of the class or series in question or to offer to purchase the shares of any other class or any series of shares before proceeding to purchase from any one holder of Preferred Shares nor shall it be required to make purchases from holders of Preferred Shares on a pro rata basis.

 

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28.5            Redemption.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 28.1, the Company may, at its option, redeem all or from time to time any part of the outstanding Preferred Shares on payment to the holders thereof, for each share to be redeemed, the redemption price per share, together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. Before redeeming any Preferred Shares the Company shall mail to each person who, at the date of such mailing, is a registered holder of the shares to be redeemed, notice of the intention of the Company to redeem such shares held by such registered holder; such notice shall be mailed by ordinary prepaid post addressed to the last address of such holder as it appears on the records of the Company or, in the event of the address of any such holder not appearing on the records of the Company, then to the last known address of such holder, at least 10 days before the date specified for redemption; such notice shall set out the date on which redemption is to take place and, if part only of the shares held by the person to whom it is addressed is to be redeemed, the number thereof so to be redeemed; on or after the date so specified for redemption the Company shall pay or cause to be paid the redemption price together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid to the registered holders of the shares to be redeemed, on presentation and surrender of the certificates for the shares so called for redemption at such place or places as may be specified in such notice, and the certificates for such shares shall thereupon be cancelled, and the shares represented thereby shall thereupon be redeemed. In case a part only of the outstanding Preferred Shares is at any time to be redeemed, the shares to be redeemed shall be selected, at the option of the board, either by lot in such manner as the board in their sole discretion shall determine or as nearly as may be pro rata (disregarding fractions) according to the number of Preferred Shares held by each holder. In case a part only of the Preferred Shares represented by any certificate shall be redeemed, a new certificate for the balance shall be issued at the expense of the Company. From and after the date specified for redemption in such notice, the holders of the shares called for redemption shall cease to be entitled to dividends and shall not be entitled to any rights in respect thereof, except to receive the redemption price together with all dividends declared (or accrued in the case of cumulative dividends) thereon prior to the date specified for redemption and unpaid, unless payment of the redemption price and such dividends shall not be made by the Company in accordance with the foregoing provisions, in which case the rights of the holders of such shares shall remain unimpaired. On or before the date specified for redemption the Company shall have the right to deposit the redemption price of the shares called for redemption, together with all dividends declared (or accrued in the case of cumulative dividends) thereon prior to the date specified for redemption and unpaid, in a special account with any chartered bank or trust company in Canada named in the notice of redemption, such redemption price and dividends to be paid to or to the order of the respective holders of such shares called for redemption upon presentation and surrender of the certificates representing the same and, upon such deposit being made, the shares in respect whereof such deposit shall have been made shall be redeemed and the rights of the several holders thereof, after such deposit, shall be limited to receiving, out of the moneys so deposited, without interest, the redemption price together with all dividends declared (or accrued in the case of cumulative dividends) thereon prior to the date specified for redemption and unpaid, applicable to their respective shares against presentation and surrender of the certificates representing such shares.

 

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28.6          Retraction.

 

(1)            Rights of Retraction.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 28.1 and to Article 28.6(2) below, a holder of Preferred Shares shall be entitled to require the Company to redeem at any time and from time to time after the date of issue of any Preferred Shares, upon giving notice as hereinafter provided, all or any number of the Preferred Shares registered in the name of such holder on the books of the Company at the redemption price per share, together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. A holder of Preferred Shares exercising this option to have the Company redeem, shall give notice to the Company, which notice shall set out the date on which the Company is to redeem, which date shall not be less than 30 days nor more than 90 days from the date of mailing of the notice, and if the holder desires to have less than all of the Preferred Shares registered in his, her or its name redeemed by the Company, the number of the holder’s shares to be redeemed. The date on which the redemption at the option of the holder is to occur is hereafter referred to as the “option redemption date”. The holder of any Preferred Shares may, with the consent of the Company, revoke such notice prior to the option redemption date. Upon delivery to the Company of a share certificate or certificates representing the Preferred Shares which the holder desires to have the Company redeem, the Company shall, on the option redemption date, redeem such Preferred Shares by paying to the holder the redemption price therefor together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid. Upon payment of the redemption price of the Preferred Shares to be redeemed by the Company together with all dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid, the holders thereof shall cease to be entitled to dividends or to exercise any rights of holders in respect thereof.

 

(2)            Partial Redemptions.

 

If the redemption by the Company on any option redemption date of all of the Preferred Shares to be redeemed on such date would be contrary to any provisions of the Act or any other applicable law, or any credit arrangement to which the Company is a party, the Company shall be obligated to redeem only the maximum number of Preferred Shares which the Company determines it is then permitted to redeem, such redemptions to be made pro rata (disregarding fractions of shares) according to the number of Preferred Shares required by each such holder to be redeemed by the Company and the Company shall issue new certificates representing the Preferred Shares not redeemed by the Company; the Company shall, before redeeming any other Preferred Shares, redeem in the manner contemplated by Article 28.5 on the first day of each month thereafter the maximum number of such Preferred Shares so required by holders to be redeemed as would not then by contrary to any provisions of the Act or any other applicable law, or any credit arrangement to which the Company is a party, until all of such shares have been redeemed, provided that the Company shall be under no obligation to give any notice to the holders of the Preferred Shares in respect of such redemption or redemptions as provided for in Article 28.5.

 

28.7          Liquidation, Dissolution and Winding-up.

 

Subject to the rights, privileges, restrictions and conditions that may be attached to a particular series of Preferred Shares by the board in accordance with Article 28.1, in the event of the liquidation, dissolution or winding-up of the Company, or any other distribution of assets of the Company among its shareholders for the purpose of winding up the affairs of the Company, whether voluntary or involuntary, the holders of the Preferred Shares shall be entitled to receive, before any distribution of any part of the assets of the Company among the holders of any other shares ranking junior to the Preferred Shares, for each Preferred Share, an amount equal to the redemption price of such share and any dividends declared (or accrued in the case of cumulative dividends) thereon and unpaid (if applicable) and no more.

 

29.            CORPORATE OPPORTUNITIES

 

29.1          Excluded Opportunities

 

The Company renounces, to the maximum extent permitted by law, any interest or expectancy of the Company in, or in being offered an opportunity to participate in, any Excluded Opportunity. An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, any director or officer of the Company (or any of its subsidiaries) who is also a director or officer of another company or corporation (or of any subsidiaries thereof) (collectively, “Covered Persons”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director or officer of the Company or a subsidiary thereof.

 

29.2          Allocation of Opportunities

 

The Company may enter into agreements with other parties regarding the allocation of corporate opportunities. To the maximum extent permissible under applicable law, no director or officer shall have any liability for complying or attempting to comply in good faith with the provisions thereof (which may involve, among other things, not bringing potential transactions to the attention of the Company).

 

 

 

 

APPENDIX “B”

EQUITY INCENTIVE PLAN RESOLUTION

 

(see attached)

 

B - 1 

 

 

EQUITY INCENTIVE PLAN RESOLUTION

of

MERCER PARK BRAND ACQUISITION CORP.

(the “Corporation”)

 

RESOLVED AS AN ORDINARY RESOLUTION THAT:

 

1. Subject to the successful completion of the Transaction (as defined in the management information circular of the Corporation dated May 4, 2021 (the “Circular”)), the equity incentive plan of the Corporation described under the heading “Equity Incentive Plan” in the Circular (the “Equity Incentive Plan”), is hereby authorized and approved as the equity incentive plan of the Corporation and all unallocated options rights and other entitlements issuable thereunder be and are hereby approved and authorized; and

 

2. Any one or more of the directors or officers of the Corporation is hereby authorized and directed, acting for, in the name of and on behalf of the Corporation, to execute or cause to be executed, under the seal of the Corporation or otherwise, and to deliver or cause to be delivered, such other documents and instruments, and to do or cause to be done all such other acts and things, as may in the opinion of such director or officer of the Corporation be necessary or desirable to carry out the intent of the foregoing resolution, the execution of any such document or the doing of any such other act or thing by any director or officer of the Corporation being conclusive evidence of such determination.

 

B - 2 

 

 

APPENDIX “C”

PROPOSED EQUITY INCENTIVE PLAN

 

(see attached)

 

C - 1 

 

 

GLASS HOUSE BRANDS INC.

AMENDED AND RESTATED EQUITY INCENTIVE PLAN

 

Section 1.         Purpose

 

The purpose of this Plan is to promote the interests of the Company and its shareholders by enabling the Company and its affiliated companies to: (i) attract and retain employees, officers, consultants, advisors and Non-Employee Directors capable of assuring the future success of the Company; (ii) offer such persons incentives to put forth maximum efforts for the success of the Company’s business; and (iii) compensate such persons through various stock-based arrangements and provide them with opportunities for stock ownership in the Company, thereby aligning the interests of such persons with the Company’s shareholders.

 

Section 2.         Definitions

 

As used in this Plan, the following terms shall have the meanings set forth below:

 

(a)            “Affiliate” shall have the meaning ascribed to such term in National Instrument 45-106 – Prospectus Exemptions of the Canadian Securities Administrators.

 

(b)           “Associate” when used to indicate a relationship with a person, shall mean (i) an issuer of which the person beneficially owns or controls, directly or indirectly, voting securities entitling the person to more than 10% of the voting rights attached to outstanding voting securities of the issuer, (ii) any partner of the person, (iii) any trust or estate in which the person has a substantial beneficial interest or in respect of which the person serves as trustee or executor or in a similar capacity, or (iv) in the case of an individual, a relative of that individual, if the relative has the same home as that individual, including (A) a spouse of that individual, or (B) a relative of that individual’s spouse.

 

(c)            “Award” shall mean any Option, Restricted Stock Unit or Unrestricted Stock Bonus granted under this Plan.

 

(d)           “Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing an Award granted under this Plan (including a document in an electronic medium) executed in accordance with the requirements of Section 10(b).

 

(e)            “Blackout Period” shall have the meaning ascribed to such term in Section 6(a)(ii).

 

(f)            “Board” shall mean the board of directors of the Company, in effect from time to time.

 

(g)           “Code” shall mean the U.S. Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.

 

(h)           “Committee” shall mean the Compensation, Nominating and Corporate Governance Committee of the Board or such other committee designated by the Board to administer this Plan, failing which shall mean the Board.

 

(i)             “Company” shall mean Glass House Brands Inc., a company incorporated under the Business Corporations Act (British Columbia), and any successor corporation.

 

(j)             “MPB AcquisitionCo” means MPB Acquisition Corp., a wholly-owned subsidiary of the Company, incorporated under the laws of Delaware.

 

 

 

 

(k)            “Director” shall mean a member of the Board.

 

(l)             “Dividend Equivalent” shall mean any right granted under Section 6(c) of this Plan.

 

(m)           “Effective Date” shall mean the date this Plan is adopted by the Board, as set forth in Section 2.

 

(n)            “Eligible Person” shall mean any employee, officer, Non-Employee Director, consultant (which, for greater certainty, shall include individuals who provide services pursuant to a management services agreement), independent contractor or advisor providing services to the Company or any Affiliate, or any such person to whom an offer of employment or engagement with the Company or any Affiliate is extended; provided that any consultant, independent contractor or advisor shall be a natural person providing bona fide services to the Company or any Affiliate and such services are not in connection with the offer or sale of securities in a capital-raising transaction and do not directly or indirectly promote or maintain a market for the Company’s securities.

 

(o)           “Exchange” means the principal securities exchange on which the Company’s Shares are trading, being the Neo Exchange Inc. as at the date hereof.

 

(p)           Exchange Policies” shall mean the rules and policies of the Exchange in effect from time to time.

 

(q)           “Exchangeable Shares” shall mean the exchangeable common stock of MPB AcquisitionCo that are exchangeable for Shares of the Company on a one-for-one basis.

 

(r)            “Fair Market Value” with respect to one Share as of any date shall mean: (i) if the Shares are listed on a stock exchange, the greater of: (A) the closing price of such Share on the Exchange (or such other stock exchange where the majority of the trading volume and value of the Shares occurs) on the previous trading day, and (B) the VWAP of such Share on the Exchange (or such other stock exchange where the majority of the trading volume and value of the Shares occurs) for the five trading days immediately preceding the relevant date; and (ii) if the Shares are not so listed on a stock exchange, the per share value of one Share, as determined by the Board, or any duly authorized Committee of the Board, in its sole discretion, by applying principles of valuation with respect thereto.

 

(s)            “Fully-Diluted Shares” shall mean the aggregate Shares and multiple voting shares of the Company issued and outstanding, including: (i) the Shares issuable on exchange of the Exchangeable Shares; and (ii) the Shares issuable on exchange of the Warrants (excluding in respect of the cashless exercise feature thereof and provided such Warrants are not determined to be “out of the money” by the Board as at the date of grant of the applicable Award(s); but shall exclude the Shares issuable pursuant to Awards granted hereunder and pursuant to any restricted Exchangeable Shares (or Shares issuable upon the exchange thereof) awarded by MPB AcquisitionCo.

 

(t)             “Incentive Stock Option” shall mean an option granted under Section 6(a) of this Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision.

 

(u)           “Non-Employee Director” shall mean a Director who is not also an employee of the Company or any Affiliate.

 

(v)           “Non-Qualified Stock Option” shall mean an option granted under Section 6(a) of this Plan that is not intended to be an Incentive Stock Option.

 

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(w)           “Option” shall mean an Incentive Stock Option or a Non-Qualified Stock Option, as applicable, to purchase shares of the Company.

 

(x)            “Participant” shall mean an Eligible Person designated to be granted an Award under this Plan.

 

(y)           “Person” shall mean any individual or entity, including a corporation, partnership, limited or unlimited liability company, association, joint venture or trust.

 

(z)            “Plan” shall mean this Glass House Brands Inc. Equity Incentive Plan, as amended or amended and restated from time to time.

 

(aa)          “Related Entity” shall mean a person that controls or is controlled by the Company or that is controlled by the same person that controls the Company.

 

(bb)          “Related Person” shall mean (i) a director or executive officer of the Company or of a Related Entity of the Company, (ii) an Associate of a director or executive officer of Company or of a Related Entity of the Company, or (iii) a permitted assign of a director or executive officer of the Company or of a Related Entity of the Company.

 

(cc)          “Restricted Stock Unit” shall mean any unit granted under Section 6(b) of this Plan evidencing the right to receive a Share (or a cash payment equal to the Fair Market Value of a Share) at some future date, provided that in the case of Participants who are liable to taxation under the Tax Act in respect of amounts payable under this Plan, that such date shall not be later than December 31 of the third calendar year following the year services were performed in respect of the corresponding Restricted Stock Unit awarded.

 

(dd)         “Section 409A” shall mean Section 409A of the Code, or any successor provision, and applicable Treasury Regulations and other applicable guidance thereunder.

 

(ee)          “Securities Act” shall mean the U.S. Securities Act of 1933, as amended.

 

(ff)           “Security Based Compensation Arrangements” shall have the meaning ascribed to such term (or equivalent term) in the Exchange Policies.

 

(gg)         “Share” or “Shares” shall mean, collectively, the subordinate voting shares, restricted voting shares and/or limited voting shares of the Company (or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(b) of this Plan).

 

(hh)         “Specified Employee” shall mean a specified employee as defined in Section 409A(a)(2)(B) of the Code or applicable proposed or final regulations under Section 409A, determined in accordance with procedures established by the Company and applied uniformly with respect to all plans maintained by the Company that are subject to Section 409A.

 

(ii)            “Tax Act” shall mean the Income Tax Act (Canada), as amended from time to time, including regulations thereunder.

 

(jj)            “U.S. Award Holder” shall mean any holder of an Award who is a “U.S. person” (as defined in Rule 902(k) of Regulation S under the Securities Act) or who is holding or exercising Awards in the United States.

 

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(kk)          “United States” shall mean the United States of America, its territories and possession, any State of the United States, and the District of Columbia.

 

(ll)            “Unrestricted Stock Bonus” shall mean an issue of Shares in consideration of past services, or an issue of Shares in exchange for cash consideration at the Fair Market Value thereof (with the cash consideration representing up to the after-withholding tax value of a cash bonus paid).

 

(mm)        “VWAP” shall mean the volume weighted average trading price of the Shares, calculated by dividing the total value by the total volume of securities traded for the relevant period.

 

(nn)         “Warrants” shall mean (i) the share purchase warrants of the Company, each of which entitle the holder thereof to purchase one Share at a price of $11.50, or (ii) the Series A Warrants of GH Group, Inc.

 

Unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “$” or “US$” are to United States dollars.

 

Section 3.         Administration

 

(a)            Power and Authority of the Board. The Plan shall be administered by the Board, and the Board shall have the power to manage this Plan and may delegate such power at its discretion to any committee of the Company, including the Committee. All references hereinafter to the “Committee” shall mean the Committee, as delegated to by the Board, if applicable, failing which shall mean the Board. Subject to the express provisions of this Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under this Plan; (iii) determine the number of Shares to be covered by (or the method by which payments or other rights are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement, including any terms relating to the forfeiture of any Award and the forfeiture, recapture or disgorgement of any cash, Shares or other amounts payable with respect to any Award; (v) amend the terms and conditions of any Award or Award Agreement, subject to the limitations under Section 7; (vi) accelerate the exercisability of any Award or the lapse of any restrictions relating to any Award, subject to the limitations in Section 7, (vii) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, other securities or other property (excluding promissory notes), or canceled, forfeited or suspended, subject to the limitations in Section 7; (viii) determine whether, to what extent and under what circumstances amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the holder thereof or the Committee, subject to the requirements of Section 409A; (ix) interpret and administer this Plan and any instrument or agreement, including an Award Agreement, relating to this Plan; (x) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of this Plan; (xi) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of this Plan; and (xii) adopt such modifications, rules, procedures and subplans as may be necessary or desirable to comply with provisions of the laws of the jurisdictions in which the Company or an Affiliate may operate, including, without limitation, establishing any special rules for Affiliates, Eligible Persons or Participants located in any particular country, in order to meet the objectives of this Plan and to ensure the viability of the intended benefits of Awards granted to Participants located in non-United States jurisdictions. Unless otherwise expressly provided in this Plan, all designations, determinations, interpretations and other decisions under or with respect to this Plan or any Award or Award Agreement shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Participant, any holder or beneficiary of any Award or Award Agreement, and any employee of the Company or any Affiliate.

 

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(b)            Delegation. The Committee may delegate to one or more officers or Directors of the Company, subject to such terms, conditions and limitations as the Committee may establish in its sole discretion, the authority to grant Awards; provided, however, that the Committee shall not delegate such authority in such a manner as would cause this Plan not to comply with applicable Exchange Policies or applicable law.

 

(c)            Power and Authority of the Committee. Notwithstanding anything to the contrary contained herein, (i) the Committee may, at any time and from time to time, without any further action of the Board, exercise the powers and duties of the Board under this Plan, unless the exercise of such powers and duties by the Committee would cause this Plan not to comply with the requirements of all applicable securities laws and Exchange Policies and (ii) only the Board (or a committee of the Board comprised of directors who qualify as independent directors within the meaning of the independence rules of any applicable stock exchange on which the Shares are then listed) may grant Awards to Directors who are not also employees of the Company or an Affiliate.

 

(d)            Indemnification. To the full extent permitted by law, (i) no member of the Board, the Committee or any person to whom the Committee delegates authority under this Plan shall be liable for any action or determination taken or made in good faith with respect to this Plan or any Award made under this Plan, and (ii) the members of the Board, the Committee and each person to whom the Committee delegates authority under this Plan shall be entitled to indemnification by the Company with regard to such actions and determinations. The provisions of this paragraph shall be in addition to such other rights of indemnification as a member of the Board, the Committee or any other person may have by virtue of such person’s position with the Company.

 

Section 4.         Shares Reserved for Awards

 

(a)            Shares Reserved.

 

(i) Subject to Section 4(b), the securities that may be acquired by Participants under this Plan will consist of (A) authorized but unissued Shares; or (B) issued and outstanding Shares held by the Company for its own account to the extent permitted by applicable law.

 

(ii) The Company will at all times during the term of this Plan ensure that it is authorized to issue such number of Shares as are sufficient to satisfy the requirements of this Plan.

 

(iii) Subject to adjustment as provided in Section 4(b) of this Plan, the maximum aggregate number of Shares issuable under this Plan and under all other Security Based Compensation Arrangements shall not exceed 10% of the total number of Fully Diluted Shares issued and outstanding from time to time. This Plan is considered an “evergreen” plan, since (i) any Shares subject to an Award which has been exercised or settled in cash by a Participant or for any reason is cancelled or terminated without having been exercised or settled in Shares will again be available for grants under this Plan, and (ii) the number of Awards available to grant will increase as the number of issued and outstanding Shares increases from time to time.

 

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(iv) For the purposes of Section 4(a)(iii), in the event that the Company cancels or purchases to cancel any of its issued and outstanding Shares (“Cancellation”) and as a result of such Cancellation, the Company exceeds the limit set out in Section 4(a)(iii), no approval of the Company’s shareholders will be required for the issuance of Shares on the exercise or settlement of any Awards which were granted prior to such Cancellation.

 

(v) For greater certainty, Awards that do not entitle the holder thereof to receive or purchase Shares shall not be counted against the aggregate number of Shares available for Awards under this Plan.

 

(vi) Shares issued under Awards granted in substitution for awards previously granted by an entity that is acquired by or merged with the Company or an Affiliate shall not be counted against the aggregate number of Shares available for Awards under this Plan.

 

(b)            Adjustments. In the event that any dividend (other than a regular cash dividend) or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, forward stock split, reverse stock split, reorganization, plan of arrangement, merger, amalgamation, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event which affects the Shares, or unusual or nonrecurring events affecting the Company or the financial statements of the Company, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or stock exchange or inter-dealer quotation, accounting principles or law, such that an adjustment is considered by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, then the Committee may, in such manner as it may deem equitable, subject to any required regulatory or Exchange approvals, adjust any or all of (i) the number and kind of Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and kind of Shares (or other securities or other property) subject to outstanding Awards, (iii) the purchase price or exercise price with respect to any Award or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, and/or (iv) any share limit set forth in this Plan; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a whole number. Such adjustment shall be made by the Committee or the Board, whose determination in that respect shall be final, binding and conclusive.

 

(c)            Additional Award Limitations.

 

(i) From and after the Effective Date and subject to Section 4(b), to the extent that section 2.25 of National Instrument 45-106 – Prospectus Exemptions applies to an Award or to the issuance of Shares pursuant thereto: (X) after a grant, the number of Shares, calculated on a fully-diluted basis, reserved for issuance under Options granted to (A) any one Related Person shall not exceed 5% of the total number of Shares that are outstanding at the time of the grant, or (B) Related Persons shall not exceed 10% of the total number of Shares that are outstanding at the time of the grant; and (Y) after a grant, the number of Shares, calculated on a fully-diluted basis, issued within any 12 months to (A) any one Related Person and the Associates of such Related Person shall not exceed 5% of the total number of Shares that are outstanding at the time of the grant, or (B) Related Persons shall not exceed 10% of the total number of Shares that are outstanding at the time of the grant.

 

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(ii) The maximum number of Shares that may be issued under this Plan to the Company’s Non-Employee Directors, as a whole, or the number of securities that may be issuable on exercise of the Awards granted to the Company’s Non-Employee Directors, as a whole, as compensation within any one-year period, shall not exceed 1% of the total number of Fully-Diluted Shares, in aggregate, at the time of grant, subject to adjustment pursuant to Section 4(b). The Board shall not (i) grant Options to any one Non-Employee Director in which the aggregate Fair Market Value of the Shares underlying such Options during any calendar year (and including any awards under any equity compensation program of MPB AcquisitionCo or its Affiliates) shall exceed $100,000, or (ii) grant Awards in which the aggregate Fair Market Value of the Shares in respect to which the Awards are exercisable by such Non-Employee Director during any calendar year (and including any awards under any equity compensation program of MPB AcquisitionCo or its Affiliates) shall exceed $150,000, and in each case of (i) and (ii), measured as at the date of grant.

 

(d)            Restricted Exchangeable Shares. If, during the term of this Plan, MPB AcquisitionCo grants awards of restricted Exchangeable Shares to Persons who are Eligible Persons under this Plan, any restricted Exchangeable Shares awarded by MPB AcquisitionCo will reduce the number of Shares that may be awarded under this Plan on a one-for-one basis. If any restricted Exchangeable Shares awarded by MPB AcquisitionCo are forfeited, cancelled, or are used or withheld to satisfy tax withholding obligations of an award recipient thereunder, any such restricted Exchangeable Shares that are forfeited, cancelled, used or withheld will thereafter not be treated as reducing the number of Shares that are available for Awards under this Plan.

 

(e)            Financial Assistance. The Company or any Affiliate or Related Entity may provide financial assistance to, or enter into support agreements with, Participants in connection with grants under this Plan, including without limitation, full, partial or non-recourse loans (to the extent permitted by applicable laws), provided approval of the disinterested members of the Board is obtained.

 

Section 5.         Eligibility

 

Any Eligible Person shall be eligible to be designated as a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company and/or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing,

 

(i) an Incentive Stock Option may only be awarded to an employee of the Company or any “Parent Corporation” or “Subsidiary Corporation” of the Company (in each case, within the meaning of Section 424 of the Code); and

 

(ii) in the case of an Eligible Person who is subject to United States income tax, a Non-Qualified Stock Option may only be awarded to such Eligible Person to the extent the Eligible Person performs direct services to (A) the Company or any corporation (other than the Company), in an unbroken chain of corporations beginning with the Company, in which each of the corporations other than the last corporation in the unbroken chain owns, directly or indirectly, stock representing at least 50% of the voting power of all classes of stock entitled to vote or at least 50% of the value of all classes of stock in one of the other corporations in such chain, or (B) to an entity that otherwise qualifies as an eligible issuer of service recipient stock pursuant to United States Treasury Regulation Section 1.409A-1(b)(5)(iii)(E)(1).

 

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Receipt of Awards by a Participant is subject to the grant being voluntary within the meaning of section 2.23(2) of National Instrument 45-106 – Prospectus Exemptions, to the extent applicable.

 

Section 6.         Awards

 

(a)            Options. The Committee is hereby authorized to grant Options to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of this Plan, as the Committee shall determine:

 

(i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee and shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option; provided, however, that, to the extent permitted under Section 409A and Section 424 of the Code, as applicable, the Committee may designate a purchase price below Fair Market Value on the date of grant if the Option is granted in substitution for a stock option previously granted by an entity that is acquired by or merged with the Company or an Affiliate.

 

(ii) Option Term. The term of each Option shall be fixed by the Committee at the date of grant but shall not be longer than ten (10) years from the date of grant. Notwithstanding the foregoing, in the event that the expiry date of an Option falls within a trading blackout period imposed by the Company (a “Blackout Period”), and neither the Company nor the individual in possession of the Options is subject to a cease trade order in respect of the Company’s securities, then the expiry date of such Option shall be automatically extended to the 10th business day following the end of the Blackout Period, provided that the extension contemplated by this paragraph (ii) shall not apply to Incentive Stock Options.

 

(iii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms, including, subject to applicable law, but not limited to, cash, cheque, or surrender of other securities or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the applicable exercise price, in which payment of the exercise price with respect thereto may be made or deemed to have been made.

 

(A) Promissory Notes. Notwithstanding the foregoing, the Committee may not permit payment of the exercise price, either in whole or in part, with a promissory note.

 

(B) Net Exercises. The Committee may, in its discretion, permit an Option to be exercised by delivering to the Participant a number of Shares having an aggregate Fair Market Value (determined as of the date of exercise) equal to the excess, if positive, of the Fair Market Value of the Shares underlying the Option being exercised on the date of exercise, over the exercise price of the Option for such Shares.

 

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(iv) Options Subject to Targets. Options may be made subject to the achievement by the Company of specified performance targets, such that such Options will only be exercisable if such targets are met.

 

(v) Incentive Stock Options. Unless an Award Agreement specifies that an Option is intended to be an Incentive Stock Option, the Option will be a Non-Qualified Stock Option. The Company makes no assurances that an Option that it designates as an Incentive Stock Option will meet all requirements for qualification under Section 422 of the Code, and neither the Company, nor its officers, directors or employees, shall have any liability to the Participant if the Option does not qualify as an Incentive Stock Option under Section 422 of the Code. If an Award Agreement specifies that an Option is intended to be an Incentive Stock Option, the following additional provisions shall apply:

 

(A) To the extent that the aggregate Fair Market Value (determined at the time of grant) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under all plans of the Company and any Affiliates) exceeds $100,000 (or such other limit established in the Code) or otherwise does not comply with the rules governing Incentive Stock Options, the Options or portions thereof that exceed such limit (according to the order in which they were granted) or otherwise do not comply with such rules will be treated as Non-Qualified Stock Options, notwithstanding any contrary provision of the applicable Award Agreement(s).

 

(B) Subject to adjustment pursuant to Section 4(b) and the overall plan limitation under Section 4(a), the maximum number of shares that may be issued pursuant to Incentive Stock Options shall not exceed 17,400,000 Shares, or such other number of Shares as may be determined by the Board prior to the shareholders’ meeting of the Company in respect of the Company’s qualifying transaction.

 

(C) The Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns (within the meaning of Sections 422 and 424 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any “Parent Corporation” or “Subsidiary Corporation” of the Company (in each case, within the meaning of Section 424 of the Code), shall not be exercisable after the expiration of five (5) years from the date such Incentive Stock Option is granted.

 

(D) The purchase price per Share for an Incentive Stock Option shall be not less than 100% of the Fair Market Value of a Share on the date of grant of the Incentive Stock Option; provided, however, that, in the case of the grant of an Incentive Stock Option to a Participant who, at the time such Option is granted, owns (within the meaning of Section 422 and 424 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any “Parent Corporation” or “Subsidiary Corporation” of the Company (in each case, within the meaning of Section 424 of the Code), the purchase price per Share purchasable under an Incentive Stock Option shall be not less than 110% of the Fair Market Value of a Share on the date of grant of the Incentive Stock Option.

 

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(E) An Incentive Stock Option will not be transferable by a Participant other than by will or the laws of descent and distribution and, during the Participant’s lifetime, may only be exercised by the Participant.

 

(F) Any Incentive Stock Option authorized under this Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain all provisions required in order to qualify the Option as an Incentive Stock Option.

 

(G) No Incentive Stock Option may be granted more than ten (10) years after the earlier of (i) the date this Plan is adopted by the Board, and (ii) the date on which this Plan is approved by shareholders of the Company.

 

(H) In order to retain status as an Incentive Stock Option, an Incentive Stock Option must be exercised within three (3) months following the date the optionee ceases to be an employee, except in the case of death or Disability as defined under Section 22(e) of the Code. Any Incentive Stock Option that is not exercised within the time periods required under Section 422 of the Code, will automatically be deemed to be a Non-Qualified Stock Option (to the extent it would otherwise remain exercisable according to its terms).

 

(I) In the event this Plan is not approved by the shareholders of the Company in accordance with the requirements of Section 422 of the Code within twelve (12) months before or after this Plan is adopted by the Board, any Incentive Stock Option granted under this Plan automatically will be deemed to be a Non-Qualified Stock Option.

 

(b)            Restricted Stock Units. The Committee is hereby authorized to grant an Award of Restricted Stock Units to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of this Plan as the Committee shall determine:

 

(i) Restrictions. Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, any limitation on the right to receive any dividend, Dividend Equivalents, or other right or property with respect thereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee may deem appropriate. Notwithstanding the foregoing, rights to dividend or Dividend Equivalent payments shall be subject to the limitations described in Section 6(c).

 

(ii) Issuance and Delivery of Shares. In the case of Restricted Stock Units, no Shares shall be issued at the time such Awards are granted. Upon the lapse or waiver of restrictions and the restricted period relating to Restricted Stock Units evidencing the right to receive Shares, one Share for each such Share covered by the Restricted Stock Unit shall be issued and delivered to the holder of the Restricted Stock Units; provided, that the Committee may elect to pay cash, or part cash and part Shares in lieu of delivering only Shares.

 

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(iii) Acceleration of Vesting. The Committee may, in its discretion, accelerate the vesting, all or in part, of the Restricted Stock Units.

 

(iv) Forfeiture. Except as otherwise determined by the Committee or as provided in an Award Agreement, upon a Participant’s termination of employment or service or resignation or removal as a Director (in either case, as determined under criteria established by the Committee) during the applicable restriction period, all Restricted Stock Units held by such Participant that, at such time, remain subject to restrictions, shall be forfeited and re-acquired by the Company for cancellation at no cost to the Company; provided, however, that the Committee may waive in whole or in part any or all remaining restrictions with respect to Restricted Stock Units.

 

(v) Performance Targets. Restricted Stock Units may be made subject to the achievement by the Company of specified performance targets established by the Board or after a period of continued service with the Company or its Affiliates or any combination of the above, as set forth in the applicable Award Agreement, such that such Restricted Stock Units will only become vested if such targets or periods are met (or waived at the discretion of the Committee).

 

(c)            Dividend Equivalents. The Committee is hereby authorized to grant Dividend Equivalents to Eligible Persons under which the Participant shall be entitled to receive payments (in cash, Shares, other securities or other property, as determined in the discretion of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of this Plan and any applicable Award Agreement, such Dividend Equivalents may have such terms and conditions as the Committee shall determine. Notwithstanding the foregoing, (i) the Committee may not grant Dividend Equivalents to Eligible Persons in connection with grants of Options or other Awards the value of which is based solely on an increase in the value of the Shares after the date of grant of such Award, and (ii) dividend and Dividend Equivalent amounts may be accrued but shall not be paid unless and until the date on which all conditions or restrictions relating to such Award have been satisfied, waived or lapsed.

 

(d)            Unrestricted Stock Bonuses. The Committee is hereby authorized to grant an Award of Unrestricted Stock Bonuses to Eligible Persons under which the Participant shall be entitled to receive fully paid and non-assessable Shares as consideration for services rendered to the Company or an Affiliate in the prior calendar year, or may purchase fully paid and non-assessable Shares for cash consideration at the Fair Market Value thereof (with the cash consideration representing up to the after-withholding tax value of a cash bonus paid). Subject to the terms of this Plan and any applicable Award Agreement, such Unrestricted Stock Bonuses may have such terms and conditions as the Committee shall determine.

 

(e)            General

 

(i) Consideration for Awards. Awards may be granted for no cash consideration or for any cash or other consideration as may be determined by the Committee or required by applicable law or the Exchange Policies.

 

(ii) Limits on Transfer of Awards. Except as otherwise provided by the Committee in its discretion and subject to such additional terms and conditions as it determines, no Award (other than fully vested and unrestricted Shares issued pursuant to any Award) and no right under any such Award shall be transferable by a Participant other than by will or by the laws of descent and distribution, and no Award (other than fully vested and unrestricted Shares issued pursuant to any Award) or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance thereof shall be void and unenforceable against the Company or any Affiliate. Where the Committee does permit the transfer of an Award other than a fully vested and unrestricted Share, such permitted transfer shall be for no value and in accordance with all applicable law and Exchange Policies. The Committee may also establish procedures as it deems appropriate for a Participant to designate a person or persons, as beneficiary or beneficiaries, to exercise the rights of the Participant and receive any property distributable with respect to any Award in the event of the Participant’s death.

 

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(iii) Restrictions; Exchange Listing. All Shares or other securities delivered under this Plan pursuant to any Award or the exercise thereof shall be subject to such restrictions as the Committee may deem advisable under this Plan, applicable laws and Exchange Policies, and the Committee may cause appropriate entries to be made with respect to, or legends to be placed on the certificates or direct registration statements or electronic positions, as applicable, for, such Shares or other securities to reflect such restrictions. The Company shall not be required to deliver any Shares or other securities covered by an Award unless and until the requirements of any securities or other laws, rules or regulations (including the Exchange Policies) as may be determined by the Company to be applicable are satisfied.

 

(iv) Prohibition on Option Repricing. Except as provided in Section 4(b) hereof, the Committee may not, without prior approval of the Company’s shareholders and applicable stock exchange approval, seek to effect any repricing of any previously granted, “out-of-the money” Option by: (i) amending or modifying the terms of the Option to lower the exercise price; (ii) canceling the out-of-the money Option and granting either (A) replacement Options having a lower exercise price; or (B) Restricted Stock Units in exchange; or (iii) cancelling or repurchasing the out-of-the money Option for cash or other securities. An Option will be deemed to be “out-of-the money” at any time when the Fair Market Value of the Shares covered by such Award is less than the exercise price of the Award.

 

(v) Section 409A Provisions. Notwithstanding anything in this Plan or any Award Agreement to the contrary, to the extent that any amount or benefit that constitutes “deferred compensation” to a Participant under Section 409A and applicable guidance thereunder (“Deferred Compensation”) is otherwise payable or distributable to a Participant under this Plan or any Award Agreement solely by reason of the occurrence of a change in control or due to the Participant’s disability or “separation from service” (as such term is defined under Section 409A), such amount or benefit will not be payable or distributable to the Participant by reason of such circumstance unless the Committee determines in good faith that (i) the circumstances giving rise to such change in control event, disability or separation from service meet the definition of a change in control event, disability, or separation from service, as the case may be, in Section 409A(a)(2)(A) of the Code and applicable proposed or final regulations, or (ii) the payment or distribution of such amount or benefit would be exempt from the application of Section 409A by reason of the short-term deferral exemption or otherwise. Any payment or distribution that is Deferred Compensation that otherwise would be made to a Participant who is a Specified Employee (as determined by the Committee in good faith) on account of separation from service may not be made before the date which is six months after the date of the Specified Employee’s separation from service (or if earlier, upon the Specified Employee’s death) unless the payment or distribution is exempt from the application of Section 409A by reason of the short-term deferral exemption or otherwise.

 

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(vi) Acceleration of Vesting. Upon a change of control event (as described in Section 7(b)), all securities (namely the Shares or Options) granted pursuant to this Plan shall immediately vest.

 

Section 7.         Amendment and Termination; Corrections

 

(a)            Amendments to this Plan and Awards. The Board may from time to time amend, suspend, discontinue or terminate this Plan, and the Committee may amend the terms of any previously granted Award at any time, provided that, except as contemplated herein (i) no amendment, alteration, suspension, discontinuation or termination may (except as expressly provided in this Plan) materially and adversely alter or impair the terms or conditions of the Award previously granted to a Participant under this Plan without the written consent of the Participant or holder thereof; and (ii) any amendment, alteration, suspension, discontinuation or termination is subject to compliance with all applicable laws, rules, regulations and policies of any applicable governmental entity or stock exchange, including receipt of any required approval from the governmental entity or stock exchange, and any such amendment, alteration, suspension, discontinuation or termination of an Award shall be in compliance with the Exchange Policies. For greater certainty and notwithstanding the foregoing, the Board may amend, suspend, terminate or discontinue this Plan, and the Committee may amend or alter any previously granted Award, as applicable, without obtaining the approval of shareholders of the Company, in order to:

 

(i) amend the eligibility for, and limitations or conditions imposed upon, participation in this Plan, except that any amendment to this Plan to change the class or classes of Persons eligible to be awarded Incentive Stock Options will be submitted for shareholder approval to the extent required by Code Section 422;

 

(ii) amend any terms relating to the granting or exercise of Awards, including but not limited to terms relating to the amount and payment of the exercise price, or the vesting, expiry, assignment or adjustment of Awards, or otherwise waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively;

 

(iii) make changes that are necessary or desirable to comply with applicable laws, rules, regulations and policies of any applicable governmental entity or the Exchange, including the Exchange Policies (including amendments to Awards necessary or desirable to avoid any adverse tax results under Section 409A), and no action taken to comply shall be deemed to impair or otherwise adversely alter or impair the rights of any holder of an Award or beneficiary thereof; or

 

(iv) amend any terms relating to the administration of this Plan, including the terms of any administrative guidelines or other rules related to this Plan.

 

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Notwithstanding the foregoing and for greater certainty, prior approval of the shareholders of the Company shall be required for any amendment to this Plan or an Award that would require shareholder approval under the rules or regulations of the Exchange that is applicable to the Company or which would:

 

(i) increase the shares authorized under this Plan as specified in Section 4 and Section 6(a)(v)(B) of this Plan;

 

(ii) remove or exceed the limits set out in a Security Based Compensation Arrangement on Awards available to any of (a) a “related party” (as defined in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions) of the Company, (b) a promoter of the Company, or, where the promoter is not an individual, an officer, director or control person of the promoter, and (c) such other Person as may be designated from time to time by the Exchange, in respect of the Company;

 

(iii) permit a re-pricing of an Award benefiting any of (a) a “related party” (as defined in Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions) of the Company, (b) a promoter of the Company, or, where the promoter is not an individual, an officer, director or control person of the promoter, and (c) such other Person as may be designated from time to time by the Exchange;

 

(iv) permit an extension of the term of an Award where the exercise price is lower than the prevailing market price, except pursuant to Section 6(a)(ii);

 

(v) permit the award of Options at a price less than 100% of the Fair Market Value of a Share on the date of grant of such Option, contrary to the provisions of Section 6(a)(i) of this Plan;

 

(vi) permit Options to be transferable other than as provided in Section 6(e)(ii);

 

(vii) amend this Section 7(a); or

 

(viii) increase the maximum term permitted for Options, as specified in Section 6(a), other than under Section 6(a)(ii), or extend the terms of any Options beyond their original expiry date.

 

(b)           Corporate Transactions. In the event of any reorganization, merger, amalgamation, consolidation, split-up, spin-off, combination, plan of arrangement, take-over bid or tender offer, repurchase or exchange of Shares or other securities of the Company or any other similar corporate transaction or event involving the change of control of the Company (or if the Company shall enter into a written agreement to undergo such a transaction or event), the Committee or the Board may, in its sole discretion, provide for any of the following to be effective upon the consummation of the event (or effective immediately prior to the consummation of the event, provided that the consummation of the event subsequently occurs), and no action taken under this Section 7(b) shall be deemed to impair or otherwise adversely alter the rights of any holder of an Award or beneficiary thereof:

 

(i) either (A) termination of the Award, whether or not vested, in exchange for an amount of cash and/or other property, if any, equal to the amount that would have been attained upon the exercise of the vested portion of the Award or realization of the Participant’s vested rights (and, for the avoidance of doubt, if, as of the date of the occurrence of the transaction or event described in this Section 7(b)(i) (A) the Committee or the Board determines in good faith that no amount would have been attained upon the exercise of the Award or realization of the Participant’s rights, then the Award may be terminated by the Company without any payment), or (B) the replacement of the Award with other rights or property selected by the Committee or the Board, in its sole discretion;

 

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(ii) that the Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares or property and prices;

 

(iii) that, subject to Section 6(e)(v), the Award shall be exercisable or payable or fully vested with respect to all Shares covered thereby, notwithstanding anything to the contrary in the applicable Award Agreement; or

 

(iv) that the Award cannot vest, be exercised or become payable after a certain date in the future, which may be the effective date of the event.

 

For greater certainty, a change of control event shall not include: (i) the conversion of multiple voting shares of the Company into Shares, (ii) the exchange of the Exchangeable Shares or other exchangeable shares of a subsidiary of the Company into Shares, or (iii) the exchange or conversion of other securities that are exchangeable or convertible, as applicable, into Shares or multiple voting shares of the Company.

 

(c)            Correction of Defects, Omissions and Inconsistencies. The Committee may, without prior approval of the shareholders of the Company, correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award or Award Agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of this Plan.

 

Section 8.      Income Tax Withholding

 

In order to comply with all applicable federal, state, provincial, local and/or foreign income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state, provincial, local or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. Without limiting the foregoing, in order to assist a Participant in paying all or a portion of the applicable taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (a) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes (subject to any applicable limitations to avoid adverse accounting treatment), or (b) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld is determined.

 

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Section 9.      Securities Laws

 

If the Awards and the securities which may be acquired pursuant to the exercise of the Awards have not been registered under the Securities Act or under any securities law of any state of the United States, the Awards may not be exercised in the United States unless an exemption from the registration requirements of the Securities Act is available. Any Awards or Shares issued to a Participant in the United States that have not be registered under the Securities Act will be deemed “restricted securities” (as such term is defined in Rule 144(a)(3) under the Securities Act) and shall be certificated and affixed with an applicable restrictive legend as set forth in the Award Agreement. The Awards may not be offered or sold, directly or indirectly, in the United States except pursuant to registration under the Securities Act and the securities laws of all applicable states or available exemptions therefrom. Each U.S. Award Holder or anyone who becomes a U.S. Award Holder, who is granted an Award in the United States, who is a resident of the United States or who is otherwise subject to the Securities Act or the securities laws of any state of the United States will be required to complete an Award Agreement which sets out the applicable United States restrictions.

 

Section 10.      General Provisions

 

(a)            No Rights to Awards. No Eligible Person, Participant or other Person shall have any claim to be granted any Award under this Plan, and there is no obligation for uniformity of treatment of Eligible Persons, Participants or holders or beneficiaries of Awards under this Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

 

(b)            Award Agreements. No Participant shall have rights under an Award granted to such Participant unless and until an Award Agreement shall have been signed by the Participant (if requested by the Company), or until such Award Agreement is delivered and accepted through an electronic medium in accordance with procedures established and accepted by the Company. An Award Agreement need not be signed by a representative of the Company unless required by the Committee. Each Award Agreement shall be subject to the applicable terms and conditions of this Plan and any other terms and conditions (not inconsistent with this Plan) determined by the Committee.

 

(c)            Availability of Information. At least annually, copies of the Company’s balance sheet and income statement for the just completed fiscal year shall be made available (including by way of filing on SEDAR), to each Participant and purchaser of Shares upon the exercise of an Award upon written request; provided, however, that this requirement shall not apply if all offers and sales of securities pursuant to this Plan comply with all applicable conditions of Rule 701 under the Securities Act; provided that for purposes of determining such compliance, any registered domestic partner shall be considered a “family member” as that term is defined in Rule 701 of the Securities Act. The Company shall not be required to make such information available to key persons whose duties in connection with the Company assure them access to equivalent information.

 

(d)            Plan Provisions Control. In the event that any provision of an Award Agreement conflicts with or is inconsistent in any respect with the terms of this Plan as set forth herein or subsequently amended, the terms of this Plan shall control.

 

(e)            No Rights of Shareholders. Except with respect to Shares issued under Awards (and subject to such conditions as the Committee may impose on such Awards pursuant to Section 6(b)(i) or Section 6(c)), neither a Participant nor the Participant’s legal representative shall be, or have any of the rights and privileges of, a shareholder of the Company with respect to any Shares issuable upon the exercise or payment of any Award, in whole or in part, unless and until such Shares have been issued.

 

(f)            No Limit on Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation plans or arrangements, and such plans or arrangements may be either generally applicable or applicable only in specific cases.

 

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(g)            No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained as an employee of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate a Participant’s employment at any time, with or without cause, in accordance with applicable law. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment free from any liability or any claim under this Plan or any Award, unless otherwise expressly provided in this Plan or in any Award Agreement. Nothing in this Plan shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under this Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in this Plan, each Participant shall be deemed to have accepted all the conditions of this Plan and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

 

(h)            Governing Law. The Plan, including the validity, construction and effect of this Plan or any Award, and any rules and regulations relating to this Plan or any Award, shall be governed by and construed in accordance with the Laws of the Province of British Columbia and the federal Laws of Canada applicable therein, but references to such laws shall not, by conflict of laws, rules or otherwise require application of the law of any jurisdiction other than the Province of British Columbia and the parties hereby further irrevocably attorn to the jurisdiction of the courts of the Province of British Columbia in respect of any matter arising hereunder.

 

(i)            Severability. If any provision of this Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify this Plan or any Award under any law or the Exchange Rules deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws or the Exchange Rules, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of this Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of this Plan or any such Award shall remain in full force and effect.

 

(j)            No Trust or Fund Created. Neither this Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

 

(k)            Other Benefits. No compensation or benefit awarded to or realized by any Participant under this Plan shall be included for the purpose of computing such Participant’s compensation or benefits under any pension, retirement, savings, profit sharing, group insurance, disability, severance, termination pay, welfare or other benefit plan of the Company, unless required by law or otherwise provided by such other plan.

 

(l)            No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to this Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Share or whether such fractional Share or any rights thereto shall be canceled, terminated or otherwise eliminated.

 

(m)            Headings. Headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Plan or any provision thereof.

 

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Section 11.      Clawback or Recoupment

 

All Awards under this Plan shall be subject to recovery or other penalties pursuant to (i) any Company clawback policy, as may be adopted or amended from time to time, or (ii) any applicable law, rule or regulation or applicable Exchange Policies.

 

Section 2.      Effective Date of the Plan

 

The Plan was adopted by the Board on [·], 2021, and approved by the shareholders of the Company on [·], 2021. The Effective Date of the Plan is [·], 2021.

 

Section 3.      Term of this Plan

 

No Award shall be granted under this Plan, and this Plan shall terminate, on the tenth (10th) anniversary of the date this Plan is approved by the shareholders of the Company, or any earlier date of discontinuation or termination established pursuant to Section 7(a) of this Plan. Notwithstanding the foregoing, an Award may only be awarded within ten (10) years from the date this Plan is adopted by the Board or, if earlier, the date this Plan is approved by the shareholders of the Company. Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such dates, and the authority of the Committee provided for hereunder with respect to this Plan and any Awards, and the authority of the Board to amend this Plan, shall extend beyond the termination of this Plan. Regardless of whether this Plan is approved by the shareholders of the Company every three (3) years or when otherwise required under the Exchange Rules, after the initial approval of this Plan by the shareholders of the Company, all previously granted Awards shall remain valid.

 

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APPENDIX “D”

INFORMATION STATEMENT

 

(see attached)

 

D-1

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

(To be renamed Glass House Brands Inc. in connection with its qualifying transaction with GH Group, Inc.)

 

 

INFORMATION STATEMENT

(Containing information as at April 30, unless indicated otherwise)

 

This information statements is furnished in connection with the solicitation of proxies by the management of Mercer Park Brand Acquisition Corp. (“BRND”) for use at the special meeting of the holders of Class A restricted voting shares and Class B shares of BRND (and any adjournment(s) or postponement(s) thereof) scheduled to be held on June 2, 2021 at the time and place and for the purposes set forth in the accompanying Notice of Meeting of Shareholders. References to “this prospectus” (and similar phrases and terminology in this document) shall be deemed to refer to this information statement.

 

 

BRND intends to derive a substantial portion of its revenues from the cannabis industry in one or more States of the United States, which industry is illegal under United States federal law. The Resulting Issuer (as defined below) intends to be directly involved (through its licensed subsidiaries) in the cannabis industry in the United States where local State laws permit such activities. Currently, the subsidiaries and managed entities of the Target Business (as defined below) are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and/or medicinal cannabis marketplace in the State of California. The Resulting Issuer, after the Transaction (as defined below), will be a vertically-integrated cannabis company in the United States with initial operations in the State of California.

 

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.

 

 

i

 

 

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 Resulting Issuer would likely be materially adversely affected. See “Risk Factors – Risks Related to Legality of Cannabis” for additional information on this risk.

 

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.

 

The Resulting Issuer’s 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 the Resulting Issuer’s ability to operate in the U.S. or any other jurisdiction. The Target Business has received and continues 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. The Target Business receives such input on an ongoing basis but does not have a formal legal opinion on such matters. There are a number of risks associated with the Target Business. See “Cannabis Market Overview – Legal and Regulatory Matters – United States Federal Overview”, “Cannabis Market Overview – Legal and Regulatory

 

Matters – U.S. Federal Enforcement Priorities”, “Risk Factors – the Resulting Issuer’s operations in the U.S. cannabis market may become the subject of heightened scrutiny” and “Risk Factors - Regulatory scrutiny of – the Resulting Issuer’s industry may negatively impact its ability to raise additional capital”.

 

Jonathan Sandelman, Charles Miles, Lawrence Hackett and Andrew Smith are the current directors of BRND and will be subject to liability as directors for any misrepresentation in this prospectus. The following proposed directors are not current directors of BRND and will not become directors of BRND until the completion of the Transaction and therefore they will not be subject to liability as directors for any misrepresentation in this prospectus: Kyle Kazan, Graham Farrar, Jamie Mendola, Jocelyn Rosenwald, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De La Torre.

 

 

ii

 

 

TABLE OF CONTENTS  

 

GLOSSARY OF TERMS 1
   
PROSPECTUS SUMMARY 15
   
NOTICE TO READERS 23
   
U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES 24
   
CAUTION REGARDING FORWARD-LOOKING STATEMENTS 24
   
COVID-19 28
   
MARKET AND INDUSTRY DATA 28
   
RECENT DEVELOPMENTS 28
   
CORPORATE STRUCTURE 29
  Mercer Park Brand Acquisition Corp. 29
  Definitive GH Group Agreement 30
  Registration Rights Agreement 37
  Piggy-back Registration Rights 37
  Accounting Treatment 37
  Proposed Transactions 37
  Private Placement 38
  Inter-Corporate Relationships 40
  Warrant Agreement 41
  Exchangeable Shares and Exchange Rights Agreements 42
     
CANNABIS MARKET OVERVIEW 50
  Exposure to U.S. Marijuana Related Activities 54
  Use of Cannabis 54
  California Cannabis Market 54
  Legal and Regulatory Matters 54
  Compliance with License Requirements 61
  Non-Compliance with State and Local Cannabis Laws 68
  Ability to Access Public and Private Capital 68
     
THE BUSINESS OF GH GROUP 69
  History of GH Group and Business Overview 69
  Cultivation 69
  Manufacturing and Distribution 74
  Wholesale Sales 75
  Brand, Product and Marketing 76
  Retail 77
  Information Technology & Inventory Management 79
  Banking & Processing 80
  Competitive Conditions 80
  Environmental Protection Requirements 80
     
SOCAL GREENHOUSE ACQUISITION 80
  SoCal Greenhouse Acquisition Agreements 81
     
ELEMENT 7 83
  Element 7 Merger Agreement 83
  Element 7 Consulting Agreement 84
     
MERCER PARK BRAND ACQUISITION CORP. 85
   
OUTLOOK 86

 

i

 

 

USE OF ESCROWED FUNDS 87
   
NON-U.S. GAAP MEASURES 88
   
SELECTED CONSOLIDATED FINANCIAL INFORMATION 90
  Pro Forma Consolidated Capitalization 90
  Summary Pro Forma Consolidated Financial Information 90
     
DIVIDEND POLICY 94
   
MANAGEMENT’S DISCUSSION AND ANALYSIS 94
   
DESCRIPTION OF SECURITIES 94
  Equity Shares and Multiple Voting Shares 95
  Advance Notice Requirements for Director Nominations 101
     
EQUITY INCENTIVE PLAN DESCRIPTION 101
  Summary of Equity Incentive Plan 101
     
OPTIONS TO PURCHASE SECURITIES 105
  Options 105
  BRND Warrants 105
     
SECURITIES SUBJECT TO CONTRACTUAL RESTRICTIONS ON TRANSFER 106
  Mercer Park Brand Acquisition Corp. Founders’ Shares 106
  Exchangeable Shares 106
     
PRIOR SALES 106
   
PRINCIPAL SHAREHOLDERS 107
   
DIRECTORS AND EXECUTIVE OFFICERS 108
  Biographies 109
  Cease Trade Orders, Bankruptcies, Penalties or Sanctions 112
  Majority Voting Policy 112
  Forum Selection Provisions 113
  Conflicts of Interest 113
  Directors’ and Officers’ Liability Insurance 113
     
DIRECTORS’ AND EXECUTIVE OFFICERS’ COMPENSATION 113
  Benchmarking 114
  Elements of Compensation 114
  Compensation, Employment Agreements, Termination and Change of Control Benefits 115
  Director Compensation 115
     
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS 116
   
AUDIT COMMITTEE 116
  Composition of the Resulting Issuer Audit Committee 116
  Pre-Approval Policies and Procedures 116
  External Audit Service Fees 116
     
CORPORATE GOVERNANCE 116
  Statement of Corporate Governance Practices 117
  Board of Directors 117
  Director Term Limits/Mandatory Retirement 119
  Diversity 119
  Orientation and Continuing Education 120
  Social Responsibility 121
  Nomination of Directors 121
  Board and Committee Assessment 121
  Audit Committee 121
  Compensation, Nomination & Corporate Governance Committee 121

 

ii

 

 

  Code of Conduct 124
  Key Governance Documents 124
     
REGULATORY APPROVALS 124
   
RISK FACTORS 125
   
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS 155
  Residents of Canada 156
  Non-Residents of Canada 158
     
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS 159
  Tax Treatment of the Transaction to the Resulting Issuer and Classification of the Resulting Issuer as a U.S.  
  Domestic Corporation 160
  Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares 161
  Tax Consequences of the Transaction to U.S. Holders of BRND Warrants 166
  Tax Consequences to Non-U.S. Holders 167
     
PROMOTER 168
   
LEGAL PROCEEDINGS AND REGULATORY ACTIONS 169
   
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS 169
   
AUDITORS 169
   
REGISTRAR AND TRANSFER AGENT 169
   
MATERIAL CONTRACTS 170
   
CONTRACTUAL RIGHT OF ACTION 170
   
SECURITIES LAWS EXEMPTIONS 171
   
FINANCIAL STATEMENTS 171
   
APPENDIX A – BRND AUDITED ANNUAL FINANCIAL STATEMENTS (YEARS ENDED DECEMBER 31, 2020 AND 2019) A-1
APPENDIX B – MANAGEMENT’S DISCUSSION & ANALYSIS OF BRND B-1
   
APPENDIX C – GH GROUP ANNUAL FINANCIAL STATEMENTS (YEAR ENDED DECEMBER 31, 2020;
YEAR ENDED DECEMBER 31, 2019; YEAR ENDED DECEMBER 31, 2018) C-1
   
APPENDIX D – MANAGEMENT’S DISCUSSION AND ANALYSIS OF GH GROUP, INC. D-1
   
APPENDIX E – CHARTER OF THE AUDIT COMMITTEE OF GLASS HOUSE BRANDS INC. E-1
   
APPENDIX F –BUD AND BLOOM AUDITED FINANCIAL STATEMENTS (FOR THE PERIOD ENDED
AUGUST 31, 2019 AND THE YEAR ENDED DECEMBER 31, 2018) F-1
   
APPENDIX G –MANAGEMENT’S DISCUSSION AND ANALYSIS OF BUD AND BLOOM G-1
   
APPENDIX H – FARMACY BERKELEY AUDITED ANNUAL FINANCIAL STATEMENTS (FOR THE
YEARS ENDED DECEMBER 31, 2020, DECEMBER 31, 2019 AND DECEMBER 31, 2018) H-1
   
APPENDIX I – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FARMACY BERKELEY I-1
   
APPENDIX J – ELEMENT 7 AUDITED ANNUAL FINANCIAL STATEMENTS (FOR THE YEARS ENDED
DECEMBER 31, 2020 AND DECEMBER 31, 2019) J-1
   
APPENDIX K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF ELEMENT 7 K-1
   
APPENDIX L – BRND UNAUDITED PRO FORMA FINANCIAL STATEMENTS L-1
   
CERTIFICATE OF MERCER PARK BRAND ACQUISITION CORP AND PROMOTER

 

iii

 

 

GLOSSARY OF TERMS

 

10% U.S. Shareholder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Effects of Section 367(b) of the Code upon the Conversion”;

 

20-day VWAP” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

2014 Cole Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

2014 Farm Bill” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters United States Federal Overview”;

 

2018 Farm Bill” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters United States Federal Overview”;

 

Accounting Standards Relief” has the meaning ascribed to it under the heading “Securities Law Exemptions”;

 

Adjusted EBITDA” has the meaning ascribed to it under the heading “Non-U.S. GAAP Measures – Adjusted EBITDA”;

 

Advance Notice Provisions” has the meaning ascribed to it under the heading “Description of Securities Advance Notice Requirements for Director Nominations”;

 

Affiliate” has the meaning ascribed to it in National Instrument 45-106 – Prospectus Exemptions of the Canadian Securities Administrators;

 

All E&P Amount” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares Conversion of BRND into a U.S. Domestic Corporation Effects of Section 367(b) of the Code upon the Conversion”;

 

allowable capital loss” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations Residents of Canada Taxation of Capital Gains and Capital Losses”;

 

Ancillary Rights” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements General”;

 

Anti-Dilution Payment” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Audit Committee” has the meaning ascribed to it under the heading “Audit Committee”;

 

AUMA” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters California State Level Overview”;

 

Automatic Exchange Right” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Automatic Exchange Right on Liquidation of BRND”;

 

Awards” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan - Purpose”;

 

BCBCA” means the Business Corporations Act (British Columbia), as it may be amended from time to time;

 

1

 

BCC” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

BRND” means Mercer Park Brand Acquisition Corp., and shall include, when appropriate, its subsidiaries from time to time;

 

BRND Audited Annual Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

BRND Class A Restricted Voting Shares” means the Class A restricted voting shares in the capital of BRND, and each a “BRND Class A Restricted Voting Share”;

 

BRND Class A Restricted Voting Units” means the Class A restricted voting units offered to the public under BRND’s initial public offering at an offering price of $10.00 per BRND Class A Restricted Voting Unit, each comprised of one BRND Class A Restricted Voting Share and one-half of a BRND Warrant, and each a “BRND Class A Restricted Voting Unit”;

 

BRND Class B Shares” means the Class B shares in the capital of BRND (and for greater certainty, includes the BRND Founders’ Shares), and each a “BRND Class B Share”;

 

BRND Class B Units” means the Class B units of BRND, each comprised of one BRND Class B Share and one-half of a BRND Warrant, and each a “BRND Class B Unit”;

 

BRND directors” has the meaning ascribed to it under the heading “Contractual Right of Action”;

 

BRND Founders” means, collectively, Mercer, Charles Miles and Sean Goodrich (or persons or companies controlled by them), as the collective holders of the BRND Founders’ Shares and of the BRND Founders’ Warrants (each as defined herein);

 

BRND Founders’ Shares” means the Class B shares in the capital of BRND issued to the BRND Founders (other than as part of the BRND Class B Units), and each a “BRND Founders’ Share”;

 

BRND Founders’ Warrants” means the share purchase warrants in the capital of BRND issued to Mercer, and each a “BRND Founders’ Warrant”;

 

BRND Meeting” means the special meeting of shareholders of BRND to be held to vote on the Transaction;

 

BRND Shareholders” means the registered or beneficial holders of the BRND Class A Restricted Voting Shares and/or the BRND Class B Shares, as the context requires;

 

BRND Warrant Holders” means the holders of the BRND Warrants, and each, a “BRND Warrant Holder”;

 

BRND Warrants” means, collectively, (A) the 20,125,000 share purchase warrants underlying the BRND Class A Restricted Voting Units, (B) the 9,810,000 BRND Founders’ Warrants, and (C) the 54,500 share purchase warrants underlying the BRND Class B Units, each of which having been issued under the Warrant Agreement and in respect of which, 65 days following the completion of the Transaction, will each entitle the holder thereof to purchase one BRND Class A Restricted Voting Share (which, at such time, will represent one Subordinate Voting Share) at a price of $11.50 and each a “BRND Warrant”;

 

Bud and Bloom” means Bud and Bloom, a California corporation;

 

Bud and Bloom Audited Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

Buyer” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

Call Rights” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements General”;

 

2

 

C&CG Committee” means the Compensation, Nominating and Corporate Governance Committee of BRND;

 

California Option Agreement” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Canaccord” has the meaning ascribed to it under the heading “Corporate Structure – Private Placement”;

 

Canada-U.S. Tax Convention” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations Non-Residents of Canada Dividends on Equity Shares”;

 

Cap” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Capital Based Earnout Shares” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

Cashless Exercise” has the meaning ascribed to it under the heading “Corporate Structure Warrant Agreement”;

 

Casitas” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

CBD” has the meaning ascribed to it under the heading “Cannabis Market Overview Use of Cannabis”;

 

CBP” has the meaning ascribed to it under the heading “Risk Factors Risks Related to Legality of Cannabis While legal under applicable U.S. State law, the Resulting Issuer’s business activities are illegal under U.S. federal law”;

 

CDC” has the meaning ascribed to it under the heading “Risk Factors Risks Related to the Resulting Issuer’s Business and GH Group’s Business – Covid-19 pandemic”;

 

CDFA” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters California State Overview”;

 

CDPH” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters – California State Level Overview”;

 

CDS” means CDS Clearing and Depository Services Inc.;

 

CEFF Camarillo Propco” means CEFF Camarillo Property, LLC;

 

CEFF Parent” means CEFF Camarillo Holdings, LLC;

 

CEFF Parties” means CEFF Parent together with CEFF Camarillo Propco;

 

Change of Control Transaction” has the meaning ascribed to it under the heading “Description of Securities Equity Shares Exercise of Voting Rights”;

 

Closing” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

CMS Asset” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

Code” means the United States Internal Revenue Code of 1986, as amended;

 

Cole Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

Company Stock” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

3

 

Compliance Provisions” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Multiple Voting Shares – Compliance Provisions”;

 

Control Transaction” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Redemption Rights”;

 

Conversion” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Consideration Tax Treatment of the Transaction to BRND and Classification of BRND as a U.S. Domestic Corporation”;

 

CPG” has the meaning ascribed to it under the heading “The Business of GH Group History of GH Group and Business Overview”;

 

CUA” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters – California State Level Overview”;

 

DEA” has the meaning ascribed to it under the heading “Risk Factors Risks Related to Legality of Cannabis – Any re-classification of cannabis or changes in U.S. controlled substance laws and regulations may affect the Resulting Issuer’s business”;

 

Deemed Dividend Election” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Effects of Section 367(b) of the Code upon the Conversion”;

 

Definitive GH Group Agreement” means the definitive purchase agreement among BRND, GH Group and its shareholders relating to the Transaction, as may be amended, supplemented or otherwise modified from time to time;

 

Definitive Option PSA” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition California Option Agreement”;

 

Definitive Property PSA” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition California Option Agreement”;

 

Demand Registration” has the meaning ascribed to it under the heading “Registration Rights Agreement Demand Registration Rights”;

 

=“ shall mean the aggregate Equity Shares issued and outstanding, including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exchange of the BRND Warrants, excluding the Cashless Exercise, provided they are not determined to be “out of the money” by the Resulting Issuer Board;

 

DOJ” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters United States Federal Overview”;

 

Effective Date” means the closing date of the Transaction;

 

Element 7” means Element 7, LLC;

 

Element 7 Audited Annual Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

Element 7 Consulting Agreement” has the meaning ascribed to it under the heading “Element 7 Element 7 Consulting Agreement”;

 

Element 7 Merger” has the meaning ascribed to it under the heading “Element 7”;

 

4

 

Element 7 Merger Agreement” has the meaning ascribed to it under the heading “Element 7 – Element 7 License Acquisition Agreement”;

 

Equity Incentive Plan” means the new equity incentive plan to be approved by BRND Shareholders at the BRND Meeting and adopted by BRND;

 

Equity Shares” means, collectively, subordinate, restricted and/or limited voting shares of the Resulting Issuer;

 

Escrowed Funds” has the meaning ascribed to it under the heading “Use of Escrowed Funds”.

 

Exchange Agreement and Undertaking” means the exchange agreement and undertaking dated May 7, 2019, entered into by each of the BRND Founders in favour of BRND;

 

Exchangeable Share Consideration” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Ranking and Liquidation Rights”;

 

Exchangeable Shareholder Put Event” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Grant of Exchange Rights”;

 

Exchangeable Shareholders’ Put Right” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements – Grant of Exchange Rights”;

 

Exchangeable Share Provisions” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements Grant of Exchange Rights”;

 

Exchangeable Shares” means the non-voting exchangeable common stock of MPB AcquisitionCo which, pursuant to the applicable Exchange Rights Agreements, are exchangeable on a one-for-one basis into Equity Shares;

 

Exchangeable Shareholders” means the holders of the Exchangeable Shares;

 

Exchanged Shares” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Grant of Exchange Rights”;

 

Exchange Rights Agreements” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Exchangeable Share Procedures”;

 

Exercise Notice” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition California Option Agreement”;

 

Existing Leases” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition”;

 

Extraordinary Dividends” means any dividend paid by BRND, together with all other dividends payable by BRND in the same calendar year, that has an aggregate absolute dollar value which is greater than $0.25 per share, with the adjustment to the applicable price, if applicable, being a reduction equal to the amount of the excess;

 

Farmacy Berkeley” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

FATCA” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Foreign Account Tax Compliance Act”;

 

FDA” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters United States Federal Overview”;

 

FDCA” has the meaning ascribed to it under the heading “Risk Factors Risks Related to Legality of Cannabis Regulatory action and approvals from the U.S. Food and Drug Administration”;

 

5

 

FinCEN” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

FinCEN Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory MattersUnited States Federal Overview”;

 

forward-looking information” has the meaning ascribed to it under the heading “Caution Regarding Forward-Looking Statements”;

 

forward-looking statements” has the meaning ascribed to it under the heading “Caution Regarding Forward-Looking Statements”;

 

FPI Capital Structure Amendments” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares”;

 

FPI Threshold” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Equity Shares – Conversion”;

 

Fully-Diluted Share Number” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

GH EIP” has the meaning ascribed to it under the heading “Options to Purchase Securities – GH Group Equity Incentive Plan”;

 

GH Group” means GH Group, Inc.;

 

GH Group Audited Annual Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

GH Group Company Incentive Plan” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

GH Group Financing” has the meaning ascribed to it under the heading “Corporate Structure – GH Group Financing”;

 

GH Group Founders” means, collectively, Kyle Kazan, Graham Farrar, Jamie Rosenwald, Benjamin Persky, Kris Hulgreen, Steven Persky and Hans Tiedemann;

 

GH Options” has the meaning ascribed to it under the heading “Options to Purchase Securities – GH Group Equity Incentive Plan”;

 

GH Participant” has the meaning ascribed to it under the heading “Options to Purchase Securities – GH Group Equity Incentive Plan”;

 

GIPI” means Glass Investments Projects, Inc.;

 

Guidelines” has the meaning ascribed to it under the heading “Corporate Governance Statement of Corporate Governance Practices”;

 

held of record” has the meaning ascribed to it under Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

HSR Act” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement;

 

6

 

iCANN” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

IMS” has the meaning ascribed to it under the heading “The Business of GH Group – Information Technology and Inventory Management”;

 

Incorporation Share” means the initial BRND Class B Share issued to Mercer in connection with the incorporation of BRND;

 

Insolvency Event” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

IPM” has the meaning ascribed to it under the heading “Cannabis Market Overview Compliance with License Requirements – Cultivation Operations Compliance”;

 

IRS” means the U.S. Internal Revenue Service;

 

ISOs” has the meaning ascribed to it under the heading “Equity Incentive Plan Description Summary of Equity Incentive Plan – Purpose”;

 

Later Redemption Date” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements – Redemption Call Right”;

 

Limited Voting Shares” means limited voting shares of the Resulting Issuer;

 

Liquidation Amount” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Ranking and Liquidation Rights”;

 

Liquidation Call Purchase Price” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Liquidation Call Right”;

 

Liquidation Call Right” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Liquidation Call Right”;

 

Liquidation Date” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Ranking and Liquidation Rights”;

 

Liquidation Event” has the meaning ascribed to it under the heading “Corporate Structure Exchangeable Shares and Exchange Rights Agreements Automatic Exchange Right on Liquidation of BRND”;

 

Liquidation Event Effective Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements Automatic Exchange Right on Liquidation of BRND”;

 

Lockup Agreement” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

Long Form Demand Registration” has the meaning ascribed to it under the heading “Registration Rights Agreement Demand Registration Rights”;

 

Mark-to-Market” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

MAUCRSA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

7

 

MCRSA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

MCSB” has the meaning ascribed to it under the heading “Cannabis Market Overview Legal and Regulatory Matters California State Level Overview California Licenses and Regulations - Manufacturing”;

 

MD&A” means management’s discussion and analysis;

 

Mercer” means Mercer Park Brand, L.P. (formerly Mercer Park CB II, L.P.), a limited partnership formed under the laws of the State of Delaware, and BRND’s sponsor;

 

Merger” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

Merger Consideration” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

Merger Parties” means BRND, Buyer, Merger Sub, GH Group, Sellers and Sellers’ Representative, and referred to individually as a “Merger Party”;

 

Merger Sub” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement;

 

METRC” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal Regulatory Matters – California State Level Overview – California Licenses and Regulations – Reporting Requirements”;

 

MPB AcquisitionCo” means MPB Acquisition Corp.;

 

MPB PipeCo” means Mercer Park Brand Pipe Inc.;

 

Multiple Voting Shares” means multiple voting shares of the Resulting Issuer;

 

NEO” means a Named Executive Officer, as such term is defined in Form 51-102F6 – Statement of Executive Compensation under NI 51-102, and collectively the “NEOs”;

 

NEO Exchange” means the Neo Exchange Inc.;

 

NEO Exchange Policies” means the rules and policies of the NEO Exchange in effect from time to time;

 

NI 51-102” means National Instrument 51-102 Continuous Disclosure Obligations;

 

NI 52-107” means National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards;

 

NI 52-109” means National Instrument 52-109 Certification of Disclosure in Issuer’s Annual and Interim Filings;

 

NI 52-110” means National Instrument 52-110 – Audit Committees;

 

NI 58-101” means National Instrument 58-101 Disclosure of Corporate Governance Practices;

 

NI 62-104” means National Instrument 62-104 – Take-Over Bids and Special Transactions;

 

Nominating Shareholder” has the meaning ascribed to it under the heading “Description of Securities Advance Notice Requirements for Director Nominations”;

 

Non-Electing Shareholder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

8

 

Non-Resident Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada”;

 

non-U.S. GAAP” has the meaning ascribed to it under the heading “Non-U.S. GAAP Measures”;

 

Non-U.S. Holder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations”;

 

Notice Date” has the meaning ascribed to it under the heading “Description of Securities — Advance Notice Requirements for Director Nominations”;

 

NP 58-201” means National Policy 58-201 – Corporate Governance Guidelines;

 

NQSOs” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan Purpose”;

 

Option” the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition California Option Agreement”;

 

Option Holder” means the Glass Investments Projects, Inc.;

 

Optionholder” has the meaning ascribed to it under the heading “Management’s Discussion and Analysis Management’s Discussion and Analysis of GH Group for the Years Ended December 31, 2020, December 31, 2019 and December 31, 2018 Recent Developments Greenhouse Option Acquisition”;

 

Option Rights” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Options” has the meaning ascribed to it under the heading “Equity Incentive Plan Description Summary of Equity Incentive Plan Purpose”;

 

OSC” means the Ontario Securities Commission;

 

Outside Date” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Owning or Controlling” has the meaning ascribed to it under the heading “Description of Securities Equity Shares and Multiple Voting Shares – Multiple Voting Shares – Compliance Provisions”;

 

Padaro” has the meaning ascribed to it under the heading “History of GH Group and Business Overview Cultivation”;

 

Participants” has the meaning ascribed to it under the heading “Equity Incentive Plan Description Summary of Equity Incentive Plan Eligibility”;

 

Per Share Merger Consideration” has the meaning ascribed to it under the heading “Corporate Structure Definitive GH Group Agreement”;

 

PFIC” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

Piggyback Shareholders” has the meaning ascribed to it under the heading “Corporate Structure Registration Rights Agreement”;

 

Polar” has the meaning ascribed to it under the heading “Recent Developments”;

 

9

 

 

Post Closing Cash” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Preferred Shares” has the meaning ascribed to it under the heading “Description of Securities”;

 

Price Based Earn-out Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Private Placement” has the meaning ascribed to it under the heading “Corporate Structure – Private Placement”;

 

Private Placement Shares” has the meaning ascribed to it under the heading “Corporate Structure – Private Placement”;

 

Programs and Policies” has the meaning ascribed to it under the heading “Notice to Readers”;

 

Purchase Price” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Purchaser” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

QEF” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

QEF Election” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations –Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

qualifying transaction” has the meaning ascribed to it under the heading “Notice to Readers”;

 

RDSP” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment;

 

Recapitalization” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND Class A Restricted Voting Shares to Subordinate Voting Shares”;

 

Redemption Call Purchase Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Call Right”;

 

Redemption Call Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Call Right”;

 

Redemption Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Redemption Deadline” means 5:00 p.m. (Toronto time) on the fifth business day before the meeting of BRND Shareholders to consider, among other things, the Transaction, or 5:00 p.m. (Toronto time) on the fifth business day before any adjournment(s) or postponement(s) thereof;

 

Redemption Event” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Redemption Notice” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

10

 

Redemption Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Registering Shareholders” has the meaning ascribed to it under the heading “Corporate Structure – Registration Rights Agreement;

 

Registration Rights Agreement” has the meaning ascribed to it under the heading “Corporate Structure – Registration Rights Agreement;

 

Related Person” has the meaning ascribed to it in the NEO Exchange Policies;

 

Resident Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada”;

 

RESP” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

Restricted Voting Shares” means restricted voting shares of the Resulting Issuer;

 

Resulting Issuer” has the meaning ascribed to it under the heading “Notice to Readers”;

 

Resulting Issuer Board” means the board of directors of BRND immediately following the closing of the Transaction;

 

Resulting Issuer Pro Forma Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

Resulting Issuer Shareholders” means the registered or beneficial holders of the Subordinate Voting Shares and/or the Multiple Voting Shares, as the context requires;

 

Retraction Call Notice” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Retraction Call Right”;

 

Retraction Call Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Retraction Call Right”;

 

Retraction Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Retraction Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Retraction Request” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Retracted Shares” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Rohrabacher-Blumenauer Amendment” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

RRIF” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

RRSP” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada –Eligibility for Investment”;

 

11

 

RSUs” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan – Purpose”;

 

SEC” has the meaning ascribed to it under the heading “Securities Laws Exemptions”;

 

Second Amendment” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Securities” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

Seller Indemnity Cap” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Sellers” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement;

 

Sellers’ Representative” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Sessions Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

Shareholder Redemption Notice” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Short Form Demand Registration” has the meaning ascribed to it under the heading “Registration Rights Agreement – Demand Registration Rights”;

 

Short-Term Lease” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition”;

 

Short-Term Tenant” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition”;

 

signatories” has the meaning ascribed to it under the heading “Contractual Right of Action”;

 

SOPs” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal Regulatory Matters – California State Level Overview – California Licenses and Regulations – Operating Procedure Requirements”;

 

SPAC” has the meaning ascribed to it under the heading “Notice to Readers”;

 

SPAC Closing Cash Minimum” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Investor Rights Agreement” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Series A Preferred Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Series A Warrants” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

SoCal Greenhouse” has the meaning ascribed to it under the heading “Corporate Structure – Proposed Transactions”;

 

SoCal Greenhouse Facility Acquisition Agreement” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

SoCal Greenhouse Agreements” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – SoCal Greenhouse Acquisition Agreements”;

 

12

 

Sponsor Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Staff Notice 51-352” has the meaning ascribed to it on the cover page hereto;

 

State” means a state of the United States, as the context requires;

 

Subordinate Voting Shares” means subordinate voting shares of BRND or the Resulting Issuer, as applicable;

 

Substances Act” has the meaning ascribed to it under the heading “Cannabis Market Overview”;

 

Target Business” means, GH Group, Inc.;

 

Target Disclosure” has the meaning ascribed to it under the heading “Risk Factors – General Legal and Regulatory Risks –Seller Indemnity Cap”;

 

taxable capital gain” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Taxation of Capital Gains and Capital Losses”;

 

Tax Act” means the Income Tax Act (Canada), as amended from time to time, including the regulations thereunder;

 

Tax Proposals” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

TFSA” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

THC” has the meaning ascribed to it under the heading “Cannabis Market Overview – Use of Cannabis”;

 

The Pottery” means The Pottery, Inc.;

 

TMX MOU” has the meaning ascribed to it under the heading “Risk Factors –Risks Related to Legality of Cannabis – The Resulting Issuer’s operations in the U.S. cannabis market may become the subject of heightened scrutiny”;

 

Total Cash” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Transaction” has the meaning ascribed to it on the cover page hereto;

 

Treasury Regulations” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations”;

 

T&T” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal Regulatory Matters – California State Level Overview – California Licenses and Regulations – Cultivation”;

 

UIDs” has the meaning ascribed to it under the heading “Cannabis Market Overview – Compliance with License Requirements – Cultivation Operations Compliance”;

 

United States” or “U.S.” means the United States of America, its territories and possessions, any State of the United States and the District of Columbia;

 

Unsuitable Person” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Multiple Voting Shares – Compliance Provisions”;

 

USAM” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

U.S. GAAP” has the meaning ascribed to it under the heading “U.S. Generally Accepted Accounting Principles”;

 

13

 

U.S. Holder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations” or under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”, as the context applies;

 

U.S. PCAOB GASS” has the meaning ascribed to it under the heading “U.S. Generally Accepted Accounting Principles”;

 

U.S. Resident” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”;

 

U.S. Securities Act” means the Securities Act of 1933;

 

USRPHC” has the meaning ascribed to it under the heading “Risk Factors – Tax Risks – U.S. tax classification of BRND as a U.S. Real Property Holding Company”;

 

Warrant Agent” means Odyssey Trust Company, in its capacity as warrant agent in respect of the Warrant Agreement; and

 

Warrant Agreement” means the warrant agency agreement between BRND and Odyssey Trust Company, as warrant agent, dated May 13, 2019, as it may be amended from time to time.

 

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PROSPECTUS SUMMARY

 

The following is a summary of this prospectus and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus.

 

Unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “$” or “US$” are to United States dollars. References to “C$” are to Canadian dollars.

 

Description of Mercer Park Brand Acquisition Corp.

 

BRND is a corporation incorporated under the laws of the Province of British Columbia. BRND is a special purpose acquisition corporation that was organized for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving BRND, which is referred to throughout this prospectus as BRND’s “qualifying transaction”.

 

BRND’s sponsor, Mercer, is a limited partnership of which Mercer Park CB II GP, LLC is the general partner, and which is indirectly controlled by Jonathan Sandelman. Mercer Park, L.P., the parent of Mercer, is a privately-held family office based in New York, New York, the executive leadership and entrepreneurial expertise, investment and deal experience and network of which have been a critical component of BRND’s identification and consummation process in respect of the Transaction.

 

On April 8, 2021, BRND announced that it had entered into the Definitive GH Group Agreement with GH Group pursuant to which, among other things, BRND shall acquire, directly or indirectly, all of the common equity of GH Group. Up to $12 million of non-convertible Class A preferred shares of GH group may remain outstanding at closing of the Transaction. This acquisition is intended to collectively constitute BRND’s “qualifying transaction”. Subject to obtaining certain approvals and the satisfaction of certain conditions stipulated therein, it is anticipated that these acquisitions will be completed by mid-2021.

 

The post-closing head office of the Resulting Issuer will be located at 3645 Long Beach Blvd., Long Beach, California, USA.

 

See “Corporate Structure – Mercer Park Brand Acquisition Corp.” and “Corporate Structure – Definitive GH Group Agreement” at page 29 of this prospectus.

 

On April 8, 2021, BRND also announced a private placement of $85 million of non-voting shares of MPB PipeCo, a wholly owned subsidiary of BRND at a price of $10.00 per share. The closing of the Private Placement is scheduled to occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares issued will be exchanged for Equity Shares on a one-for-one basis. The Private Placement is subject to customary conditions, including the closing of the Transaction. See “Corporate Structure – Private Placement” at page 38 of this prospectus.

 

Definitive GH Group Agreement

 

On April 8, 2021, BRND, and its wholly owned subsidiary MPB AcquisitionCo, and its wholly owned subsidiary Merger Sub, entered into the Definitive GH Group Agreement with GH Group, the sellers listed on the signature page thereto, Kyle Kazan as sellers’ representative and certain GH Group Founders, whereby BRND intends to effectuate a merger of Merger Sub with and into GH Group, with GH Group continuing as the surviving corporation and a majority-owned subsidiary of MPB AcquisitionCo.

 

The description of the Definitive GH Group Agreement, both in this section and elsewhere in this prospectus (see “Corporate Structure – Definitive GH Group Agreement” at page 30 of this prospectus), is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Definitive GH Group Agreement, which may be found on BRND’s profile on SEDAR at www.sedar.com.

 

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Proposed Transactions

 

GH Group has executed a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. See “SoCal Greenhouse Acquisition” at page 80 of this prospectus.

 

GH Group has executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California. See “Element 7” at page 80 of this prospectus.

 

In addition, GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional licenses in California. See “Element 7” at page 80 of this prospectus.

 

Cannabis Market Overview

 

The legalization and regulation of marijuana for medical and adult use is being implemented at the State level in the United States. State laws regulating cannabis are in direct conflict with U.S. federal law, which makes cannabis use and possession federally illegal. Although certain States and territories of the U.S. 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 under any and all circumstances under the Substances Act. Although the Target Business’ activities are compliant with applicable United States State and local law, strict compliance with State and local laws with respect to cannabis may neither absolve BRND of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against BRND. The risk of federal enforcement and other risks associated with BRND’s business are described under “Risk Factors”.

 

As of December 31, 2020, the date of the Audited GH Group Financial Statements, 100% of GH Group’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of GH Group. As such, GH Group’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

 

See “Cannabis Market Overview” at page 50 of this prospectus for further details on the legal and regulatory environment of the cannabis market.

 

The Business of GH Group

 

Key Assets   Description
   

2 Greenhouse/Cultivation Facilities

 

1 Manufacturing and Distribution Facility

 

4 Dispensaries

GH Group is a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in California. GH Group has been cultivating cannabis since 2015 and was one of the first three (3) recipients of a license to open a retail dispensary in Santa Barbara, California. It possesses (i) an aggregate of 550,000 sq. ft. in two operating greenhouse facilities in Santa Barbara county that both include associated processing facilities, (ii) a volatile and non-volatile manufacturing and distribution facility in Lompec, California, and (iii) an additional non-volatile manufacturing facility in Long Beach, California. GH Group owns three (3) operating retail dispensaries in Santa Barbara, Los Angeles and Berkeley, California and partially owns and manages a fourth located in Los Angeles that includes a specialty indoor cultivation facility. GH Group is brand-focused with cannabis products including flower, oil and concentrate, tinctures, and vaporizer products. GH Group’s brands include Forbidden Flowers, Mama Sue and Glass House Farms, which is the second largest cannabis flower brand in California according to data from BDS Analytics. See “The Business of GH Group” at page 69 of this prospectus.
   
  GH Group has agreed to acquire additional dispensaries (see “Element 7” at page 80 of this prospectus) and a greenhouse complex in Southern California (see “SoCal Greenhouse Acquisition” at page 80 of this prospectus). Each such transaction is conditional upon closing of the Transaction and is subject to customary closing conditions, including regulatory approval.

 

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Mercer Park Brand Acquisition Corp. Company Overview

 

The Resulting Issuer, after the Transaction, will be a leading vertically-integrated cannabis company in the United States focused on recreational and wellness applications, with an initial portfolio of high quality vertically-integrated operations in California.1 GH Group was selected based on its anticipated 2021 financial results and strength of the resulting platform for future growth, with a focus on positive Adjusted EBITDA2 and vertical integration in the largest state cannabis market in the United States of America.

 

The Resulting Issuer’s combined operations will initially employ over approximately 300 people across four (4) cultivation and production facilities (including the proposed SoCal Greenhouse) and four (4) dispensaries across the State of California. The Resulting Issuer’s post-closing operations, which will be made up of the existing operations of GH Group, will be led by proven operators with deep talent pools and expertise to contribute to the Resulting Issuer’s future growth.

 

The Resulting Issuer’s executive team comprises proven leaders in marketing, healthcare, operations and finance, areas essential for the future success of the Resulting Issuer.

 

Kyle Kazan, Chairman, Chief Executive Officer and Director

 

A seasoned investor and expert manager of private equity funds with over two (2) decades of domestic and international experience, Kyle has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. Kyle also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the vertically integrated GH Group.

 

Graham Farrar, President and Director

 

Graham is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Farrar served as a board member for Heal the Ocean, was a founder and partner of ebook publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry.

 

Derek Higgins, Chief Financial Officer

 

Derrek Higgins serves as Chief Financial Officer for GH Group. Derrek has day to day responsibility managing the financial actions and planning of GH Group, overseeing cash flow, leading capital raises, analyzing mergers and acquisitions, and implementing growth strategies. He has more than 20 years of public and private company financial expertise in preparing venture-backed startups for public listings, representing shareholders and implementing comprehensive profitability and working capital plans.

 

 

1 Subject to receipt of any necessary State and local regulatory approvals in California.

2 See “Non-U.S. GAAP Measures”.

 

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Jamin Horn, Corporate Secretary

 

Jamin has over a decade of legal experience in counseling high-growth private and public companies, principally in the medical and digital technology sectors, and over six years of experience advising California and multi-state cannabis operators and associated technology service providers. Prior to becoming an attorney, he worked on investor-side early-stage financing and intellectual property commercialization planning and analysis. He is a member of the California bar, the Association of Corporate Counsel and the International Cannabis Bar Association.

 

Daryl Kato, Chief Operating Officer

 

Daryl is a seasoned leader with over 20 years of experience in operations, finance, accounting, and technology across multiple industry sectors and consumer packaged goods categories. Most recently, he served as the Chief Financial Officer and Board Director at Nissin Foods USA. Prior to that, he co-founded and sold a digital out-of-home advertising company and completed several business transformation projects while with Nestlé USA, Global Nestle Professional, Farmer Brothers (NASDAQ: FARM), and Mitsubishi UFJ Financial Group (NYSE: MUFG). Kato began his career in Deloitte’s audit practice where he earned his CPA license.

 

Joe Andreae, Vice President, Business Development

 

Joe is a true veteran of legal cannabis markets, having spent over a decade as a serial cannabis entrepreneur. With multiple endeavors spanning 3 states, he has acquired a range of expertise that encompasses nearly every aspect of the cannabis business, beginning in the cultivation supply sector with lighting and hydroponic equipment for the medical market. From there, he dove ever-deeper into the industry, as a pioneer of the extraction sector in Colorado, co-owner of a medical cannabis dispensary in California, founder/owner of Madrone Oregon, which held 11 state cultivation licenses, and President of the ceramic accessories brand, Hive. Most recently, he served as the CEO of a premium California concentrates brand for three years, before bringing his extensive industry knowledge and leadership to GH Group.

 

It is intended that the Resulting Issuer will continue to seek opportunities to broaden its existing footprint in California and elsewhere with potential for branding and other synergies, while maintaining a focus on vertical integration. Such acquisitions may be directly “plant-touching” or may be in related businesses whose inclusion within the Resulting Issuer portfolio would be accretive to future growth prospects.

 

Risk Factors

 

The acquisition of any of the securities of BRND is speculative, involving a high degree of risk. An investment in the securities of BRND should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. BRND’s shareholders should evaluate carefully the risks identified in this prospectus under the heading “Risk Factors” associated with BRND’s securities, along with the risk factors described elsewhere in this prospectus.

 

Summary of Certain Canadian Federal Income Tax Considerations

 

For a summary of certain Canadian federal income tax considerations applicable to a beneficial owner of the Securities following the Transaction, see “Certain Canadian Federal Income Tax Considerations” at page 156 of this prospectus.

 

Holders are urged to consult their own income tax advisors with respect to the tax consequences applicable to the acquisition, holding and disposition of Securities based on their own particular circumstances.

 

Summary of Certain United States Federal Income Tax Considerations

 

For a summary of certain United States federal income tax considerations of the Transaction applicable to a U.S. Holders, please see “Certain United States Federal Income Tax Considerations” at page 160 of this prospectus.

 

Holders are urged to consult their own income tax advisors with respect to the tax consequences applicable to the acquisition, holding and disposition of Securities based on their own particular circumstances.

 

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Summary of Financial Information

 

Pro Forma Consolidated Capitalization

 

Completion of the Transaction requires, among other things, shareholder approval of the BRND Shareholders at a meeting of the BRND Shareholders, which meeting has not yet taken place. In addition, as the Transaction constitutes BRND’s qualifying transaction, holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, whether they vote for or against, or do not vote on, the qualifying transaction, provided that they deposit (and do not validly withdraw) their shares for redemption prior to the Redemption Deadline. A description of the redemption rights will be included in the management information circular to be mailed to BRND Shareholders in connection with the shareholders meeting. A redeeming BRND shareholder is entitled (conditional on closing) to receive an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion (per BRND Class A Restricted Voting Share) of: (A) the escrowed funds available in the BRND’s escrow account at the time of the BRND Meeting, including interest and other amounts earned thereon; less (B) an amount equal to the total of (i) applicable taxes payable by BRND 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 BRND. For greater certainty, such amount will not be reduced by the amount of any tax of BRND under Part VI.1 of the Tax Act or the deferred underwriting commissions per BRND Class A Restricted Voting Share held in escrow. This redemption amount is anticipated to be $10.11 per BRND Class A Restricted Voting Share, assuming a June 4, 2021 redemption date.

 

The following table sets forth the consolidated capitalization of the Resulting Issuer as of December 31, 2020 adjusted to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing, assuming a zero and 25% level of redemptions of Class A Restricted Voting Shares. Since December 31, 2020, other than in the normal course of business, there has been no material change in the equity and debt capital of GH Group.

 

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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix F, Appendix H, Appendix J and Appendix L, respectively.

 

    As of December 31, 2020, as adjusted after giving     As of December 31, 2020, as adjusted after giving  
    effect to (i) the Transaction and the acquisition of     effect to the Transaction and the acquisition of  
    Farmacy Berkeley, (ii) the proposed acquisition of     Farmacy Berkeley, (ii) the proposed acquisition of  
    SoCal Greenhouse, (iii) the proposed Element 7     SoCal Greenhouse, (iii) the proposed Element 7  
    Merger, (iv) the Private Placement, and (v) the GH     Merger, (iv) the Private Placement, and (v) the GH  
    Group Financing and assuming no redemptions of     Group Financing and assuming 25% redemptions of  
    BRND Class A Restricted Voting Shares     BRND Class A Restricted Voting Shares  
Cash and cash equivalents   381,177,330     177,408,802  
Debt   989,554     989,554  
Shareholders’ equity(1)   713,882,057     512,632,057  
Total Capitalization   714,871,611     513,621,611  
             
Debt, net of cash   (380,187,776 )   (176,419,248 )

 

Notes:

 

(1) Excludes the Equity Shares issuable upon the exercise of the BRND Warrants, which are exercisable commencing 65 days after the completion of the Transaction. See “Corporate Structure – Warrant Agreement”at page 41 of this prospectus.

 

Summary Pro Forma Consolidated Financial Information

 

The unaudited pro forma consolidated statement of financial position of BRND as at December 31, 2020 (see “Mercer Park Brand Acquisition Corp. Unaudited Pro Forma Consolidated Statement of Financial Position As at December 31, 2020” at page 92 of this prospectus) has been prepared by BRND to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2020. The unaudited pro forma consolidated statement of operations of BRND for the year ended December 31, 2020 (see “Mercer Park Brand Acquisition Corp. Unaudited Pro Forma Consolidated Statements of Operations For the Year Ended December 31, 2020” at page 93 of this prospectus) has been prepared by BRND to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2019.

 

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This summary pro forma financial information 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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix F, Appendix H, Appendix J, and Appendix L, respectively.

 

The pro forma financial information has been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would have been achieved if (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing had been completed on the date or for the periods noted above, nor does it purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro forma adjustments that comprise this pro forma financial information, various other factors will have an effect on the financial condition and results of operations of BRND following the completion of (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing including an adjustment as it relates to the closing of the Transaction which assumes no redemption of BRND Class A Restricted Voting Shares (the actual redemption level is uncertain, but see Note 5 of the Resulting Issuer Pro Forma Financial Statements for the illustrative effect of 0% and 25% redemption levels). See “Notes to Pro Forma Condensed Consolidated Combined Financial Information” included in Appendix L for a discussion of pro forma adjustments. See also “Caution Regarding Forward-Looking Statements” at page 24 of this prospectus.

 

20

 

 

Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Financial Position

 

As at December 31, 2020

 

  Mercer Park BRAND     GH Group             Subtotal       Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     iCann     Element 7     December 31, 2020         Adjustments     December 31, 2020  
US$   $     $     December 31, 2020     December 31, 2020     $     Notes   $     $  
ASSETS                                                            
Current                                                            
Cash     2,095,023       4,535,251       158,928               6,789,202     5a     407,537,056       365,936,258  
                                            5d     (118,890,000 )        
                                            5f     (16,100,000 )        
                                            5i     85,000,000          
                                            5l     (400,000 )        
                                            5k     2,000,000          
Deposit                             61,893       61,893     5k     10,000,000       10,061,893  
Accounts receivable, trade, no                                                            
allowance     -       5,141,021                       5,141,021                   5,141,021  
Income tax recoverable     1,209,852       -                       1,209,852                   1,209,852  
Inventory     -       6,866,002       343,289               7,209,291                   7,209,291  
Prepaid Expenses and other assets     -       1,018,212       61,528               1,079,740                   1,079,740  
Notes Receivables             904,534                       904,534                   904,534  
      3,304,875       18,465,020       563,745       61,893       22,395,533           369,147,056       391,542,589  
Operating Lease Right-of-Use Assets,                                                            
Net             2,532,629               538,065       3,070,694                   3,070,694  
Marketable securities held in a escrow                                                            
account     407,537,056       -                       407,537,056     5a     (407,537,056 )     -  
Intangible assets     -       5,279,000               153,477       5,432,477     5d     171,920,360       214,103,880  
                                            5e     (153,477 )        
                                            5e     24,000,000          
                                            5l     12,904,520          
Property, plant and equipment     -       27,192,027       692,645               27,884,672     5d     92,420,992       120,305,664  
Goodwill     -       4,815,999                       4,815,999                   4,815,999  
Deferred tax assets     598,435       -                       598,435     5c(iii)     (598,435 )     -  
Investments             10,701,868                       10,701,868     5l     (2,045,309 )     8,656,559  
Other long term assets     -       554,266                       554,266                   554,266  
Total assets     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  
                                                             
Liabilities                                                            
Current                                                            
Accounts payable and accrued liabilities     396,779       6,570,715       875,599               7,843,093     5g     6,000,000       13,843,093  
Income tax payable     -       4,740,003       209,466               4,949,469                   4,949,469  
Debts/notes payable - current portion     -       601,188                       601,188                   601,188  
Derivative Liabilities             7,365,000                       7,365,000                   7,365,000  
Operating Lease Liabilities - current portion             327,329               155,906       483,235                   483,235  
Due to related parties     349,034       -               531,121       880,155     5e     (531,121 )     349,034  
      745,813       19,604,235       1,085,065       687,027       22,122,140           5,468,879       27,591,019  
                                                             
Deferred underwriters’ commission     16,100,000       -                       16,100,000     5f     (16,100,000 )     -  
Class A restricted voting shares                                                            
subject to redemption     402,500,000       -                       402,500,000     5b     (402,500,000 )     -  
Debts payable - Non-current portion     -       19,072,858                       19,072,858     5j     (18,684,492 )     388,366  
Operating Lease Liabilities - Non-current portion             2,318,852               451,259       2,770,111                   2,770,111  
Deferred Tax Liabilities             1,420,583                       1,420,583                   1,420,583  
Other Non-Current Liabilities     -       849,358                       849,358                   849,358  
Total liabilities     419,345,813       43,265,886       1,085,065       1,138,286       464,835,050           (431,815,613 )     33,019,437  
                                                             
Additional paid-in-capital     (11,684,284 )     -                       (11,684,284 )   5b     402,500,000       667,345,361  
                                            5c(ii)     (390,815,716 )        
                                            5d     100,000,000          
                                            5d     45,451,352          
                                            5e     24,000,000          
                                            5e     531,121          
                                            5e     (153,477 )        
                                            5c(i)     393,996,118          
                                            5c(ii)     26,061,981          
                                            5i     85,000,000          
                                            5j     (18,001,529 )        
                                            5e     584          
                                            5l     (171,325 )        
                                            5l     10,630,536          
Preferred Stock                                           5k     12,000,000       48,686,021  
                                            5j     18,684,492          
                                            5j     18,001,529          
Retained earnings     3,778,837       -                       3,778,837     5i     (3,778,837 )     -  
                                            5g     (6,000,000 )     (6,000,000 )
Members’ equity     -       26,274,923       171,325       (384,267 )     26,061,981     5c(ii)     (26,061,981 )     -  
Non-Controlling Interest                             (584 )     (584 )   5e     (584 )     (1,168 )
Total Shareholders’ Equity     (7,905,447 )     26,274,923       171,325       (384,851 )     18,155,950     -     691,874,264       710,030,214  
                                                             
Total liabilities and members’ equity     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  

 

21

 

 

Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Operations

 

As at December 31, 2020

 

    Mercer Park BRAND       GH Group             Element 7               Pro-Forma       Consolidated  
      December 31, 2020       December 31, 2020       iCann       December 31, 2020       Subtotal         Adjustments       December 31, 2020  
US$     $       $       December 31, 2020       $       $     Notes     $       $  
Revenues, net of discounts     -       48,259,601       3,607,307             51,866,908                 51,866,908  
Cost of goods sold     -       29,519,143       2,621,272               32,140,415                   32,140,415  
      -       18,740,458       986,035       -       19,726,493           -       19,726,493  
Gross profit (loss)     -       18,740,458       986,035       -       19,726,493           -       19,726,493  
                                                             
Expenses                                                            
Transaction costs     -       -                       -     5g     6,000,000       6,000,000  
General and administrative     752,259       18,637,477       1,798,289       274,397       21,462,422                   21,462,422  
Sales and marketing     -       1,489,664       166,784               1,656,448                   1,656,448  
Professional Fees     -       2,040,004       71,570               2,111,574                   2,111,574  
Depreciation and Amortization     -       2,576,263       108,672               2,684,935                   2,684,935  
Foreign exchange loss (gain)     43,142       -                       43,142                   43,142  
Total Expenses     795,401       24,743,408       2,145,315       274,397       27,958,521           6,000,000       33,958,521  
                                                             
Net income (loss) from operations     (795,401 )     (6,002,950 )     (1,159,280 )     (274,397 )     (8,232,028 )         (6,000,000 )     (14,232,028 )
                                                             
Other (income) expense                                                            
Share of (income) loss on equity investments     -       2,126,112                       2,126,112                   2,126,112  
Interest expense     -       2,179,137       327,104               2,506,241                   2,506,241  
Interest income     (1,742,747 )     (115,572 )                     (1,858,319 )                 (1,858,319 )
Loss on Change in Fair Value of Derivative Liablities             251,663                       251,663                   251,663  
Other expense (income)     -       (203,345 )     32,566               (170,779 )                 (170,779 )
Total other (income) expense     (1,742,747 )     4,237,995       359,670       -       2,854,918           -       2,854,918  
                                                             
Income tax (recovery) expense     -       6,418,533       207,868               6,626,401                   6,626,401  
                                                             
Net Income (loss) and comprehensive income (loss)     947,346       (16,659,479 )     (1,726,818 )     (274,397 )     (17,713,348 )         (6,000,000 )     (23,713,348 )
                                                             
Net Income (Loss) Attributable to Non-Controlling Interest                             (584 )     (584 )   5e     584       -  
                                                             
Net Loss Attributable to Members Interest     947,346       (16,659,479 )     (1,726,818 )     273,813       (17,713,932 )         (5,999,416 )     (23,713,348 )

 

22

 

NOTICE TO READERS

 

This prospectus is being filed by BRND, which is a corporation incorporated under the laws of the Province of British Columbia. BRND is a special purpose acquisition corporation (“SPAC”) that was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination involving BRND that will qualify as its “qualifying transaction”.

 

On April 8, 2021, BRND announced that it had entered into the Definitive GH Group Agreement (as defined below) with GH Group pursuant to which, among other things, BRND shall acquire, directly or indirectly, all of the common equity of GH Group. Up to $12 million of non-convertible Series A Preferred Shares of GH Group may remain outstanding at closing of the Transaction. Existing shareholders of BRND (who, in the case of holders of BRND Class A Restricted Voting Shares (as defined below), do not choose to redeem their shares) will continue to hold an interest in BRND after giving effect to the Transaction. In connection with the completion of the Transaction, BRND intends to change its name to “Glass House Brands Inc.”.

 

BRND will indirectly own 100% of the common equity of GH Group. See “The Business of GH Group” and “Corporate Structure – Definitive GH Group Agreement”. See “Description of Securities – Capital Structure” for a description of the intended capital structure of the Resulting Issuer (as defined below).

 

This prospectus is being filed in accordance with the NEO Exchange Listing Manual in connection with the completion of BRND’s qualifying transaction. Unless otherwise indicated or where inapplicable, the disclosure in this prospectus has been prepared assuming that the Transaction has become effective. References to the “Resulting Issuer” in this prospectus are to BRND after giving effect to the Transaction, as the context requires.

 

The information provided herein concerning the Resulting Issuer following the completion of the Transaction is provided as of the date of this prospectus. Accordingly, the information provided herein is subject to change prior or subsequent to the date hereof. See “Caution Regarding Forward-Looking Statements”.

 

Unless otherwise indicated, references herein to the programs, policies, procedures, practices, guidelines, mandates and plans (collectively, the “Programs and Policies”) of BRND refer, in each case, to the Programs and Policies of the Resulting Issuer which are expected to be formally ratified and adopted by the Resulting Issuer’s board of directors (the “Resulting Issuer Board”) subsequent to the Transaction. Unless otherwise indicated, the disclosure in respect of the Programs and Policies contained in this prospectus is presented on the assumption that the Programs and Policies have been formally ratified by the Resulting Issuer Board in such form and have been instituted by the Resulting Issuer. Notwithstanding the foregoing, prior to the formal ratification and adoption of each of the Programs and Policies, it is expected that the Resulting Issuer Board will review and adjust such Programs and Policies to the extent necessary to seek to ensure that the specific requirements of the Resulting Issuer and its operations are met. Accordingly, the disclosure contained in this prospectus in respect of such Programs and Policies remains subject to revision.

 

Unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “$” or “US$” are to United States dollars. References to “C$” are to Canadian dollars.

 

The following table sets forth, for the periods indicated, the high, low, average and period-end rates of exchange for one U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada during the respective periods, based on the daily average exchange ratee published by the Bank of Canada.

 

    Year Ended
    December 31
      2020       2019       2018  
Rate at end of period   C$ 1.2732     C$ 1.2988     C$ 1.3642  
Average rate during period   C$ 1.3415     C$ 1.3269     C$ 1.2957  
High rate for period   C$ 1.4496     C$ 1.3600     C$ 1.3642  
Low rate for period   C$ 1.2718     C$ 1.2988     C$ 1.2288  

 

23

 

GH Group reports certain non-U.S. GAAP (as defined below) measures that are used to evaluate the performance of the business and the performance of its segments, as well as to manage its capital structures. As non-U.S. GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined and reconciled with their most directly comparable U.S. GAAP (as defined below) measure. See “Non-U.S. GAAP Measures”.

 

The Resulting Issuer Pro Forma Financial Statements included in Appendix L to this prospectus assume the completion of the Transaction. The Resulting Issuer Pro Forma Financial Statements 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 Element 7 Audited Annual Financial Statements included in Appendix A, Appendix C, Appendix F, Appendix H and Appendix K, respectively.

 

U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

The BRND Audited Annual Financial Statements and the summary pro forma financial information of the Resulting Issuer attached as Appendix A and Appendix L, respectively, to this prospectus have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the BRND Audited Annual Financial Statements are being audited in accordance with the standards of the U.S. Public Company Accounting Oversight Board (“U.S. PCAOB GAAS”). The GH Group Audited Annual Financial Statements, the Bud and Bloom Audited Financial Statements, the Farmacy Berkeley Audited Annual Financial Statements and the Element 7 Audited Annual Financial Statements, attached as Appendix C, Appendix F, Appendix H and Appendix K, respectively, to this prospectus, are being prepared in accordance with U.S. GAAP and audited in accordance with U.S. PCAOB GAAS. See “Securities Laws Exemptions”.

 

After the completion of the Transaction, the Resulting Issuer intends to file its financial statements required by Canadian securities laws prepared in accordance with U.S. GAAP and audited as required in accordance with U.S. PCAOB GAAS under Sections 3.7 and 3.8 of National Instrument 52-107 –Acceptable Accounting Principles and Auditing Standards (“NI 52-107”), permitting the continued use of U.S. GAAP and U.S. PCAOB GAAS by the Resulting Issuer.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this prospectus are prospective in nature and include forward-looking information and/or forward-looking statements within the meaning of applicable securities laws (collectively, “forward-looking statements”). All information, other than statements of historical facts, included in this prospectus that address activities, events or developments that BRND expects or anticipates will or may occur in the future is “forward-looking information”. Forward-looking statements include, but are not limited to:

 

the extent of the impact of COVID-19, including government and/or regulatory responses to the outbreak (see “COVID-19”);
statements concerning the completion of, and matters relating to, the Transaction and the expected timing related thereto;
the likelihood of the Transaction being completed;
the likelihood of the Private Placement (as defined below) being completed;
the redemption amount, if any, in respect of the BRND Class A Restricted Voting Shares;
the members of the Resulting Issuer Board and the executive officers of the Resulting Issuer following the Transaction;
the expected operations, financial results and condition of the Resulting Issuer following the Transaction;
general economic trends;
the regulatory and legal environment relating to cannabis in the United States and Canada;
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 in which the Resulting Issuer operates;
cannabis cultivation, production and extraction capacity estimates and projections;

 

24

 

additional funding requirements;
statements based on the BRND Pro Forma Financial Statements;
the Resulting Issuer’s Programs and Policies;
the Resulting Issuer’s future objectives and strategies to achieve those objectives;
the listing or continued listing of the Equity Shares (excluding the Multiple Voting Shares which will not be listed securities) and BRND Warrants on the NEO Exchange;
any market created for the Resulting Issuer’s or BRND’s securities;
the estimated cash flow, capitalization and adequacy thereof for the Resulting Issuer following the Transaction;
the expected benefits of the Transaction to, and resulting treatment of, holders of BRND Class A Restricted Voting Shares, BRND Class B Shares (as defined below), and BRND Warrants;
the amount and frequency of any dividend which may be paid on Equity Shares in the future;
the anticipated effects of the Transaction;
the number of Equity Shares outstanding following the Transaction;
the Resulting Issuer’s compensation of its directors and executive officers;
the satisfaction of the conditions to consummate the Transaction; 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.

 

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “would”, “could”, “will”, “intend”, “target”, “forecast”, “project”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “design”, “goal”, “plans” or “continue”, or similar expressions suggesting future outcomes or events.

 

Forward-looking statements reflect BRND’s and/or GH Group’s management’s current beliefs, expectations and assumptions and are based on information currently available to management, management’s historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. With respect to the forward-looking statements included in this prospectus, BRND and GH Group have made certain assumptions with respect to, among other things:

 

the anticipated approval of the Transaction by the BRND Shareholders;
the anticipated acquisition of SoCal Greenhouse by GH Group:
the anticipated merger of GH Group with certain subsidiary entities of Element 7 that are in the process applying for up to 17 state and local retail cannabis licenses in California;
the anticipated entry into the Element 7 Consulting Agreement between Element 7 and GH Group;
the anticipated receipt of any required regulatory approvals and consents (including the final approval of the NEO Exchange);
the expectation that both BRND and GH Group will comply with the terms and conditions of the Definitive GH Group Agreement;
the expectation that no event, change or other circumstance will occur that could give rise to the termination of the Definitive GH Group Agreement;
that no unforeseen changes in the legislative and operating frameworks for the Resulting Issuer will occur;
that the Resulting Issuer will meet its future objectives and priorities;
that the Resulting Issuer will have access to adequate capital to fund its future projects and plans;
that the Resulting Issuer’s future projects and plans will proceed as anticipated;
that there will be no material changes in the U.S. legal and regulatory environment relating to cannabis;
taxes payable;
customer growth, pricing, usage and churn rates; technology deployment;
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.

 

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Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated or implied by such forward-looking statements will occur or that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated by such statements. Factors that could cause such differences include, but are not limited to:

 

cannabis is a controlled substance under the Substances Act (as defined below);
enforcement of cannabis laws could change;
the Resulting Issuer may be subject to restricted access to banking services in the United States and Canada;
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;
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 or Canada;
risks associated with the Multiple Voting Shares, including unpredictability caused by the Resulting Issuer’s capital structure and the concentration of voting control and the ability to influence corporate matters by the holders of the Multiple Voting Shares;
the issuance of Preferred Shares (as defined below) could decrease earnings and assets available to holders of the Equity Shares and may decrease the market price of the Equity Shares;
risk of civil asset forfeiture;
lack of access to U.S. bankruptcy protection;
BRND Shareholders will only have limited and indirect recourse against the vendors of the Target Business;
enforceability of contracts;
changes in Canadian regulation;
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;
conditions precedent or approvals required for the Transaction not being obtained;
the potential benefits of the Transaction not being realized;
BRND and GH Group’s abilities to delay or amend the implementation of all or part of the Transaction or to proceed with the Transaction even if certain consents and approvals are not obtained on a timely basis;
future factors that may arise making it inadvisable to proceed with, or advisable to delay, all or part of the Transaction;
the costs related to the Transaction that must be paid even if the Transaction is not completed;
no assurance that the Private Placement will be completed;
risks inherent in the current state of scientific research related to the benefits of cannabis;
competition;
ability to attract and retain customers;
unfavourable publicity or consumer perception;
results of future clinical research;
future research may lead to findings that vaporizers and related products are not safe for their intended use;
controversy surrounding vaporizers and vaporizer products;
limited market data and difficulty to forecast;
constraints on marketing products;
effects of the COVID-19 pandemic;

 

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execution of the Resulting Issuer’s business strategy;
effective use of BRND’s non-redeemed escrowed funds and the net proceeds from the Private Placement;
limited operating history of BRND and GH Group;
reliance on management;
conflicts of interests;
the SoCal Greenhouse 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;
developments in the cannabis industry;
reputational risks for BRND, the Resulting Issuer and third parties;
advertising and promotional risk;
product liability;
product 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;
website accessibility;
costs of being a public company;
difficulty in enforcing judgments and effecting service of process on directors and officers;
past performance not being indicative of future results;
financial projections may prove materially inaccurate or incorrect;
currency fluctuations;
market price volatility risks;
restrictions on and limited markets for securities of the Resulting Issuer;
sales by existing shareholders;
subsequent offers will result in dilution to holders of the Equity Shares;
the Cashless Exercise (as defined below) feature of the BRND Warrants;
global financial conditions;
environmental regulation;
unknown environmental risks;
the dual United States and Canadian tax residence and tax classification of the Resulting Issuer;
the deduction of certain expenses of the Resulting Issuer may be restricted;
dividends paid by the Resulting Issuer may be subject to withholding tax; and
the Resulting Issuer may be subject to net operating loss limitations.

 

For a further description of these and other factors that could cause actual results to differ materially from the forward-looking statements included in this prospectus, see the risk factors discussed under the heading “Risk Factors” and as described from time to time in the reports and disclosure documents filed by BRND and, following the Transaction, the Resulting Issuer with the Canadian securities regulatory agencies and commissions. This list is not exhaustive of the factors that may impact the forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on forward-looking statements. As a result of the foregoing and other factors, there can be no assurance that actual results will be consistent with these forward-looking statements.

 

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All forward-looking statements included in and incorporated into this prospectus are qualified by these cautionary statements. Unless otherwise indicated, the forward-looking statements contained herein are made as of the date of this prospectus and, except as expressly required by applicable law, BRND, its promoter, GH Group, and the Resulting Issuer and its directors and officers undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Readers are cautioned that the actual results achieved may vary from the information provided herein and that such variations may be material. Consequently, there are no representations that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.

 

COVID-19

 

The global outbreak of 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, store closures, self-imposed quarantine periods and social distancing, have caused and may continue to cause material disruption to businesses globally, resulting in an economic slowdown. The full extent of the impact that COVID-19, including government and/or regulatory responses to the pandemic, will have on the Resulting Issuer is highly uncertain and difficult to predict at this time.

 

GH Group evaluated the risk of supply chain disruption as well as staffing disruption from COVID-19. While GH Group has not to date experienced any failure to secure critical supplies or services, future disruptions in the supply chain are possible and may significantly increase costs or delay production times. To remediate the risk of staffing disruption, GH Group has sought to implement new safety procedures in accordance with the guidance of the U.S. Centers for Disease Control and Prevention at all locations to better protect the health and safety of both employees and customers. These changes include, but are not limited to: (i) all GH Group dispensaries have had plexiglass dividers installed; and (ii) all floors and waiting areas, including exteriors, have had physical distancing signage and posted guidelines installed to seek to ensure physical distancing within facilities. GH Group staff have personal protective equipment and are required to follow necessary sanitary protocols after every transaction. GH Group is re-assessing the response of GH Group to the COVID-19 pandemic on an ongoing basis. Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact of these developments on all aspects of the Resulting Issuer.

 

MARKET AND INDUSTRY DATA

 

This prospectus relies on and refers to information regarding various companies and certain market and industry data. BRND and/or GH Group have obtained this information and industry data from independent market research reports and/or information made publicly available by such companies. Such reports generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy or completeness of such information is not guaranteed. Although BRND and GH Group believe the market research and publicly available information is reliable, BRND and GH Group have not independently verified and cannot guarantee the accuracy or completeness of that information and investors should use caution in placing reliance on such information.

 

RECENT DEVELOPMENTS

 

On March 10, 2021, Polar Asset Management Partners Inc. (“Polar”) disclosed pursuant to an Alternative Monthly Report under National Instrument 62-103 –The Early Warning System and Related Take-Over Bid and Insider Reporting Issues that as at February 28, 2021, Polar, on behalf of client accounts over which it has discretionary trading authority, exercised control or direction over 4,468,143 BRND Class A Restricted Voting Shares, representing approximately 11.1% of the issued and outstanding BRND Class A Restricted Voting Shares. Polar exercises control or direction, but not beneficial or registered ownership, over such BRND Class A Restricted Voting Shares.

 

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CORPORATE STRUCTURE

 

Mercer Park Brand Acquisition Corp.

 

Name, Address and Incorporation

 

BRND was incorporated under the BCBA on April 16, 2019. The head office of BRND is located at 590 Madison Avenue, 26th Floor, New York, New York, USA. The authorized capital of BRND includes an unlimited number of BRND Class A Restricted Voting Shares and an unlimited number of BRND Class B Shares, each without nominal or par value. In addition, BRND’s authorized capital currently includes an unlimited number each of Subordinate Voting Shares and Multiple Voting Shares, but the terms of such shares are expected to be amended. As described below.

 

BRND intends to change its name to “Glass House Brands Inc.” and amend its capital structure in connection with the completion of the Transaction.

 

The Transaction

 

As of the date of this prospectus, BRND is a SPAC that was incorporated under the laws of the Province of British Columbia for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving BRND, which is referred to throughout this prospectus as BRND’s “qualifying transaction”.

 

BRND’s sponsor, Mercer, is a limited partnership of which Mercer Park CB GP II, LLC is the general partner, and which is indirectly controlled by Jonathan Sandelman. Mercer is a privately-held family office based in New York, New York, the executive leadership and entrepreneurial expertise, investment and deal experience and network of which have been a critical component of BRND’s identification and consummation process in respect of the Transaction.

 

On April 8, 2021, BRND announced that it had entered into the Definitive GH Group Agreement to acquire GH Group, which is intended to constitute BRND’s “qualifying transaction”. Subject to obtaining certain approvals and the satisfaction of certain conditions stipulated therein, it is anticipated that this acquisition will be completed by mid-2021.

 

In connection with the Transaction, BRND intends to amend its constating documents to, among other things, (i) create and set the terms of the proposed Restricted Voting Shares and Limited Voting Shares, including applying coattail terms to such shares similar to those applicable to the Subordinate Voting Shares as more particularly described below, (ii) amend the terms of the BRND Class A Restricted Voting Shares to provide that, upon completion of the Transaction, the BRND Class A Restricted Voting Shares shall be converted into Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as applicable (rather than solely into Subordinate Voting Shares), (iii) provide that, upon completion of the Transaction, the BRND Class B Shares shall be directly or indirectly converted on a one-for-one basis into Equity Shares, (iv) amend the terms of the 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, (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder) and (v) amend the terms of the Subordinate Voting Shares issuable on conversion of the BRND Class A Restricted Voting Shares, including by amending the requirements in respect of who may hold Subordinate Voting Shares. BRND intends to issue Multiple Voting Shares to the GH Group Founders in connection with the closing of the Transaction. See “Description of Securities”.

 

Following the closing of the acquisition of GH Group, BRND will indirectly own 100% of the common equity of GH Group. See “Notice to Readers”,The Business of GH Group”,Corporate Structure – Definitive GH Group Agreement” and “Risk Factors”.

 

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The head office of the Resulting Issuer is expected be located at 3645 Long Beach Blvd., Long Beach, California. The Resulting Issuer will be a reporting issuer in all of the provinces and territories of Canada, other than Quebec.

 

There is no assurance that the acquisition of GH Group will be completed or, if completed, will be on terms that are exactly the same as disclosed in this prospectus.

 

Definitive GH Group Agreement

 

On April 8, 2021, BRND, and its wholly owned subsidiary MPB AcquisitionCo (“Buyer”), and its wholly owned subsidiary MPB Mergersub Corp. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Definitive GH Group Agreement”) with GH Group, the sellers listed on the signature page thereto (“Sellers”), Kyle Kazan as sellers’ representative (in such capacity, “Sellers’ Representative”) and certain GH Group Founders, whereby BRND intends to effectuate a merger of Merger Sub with and into GH Group (the “Merger”), with GH Group continuing as the surviving corporation and a majority-owned subsidiary of Buyer. BRND, Buyer, Merger Sub, GH Group, Sellers and Sellers’ Representative are referred to individually as a “Merger Party” and collectively as the “Merger Parties”.

 

Pursuant to the terms of the Definitive GH Group Agreement, including the fulfillment of the closing conditions specified therein, all of the issued and outstanding shares of common stock of GH Group prior to the effective time of the merger (“Company Stock”), other than any dissenting shares of Company Stock, will be converted into the right to receive the Per Share Merger Consideration (as defined below) upon the Closing (as defined below). The “Per Share Merger Consideration” is the amount equal to the Merger Consideration divided by the Fully-Diluted Share Number (as defined below). The “Merger Consideration” is the value equal to: (i) the purchase price of $325,000,000 (the “Purchase Price”); minus (ii) the amount of indebtedness of GH Group and its direct and indirect subsidiaries as of the date immediately preceding the closing of the Transaction (the “Closing”); plus (iii) the amount of cash of GH Group and its direct and indirect subsidiaries on the date immediately preceding the Closing; plus (iv) the amount (if any) by which the working capital on the date immediately preceding the Closing exceeds the working capital target of $15,000,000; minus (v) the amount (if any) by which the working capital target of $15,000,000 exceeds working capital on the date immediately preceding the Closing; minus (vi) the number of shares of Series A Preferred Shares outstanding immediately preceding the Closing multiplied by $1.27 plus all accrued and unpaid dividends thereon. The “Fully-Diluted Share Number” is the aggregate number of shares of Class A common stock of GH Group outstanding (assuming the conversion of all shares of the Class B common stock of GH Group) and issuable upon the exercise of outstanding warrants and conversion of convertible promissory notes in GH Group at the effective time of the merger.

 

The Fully-Diluted Share Number excludes (i) the aggregate number of shares of Company Stock issuable upon the full exercise of all unvested GH Group options, (ii) any shares of Company Stock (or shares of Company Stock issued upon exercise or conversion of securities convertible into or exercisable for Company Stock) issued in connection with the consummation of the other transactions described below, and (iii) any shares of Company Stock into which the Series A Preferred Shares and Series A Warrants were convertible or exercisable, as applicable, prior to the Closing (unless converted into or exercised for, as applicable, Company Stock prior to the Closing), all of which will remain as obligations of GH Group after the Closing, including the assumption by BRND of the incentive plan of GH Group (the “GH Group Company Incentive Plan”). Each incentive stock option under the GH Group Company Incentive Plan will cease to represent the right to purchase Company Stock and will become an option to purchase a number of Equity Shares. Each vested option under the GH Group Company Incentive Plan that is not an incentive stock option will be converted into the right to receive an economically equivalent number of Exchangeable Shares. Each unvested option under the GH Group Company Incentive Plan that is not an incentive stock option will converted into an economically equivalent number of restricted units of Exchangeable Shares.

 

At the Closing, the Per Share Merger Consideration will be issued in the form of common shares in the capital of Buyer with a value of $10.00 per share that are exchangeable on a one-for-one basis into Equity Shares. The Per Share Merger Consideration will be allocated among the GH Group shareholders in the proportions set forth in the Definitive GH Group Agreement. Upon the consummation of the Closing, the shares of Merger Sub owned by Buyer will automatically be cancelled and retired and will cease to exist, and no consideration will be delivered in exchange therefor.

 

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It is a condition of closing under the Definitive GH Group Agreement that if the SPAC Closing Cash (as such term is defined in the Definitive GH Group Agreement) is less than $250,000,000, the holders of at least two-thirds (2/3rds) of the then outstanding shares of Class B common stock of GH Group shall have approved the consummation of the Closing.

 

The Definitive GH Group Agreement contains a post-closing adjustment mechanism for (i) the level of working capital actually delivered at Closing compared to the closing estimate of working capital, (ii) the actual amount cash at Closing compared to the closing estimate of cash, and (iii) the actual amount of indebtedness at Closing compared to the closing estimate of indebtedness. The amount of actual Merger Consideration will be increased by any excess working capital, any increase in cash and any decrease in indebtedness. The amount of actual Merger Consideration will be decreased by any shortfall in working capital, any decrease in cash and any increase in indebtedness. If the actual Merger Consideration is less than the closing estimate of Merger Consideration by more than $500,000, BRND may reduce the Merger Consideration by the shortfall. If the actual Merger Consideration exceeds the closing estimate of Merger Consideration by more than $500,000, the Merger Consideration will be increased by the excess. Exchangeable Shares with a value (based on $10.00 per share) of $7,500,000 (which make up part of the Merger Consideration) will be held back at Closing for any adjustment to Merger Consideration.

 

The Definitive GH Group Agreement requires the Merger Parties to enter into certain ancillary agreements, including:

 

BRND, Buyer and the Sellers’ Representative, on behalf of the GH Group Shareholders (as defined in the Definitive GH Group Agreement), must enter into an exchange rights agreement setting forth the rights and obligations of the holders of the Exchangeable Shares;

the GH Group Founders and the BRND Founders must enter into a lockup agreement, pursuant to which (i) 50% of the Exchangeable Shares issued to the GH Group Founders will be subject to a six (6) month lock-up period and the remaining 50% of the Exchangeable Shares issued to the GH Group Founders will be subject to a 12-month lock-up period, and (ii) the Equity Shares issued to the BRND Founders at Closing will be subject, in addition to certain forfeiture-based restrictions, to similar lock-up restrictions (collectively, the “Lockup Agreement”);

Mercer and the GH Group Founders shall be granted registration rights by the Resulting Issuer pursuant to a registration rights agreement (see “Corporate Structure – Registration Rights Agreement”);

The BRND Founders will enter into an investor rights agreement with BRND (the “Investor Rights Agreement”), whereby the BRND Founders agree (i) to vote all of their shares of BRND in favour of the transactions contemplated by the Merger Agreement, (ii) that for a period of up to three (3) years following the Closing the BRND Founders may put forward one nominee for the Resulting Issuer Board for as long as the BRND Founders holds at least 50% of their respective Sponsor Shares owned by each of them, respectively, at Closing (assuming forfeited shares to be continued to be owned), and (iii) that the ultimate number of Equity Shares to be issued to the BRND Founders on Closing in exchange for the BRND Class B Shares that were issued to them for nominal consideration in connection with BRND’s initial public offering (the “Sponsor Shares”) be subject to forfeiture as follows:

o 50% of the Sponsor Shares (which equals approximately 5,044,875 Sponsor Shares) will be earned upon closing of the Merger and not subject to forfeiture;

o 25% of the Sponsor Shares (which equals approximately 2,522,438 Sponsor Shares) will be earned based on meeting the following share price trading thresholds (the “Price Based Earn-out Shares”):

if within two (2) years following the Closing, the volume weighted average price per share of the Equity Shares on the NEO Exchange or other nationally recognized Canadian or United States stock exchange for 20 consecutive trading days’ (the “20-day VWAP”) meets or exceeds $13.00 (subject to customary adjustments), BRND Founders will earn and retain 2/3 of the Price Based Earn-out Shares; and

if within two (2) years following the Closing, the 20-day VWAP meets or exceeds $15.00 (subject to customary adjustments), the BRND Founders will earn and retain the remaining 1/3 of the Price Based Earn-out Shares.

o in the event the BRND Founders earn any Price Based Earn-out Shares pursuant to the foregoing, BRND will promptly issue to those shareholders of GH Group who were eligible to receive Merger Consideration under the Merger Agreement 1.5 Equity Shares for every Price Based Earn-out Share earned and retained by the BRND Founders;

 

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o 25% of the Sponsor Shares (which equals approximately 2,522,438 Sponsor Shares) (the “Capital Based Earn-out Shares”) will be earned and retained based on the amount of BRND’s closing cash (as such term is defined in the Definitive GH Group Agreement), plus any net proceeds from equity or equity-linked financings (e.g., issuance of convertible debt, sale of common or preferred stock, etc.) closed within one (1) year following the Closing (the “Post Closing Cash”, together with BRND’s Closing Cash, the “Total Cash”, not to exceed $402.5 million);

o the Capital Based Earn-out Shares to be earned and retained by Mercer will be calculated based on the following formula (but in no event will more than 2,522,438 Capital Based Earn-out Shares be deemed earned): (Total Cash - $185.0 million) / $202.5 million * 2,522,438;

o notwithstanding the provisions above:

in the event that less than $185.0 million in BRND’s Closing Cash is available immediately following the Closing, as reflected on BRND’s balance sheet (“the “SPAC Closing Cash Minimum”), then no Capital Based Earn-out Shares will be earned by Mercer; and

in the event the 20-day VWAP reaches $17.00 (subject to customary adjustments) within two (2) years following the Closing, Mercer will earn and retain 100% of the Capital Based Earn-out Shares; provided that, (i) if the SPAC Closing Cash Minimum was not met, no Capital Based Earn-out Shares will be earned and retained, and (ii) if an Anti-Dilution Payment (as defined below) was paid to the GH Group Shareholders, the amount of Capital Based Earn-out Shares to be earned and retained by Mercer will be reduced by the number of Equity Shares issued to the Selling Shareholders under the Anti-Dilution Payment.

o if any Post Closing Cash is raised below $10.00 per Equity Share, the GH Group Shareholders will have the benefit of anti-dilution protection whereby additional Equity Shares will be issued by BRND to the GH Group Shareholders (the “Anti-Dilution Payment”);

o if BRND consummates a transaction which results in the holders of Equity Shares having the right to exchange their shares for cash, securities or other property having a value equaling or exceeding a 20-day VWAP threshold set forth above (for any non-cash proceeds, as determined based on the agreed valuation set forth in the applicable definitive agreements for such transaction or, in the absence of such valuation, their fair market value), the 20-day VWAP threshold will be considered met and the applicable Sponsor Shares will be considered earned and retained and may participate in such transaction; and

o Mercer will use its reasonable best efforts to assist the Resulting Issuer with fundraising efforts and to leverage its capital markets expertise and relationships for a period of at least one (1) year after the Closing.

 

The Definitive GH Group Agreement contains representations and warranties made by (i) BRND, Buyer and Merger Sub to GH Group and the GH Group Shareholders and (ii) GH Group and the GH Group Shareholders to BRND, Buyer and Merger Sub, including representations and warranties related to due organization and qualification, capitalization and authorization to enter into the Definitive GH Group Agreement and carry out their respective obligations thereunder. In addition, GH Group and the GH Group Shareholders made certain customary representations and warranties particular to the conduct of GH Group’s business, the ownership of GH Group’s equity, the ownership, sufficiency and quality of GH Group’s assets, required consents to the Merger, the accuracy of GH Group’s books and records and financial statements, taxes, litigation, certain employee matters, related party transactions, compliance with applicable laws and the lack of any claims, actions or proceedings that may cause a material adverse effect. In addition, BRND, Buyer and Merger Sub made certain representations with respect to required consents, securities law matters, its financial statements, tax matters, related party transactions, prospectus disclosures, and subsidiaries. These representations and warranties may be subject to important qualifications, limitations and exceptions agreed to by the Merger Parties, including the uncertainty surrounding the legality of cannabis under U.S. federal law.

 

The representations and warranties of GH Group and the GH Group Shareholders and BRND, Buyer and Merger Sub contained in the Definitive GH Group Agreement have customary survival periods following the Closing, during which time indemnification for breaches may be sought against GH Group and the GH Group Shareholders or against BRND, Buyer and Merger Sub for any breaches or inaccuracies, subject to negotiated limitations, baskets and caps.

 

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The Definitive GH Group Agreement contains pre-Closing and post-Closing covenants by each party (including confidentiality, non-compete and non-solicit provisions imposed on certain of the GH Group Shareholders). Prior to Closing, the Merger Parties agree to cooperate and use commercially reasonable efforts to complete the transaction and to secure the necessary approvals, consents, registrations, permits, authorizations and other confirmations for Closing. Additionally, GH Group and the GH Group Shareholders agreed not to solicit or enter into any discussions regarding a similar transaction with any other third party. Prior to the Closing, GH Group will be required to be operated in the ordinary course of its business (except for certain agreed upon fund raising necessary for the other transactions described below). Meanwhile, BRND agrees to file a prospectus with the Ontario Securities Commission and the NEO Exchange and prepare a circular, if applicable, hold shareholder meetings and, if applicable, hold Warrantholder meetings for all necessary approvals for the acquisition, as required by the NEO Exchange and applicable Canadian securities regulators. Post-Closing, the Resulting Issuer will adopt an equity incentive plan as approved by the Resulting Issuer Board.

 

The lockup restrictions in the Lockup Agreeement may be eliminated if Buyer or BRND undergoes certain fundamental changes within the 12-month period following the closing, such as liquidation or winding up, change of control pursuant to a merger or similar business combination transaction or sale of a majority of their shares or all or substantially all of their consolidated assets.

 

The Definitive GH Group Agreement contains customary closing conditions and other conditions that are specific to the transaction, including:

 

     For the benefit of both parties:

 

o no governmental authority making the transactions contemplated in the Definitive GH Group Agreement illegal (other than existing federal cannabis laws);

o no proceeding will have been commenced and remain pending against any Merger Party which would reasonably be expected to prevent the Closing; provided, that such proceeding is not attributable to any breach or violation of Buyer or BRND of the terms of the Definitive GH Group Agreement or any Other Transaction (as defined in the Definitive GH Group Agreement);

o receipt of all required consents and approvals;

o BRND will have received shareholder approval from the shareholders of BRND;

o the U.S. Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”) waiting period applicable to the transactions contemplated by the Definitive GH Group Agreement will have expired;

o the approval of the NEO Exchange will have been obtained by BRND to enable the Merger to qualify as BRND’s qualifying transaction and the listing of the Equity Shares on the NEO Exchange after the Closing Date;

o a final receipt for this prospectus will have been issued by or on behalf of the OSC (as defined below);

o the strategic opportunities agreement between BRND and one of its affiliates shall have been terminated;

o on or prior to the effective time of the Merger, all of the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Restricted Voting Shares outstanding immediately prior to the Closing will have been converted directly or indirectly into Equity Shares; and

o the Investor Rights Agreement will be in full force and effect, and neither BRND nor Mercer will be in breach thereof, will have failed to perform thereunder or will have threatened to terminate or repudiate the Investor Rights Agreement.

 

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     For the benefit of Buyer:

 

o the representations and warranties of the GH Group Shareholders and GH Group contained in the Definitive GH Group Agreement will be true and correct in all material respects as of the date of Closing (without giving effect to any materiality qualifiers), except where the failure to be so true and correct has not had and would not be reasonably likely to have a material adverse effect on GH Group; provided that certain specified representations and warranties of GH Group and the GH Group Shareholders contained in the Definitive GH Group Agreement shall be true and correct in all material respects as of the date of the Closing;

o the GH Group Shareholders and GH Group will have duly performed and complied in all material respects with all agreements, covenants and conditions required by the Definitive GH Group Agreement;

o all of the documents, instruments and agreements to be executed and/or delivered pursuant to the Definitive GH Group Agreement will have been executed by the Merger Parties;

o no Material Adverse Effect (as defined in the Definitive GH Group Agreement) in respect of GH Group and its direct and indirect subsidiaries will have occurred and be continuing;

o the GH Group Shareholders will have delivered the audited financial statements of GH Group for the fiscal years ended December 31, 2018, December 31, 2019, and December 31, 2020 to Buyer;

o GH Group Shareholders holding no more than 10% of the outstanding Company Stock shall have exercised their appraisal rights under Delaware law;

o the GH Group Shareholders will have delivered to Buyer regulatory legal opinions by GH Group’s cannabis regulatory counsel, which meet the requirement of the NEO Exchange; and

o the amount of cash payable by BRND at the Closing to the GH Group Shareholders who are not accredited investors shall not exceed $750,000.

 

     For the benefit of Sellers and GH Group:

 

o the representations and warranties of Buyer, Merger Sub and BRND contained in the Definitive GH Group Agreement will be true and correct in all material respects as of the date of Closing, except where the failure to be so true and correct has not had and would not be reasonably likely to have a material adverse effect on BRND, Buyer and Merger Sub; provided that certain specified representations and warranties of BRND, Buyer and Merger Sub contained in the Definitive GH Group Agreement shall be true and correct in all material respects as of the date of the Closing;

o Buyer, Merger Sub and BRND will have duly performed and complied in all material respects with all agreements, covenants and conditions required by the Definitive GH Group Agreement;

o all of the documents, instruments and agreements to be executed and/or delivered pursuant to the Definitive GH Group Agreement will have been executed by the Merger Parties;

o no Material Adverse Effect on Buyer or BRND will have occurred and be continuing;

o each of Kyle Kazan, Graham Farrar, Derrek Higgins and Jamin Horn will have executed and delivered an employment agreement with the Resulting Issuer, with annual compensation that is the same as his annual compensation preceding the date of the Definitive GH Group Agreement, the effectiveness of which agreements is only conditioned upon the occurrence of the Closing;

o Buyer will have delivered to Kyle Kazan an opinion of legal counsel for BRND as to common shares in the capital of Buyer that are exchangeable on a one-for-one basis into Equity Shares regarding, among others, valid issuance of such securities on a fully paid, non-assessable basis and freely-tradable nature of such securities subject to the applicable lockup terms set forth in the Lockup Agreement and applicable law, in the form mutually acceptable to the Merger Parties, acting reasonably;

o at the Closing, BRND will have a minimum of $185,000,000 in cash: (i) before any cash consideration, as applicable, is payable for any Other Transactions; (ii) after any payments due and payable for BRND’s, the Merger Sub’s and the Buyer’s expenses related to the closing of the Merger, including all costs, fees, expenses and payments contingent on the closing of the Merger; (iii) after reduction for the aggregate amount of payments required to be made in connection with the exercise by one or more BRND shareholders of their rights to redeem BRND Class A Restricted Voting Shares held by them in accordance with BRND’s organizational documents; (iv) plus the cash proceeds actually received by BRND in respect of the Private Placement or certain other equity or debt offerings; and (v) after taking into account any estimated debt or payables on BRND’s balance sheet as of the closing of the Merger, and the GH Group Shareholders will have received a certificate signed on behalf of Buyer, Merger Sub and BRND such effect;

o Buyer and BRND will have delivered to the exchange agent the common shares in the capital of Buyer that are exchangeable on a one-for-one basis into Equity Shares, to be held and delivered by the exchange agent to all of the GH Group Shareholders in accordance with the Definitive GH Group Agreement;

 

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o GH Group will have received a certified pro forma capitalization statement and pro forma balance sheet of BRND as of the Closing;

o BRND will have issued to certain of the GH Group Founders certain Multiple Voting Shares (see “Principal Shareholders” and “Description of Securities – Equity Share and Multiple Voting Share Structure – Multiple Voting Shares”); and

o If BRND’s Closing Cash is less than $250,000,000, the holders of at least two-thirds of the outstanding Class B common stock of GH Group will have approved the Closing.

 

If these conditions are not satisfied or waived prior to July 31, 2021 (the “Outside Date”) (subject to extension as described below), the Closing will not occur.

 

Post-Closing, the Resulting Issuer Board will initially consist of eight (8) total members of which (i) the Sponsor will put forward one (1) nominee, represented initially by Jamie Mendola, (ii) GH Group will put forward four (4) nominees, initially represented by Kyle Kazan, Graham Farrar and two (2) independent nominees, (iii) Element 7 will put forward one (1) independent nominee, represented initially be Bob Hoban, and (iv) two (2) additional independent nominees will be chosen by unanimous consent of the Sponsor, Kyle Kazan and Graham Farrar. All of such directors will be subject to customary regulatory approvals. Appropriate recusal, independence, special committee and/or resignation provisions will be enacted and adhered to as it relates to potential competitor and conflicting outside interests. In addition, Kyle Kazan will serve as the Executive Chairman and Chief Executive Officer of the Resulting Issuer, Graham Farrar will serve as the President of the Resulting Issuer and Derrek Higgins will serve as the Chief Financial Officer of the Resulting Issuer. The compensation of each of the above-named officers will be public market-based, compliant with NEO Exchange rules and applicable laws, and as mutually agreed by the Merger Parties.

 

The Definitive GH Group Agreement may be terminated and the merger may be abandoned at any time prior to the Closing:

 

by mutual written consent of Buyer and the Seller’s Representative;

by either Buyer or Sellers’ Representative if:

o the Closing has not occurred on or before the Outside Date; provided, that the right to terminate the Definitive GH Group Agreement will not be available to any Merger Party whose failure to fulfill any material obligation under the Definitive GH Group Agreement has been the cause of, or resulted in, the failure of the Closing to have occurred on or before such date; provided, further that if the only closing condition that remains to be satisfied (other than closing conditions that, by their terms, can only be satisfied as of Closing) is approval under the HSR Act, the Outside Date may, at the option of Buyer, be extended for successive thirty (30)-day periods upon Buyer providing the Sellers’ Representative with written notice of such extension on or prior to the then- current Outside Date; provided, further, that in no event will the Outside Date be extended beyond September 30, 2021;

o a governmental authority will have issued an order or taken any other action (excluding any order or action arising under, relating to or in connection with the Federal Cannabis Laws (as defined in the Definitive GH Group Agreement)), in each case that has become final and non-appealable and that restrains, enjoins or otherwise prohibits the merger or any part of it; provided, that the right to terminate the Definitive GH Group Agreement will not be available to any Merger Party whose failure to fulfill any material obligation under the Definitive GH Group Agreement has been the cause of, or resulted in, the issuance of such order or such action; or

o shareholder approval from the shareholders of BRND is not obtained at the shareholder meeting of BRND shareholders in respect of the Transaction (subject to any adjournment or postponement of the shareholder meeting of BRND shareholders in respect of the Transaction); provided that the right to terminate the Definitive GH Group Agreement will not be available to Buyer if, at the time of such termination, Buyer, Merger Sub or BRND is in material uncured breach of the Definitive GH Group Agreement;

 

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by Buyer, if any of the representations and warranties of the GH Group Shareholders and GH Group in the Definitive GH Group Agreement become untrue or inaccurate or there has been a material breach on the part of GH Group or any of the GH Group Shareholders of any of its covenants or agreements contained in the Definitive GH Group Agreement; provided that Buyer will not have the right to terminate the Definitive GH Group Agreement if Buyer, Merger Sub, or BRND is then in material breach of any of its representations, warranties, covenants or agreements set forth in the Definitive GH Group Agreement; and

by Sellers’ Representative, if any of the representations and warranties of Buyer, Merger Sub, or BRND in the Definitive GH Group Agreement become untrue or inaccurate or there has been a material breach on the part of Buyer, Merger Sub, or BRND of any of its covenants or agreements contained in the Definitive GH Group Agreement; provided that the Sellers’ Representative will not have the right to terminate the Definitive GH Group Agreement if any of the GH Group Shareholders or GH Group is then in material breach of any of its representations, warranties, covenants or agreements set forth in the Definitive GH Group Agreement.

 

The threshold or deductible for losses resulting from breaches of representations and warranties under the Definitive GH Group Agreement is $3,000,000.

 

Sellers’ aggregate liability for all losses resulting from breaches of representations and warranties of Sellers or GH Group shall not exceed $40,625,000 (the “Cap”). The aggregate liability of an individual Seller for all losses resulting from breaches of such Seller’s individual representations and the representations and warranties of GH Group shall not exceed an amount equal to such Seller’s pro rata share of the Cap.

 

Buyer’s, Merger Sub’s and BRND’s aggregate liability for all indemnifiable losses will not exceed an amount equal to the Purchase Price.

 

In no event will any Seller have any liability for indemnification obligations or otherwise arising under, relating to, or in connection with, the Definitive Merger Agreement for any amount, individually or in the aggregate, in excess of the amount equal to the lesser of the following (the “Seller Indemnity Cap”): (i) the product of (x) such Seller’s pro rata share of GH Group’s common equity, and (y) the Purchase Price; or (ii) the then-current value of such Seller’s pro rata share of the Merger Consideration as of the date of the indemnification claim to the extent such Seller has not sold the underlying shares prior to such date, (x) with each Exchangeable Share deemed to have a value equal to the number of Equity Shares into which such Exchangeable Share is convertible as of such determination date multiplied by the closing trading price for an Equity Share on the principal securities exchange on which such security is traded on the date immediately preceding such determination date, and (y) each Equity Share being valued at the closing trading price for an Equity Share on the principal securities exchange on which such security is traded on the date immediately preceding such determination date.

 

The above limitations do not apply to any losses (i) incurred by Buyer as a result of Sellers’ failure to comply with covenants made in the Definitive GH Group Agreement or breach of certain excluded representations of Sellers, and (ii) incurred by Sellers as a result of Buyer, Merger Sub or BRND’s failure to comply with covenants made in the Definitive GH Group Agreement or breach of certain excluded representations of Buyer.

 

Sellers, their related indemnitees and their respective affiliates will have no recourse against BRND’s escrow account for any indemnifiable losses suffered by them.

 

Each Seller will be liable only for such Sellers’ own breach of such Seller’s individual representations or breach of or failure to comply with covenants or agreements of such Seller contained in the Definitive GH Group Agreement and no Seller will be liable for any other Seller’s breach or inaccuracy of such other Seller’s individual representations or breach of or failure to comply with covenants or agreements of such other Seller contained in the Definitive GH Group Agreement.

 

The description of the Definitive GH Group Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Definitive GH Group Agreement, which will be made available on BRND’s profile on SEDAR at www.sedar.com.

 

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Registration Rights Agreement

 

Concurrently with Closing, BRND will enter into a registration rights agreement (the “Registration Rights Agreement”) with the GH Group Founders and Mercer (the “Registering Shareholders” or the “Piggyback Shareholders”, as applicable). The Registration Rights Agreement will provide the Registering Shareholders with the registration rights outlined below in respect of the Equity Shares held by such holders from time to time. These Equity Shares are referred to as “registrable securities”.

 

Demand Registration Rights

 

Each of the Registering Shareholders can request that the Resulting Issuer qualify by prospectus (a “Long-Form Demand Registration”) or short-form prospectus (a “Short-Form Demand Registration”, and together with the Long-Form Demand Registration, a “Demand Registration”) in Canada all or a portion of their registrable securities, provided that the aggregate offering price is at least $15 million in the case of a Long-Form Demand Registration or at least $10 million in the case of a Short-Form Demand Registration. No prospectus need be filed by the Resulting Issuer within 120 days of the last prospectus for a Demand Registration. The Resulting Issuer can postpone the filing of a prospectus for up to 90 days twice in a 12-month period if the Board determines that a Demand Registration would materially interfere with any material financing, acquisition, corporate reorganization or merger or other transaction or which would require disclosure of information at a time when the Resulting Issuer has a bona fide business purpose not to immediately disclose such information. The underwriters for any Demand Registration will be selected by the Registering Shareholders in consultation with the Resulting Issuer. The Resulting Issuer may participate in a proposed Demand Registration by selling Equity Shares from treasury if the underwriters of the Demand Registration, acting reasonably, are of the view that to do so would facilitate the offering.

 

Piggy-back Registration Rights

 

If the Resulting Issuer proposes to register or qualify its securities for sale to the public, it must provide notice to each Registering Shareholder and the Piggyback Shareholders and use its reasonable commercial efforts to cause to be registered all registrable securities that the holders of such registrable securities request in writing be so registered. These piggy-back registration rights are unlimited in number. If a public offering of securities is being effected, those securities offered shall be allocated first to the Resulting Issuer then, to the Registering Shareholders (pro rata based on the amount owned by each), and then, to the Piggyback Shareholders (pro rata based on the amount owned by each).

 

The Resulting Issuer will agree to pay certain costs and expenses in connection with each demand and piggy-back registration, except underwriting fees applicable to the securities sold by the holders of registrable securities and any legal fees of independent counsel exceeding $75,000 to such holders of registrable securities. In the case of both demand and piggy-back registration rights, all person(s) holding either type of right must agree to enter into such lockup agreements as may be reasonably requested by the lead underwriter of any public offering, not to exceed 180 days following Closing.

 

The description of the Registration Rights Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Registration Rights Agreement, which may be found on BRND’s profile on SEDAR at www.sedar.com.

 

Accounting Treatment

 

The Transaction will be accounted for on the basis that GH Group is the accounting acquirer. As a result, BRND will be treated as the “acquired” company for accounting purposes and the Transaction will be treated as the equivalent of the Resulting Issuer issuing shares for the net assets of BRND, accompanied by a recapitalization. The net assets of BRND will be stated at historical cost, with no goodwill or other intangible assets recorded.

 

Proposed Transactions

 

GH Group has entered into a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm complex (“SoCal Greenhouse”) located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. See “SoCal Greenhouse Acquisition”.

 

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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 merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California. See “Element 7”.

 

In addition, GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional licenses in California. See “Element 7”.

 

NEO Exchange Guidance Regarding Companies with U.S. Marijuana-Related Activities

 

Subject to satisfactory compliance with all listing requirements set out in the NEO Exchange Listing Manual and the additional items reflected below, the NEO Exchange currently does not have a policy prohibiting the listing of companies established and/or holding assets in the U.S. with marijuana-related activities, provided such activities are conducted in compliance with the current laws and regulations of a U.S. State where such activities are legal.

 

In addition to the listing requirements in the NEO Exchange Listing Manual, which include the standard requirements for timely and accurate disclosure as defined by the Canadian Securities Administrators and as further enhanced by their specific disclosure requirements set out in Staff Notice 51-352, the NEO Exchange expects issuers with U.S. marijuana-related activities, among other things, to: (i) undertake that they are respecting and will continue to respect, within the realm of their control, the U.S. DOJ (as defined below) marijuana enforcement priorities as they were defined in the now-rescinded Cole Memorandum (as defined below) (see “Cannabis Market Overview – Legal and Regulatory Matters – United States Federal Overview”); and (ii) undertake that they are neither importing nor exporting marijuana to or from the United States.

 

Private Placement

 

On April 8, 2021, BRND announced a private placement of $85 million of non-voting shares of MPB PipeCo, a wholly owned subsidiary of BRND (the “Private Placement Shares”) at a price of $10.00 per Private Placement Share (the “Private Placement”). Canaccord Genuity Corp. (“Canaccord”), the underwriter in respect of BRND’s initial public offering and the sole agent in respect of the Private Placement, has subscribed for $4.9 million of Private Placement Shares under the Private Placement, which subscription is expected to be funded by Canaccord directing to BRND an equal amount from the non-discretionary portion of deferred underwriting fees that will be owed by BRND to Canaccord in connection with the Closing. Canaccord is currently expected to assign its subscription agreement to an affiliate. Under the terms of the Private Placement, Canaccord shall be 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 Private Placement subscriber that has subscribed for $20.1 million of Private Placement Shares will be transferred 223,333 free-trading Equity Shares by the Sponsor for no additional consideration in order make the effective price of such subscription $9.00 per Private Placement Share.

 

The closing of the Private Placement is scheduled to occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares issued will be exchanged for Equity Shares on a one-for-one basis. The Private Placement is subject to customary conditions, including the closing of the Transaction.

 

The funds from the Private Placement are expected to be used to fund the Resulting Issuer’s growth strategy, for working capital and for general corporate purposes.

 

GH Group Financing

 

GH Group is expected to complete an up to $12 million equity financing in the United States before the end of May 2021 (the “GH Group Financing”). Investors in the GH Group Financing will receive, for each $1.27 invested, one (1) Series A preferred share of GH Group (the “Series A Preferred Shares”) and one (1) warrant (the “Series A 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 warrant.

 

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Series A Preferred Shares

 

The proposed terms of the Series Preferred Shares are as follows, but remain subject to change.

 

The Series Preferred Shares will rank with respect to dividends and on liquidation ahead of the common shares of GH Group.

 

In the event of liquidation, the holders of Series Preferred Shares will be entitled, in priority to the holders of common shares, but after payment to any senior claimants, to their liquidation value, which is their original issue price, plus all accrued and unpaid dividends. A similar amount must be paid in the event of certain mergers, asset sales or other liquidity-equivalent events.

 

The Series A Preferred Shares will be entitled to quarterly compounding cumulative dividends at the rate of 15% per annum based on their liquidation value, payable on the last day of March, June, September and December, commencing in June 2021, or upon earlier liquidation or redemption. If the Series A Preferred Shares are still outstanding one (1) year following their date of issuance, the dividend rate shall increase to 20% per annum. No cash dividends may be paid on the common shares of GH group unless all accrued and unpaid dividends on the Series Preferred Shares have been paid.

 

The Series Preferred Shares are generally non-voting, except in the event that they would be adversely affected by a proposed amendment to the Articles or By-laws of GH Group, as the same may be amended from time to time.

 

The Series A Preferred Shares are redeemable by GH Group at any time for their liquidation value, which is their original issue price, plus all accrued and unpaid dividends.

 

The Series A Preferred Shares are convertible at the option of the holder into common shares of GH Group prior to the date that is 60 days following the date of issuance of such shares.

 

Assuming that the GH Group Financing is successfully completed, it is currently expected by GH Group that some of the Series A Preferred Shares will be converted into Class A common shares of GH Group prior to the closing of the Transaction, such that they will be exchanged for Exchangeable Shares at closing of the Transaction. If all of the Series A Preferred Shares in the amount of $12 million were so converted before the Closing, they would represent a total of 1,200,000 Exchangeable Shares at the effective time. However, it is possible that some or all of the Series A Preferred Shares may remain outstanding following the closing of the Transaction, in which case it is intended that they will be redeemed as soon as practicable thereafter, subject to the availability of cash.

 

Series A Warrants

 

As part of the GH Group Financing, for every $1.27 invested in respect of Series A Preferred Shares, each investor will also receive one Series A Warrant to purchase one common share of GH Group at an exercise price per share equal to the fair market value of one Class A common share of GH Group as of the date of issuance of such warrant. Assuming for illustrative purposes only that the closing of the GH Group Financing were to occur on the date of this prospectus, the exercise price per share would be $1.06. If the GH Group Financing is fully subscribed, Series A Warrants to purchase a total of 9,448,819 Class A common shares of GH Group will be issued at the closing of the GH Group Financing.

 

Following the closing of the Transaction, the Series A Warrants will, assuming the GH Group Financing is fully subscribed, represent the right to acquire 1,200,000 Equity Shares at a price of $10.00 per share. Fractional shares will be paid in cash. The Series A Warrants will be subject to customary anti-dilution protections.

 

The Series A Warrants will expire 36 months after their date of issuance. That expiration date can be accelerated on 30 days’ prior notice in GH Group’s discretion if the closing market price of the Equity Shares equals or exceeds a specified threshold for 20 trading days within any thirty (30) trading day period. In that event, GH Group will have the option to require any holder wishing to exercise its Series A Warrants to do so on a cashless basis in whole or in part.

 

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Inter-Corporate Relationships

 

The organizational chart below indicates the proposed inter-corporate relationships of the Resulting Issuer and its material subsidiaries, including their jurisdiction of incorporation in parentheses, after giving effect to the Transaction:

 

 

Notes:

(1) After giving effect to the Transaction, before the exchange of any Exchangeable Shares and assuming no redemptions of the BRND Class A Restricted Voting Shares, the GH Group Founders are expected to beneficially own or control, directly or indirectly, approximately 69.1% of voting power over the Resulting Issuer as result of their direct or indirect beneficial ownership or control over the Multiple Voting Shares.

(2) On closing of the Transaction, the BRND Class A Restricted Voting Shares, BRND Class B Shares and Private Placement Shares will convert into Equity Shares on a one-for-one basis.

(3) See “Corporate Structure – GH Group Financing”.

 

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(4) As of December 31, 2020, the date of the Audited GH Group Financial Statements, 100% of GH Group’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of GH Group. As such, GH Group’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

 

On closing of the Transaction, (a) assuming (i) zero redemptions of BRND Class A Restricted Voting Shares, (ii) no exchanges of Exchangeable Shares, and (iii) no exercises of BRND Warrants, and (b) prior to the issuance of any Equity Shares in connection with (i) the acquisition of SoCal Greenhouse, and (ii) any Element 7 Merger, the former holders of BRND Class A Restricted Voting Shares are expected to hold an approximately 68.2% economic interest in the Resulting Issuer.

 

Warrant Agreement

 

All BRND Warrants will become exercisable only commencing 65 days after the completion of BRND’s qualifying transaction (which is expected to consist of the Transaction). Each BRND Warrant is exercisable to purchase one BRND Class A Restricted Voting Share (which, following the closing of the Transaction, will become one Equity Share) at a price of $11.50 per share, subject to the following adjustments. The BRND Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. No adjustments shall be made to the BRND Warrants, however, if the issue of Equity Shares, rights, options warrants or securities exchangeable therefor is made at a price below their respect exercise prices, including the exercise price in respect of the BRND Warrants. Once the BRND Warrants become exercisable, BRND may accelerate the expiry date of the outstanding BRND Warrants (excluding the BRND Founders’ Warrants but only to the extent still held by Mercer at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by Mercer of material undisclosed information which could limit its flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Equity Shares equals or exceeds $18.00 per share (as adjusted for stock splits or combinations, stock dividends, Extraordinary Dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30-trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice is provided.

 

The right to exercise will be forfeited unless the BRND Warrants are exercised prior to the date specified in the notice of acceleration of the expiry date. On and after the accelerated expiry date, a record holder of a BRND Warrant will have no further rights. BRND Warrants may be exercised only for a whole number of shares. No fractional shares will be issued upon exercise of the BRND Warrants. If, upon exercise of the BRND Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to the nearest whole number of shares to be issued to the BRND Warrant Holder and such BRND Warrant Holder will not be entitled to any cash or other consideration in lieu of fractional interest held.

 

The exercise of the BRND Warrants by any holder in the United States, or that is a “U.S. Person” (as defined in Rule 902(k) of the U.S. Securities Act), may only be effected in compliance with an exemption from the registration requirements of the U.S. Securities Act and applicable state “blue sky” securities laws.

 

The BRND Warrant Holders do not have the rights or privileges of holders of shares and any voting rights until they exercise their BRND Warrants and receive corresponding Equity Shares. After the issuance of corresponding Equity Shares upon exercise of the BRND Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders (other than in respect of the election of members of the Resulting Issuer Board, in respect of which the holders of Limited Voting Shares will not have any right to vote). On the exercise of any BRND Warrant, the BRND Warrant exercise price will be $11.50, subject to adjustments as described herein.

 

The Warrant Agreement contemplates that the BRND Warrants may be exercised through Cashless Exercise. A Cashless Exercise permits a BRND Warrant Holder, in lieu of making a cash payment on exercise, to instead elect to surrender the BRND Warrant Holder’s BRND Warrants and to receive the number of shares in the capital of BRND for which the BRND Warrants are conferred the right to acquire that is equal to the quotient obtained by multiplying (i) the number of Equity Shares for which the BRND Warrants are being exercised by (ii) the difference between, if positive, (A) the volume weighted average price of the Equity Shares trading on the NEO Exchange for the 20 trading days immediately prior to (but not including) the date of exercise of such BRND Warrants and (B) $11.50, and dividing such product by the volume weighted average price of the Equity Shares trading on the NEO Exchange for the 20 trading days immediately prior to (but not including) the date of exercise of such BRND Warrants (the “Cashless Exercise”).

 

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The Warrant Agent shall, on receipt of a written request of BRND or holders of not less than 25% of the aggregate number of BRND Warrants then outstanding, convene a meeting of holders of BRND Warrants upon at least 21 calendar days’ written notice to holders of BRND Warrants. Every such meeting shall be held in Toronto, Ontario or at such other place as may be approved or determined by the Warrant Agent. A quorum at meetings of holders of BRND Warrants shall be two persons present in person or represented by proxy holding or representing more than 20% of the aggregate number of BRND Warrants then outstanding.

 

From time to time, BRND and the Warrant Agent, without the consent of the holders of BRND Warrants, may amend or supplement the Warrant Agreement for certain purposes including curing defects or inconsistencies or making any change that does not adversely affect the rights of any holder of BRND Warrants. Any amendment or supplement to the Warrant Agreement that adversely affects the interests of the holders of BRND Warrants may only be made by an “extraordinary resolution”, which is defined in the Warrant Agreement as a resolution either (i) a resolution passed at a duly-convened meeting of BRND Warrant Holders, at which, by the affirmative vote of holders of BRND Warrants representing not less than 66 2/3% of the aggregate number of the then outstanding BRND Warrants represented at the meeting and voted on such resolution, or (ii) adopted by an instrument in writing signed by the holders of BRND Warrants representing not less than two-thirds of the aggregate number of the then outstanding BRND Warrants.

 

The BRND Warrants will expire at 5:00 p.m. (Toronto time) on the day that is five years after the completion of the qualifying transaction of BRND (which is expected to consist of the Transaction) or may expire earlier if a qualifying transaction does not occur by May 13, 2021, or if the expiry date is accelerated, as described above.

 

Exchangeable Shares and Exchange Rights Agreements

 

For tax reasons, rather than receiving Equity Shares, the sellers of GH Group will receive, following the closing of the Transaction, Exchangeable Shares of MPB AcquisitionCo as part of their consideration.

 

Broadly speaking, the Exchangeable Shares will entitle their holders to rights that are comparable (without taking into account tax consequences) to those rights attaching to the Subordinate Voting Shares, except that (i) the Exchangeable Shares will have 1.1 votes per share (this will expire after one (1) year, after which they will have one vote per share), and (ii) the aggregate voting power of the Exchangeable Shares will not exceed 49.9% of the total voting power of all classes of shares of MPB AcquisitionCo. Until their Exchangeable Shares are exchanged for the applicable Equity Shares pursuant to the Exchange Rights Agreement or the Exchangeable Share Provisions, holders of Exchangeable Shares will not have the right to vote at meetings of Resulting Issuer Shareholders, though it is anticipated that they will have the right to at meetings of the shareholders of MPB AcquisitionCo, including at meetings of the shareholders of MPB AcquisitionCo with respect to altering the rights of holders of any of the Exchangeable Shares, or if MPB AcquisitionCo decides to take certain actions without fully protecting the holders of any of the Exchangeable Shares, or as otherwise required by law. The Exchangeable Shares will be exchangeable at any time, on a one-for-one basis, for Equity Shares, at the option of the holder, subject to certain contractual lockup restrictions. Certain ancillary rights, as further described below, will be provided to the holders of the Exchangeable Shares pursuant to the terms of the Exchange Rights Agreement.

 

Exchangeable Share Procedures

 

In connection with the Definitive GH Group Agreement, at the Effective Date, BRND will enter into an exchange rights agreement with MPB AcquisitionCo and the Sellers’ Representative on behalf of the holders of the Exchangeable Shares (the “Exchange Rights Agreement”), whereby BRND has agreed to make certain covenants in favour of the sellers to protect their rights as holders of Exchangeable Shares. BRND agrees to reserve the necessary amount of Equity Shares for issuance upon exchange of the Exchangeable Shares, and ensure such shares remain protected from pre-emptive and other rights. Upon notice to the Resulting Issuer and MPB AcquisitionCo and as required under the Exchangeable Share Provisions, the Resulting Issuer will issue such number of Equity Shares to a holder of Exchangeable Shares in exchange for the Exchangeable Shares of such holder, subject to the terms specified in the Exchange Rights Agreement. Additionally, the Resulting Issuer will have an overriding liquidation call right under the Exchange Rights Agreement to purchase all, but not less than all, of the Exchangeable Shares from the holders thereof upon a proposed liquidation, dissolution or winding-up of MPB AcquisitionCo, as well as a redemption call right and retraction call right on the Exchangeable Shares, in each case for the consideration set forth in such agreements.

 

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General

 

The Exchangeable Shares, together with the Ancillary Rights (as defined below), are intended to be economically comparable to the applicable Equity Shares. The dividends and other rights attaching to the Exchangeable Shares, together with the Ancillary Rights, are designed to place holders of Exchangeable Shares, as nearly as practicable, in the same economic position as holders of Equity Shares, except that the holders of Exchangeable Shares will have no right to vote as Resulting Issuer Shareholders, except as described in this prospectus and except for the enhanced rights as described above. As used in this prospectus, a reference to the phrase “comparable” (or words to similar effect) between the Exchangeable Shares and the Equity Shares does not take into account any tax implications or different tax treatment with respect to the Exchangeable Shares and the Equity Shares, which vary depending upon each holder, such holder’s residence for tax purposes and the residence of the paying company.

 

The ancillary rights, consisting of the Automatic Exchange Right (as defined below) and the Exchangeable Shareholders’ Put Right (as defined below) (collectively, the “Ancillary Rights”), are rights established for the benefit of the holders of Exchangeable Shares pursuant to the Exchange Rights Agreement and are intended to ensure that such holders have the right to receive the applicable Subordinate Voting Shares in the event of: (i) a Liquidation Event (as defined below) (by the operation of the Automatic Exchange Right); or (ii) an Insolvency Event (as defined below) (by the operation of the Exchangeable Shareholders’ Put Right).

 

In connection with the issuance of the Exchangeable Shares, call rights are provided in favour of BRND, which are triggered in certain circumstances. The call rights, consisting of the Liquidation Call Right, the Redemption Call Right and the Retraction Call Right (in each case, as defined below) (collectively, the “Call Rights”), are rights established in favour of BRND to allow it to purchase Exchangeable Shares: (i) in the event of the liquidation, dissolution or winding-up of MPB AcquisitionCo (by the operation of the Liquidation Call Right); or (ii) that would otherwise be redeemed by MPB AcquisitionCo (by the operation of the Redemption Call Right or the Retraction Call Right). The consideration received by a holder of Exchangeable Shares will be the same whether such holder’s Exchangeable Shares are redeemed by MPB AcquisitionCo or purchased by the Resulting Issuer.

 

Voting and Dividend Rights

 

Holders of Exchangeable Shares will not be entitled to vote at any meeting of the Resulting Issuer Shareholders or on any matter or resolution otherwise submitted by BRND to its shareholders. The Exchangeable Shares will have voting rights in MPB AcquisitionCo (as described above).

 

Holders of Exchangeable Shares will be entitled to receive, subject to applicable law, dividends comparable to all dividends paid on the Equity Shares. Cash dividends on the Exchangeable Shares are payable in an amount equal to and in the currency of the corresponding cash dividend payable on Subordinate Voting Shares, or the U.S. dollar equivalent. Stock dividends declared on the Equity Shares to be paid in Equity Shares will be satisfied for each Exchangeable Share by the issue or transfer of such number of Exchangeable Shares as is equal to the number of Equity Shares to be paid on each Equity Share (or by way of an economically equivalent stock split). Dividends declared on Equity Shares in property other than cash or Equity Shares will be satisfied by such type and amount of property for each Exchangeable Share as is the same as, or economically equivalent to, the type and amount of property declared as a dividend on each Equity Share. The declaration date, record date and payment date for dividends on the Exchangeable Shares will be the same as the relevant date for the corresponding dividends on the Equity Shares.

 

The record date for the determination of the holders of Exchangeable Shares entitled to receive payment of, and the payment date for, any dividend or distribution declared on the Exchangeable Shares shall be the same dates as the record date and payment date, respectively, for the corresponding dividend or distribution declared on the Equity Shares.

 

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Any dividend which should have been declared or paid on the Exchangeable Shares but was not so declared or paid due to the provisions of applicable law shall be declared and paid by MPB AcquisitionCo as soon as payment of such dividend is permitted by such law.

 

If, on any payment date for any dividends or distributions declared on the Exchangeable Shares, the dividends or distributions are not paid in full on all of the Exchangeable Shares then outstanding, any such dividends or distributions that remain unpaid shall be paid on the first subsequent date or dates determined by the MPB AcquisitionCo board of directors on which MPB AcquisitionCo shall have sufficient moneys, assets or other property properly applicable to the payment of such dividend or distribution.

 

Notwithstanding any provisions in the constating documents of MPB AcquisitionCo or the Exchange Rights Agreement to the contrary, no holder of Exchangeable Shares shall receive duplicate rights and privileges upon the occurrence of the same event. This prohibition on duplication applies to all classes of Exchangeable Shares and with respect to all dividends, distributions, rights offerings, stock splits, consolidations, recapitalization, reorganizations and any other right or privilege applicable to them. For greater certainty, no dividend will be paid on the Exchangeable Shares unless an equivalent per share dividend is paid on the Equity Shares.

 

The MPB AcquisitionCo board of directors shall determine, in good faith and acting reasonably (with the assistance of such reputable and qualified independent financial advisors and/or other experts as it may require), economic equivalence for these purposes, and shall provide the Exchangeable Shareholders with a copy of a written determination of economic equivalence and the underlying calculations supporting such determination and the final version of any written report provided by such financial advisors and/or other experts supporting such determination, if requested. For greater certainty, the MPB AcquisitionCo board of directors shall not be under any obligation to procure any such assistance in support of their determination of economic equivalence for these purposes.

 

Ranking and Liquidation Rights

 

Except for the exchange features and any related rights, dividend rights corresponding to dividends paid on Equity Shares, as well as the voting rights of the Exchangeable Shares , the Exchangeable Shares rank pari passu with the MPB AcquisitionCo Class A common voting shares. Subject to applicable law and the due exercise by BRND of its Liquidation Call Right, in the event of the liquidation, dissolution or winding-up of BRND, or MPB AcquisitionCo, as applicable, a holder of Exchangeable Shares shall be entitled to receive in respect of each Exchangeable Share held by such holder on the effective date (the “Liquidation Date”) of such liquidation, dissolution or winding-up, before any distribution of any part of the assets of BRND or MPB AcquisitionCo, an amount per Exchangeable Share equal to the Exchangeable Share Consideration applicable on the last business day prior to the Liquidation Date (the “Liquidation Amount”).

 

On or promptly after the Liquidation Date, and subject to the exercise by BRND of its Liquidation Call Right in accordance with the terms of the Exchange Rights Agreement, MPB AcquisitionCo shall cause to be delivered to the holders of the Exchangeable Shares the Liquidation Amount for each such Exchangeable Share upon presentation and surrender of the certificates representing such Exchangeable Shares and a document (in the case of a holder who is a U.S. Resident (as defined below)) containing a representation and warranty that the holder is a U.S. Resident, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under applicable law and the articles and by-laws of MPB AcquisitionCo at the registered office of MPB AcquisitionCo. Upon such payment of the total Liquidation Amount, the holders of the Exchangeable Shares (other than any holder which is an affiliate (as such term is defined in the Exchange Rights Agreement) of BRND) shall thereafter be considered and deemed for all purposes to be holders of the Equity Shares delivered to them as part or all of the Exchangeable Share Consideration notwithstanding that the certificate or certificates representing such Exchangeable Shares have not been delivered by the holder or holders thereof to BRND, and such holders shall not be entitled, in respect of the Exchangeable Shares, to share in any further distribution of the assets of MPB AcquisitionCo.

 

For the purposes hereof, a “U.S. Resident” means a person who is a resident of the United States for purposes of the Internal Revenue Code of 1986, as amended or, if a partnership, all of whose partners are U.S. Residents, and the “Exchangeable Share Consideration” per Exchangeable Share means one Equity Share and any unpaid dividend entitlements, less applicable withholding taxes.

 

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Exchange of Exchangeable Shares for Equity Shares

 

Subject to the exercise by BRND of its Retraction Call Right, a holder of Exchangeable Shares will be entitled at any time following the closing of the Transaction to retract (meaning require MPB AcquisitionCo to redeem) any or all of the Exchangeable Shares held by such holder for a retraction price per share equal to the then Retraction Price (as defined below). A holder of Exchangeable Shares may affect such retraction by presenting: (i) a certificate or certificates to MPB AcquisitionCo or Odyssey Trust Company, acting as BRND’s transfer agent (or any successor thereto), representing the number of Exchangeable Shares the holder desires to retract, duly endorsed in blank; (ii) a duly executed request (a “Retraction Request”) indicating the number of Exchangeable Shares the holder desires to retract (the “Retracted Shares”) and the date of retraction (the “Retraction Date”) and acknowledging the Retraction Call Right; and (iii) such other documents as may be required to effect the retraction of the Retracted Shares.

 

When a holder requests MPB AcquisitionCo to redeem Exchangeable Shares, BRND will have an overriding Retraction Call Right to purchase on the Retraction Date all but not less than all of the Retracted Shares, at a purchase price per share equal to the then Retraction Price. Upon receipt of a Retraction Request, MPB AcquisitionCo is required to immediately notify BRND in writing of the Retraction Request. BRND must then advise MPB AcquisitionCo and the Exchangeable Shareholder within five business days as to whether the Retraction Call Right will be exercised. If BRND advises MPB AcquisitionCo that BRND will exercise the Retraction Call Right within such five business day period, then, provided the Retraction Request is not validly revoked by the holder, the Retraction Request shall be considered to be an offer by the holder to sell the Retracted Shares to BRND in accordance with the Retraction Call Right.

 

On and after the close of business on the Retraction Date, the holder of the Retracted Shares shall cease to be a holder of such Retracted Shares and shall not be entitled to exercise any of the rights of a holder in respect thereof, other than the right to receive the Retraction Price, unless upon presentation and surrender of certificates in accordance with the foregoing provisions, payment of the total Retraction Price payable to such holder shall not be made, in which case the rights of such holder shall remain unaffected until the total Retraction Price has been paid in the manner hereinbefore provided. On and after the close of business on the Retraction Date, provided that presentation and surrender of certificates and payment of the total Retraction Price has been made in accordance with the foregoing provisions, the holder of the Retracted Shares so redeemed by MPB AcquisitionCo shall thereafter be considered and deemed for all purposes to be a holder of the Equity Shares delivered to such holder.

 

Notwithstanding the foregoing, MPB AcquisitionCo shall not be obligated to redeem Retracted Shares specified by a holder in a Retraction Request to the extent that such redemption of Retracted Shares would be contrary to solvency requirements or other provisions of applicable law. If MPB AcquisitionCo believes that on any Retraction Date it would not be permitted by any of such provisions to redeem the Retracted Shares tendered for redemption on such date, MPB AcquisitionCo shall only be obligated to redeem Retracted Shares to the extent of the maximum number that may be so redeemed (rounded down to the next whole number of shares) as would not be contrary to such provisions. In any case in which the redemption by MPB AcquisitionCo of Retracted Shares would be contrary to solvency requirements or other provisions of applicable law, and more than one holder has duly delivered a Retraction Request, MPB AcquisitionCo shall redeem Retracted Shares on a pro rata basis. Provided that the Retraction Request is not revoked by the holder, the holder of any such Retracted Shares not redeemed by MPB AcquisitionCo as a result of solvency requirements or other provisions of applicable law shall be deemed by giving the Retraction Request to require BRND to purchase such Retracted Shares from such holder on the Retraction Date or as soon as practicable thereafter on payment by BRND to such holder of the Retraction Price for each such Retracted Share.

 

For the purposes hereof, the “Retraction Price” per Exchangeable Share means one Equity Share and any unpaid dividend entitlements, less applicable withholding taxes.

 

It is anticipated that upon exchange of the Exchangeable Shares into Equity Shares and any other event requiring the issuance of Equity Shares, MPB AcquisitionCo will issue an equivalent number of Class A common voting shares of MPB AcquisitionCo to BRND.

 

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Redemption Rights

 

Subject to applicable law, and provided that the Resulting Issuer has not exercised the Redemption Call Right or an Exchangeable Shareholder has not exercised the Exchangeable Shareholders’ Put Right pursuant to the Exchange Rights Agreement, upon the occurrence of a Redemption Event (as defined below), MPB AcquisitionCo shall have the right to redeem all but not less than all of the then outstanding Exchangeable Shares for an amount per Exchangeable Share equal to the Exchangeable Share Consideration on the last business day prior to the Redemption Date (the “Redemption Price”). “Redemption Date” means the date for redemption as established in accordance with the terms of the Exchangeable Shares.

 

In the case of a proposed redemption by MPB AcquisitionCo of Exchangeable Shares, MPB AcquisitionCo shall:

 

at least 15 days before the Redemption Date (other than a Redemption Date established in connection with a Control Transaction (as defined below)), notify BRND in writing (the “Redemption Notice”) of the intention of MPB AcquisitionCo to redeem the Exchangeable Shares; and

at least 10 days before the Redemption Date (other than a Redemption Date established in connection with a Control Transaction), send or cause to be sent to BRND and each holder of Exchangeable Shares a notice in writing (the “Shareholder Redemption Notice”) of the proposed redemption by MPB AcquisitionCo of the Exchangeable Shares held by such holder.

 

In the case of a Redemption Date established in connection with a Control Transaction, the Redemption Notice and the Shareholder Redemption Notice must be sent on or before the Redemption Date, on as many days prior written notice as may be determined by the MPB AcquisitionCo board of directors, to be reasonably practicable in the circumstances (provided that at least ten business days’ notice is given). In any such case, such notice shall set out the Redemption Date.

 

On the Redemption Date and subject to the exercise by the Resulting Issuer of the Redemption Call Right or the exercise of the Exchangeable Shareholders’ Put Right pursuant to the Exchange Rights Agreement, MPB AcquisitionCo shall cause to be delivered to the holders of the Exchangeable Shares to be redeemed the Exchangeable Share Consideration representing the full Redemption Price for each such Exchangeable Share, upon presentation and surrender at the registered office of MPB AcquisitionCo of the certificates representing such Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the applicable law and (in the case of a holder who is a U.S. Resident) a representation and warranty by such holder of Exchangeable Shares to be redeemed that such holder is a U.S. resident. On and after the Redemption Date, the holders of the Exchangeable Shares called for redemption shall cease to be holders of such Exchangeable Shares and shall not be entitled to exercise any of the rights of holders in respect thereof, other than the right to receive their proportionate part of the total Redemption Price, unless payment of the total Redemption Price delivered to a holder for such Exchangeable Shares shall not be made upon presentation and surrender of share certificates in accordance with the foregoing provisions, in which case the rights of the holders shall remain unaffected until the total Redemption Price has been paid in the manner hereinbefore provided. Upon such payment of the total Redemption Price, the holders of the Exchangeable Shares shall thereafter be considered and deemed for all purposes to be holders of the Equity Shares delivered to them.

 

For the purposes hereof, a “Redemption Event” means (a) the occurrence of a Control Transaction, (b) the occurrence of an Insolvency Event, (c) the day upon which U.S. tax legislation is amended and becomes effective such that all U.S. resident holders of Exchangeable Shares may receive Equity Shares in exchange for their Exchangeable Shares on a tax-deferred basis for U.S. income tax purposes, or (d) the seventh (7th) anniversary of the closing or any date thereafter; a “Control Transaction” means any of the following: (i) any person or group of persons acting jointly or in concert (within the meaning of NI 62-104) acquires, directly or indirectly, control (as defined in NI 62-104) of BRND; (ii) the shareholders of the Resulting Issuer shall have approved merger, consolidation, recapitalization or reorganization of the Resulting Issuer, or, if shareholder approval is not sought or obtained, any such transaction shall have been consummated, in either case other than any such transaction which would result in at least 50% of the total voting power represented by the voting securities of the resulting entity outstanding immediately after such transaction being beneficially owned by holders of outstanding voting securities of the Resulting Issuer immediately prior to the transaction, with the voting power of each such continuing holder relative to such other continuing holders being not altered substantially in the transaction; or (iii) the shareholders of the Resulting Issuer shall approve an agreement for the sale or disposition by the Resulting Issuer of all or substantially all of the Resulting Issuer’s assets; and an “Insolvency Event” means the institution by MPB AcquisitionCo of any proceeding to be adjudicated as bankrupt or insolvent or to be liquidated, dissolved or wound-up, or the consent of MPB AcquisitionCo to the institution of bankruptcy, insolvency, liquidation, dissolution or winding up proceedings against it, or the filing of a petition, answer or consent seeking liquidation, dissolution or winding up under any bankruptcy, insolvency or analogous laws in any jurisdiction, and the failure by MPB AcquisitionCoto contest in good faith any such proceedings instituted by any person other than MPB AcquisitionCo commenced in respect of MPB AcquisitionCo within 30 days of becoming aware thereof, or the consent by MPB AcquisitionCo to the filing of any such petition or to the appointment of a receiver, or the making by MPB AcquisitionCo of a general assignment for the benefit of creditors, or the admission in writing by MPB AcquisitionCo of its inability to pay its debts generally as they become due, or MPB AcquisitionCo not being permitted, pursuant to solvency requirements of applicable law, to purchase any Retracted Shares (as defined below).

 

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Purchase for Cancellation

 

Subject to applicable law, MPB AcquisitionCo may at any time and from time to time purchase for cancellation all or any part of the Exchangeable Shares by private contract with any holder of Exchangeable Shares at any price agreed to between MPB AcquisitionCo and such holder of Exchangeable Shares.

 

Amendments and Approval

 

The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares in the Exchange Rights Agreement may be added to, changed or removed but only with the approval of BRND and the holders of the Exchangeable Shares given as hereinafter specified.

 

Any approval given by the holders of the Exchangeable Shares to add to, change or remove any right, privilege, restriction or condition attaching to the Exchangeable Shares or any other matter requiring the approval or consent of the holders of the Exchangeable Shares shall be deemed to have been sufficiently given if it shall have been given in accordance with applicable law subject to a minimum requirement that such approval be evidenced by resolution passed by not less than two-thirds of the votes cast on such resolution at a meeting of holders of Exchangeable Shares duly called and held at which the holders of at least 50% of the outstanding Exchangeable Shares at that time are present or represented by proxy. If at any such meeting the holders of at least 50% of the outstanding Exchangeable Shares at that time are not present or represented by proxy within one-half hour after the time appointed for such meeting, then the meeting shall be adjourned to such date not less than five days thereafter and to such time and place as may be designated by the chairperson of such meeting. At such adjourned meeting the holders of Exchangeable Shares present or represented by proxy thereat shall form a quorum and may transact the business for which the meeting was originally called and a resolution passed thereat by the affirmative vote of not less than two-thirds of the votes cast on such resolution at such meeting shall constitute the approval or consent of the holders of the Exchangeable Shares.

 

Certain Restrictions

 

So long as any of the Exchangeable Shares are outstanding, MPB AcquisitionCo shall not at any time without, but may at any time with, the approval of the holders of the Exchangeable Shares by special resolution:

 

(a) amend the articles of MPB AcquisitionCo; or

 

(b) initiate the voluntary liquidation, dissolution or winding-up of MPB AcquisitionCo, nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of MPB AcquisitionCo.

 

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Reciprocal Changes

 

Except for the issuance of employee incentive stock-based compensation in accordance with the terms of any employee stock option plan, in the event that the Resulting Issuer, without the prior approval of MPB AcquisitionCo and the prior approval of the holders of the Exchangeable Shares given by special resolution:

 

(a) issues or distributes Equity Shares or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares to the holders of the then outstanding Equity Shares by way of stock dividend or other distribution, other than an issue of Equity Shares pursuant to a distribution which is accompanied by an economically equivalent distribution on the Exchangeable Shares as described under “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Voting and Dividend Rights” above or an issue of Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares) to holders of Equity Shares who exercise an option to receive dividends of Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares) in lieu of receiving cash dividends, provided that the holders of Exchangeable Shares shall receive the same option to either receive such cash dividends or receive dividends of Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares) or have their Exchangeable Shares sub-divided as provided above, all as applicable and without duplication;

 

(b) issues or distributes rights, options or warrants to the holders of the-then outstanding Equity Shares entitling them to subscribe for or to purchase Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares, all as applicable and without duplication); or

 

(c) issues or distributes to the holders of the-then outstanding Equity Shares:

 

(i) shares or securities of the Resulting Issuer of any class other than Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares;

 

(ii) rights, options or warrants other than those referred to in clause (b); or

 

(iii) evidences of indebtedness of the Resulting Issuer;

 

MPB AcquisitionCo will provide at least five (5) business days’ prior notice to the holders of Exchangeable Shares and will ensure that the economic equivalent on a per share basis of such Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares), rights, options, securities, shares, evidences of indebtedness or other assets is issued or distributed simultaneously to holders of the Exchangeable Shares, all as applicable and without duplication.

 

In the event that the Resulting Issuer, without the prior approval of MPB AcquisitionCo and the prior approval of the holders of the Exchangeable Shares given by special resolution:

 

(a) subdivides, redivides or changes the then outstanding Equity Shares into a greater number of Equity Shares;

 

(b) reduces, combines, consolidates or changes the then outstanding Equity Shares into a lesser number of Equity Shares; or

 

(c) reclassifies or otherwise changes the Equity Shares or effects an amalgamation, merger, reorganization or other similar transaction affecting the Equity Shares;

 

MPB AcquisitionCo will ensure that the same or an economically equivalent change as effected in respect of the Equity Shares shall simultaneously be made to, or in, the rights of the holders of the Exchangeable Shares.

 

Grant of Exchange Rights

 

Subject to the Resulting Issuer’s Call Rights under the Exchange Rights Agreement, the Resulting Issuer will grant to each of the Exchangeable Shareholders the right, exercisable at any time (each an “Exchangeable Shareholder Put Event”), to require the Resulting Issuer to purchase from such Exchangeable Shareholder all or any part of the Exchangeable Shares held by such Exchangeable Shareholder (the “Exchanged Shares”), all in accordance with the provisions of the Exchange Rights Agreement and the share terms (the “Exchangeable Share Provisions”) of MPB AcquisitionCo governing the Exchangeable Shares (the “Exchangeable Shareholders’ Put Right”).

 

The purchase price payable by the Resulting Issuer for each Exchangeable Share to be purchased by the Resulting Issuer upon the exercise of the Exchangeable Shareholders’ Put Right shall be an amount per Exchangeable Share equal to the Exchangeable Share Consideration.

 

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The Resulting Issuer will also grant the Automatic Exchange Right to the Exchangeable Shareholders.

 

Automatic Exchange Right on Liquidation of the Resulting Issuer

 

The Resulting Issuer will give each Exchangeable Shareholder written notice of each of the following events (each a “Liquidation Event”) at the time set forth below:

 

(a) in the event of any determination by the Resulting Issuer Board to institute voluntary liquidation, dissolution or winding-up proceedings with respect to the Resulting Issuer or to affect any other distribution of assets of the Resulting Issuer among its stockholders for the purpose of winding up its affairs, at least 30 days prior to the proposed effective date of such liquidation, dissolution, winding-up or other distribution; and

 

(b) as soon as practicable following the earlier of:

 

(i) receipt by the Resulting Issuer of notice of; and

 

(ii) BRND’s otherwise becoming aware of,

 

any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of the Resulting Issuer or to affect any other distribution of assets of the Resulting Issuer among its stockholders for the purpose of winding up its affairs, in each case where the Resulting Issuer has failed to contest in good faith any such proceeding commenced in respect of the Resulting Issuer within 30 days of becoming aware thereof.

 

Such notice shall include a brief description of the automatic exchange of Exchangeable Shares for Equity Shares (the “Automatic Exchange Right”).

 

In order for the Exchangeable Shareholders to participate on a pro-rata basis with the holders of the Equity Shares in the distribution of assets of the Resulting Issuer in connection with a Liquidation Event, immediately prior to the effective date of a Liquidation Event (the “Liquidation Event Effective Date”), subject to each of the Liquidation Call Right and Exchangeable Shareholders’ Put Right (if applicable) not having been exercised, each of the then outstanding Exchangeable Shares shall be automatically exchanged for Equity Shares. To effect such automatic exchange, the Resulting Issuer shall be deemed to have purchased each Exchangeable Share outstanding on the Liquidation Event Effective Date held by Exchangeable Shareholders, and each Exchangeable Shareholder shall be deemed to have sold the Exchangeable Shares held by it at such time to the Resulting Issuer, for an amount per share equal to the Exchangeable Share Consideration applicable on the business day prior to the Liquidation Event Effective Date.

 

Liquidation Call Right

 

The Resulting Issuer shall have the overriding right (the “Liquidation Call Right”), in the event of and notwithstanding the proposed liquidation, dissolution or winding-up of the Resulting Issuer and notwithstanding the Exchangeable Share Provisions, to purchase from all, but not less than all, of the Exchangeable Shareholders (other than any Exchangeable Shareholder which is an affiliate of the Resulting Issuer) on the Liquidation Date all, but not less than all, of the Exchangeable Shares held by each such Exchangeable Shareholder on payment by the Resulting Issuer to each such Exchangeable Shareholder an amount per Exchangeable Share equal to the Exchangeable Share Consideration applicable on the business day prior to the Liquidation Date (the “Liquidation Call Purchase Price”). In the event of the exercise of the Liquidation Call Right by the Resulting Issuer, each Exchangeable Shareholder (other than any Exchangeable Shareholder which is an affiliate of the Resulting Issuer) shall be obligated to sell all the Exchangeable Shares held by such Exchangeable Shareholder to the Resulting Issuer on the Liquidation Date on payment by the Resulting Issuer to the Exchangeable Shareholder of the Liquidation Call Purchase Price, less any applicable withholding taxes, for each such Exchangeable Share and MPB AcquisitionCo shall have no obligation to pay the Liquidation Amount to the holders of such Exchangeable Shares so purchased by the Resulting Issuer.

 

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Redemption Call Right

 

Upon the receipt of a Redemption Notice, the Resulting Issuer shall have the overriding right (the “Redemption Call Right”), notwithstanding the proposed redemption of the Exchangeable Shares by the Resulting Issuer pursuant to the Exchangeable Share Provisions, to purchase from all but not less than all of the Exchangeable Shareholders (other than any Exchangeable Shareholder which is an affiliate of the Resulting Issuer) on the Redemption Date or, if the Exchangeable Shares have not otherwise been redeemed or retracted by such date, any date following the Redemption Date (the “Later Redemption Date”), all but not less than all of the Exchangeable Shares held by each such holder on payment by the Resulting Issuer to each Exchangeable Shareholder an amount per Exchangeable Share (the “Redemption Call Purchase Price”) equal to the Exchangeable Share Consideration on the last business day prior to the Redemption Date or the Later Redemption Date, as applicable. In the event of the exercise of the Redemption Call Right by the Resulting Issuer, each Exchangeable Shareholder shall be obligated to sell all the Exchangeable Shares held by the Exchangeable Shareholder to the Resulting Issuer on the Redemption Date or the Later Redemption Date, as applicable, on payment by the Resulting Issuer to the Exchangeable Shareholder of the Redemption Call Purchase Price for each such Exchangeable Share, and MPB AcquisitionCo shall have no obligation to redeem such Exchangeable Shares so purchased by the Resulting Issuer.

 

Retraction Call Right

 

Upon receipt by the Resulting Issuer of a Retraction Request, MPB AcquisitionCo shall immediately notify the Resulting Issuer in writing thereof (a “Retraction Call Notice”) and shall provide to the Resulting Issuer a copy of the Retraction Request. Upon receipt by the Resulting Issuer of a Retraction Call Notice, the Resulting Issuer shall have the right (the “Retraction Call Right”), notwithstanding the Exchangeable Share Provisions, to purchase from each such Exchangeable Shareholder that has delivered a Retraction Request, on the Retraction Date, all but not less than all of the Exchangeable Shares held by such holder on payment by the Resulting Issuer to each such Exchangeable Shareholder an amount per Exchangeable Share equal to the Exchangeable Share Consideration on the last business day prior to the Retraction Date.

 

Resulting Issuer Shareholder Information

 

The Resulting Issuer, its affiliates or its representatives shall promptly mail or cause to be mailed (or otherwise communicate in the same manner as the Resulting Issuer utilizes in communications to Resulting Issuer Shareholders, subject to applicable regulatory requirements) to each of the Exchangeable Shareholders copies of all mailings and communications that it sends to Resulting Issuer Shareholders, such mailing or communication to commence on or about the same day as the mailing or notice (or other communication) with respect thereto is commenced by the Resulting Issuer to the Resulting Issuer Shareholders.

 

Any written materials distributed by the Resulting Issuer shall be sent by mail (or otherwise communicated in the same manner as the Resulting Issuer utilizes in communications to the Resulting Issuer Shareholders, subject to applicable regulatory requirements) to each Exchangeable Shareholder at its address as shown on the books of MPB AcquisitionCo.

 

Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders

 

For a description of the lockup restrictions applicable to the Exchangeable Shareholders, see “Corporate Structure – Definitive GH Group Agreement”.

 

CANNABIS MARKET OVERVIEW

 

In accordance with Staff Notice 51-352, below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where GH Group is currently directly or indirectly involved through its subsidiaries. In accordance with Staff Notice 51-352, BRND intends to evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended and made available to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on BRND’s licensing, business activities or operations are required by Staff Notice 51-352 to be promptly disclosed by BRND.

 

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The legalization and regulation of marijuana for medical and adult-use purposes is being implemented at the State level in the United States. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act (the “Substances Act”), which makes cannabis use and possession federally illegal. Although certain States and territories of the U.S. 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 under any and all circumstances under the Substances Act. Although GH Group’s activities are compliant with applicable United States State and local law, strict compliance with State and local laws with respect to cannabis may neither absolve BRND of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against BRND. The risk of federal enforcement and other risks associated with BRND’s business are described under “Risk Factors”.

 

The following table is intended to assist readers in identifying those parts of this prospectus that address the disclosure expectations outlined in Staff Notice 51-352 for issuers that currently have marijuana-related activities in U.S. States where such activity has been authorized within a State regulatory framework.

 

    Specific Disclosure Necessary to Fairly    
Industry   Present all Material Facts, Risks and   Prospectus Cross-Reference
Involvement   Uncertainties    

All Issuers with U.S. Marijuana- Related Activities

  Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table.   - Mercer Park Brand Acquisition Corp.
         
    Prominently State that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework –United

States Federal Overview

- Regulatory Framework – U.S. Federal

Enforcement Priorities

- Risk Factors – The approach to the

enforcement of cannabis laws may be subject to change or may not proceed as previously

outlined

         
    Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United

States Federal Overview

- Legal and Regulatory Framework – U.S.

Federal Enforcement Priorities

- Legal and Regulatory Framework –

California State Level Overview

         
    Outline related risks including, among others, the risk that third-party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United

States Federal Overview

- Legal and Regulatory Framework – U.S.

Federal Enforcement Priorities

- Legal and Regulatory Framework –

California State Level Overview

- Risk Factors – Service providers could

suspend or withdraw service

- Risk Factors -While legal under applicable

U.S. State law, BRND’s business activities are

illegal under U.S. federal law

 

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    Specific Disclosure Necessary to Fairly    
Industry   Present all Material Facts, Risks and   Prospectus Cross-Reference
Involvement   Uncertainties    
    Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations.  

- Cannabis Market Overview - Ability to Access Public and Private Capital

- Risk Factors – The Resulting Issuer may be subject to restricted access to banking in the United States and Canada

- Risk Factors – The Resulting Issuer’s investments in the U.S. are subject to applicable anti-money laundering laws and regulations

         
    Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities.   - Mercer Park Brand Acquisition Corp.
         
    Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable State regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.   GH Group has received and continues to receive legal input regarding (a) compliance with applicable State regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law in certain respects. GH Group receives such input on an ongoing basis but does not have a formal legal opinion on such matters.
         
U.S. Marijuana Issuers with direct involvement in cultivation or distribution   Outline the regulations for U.S. States in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. State.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United

States Federal Overview

- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities

- Legal and Regulatory Framework – California State Level Overview

- Legal and Regulatory Framework – Compliance with State Regulatory Framework

- Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws

         
    Discuss the issuer’s program for monitoring compliance with U.S. State law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. State law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United States Federal Overview

- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities

- Legal and Regulatory Framework – California State Level Overview

- Legal and Regulatory Framework – Compliance with State Regulatory Framework

- Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws

         
U.S. Marijuana Issuers with indirect involvement in cultivation or distribution   Outline the regulations for U.S. states in which the issuer’s investee(s) operate.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United States Federal Overview

- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities

- Legal and Regulatory Framework –

 

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    Specific Disclosure Necessary to Fairly    
Industry   Present all Material Facts, Risks and   Prospectus Cross-Reference
Involvement   Uncertainties    
       

California State Level Overview

- Legal and Regulatory Framework – Compliance with State Regulatory Framework

- Legal and Regulatory Framework – Non-

Compliance with State and Local Cannabis Laws

         
    Provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non- compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee’s license, business activities or operations.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United States Federal Overview

- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities

- Legal and Regulatory Framework – California State Level Overview

- Legal and Regulatory Framework – Compliance with State Regulatory Framework

- Legal and Regulatory Framework – Non-

Compliance with State and Local Cannabis Laws

- Risk Factors -California Regulatory Regime and Transfer and Grant of Licenses

         
U.S. Marijuana Issuers with material ancillary involvement   Provide reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.  

- Cover Page (bold typeface)

- Legal and Regulatory Framework – United

States Federal Overview

- Legal and Regulatory Framework – U.S.

Federal Enforcement Priorities

- Legal and Regulatory Framework – California State Level Overview

- Legal and Regulatory Framework – Compliance with State Regulatory Framework

- Legal and Regulatory Framework – Non-

Compliance with State and Local Cannabis Laws

- Risk Factors - California Regulatory Regime and Transfer and Grant of Licenses

 

In accordance with Staff Notice 51-352, below is a discussion of the federal and State-level U.S. regulatory regimes in those jurisdictions where GH Group is, and the Resulting Issuer will be, directly or indirectly involved through its subsidiaries. GH Group and its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and/or medicinal cannabis marketplace in the State of California. In accordance with Staff Notice 51-352, BRND will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding cannabis regulation. As noted under “Non-Compliance with State and Local Cannabis Laws” below, the Resulting Issuer intends to cause GH Group to promptly remedy any known occurrences of non-compliance with applicable State and local cannabis rules and regulations, and the Resulting Issuer intends to publicly disclose any non-compliance, citations or notices of violation which may have an impact on its licenses, business activities or operations.

 

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See “Corporate Structure - NEO Exchange Guidance Regarding Companies with U.S. Marijuana-Related Activities” for a discussion on the NEO Exchange’s additional expectations for issuers with U.S. marijuana-related activities.

 

Exposure to U.S. Marijuana Related Activities

 

As of December 31, 2020, the date of the Audited GH Group Financial Statements, 100% of GH Group’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of GH Group. As such, GH Group’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

 

Use of Cannabis

 

Marijuana is a preparation of the leaves and flowering tops of cannabis sativa, the hemp plant, which contains a number of pharmacologically-active principles (cannabinoids). It is used for its euphoric properties and can be considerably more potent when smoked and inhaled than when simply eaten.

 

Medical cannabis refers to the use of cannabis and its constituent cannabinoids, such as tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”), as medical therapy to treat disease or alleviate symptoms. The cannabis plant has a history of medicinal use dating back thousands of years across many cultures.

 

Smoking cannabis is the most traditional form of ingestion and consists of smoking the dried flowers or leaves of the cannabis plant. Cannabis can be smoked through a pipe, rolled into a joint (or cigarette), or smoked using a water pipe (also known as a “bong”). Vaporizing involves using a vaporizer, which is a device that is able to extract the therapeutic ingredients in the cannabis plant material at a much lower temperature than required for burning. This allows user to inhale the active ingredients as a vapor instead of smoke. Many medical marijuana patients find that vaporizing offers an improved medical effectiveness, compared to smoking.

 

Topical cannabis encompasses herbal medicines that are applied directly to the skin or muscles. They include lotions, salves, balms, sprays, oils, and creams. Some patients report they are effective for skin conditions like psoriasis, joint diseases like rheumatoid arthritis, migraines, restless leg syndrome, some spasms, and everyday muscle stress and soreness. Unlike smoking, vaporizing or eating cannabis, topical products are generally non-psychoactive.

 

California Cannabis Market

 

Management believes that California is the most strategic base for post-prohibition expansion given its talent pool, wealth of brand and product expertise, mature consumer trends and agricultural conditions. It is management’s view that California has significant impact on global consumer trends, especially the consumer-packaged goods industry. California brands and retailers are often perceived as the “gold standard” influencing the global industry. With approximately 31 million adult residents and 279 million adult visitors annually, the California cannabis market grew to nearly $3 billion in annual spending in 2017, the largest market in the world. Annual legal cannabis spending in the State decreased to $2.5 billion in 2018, including as a direct result of burdensome regulations and taxes and recalcitrant or unprepared county and city authorities. Legal spending increased to $2.9 billion in 2019. California represents approximately 22% of the total 2025 U.S. cannabis market opportunity, and 16% of the estimated 2025 global recreational adult-use industry. According to BDS Analytics, the California cannabis market is expected to reach $7.4 billion in 2025, more than 2.7 times larger than Florida, the next largest market in the United States.3

 

Legal and Regulatory Matters

 

United States Federal Overview

 

A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (“DOJ”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The United States Food and Drug Administration (“FDA”) has not approved marijuana as a safe and effective drug for any indication.4

 

 

3 Arcview Market Research (2020). The State of Legal Cannabis Markets, 8th edition. Available at: https://research.arcviewgroup.com/solcm8/.

 

4 United States Drug Enforcement Administration (2018). Drug Scheduling. Available at: https://www.dea.gov/drug-scheduling.

 

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As of March 1, 2021, 47 States, the District of Columbia and the territories of Guam and Puerto Rico have now, under State law, legalized cannabis for medical and/or recreational purposes and public acceptance of cannabis continues to increase across the United States at a rapid pace. In 15 States, the sale and possession of both medical-use and adult-use cannabis is legal, and the District of Columbia has legalized adult-use cannabis but does not permit commercial sales. The sale and possession of both medical-use and adult-use cannabis is legal in the State of California.

 

Notwithstanding the permissive regulatory environment of medical and/or recreational cannabis at the State level, and the increasing number of States with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the Substances Act. Dozens of pieces of legislation have been introduced in the United States Congress that would legitimize the use and sale of cannabis, including the “Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act” that would remove marijuana from the Substances Act, and the “Strengthening the Tenth Amendment through Entrusting States (STATES) Act” that would lift the Substances Act’s restrictions on cannabis for individuals or corporations operating in compliance with State law. The MORE Act passed the House of Representatives on December 4, 2020, but was not considered in the Senate. Following the 2020 election, the Democratic Party now controls both the House of Representatives and the Senate. Democratic Senate Majority Leader Chuck Schumer, Senator Cory Booker and Senator Ron Wyden released a public statement on February 1, 2021 stating their intention to introduce comprehensive cannabis reform legislation. They plan to release a unified discussion draft of the reform legislation in the early part of 2021. However, there can be no assurances as to when any such bill will pass, if any such bill will pass at all or if any such bill will be accepted and made law by the President. As a result, cannabis-related practices or activities, including without limitation, the manufacture, importation, possession, use, or distribution of cannabis, remain illegal under United States federal law.

 

As a result of the conflict between state and federal law regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. On August 29, 2013, the U.S. DOJ attempted to address this inconsistency and to provide guidance to enforcement agencies when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States 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 and recreational purposes.

 

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 prosecutorial 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.

 

The Cole Memorandum outlined the following priorities for the U.S. DOJ relating to the prosecution of cannabis offenses:

 

Preventing the distribution of marijuana to minors;

 

Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

 

Preventing the diversion of marijuana from States where it is legal under State law in some form to other States;

 

Preventing State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

 

Preventing violence and the use of firearms in the cultivation and distribution of marijuana;

 

Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

 

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Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

 

Preventing marijuana possession or use on federal property.

 

While not legally binding, and merely prosecutorial guidance, the Cole Memorandum laid a framework for managing the tension between State and federal laws concerning State-regulated cannabis businesses.

 

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, the Cole Memorandum was rescinded by Attorney General Sessions. While this did not create a change in federal law, as the Cole Memorandum was not itself law, the revocation removed the U.S. DOJ’s guidance to U.S. Attorneys that State-regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority.

 

In addition to the rescission of the Cole Memorandum, Attorney General Sessions issued a memorandum (the “Sessions Memorandum”) which confirmed the rescission of the Cole Memorandum on the basis that the prosecutorial guidelines therein were “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 United States Attorneys’ Manual (“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.

 

While the Sessions Memorandum emphasizes that marijuana is a Schedule I controlled substance, and reiterates the statutory view that cannabis is a “dangerous drug and that marijuana activity is a serious crime,” it does not otherwise indicate that the prosecution of marijuana-related offenses is now a DOJ priority. Furthermore, the Sessions Memorandum explicitly describes itself as a guide to prosecutorial discretion. Such discretion is in the hands of U.S. Attorneys in deciding whether or not to prosecute marijuana-related offenses; resultantly, it is uncertain how active U.S. federal prosecutors will be in relation to such activities. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed.

 

To the knowledge of management of BRND, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the State of California.

 

Cannabis remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor the Sessions Memorandum has changed that fact. The federal government of the United States has always reserved the right to enforce federal law in regard to the sale and disbursement of medical or recreational cannabis, even if State law sanctioned such sale and disbursement. From a purely legal perspective, the criminality of cannabis activities at the federal level today is identical to what it was on January 3, 2018 and it remains unclear whether the risk of enforcement has been altered. Attorney General Sessions resigned on November 7, 2018 and was later replaced by Attorney General William Barr. During his Senate confirmation hearing, Mr. Barr stated that he disagrees with efforts by States to legalize marijuana, but would not go after marijuana companies in states that legalized it under Obama administration policies. He stated further that he would not upset settled expectations that have arisen as a result of the Cole Memorandum (as defined below). Federal enforcement of cannabis-related activity remained consistent with the priorities outlined in the Cole Memorandum throughout Attorney General Barr’s tenure.

 

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Current U.S. President Biden publicly stated during his campaign a policy goal to decriminalize possession of cannabis at the federal level. 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. Additionally, under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to accept any proceeds from cannabis sales or any other Schedule I narcotics. As a result, both U.S. and Canadian banks have been reluctant to transact with cannabis companies, due to the uncertain legal and regulatory framework characterizing the industry at present. There is a risk that banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. More specifically, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be prosecuted for money laundering or conspiracy. Despite these laws, in February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department issued a memorandum (the “FinCEN Memorandum”) providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memorandum, which is covered in more detail below, 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 (the “2014 Cole Memorandum”) to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the Substances Act. The 2014 Cole Memorandum was also rescinded by the Sessions Memorandum. However, the FinCEN Memorandum was not rescinded, and the then Treasury Secretary Steve Mnuchin publicly stated that the U.S. Treasury Department was not informed of Attorney General Sessions’ intent to rescind the Cole Memorandum and that there is no desire to rescind the FinCEN Memorandum.

 

While the Sessions Memorandum introduced further uncertainty and added to the State-federal divide concerning the legislation and prosecution of cannabis, the United States Congress has repeatedly enacted legislation to protect the medical marijuana industry from prosecution. The United States Congress has passed appropriations bills each year since 2014 that included a so-called “rider” provision (known then as the “Rohrabacher-Blumenauer Amendment”) which by its terms does not appropriate any federal funds to the U.S. DOJ for the prosecution of medical cannabis offenses of individuals who are in compliance with State medical cannabis laws. Subsequent to the issuance of the Sessions Memorandum on January 4, 2018, the United States Congress continued to include the Rohrabacher-Blumenauer Amendment in each subsequent omnibus appropriations bill for fiscal years 2018, 2019, 2020 and 2021, thus preserving the protections for the medical cannabis marketplace and its lawful participants from interference by the U.S. DOJ up and through the 2021 appropriations deadline of September 30, 2021.

 

Notably, the Amendment has always applied only to medical cannabis programs, and have no effect on pursuit of recreational cannabis activities. There have been attempts by Congressional supporters of cannabis legalization to extend the protections afforded by the Rohrabacher-Blumenauer Amendment to recreational cannabis activities, but those efforts have been unsuccessful.

 

American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals are operating in strict compliance with State law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the Substances Act, any individual or business—even those that have fully complied with State law—could be prosecuted for violations of federal law. If Congress restores funding, the U.S. government will have the authority to prosecute individuals for violations of the law within the past five years under the Substances Act’s statute of limitations.

 

Prior to 2018, the cultivation of hemp in the U.S. was governed by (i) Section 7606 of the Agricultural Act of 2014, codified at U.S.C. Chapter 7, Section 5490 (the “2014 Farm Bill”) and (ii) applicable State law. Section 7606 allowed for the cultivation of industrial hemp for research purposes under State agricultural pilot programs. Although the 2014 Farm Bill expired on September 30, 2018, Section 7606 remained in place.

 

On December 20, 2018, the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) became law. The law legalizes hemp as an agricultural commodity by removing hemp, its derivatives, cannabinoids, and extracts (including CBD and any part of the cannabis plant which contains 0.3% THC or less on a dry weight basis) from the list of controlled substances in the Substances Act.5 Each State can now develop a plan for the regulation of hemp production, which will be administered subject to the approval and oversight of the United States Department of Agriculture. On January 15, 2021, USDA published a final rule that provides regulations for the production of hemp in the United States and is effective on March 22, 2021. With the passage of the 2018 Farm Bill, hemp and its derivatives cultivated and produced in compliance with federal and state laws and regulations is now legal.

 

 

5 Specifically, the law defines “hemp” as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

 

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However, cultivation is still subject to serious restrictions that, ultimately, may vary greatly between different jurisdictions.

 

Notwithstanding the comments made by Attorney General Garland, there is no guarantee that the current presidential administration will not change its stated policy regarding the low-priority enforcement of U.S. federal cannabis laws that conflict with State laws. The Biden administration and Congress could reverse course and decide to enforce U.S. federal cannabis laws vigorously.

 

An additional challenge to marijuana-related businesses is that the provisions of the United States Internal Revenue Code (“Code”) (specifically, section 280E thereof) are being applied by the U.S. Internal Revenue Service (“IRS”) to businesses operating in the medical and adult-use marijuana industry. Section 280E of the Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing them to pay higher effective U.S. federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.

 

U.S. Federal Enforcement Priorities

 

For the reasons set forth above, GH Group, and any future investments of the Resulting Issuer, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada and the U.S. As a result, the Resulting Issuer 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 Resulting Issuer’s ability to invest in the U.S. or any other jurisdiction. See “Risk Factors”.

 

Changes in government policy or public opinion can significantly influence the regulation of the cannabis industry in Canada, the United States and elsewhere. A negative shift in the public’s perception of cannabis in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause State jurisdictions to abandon initiatives or proposals to legalize cannabis, thereby limiting the number of new State jurisdictions into which the Resulting Issuer could expand. Any inability to fully implement the Resulting Issuer’s expansion strategy may have a material adverse effect on the Resulting Issuer’s business, financial condition and results of operations. See “Risk Factors”.

 

Further, violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from criminal charges or civil proceedings conducted by either the U.S. federal government or private citizens (who have the right to seek private relief for BRND’s “aiding and abetting” activities that violate U.S. federal law), including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on BRND, including on its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licenses in the U.S., the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity, or the market price of its publicly-traded shares. In addition, it is difficult for BRND to estimate the time or resources that would be needed for the investigation or final resolution of any such matters 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. See “Risk Factors”.

 

California State Level Overview

 

In 1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act (“CUA”). This legalized the use, possession and cultivation of medical marijuana by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine or any other illness for which marijuana provides relief. In 2003, Senate Bill 420 was signed into law establishing an optional identification card system for medical marijuana patients.

 

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In September 2015, the California legislature passed three bills collectively known as Medical Cannabis Regulation and Safety Act (“MCRSA”). MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies, and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California overwhelmingly passed Proposition 64, the Adult Use of Marijuana Act (“AUMA”) creating an adult use marijuana program for adult use 21 years of age or older. AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed Senate Bill No. 94, known as the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which amalgamates MCRSA and AUMA to provide a set of regulations to govern medical and adult use licensing regime for cannabis businesses in the State of California. MAUCRSA went into effect on January 1, 2018. The Bureau of Cannabis Control (“BCC”), the California Department of Food and Agriculture (“CDFA”), the California Department of Public Health (“CDPH”), and the California Department of Tax and Fee Administration all have some degree of regulatory responsibility for marijuana operations. MAUCRSA became effective on January 1, 2018.

 

In July 2019, California enacted A.B. 97. In relevant part, this bill authorizes licensing authorities to issue citations and fines to a licensee or an unlicensed person who violates MAUCRSA. The maximum fine is $5,000 per violation for licensees and $30,000 per violation for unlicensed persons. Each day of a violation constitutes a separate violation. A.B. 97 also repeals a prior requirement that an applicant for a provisional license first hold a temporary license. The bill also requires applicants for provisional licenses to submit evidence of compliance with the California Environmental Quality Act, limits the validity of a provisional license to 12 months with subsequent renewals as-approved by the relevant licensing authority, and allows licensing authorities to revoke provisional licenses for failing to diligently pursue final licensure. Finally, the bill requires the CDPH to establish a certification program for manufactured cannabis products comparable to the National Organic Program and the California Organic Food and Farming Act. In October 2019, California enacted A.B. 1529. This bill mandates that all cannabis vaping cartridges and cannabis vaporizers must include a universal symbol identifying the product as a vaping product.

 

In order to legally operate a medical or adult use cannabis business in California, the operator must have both a local and state license. This requires license holders to operate in cities with marijuana licensing programs. Therefore, cities in California are allowed to determine the number of licenses they will issue to marijuana operators or can choose to outright ban marijuana.

 

In the State of California, only marijuana that is grown in the state can be sold in the state. Although California is not a vertically-integrated system, the state allows licensees to only make wholesale purchase of marijuana from, or a distribution of marijuana to, another licensed entity within the state.

 

To the knowledge of management of BRND, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the State of California. For more information on federal enforcement and the risks associated with the U.S. cannabis regulatory environment generally, see, without limitation, “Risk Factors – Risks Related to the Regulatory Environment – U.S. federal law and enforcement pertaining to cannabis and hemp” and “Risk Factors – Risks Related to the Regulatory Environment - Risks related to heightened scrutiny by regulatory authorities”.

 

California Licenses and Regulations

 

In California, State and local medical and adult use cannabis business licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by BCC. While renewals are annual, there is no limit to the number of renewals a licensee may obtain. Assuming requisite renewal fees are paid, renewal applications are submitted in a timely manner, the establishment has not been cited for material violations, renewal applicants can anticipate approval in the ordinary course of business. However, any unexpected denials, delays or costs associated with a licensing renewal could impede planned operations and may have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Retail

 

The BCC is responsible for licensing and regulating cannabis retailers in California. Adult use retailer licenses permit the sale of cannabis and cannabis products to any individual age 21 years of age or older who do not possess a physician’s recommendation. Thus, should a Resulting Issuer subsidiary be awarded a license, it will be authorized to sell cannabis and cannabis products to adults over the age of 21 subject to customer presentation of a valid government-issued photo ID. As with all state-legal marijuana programs, only cannabis grown in California can be sold in California and retail licensees may only sell cannabis products procured from a duly licensed distributor or licensed microbusiness authorized to engage in distribution. All cannabis products are subject to appropriate laboratory testing, packaging, labeling, and tracking requirements. Upon receipt, licensed retailers must confirm cannabis products have not expired, are properly packaged and bear batch numbers which correspond with tracking and laboratory analysis documentation. Cannabis and cannabis products may only be displayed for inspection and sale on the sales floor of the facility, and may only be removed from packaging for customer inspection if placed in a proper container provided by the licensee and not readily accessible without the assistance of licensee staff (who must remain with the customer throughout such inspection). Any cannabis product displayed or inspected in this manner must be destroyed following inspection or when no longer being using for display purposes and may not be sold or consumed. Retailers may only provide free cannabis products under certain, very limited circumstances and may not sell other goods, with the exception of cannabis accessories and branded merchandise.

 

Medicinal retailer licenses permit the sale of medicinal cannabis and cannabis products for use pursuant to the CUA, found at Section 11362.5 of the Health and Safety Code, by a medicinal cannabis patient in California who possesses a physician’s recommendation. Only certified physicians may provide medicinal marijuana recommendations.

 

Distribution

 

The BCC is responsible for licensing and regulating cannabis distributors in California. Cannabis distribution licenses permit the licensee to transport cannabis goods between licensees, arrange for testing of cannabis goods, and conduct the quality assurance review of cannabis goods to ensure compliance with all packaging and labeling requirements. A licensed cannabis distributor may only distribute cannabis goods, cannabis accessories and licensees’ branded merchandise or promotional materials.

 

Manufacturing

 

The CDPH’s Manufactured Cannabis Safety Branch (“MCSB”) is responsible for licensing and regulating cannabis manufacturers and for establishing statewide standards for packaging and labeling of cannabis and cannabis products. A cannabis manufacturer is anyone who makes or packages a prepared cannabis product, including edibles, topicals, tinctures, extracts, vape cartridges, capsules and more. Cannabis manufacturers can also package flower and roll and package pre-rolls on their licensed premises. Manufacturing licenses are issued based on the type of manufacturing operations to be conducted on the licensed premises. License types issued by MCSB include extraction (using volatile and nonvolatile solvents), infusion, packaging and labeling, and shared-use facilities.

 

Cultivation

 

The CalCannabis division of the CDFA is responsible for licensing and regulating cannabis cultivators, nurseries and processors. CDFA is authorized to issue 17 different types of cannabis cultivation licenses, depending on the type of cultivation (outdoor, indoor, mixed-light) and the size (small, medium, large). CDFA also issues licenses to nurseries and processors. CDFA manages the California Cannabis Track-and-Trace system (“T&T”), which tracks all commercial cannabis and cannabis products.

 

Reporting Requirements

 

The state of California has selected Franwell Inc.’s METRC solution (“METRC”) as the State’s T&T system system used to track commercial cannabis activity and movement along the legal supply chain. While METRC is interoperable with other third-party systems via application programming interface, only licensees have access to METRC itself.

 

Operating Procedure Requirements

 

Licensing applicants must submit standard operating procedures (“SOPs”) describing how the operator will, among other requirements, secure the facility, manage inventory, comply with seed-to-sale requirements, dispense cannabis, and handle waste. Once SOPs approved by the governing regulating body(ies), licensees must provide their employees with SOP training and seek written approval from governing regulating bodies before materially changing their SOPs.

 

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Site-Visits & Inspections

 

The BCC, CDPH and CDFA and their authorized representatives have broad authority, with or without notice, to inspect licensed cannabis operations, including premises, facilitates, equipment, books and records (which may be copied, and such copies retained), and cannabis products. Failure to grant representatives from BCC, CDPH or CDFA full and immediate access to facilities, property, and premises, and to cooperate with inspections and investigations may result in disciplinary action. Laws and regulations enacted by many local jurisdictions grant local cannabis governing bodies and law enforcement agencies similar inspection authority.

 

Storage and Security

 

To ensure the safety and security of cannabis facilities and operations, the BCC requires licensees to:

 

1. Maintain a fully operational security alarm system;

 

2. Contract for security guard services;

 

3. Maintain a video surveillance system that records continuously 24 hours a day;

 

4. Ensure adequate lighting is installed and maintained on and about licensed facilities;

 

5. Only transact business during authorized hours of operations;

 

6. Store cannabis and cannabis product only in areas identified for such purposes on drawings submitted to and approved by the State in connection with licensing;

 

7. Store all cannabis and cannabis products in a secured, locked room or a vault;

 

8. Report to local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis; and

 

9. To the extent applicable based on a licensee’s authorized scope of operations, ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a delivery manifest in any vehicle transporting cannabis and cannabis products. Only vehicles registered with the BCC, that meet BCC distribution requirements, are to be used to transport cannabis and cannabis products.

 

In addition to BCC storage and security requirements, local jurisdictions may have additional storage and security requirements. Such requirements, to the extent they exist, may vary from one locality to another.

 

BRND understands that GH Group is in compliance with the laws of the State of California and the related cannabis licensing framework. There are no current incidences of non-compliance, citations or notices of violation which are outstanding which may have an impact on GH Group’s licenses, business activities or operations in the State of California. Notwithstanding the foregoing, like most businesses, GH Group may from time to time experience incidences of non-compliance with applicable rules and regulations in the states in which GH Group operates, including the State of California, and such non-compliance may have an impact on GH Group’s licenses, business activities or operations in the applicable state. However, GH Group, takes steps to minimize, disclose and remedy all incidences of non-compliance which may have an impact on GH Group’s licenses, business activities or operations in all states in which GH Group operates, including the State of California. See “Regulatory Framework - Compliance”.

 

Compliance with License Requirements

 

GH Group currently has cannabis cultivation, manufacturing, distribution, retail, and delivery operations in the State of California and is in compliance with applicable State licensing requirements and the California cannabis regulatory framework. GH Group maintains the appropriate licenses for its California cultivation, manufacturing, distribution, retail and delivery operations, as applicable.

 

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The licenses of GH Group and its subsidiaries are independently issued for each approved activity for use at the GH Group’s facilities in California. License renewal applications are submitted in accordance with the guidelines published by local cannabis regulators, the BCC, the California Department of Food and Agriculture, and the California Department of Public Health. GH Group has a strong track record of maintaining its licenses in good standing.

 

GH Group has developed and implemented a compliance program designed to achieve its strategic business goals. This compliance program integrates external regulations and requirements with internal procedures and rules to effectively outline the employee duties and standards of work. GH Group has implemented policies and procedures to seek to ensure compliance with applicable laws and regulations.

 

In additions, GH Group employs individuals dedicated to monitoring California law and local regulations for changes and updates. Further, GH Group has contracts with external consultants and external advisors that assist in the monitoring, notification, and interpretation of any changes.

 

GH Group conducts quarterly internal audits to monitor compliance with regulations and to identify the areas for improvement.

 

Cultivation Operations Compliance

 

GH Group’s onsite operations maintain compliance by merging compliant operations into day to day activity. Onsite staff is trained on compliance matters and is required to operate in accordance with SOPs that have merged compliance functions with daily operational activity necessary to propagate, cultivate, harvest, and cure cannabis.

 

Onsite staff are required to understand and adhere to compliance requirements related to cultivation. Cultivation operations include the following departments, each of which has a manager or supervisor responsible for maintaining regulatory compliance, updating the SOPs, confirming with compliance department managers any changes to operations or the premises, and reporting, both within their chain of command but also, in many cases, into systems or reporting chains in compliance and finance.

 

The departments that have material compliance obligations GH Group cultivation operations include:

 

· propagation;

· integrated pest management (“IPM”);

· general cultivation;

· track and trace;

· inventory control;

· facilities; and

· operations.

 

Facilities, in conjunction with compliance staff, designate and maintain premises diagram information, including lighting plans and implementation, and canopy areas. Canopy areas are marked using easily identifiable ribbon lines and attaching the relevant licenses to such contiguous canopy spaces. General cultivation staff are aware of the canopy limitations and are required to ensure that all cultivation is kept within canopy boundaries.

 

The track and trace team is led by a Track and Trace Manager and includes four additional staff who manage compliance with respect to track and trace operations, including requesting unique identifiers (“UIDs”), tagging immature plant lots, upon moving immature plants to mature plant growth area tagging such plants with new UIDs, assisting in harvesting measurement and data input in conjunction with various cultivation team members.

 

The track and trace team members have each completed training to enter the cultivation licenses daily track and trace activities in the METRC system. The Track and Trace Manager oversees all data entry to seek to ensure accuracy and perform corrections within 24 hours of identified data entries. The Track and Trace Manager is also responsible for general track and trace compliance reconciliation, record storage, cross-functional reporting, and notifying the CDFA in the event of any outage that keeps the account offline and are required to maintain a record of track and trace activities which occurred while offline.

 

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The propagation team is responsible for initiating a transfer from nursery licensed areas to mature plant licensed areas. The propagation issues an external transfer sheet containing the UIDs and quantities of plant batches and licensed destination to the track and trace team. Upon receiving a transfer sheet, the track and trace team enters the information into the METRC system, producing a manifest to initiate the movement of plants from the nursery to the Small Mixed Tier 1 licensed areas.

 

The processing team led by the Processing Manager is responsible for oversight of the harvesting and processing of all cannabis batches. This includes working with the track and trace team to in providing the required harvest information, including for each plant and UID the wet weight and waste weight (such waste is required to be processed in accordance with the applicable guidelines).

 

The track and trace team works with Inventory Managers to maintain accurate inventory records and update weights after drying and curing processes. A certified scale is used to weigh the total dry weight of a harvested batch as soon as the drying phase is completed, typically after approximately 10 days from harvest. This total dry weight is recorded prior to any processing activity. The total dry weight is then reconciled upon completion of processing the harvest batch by comparing final product and waste weights.

 

In addition to the general cultivation operations track and trace teams are responsible, along with inventory team members, for issuing manifests for nursery transfers onsite, transfer of cannabis offsite, and any other inbound or outbound cannabis goods processing as well as general inventory management and information collection at the required times and processes. In order to seek to ensure accuracy, a cycle count schedule is in place at each cultivation facility to accomplish a 30-day reconciliation of all cannabis plant and processed inventory.

 

Senior Cultivation Managers are responsible for drafting and updating an IPM plan in conjunction with compliance staff. The IPM plan includes any county-imposed limitations, legal limitations, and label guidelines for application. In addition, GH Group imposes its own strict guidelines on the use of active ingredient products and categorically excludes certain product classes.

 

GH Group’s indoor cultivation operation at The Pottery is a small scale grow opposed to the greenhouse operations. The indoor grow operates with a CDFA Specialty Indoor license. This license is regulated by a maximum of 5,000 sq. ft. of canopy space which suits the premises as the physical design as constructed is just under 5,000 square feet.

 

Additional regulatory requirements for this license type, such as weighmaster licenses and local permits, are maintained by The Pottery’s Cultivation Manager with assistance from third party advisors.

 

Required record retention for the specialty indoor license is as follows:

 

· Financial records: the cultivation managers send copies of all receipts & invoices (cash & card) to GH Group’s accounting team. Onsite copies are kept in a filing cabinet at The Pottery cultivation by Cultivation Managers.

· Personnel records: GH Group’s human resources department keeps all employee files stored in office.

· Disposal records: the cultivation management maintains a binder with all waste manifests/invoices/destruction certificates.

 

The compliance department is generally responsible for maintaining licenses in good standing, including ancillary cultivation licenses such as weighmasters licenses, State Water Resources Control Board licenses and disclosures, and maintaining information on GH Group’s ability to meet license obligations. The responsibility includes maintaining accurate state level licenses and amending and updating such licenses and related license information, such as the premises diagrams, when required.

 

GH Group’s compliance and licensing team is responsible for audits of onsite activities, implementing reporting guidelines, and acting as a resource to onsite team members. The compliance team calendars license renewals and other regulatory deadlines and submits, or approves the submission through contractors, of all documents to cannabis regulators. The compliance/licensing manager is responsible for preparing and submitting license renewals prior to expiration of both cannabis and other regulatory licenses, for example, State Water Resources Control Board licenses and waivers, weighmasters certificates and local permits.

 

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GH Group has a robust financial reporting and compliance system in place. Financial reporting is reconciled against METRC reporting for maintenance of accuracy and prevention of loss. The cultivation business units are led by a Cultivation Controller who reports to the Corporate Controller who in turn reports to GH Group’s Chief Financial Officer. In conjunction with operations staff, the finance team provides for the payment of local cannabis taxes, California cultivation and excise taxes and the tracking of outbound and inbound products transfers.

 

The finance team is also responsible for maintaining records relating to financial interest holders, tax payments, contracts and transaction records which are produced as needed for regulatory review.

 

Manufacturing Operations Compliance

 

Under applicable State regulatory requirements, licensed cannabis manufacturers are required to establish a security plan to include measures preventing access to the premises by unauthorized persons and to protect physical safety of employees and to install a security alarm system designed to prevent theft or loss.

 

GH Group seeks to comply with such security requirements through the following policies and procedures:

 

Security and Security Plans

 

Security management: The Security Manager, in coordination with managers and security advisors, is responsible for the development, upkeep, and adherence to a security plan.

 

Security training: All employees receive adequate security training which includes (i) the proper use of security measures and controls for the prevention of diversion, theft, or loss of cannabis or cannabis products, (ii) procedures and instructions for responding to an emergency, and (iii) education of department managers, who are responsible for the ongoing security training in daily operations. Employees are required to report any suspicious activity or security concerns to their supervisor immediately or security officer on duty immediately.

 

Personnel security: Each person working is supplied with a unique identification code to document entry and egress. This is accomplished with the use of a credentialed fob device that is controlled by the Security Manager. Security codes and fobs are kept secure and inaccessible to any unauthorized person. The Human Resources Manager maintains personnel records (separate from payroll records) to be kept for seven (7) year for each employee The Human Resources Manager is assigned responsibility for personnel policy and procedure documentation, maintenance, implementation, and training.

 

Security access: Each person employed is supplied with a unique identification code contained in a credentialed fob device for access. Visitors, including outside vendors and consultants, must obtain a visitor identification badge prior to entering an enclosed locked area and will be escorted and monitored by a Manufacturing Manager.

 

Theft or diversion: Any incident involving theft or diversion will be reported to the City of Lompoc and the Lompoc Police Department as soon as practical but within 24 hours. Any theft in excess of $250 in retail value of cannabis plant materials, extract, cannabis-infused product, or other item containing cannabis shall be reported to the Lompoc Police Department and the City of Lompoc in writing within 24 hours of the theft.

 

Facility security: Consists of four primary systems: (i) contracted physical security; (ii) CCTV 24-7 recording; (iii) manual code access doors equipped with ID card readers; and (iv) intrusion alarms.

 

Quality Control Program

 

Each cannabis manufacturing licensee is responsible for implementing a quality control program to ensure that cannabis products are not adulterated or misbranded. The quality control program includes quality control operations for all of the following:

 

· The grounds, building, and manufacturing premises: This is accomplished by GH Group’s Manufacturing Facilities Manager and staff following internal SOPs to maintain the manufacturing premises so that they remain in a clean condition, free from any contamination or potential disturbance to the quality and safety of products on site.

· Equipment and utensils: GH Group manufacturing has established procedures for validating that all equipment and machinery is in compliance with design specification, including built as designed with proper materials, capacity, and functions, in addition to properly connected and calibrated. The Equipment Production Supervisor oversees that team performs a visual inspection, looks for any contaminants, foreign objects, or quality issues with the equipment, supplies, raw materials or the facility. If a quality control issue is discovered when performing a visual inspection, staff must immediately notify the Manager on duty so that batch is remediated before further processing. The manufacturing team establish that operating ranges are shown to be capable of being held as long as necessary during routine productions and have a schedule for routine re-verification of all equipment and machinery.

 

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· Personnel: The GH Group manufacturing team seeks to ensure that all cannabis and cannabis products are processed, manufactured, packaged, labeled, handled, and stored in a safe and sanitary manner and seeks to ensure that the identity, strength, quality, and purity of cannabis and cannabis products will be maintained. All employees working in direct contact with cannabis must conform to hygienic practices.

· Cannabis product components: All production materials, packaging components, labeling, and other supplies must be physically inspected and stored under quarantine until they are sampled, if necessary, and released for use. All containers will be inspected for appropriate labeling as to contents, container damage, or broken seals and contamination.

· Shipment inspection: Shipments unloaded from carriers are inspected for physical damage. If there is slight or moderate physical damage, the material will be more closely inspected. If any consequential damage is found, the material in question will not be permitted into the facility and the Inventory Manager will be immediately notified. The Inventory Manager and/or a Quality Assurance Specialist will make the decision to either accept or return the material. Any damaged material, which cannot be left on the truck, will be brought to the quarantine area and clearly marked as “DAMAGED” or “REJECTED”.

 

Manufacturing Processes and Procedures

 

GH Group’s manufacturing operations have organized their processes and procedures by outlining each process that occurs in designated areas in the following order:

 

· Pre-processing/preparation area: This area is used for preparing the raw plant material. Mechanical homogenizers are used to grind the material to a uniform size. Large, super-low temperature freezers are used for storage. After preparation, material is brought to the extraction room.

· Extraction room: Non-volatile extraction is completed in the designated “extraction room” by an original equipment manufacture-trained and certified technician. After the initial extraction is completed, the product can move into the designated area for post-production and refinement.

· Post-processing/refinement lab: This room houses solvent reclamation equipment, hazardous/flammable material storage, vacuum ovens, vacuum pumps, small benchtop chillers, water heaters, heating mantels, distillation apparati, etc. The area meets U.S. National Fire Protection Association criteria for class 1B flammable liquids and vapors. All product completed in this section of the facility is deemed safe for handling by the QA Specialist before entering the Packaging Area. When products reach the end of their refinement cycle and pass quality control sampling/testing, they are be moved to the designated finished product area.

· Commercial food processing/“kitchen”: The area referred to as the food processing facility or “kitchen” is utilized to infuse active cannabis ingredients into consumable goods. All employees working in this area have sufficient training in Hazard Analysis Critical Control Point training and are “Serv Safe” certified. All food products are stored according to their perishability in a clean and efficacious work environment for the purpose of food processing.

· Packaging/labeling area: Finished products are moved to this area, and products still in need of formulation go to the “formulation and filling room,” where the various derivative products are volumetrically packaged and labeled by way of automated or manual robotic filling machines, then returned to this area. All product prior to being packaged and labeled undergoes a quality assessment to seek to ensure product is free of debris. An enhanced visual inspection and an olfaction inspection may be performed at this time. A log is compiled by every employee delineating employee number, product batch code, date and net batch weight. When a product has been counted and logged, the items are moved to the “secured product storage vault” and locked until further distribution.

· Formulation and filling room: This area is considered a clean room to create ‘nutraceutical style’ products and can be used as a clean area for future work. Products to be volumetrically filled and formulated primarily consist of vape devices and topical products and tinctures.

· Secured product storage vault: This area is the most secure space in the facility, surrounded by a U.S. Drug Enforcement Agency-style “cage” comprised of anchored rod iron and Kevlar/steel inserts within the drywall. This area is tightly climate-controlled to seek to ensure hazard controls for any consumable products that are at risk for food-borne bacteria.

 

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· Testing: All cannabis received is tested for contaminants and cannabinoid and terpenoid profile, though testing of cannabis that will undergo further processing before sale is not required by State law or regulation. In lieu of initiated testing with an independent testing laboratory, a lot specific report or Certificate of Analysis may be accepted from the supplier of the cannabis provided the results are reported by an independent testing laboratory that is licensed by the State of California. The Quality Assurance department establishes the reliability of the supplier’s analyses through confirmation of the supplier’s test results at appropriate intervals.

 

Inventory Control

 

GH Group has a written inventory control plan capable of tracking the location and disposition of all cannabis and cannabis products at its licensed premises. The Inventory Control Manager follows the internal Inventory Tracking SOP and oversees that the inventory team reports all tracking of inventory items accurately.

 

In addition, GH Group reconciles the on-hand inventory of cannabis and cannabis products at its licensed premises with the records in the track-and-trace database at least once every 30 calendar days. The Inventory Control Manager and team produce a 30-day inventory reconciliation for all inventory in the track and trace system. This is overseen by the Operations Coordinator who reports to the Plant Manager.

 

Retail and Distribution

 

Each GH Group retail location is managed by a General Manager who is responsible for maintaining compliant operations. Track and trace obligations are handled by the inventory and compliance team whose duties include receiving inbound cannabis products, checking the products against the manifest, accepting or rejecting products and updating the track and trace database when accepted, destruction of product, processing returns, compliance training and inventory reconciliation. At the time of delivery, the receiving employee is charged with examining the product packaging to seek to ensure that it meets all of the packaging and labeling requirements.

 

The track and trace system, METRC, is only one of multiple data sets used to manage, track, reconcile, and reduce loss of inventory. GH Group also enters all inventory into its general inventory management system, by porting METRC tags through GH Group’s enterprise resource planning software. Each dispensary has its own assigned tags to be used if necessary. METRC manifests, tags, certificates of analysis and invoices are kept for records retention. Manifests are required to be kept for seven (7) years.

 

The inventory and compliance team reviews and fully assesses all on-hand inventory every 30 days and cross-references to the general inventory database.

 

Safety and security measures are an integral part of each floorplan. Licensed premises are designed to control customer flow and prohibit unauthorized entry to limited-access areas. Limited-access areas include spaces utilized to secure, store, transfer, or receive cash, salable goods, records and surveillance equipment (excluding the sales floor). These areas are accessible only to authorized individuals; authorization is granted by necessity of job function. Additionally:

 

· no one under age 21 may enter a limited-access area;

· only authorized individuals are permitted entry to a limited-access area, which may include:

employees;

o outside vendors;

o contractors; or

o anyone doing business that requires access to the limited-access area;

· authorized individuals who are not employees must:

o be accompanied by an employee at all time;

o have their visits recorded in a log (including date, time, name, purpose of visit, areas visited, employee escort name; logs are retained in compliance with State record keeping requirements and available to licensing agencies and authorities upon request); and

· only employees and contractors are permitted on site outside of retail store hours.

 

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Employees are required to display a laminated identification badge. Visitors are provided a visitors badge. To enter each retail licensed area, a customer is required to present a valid government issued photo ID.

 

Each GH Group retail licensee location has specific access controls related to both inventory and cash management. Cash is secured in specialized vaults as a safety measure against robbery and is regularly deposited.

 

When transporting cash, each GH Group retail store is required to comply with all BCC regulations, security protocols and best business practices defined by the retail finance team in all transportation of cash. Armored car transportation is the preferred method of transportation. This service in combination with retail security protocols are designed to safeguard all transportation of cash to and from the specific site.

 

There are several specific controls related to general retail merchandising, that include limits on customer interactions with samples, product display, and purchasing requirements. Store merchandising is directed and approved by the VP of Retail and implemented by store General Managers and designees. Changes to merchandising are reviewed for any compliance issues, and, where appropriate, proposed changes are reviewed by the corporate compliance managers.

 

To purchase a cannabis product online, a GH Group customer is required to upload a valid California identification and a self-photo, both of which are electronically verified by retail employees. No online sales or home deliveries are made to individuals outside the State of California. On delivery, the GH Group delivery employee electronically scans the customer’s identification and utilizes mobile technology to process electronic payments and to upload data into GH Group’s inventory management system.

 

Delivery operations must be conducted by an employee over the age of 21. A copy of the licensee’s license, the driver’s government identification, and the employee badge are required to be carried by the driver. At the time of delivery, the driver must confirm the age and identify of the customer in accordance with general retail customer data collection procedures.

 

Certain restrictions on where the delivery is allowed to occur include the requirement that it be to a physical address within California, cannot be to a school, youth center, or childcare center, and cannot be delivered to any public or United States land.

 

Retail delivery may only be accomplished by using an enclosed motor vehicle that cannot have markings that indicate that the vehicle might contain cannabis and no passengers or operators outside of employees of the licensee may be in the vehicle. The vehicle is required to have a GPS device owned by the licensee that records all locations traveled and stores such information for 90 days. The total value of goods that can be carried cannot exceed $5,000 at any time, or more than $3,000 in goods that do not have orders associated with them and the delivery driver cannot leave the licensed premises until a delivery order has been received.

 

Cannabis goods are kept in a lockable case (either combination or lock) that is secured to the inside of the vehicle.

 

Distributor obligations include separation of non-cannabis goods storage from cannabis goods, a requirement to store by batches of similar products and not store mixed product batches together. Batch labeling of products must occur and include, manufacturer or processor license number and information, date of entry into storage, UID for each batch, a description of the goods and the unit weight or batch weight and count (as accomplished by licensed weighing devices and personnel), and the best by or any expiration dates.

 

Batch testing is accomplished by licensed laboratories who take samples while products are held. Testing operations, including those accomplished while the goods are held, are highly regulated. A GH Group employee must be present when sampling occurs. The sampling process must be on video with the batch number identified on video and the recording maintained for 90 days. Chain of custody records for anyone possessing and moving the sample are required.

 

All cannabis goods transported by distribution require a manifest in the track and trace system prior to shipment, the information required includes: testing and sampling data, sale of goods, destruction or disposal of goods, description of goods and weight and count of goods. Prior to shipment the manifest must be sent to the purchaser or transferee and the BCC. The receiving licensee is required to check the manifest and reject any non-conforming goods or goods not on the manifest.

 

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While GH Group is compliant with State and local cannabis laws, its cannabis-related activities remain illegal under United States federal law. See “Risk Factors”.

 

Non-Compliance with State and Local Cannabis Laws

 

From time to time, as with all businesses and all rules, it is anticipated that GH Group may experience incidences of non-compliance with applicable rules and regulations, which may include minor matters such as:

 

· staying open slightly too late due to an excess of customers at stated closing time;

· minor inventory discrepancies with regulatory reporting software;

· missing fields in regulatory reports;

· cleaning schedules not available on display;

· educational materials and/or interpreter services not available in an sufficient number of languages;

· updated staffing plan not immediately available on site;

· improper illumination of external signage;

· marijuana infused product utensils improperly stored;

· labels out of compliance with most recent regulatory guidelines;

· partial obstruction of camera views; and

· onsite surveillance room used for any other function (i.e., storage).

 

In addition, either on an inspection basis or in response to complaints, such as from neighbours, customers or former employees, State or local regulators may among other things issue “show cause” letters, give warnings to or cite GH Group for violations, including those listed above. Such regulatory actions could lead to the requirement to remedy the situation, or, in more serious cases, lead to penalties and/or amendments, suspensions or revocations of licenses or otherwise have an impact on the Resulting Issuer’s licenses, business activities or operations.

 

GH Group does conducts internal audits with respect to compliance with applicable State and local cannabis rules and regulations and it is intended that the Resulting Issuer will continue this practice.

 

BRND intends to cause GH Group to promptly remedy any known occurrences of non-compliance with applicable State and local cannabis rules and regulations and BRND intends to publicly disclose any non-compliance, citations or notices of violation which may have an impact on its licenses, business activities or operations.

 

Ability to Access Public and Private Capital

 

BRND has historically, and the Resulting Issuer will continue to have upon closing of the Transaction, access to equity financing from the public capital markets by virtue of its status as a reporting issuer in each of the provinces and territories of Canada other than Quebec.

 

GH Group has historically, and continues to have, access to equity and debt financing from the prospectus exempt (private placement) markets in the U.S. GH Group also has relationships with sources of private capital (such as funds and high net worth individuals) that could be investigated at a higher cost of capital.

 

While GH Group is not currently able to obtain bank financing in the U.S. or financing from other U.S. federally regulated entities, they currently have access to equity financing through the private markets in the U.S. Since the use of marijuana is illegal under U.S. federal law, and in light of concerns in the banking industry regarding money laundering and other federal financial crime related to marijuana, U.S. banks have been reluctant to accept deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. Likewise, marijuana businesses have limited, if any, access to credit card processing services. As a result, marijuana businesses in the U.S. are largely cash-based. This complicates the implementation of financial controls and increases security issues.

 

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Commercial banks, private equity firms and venture capital firms have approached the cannabis industry cautiously to date. However, there are increasing numbers of high net worth individuals and family offices that have made meaningful investments in companies and businesses similar to that of GH Group. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep 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 Resulting Issuer when needed or on terms which are acceptable to the Resulting Issuer. The Resulting Issuer’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. See “Risk Factors – The Resulting Issuer may be subject to restricted access to banking services in the United States and Canada.

 

THE BUSINESS OF GH GROUP

 

History of GH Group and Business Overview

 

GH Group was 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. As of December 31, 2020, GH Group had 294 employees.

 

In 2019, GH Group expanded its retail presence to include one of the three (3) dispensary permits in Santa Barbara, California, under its “Farmacy” brand and established an omnichannel retail approach with web-based ordering capabilities and delivery optionality. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution” for a discussion of GH Group’s online sale and delivery regulatory compliance protocols. At the same time, GH Group strengthened its 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, GH Group completed the acquisition of a fourth (4th) dispensary, iCANN, LCC d/b/a Farmacy Berkeley (“iCANN” or “Farmacy Berkeley”).

 

In 2020, GH Group expanded its cultivation footprint by over 300% with an approximately 355,000 sq. ft. cultivation facility in Padaro, California. GH Group’s 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 Analytics6. In December 2020, the brand held onto its number two spot.

 

GH Group also added additional brands and form factors to its offerings to complement the strong positioning in the flower segment enjoyed by Glass House Farms. In edibles and topicals, GH Group benefits from a partnership with a well-known cannabis activist and entrepreneur under its cannabis wellness brand “Mama Sue”.

 

Through these activities, GH Group established the foundation for its 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. GH Group strives to provide customers with consistently high-quality products across a range of trusted and recognizable brands.

 

Cultivation

 

GH Group’s 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. GH Group uses the sun, the climate and advanced technology to conduct precision agriculture.

 

 

6 BDS Analytics (2020). Sales in December 2020. Available at: https://www.BDSA.com.

 

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As of Q1 2021, GH Group’s 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 GH Group taking over the properties and were transitioned to cannabis use by GH Group. 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 GH Group, including the addition of new growing systems, fertigation, photoperiod lights, automated light deprivation curtains, and upgraded climate control technology. GH Group followed up the Casitas project with its Padaro facility acquisition, which tripled GH Group’s cultivation footprint while increasing canopy planting efficiency by over 350% through the use of an innovative rolling tray system. GH Group 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, GH Group 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 GH Group expects 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. GH Group’s 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, the GH Group 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 GH Group’s 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.

 

GH Group’s cultivation expertise reflects the culmination of years of operating experience and specialized input from cannabis, agriculture, technology, business, manufacturing and scientific experts, allowing GH Group to grow high-quality cannabis at a low cost. GH Group’s cultivation management team has a combined 100+ years of greenhouse experience. GH Group 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, GH Group’s 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. GH Group’s ability to grow productively at scale has resulted in lower unit production costs. During 2020, GH Group scaled up its 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.

 

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Cultivation Licenses

 

Padaro Licenses

 

The applicable licenses for cultivation/processing issued by the 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.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001702   11/22/21   Adult-Use-Nursery
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001703   11/22/21   Adult-Use-Processor
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001652   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001633   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001624   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001622   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001599   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001589   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001582   02/20/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001700   01/02/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001696   01/02/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001695   01/02/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001683   01/02/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001678   01/02/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001664   01/02/22   Adult-Use-Small Mixed-Light Tier 1
G&K Produce, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001655   01/02/22   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001673   11/22/21   Adult-Use-Small Mixed-Light Tier 1

 

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K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001670   11/22/21   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001668   11/22/21   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001667   11/22/21   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001665   11/22/21   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001649   11/22/21   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001647   11/22/21   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001660   02/20/22   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001657   02/20/22   Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001654   02/20/22   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001635   02/20/22   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001630   02/20/22   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001629   02/20/22   Adult-Use-Small Mixed-Light Tier 1
K&G Flowers, LLC   3480 Via Real Carpinteria, CA 93013   CCL18-0001628   02/20/22   Adult-Use-Small Mixed-Light Tier 1

 

See “Material Contracts”.

 

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 BCC is held by Mission Health Associates, Inc., as described in the table below.

 

License Holder   Address   Permit/License
No.
  Expiration/Renewal
Date (MM/DD/YY)
  License Type
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0001009   06/07/21   Medicinal-Nursery

 

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Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   C13-0000080- LIC (BCC)   07/08/21   Medicinal - Distributor/Transport Only
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0003034   03/25/22   Medicinal-Processor
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000498   03/15/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000503   03/15/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000512   03/11/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000510   03/11/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000509   03/11/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000506   03/11/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000505   03/11/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000502   03/11/22   Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.   5601 Casitas Pass Road Carpinteria, CA 93013   CCL18- 0000500   03/11/22   Medicinal-Small Mixed-Light Tier 1

 

See “Material Contracts”.

 

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.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
The Pottery Inc.   5042 Venice Blvd. Los Angeles, CA 90019   CCL18-0000935   04/01/21   Adult-Use-Specialty Indoor
The Pottery Inc.   5042 Venice Blvd. Los Angeles, CA 90019   C11-0000726-LIC (BCC)   07/08/21   Adult-Use & Medicinal – Distributor License

 

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See “Material Contracts”.

 

Manufacturing and Distribution

 

GH Group’s 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 the GH Group’s 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, GH Group 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 GH Group), 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.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
CA Manufacturing Solutions LLC   1637 W. Central Ave. Lompoc, CA 93436   CDPH-10002412   04/12/21   Annual Manufacturing License – Adult and Medicinal Cannabis Products Type 7: Volatile Solvent Extraction
CA Manufacturing Solutions LLC   1637 W. Central Ave. Lompoc, CA 93436   C11-0000031-LIC (BCC)   04/30/21   Adult-Use & Medicinal – Distributor License

 

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See “Material Contracts”.

 

Wholesale Sales

 

In addition to sending cultivated biomass to the CMS Asset for manufacture, GH Group also sells its biomass on various wholesale markets.

 

WHOLESALE - BULK BIOMASS   Q1     Q2     Q3     Q4     TOTAL  
Number of Bulk Customers     14       21       18       19       36  
                                         
Total Revenue   $ 2.4     $ 6.5     $ 6.6     $ 8.4     $ 23.9  
                                         
Average Revenue per Customer   $ 0.1     $ 0.3     $ 0.3     $ 0.4     $ 0.7  
                                         
Top 5 customers (% of sales)     68.8 %     80.6 %     83.2 %     78.3 %     69.1 %
Top 10 customers (% of sales)     92.1 %     93.0 %     96.7 %     94.9 %     83.5 %

 

Dollar figures in above table are expressed in millions and each quarter refers to the applicable quarter of the 2020 financial year.

 

Further, GH Group has a wholesale business selling GH Group-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.7

 

 

WHOLESALE – OWNED BRANDS                                    
Consumer Packaged Goods          Q1 2020      Q2 2020      Q3 2020      Q4 2020      Total  
Cumulative Points of Distribution             64       151       239       273       273  
Revenue by Brand     100.0 %   $ 1.3     $ 2.2     $ 3.5     $ 6.2     $ 13.2  
Glass House Farms     71.4 %     0.4       1.4       2.5       5.2       9.5  
Other     28.6 %     0.1       0.2       0.5       0.4       1.2  
Revenue by Category     100.0 %   $ 1.3     $ 2.2     $ 3.5     $ 6.2     $ 13.2  
Flower     71.4 %     0.5       1.4       2.8       5.0       9.7  
Concentrates     19.3 %     0.7       0.2       0.4       0.5       1.8  
Pre-rolls     9.3 %     -       0.2       0.2       0.5       0.9  
Vape     19.3 %     -       0.4       0.1       0.2       0.7  
Other     9.3 %     0.1       -       -       -       0.1  

 

Dollar figures in above table are expressed in millions.

 

 

7 BDS Analytics (2020). Sales in December 2020. Available at: https://www.BDSA.com.

 

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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.

 

GH Group relies on a single large distributor to provide the bulk of its wholesale sales, which provided approximately 99% of its wholesale revenue in 2020 and has provided approximately 84% of its year to date wholesale sales. GH Group is currently negotiating an exclusive contract for distribution for an initial one (1)-year term with its major distributor. Although GH Group is not dependent on this relationship, a change in the status of the distributor or the relationship is likely to cause a material impact until GH Group can develop relationships with alternative distributors to carry its goods.

 

Each of the following licensed facilities are responsible for more than 10% of the gross revenue of GH Group: Casitas, Padaro, Farmacy SB, and Bud and Bloom.

 

Brand, Product and Marketing

 

The creation of dominant, extensible CPG products and brands is GH Group’s strategic mission. While many cannabis businesses prioritized brand building and customer acquisition before securing a reliable product flow, GH Group 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.

 

As production quantity has increased and the GH Group’s products have become more widely distributed, GH Group has 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 Region8.

 

GH Group does 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.

 

GH Group has 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, GH Group’s 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, GH Group’s 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.

 

 

8 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/papayapunch- 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-housefarms/; 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/.

 

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Retail

 

GH Group has operational dispensaries in Santa Barbara, Santa Ana, Los Angeles and Berkeley, California. GH Group uses clean, minimalistic retail space with a focus on local sourcing and sustainably grown cannabis. GH Group staff has substantial knowledge on the health and wellness benefits of cannabis, as well as GH Group’s focus on educating customers on responsible adult-use, including understanding appropriate dosing.

 

GH Group offers 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. GH Group’s motto is “Local Farms, Local People, Local Values”. This ethos is woven into purchasing decisions and illustrates GH Group’s prioritization of locally cultivated and manufactured products.

 

GH Group intends 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 GH Group 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.

 

Retail Locations

 

GH Group currently offers online payment processing, as well as in store pickup and home delivery services for adult-use and medicinal-use customers at all locations. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution” for a discussion of GH Group’s online sale and delivery regulatory compliance protocols.

 

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 GH Group’s contribution to and partnership with the local community. GH Group has 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 2020.9

 

Farmacy SB

 

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.

 

 

9 Santa 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/.

 

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Farmacy SB Licenses

 

The applicable license for retail issued by BCC is held by Farmacy SB, Inc. (a wholly owned subsidiary of GH Group), as described in the table below.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
Farmacy SB, Inc.   128 W. Mission Street Santa Barbara, CA 93101   C10-0000293-LIC (BCC)   06/25/21   Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

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.10

 

Farmacy Berkeley Licenses

 

The applicable license for retail issued by BCC is held by Farmacy Berkeley (a wholly owned subsidiary of GH Group), as described in the table below.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
Farmacy Berkeley   3243 Sacramento Street Berkeley, CA 94702   C10-0000506-LIC (BCC)   07/24/21   Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

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.

 

 

10 East Bay Express (2021). Best of The East Bay 2021 – Reader’s Picks: Best Cannabis Delivery. Available at: https://eastbayexpress.com/readers-picks-cannabis/.

 

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The Pottery License

 

The applicable license for retail issued by BCC is held by The Pottery Inc. (a wholly owned subsidiary of GH Group), as described in the table below.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
The Pottery Inc.   5042 Venice Blvd, Los Angeles, CA 90019   C11-0000389-LIC (BCC)   07/08/21   Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

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 2017.11

 

Bud and Bloom Licenses

 

The applicable license for retail issued by BCC is held by Bud and Bloom, as described in the table below.

 

License Holder   Address   Permit/License No.   Expiration/Renewal
Date (MM/DD/YY)
  License Type
Bud and Bloom   1327 St. Gertrude Place E. Santa Ana, CA 92705   C10-0000044-LIC (BCC)   05/09/21   Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

Information Technology & Inventory Management

 

GH Group has an information technology infrastructure that prioritizes security, compliance, business process support, customer-facing technology, operational systems, data insights, and business intelligence. GH Group uses Treez, a third-party software platform, to serve as its inventory management system (“IMS”) and data warehouse. GH Group’s 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. GH Group’s IMS also serves as a data warehouse, allowing for daily inventory management.

 

GH Group also uses its IMS for weekly cycle counts across all retail and storage locations. GH Group’s IMS allows for comprehensive reporting on all stages of inventory within GH Group. All personally identifiable information is required to be stored and maintained by GH Group in compliance with the California Consumer Privacy Act.

 

In addition to its IMS, GH Group participates in California’s track and trace system (METRC).

 

GH Group’s websites are its primary customer-facing technology for online customer transactions in its growing direct-to-consumer business. GH Group works with Stronghold to enable bank-to-bank transfers for secure, contactless electronic payments from direct-to-consumer customers.

 

 

11 Leafly (2017). Top 10 Most Beautiful Dispensaries in America. Available at:  https://www.leafly.com/news/lifestyle/beautiful-marijuana-dispensary-designs-and-layouts.

 

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GH Group intends to continue to implement and use leading tools and technologies that allow it to support and promote growth in its business.

 

Banking & Processing

 

GH Group and all of its affiliated entities have accounts with the largest bank headquartered in the greater Los Angeles area. GH Group selected its bank because it is also a subsidiary of one of the largest banks in the United States, which is expected to be helpful as GH Group scales its operations.

 

GH Group currently accepts cash and debit cards for sales in the retail locations and cash for sales to direct-to-consumer customers. GH Group also has a relationship with Stronghold to allow direct-to-consumer customers to prepay using a debit card. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution”.

 

Competitive Conditions

 

As GH Group is vertically integrated, it competes on multiple fronts, from manufacturing to retail to delivery, and experiences competition in each of these areas. From a retail perspective, GH Group competes 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, GH Group competes with other manufactures of brands for shelf space in non-GH Group owned dispensaries throughout California. Similar to certain competitors in the retail space, GH Group competes with manufacturers ranging in size from small local operators to significant operators with a larger presence. Indirectly, GH Group competes with the illicit market, including many illegal dispensaries.

 

Environmental Protection Requirements

 

Although a number of environmental restrictions apply to GH Group, 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 GH Group’s financial position or operations as currently conducted.

 

SOCAL GREENHOUSE ACQUISITION

 

GH Group’s wholly-owned subsidiary, GH Camarillo LLC (“Purchaser”), has entered into a series of agreements, subject to satisfactory completion of due diligence and other conditions, to effect the purchase of SoCal Greenhouse located in southern California consisting of approximately 160 acres (including 125 acres of glass greenhouses and associated support structures). The SoCal Greenhouse property currently consists of six separate greenhouses, six packhouses or warehouses, a water filtration building, a building housing multiple energy co-generation generators and a main office, along with associated water tanks, solar arrays and ancillary buildings.

 

The 125-acres of existing greenhouses use high-tech climate control systems and, while they are currently used to grow immature and mature vine crops including, without limitation, tomatoes, peppers, and cucumbers, are an ideal height for cultivation of premium commercial cannabis. While capital expenditures will be required to make certain capital expenditure improvements to the greenhouses for such purposes, such improvements will not require any structures to be replaced.

 

The six (6) greenhouses were constructed between 1996 and 2009 as one of California’s first large-scale vegetable greenhouses. SoCal Greenhouse currently is in use to grow vine crops and it is anticipated, subject to the receipt of applicable state and local regulatory approvals, that the greenhouses will be re-purposed in three (3) phases to grow commercial cannabis. As part of the purchase of the Property, the CEFF Parties, as SoCal Greenhouse’s seller, will cause each of the existing master lease and ground lease (collectively, the “Existing Leases”) to be terminated pursuant to a form approved by Purchaser, and Purchaser will enter into a license agreement with the vacating tenant to allow it up to 14 weeks to complete harvest operations for any then existing vine crops during which time Purchaser expects to begin its phased capital expenditure improvements to the property. Due to the size of the existing greenhouses, capital expenditure improvements will be accomplished in each of the aforementioned phases.

 

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As part of the planned, phased conversion of the greenhouses, Purchaser is expected to enter into an arm’s length term lease of no less than three (3) years (the “Short-Term Lease”) with an experienced large-scale commercial agricultural operator who has previously operated SoCal Greenhouse (the “Short-Term Tenant”) to operate the greenhouses for cultivating vegetables until the capital expenditure improvements are completed. The terms of the Short-Term Lease provide, among other things, that (i) the Short-Term Tenant is responsible for all costs of maintenance, taxes, insurance and utilities in operating SoCal Greenhouse, which is expected to defray the overall cost of operations of SoCal Greenhouse, and (ii) the Short-Term Tenant shall be entitled to all revenues in respect of the sale of vegetables cultivated at SoCal Greenhouse during the Short-Term Lease. Further, the amount of rentable square footage of greenhouse space occupied by the Short-Term Tenant will be reduced proportionately as each phase of conversion is completed by Purchaser.

 

The acquisition of SoCal Greenhouse by Purchaser is not considered the acquisition of a “business”, and, accordingly, no financial statements in respect of SoCal Greenhouse have been provided in this prospectus.

 

SoCal Greenhouse Acquisition Agreements

 

Pursuant to an Option Agreement (California Option Assets) dated December 28, 2018 by and among CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC (“CEFF Parent” and. together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc. (the “Option Holder” or “GIPI”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and GIPI (“First Amendment”), (ii) the Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and among the CEFF Parties and GIPI (“Second Amendment”), (iii) the Third Amendment to Option Agreement (California Option Assets), made effective as of March 21, 2021 by and among the CEFF Parties and GIPI (“Third Amendment”), and (iv) the Fourth Amendment to Option Agreement (California Option Assets), effective as of March 24, 2021 by and among the CEFF Parties and GIPI (“Fourth Amendment”) (the California Option Agreement, as amended by the First Amendment, Second Amendment, Third Amendment and Fourth Amendment, collectively, the “California Option Agreement”), GIPI owns an option to purchase the California Option Assets (the “Option” and collectively with all rights, option and interests held by GIPI in, to and under the California Option Agreement including, without limitation, the relevant land located in southern California, together with the fixtures, greenhouses and other structures and improvements located thereon and appurtenances relating thereto and all other California Option Assets (as defined in the California Option Agreement), the “Option Rights”).

 

On February 13, 2021, GH Group delivered a purchase offer to the Option Holder (the “SoCal Greenhouse Acquisition Agreement”), to purchase GIPI’s Option Rights under the California Option Agreement, including, without limitation, all rights relating to the Option Rights. The Option Holder delivered an Exercise Notice, dated February 20, 2021, electing to exercise its Option Rights under the California Option Agreement, which was delivered to the CEFF Parties and designated Purchaser as designee of GIPI (the “Exercise Notice”). The Exercise Notice was intended as, and constituted, a non-binding intention by each party to enter into a separate binding agreement.

 

Subsequently, as contemplated by the SoCal Greenhouse Facility Acquisition Agreement, (i) GIPI, as the seller, and Purchaser, as the buyer, are in the process of negotiating and finalizing an Agreement to Assign an Option to Acquire Real Estate, effective as of March 29, 2021 (the “Definitive Option PSA”), an accompanying Earn-Out Agreement by and between BRND and GIPI of even date therewith (the “Earn-Out Agreement”, together with Definitive Option PSA, the California Option Agreement and the SoCal Greenhouse Acquisition Agreement, the “SoCal Greenhouse Agreements”) to document the definitive terms and conditions that will govern the sale by GIPI to Purchaser of the Option Rights, and (ii) GIPI shall conditionally assign all of its rights, title and interests in and to all Option Rights to Purchaser pursuant to the Conditional Assignment of Option Agreement made effective as of March 29, 2021, by and between GIPI, as assignor, and Purchaser, as assignee.

 

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Pursuant to the California Option Agreement, the CEFF Parties and Purchaser, as GIPI’s assignee, entered into an Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions dated March 29, 2021 and related instruments for the transactions contemplated by the California Option Agreement (all such agreements and instruments are, collectively, the “Definitive Property PSA”). The proposed closing date under the Definitive Property PSA is no later than August 20, 2021.

 

There are a number of conditions that must be met before each of the Definitive Option PSA and Definitive Property PSA will close, including, but not limited to, the following:

 

satisfaction of all required entitlement conditions thirty (30) days prior to the closing date, including obtaining all regulatory approvals necessary to convert SoCal Greenhouse from its current agricultural use to commercial cannabis use;

GIPI will have caused, and will cause, a mutually acceptable designee to enter into a consulting agreement with such title as is mutually agreed by Purchaser and GIPI, and such consultant will report directly to the President, Chief Executive Officer or such other designees of GH Group’s board of directors;

no governmental moratorium will have been enacted and is continuing with respect to the cultivation, processing, packaging, on-site testing, storage and distribution of cannabis and that would apply to all or any “material” portion of SoCal Greenhouse;

the relevant title company will be irrevocably committed to issue one or more policies of title insurance for SoCal Greenhouse in favour of GH Group;

the Existing Leases for SoCal Greenhouse will have been terminated pursuant to a form of termination agreement satisfactory to Purchaser and BRND;

the entry into the Short-Term Lease for the portions of the property not then being used for cannabis use;

the CEFF Parties, as the seller, and Purchaser, as the buyer, will be in a position to close the purchase and sale of the property in accordance with the terms of the Definitive PSA immediately after the closing of the transactions contemplated by the California Option Agreement;

all parties will have been in a position to close the sale to the Purchaser of the Option Rights in accordance with the Definitive Option PSA immediately prior to the closing date (or on any such earlier date as may be exercisable by Purchaser under the Definitive Option PSA);

as of the date of closing, no material breach by the CEFF Parties of any covenant, representation or warranty of the CEFF Parties set forth in the California Option Agreement or the Definitive PSA will have occurred and remains uncured;

all funds and instruments required under the Definitive PSA to be delivered on or prior to the date of closing will have been delivered in accordance with applicable provisions of the Definitive PSA; and

as of the date of closing, no material breach by Purchaser of any covenant, representation or warranty of Purchaser set forth in the Definitive PSA will have occurred and remains uncured.

 

Pursuant to the SoCal Greenhouse Facility Acquisition Agreement, one addition closing condition is that BRND will have completed its acquisition of GH Group pursuant to the Transaction.

 

Pursuant to the Definitive Property PSA, the total purchase price payable to the CEFF Parties for the fee simple interest of SoCal Greenhouse (i.e., the real property and existing improvements) is $118,890,000, cash, payable on the closing date of the transactions contemplated therein.

 

Pursuant to the Definitive Option PSA and the Earn-Out Agreement, the total purchase price payable to GIPI for the Option Rights is up to $175,000,000, payable solely in Equity Shares pursuant to the terms of the Definitive Option PSA. Additionally, BRND has contractually agreed to commit up to $40,000,000 for capital expenditure improvements required to further develop or repurpose SoCal Greenhouse for commercial cannabis use following the closing of the transactions contemplated by the Definitive Option PSA. The terms for the issuance of the Equity Shares for the Option Rights by BRND are as follows: (i) 10,000,000 fully-vested Equity Shares on the closing date at a price equal to $10.00 per share (the “Closing Shares”), and (ii) up to $75,000,000 of additional Equity Shares (the “Earn-Out Shares”) following the closing date pursuant to the terms of the Earn-Out Agreement. More particularly, the Earn-Out Shares will be determined in accordance with the vesting formula set forth in the Earn-Out Agreement over a period of twelve (12) consecutive months commencing August 1, 2023 and ending July 31, 2024. The price of the Earn-Out Shares will be based on the volume weighted average price of such Earn-Out Shares for twenty (20) consecutive trading days immediately prior to October 31, 2024. GIPI will be subject to a 12-month lock-up agreement with respect to its receipt of both the Closing Shares and Earn-Out Shares.

 

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Assuming all of the conditions in the SoCal Greenhouse Agreements are fully satisfied, the SoCal Greenhouse transactions are expected to close in or about Q3 2021.

 

The description of the SoCal Greenhouse Acquisition Agreements, both below and elsewhere in this prospectus, is a summary only, not exhaustive and qualified in its entirety by reference to the terms of the California Option Agreement, which will be available on BRND’s profile on SEDAR at www.sedar.com.

 

ELEMENT 7

 

GH Group has executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California (each an “Element 7 Merger”).

 

Element 7 Merger Agreement

 

GH Group has executed a Merger and Exchange Agreement dated as of February 23, 2021 with Element 7 (“Element 7 Merger Agreement”), whereby GH Group has the right, subject to satisfactory completion of due diligence, to merge with up to 17 subsidiary entities of Element 7 which are in the process of applying for state and local retail cannabis licenses in California, by way of a separate merger for each entity. The Element 7 Merger Agreement is conditional on, and assuming all conditions thereto are satisfied is expected to be completed at the same time as, the closing of the Transaction.

 

For each 1% of the membership interests of a wholly owned licensed entity owned by Element 7 or partially owned licensed entity owned by Element 7 at the closing of an Element 7 Merger, GH Group will issue $15,000 in Company Stock at a price per share of: (i) Company Stock at a GH Group valuation of $325,000,000; plus (ii) any amount of equity financing completed prior to the closing of any Element 7 Merger and excluding all in-the-money options (or in the event that the Transaction is completed, $10.00 per Equity Share). The stock will be issued at $10.00 per share for up to $24,000,000 consideration.

 

There are a number of conditions that must be met by Element 7 before GH Group will be required to close on a merger with an Element 7 licensed entity pursuant to the Element 7 Merger Agreement, including:

 

that such Element 7 licensed entity possesses the required local authorization to conduct retail cannabis operations;

such Element 7 licensed entity has no liabilities except commercially reasonable leases in good standing disclosed on the disclosure schedule to the Element 7 Merger Agreement;

if partially owned, such Element 7 licensed entity does not have membership interests exceeding 49% of the membership interests that are not transferrable to Glass House Retail, LLC (a subsidiary of GH Group) under applicable laws and regulations;

if partially owned, such Element 7 licensed entity does not have membership interests that are restricted from transfer pursuant to any agreements entered into by Element 7 or such partially owned Element 7 licensed entity; and

such Element 7 licensed entity is able to complete an unqualified U.S. PCAOB GAAS-compliant audit for the prior three (3) years by a certified public accountant (to the extent required to complete the Transaction).

 

The Element 7 Merger Agreement contains customary representations and warranties, pre-closing and post-closing covenants, indemnification (subject to certain limitations) and closing conditions, including:

 

For the benefit of both parties:

 

adoption of the Element 7 Merger Agreement by the board of directors of GH Group and the managers and members of Element 7; and

no governmental authority enacting, issuing, promulgating, enforcing or entering any order making the transactions contemplated in the Element 7 Merger Agreement illegal or prohibiting such transactions.

 

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For the benefit of GH Group:

 

the representations and warranties of Element 7 will be true and correct in all respects as of the date of closing;

Element 7 will have duly performed and complied in all material respects with all agreements, covenants and conditions;

the delivery of customary closing deliverables by Element 7, which includes fully executed documents required to effect the subsidiary mergers contemplated within the Element 7 Merger Agreement;

the closing of the transactions contemplated in the Definitive GH Group Agreement on or before July 30, 2021;

no termination or default under the Element 7 Consulting Agreement (described below); and

delivery of market rate leases related to the Element 7 properties in the Element 7 Merger Agreement.

 

For the benefit of Element 7:

 

the representations and warranties of GH Group will be true and correct in all respects as of the date of closing;

GH Group will have duly performed and complied in all material respects with all agreements, covenants and conditions required by the Element 7 Merger Agreement and any ancillary document thereto;

GH Group will have delivered each of the closing deliverables;

the closing of the transactions contemplated in the Definitive GH Group Agreement on or before July 30, 2021;

directly after the close of the Element 7 Merger Agreement there be $25,000,000 in free cash available, and that such amount be dedicated to the development of cannabis retail facilities such that they obtain all permits and authorizations necessary to conduct sales under California law;

that the SPAC Closing Cash (as defined in the Definitive GH Group Agreement) at the close of the Element 7 Merger will be at least $185,000,000 less: (i) any amount raised through incurring debt or equity sales by GH Group prior to such close; (ii) any amount spent with respect to the purchase of cultivation assets as the close of the Transaction; and

no termination or default under the Element 7 Consulting Agreement.

 

GH Group is required to provide financing for four (4) of the licensed entities to be merged under the Element 7 Merger Agreement, commencing upon the execution of the Element 7 Merger Agreement to reasonably maintain and build such licensed retail entities, at a total cost per entity assumed to be $850,000 with respect to each such licensed entity, provided such financing obligation shall not exceed $1,000,000 with respect to each such licensed entity.

 

BRND is not a party to the Element 7 Merger Agreement.

 

See the Element 7 Audited Annual Financial Statements and the Element 7 Annual MD&A attached hereto as Appendix J and Appendix K, respectively.

 

The description of the Element 7 Merger Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Element 7 Merger Agreement, which will be made available on BRND’s profile on SEDAR at www.sedar.com.

 

Element 7 Consulting Agreement

 

Pursuant to a License Development Consulting Agreement dated February 23, 2021 by and between Element 7 and GH Group (the “Element 7 Consulting Agreement”), GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional permits, licenses and operations in localities within the State of California in addition to those contemplated under the Element 7 Merger Agreement. The Element 7 Consulting Agreement is conditional on the closing of the Transaction.

 

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In consideration of the provision of the services by Element 7 and the rights granted to GH Group under the Element 7 Consulting Agreement, GH Group will be obliged to pay:

 

cash fees in the amount of $155,000 per month, the total not to exceed $5,580,000 (which monthly payments have been made to date);

 

a one (1)-time payment $375,000 payable within three (3) business days of the execution of the Element 7 Consulting Agreement (which has been paid); and

 

for each local permit in a specific jurisdiction for which a local authorization for cannabis activities is going to be filed, a cash fee of $30,000 (the total amount not to exceed, without written waiver by GH Group, $1,800,000).

 

All cash fees due will be payable within 10 days of the close of each month. Unpaid invoices will incur an eight percent (8%) interest charge per year, which will accrue daily after a five (5) day grace period.

 

GH Group will also pay to Element 7 $15,000 for each 1% of membership interests acquired from Element 7 of either: (i) a limited liability company formed for purposes of applying for the local authorization for cannabis activities; or (ii) an entity for which a option or other purchase arrangement has been entered into that meets the Conditions for Transfer (as defined in the Element 7 Consulting Agreement), or with respect to any specific condition the requirement has been waived, and for which a transfer of ownership is completed, such amount to be payable in newly created and issuable shares of GH Group, or its successor in interest, or the Resulting Issuer after the close of the Transaction, at a deemed value of $10.00 per share. All such shares will be subject to resale restrictions imposed by securities laws or stock exchange rules, and in any event a minimum six (6) months resale restriction. Element 7 will pay and be responsible for any taxes imposed on, or with respect to, Element 7’s income, revenues, gross receipts, personnel, or real or personal property or other assets. No fee is payable and no credit will apply in respect of the Element 7 Merger Agreement, any license or entity to which it relates, or any work related to the Element 7 Merger Agreement or any work or obligation related thereto.

 

There is no guarantee that Element 7 will be granted any local licenses. Even if Element 7 is granted a local license, a license from the State of California must be obtained before the licensed entity can begin selling cannabis.

 

BRND is not a party to the Element 7 Consulting Agreement.

 

The description of the Element 7 Consulting Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Element 7 Consulting Agreement, which will be made available on BRND’s profile on SEDAR at www.sedar.com.

 

MERCER PARK BRAND ACQUISITION CORP.

 

BRND is a SPAC incorporated under the laws of the Province of British Columbia. BRND was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination involving BRND that will qualify as its “qualifying transaction”.

 

As part of the Transaction, it is contemplated that BRND will complete the acquisition of GH Group subject to various closing conditions in respect of the acquisition of GH Group pursuant to the Transaction. However, BRND has no control over whether or not the conditions will be met and there can be no assurance that all conditions will be satisfied or waived or that such acquisition will be consummated. There is no assurance that the acquisition of GH Group will be completed or, if completed, will be on terms that are exactly the same as disclosed in this prospectus.

 

The Resulting Issuer, upon completion of the Transaction, will be a vertically-integrated cannabis company in the United States focused on recreational and wellness applications, with operations in the State of California.

 

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GH Group was selected in part based on its anticipated 2021 financial results and strength of the resulting platform for future growth, with a focus on positive Adjusted EBITDA12 and vertical integration in recreationally legal States with large addressable consumer populations. See “Outlook”.

 

The post-closing head office of the Resulting Issuer is expected to be located at 3645 Long Beach Blvd., Long Beach, California.

 

OUTLOOK

 

GH Group’s outlook for the business is based on a number of factors, including the experience of its management team and advisors in growing cannabis businesses, management’s local market expertise and management’s positive views on the prospects for the cannabis market in the state of the California and the U.S. cannabis market as a whole.

 

GH Group believes it has the opportunity to grow its business to achieve the following targets:

 

estimated total annual revenue of $124.1 million in 2021, $326.4 million in 2022, and $600.9 million in 2023;

o the revenue growth implied by these targets is 163% from 2021 to 2022 and 84% from 2022 to 2023;

o the increased cultivation capacity expected to be derived primarily from the acquisition of SoCal Greenhouse is an outsized contributor to that revenue growth; excluding its impact the GH Group business and the Element 7 Merger are anticipated to yield combined revenue growth of 72% from 2021 to 2022 and 40% from 2022 to 2023;

estimated gross profit of $61.6 million in 2021, $162.6 million in 2022, and $310.6 million in 2023; and

estimated Adjusted EBITDA13 of $24.5 million in 2021, $103.8 million in 2022, and $240.0 million in 2023.

 

In developing the targets above, GH Group has made the following assumptions and relied on the following factors and considerations:

 

these targets are based on the expertise of management and their historical results;

these targets assume an increase in cultivation capacity via the Greenhouse Option Acquisition, allowing for volume growth at GH Group’s brands, sold into both GH Group’s operated dispensaries and the third-party wholesale channel:

o from the acquisition through 2022 additional greenhouse capacity is expected to be brought online with ~9,500 sq. ft. coming online each week in 2021, accelerating to 13,000 in 2022 and to over 20,000 square feet per week in 2023;

o the new facility is expected to become more productive over time, from initially yielding 32 grams per sq. ft. per harvest to reaching 41 grams per sq. ft. per harvest in 2022 and 42 grams per sq. ft. per harvest in 2023, reaching 60%-80% higher yields per harvest over GH Group’s existing facilities during the same period, due to the technology and infrastructure of the new facility including climate control, supplemental lighting, and power capacity; and

o in order to retrofit and ramp the facility, GH Group expects to initially commit $40 million in capital expenditures, with the additional costs expected to be funded from either cash flow or cash on hand;

through 2023 the full buildout is expected to cost $75-80 million, with $20-25 million, $35-40 million, and $20-25 million expected to be spent in 2021, 2022, and 2023 respectively;

 

 

12 See “Non-U.S. GAAP Measures”.

13 See “Non-U.S. GAAP Measures”.

 

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these targets assume expansion of the retail distribution footprint from four (4) dispensaries at the end of 2020 to 21 dispensaries by the end 2022 via licenses from the Element 7 Merger. GH Group has historically seen significantly higher sales of its internally produced brands in its own dispensaries, which allows for broader brand distribution and increased brand awareness for GH Group’s products:

o from the closing of the proposed Element 7 Merger, 12 dispensaries are expected to open through Q4 2021 with 17 total additional dispensaries by Q1 2022;

o the additional dispensaries are expected to generate approximately $2.7 million in revenue per dispensary, on an annualized basis, in Q4 2021 growing to approximately $3.9 million per store, on an annualized basis, in 2023. This assumes average ticket sizes 5-10% below GH Group’s existing dispensaries for 2021 and 2022, with average ticket sizes increasing to reach 0-5% below GH Group’s existing dispensaries in 2023; and

o the 17 new dispensaries are expected to cost approximately $9.7 million in capital expenditures, with $7-9 million expected to be spent in 2021 and the remainder anticipated to be spent in Q1 2022;

 

these targets assume growth of the GH Group base business as follows:

o revenue for GH Group is expected to grow from $109.6 million in 2021, to $156.3 million in 2022, and to $227.7 million in 2023;

o the CPG segment is expected to grow from $47.0 million in 2021, to $107.3 million in 2022, and to $181.3 million in 2023, driven by expanded distribution on existing portfolio, new product and form factor development, and velocity gains through omni-channel marketing;

o the retail segment is expected to grow from $30.4 million in 2021, to $34.0 million in 2022, and to $37.8 million in 2023, from increased sales in the existing four dispensaries;

o as GH Group grows its CPG segment and scales its cultivation, the cost is expected to decrease from $118 per pound in 2021 to $84 per pound in 2023. This decline in per unit costs is partially offset by increased costs in the CPG segment from packaging and other direct costs for branded products. Taken together, these shifts cause gross margins to decline slightly from 52% in 2021 to ~50% in 2023; and

o modest SG&A growth over 2021 levels is expected, allowing EBITDA margins for the GH Group business to expand over time, going from 26% in 2021 to 34% in 2023; and

o GH Group’s anticipated effective income tax rate applicable to the operations is expected to range from 32-38%. GH Group’s statutory rate is expected to be 28%, comprised of a 21% federal statutory rate and a 7% California state statutory rate, with effective rates exceeding the statutory rate due to the limitations from Section 280E of the U.S. Internal Revenue Code.

 

GH Group has also assumed that business and economic conditions will continue substantially in the ordinary course, including, without limitation, with respect to general industry conditions, competition, regulations (including those in respect of the cannabis industry), taxes, continued growing acceptance of cannabis, that there will be no material safety issues or material recalls required, and that there will be no unplanned material changes in GH Group’s facilities, equipment or customer or employee relations.

 

These targets, and the related assumptions, involve known and unknown risks and uncertainties that may cause actual results to differ materially. While GH Group believes there is a reasonable basis for these targets, such targets may not be met.

 

These targets represent forward-looking information. Actual results may vary and differ materially from the targets. See “Caution Regarding Forward-Looking Statements”.

 

USE OF ESCROWED FUNDS

 

Upon completion of the Transaction, the proceeds received by BRND for the non-redeemed BRND Class A Restricted Voting Shares distributed in its initial public offering (the “Escrowed Funds”), which funds are currently held in BRND’s escrow account, will be released to the Resulting Issuer. It is expected that the Resulting Issuer will allocate:

 

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approximately $105-$115 million of the Escrowed Funds to capital expenditures,

o approximately $20-25 million of which is expected to be allocated to the buildout of GH Group’s existing infrastructure,

o approximately $75-80 million of which is expected to be allocated to the buildout of SoCal Greenhouse (assuming completion of the acquisition of SoCal Greenhouse, which cannot be assured), and

o approximately $10 million of which is expected to be allocated to additional dispensaries to be opened in connection with the Element 7 Merger (assuming the acquisition of licenses in connection with the Element 7 Merger, which cannot be assured;

 

approximately $120 million to the purchase price for SoCal Greenhouse;

 

approximately $20-25 million of the Escrowed Funds to underwriter’s fees and expenses in connection with BRND’s initial public offering (as more particularly described in the BRND’s final prospectus dated May 7, 2019 which is available on BRND’s profile on SEDAR at www.sedar.com); and

 

in respect of the balance of the Escrowed Funds (estimated to be approximately $235-250 million assuming zero redemptions and approximately $130-145 million assuming a 25% level of redemptions, when including the $85 million in respect of the Private Placement):

o approximately 20% to continued development of the Resulting Issuer’s brands;

o approximately 10% to operating capital and general corporate purposes; and

o approximately 70% to future M&A and capital projects. The focus of future M&A activity is expected to be centered on maintaining a leading number of dispensaries in the State of California. The number of dispensaries purchased could be 20 or more, doubling from the 21 dispensaries currently anticipated to be controlled by GH Group. Although there can be no guarantee as to pricing, doubling the GH Group dispensary count could require in the range of $100 million (roughly $5 million per operational dispensary). Beyond dispensaries, GH Group also intends to seek other acquisitions that expand its distribution network, such as operators that allow for a greater direct-to-consumer distribution. Finally, GH Group intends to seek to expand its brand portfolio by acquisition, which would require cash investment in the form of both purchase price and additional investment in the form of brand support for such purchased brands. Notwithstanding its future capital allocation plans in respect of M&A, GH Group has no letters of intent or binding agreements in respect of such acquisitions outstanding at this time.

 

See “Outlook”.

 

While it is currently anticipated that the Resulting Issuer will use the non-redeemed Escrowed Funds as outlined above, the actual use of such funds may vary depending upon numerous factors, including the Resulting Issuer’s operating costs and capital expenditure requirements, its strategy relative to the market and other conditions in effect at the time, as well as the other factors described under “Risk Factors” in this prospectus. Accordingly, the Resulting Issuer will retain the discretion to allocate such funds, and reserves the right to change the allocation of such funds from time to time. The Resulting Issuer will operate in a dynamic and rapidly evolving market, and it is expected that financial flexibility to react to market demand and conditions will be a competitive advantage for the Resulting Issuer. Pending deployment, the Escrowed Funds are expected to be held in cash and/or cash equivalents or similar secure investments.

 

NON-U.S. GAAP MEASURES

 

GH Group reports certain non-U.S. GAAP measures that are used to evaluate the performance of such businesses and the performance of their respective segments, as well as to manage its capital structure. As non-U.S. GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined and reconciled with their most directly comparable U.S. GAAP measure.

 

88

 

Adjusted EBITDA

 

Adjusted EBITDA” represents income (loss) from operations, as reported, before interest, tax, and adjusted to exclude extraordinary items, non-recurring items, other non-cash items, including stock based compensation expense, depreciation and further adjusted to remove acquisition related costs.

 

The following is a reconciliation of how BRND calculates Adjusted EBITDA and reconciles it to U.S. GAAP figures, based on figures derived from the Resulting Issuer Pro Forma Financial Statements attached hereto as Appendix C.

 

    Twelve Months Ended December 31, 2020  
                                  Pro-Forma        
    BRND     GH Group     iCann     Element 7     Combined     Adjustments     Total  
Net Income (Loss) Before Non-Controlling Interest   $ 947,346     $ (16,659,479 )   $ (1,726,818 )   $ (274,397 )   $ (17,713,348 )   $ (6,000,000 )   $ (23,713,348 )
Depreciation and amortization     -       2,576,263       108,672       -       2,684,935       -       2,684,935  
Interest Expense     -       2,179,137       327,104       -       2,506,241       -       2,506,241  
Interest Income     (1,742,747 )     (115,572 )     -       -       (1,858,319 )     -       (1,858,319 )
Income Tax Expense     -       6,418,533       207,868       -       6,626,401       -       6,626,401  
EBITDA (non-GAAP)   $ (795,401 )   $ (5,601,117 )   $ (1,083,174 )   $ (274,397 )   $ (7,754,089 )   $ (6,000,000 )   $ (13,754,089 )
Adjusting Items:                                                        
Share of (income) loss on equity investments     -       2,126,112       -       -       2,126,112       -       2,126,112  
Loss on change in fair value of derivative liablities     -       251,663       -       -       251,663       -       251,663  
Non-cash operating lease costs     -       865,438               -       865,438       -       865,438  
Share-based compensation expense     -       2,547,792               -       2,547,792       -       2,547,792  
Acquisition costs     -       479,501               274,397       753,898       6,000,000       6,753,898  
SPAC related costs     752,259       -               -       752,259       -       752,259  
Foreign exchange loss (gain)     43,142       -               -       43,142       -       43,142  
Other expense (income)     -       (203,345 )     32,566       -       (170,779 )     -       (170,779 )
Other non-operating expenses1     -       1,051,377               -       1,051,377       -       1,051,377  
Adjusted EBITDA (non-GAAP)   $ -     $ 1,517,421     $ (1,050,608 )   $ -     $ 466,813     $ 6,000,000     $ 466,813  

 

Notes:

(1) Other adjustments made to exclude the impact of one time inventory write-offs including outdated packaging and discontinued product lines.

 

This prospectus makes reference to certain non-U.S. GAAP measures and cannabis industry metrics. These measures are not recognized measures under U.S. GAAP and do not have a standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these are provided as additional information to complement those U.S. GAAP measures by providing further understanding of GH Group’s results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation, nor as a substitute for analysis of GH Group’s financial information reported under U.S. GAAP. Non-U.S. GAAP measures used to analyze the performance of GH Group include “Adjusted EBITDA”.

 

BRND believes that these non-U.S. GAAP financial measures provide meaningful supplemental information regarding GH Group’s performance and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. These financial measures are intended to provide investors with supplemental measures of GH Group’s operating performances and thus highlight trends in GH Group’s core businesses that may not otherwise be apparent when solely relying on the U.S. GAAP measures.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

 

Pro Forma Consolidated Capitalization

 

Completion of the Transaction and the Private Placement requires, among other things, shareholder approval at a meeting of the BRND Shareholders, which meeting has not yet taken place. In addition, as the Transaction constitutes BRND’s qualifying transaction, holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, whether they vote for or against, or do not vote on the qualifying transaction, provided that they deposit (and do not validly withdraw) their shares for redemption prior to the Redemption Deadline. A description of the redemption rights will be included in the management information circular to be mailed to BRND Shareholders in connection with the BRND shareholders meeting. A redeeming BRND Shareholder is entitled (conditional on closing) to receive an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion (per BRND Class A Restricted Voting Share) of: (A) the escrowed funds available in the BRND’s escrow account at the time of the BRND Meeting, including interest and other amounts earned thereon; less (B) an amount equal to the total of (i) applicable taxes payable by BRND 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 BRND. For greater certainty, such amount will not be reduced by the amount of any tax of BRND under Part VI.1 of the Tax Act or the deferred underwriting commissions per BRND Class A Restricted Voting Share held in escrow. This redemption amount is anticipated to be $10.11 per BRND Class A Restricted Voting Share, assuming a June 4, 2021 redemption date. Upon payment in cash of such redemption amount (which shall occur no later than 30 calendar days following Closing), the holders of the BRND Class A Restricted Voting Shares so redeemed will have no further rights in respect of the BRND Class A Restricted Voting Shares. Holders of BRND Class B Shares and BRND Warrants do not have redemption rights with respect to their BRND Class B Shares or BRND Warrants.

 

The following table sets forth the consolidated capitalization of the Resulting Issuer as of December 31, 2020 adjusted to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing, 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 the equity and debt capital of GH Group.

 

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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix H, Appendix J and Appendix L, respectively.

 

    As of December 31, 2020, as adjusted after giving
effect to (i) the Transaction and the acquisition of
Farmacy Berkeley, (ii) the proposed acquisition of
SoCal Greenhouse, (iii) the proposed Element 7
Merger, (iv) the Private Placement, and (v) the GH
Group Financing and assuming no redemptions of
BRND Class A Restricted Voting Shares
    As of December 31, 2020, as adjusted after giving
effect to the Transaction and the acquisition of
Farmacy Berkeley, (ii) the proposed acquisition of
SoCal Greenhouse, (iii) the proposed Element 7
Merger, (iv) the Private Placement, and (v) the GH
Group Financing and assuming 25% redemptions of
BRND Class A Restricted Voting Shares
 
Cash and cash equivalents     381,177,330       177,408,802  
Debt     989,554       989,554  
Shareholders’ equity(1)     713,882,057       512,632,057  
Total Capitalization     714,871,611       513,621,611  
Debt, net of cash     (380,187,776 )     (176,419,248 )

 

Notes:

 

(1) Excludes the Equity Shares issuable upon the exercise of the BRND Warrants, which are exercisable commencing 65 days after the completion of the Transaction. See “Corporate Structure – Warrant Agreement”.

 

Summary Pro Forma Consolidated Financial Information

 

The following unaudited pro forma consolidated statement of financial position of BRND as at December 31, 2020 has been prepared by BRND to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2020. The following unaudited pro forma consolidated statement of operations of BRND for the year ended December 31, 2020 has been prepared by BRND to give effect to (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2019.

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This summary pro forma financial information 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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix H, Appendix J, and Appendix L, respectively.

 

The pro forma financial information has been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would have been achieved if (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing had been completed on the date or for the periods noted above, nor does it purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro forma adjustments that comprise this pro forma financial information, various other factors will have an effect on the financial condition and results of operations of BRND following the completion of (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing, including an adjustment as it relates to the closing of the Transaction which assumes no redemption of BRND Class A Restricted Voting Shares (the actual redemption level is uncertain, but see Note 5 of the Resulting Issuer Pro Forma Financials for the illustrative effect of 0% and 25% redemption levels). See “Notes to Pro Forma Condensed Consolidated Combined Financial Information” included in Appendix L for a discussion of pro forma adjustments. See also “Caution Regarding Forward-Looking Statements”.

 

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Mercer Park Brand Acquisition Corp.

Unaudited Pro Forma Consolidated Statement of Financial Position

As at December 31, 2020

 

     Mercer Park BRAND
December 31, 2020
      GH Group
December 31, 2020
      iCann       Element 7       Subtotal
December 31, 2020
           Pro-Forma
Adjustments
      Consolidated
December 31, 2020
  
US$    $     $     December 31, 2020     December 31, 2020      $     Notes   $     $  
ASSETS                                                              
Current                                                              
Cash     2,095,023       4,535,251       158,928               6,789,202       5a     407,537,056       365,936,258  
                                              5d     (118,890,000 )        
                                              5f     (16,100,000 )        
                                              5i     85,000,000          
                                              5l     (400,000 )        
                                              5k     2,000,000          
Deposit                             61,893       61,893       5k     10,000,000       10,061,893  
Accounts receivable, trade, no                                                              
allowance     -       5,141,021                       5,141,021                     5,141,021  
Income tax recoverable     1,209,852       -                       1,209,852                     1,209,852  
Inventory     -       6,866,002       343,289               7,209,291                     7,209,291  
Prepaid Expenses and other assets     -       1,018,212       61,528               1,079,740                     1,079,740  
Notes Receivables             904,534                       904,534                     904,534  
      3,304,875       18,465,020       563,745       61,893       22,395,533             369,147,056       391,542,589  
Operating Lease Right-of-Use Assets,                                                              
Net             2,532,629               538,065       3,070,694                     3,070,694  
Marketable securities held in a escrow                                                              
account     407,537,056       -                       407,537,056       5a     (407,537,056 )     -  
Intangible assets     -       5,279,000               153,477       5,432,477       5d     171,920,360       214,103,880  
                                              5e     (153,477 )        
                                              5e     24,000,000          
                                              5l     12,904,520          
Property, plant and equipment     -       27,192,027       692,645               27,884,672       5d     92,420,992       120,305,664  
Goodwill     -       4,815,999                       4,815,999                     4,815,999  
Deferred tax assets     598,435       -                       598,435       5c(iii)     (598,435 )     -  
Investments             10,701,868                       10,701,868       5l     (2,045,309 )     8,656,559  
Other long term assets     -       554,266                       554,266                     554,266  
Total assets     411,440,366       69,540,809       1,256,390       753,435       482,991,000             260,058,651       743,049,651  
                                                               
Liabilities                                                              
Current                                                              
Accounts payable and accrued liabilities     396,779       6,570,715       875,599               7,843,093       5g     6,000,000       13,843,093  
Income tax payable     -       4,740,003       209,466               4,949,469                     4,949,469  
Debts/notes payable - current portion     -       601,188                       601,188                     601,188  
Derivative Liabilities             7,365,000                       7,365,000                     7,365,000  
Operating Lease Liabilities - current portion             327,329               155,906       483,235                     483,235  
Due to related parties     349,034       -               531,121       880,155       5e     (531,121 )     349,034  
      745,813       19,604,235       1,085,065       687,027       22,122,140             5,468,879       27,591,019  
                                                               
Deferred underwriters’ commission     16,100,000       -                       16,100,000       5f     (16,100,000 )     -  
Class A restricted voting shares                                                              
subject to redemption     402,500,000       -                       402,500,000       5b     (402,500,000 )     -  
Debts payable - Non-current portion     -       19,072,858                       19,072,858       5j     (18,684,492 )     388,366  
Operating Lease Liabilities - Non-current     portion       2,318,852               451,259       2,770,111                     2,770,111  
Deferred Tax Liabilities             1,420,583                       1,420,583                     1,420,583  
Other Non-Current Liabilities     -       849,358                       849,358                     849,358  
Total liabilities     419,345,813       43,265,886       1,085,065       1,138,286       464,835,050             (431,815,613 )     33,019,437  
                                                               
Additional paid-in-capital     (11,684,284 )     -                       (11,684,284 )     5b     402,500,000       667,345,361  
                                              5c(ii)     (390,815,716 )        
                                              5d     100,000,000          
                                              5d     45,451,352          
                                              5e     24,000,000          
                                              5e     531,121          
                                              5e     (153,477 )        
                                              5c(i)     393,996,118          
                                              5c(ii)     26,061,981          
                                              5i     85,000,000          
                                              5j     (18,001,529 )        
                                              5e     584          
                                              5l     (171,325 )        
                                              5l     10,630,536          
Preferred Stock                                             5k     12,000,000       48,686,021  
                                              5j     18,684,492          
                                              5j     18,001,529          
Retained earnings     3,778,837       -                       3,778,837       5i     (3,778,837 )     -  
                                              5g     (6,000,000 )     (6,000,000 )
Members’ equity     -       26,274,923       171,325       (384,267 )     26,061,981       5c(ii)     (26,061,981 )     -  
Non-Controlling Interest                             (584 )     (584 )     5e     (584 )     (1,168 )
Total Shareholders’ Equity     (7,905,447 )     26,274,923       171,325       (384,851 )     18,155,950             691,874,264       710,030,214  
Total liabilities and members’ equity     411,440,366       69,540,809       1,256,390       753,435       482,991,000             260,058,651       743,049,651  

 

92

 

Mercer Park Brand Acquisition Corp.

Unaudited Pro Forma Consolidated Statement of Operations

As at December 31, 2020

 

 

    Mercer Park BRAND     GH Group           Element 7               Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     iCann     December 31, 2020     Subtotal         Adjustments     December 31, 2020  
US$   $     $     December 31, 2020      $     $     Notes   $     $  
Revenues, net of discounts     -       48,259,601       3,607,307               51,866,908                     51,866,908  
Cost of goods sold     -       29,519,143       2,621,272               32,140,415                     32,140,415  
      -       18,740,458       986,035       -       19,726,493             -       19,726,493  
Gross profit (loss)     -       18,740,458       986,035       -       19,726,493             -       19,726,493  
                                                               
Expenses                                                              
Transaction costs     -       -                       -       5g     6,000,000       6,000,000  
General and administrative     752,259       18,637,477       1,798,289       274,397       21,462,422                     21,462,422  
Sales and marketing     -       1,489,664       166,784               1,656,448                     1,656,448  
Professional Fees     -       2,040,004       71,570               2,111,574                     2,111,574  
Depreciation and Amortization     -       2,576,263       108,672               2,684,935                     2,684,935  
Foreign exchange loss (gain)     43,142       -                       43,142                     43,142  
Total Expenses     795,401       24,743,408       2,145,315       274,397       27,958,521             6,000,000       33,958,521  
                                                               
Net income (loss) from operations     (795,401 )     (6,002,950 )     (1,159,280 )     (274,397 )     (8,232,028 )           (6,000,000 )     (14,232,028 )
                                                               
Other (income) expense                                                              
Share of (income) loss on equity investments     -       2,126,112                       2,126,112                     2,126,112  
Interest expense     -       2,179,137       327,104               2,506,241                     2,506,241  
Interest income     (1,742,747 )     (115,572 )                     (1,858,319 )                   (1,858,319 )
Loss on Change in Fair Value of Derivative Liablities             251,663                       251,663                     251,663  
Other expense (income)     -       (203,345 )     32,566               (170,779 )                   (170,779 )
Total other (income) expense     (1,742,747 )     4,237,995       359,670       -       2,854,918             -       2,854,918  
                                                               
Income tax (recovery) expense     -       6,418,533       207,868               6,626,401                     6,626,401  
Net Income (loss) and comprehensive income (loss)     947,346       (16,659,479 )     (1,726,818 )     (274,397 )     (17,713,348 )           (6,000,000 )     (23,713,348 )
                                                               
Net Income (Loss) Attributable to Non-Controlling Interest                             (584 )     (584 )     5e     584       -  
                                                               
Net Loss Attributable to Members Interest     947,346       (16,659,479 )     (1,726,818 )     273,813       (17,713,932 )           (5,999,416 )     (23,713,348 )

 

93

 

DIVIDEND POLICY

 

The declaration of dividends on Equity Shares will be at the sole discretion of the Resulting Issuer Board. No dividend policy has yet been adopted by the Resulting Issuer Board. It is not intended that the Resulting Issuer will pay dividends on the Equity Shares in the immediate future following the Transaction as it intends to retain earnings to finance the growth and development of its businesses and to otherwise reinvest in its businesses. Therefore, it is not anticipated that the Resulting Issuer will pay cash dividends on the Equity Shares in the near future. In addition, the Exchange Rights Agreement will restrict the Resulting Issuer from declaring or paying dividends on the Equity Shares unless economically equivalent dividends are declared and paid on the Exchangeable Shares, subject to applicable law. See “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Voting and Dividend Rights”.

 

The Resulting Issuer’s dividend policy will be reviewed from time to time by the Resulting Issuer Board in the context of the Resulting Issuer’s earnings, financial condition and other relevant factors. The payment of dividends in the future will depend on the earnings, cash flow and financial condition of the Resulting Issuer as well as the need to finance the Resulting Issuer’s business activities and any restrictions that may be contained in any credit or financing agreements and such other factors as the Resulting Issuer Board considers appropriate. Until the time that the Resulting Issuer does pay dividends, which it may never do, Resulting Issuer Shareholders will not be able to receive a return on their Equity Shares unless they sell them. See “Risk Factors – The Resulting Issuer may not pay dividends”.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Please see the MD&A of BRND attached hereto as Appendix B.

 

Please see the MD&A of GH Group attached hereto as Appendix D.

 

The MD&A of BRND and of GH Group contain important information about each respective entity’s business and its performance for the relevant periods. The discussion and analysis of BRND and GH Group’s respective financial conditions and results of operations covers periods prior to the completion of the Transaction. The MD&A of BRND and of GH Group should be read in conjunction with the BRND Audited Annual Financial Statements and the GH Group Audited Financial Statements attached to this prospectus as Appendix A and Appendix C, respectively.

 

All dollar amounts are in U.S. dollars, unless otherwise stated. Amounts for subtotal, totals and percentage variances included in tables in each respective MD&A may not sum or calculate using the numbers as they appear in the tables due to rounding. The MD&A of BRND and GH Group is current as of December 31, 2020. The MD&A of BRND was approved by BRND’s board of directors. These discussions contain forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described under the headings “Caution Regarding Forward-Looking Statements”, “Risk Factors” and elsewhere in this prospectus. The actual results of the Resulting Issuer may differ materially from those contained in any forward-looking statements.

 

DESCRIPTION OF SECURITIES

 

The following is a summary of the rights, privileges, restrictions and conditions attaching to the Equity Shares and Multiple Voting Shares after giving effect to the Transaction. Following completion of the Transaction, the Resulting Issuer will be authorized to issue an unlimited number each of Subordinate Voting Shares, Restricted Voting Shares, Limited Voting Shares and Multiple Voting Shares. In addition, the Resulting Issuer will have as part of its authorized share capital an unlimited number of preferred shares (excluding the Multiple Voting Shares, “Preferred Shares”) issuable in series with such terms as are determined by the Resulting Issuer Board from time to time. It is not intended that such Preferred Shares will be used for anti-takeover purposes.

 

The number of Equity Shares expected to be issued and outstanding upon completion of the Transaction will be approximately 62,848,751 (assuming no BRND Shareholders elect to redeem BRND Class A Restricted Voting Shares). Assuming a redemption level of BRND Class A Restricted Voting Shares of 25%, it is expected that there will be approximately 52,786,251 Equity Shares issued and outstanding upon completion of the Transaction. Approximately 4,756,849 Multiple Voting Shares will also be issued and outstanding upon completion of the transaction. No Preferred Shares are expected to be issued and outstanding upon completion of the Transaction. See “Selected Consolidated Financial Information – Pro Forma Consolidated Capitalization”.

 

94

 

Equity Shares and Multiple Voting Shares

 

In connection with the Transaction, BRND intends to amend its constating documents to, among other things, (i) create and set the terms of the Restricted Voting Shares and Limited Voting Shares, including applying coattail terms to such shares similar to those applicable to the Subordinate Voting Shares as more particularly described below, (ii) amend the terms of the BRND Class A Restricted Voting Shares to provide that, upon completion of the Transaction, the BRND Class A Restricted Voting Shares shall be converted into Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as applicable (rather than solely into Subordinate Voting Shares), (iii) amend the terms of the Subordinate Voting Shares issuable on conversion of the BRND Class A Restricted Voting Shares, including by amending the requirements in respect of who may hold Subordinate Voting Shares (together with (i) and (ii) above, the “FPI Capital Structure Amendments”), (iv) provide that, upon completion of the Transaction, the BRND Class B Shares shall be directly or indirectly converted on a one-for-one basis into Equity Shares, and (v) amend the terms of the 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 (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder). BRND intends to issue Multiple Voting Shares to the GH Group Founders in connection with the closing of the Transaction.

 

It is expected that the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares will, upon completion of the Transaction, collectively trade under the symbol “GLAS.A.U” on the NEO Exchange. It is a condition of closing of the Transaction that the Equity Shares and Warrants be listed and posted for trading on the NEO Exchange. The NEO Exchange has conditionally approved the listing of the Equity Shares and the BRND Warrants under the symbols “GLAS.A.U”, and “GLAS.WT.U”, respectively.

 

We are seeking to implement the FPI Capital Structure Amendments in order to seek to maintain the Resulting Issuer’s FPI status under U.S. securities laws and thereby avoid a commensurate material increase in the Resulting Issuer’s ongoing costs. This is to be accomplished by implementing a mandatory conversion mechanism in the Resulting Issuer’s share capital to decrease the number of shares eligible to be voted for directors of the Resulting Issuer if the Resulting Issuer’s FPI Threshold (as defined below) is exceeded. Each of the classes of Equity Shares will be, as further described below, economically identical and mandatorily inter-convertible (continuously and without formality) based on (i) the holder’s status as a United States resident or a non-United States resident, and (ii) the status of the Resulting Issuer’s FPI Threshold. This proposed multi-class structure will likely require additional BRND Shareholder votes at the BRND Meeting, including majority of minority approval by a majority of votes cast by the holders of BRND Class A Restricted Voting Shares, excluding any votes attached to BRND Class A Restricted Voting Shares held directly or indirectly by persons who also hold BRND Class B Shares.

 

Upon implementation of the FPI Capital Structure Amendments in connection with the Transaction, each of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares may be considered “restricted securities” or “restricted shares”, as applicable under applicable Canadian securities legislation, respectively, as (i) there will be another class of Resulting Issuer Shares (namely, the Multiple Voting Shares) that will carry a disproportionate vote per share relative to each class of Equity Shares, and (ii) the share terms of the Limited Voting Shares will contain provisions that nullify certain of the voting rights attributable to the Limited Voting Shares (i.e., the Limited Voting Shares will not have votes in respect of the election of directors of the Resulting Issuer).

 

Under the Articles, the quorum for the transaction of business at a meeting of shareholders of the Resulting Issuer will be two shareholders who are present in person or represented by proxy and who represent at least 25% of the applicable class or series of shares (and, for greater certainty, where more than one class or series of shares are voting together as if they were a single class of shares, at least 25% of the total issued and outstanding shares of such classes or series).

 

95

 

Equity Shares

 

Exercise of Voting Rights

 

The holders of each class of Equity Shares will be entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Resulting Issuer, except that they will not be able to vote (but will be entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the Business Corporations Act (British Columbia) (“BCBCA”), and except that holders of Limited Voting Shares will not be entitled to vote for the election of directors. The Subordinate Voting Shares and Restricted Voting Shares will carry one vote per share on all matters. The Limited Voting Shares will carry one vote per share on all matters except the election of directors, as the holders of Limited Voting Shares will not have any entitlement to vote in respect of the election for directors of the Company.

 

In connection with any Change of Control Transaction (as defined below) requiring approval of the holders of all classes of Equity Shares under the BCBCA, holders of the Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of each such class is approved by a majority of the votes cast by the holders of outstanding Subordinate Voting Shares, Restricted Voting Shares and/or Limited Voting Shares, as applicable, in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of that class called and held for such purpose.

 

For purposes herein, a “Change of Control Transaction” means an amalgamation, arrangement, recapitalization, business combination or similar transaction of the Resulting Issuer, other than an amalgamation, arrangement, recapitalization, business combination or similar transaction that would result in (i) the voting securities of the Resulting Issuer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the continuing entity or its direct or indirect parent) more than 50% of the total voting power of the voting securities of the Resulting Issuer, the continuing entity or its direct or indirect parent, and more than 50% of the total number of outstanding shares of the Resulting Issuer, the continuing entity or its direct or indirect parent, in each case as outstanding immediately after such transaction, and (ii) the shareholders of the Resulting Issuer immediately prior to the transaction owning voting securities of the Resulting Issuer, the continuing entity or its direct or indirect parent immediately following the transaction in substantially the same proportions (vis-a-vis each other) as such shareholders owned the voting securities of the Resulting Issuer immediately prior to the transaction (provided that in neither event shall the exercise of any exchangeable shares of a subsidiary of the Resulting Issuer that are exchangeable into shares of the Resulting Issuer be taken into account in such determination).

 

Notwithstanding the foregoing, the holders of an outstanding class of Equity Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the applicable class of Equity Shares; (ii) affect the holders of any class of Equity Shares differently, on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of the applicable outstanding class of Equity Shares.

 

Dividends

 

Holders of Equity Shares will be entitled to receive, as and when declared by the Resulting Issuer Board, dividends in cash or property of the Resulting Issuer. No dividend will be declared or paid on any class of Resulting Issuer Shares unless the Resulting Issuer simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on all classes of Equity Shares then issued and outstanding. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares shall receive Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, respectively, unless otherwise determined by the Resulting Issuer Board, provided an equal number of shares is declared as a dividend or distribution on a per-share basis, without preference or distinction, in each case.

 

96

 

Liquidation, Dissolution or Winding-Up

 

In the case of liquidation, dissolution or winding-up of the Resulting Issuer, whether voluntary or involuntary, or in the event of any other distribution of assets of the Resulting Issuer for the purposes of a dissolution or winding-up of the Resulting Issuer, the holders of Equity Shares will be entitled, subject to the prior rights of the holders of any shares of the Resulting Issuer ranking in priority to the Equity Shares (including any liquidation preference on any issued and outstanding Multiple Voting Shares and/or Preferred Shares), to receive the Resulting Issuer’s remaining property. Each class of Equity Shares is entitled to share equally, on a share for share basis, with all other classes of Equity Shares in all distributions of such assets. No Preferred Shares are currently issued and outstanding, nor are any Preferred Shares expected to be issued and outstanding upon completion of the Transaction.

 

Rights to Subscribe; Pre-Emptive Rights

 

The holders of Equity Shares will not be entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Resulting Issuer now or in the future.

 

Conversion

 

Under the Articles, where Subordinate Voting Shares are held of record, directly or indirectly, jointly by (i) one or more United States residents, and (ii) one or more non-United States residents, such Subordinate Voting Shares shall be deemed to be held of record by a United States resident. At the request of the Resulting Issuer, beneficial shareholders and actual or proposed transferees will be required to respond to enquiries regarding their status as United States residents or non-United States residents, and will be required to provide declarations or other documents with respect thereto, as may be necessary or desirable, in the discretion of the Resulting Issuer, failing which they would, in the Resulting Issuer’s discretion, be deemed to be United States residents.

 

If, at any given time, the Subordinate Voting Shares are held of record by United States residents, they will be automatically converted, without further act or formality, on a one-for-one basis into Restricted Voting Shares. If, at any given time, the Restricted Voting Shares or the Limited Voting Shares are held of record by non-United States residents, they will be automatically converted, without further act or formality, on a one-for-one basis into Subordinate Voting Shares.

 

Notwithstanding the foregoing, if, at any given time, the total number of Restricted Voting Shares represents a number equal to or in excess of the formulaic threshold set forth below (the “FPI Threshold”), then the minimum number of Restricted Voting Shares required to stay within the FPI Threshold will be automatically converted, without further act or formality, on a pro rata basis across all registered holders of Restricted Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Limited Voting Shares:

 

(0.50 x Aggregate Number of Multiple Voting Shares, Subordinate Voting Shares and Restricted Voting Shares) – (Aggregate Number of Multiple Voting Shares held of record by United States residents)

 

If, at any given time, the total number of Restricted Voting Shares represents a number below the FPI Threshold, then a number of Limited Voting Shares will be automatically converted, without further act or formality, on a pro rata basis across all registered holders of Limited Voting Shares (rounded down to the next nearest whole number of shares), on a one-for-one basis, into Restricted Voting Shares, to the maximum extent possible such that the Restricted Voting Shares then represent a number of Shares that is one share less than the FPI Threshold.

 

The Company has applied for exemptive relief from the Canadian securities regulatory authorities such that, inter alia, each class of Equity Shares may be aggregated for the purposes of certain securities law reporting thresholds, including in respect of certain take-over bid and issuer bid rules and the early warning requirements under NI 62-104. See “Securities Laws Exemptions”.

 

97

 

If an offer is made to purchase any class of Resulting Issuer Shares and such offer is one which is required, pursuant to Ontario securities legislation or the rules of a stock exchange on which such Resulting Issuer Shares that are subject to the offer are then listed, to be made to all or substantially all the holders of such Resulting Issuer Shares in a given province of Canada to which these requirements apply (assuming that the offeree was a resident in Ontario), each Subordinate Voting Share, Restricted Voting Share and/or Limited Voting Share shall become convertible, at the option of the holder, on a one-for-one basis, into such class of Resulting Issuer Shares that are subject to the offer, at any time while such offer is in effect until the date prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to such offer. The conversion right may only be exercised in respect of Subordinate Voting Shares, Restricted Voting Shares and/or Limited Voting Shares, as applicable, for the purpose of depositing the resulting Resulting Issuer Shares pursuant to the offer, and for no other reason, including with respect to voting rights attached thereto, which are deemed to remain subject to the provisions concerning voting rights for Subordinate Voting Shares, Restricted Voting Shares and/or Limited Voting Shares, as applicable, notwithstanding their conversion. The transfer agent will be required to deposit the resulting Resulting Issuer Shares pursuant to such offer on behalf of such holder.

 

Should the applicable Resulting Issuer Shares issued upon such conversion and tendered in response to such offer be withdrawn by shareholders of the Resulting Issuer or not taken up by the offeror, or should the offer be abandoned or withdrawn, then each Resulting Issuer Share resulting from such conversion shall be automatically reconverted, without any further act on the part of the Resulting Issuer or on the part of the holder, back into one Subordinate Voting Share, Restricted Voting Share or Limited Voting Share, as applicable.

 

Constraints on Share Ownership

 

Subject to the Specified Exceptions (as defined below), (i) the Subordinate Voting Shares will only be able to be held of record, directly or indirectly, by non-United States residents, and (ii) the Restricted Voting Shares and Limited Voting Shares will only be able to be held of record, directly or indirectly, by United States residents.

 

Pursuant to the “Specified Exceptions”, (i) the automatic conversion features of the Equity Shares will not apply in the context of Equity Shares held, beneficially owned or controlled by one or more underwriters solely for the purposes of a distribution to the public, and (ii) the United States resident/non-United States resident status of an entity holding, beneficially owning or controlling Equity Shares solely in the capacity of an intermediary in connection with either the payment of funds and/or the delivery of securities and which entity provides centralized facilities for the deposit, clearing or settlement of trades in securities (including CDS Clearing and Depositary Services Inc., or any successor or assign) without general discretionary authority over the voting or disposition of such Equity Shares will be disregarded for purposes of the automatic conversion features of the Equity Shares.

 

Renamed as Common Shares

 

At the effective time that there are no Multiple Voting Shares issued and outstanding, the Subordinate Voting Shares may in the discretion of the Board from that point on be named and referred to as “Common Shares”.

 

Multiple Voting Shares

 

Exercise of Voting Rights

 

The holders of Multiple Voting Shares will be entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Resulting Issuer, except that they will not be able to vote (but will be entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the BCBCA. The Multiple Voting Shares will carry 50 votes per share, voting together with the other classes of Equity Shares as if they were a single class except where otherwise required by law or stock exchange requirements.

 

The holders of Multiple Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would adversely affect the rights of the holders of the Multiple Voting Shares, and such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of the Multiple Voting Shares.

 

98

 

Dividends

 

Holders of Multiple Voting Shares shall not be entitled to receive any dividends.

 

Liquidation, Dissolution or Winding-Up

 

In the case of liquidation, dissolution or winding-up of the Resulting Issuer, whether voluntary or involuntary, or in the event of any other distribution of assets of the Resulting Issuer for the purposes of a dissolution or winding-up of the Resulting Issuer, the holders of Multiple Voting Shares shall be entitled, subject to the prior rights of the holders of any shares of the Resulting Issuer ranking in priority to the Multiple Voting Shares (including any liquidation preference on any issued and outstanding Preferred Shares ranking in priority to the Multiple Voting Shares), to a liquidation preference of $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being liquidated at the relevant time by the applicable holder).

 

Rights to Subscribe; Pre-Emptive Rights

 

The holders of Multiple Voting Shares will not be entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Resulting Issuer.

 

Retraction and Redemption

 

The Multiple Voting Shares will be retractable by the holders thereof at any time for $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being retracted at the relevant time by the applicable holder). In addition, the Multiple Voting Shares will be automatically redeemed by the Corporation for $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed at the relevant time by the applicable holder) on the earliest of (i) the third (3rd) anniversary of the Transaction, and (ii) the date on which such Multiple Voting Shares are held or controlled by a person who is not a Permitted Holder (as defined in the Articles to be in effect a controlled affiliate). The Multiple Voting Shares will not be transferable except to Permitted Holders.

 

Compliance Provisions

 

The Resulting Issuer’s notice of articles and Articles will contain, in respect of the Equity Shares (and BRND’s notice of articles and Articles currently contain in respect of the Subordinate Voting Shares), certain provisions to facilitate compliance with applicable regulatory and/or licensing regulations (the “Compliance Provisions”). The Compliance Provisions include a combination of certain remedies such as an automatic suspension of voting and/or dividend rights, as applicable, a discretionary right to force a share transfer to a third party and/or a discretionary redemption right in our favour, in each case to seek to ensure that the Resulting Issuer and its subsidiaries are able to comply with applicable regulatory and licensing regulations. The purpose of the Compliance Provisions is to provide the Resulting Issuer with a means of protecting itself from having a shareholder, or, as determined by the Resulting Issuer Board, a group of shareholders acting jointly or in concert, with an ownership interest of, whether of record or beneficially (or having the power to exercise control or direction over) (“Owning or Controlling”), five percent (5%) or more of the issued and outstanding shares of the Resulting Issuer, or such other number as is determined by the Resulting Issuer Board from time to time, and: (i) who a governmental authority granting licenses to, or otherwise governing the operations of, the Resulting Issuer or its subsidiaries has determined to be unsuitable to own Equity Shares; (ii) whose ownership of Equity Share may reasonably result in the loss, suspension or revocation (or similar action) with respect to any licenses or permits relating to the Resulting Issuer’s or its subsidiaries’ conduct of business (being the conduct of any activities relating to the cultivation, manufacturing, distributing and dispensing of cannabis and cannabis-derived products in the United States, which include the owning and operating of cannabis licenses) or in the Resulting Issuer being unable to obtain any new licenses or permits in the normal course, all as determined by the Resulting Issuer Board; or (iii) who have not been determined by the applicable regulatory authority to be an acceptable person or otherwise have not received the requisite consent of such regulatory authority to own the Equity Shares, as applicable, in each case within a reasonable time period acceptable to the Resulting Issuer Board or prior to acquiring any Equity Shares (in each case, an “Unsuitable Person”). The ownership restrictions in the Resulting Issuer’s notice of articles and Articles will also be (and the notice of articles and articles of BRND currently are) subject to an exemption for applicable depositaries and clearing houses as well as underwriters (as defined in the Securities Act (Ontario)) in the course of a distribution of securities

 

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Notwithstanding the foregoing, the Compliance Provisions will provide that any shareholder (or group of shareholders acting jointly or in concert) proposing to Own or Control five percent (5%) or more of the issued and outstanding shares of the Resulting Issuer (or such other number as is determined by the Resulting Issuer Board from time to time) will be required to provide not less than 30 days’ advance written notice to the Corporation by mail sent to the Corporation’s registered office to the attention of the Corporate Secretary and to obtain all necessary regulatory approvals. Upon any such shareholder(s) Owning or Controlling five percent (5%) or more of the issued and outstanding shares of the Resulting Issuer (or such other number as is determined by the Resulting Issuer Board from time to time), and having not received the requisite approval of any applicable regulatory authority to own the Equity Shares, the Compliance Provisions will provide: (i) that such shareholder(s) may, in the discretion of the Resulting Issuer Board, be prohibited from exercising any voting rights and/or receiving any dividends from the Resulting Issuer, unless and until all requisite regulatory approvals are obtained; and (ii) the Resulting Issuer with a right, but not the obligation, at its option, upon notice to the Unsuitable Person, to: (A) redeem any or all Equity Shares directly or indirectly held by an Unsuitable Person; and/or (B) forcibly transfer any or all Equity Shares directly or indirectly held directly or indirectly by an Unsuitable Person to a third party. Such rights are required in order for the Resulting Issuer to comply with regulations in various jurisdictions where the Resulting Issuer or its subsidiaries are expected to conduct business.

 

Upon receipt by the holder of a notice to redeem or to transfer any or all of its Equity Shares, the holder will be entitled to receive, as consideration therefor, (i) if the Equity Shares are then listed for trading on a stock exchange, no less than 95% of the lesser of (A) the closing price of the Equity Shares on the NEO Exchange (or the then principal exchange on which the Resulting Issuer’s securities are listed for trading) on the trading day immediately prior to the closing of the redemption or transfer (or the average of the last bid and last asking prices if there was no trading on the specified date), and (B) the five-day volume weighted average price of the Equity Shares on the NEO Exchange (or the then principal exchange on which the Resulting Issuer’s securities are quoted for trading) for the five trading days immediately prior to the closing of the redemption or transfer (or the average of the last bid and last asking prices if there was no trading on the specified dates), or (ii) if the Equity Shares are not then listed for trading on a stock exchange, a price per share to be determined by the Resulting Issuer Board, acting reasonably.

 

The foregoing restriction will not apply to the ownership, acquisition or disposition of Equity Shares as a result of: (i) transfer of Equity Shares occurring by operation of law including, inter alia, the transfer of Equity Shares to a trustee in bankruptcy, (ii) an acquisition or proposed acquisition by one or more underwriters who hold Equity Shares for the purposes of distribution to the public or for the benefit of a third party provided that such third party is in compliance with the foregoing restriction, or (iii) conversion, exchange or exercise of securities issued by the Resulting Issuer or a subsidiary into or for Equity Shares in accordance with their respective terms. If the Resulting Issuer Board reasonably believes that any such holder of the Equity Shares may have failed to comply with the foregoing restrictions, the Resulting Issuer may apply to the Supreme Court of British Columbia, or any other court of competent jurisdiction, for an order directing that such shareholder disclose the number of Equity Shares directly or indirectly held.

 

Notwithstanding the adoption of the Compliance Provisions, the Resulting Issuer may not be able to exercise such rights in full or at all, including its redemption rights. Under the BCBCA, a corporation may not make any payment to redeem shares if there are reasonable grounds for believing that the Resulting Issuer is unable to pay its liabilities as they become due in the ordinary course of its business or if making the payment of the redemption price or providing the consideration would cause the Resulting Issuer to be unable to pay its liabilities as they become due in the ordinary course of its business. Furthermore, the Resulting Issuer may become subject to contractual restrictions on its ability to redeem its Equity Shares by, for example, entering into a secured credit facility subject to such restrictions. In the event that restrictions prohibit the Resulting Issuer from exercising its redemption rights in part or in full, the Resulting Issuer will not be able to exercise its redemption rights absent a waiver of such restrictions, which the Resulting Issuer may not be able to obtain on acceptable terms or at all.

 

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Ownership of Restricted Voting Shares and Limited Voting Shares

 

For reasons of tax efficiency, any holder of Multiple Voting Shares that holds at least two (2) Restricted Voting Shares and/or Limited Voting Shares shall be deemed to hold (i) at least one (1) Restricted Voting Share, and (ii) at least one (1) Limited Voting Share.

 

Advance Notice Requirements for Director Nominations

 

The Articles will contain an advance notice provision pertaining to the Resulting Issuer Shareholders (who meet the necessary qualifications outlined in the Articles) seeking to nominate candidates for election as directors (a “Nominating Shareholder”) at any annual meeting of the Resulting Issuer Shareholders, or for any special meeting of Resulting Issuer Shareholders if one of the purposes for which the special meeting was called was the election of directors (the “Advance Notice Provisions”). The following description is a summary only and is qualified in its entirety by the full text of the applicable provisions of Articles which will be made available on the Resulting Issuer’s SEDAR profile at www.sedar.com.

 

In addition to any other applicable requirements, for a nomination to be made by a Nominating Shareholder, the Nominating Shareholder must have given timely notice thereof in proper written form to the Corporate Secretary of the Resulting Issuer. To be timely, a Nominating Shareholder’s notice to the Corporate Secretary must be made: (i) in the case of an annual meeting of shareholders (including an annual and special meeting), not less than 30 days’ prior to the date of the annual meeting of Resulting Issuer Shareholders; provided, however, that in the event that the annual meeting of shareholders is to be held on a date that is less than 50 days after the date (the “Notice Date”) on which the first public announcement of the date of the annual meeting was made, notice by the Nominating Shareholder may be made not later than the close of business on the 15th day following the Notice Date; and (ii) in the case of a special meeting of shareholders (which is not also an annual meeting) called for the purpose of electing directors (whether or not called for other purposes as well), not later than the close of business on the 15th day following the day on which the first public announcement of the date of the special meeting of shareholders was made. The Articles will also prescribe the proper written form for a Nominating Shareholder’s notice.

 

The chairperson of the meeting shall have the power and duty to determine whether a nomination was made in accordance with the notice procedures set forth in the Articles and, if any proposed nomination is not in compliance with such provisions, the discretion to declare that such defective nomination will be disregarded.

 

Notwithstanding the foregoing, the directors of the Resulting Issuer Board may, in their sole discretion, waive any requirement in the Advance Notice Provisions.

 

EQUITY INCENTIVE PLAN DESCRIPTION

 

Summary of Equity Incentive Plan

 

The Equity Incentive Plan will be implemented in respect of the Resulting Issuer, the principal terms of which are described below.

 

Purpose

 

The purpose of the Equity Incentive Plan will be to enable the Resulting Issuer and its affiliated companies to: (i) attract and retain employees, officers, consultants, advisors and non-employee directors capable of assuring the future success of the Resulting Issuer, (ii) offer such persons incentives to put forth maximum efforts, (iii) compensate such persons through various stock-based arrangements and provide them with opportunities for stock ownership, thereby aligning the interests of such persons and the Resulting Issuer Shareholders.

 

The Equity Incentive Plan permits the grant of (i) nonqualified stock options (“NQSOs”) and incentive stock options (“ISOs”) (collectively, “Options”), (ii) restricted stock units (“RSUs”), (iii) performance compensation awards, and (iv) unrestricted stock bonuses or purchases, which are referred to herein collectively as “Awards”, all as more fully described below.

 

The Resulting Issuer Board shall have the power to manage the Equity Incentive Plan and may delegate such power at its discretion to any committee of the Resulting Issuer Board, including the Compensation, Nominating and Corporate Governance Committee (“C&CG Committee”).

 

The Resulting Issuer will not issue equity compensation awards under the Equity Incentive Plan until the Transaction has been completed. The Equity Incentive Plan will be filed on SEDAR at www.sedar.com prior to the completion of the Transaction.

 

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Eligibility

 

Any non-employee director of the Resulting Issuer or any employee, officer, director, consultant, independent contractor or advisor providing services to the Resulting Issuer or any Affiliate, or any such person to whom an offer of employment or engagement with the Resulting Issuer or any Affiliate is extended, are eligible to participate in the Equity Incentive Plan if selected by the Resulting Issuer Board (the “Participants”). The basis of participation of an individual under the Equity Incentive Plan, and the type and amount of any Award that an individual will be entitled to receive under the Equity Incentive Plan, will be determined by the Resulting Issuer Board based on its judgment as to the best interests of the Resulting Issuer and its shareholders, and therefore cannot be determined in advance.

 

The maximum number of Equity Shares that may be issued under the Equity Incentive Plan shall be fixed by the Resulting Issuer Board to be 12% of the Equity Shares outstanding, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made pursuant to the Equity Incentive Plan and any grants of restricted Exchangeable Shares made under any equity plan of MPB AcquisitionCo, as described below), from time to time, subject to adjustment in the Equity Incentive Plan. 10% of such Equity Shares, subject to adjustment in accordance with the Equity Incentive Plan, shall be available for time-based vested Awards. In addition to the foregoing, 2% of such Equity Shares, subject to adjustment in the Equity Incentive Plan, shall be available for performance-based Awards (with the performance target being set as the market capitalization of the Equity Shares outstanding, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made pursuant to the Equity Incentive Plan and any grants of restricted Exchangeable Shares made under any equity plan of MPB AcquisitionCo), having reached or exceeded $1.0 billion for 20 out of 30 consecutive trading days in order for vesting of such Awards to occur). Notwithstanding the foregoing, a maximum of 16,406,629 Equity Shares may be issued as ISOs, subject to adjustment in the Equity Incentive Plan.

 

The maximum number of Equity Shares that may be issued under the Equity Incentive Plan to any one Related Person, or the number of securities that may be issuable on exercise of the Options granted to any one Related Person, as compensation within any one-year period, excluding performance-based Awards (with the performance target being set as the market capitalization of the Equity Shares outstanding), shall not exceed 5.0% of the outstanding Equity Shares, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made under the Equity Incentive Plan and any equity plan of MPB AcquisitionCo), at the time of grant, subject to adjustment in the Equity Incentive Plan. The maximum number of Equity Shares that may be issued under the Equity Incentive Plan to the Resulting Issuer’s non-executive directors, as a whole, or the number of securities that may be issuable on exercise of the Awards granted to the Resulting Issuer’s non-executive directors, as a whole, as compensation within any one-year period, shall not exceed 1.0% of the outstanding Equity Shares, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made under the Equity Incentive Plan and any equity plan of MPB AcquisitionCo), at the time of grant, subject to adjustment in the Equity Incentive Plan. The Resulting Issuer Board will not grant Options to any one non-executive director in which the aggregate fair market value (determined as of the time the Options are granted) of such Options during any calendar year (under the Equity Incentive Plan and all other plans of the Resulting Issuer and its Affiliates) shall exceed $100,000, or will not grant Awards in which the aggregate fair market value (determined as of the time the Awards are granted) of the Equity Shares in respect to which the Awards are exercisable by such non-executive director during any calendar year (under the Equity Incentive Plan and all other plans of BRND and its Affiliates) shall exceed C$150,000.

 

Any shares subject to an Award under the Equity Incentive Plan that are not purchased or are forfeited, cancelled, expire unexercised, are settled in cash, or are used or withheld to satisfy tax withholding obligations of a Participant shall again be available for Awards under the Equity Incentive Plan.

 

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In the event of any dividend (other than a regular cash dividend) or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, forward stock split, reverse stock split, reorganization, plan of arrangement, merger, amalgamation, consolidation, split-up, spin-off, combination, repurchase or exchange of Equity Shares or other securities of the Resulting Issuer, issuance of warrants or other rights to acquire Equity Shares or other securities of the Resulting Issuer, or other similar corporate transaction or event which affects the Equity Shares or unusual or nonrecurring events affecting the Resulting Issuer or the financial statements of the Resulting Issuer, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange or inter-dealer quotation system, accounting principles or law, the Resulting Issuer Board may, subject to any required regulatory or NEO Exchange approvals, make such adjustment which it deems appropriate in its discretion in order to prevent dilution or enlargement of the rights of Participants under the Equity Incentive Plan, to (i) the number and kind of Equity Shares (or other securities or other property) that may thereafter be issued in connection with Awards, (ii) the number and kind of Equity Shares (or other securities or other property) subject to outstanding Awards, (iii) the purchase price or exercise price relating to any Award or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, and/or (iv) any share limit set forth in the Equity Incentive Plan.

 

MPB AcquisitionCo may establish an equity plan through which awards of restricted Exchangeable Shares may be granted to service providers to MPB AcquisitionCo and their Affiliates. To the extent any awards of restricted Exchangeable Shares are granted by MPB AcquisitionCo, the number of restricted Exchangeable Shares granted by MPB AcquisitionCo will reduce the number of Equity Shares that may be awarded under the Equity Incentive Plan on a one-for-one basis. If any restricted Exchangeable Shares awarded under a MPB AcquisitionCo equity plan are forfeited, cancelled, or are used or withheld to satisfy tax withholding obligations of an award recipient, any such Exchangeable Shares that are forfeited, cancelled, used or withheld will not be treated as reducing the number of Equity Shares that are available for Awards under the Equity Incentive Plan.

 

Awards

 

Options

 

The Resulting Issuer Board is authorized to grant Options to purchase Equity Shares that are either ISOs (meaning they are intended to satisfy the requirements of Section 422 of the Code), or NQSOs (meaning they are not intended to satisfy the requirements of Section 422 of the Code). Options granted under the Equity Incentive Plan will be subject to the terms and conditions established by the Resulting Issuer Board. Options granted under the Equity Incentive Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the Resulting Issuer Board and specified in the applicable award agreement. The maximum term of an Option granted under the Equity Incentive Plan will be ten years from the date of grant (or five years in the case of an ISO granted to a 10% shareholder). Payment in respect of the exercise of an Option may be made in cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise) or by such other method as the Resulting Issuer Board may determine to be appropriate.

 

RSUs

 

RSUs are granted in reference to a specified number of Equity Shares and entitle the holder to receive, on achievement of specific performance goals established by the Resulting Issuer Board or after a period of continued service with the Resulting Issuer or its affiliates or any combination of the above as set forth in the applicable award agreement, one Equity Share for each such Equity Share covered by the RSU; provided, that the Resulting Issuer Board may elect to pay cash, or part cash and part Equity Shares in lieu of delivering only Equity Shares. The Resulting Issuer Board may, in its discretion, accelerate the vesting of RSUs. Unless otherwise provided in the applicable award agreement or as may be determined by the Resulting Issuer Board upon a Participant’s termination of employment or service with the Resulting Issuer, the unvested portion of the RSUs will be forfeited and re-acquired by the Resulting Issuer for cancellation at no cost.

 

Unrestricted Stock Bonuses or Purchases

 

The Resulting Issuer Board is authorized to grant unrestricted Subordinate Voting Shares as consideration for services rendered to the Resulting Issuer or an Affiliate in the prior calendar year, or may offer a Participant the opportunity to purchase unrestricted Equity Shares for cash consideration equal to the fair market value of the unrestricted Equity Shares.

 

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Dividend Equivalents

 

The Resulting Issuer Board is authorized to grant dividend equivalents, under which the holder shall be entitled to receive payments (in cash, Subordinate Voting Shares, other securities or other property, as determined by the Resulting Issuer Board) equivalent to the amount of cash dividends paid by BRND to holders of Subordinate Voting Shares with respect to a number of Subordinate Voting Shares determined by the Resulting Issuer Board. Subject to the terms of the Equity Incentive Plan and any applicable award agreement, such dividend equivalents may have such terms and conditions as the Resulting Issuer Board shall determine. Notwithstanding the foregoing, (i) the Resulting Issuer Board may not grant dividend equivalents to Participants in connection with grants of Options or other Awards, the value of which is based solely on an increase in the value of the Subordinate Voting Shares after the date of grant of such Award, and (ii) dividend and dividend equivalent amounts may be accrued but shall not be paid unless and until the date on which all conditions or restrictions relating to such Award have been satisfied, waived or lapsed.

 

Restricted Exchangeable Shares

 

If, during the term of the Equity Incentive Plan, MPB AcquisitionCo establishes a compensatory plan or arrangement through which they may grant awards of restricted Exchangeable Shares to Participants, any restricted Exchangeable Shares awarded under such plan(s) will reduce the number of Equity Shares that may be awarded under the Equity Incentive Plan on a one-for-one basis. If any restricted Exchangeable Shares awarded under the plans of MPB AcquisitionCo are forfeited, cancelled, or are used or withheld to satisfy tax withholding obligations of an award recipient thereunder, any such restricted Exchangeable Shares that are forfeited, cancelled, used or withheld will thereafter not be treated as reducing the number of Equity Shares that are available for Awards under the Equity Incentive Plan.

 

General

 

The maximum term of the Awards to be granted under the Equity Incentive Plan will be 10 years. The Equity Incentive Plan will be presented to the BRND Shareholders at the BRND Meeting for their approval.

 

The Resulting Issuer Board may impose restrictions on the vesting, exercise or payment of an Award as it determines appropriate. Generally, no Awards (other than fully vested and unrestricted Equity Shares issued pursuant to any Award) granted under the Equity Incentive Plan shall be transferable except by will or by the laws of descent and distribution. No Participant shall have any rights as a shareholder with respect to Equity Shares covered by Options or RSUs, unless and until such Awards are settled in Equity Shares.

 

No Option shall be exercisable, no Equity Shares shall be issued, no certificates, registration statements or electronic positions for Equity Shares shall be delivered and no payment shall be made under the Equity Incentive Plan except in compliance with all applicable laws and NEO Exchange and any other regulatory requirements.

 

The Resulting Issuer Board may amend, alter, suspend, discontinue or terminate the Equity Incentive Plan and the Resulting Issuer Board may amend any outstanding Award at any time; provided that (i) such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Resulting Issuer Shareholders if such approval is necessary to comply with any tax, regulatory or NEO Exchange requirement applicable to the Equity Incentive Plan (including, without limitation, as necessary to comply with the NEO Exchange Policies or any rules or requirements of any applicable securities exchange), and (ii) subject to the next following paragraph, no such amendment or termination may adversely alter or impair the Awards then outstanding without the Award holder’s permission. The Resulting Issuer Board may, without prior approval of the Resulting Issuer Shareholders, correct any defect, supply any omission or reconcile any inconsistency in the Equity Incentive Plan or in any Award or award agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of the Equity Incentive Plan. The Equity Incentive Plan also provides for the issuance of Equity Shares in lieu of bonuses.

 

In the event of any reorganization, merger, amalgamation, consolidation, split-up, spin-off, combination, plan of arrangement, take-over bid or tender offer, repurchase or exchange of Equity Shares or other securities of the Resulting Issuer or any other similar corporate transaction or event involving the change of control of the Resulting Issuer (or if the Resulting Issuer shall enter into a written agreement to undergo such a transaction or event), the Resulting Issuer Board may, in its sole discretion, take such measures or make such adjustments in regards to any securities granted pursuant to the Equity Incentive Plan, as it deems appropriate, as further described in the Equity Incentive Plan. Notwithstanding the foregoing, upon a corporate transaction or event involving the change of control of the Resulting Issuer, all securities granted pursuant to the Equity Incentive Plan shall immediately vest.

 

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Unless the Awards and the Equity Shares issuable upon exercise or redemption thereof have been registered under the U.S. Securities Act, and any applicable state securities laws, any Awards or Equity Shares granted to residents of the United States will be “restricted securities” within the meaning of Rule 144 under the U.S. Securities Act and will be subject to transfer restrictions under U.S. securities laws.

 

Tax Withholding

 

The Resulting Issuer may take such action as it deems appropriate to ensure that all applicable federal, State, provincial, local and/or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant.

 

OPTIONS TO PURCHASE SECURITIES

 

Options

 

The aggregate number of Options and RSUs that are expected to be outstanding upon completion of the Transaction, as well as their corresponding vesting terms and exercise prices, as applicable, currently remain to be determined. For a description of the Options and RSUs, see “Equity Incentive Plan Description – Summary of Equity Incentive Plan”.

 

BRND Warrants and Series A Warrants

 

29,989,500 BRND Warrants are outstanding as of the date of this prospectus, which were issued as part of the 2019 initial public offering of BRND. Each BRND Warrant shall represent share purchase warrants to acquire BRND Class A Restricted Voting Shares following 65 days after the Effective Date (which, at such time, will represent the right to acquire Equity Shares), at an exercise price of $11.50 per share.

 

The 29,989,500 BRND Warrants are governed by the terms of the Warrant Agreement. See “Corporate Structure – Warrant Agreement” for a description of the terms.

 

Once the BRND Warrants become exercisable, pursuant to the terms of the Warrant Agreement, BRND may accelerate the expiry date of the outstanding BRND Warrants (excluding the BRND Founders’ Warrants but only to the extent still held by Mercer at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by Mercer of material undisclosed information which could limit their flexibility) by providing 30 days’ notice if, and only if, the closing share price of the BRND Class A Shares (which will be designated as Equity Shares) equals or exceeds $18.00 per share (as adjusted for stock splits or combinations, stock dividends, Extraordinary Dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30-trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice is provided. In the event that the foregoing conditions are satisfied upon or following completion of the Transaction, it is expected that BRND will accelerate the expiry date of the BRND Warrants by providing such notice.

 

See “Corporate Structure – GH Group Financing” in respect of the Series A Warrants.

 

GH Group Equity Incentive Plan

 

GH Group established an equity incentive plan in 2019 (the “GH EIP”) for the benefit of its employees, officers, directors and eligible consultants (each, a “GH Participant”). The GH EIP provides for options, restricted stock and other forms of awards. It is administered by the GH Group board of directors.

 

Options have a maximum term of 10 years from the date of grant and the option exercise price could not be less than the fair market value at the date of grant.

 

Awards are subject to vesting restrictions, either time-based or conditioned on the consummation of an equity financing or initial public offering.

 

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In the event of a GH Participant’s termination of service, his or her options expire as follows:

 

(i) In the event of death, options are set to expire on the earlier of (a) their original expiry date, and (b) 12 months after the death, unless extended by the board.

 

(ii) In the event of termination for cause, options are set to expire immediately.

 

(iii) In the event of termination other than as a result of death or for cause, options are set to expire on the earlier of: (a) their original expiry date; and (b) 90 days from the termination date (or, if the termination was due to disability, 12 months from the termination date).

 

Option grants could permit cashless exercises and payment of the exercise price by way of a promissory note.

 

Awards are non-transferable except in the event of death or pursuant to a domestic relations-related court order and are subject to customary anti-dilution provisions for stock splits, stock consolidations, stock dividends and other changes. On a change of control, fully-vested awards could, in the board’s discretion, be either paid out or terminated, unless assumed by the buyer.

 

As of the date of this prospectus, 60,711,886 stock options (the “GH Options”) are issued and outstanding under the GH EIP, 26,940,583 of which are incentive stock options and 33,771,303 of which are non-qualified stock options. As of the date of this prospectus, 10,821,414 of such incentive stock options are vested, 16,119,169 of such incentive stock options are unvested, 17,744,724 of such non-qualified stock options are vested and 16,026,579 of such non-qualified stock options are unvested. For clarity, the GH Options continue to vest (if applicable) on their respective vesting schedules through the effective time of the Merger.

 

Pursuant to the terms of the Definitive GH Group Agreement, at the effective time of the Merger:

 

(i) each outstanding GH Option that is an incentive stock option will be assumed by the Resulting Issuer and become an option to purchase a number of Equity Shares calculated pursuant to a formula set forth in the Definitive GH Group Agreement, with an exercise price between $2.07 and $3.10. Assuming for illustrative purposes only that the effective time of the Merger were to occur on the date of this prospectus, such number of Equity Shares would be 2,864,539;

 

(ii) each outstanding GH Option that is vested and is not an incentive stock option will be cancelled, extinguished and converted into the right to receive a number of Exchangeable Shares calculated pursuant to a formula set forth in the Definitive GH Group Agreement. Assuming for illustrative purposes only that the effective time of the Merger were to occur on the date of this prospectus, such number of Exchangeable Shares would be 1,474,711; and

 

(iii) each outstanding GH Option that is unvested and is not an incentive stock option will be cancelled, extinguished and converted into a restricted unit representing a number of Exchangeable Shares calculated pursuant to a formula set forth in the Definitive GH Group Agreement, with an exercise price between $2.07 and $3.10. Assuming for illustrative purposes only that the effective time of the Merger were to occur on the date of this prospectus, such number of Exchangeable Shares would be 1,305,275.

 

SECURITIES SUBJECT TO CONTRACTUAL RESTRICTIONS ON TRANSFER

 

The following sets out, based on the number of issued and outstanding Equity Shares expected to be outstanding upon completion of the Transaction, the anticipated number of securities of the Resulting Issuer that will be subject to a contractual restriction on transfer upon the completion of the Transaction. The Multiple Voting Shares will be non-transferable except to controlled affiliates. To the knowledge of BRND and GH Group, no other securities of the Resulting Issuer will be held in escrow or will be subject to contractual restrictions on transfer upon closing of the Transaction.

 

    Number of Securities Subject to        
Designation of Class   Contractual Restriction     Percentage of Class(2)  
Subordinate, Restricted or Limited Voting Shares     10,178,751       16.2 %
Exchangeable Shares(1)     29,224,437       100 %
Multiple Voting Shares     4,756,849       100 %

 

Notes:

 

(1) See “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders”.

 

(2) Assumes no redemptions of the BRND Class A Restricted Voting Shares.

 

Mercer Park Brand Acquisition Corp. Founders’ Shares

 

On the closing of BRND’s initial public offering, the BRND Founders entered into the Exchange Agreement and Undertaking pursuant to which each BRND Founder agreed to certain transfer restrictions in respect of their: (i) aggregate 10,089,750 BRND Founders’ Shares (which were acquired for nominal consideration); (ii) 9,810,000 BRND Warrants (which were acquired for $1.00 per BRND Warrant); and (iii) 109,000 BRND Class B Units (which were acquired for $10.00 per BRND Class B Unit). Pursuant to the Exchange Agreement and Undertaking, the BRND Founders agreed not to transfer any of their Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the BRND Class B Units), Founders’ Shares or Founders’ Warrants, or any securities of BRND received in exchange therefor, prior to the closing of BRND’s qualifying transaction without the prior consent of the NEO Exchange. Such transfer restrictions only apply to BRND Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the Class B Units), Founders’ Shares and Founders’ Warrants and do not apply to any BRND Class A Restricted Voting Shares of the BRND Founders (if any).

 

Pursuant to the Investor Rights Agreement, none of the Sponsor Shares (i.e., the Equity Shares to be issued to Mercer, Charles Miles and Sean Goodrich on Closing in exchange for their BRND Founders’ Shares) subject to forfeiture thereunder shall be transferable until the expiry of the applicable forfeiture periods.

 

Exchangeable Shares

 

See “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders”.

 

PRIOR SALES

 

There have been no issuances of shares, including any securities convertible or exchangeable into shares, during the 12-month period before the date of this prospectus, except for the proposed Private Placement.

 

The BRND Class A Restricted Voting Shares are listed on the NEO Exchange and trade under the symbol “BRND.A.U”. The following table sets forth, for the periods indicated, the reported high and low prices and the aggregate volume of trading of the Class A Restricted Voting Shares on the NEO Exchange:

 

Period   High ($)     Low ($)     Volume  
April 2020     9.75       9.50       735,222  
May 2020     9.80       9.60       632,950  
June 2020     9.95       9.66       2,069,640  
July 2020     9.93       9.71       210,274  
August 2020     9.95       9.83       487,983  
September 2020     9.95       9.80       5,539,402  
October 2020     9.95       9.82       676,469  

 

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Period   High ($)     Low ($)     Volume  
November 2020     10.02       9.84       496,774  
December 2020     10.08       9.91       995,473  
January 2021     10.80       10.08       2,349,382  
February 2021     10.75       10.06       3,058,107  
March 2021     10.50       9.84       3,889,469  
April 1 - 29, 2021     10.40       9.97       3,860,008  

 

The BRND Warrants are listed on the NEO Exchange and trade under the symbol “BRND.WT”. The following table sets forth, for the periods indicated, the reported high and low prices and the aggregate volume of trading of the BRND Warrants on the NEO Exchange:

 

Period   High ($)     Low ($)     Volume  
April 2020     0.59       0.305       218,775  
May 2020     0.70       0.30       649,925  
June 2020     0.70       0.50       50,140  
July 2020     1.08       0.65       199,350  
August 2020     0.70       0.55       125,388  
September 2020     0.9       0.51       302,802  
October 2020     0.95       0.6       305,836  
November 2020     1.25       0.69       497,870  
December 2020     1.20       0.90       1,784,867  
January 2021     1.76       0.76       1,424,089  
February 2021     2.30       1.63       727,270  
March 2021     2.00       1.46       451,643  
April 1 - 29, 2021     2.44       1.11       9,524,364  

 

PRINCIPAL SHAREHOLDERS

 

The following table discloses, based on the number of issued and outstanding Equity Shares and Multiple Voting Shares expected to be outstanding upon completion of the Transaction, the names of the persons or companies who, upon completion of the Transaction and assuming that no BRND Shareholders elect to redeem their BRND Class A Restricted Voting Shares, will, to BRND and GH Group’s knowledge, beneficially own or control, directly or indirectly, more than 10% of the combined voting rights attached to the Equity Shares and Multiple Voting Shares.

 

                        Total Voting      
                  Equity Shares     Power      
            Total Voting     assuming     assuming      
      Equity Shares     Power upon     Exchangeable     Exchangeable      
      upon Closing of     Completion of     Shares are     Shares are     Type of
Name     the Transaction     the Transaction     Exchanged     Exchanged(4)     Ownership
Kyle Kazan(1)        -       29.16 %     2,197,654       25.86 %   Registered and beneficial
Jamie Rosenwald(2)          -          21.35       1,247,973          18.82    Registered and beneficial
Graham Farrar(3)       -       22.60 %     1,456,749       19.97 %   Registered and beneficial

 

Notes:

 

(1) Will also hold 1,704,586 Multiple Voting Shares (approximately 38.6% of such class of shares) for up to three years from closing of the Transaction, which will be entitled to 50 votes per share and be of nominal value.

 

(2) Will also hold 1,247,973 Multiple Voting Shares (approximately 31.4% of such class of shares) for up to three years from closing of the Transaction, which will be entitled to 50 votes per share and be of nominal value.

 

(3) Will also hold 1,321,087 Multiple Voting Shares (approximately 30.0% of such class of shares) for up to three years from closing of the Transaction, which will be entitled to 50 votes per share and be of nominal value.

 

(4) Prior to the issuance of any Earn-Out Shares in connection with the acquisition of SoCal Greenhouse. Assumes the issuance of 2,400,000 Equity Shares in connection with the Element 7 Mergers. See “SoCal Greenhouse” and “Element 7”.

 

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DIRECTORS AND EXECUTIVE OFFICERS

 

The names, municipality of residence and positions with the Resulting Issuer of the persons who are expected to serve as directors and executive officers of the Resulting Issuer after giving effect to the Transaction are set out below. Each of the proposed members of the Resulting Issuer Board will be formally appointed to the Resulting Issuer Board at or following the closing of the Transaction.

 

Directors

 

Name and Province/State and Country of Residence    Present Principal Occupation 
Kyle Kazan   Chief Executive Officer, GH Group
Palos San Verdes, CA, USA    
Graham Farrar   President, GH Group
Santa Barbara, CA, USA    
Jamie Mendola   Head of Strategy and M&A, Mercer Park L.P.
San Francisco, CA, USA    
Jocelyn Rosenwald(1)   Director of Acquisitions and Asset Management, Beach Front
Costa Mesa, CA, USA   Property Management
Lameck Humble Lukangka(1)   Principal, Life Line Financial Group
Los Angeles, CA, USA    
George Raveling   Self-Employed Consultant, Coaching for Success
Los Angeles, CA, USA    
Bob Hoban   Principal Attorney of Hoban Law Group and Global Proven
Denver, CO, USA   Strategies
Hector De La Torre(1)   Director, California Air Resources Board
Los Angeles, CA, USA    

 

Notes:

 

(1) Proposed member of the Audit Committee (as defined below).

 

As the proposed directors of the Resulting Issuer set forth above are not current directors of BRND and will not become directors until the completion of the Transaction, they will not be subject to liability as directors for any misrepresentation in this prospectus.

 

The directors of the Resulting Issuer will thereafter be elected by Resulting Issuer Shareholders at each annual meeting of shareholders, and will hold office until the next annual meeting of the Resulting Issuer, unless: (i) his or her office is earlier vacated in accordance with the articles of the Resulting Issuer; or (ii) he or she becomes disqualified to act as a director.

 

Executive Officers

 

Name and Residence     Proposed Position with the
Resulting Issuer
   Present Principal Occupation 
Kyle Kazan   Executive Chairman, Chief   Chief Executive Officer, GH Group
Palos San Verdes, CA, USA   Executive Officer and Director    
Graham Farrar   President and Director   President, GH Group
Santa Barbara, CA, USA        
Derek Higgins   Chief Financial Officer   Chief Financial Officer, GH Group
Long Beach, CA, USA        
Jamin Horn   Corporate Secretary   General Counsel and Corporate Secretary, GH Group
Long Beach, CA, USA        
Daryl Kato   Chief Operating Officer   Chief Operating Officer, GH Group
Rancho Palos Verdes, CA, USA        
Joe Andreae   Vice President, Business Development   Vice President, Business Development, GH Group
Huntington Beach, CA, USA        

 

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Biographies

 

The following are brief profiles of the proposed directors and executive officers of the Resulting Issuer, including a description of each individual’s principal occupation within the past five years.

 

Kyle Kazan, Executive Chairman, Chief Executive Officer and Director

 

A seasoned investor and expert manager of private equity funds with over two (2) decades of domestic and international experience, Kyle has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. In 1991 he began investing in real estate, eventually launching a total of 23 private equity funds with a current estimated value of owned and managed properties that stands above $2.75 billion. Kyle also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the vertically integrated GH Group. Since his early service as a special education teacher and law enforcement officer, Kyle has been a vocal advocate for police reform and ending the War on Drugs and its injustices, speaking on behalf of Law Enforcement Against Prohibition (LEAP) and appearing in many media outlets ranging from CNN to Fox. He is a frequent guest professor at NYU Stern School of Business, USC Marshall Business School, and UCLA Anderson School of Management, and Kyle is a graduate of the University of Southern California, where he played varsity basketball for Hall of Fame Coach George Raveling.

 

Graham Farrar, President and Director

 

Graham is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Farrar served as a board member for Heal the Ocean, was a founder and partner of ebook publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry. Farrar currently sits on the Board of Directors of The Santa Barbara Bowl Foundation.

 

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Derrek Higgins, Chief Financial Officer

 

Derrek Higgins serves as Chief Financial Officer for GH Group. Derrek has day to day responsibility managing the financial actions and planning of GH Group, overseeing cash flow, leading capital raises, analyzing mergers and acquisitions, and implementing growth strategies. He has more than 20 years of public and private company financial expertise in preparing venture-backed startups for public listings, representing shareholders and implementing comprehensive profitability and working capital plans. Derrek has held various key roles throughout his career, including most recently as the Chief Financial Officer and board member of FLRish Inc., the parent company of Harborside Inc, where helped lead the completion of Harborside’s reverse takeover of FLRish, Inc., recapitalized the business and implemented public reporting frameworks, accounting policies and operational transformation initiatives across Harborside, its subsidiaries and controlled entities. Prior to FLRish/Harborside, Higgins served as a consultant for The Brenner Group LLC, where he provided Chief Financial Officer advisory services to venture-backed startups and mid-size companies, developed and executed strategic plans, raised capital and managed shareholder representation. Derrek also served as a strategic consultant at Alvarez & Marsal, a global professional services firm known for its work in turnaround management and performance improvement of large, high-profile businesses both in the U.S. and internationally, providing critical assistance to companies in crisis situations and helping to stabilize financial and operational performance by developing and implementing comprehensive profitability and working capital plans. Higgins holds a B.S. degree in Accounting from Arizona State University, an MBA from the USC Marshall School of Business, and a CPA (inactive) in the state of California.

 

Jamin Horn, General Counsel and Corporate Secretary

 

Jamin has over a decade of legal experience in counseling high-growth private and public companies, principally in the medical and digital technology sectors, and over six years of experience advising California and multi-state cannabis operators and associated technology service providers. Prior to becoming an attorney, he worked on investor-side early-stage financing and intellectual property commercialization planning and analysis. Jamin joined FLRish, Inc., the parent company of Harborside, in 2017 as Associate Counsel, where he was responsible for corporate and commercial transactions through the company’s growth and public listing before departing at the end of 2020 as VP of Corporate Affairs. He is a member of the California bar, the Association of Corporation Counsel, and the International Cannabis Bar Association, and he holds a JD from UC Davis School of Law and a BS in Molecular, Cellular and Developmental Biology from UC Santa Cruz.

 

Daryl Kato, Chief Operating Officer

 

Daryl is a seasoned leader with over 20 years of experience in operations, finance, accounting, and technology across multiple industry sectors and consumer packaged goods categories. Most recently, he served as the Chief Financial Officer and Board Director at Nissin Foods USA. Prior to that, he co-founded and sold a digital out-of-home advertising company and completed several business transformation projects while with Nestlé USA, Global Nestle Professional, Farmer Brothers (NASDAQ: FARM), and Mitsubishi UFJ Financial Group (NYSE: MUFG). Kato began his career in Deloitte’s audit practice where he earned his CPA license. He holds a BA in Business Economics & minor in Accounting from the University of California at Los Angeles and an MBA from USC Marshall School of Business.

 

Joe Andreae, Vice President, Business Development

 

Joe is a true veteran of legal cannabis markets, having spent over a decade as a serial cannabis entrepreneur. With multiple endeavors spanning 3 states, he has acquired a range of expertise that encompasses nearly every aspect of the cannabis business, beginning in the cultivation supply sector with lighting and hydroponic equipment for the medical market. From there, he dove ever-deeper into the industry, as a pioneer of the extraction sector in Colorado, co-owner of a medical cannabis dispensary in California, founder/owner of Madrone Oregon, which held 11 state cultivation licenses, and President of the ceramic accessories brand, Hive. Most recently, he served as the CEO of a premium California concentrates brand for three years, before bringing his extensive industry knowledge and leadership to GH Group.

 

Jocelyn Rosenwald, Director14

 

Jocelyn began her career as a Teach for America Corps member in New York City. She began her career in real estate investment in 2013 with Beach Front Properties LLC and managed a $500M portfolio of opportunistic real estate investments. In November of 2016, Rosenwald began supervising the operations of 4 funds in the regulated cannabis industry which would eventually be consolidated to form GH Group. Today, Rosenwald sits on the board of GH Group as a director. She holds a BA from the University of Pennsylvania, an MA in Education from Hunter College, and an MBA from UCLA Anderson School of Business. She is a Co-founder and current Board Director of GH Group.

 

 

14 Considered independent for the purposes of NI 58-101.

 

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Jamie Mendola, Director

 

Jamie Mendola is the Head of Strategy and M&A for Mercer Park L.P., which is a family office focused on the cannabis sector that controls the Sponsor. Mercer Park provides management services to Ayr Wellness, a U.S. multi-state operator with key assets in 7 states and the parent of the Sponsor of Mercer Park Brand Acquisition Corp. Jamie has nearly 20 years of experience as a public and private equity investor and has been an active investor in the cannabis industry for several years. Prior to joining Mercer Park, Jamie was the CEO and Portfolio Manager of Pacific Grove Capital, a San Francisco-based hedge fund focused primarily on investments in consumer, technology and cannabis. He also managed the Pacific Grove Opportunity Fund, which focused on special purpose acquisition companies (SPACs), and was one of the top performing hedge funds during its tenure. Pacific Grove was named the best new hedge fund by Hedge Funds Review in 2015 and Jamie received accolades from Institutional Investor as a Hedge Fund Rising Star and was named as one of Tomorrow’s Titans by The Hedge Fund Journal. Prior to founding Pacific Grove in 2014, Jamie was a Partner at Scout Capital, which had assets under management of approximately $7 billion. He was a senior member of the firm’s Investment and Risk Committees and helped to build Scout’s west coast office. Previously, Jamie worked as a Principal of Watershed Asset Management, a private equity analyst at JLL Partners and an investment banking analyst at J.P. Morgan Chase. Jamie graduated with a B.S. in Management, summa cum laude, from Binghamton University in 1999, where he was also a 4-year letter-winner in Baseball, and earned his M.B.A. from Stanford’s Graduate School of Business in 2005. He resides in San Francisco with his wife and four sons.

 

Lameck Humble Lukanga, Director15

 

Lameck Humble Lukanga was born in a small village in Uganda, where he spent the first decade of his life enduring genocide, famine and extreme poverty. At the age of 11, he and his family were granted a political asylum, allowing them to come to the United States to seek refuge, which he calls “the biggest blessing of my life.” Since, Humble has gone on to become a venerable young leader in finance. Humble owns Life Line Financial Group, a wealth management firm servicing world-class performers and leaders in business, sports and entertainment. In addition to Life Line Financial, Humble serves on the board of trustees for the University of New Mexico and the board of directors for various companies. He holds both a Bachelors and Masters in Business Administration from the Anderson School of Management at the University of New Mexico, received a Personal Finance Planning degree from UCLA and holds the CFP credential. Humble is passionate about social entrepreneurship, financial literacy, freedom and the orphans of Uganda. He is a philanthropist, teacher and self-proclaimed “ambassador of hope”.

 

George Raveling, Director16

 

One of basketball’s most impactful Hall of Fame coaches, George has defined his career, from basketball to business, by his relentless dedication to leadership and mentoring. In 1964, he joined the coaching staff at his alma mater, Villanova, before becoming the first African American basketball coach in the Pacific-8 Conference (now the Pac-12), the head coach at Washington State, the University of Iowa and USC, and an assistant coach of the medal-winning U.S. Olympic teams of 1984 and 1988. While coaching, he published two books and afterwards became a broadcaster for Fox Sports and CBS. Nike subsequently named George Director of International Basketball, kicking off his life as an executive; he would go on to key positions on the boards of the NCAA, NABC, USA Basketball, and Nike, Inc. He was the recipient of the Naismith Memorial Hall of Fame’s John W. Bunn Lifetime Achievement Award and the co-founder, with former NFL GM Michael Lombardi, of leadership program The Daily Coach. As a result of his dedication to civil rights and service as additional security during 1963’s famed March on Washington, George is the current guardian of the original draft of Martin Luther King’s “I Have a Dream” speech.

 

 

15 Considered independent for the purposes of NI 58-101.

16 Considered independent for the purposes of NI 58-101.

17 Considered independent for the purposes of NI 58-101.

 

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Bob Hoban, Director17

 

Bob Hoban sits at the center of a large commercial cannabis industry network, a cannabis industry ecosystem that he has cultivated since 2008 as an attorney, an entrepreneur, and an executive. Bob has earned a reputation as a cannabis industry dealmaker representing start-ups, entrepreneurs, governments, and companies in all stages of development. He is a visionary industry leader, who has founded, created, bought, and sold over fifteen of his own cannabis companies. He has served as a C-Suite executive in multiple companies and as a director on a number of boards. He is Co-Founder of Gateway Proven Strategies, a leading global cannabis industry consulting firm. He constructed the Hoban Law Group to become a leading full-service commercial cannabis industry law firm. And Bob served as a cannabis policy instructor at the University of Denver, where he lectured regarding cannabis regulation and policy. He has crafted cannabis policy solutions for over thirty different countries around the world and has consistently been recognized as one of the most influential people in the global cannabis industry by a variety of organizations and publications over the course of the past twelve years. Bob received his Ph.D. in Public Affairs from the University of Colorado, his J.D. from the University of Wyoming and his B.A. from Rutgers University.

 

Hector De La Torre, Director18

 

Hector’s career has been defined by his public service and outstanding record of leadership. From 2004-10, Hector represented the 50th District in southeast Los Angeles County to the California State Assembly, where he focused on health care, the environment, and good governance. Previously, he was a member of the South Gate City Council for 8 years, including serving 2 years as Mayor. In 2011, Hector became the Assembly-Appointed Member of the California Air Resources Board, a position he still holds, where he focuses on goods movement, environmental justice, and green technologies. He served as the executive director of the Transamerica Center for Health Studies, a national nonprofit focused on helping people better understand health coverage, and today is chair of the board at L.A. Care, the largest public health plan in America, as well as a trustee of Occidental College, where he received his B.A. He did his graduate studies at the Elliott School of International Affairs at the George Washington University. Hector has been an early and vocal advocate for cannabis policy reform and remains dedicated to serving the industry.

 

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

 

To the knowledge of BRND and GH Group, no proposed nominee for election as a director or proposed executive officer of the Resulting Issuer has been, at the date of the prospectus or within the last 10 years: (a) a director, chief executive officer or chief financial officer of any company that, while that person was acting in that capacity, (i) was the subject of a cease trade or similar order or an order that denied BRND access to any exemption under securities legislation, for a period of more than 30 consecutive days, or (ii) was the subject of an event that resulted, after that person ceased to be a director or chief executive officer or chief financial officer, in BRND being the subject of such an order; or (b) a director or executive of a company that, while that person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or was subject to or instituted any proceedings, transaction or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

 

No proposed director or executive officer of the Resulting Issuer has been subject to (a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in making an investment decision.

 

To the knowledge of BRND, no proposed director or executive officer of the Resulting Issuer has, within the 10 years before the date of the prospectus, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, transaction or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.

 

Majority Voting Policy

 

Consistent with NEO Exchange Requirements, the Resulting Issuer will adopt a majority voting policy prior to the first uncontested meeting of shareholders at which directors are to be elected where such meeting is subsequent to the Resulting Issuer ceasing to be “majority controlled” (as such term is defined in the NEO Exchange Listing Manual). The Resulting Issuer will be “majority controlled” by the GH Group Founders upon closing of the Transaction.

 

 

18 Considered independent for the purposes of NI 58-101.

 

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Forum Selection Provisions

 

The Resulting Issuer’s articles will include a provision providing for a forum for adjudication of certain disputes whereby, unless the Resulting Issuer approves or consents in writing to the selection of an alternative forum, the Superior Court of Justice of the Province of British Columbia, Canada and appellate courts therefrom shall be the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Resulting Issuer ; (ii) any action asserting a claim for breach of a fiduciary duty owed by any director or officer of the Resulting Issuer to the Resulting Issuer ; (iii) any action asserting a claim arising pursuant to any provision of the BCBCA or the articles of the Resulting Issuer (as either may be amended from time to time); or (iv) any action asserting a claim otherwise related to the relationships among the Resulting Issuer , its affiliates and their respective shareholders, directors and/or officers, but does not include claims related to the business carried on by the Resulting Issuer or such affiliates. Any person or entity owning, purchasing or otherwise acquiring any interest, including without limitation any registered or beneficial ownership thereof, in the securities of the Resulting Issuer shall be deemed to have notice of and consented to the provisions of the articles.

 

Conflicts of Interest

 

Certain of the proposed directors and executive officers of the Resulting Issuer 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 Resulting Issuer from time to time. The BCBCA requires, among other things, that the directors and executive officers of the Resulting Issuer act honestly and in good faith with a view to the best interest of the Resulting Issuer , to disclose any personal interest which they may have in any material contract or transaction which is proposed to be entered into with the Resulting Issuer 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.

 

In light of its anticipated growing operations, BRND recognizes that the position of Chief Financial Officer, currently held by Carmelo Marrelli, may need to be transitioned to accommodate a more considerable time commitment, which may include transitioning to a half-time or full-time Chief Financial Officer, in each case, as the Resulting Issuer Board sees fit. Should the Resulting Issuer resolve to transition such role, it is currently anticipated that Carmelo Marrelli may continue to be retained by the Resulting Issuer as a consultant. See also “Corporate Governance” and “Risk Factors” in this prospectus.

 

Directors’ and Officers’ Liability Insurance

 

It is intended that the Resulting Issuer will seek to carry a directors’ and officers’ liability insurance policy which will be designed to protect the Resulting Issuer and its directors and officers against any legal action which may arise as a result of wrongful acts on the part of directors and/or officers of the Resulting Issuer . Any such policy will be written with a maximum limit and be subject to a corporate deductible on all claims.

 

DIRECTORS’ AND EXECUTIVE OFFICERS’ COMPENSATION

 

The Resulting Issuer will operate in a competitive and rapidly evolving market. To succeed in this environment and to achieve its business and financial objectives, the Resulting Issuer needs to attract, retain and motivate a highly talented team of executives. It is expected that the Resulting Issuer’s team will possess and demonstrate strong leadership and management capabilities, as well as foster the Resulting Issuer’s company culture, which is at the foundation of its success and remains a pivotal part of its everyday operations.

 

The Resulting Issuer’s executive compensation program will be designed to achieve the following objectives:

 

provide market-competitive compensation opportunities in order to attract and retain talented, high-performing and experienced executive officers, whose knowledge, skills and performance are critical to the Resulting Issuer’s success;

 

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motivate these executive officers to achieve the Resulting Issuer’s business objectives;

 

align the interests of the Resulting Issuer’s executive officers with those of its shareholders by tying a meaningful portion of compensation directly to the long-term value and growth of the Resulting Issuer’s business; and

 

provide incentives that encourage appropriate levels of risk-taking by the executive team.

 

It is expected that the “named executive officers” of the Resulting Issuer will include Kyle Kazan as the Chief Executive Officer, Graham Farrer as President, Derek Higgins as Chief Financial Officer, Jamin Horn as Corporate Secretary, Daryl Kato as Chief Marketing Officer and Joe Andreae as Vice President, Business Development. An issuer’s “named executive officers” are comprised of its Chief Executive Officer and Chief Financial Officer (or individuals who serve in similar capacities), and its next three most highly compensated executive officers, other than the Chief Executive Officer and Chief Financial Officer, whose total compensation is, individually, more than C$150,000.

 

It is anticipated that the Resulting Issuer Board will adopt a written charter for the C&CG Committee that establishes, among other things, the C&CG Committee’s purpose and its responsibilities with respect to executive compensation (see “Corporate Governance – C&CG Committee”). The charter of the C&CG Committee will provide that such committee shall, among other things, assist the Resulting Issuer Board in its oversight of executive compensation, management development and succession, director compensation and executive compensation disclosure.

 

Although formal executive compensation arrangements for the executive officers of the Resulting Issuer have not yet been determined, it is anticipated that the Resulting Issuer will adopt a compensation structure for executive officers that is consistent with its peers and designed to provide strong incentive for business growth.

 

The Resulting Issuer will continue to evaluate its philosophy and compensation programs as circumstances require and plan to review compensation on an annual basis. As part of this review process, it is expected that the Resulting Issuer will be guided by the philosophy and objectives outlined above, as well as other factors which may become relevant, such as the cost to find a replacement for a key employee.

 

The Resulting Issuer’s annual retainer fee or attendance fee for directors has not been established. However, the Resulting Issuer may establish directors’ fees for non-executive directors in the future, in consultation with a compensation consultant or advisor, and will reimburse directors for all reasonable expenses incurred in order to attend meetings.

 

All current directors and officers of BRND , as well as all those to be appointed at closing, will be indemnified on customary terms by both BRND and GH Group.

 

Benchmarking

 

The executive team is expected to establish an appropriate comparator group for purposes of setting the future compensation of the named executive officers (“NEOs”).

 

Elements of Compensation

 

The compensation of the NEOs is expected to be comprised of the following major elements: (a) base salary; (b) an annual, discretionary cash bonus; and (c) long-term equity incentives, consisting of stock options, restricted stock awards, performance compensation awards and/or other applicable awards granted under the Equity Incentive Plan and any other equity plan that may be approved by the Resulting Issuer Board from time to time. These principal elements of compensation are described below.

 

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Base Salary

 

Base salaries are intended to provide an appropriate level of fixed compensation that will assist in employee retention and recruitment. Base salaries will be determined on an individual basis, taking into consideration the past, current and potential contribution to the Resulting Issuer’s success, the NEO’s experience and expertise, the position and responsibilities of the NEO, and competitive industry pay practices for other high growth, premium brand companies of similar size and revenue growth potential.

 

Annual Cash Bonus

 

Annual bonuses may be awarded based on qualitative and quantitative performance standards, and will reward performance of the NEO individually. The determination of a NEO’s performance may vary from year to year depending on economic conditions and conditions in the cannabis industry, and may be based on measures such as stock price performance, the meeting of financial targets against budget (such as adjusted funds from operations), the meeting of acquisition objectives and balance sheet performance.

 

Equity Incentive Plan

 

In connection with the Transaction, BRND Shareholders will be asked to approve the Equity Incentive Plan at the BRND Meeting. BRND may grant Options and other securities upon completion of the Transaction. The Resulting Issuer Board may also decide to grant new Options and other securities pursuant to the Equity Incentive Plan in the future. For further details in respect of the Equity Incentive Plan, please see “Equity Incentive Plan Description – Summary of Equity Incentive Plan”.

 

Pension Plan Benefits

 

The Resulting Issuer does not intend to implement any deferred compensation plan, pension plan or other forms of funded or unfunded retirement compensation for its employees that provides for payments or benefits at, following or in connection with retirement.

 

Compensation, Employment Agreements, Termination and Change of Control Benefits

 

Employment agreements between the Resulting Issuer and its NEOs are expected to be executed in connection with or following closing of the Transaction. It is expected that such employment agreements will contain customary change of control provisions. The specific terms of the employment contracts to be entered into between the Resulting Issuer and its NEOs will be subject to review and approval by the Resulting Issuer Board and, other than as described below, have not yet been finalized as of the date of this prospectus. Upon completion of the Transaction, it is expected that the Resulting Issuer Board will review and adjust the executive compensation for its NEOs to the extent necessary to ensure that the compensation is in line with the Resulting Issuer’s compensation philosophy and objectives and aligned with market practices of similar issues. Accordingly, the information provided below is subject to change following completion of the Transaction.

 

In respect of the year ended December 31, 2021, the NEOs are expected to have base salaries in the ranges of $220,000 to $450,000, respectively. It is expected that none of the NEOs will be entitled to perquisites or other personal benefits which, in the aggregate, will be worth over $50,000 or over 10% of their base salary.

 

Following completion of the Transaction, the Resulting Issuer will continue to evaluate its philosophy and compensation programs as circumstances require and plans to review compensation on an annual basis. As part of this review process, the Resulting Issuer expects to be guided by the philosophy and objectives outlined above, as well as other factors which may become relevant, such as the cost to the Resulting Issuer if it were required to find a replacement for a key employee.

 

Director Compensation

 

It is anticipated that the Resulting Issuer will pay compensation to its directors, which may be comprised of cash (including annual fees for attending meetings of the Resulting Issuer Board and additional compensation for acting as chairs of committees of the Resulting Issuer Board), stock options and other applicable awards granted in accordance with the terms of the Equity Incentive Plan and the NEO Exchange Policies, or a combination of both. It is anticipated that the Resulting Issuer will grant Options pursuant to its Equity Incentive Plan to each of its independent directors upon the consummation of the Transaction and thereafter annually. It is anticipated that the directors will be reimbursed for any out-of-pocket travel expenses incurred in order to attend meetings of the Resulting Issuer Board, committees of the Resulting Issuer Board or meetings of the shareholders of the Resulting Issuer . It is also anticipated that the Resulting Issuer will obtain customary insurance for the benefit of its directors and enter into indemnification agreements with its directors pursuant to which the Resulting Issuer will agree to indemnify its directors to the extent permitted by applicable law.

 

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INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

 

As of the date of this prospectus, no current, former, or proposed director, executive officer or employee of BRND or GH Group, nor any of their respective associates, is or has been at any time during the most recently completed financial year, indebted to BRND of GH Group, or is expected to be indebted to BRND or GH Group following the completion of the Transaction, other than routine indebtedness (as defined under NI 51-102).

 

AUDIT COMMITTEE

 

The following disclosure is based on the present expectations of the Resulting Issuer with respect to the formal establishment of the Audit Committee (the “Audit Committee”) of the Resulting Issuer Board (without changes to the proposed composition) and the ratification and adoption of its proposed mandate (without any material modifications) will occur following completion of the Transaction. However, such disclosure remains subject to revision prior or subsequent to the Effective Date. See “Notice to Readers” in this prospectus. The proposed mandate of the Audit Committee is set out in Appendix E to this prospectus.

 

Composition of the Resulting Issuer Audit Committee

 

On the Effective Date, the Audit Committee is expected to consist of Lameck Humble Lukanga, Jocelyn Rosenwald and Hector De La Torre. It is expected that Lameck Humble Lukanga will be the chair of the Audit Committee. Each member of the Audit Committee will be independent (as defined in National Instrument 52-110 – Audit Committees (“NI 52-110”)) and none is expected to receive, directly or indirectly, any compensation from the Resulting Issuer other than for service as a member of the Resulting Issuer Board and its committees. All proposed members of the Audit Committee are considered to be financially literate (as defined under NI 52-110).

 

For the relevant education and experience of the members of the Audit Committee, please refer to the biographies of Lameck Humble Lukanga, Jocelyn Rosenwald and Hector De La Torre in “Directors and Executive Officers — Biographies” in this prospectus.

 

Pre-Approval Policies and Procedures

 

The Audit Committee will adopt requirements regarding pre-approval of non-audit services as part of its Audit Committee Mandate. The Audit Committee Mandate will require that the Audit Committee must approve in advance any retainer of the auditors to perform any non-audit service to the Resulting Issuer (together with all non-audit service fees) that it deems advisable in accordance with applicable requirements and the Resulting Issuer Board approved policies and procedures. The Audit Committee intends to consider the impact of such service and fees on the independence of the auditor. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee; however, the decisions of any member of the Audit Committee to whom this authority has been delegated must be presented to the full Audit Committee at its next scheduled Audit Committee meeting.

 

External Audit Service Fees

 

All audit and non-audit services to be provided by the Resulting Issuer’s external auditor will be required to be pre-approved by the Audit Committee. It is expected that on an annual basis, the Resulting Issuer’s Audit Committee will pre-approve a budget for certain specific non-audit services such as assistance with tax returns.

 

CORPORATE GOVERNANCE

 

Unless otherwise indicated, the following disclosure is based on the present expectations of the Resulting Issuer in respect of its corporate governance practices and the formal establishment of committees of the Resulting Issuer Board described below (without changes to the proposed composition) and the ratification and adoption of their respective proposed mandates (without any material modifications) will occur following completion of the Transaction. However, such disclosure remains subject to revision prior or subsequent to the Effective Date. See “Notice to Readers” in this prospectus.

 

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Statement of Corporate Governance Practices

 

The Resulting Issuer’s corporate governance disclosure obligations are set out in the Canadian Securities Administrators’ NI 58-101, NP 58-201 and NI 52-110. These instruments set out a series of guidelines and requirements for effective corporate governance (collectively, the “Guidelines”). The Guidelines address matters such as the constitution and independence of corporate boards, the functions to be performed by boards and their committees and the effectiveness and education of board members. NI 58-101 requires the disclosure by each listed corporation of its approach to corporate governance with reference to the Guidelines.

 

Set out below is a description of the anticipated approach of the Resulting Issuer to corporate governance in relation to the Guidelines.

 

Board of Directors

 

On the Effective Date, it is expected that the Resulting Issuer Board will be comprised of eight (8) directors: Kyle Kazan, Graham Farrar, Jamie Mendola, Jocelyn Rosenwald, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De La Torre. The names, municipality of residence and positions with the Resulting Issuer of the persons who are expected to serve as directors and executive officers of the Resulting Issuer after giving effect to the Transaction are set out below. Each of the proposed members of the Resulting Issuer Board will be formally appointed to the Resulting Issuer Board following closing of the Transaction.

 

Directors

 

Name and Province/State and Country of Present Principal Occupation
Residence  
Kyle Kazan Chief Executive Officer, GH Group
Palos San Verdes, CA, USA  
Graham Farrar President, GH Group
Santa Barbara, CA, USA  
Jamie Mendola Head of Strategy and M&A, Mercer Park L.P.
San Francisco, CA, USA  
Jocelyn Rosenwald(1) Director of Acquisitions and Asset Management, Beach Front Property Management
Costa Mesa, CA, USA  
Lameck Humble Lukangka(1) Principal, Life Line Financial Group
Los Angeles, CA, USA  
George Raveling Self-Employed Consultant, Coaching for Success
Los Angeles, CA, USA  
Bob Hoban Principal Attorney of Hoban Law Group and Global Proven Strategies
Denver, CO, USA  
Hector De La Torre(1) Director, California Air Resources Board
Los Angeles, CA, USA  

 

 

Notes:

 

(1) Proposed member of the Audit Committee.

 

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Jonathan Sandelman, Charles Miles, Lawrence Hackett and Andrew Smith are the current directors of BRND and will be subject to liability as directors for and misrepresentation in this prospectus. The following proposed directors are not current directors of BRND and will not become directors of the Resulting Issuer until the completion of the Transaction and therefore they will not be subject to liability as directors for any misrepresentation in this prospectus: Kyle Kazan, Graham Farrar, Jocelyn Rosenwald, Jamie Mendola, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De La Torre.

 

Each director of the Resulting Issuer will thereafter be required to be elected by Resulting Issuer Shareholders at each annual meeting of shareholders, and will hold office until the next annual meeting of the Resulting Issuer, unless: (i) his or her office is earlier vacated in accordance with the Articles of the Resulting Issuer; or (ii) he or she becomes disqualified to act as a director.

 

The primary function of the Resulting Issuer Board will be to supervise the management of the business and affairs of the Resulting Issuer, including the responsibility for the strategic planning process, risk management, succession planning, approving and communicating a communications policy and disclosure policy, setting internal controls, corporate governance, senior management compensation and oversight, director compensation and assessment and approving material transactions and contracts. The Resulting Issuer Board will also be responsible for reviewing the succession plans for the Resulting Issuer, including appointing, training and monitoring senior management to ensure that the Resulting Issuer Board and management have appropriate skill and experience. The Resulting Issuer Board will establish an Audit Committee and C&CG Committee. See “Audit Committee” and “Corporate Governance – C&CG Committee” for a description of each of the proposed committees of the Resulting Issuer Board, including the proposed membership thereof, as applicable.

 

Following the Effective Date and consistent with NEO Exchange Requirements, the Resulting Issuer Board will adopt a majority voting policy prior to the first uncontested meeting of shareholders at which directors are to be elected where such meeting is subsequent to the Resulting Issuer ceasing to be “majority controlled” (as such term is defined in the NEO Exchange Listing Manual). The Resulting Issuer will be “majority controlled” by the GH Group Founders upon closing of the Transaction.. See “Directors and Executive Officers — Majority Voting Policy” in this prospectus.

 

The Resulting Issuer Board will delegate to the applicable committee those duties and responsibilities set out in each committee’s proposed mandate. The primary mandate of the Audit Committee will be to provide assistance to the Resulting Issuer Board in fulfilling its responsibility to Resulting Issuer Shareholders, potential shareholders and the investment community, to oversee the work and review the qualifications and independence of the external auditors of the Resulting Issuer, to review the financial statements of the Resulting Issuer and public disclosure documents containing financial information and to assist BRND with the legal compliance and ethics programs as established by management and by the Resulting Issuer Board and as required by law.

 

The primary mandate of the C&CG Committee with respect to compensation will be to approve corporate goals and objectives relevant to the compensation of the Resulting Issuer’s CEO and to make recommendations with respect to the Resulting Issuer’s CEO compensation based on its evaluation, to recommend compensation Transactions for the directors, committee members and chairs, and the Resulting Issuer Chairman, to administer and interpret the incentive compensation and equity compensation plans, and to approve the appointment, compensation and terms of employment for the Resulting Issuer’s CFO and senior management of Resulting Issuer. The primary mandate of the C&CG Committee with respect to corporate governance will be to assess the effectiveness of the Resulting Issuer Board, of committees of the Resulting Issuer Board and of the directors of the Resulting Issuer Board, to recommend to the Resulting Issuer Board candidates for election as directors and candidates for appointment to Board committees and to advise the Resulting Issuer Board on enhancing Resulting Issuer’s corporate governance through a continuing assessment of Resulting Issuer’s approach to corporate governance.

 

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Independence of the Resulting Issuer Board

 

NI 58-101 defines an “independent director” as a director who has no direct or indirect material relationship with Resulting Issuer. A “material relationship” is in turn defined as a relationship which could, in the view of the Resulting Issuer Board, be reasonably expected to interfere with such member’s independent judgment. In determining whether a particular director is an “independent director” or a “non-independent director”, the Resulting Issuer Board will consider the factual circumstances of each director in the context of the Guidelines.

 

It is expected that the Resulting Issuer Board will be comprised of eight (8) members upon completion of the Transaction. Kyzle Kazan, Graham Farrar and Jamie Mendola are not considered independent for the purposes of NI 58-101 because of,: (i) in respect of Kyle Kazan and Graham Farrar, their anticipated roles as executive officers of the Resulting Issuer upon completion of the Transaction, and (ii) in respect of Jamie Mendola, his position as Head of Strategy and M&A of Mercer Park, L.P., which is the parent of Mercer.

 

Executive Chairman

 

Kyle Kazan will serve as the Executive Chairman of the Resulting Issuer. The Executive Chairman’s role will be to coordinate the management, development and effective functioning of the Resulting Issuer Board and provide leadership. The Executive Chairman and each committee can also engage outside consultants without consulting management. This is designed to ensure they receive independent advice as they feel necessary.

 

Meeting In-camera

 

The Resulting Issuer Board and committees are expected to hold regularly scheduled meetings at each quarterly board meeting without management and non-independent directors, including Mr. Kazan, the anticipated chairperson of the Resulting Issuer Board. These discussions are intended to generally form part of the committee chairs’ reports to the Resulting Issuer Board. The BRND’s Chairman intends to encourage open and candid discussions among the independent directors by providing them with an opportunity to express their views on key topics before decisions are taken.

 

Succession Planning

 

The C&CG Committee (with the advice of the BRND’s Chairman) is expected to provide primary oversight of succession planning for senior management, the performance assessment of the Resulting Issuer’s CEO, and the Resulting Issuer’s CEO’s assessments of the other senior officers. The C&CG Committee is expected to conduct in-depth reviews of succession options relating to senior management positions and, when appropriate, is expected to approve the rotation of senior executives into new roles to broaden their responsibilities and experiences and deepen the pool of internal candidates for senior management positions. The C&CG Committee is expected to develop an emergency succession plan and contingency plan for the Resulting Issuer’s CEO for a scenario in which the CEO suddenly and unexpectedly was unable to perform his duties for an extended period.

 

The independent directors are expected to participate in the assessment of the performance of the Resulting Issuer’s CEO every year. The Resulting Issuer Board is expected to approve all appointments of executive officers.

 

Director Term Limits/Mandatory Retirement

 

The Resulting Issuer Board will consider the matters of term limits and mandatory retirement. At this time, BRND does not expect that these types of policies would be appropriate for the Resulting Issuer Board. BRND believes that a rigorous self-evaluation process combined with input, where appropriate, from an external third party governance firm would be a more effective and transparent manner to ensure that the Resulting Issuer’s directors add value and remain strong contributors.

 

Diversity

 

Board of Directors

 

BRND recognizes the benefits that diversity brings to BRND. The Resulting Issuer Board will aim to be comprised of directors who have a range of perspectives, insights and views in relation to the issues affecting the Resulting Issuer. This belief in diversity is expected to be reflected in a written Diversity Policy that is expected to be adopted by the Resulting Issuer Board. The Diversity Policy is expected to state that the Resulting Issuer Board should include individuals from diverse backgrounds, having regard to, among other things, gender, status, age, business experience, professional expertise, education, nationality, race, culture, language, personal skills and geographic background. Accordingly, consideration of whether the diverse attributes highlighted in the policy are sufficiently represented on the Resulting Issuer Board will be an important component of the selection process for new Resulting Issuer Board members.

 

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Management

 

BRND believes that a diversity of backgrounds, opinions and perspectives and a culture of inclusion helps to create a healthy and dynamic workplace, which improves overall business performance. BRND recognizes the value of ensuring that the Resulting Issuer has leaders who are women. The Resulting Issuer will work to develop its employees internally and provide them with opportunities to advance their careers. The Resulting Issuer will build a strategy and execution plan to work towards increasing the representation of women in leadership roles at all levels of the organization. One of the objectives of this initiative will be to ensure that there are highly-qualified women within the Resulting Issuer available to fill vacancies in executive officer and other leadership positions. In appointing individuals to its leadership team, both at the corporate level and business vertical level, the Resulting Issuer will weigh a number of factors, including the skills and experience required for the position and the personal attributes of the candidates.

 

Female Representation

 

Two (2) of the proposed directors of the Resulting Issuer are female, and BRND recognizes the value of the contribution of members with diverse attributes on the Resulting Issuer Board and will be committed to ensuring that there is representation of women on the Resulting Issuer Board in the future. However, the Resulting Issuer does not intend to establish a target regarding the number of women on the Resulting Issuer Board. BRND believes a target would not be the most effective way of ensuring the Resulting Issuer Board is comprised of individuals with diverse attributes and backgrounds. The Resulting Issuer will, however, evaluate the appropriateness of adopting targets in the future.

 

Three (3) of the 10 proposed executive officers of the Resulting Issuer are female. The Resulting Issuer does not intend to establish a target regarding the number of women in executive officer or senior leadership positions. BRND believes that the most effective way to achieve its goal of increasing the representation of women in leadership roles at all levels of the organization is to identify high-potential women within the Resulting Issuer and work with them to ensure they develop the skills, acquire the experience and have the opportunities necessary to become effective leaders. The Resulting Issuer will, however, evaluate the appropriateness of adopting targets in the future.

 

Orientation and Continuing Education

 

As set out in the proposed Resulting Issuer Board Mandate, the Resulting Issuer will have a policy of making a full initial orientation and continuing education process available to Board members. All new directors are expected to be provided with an initial orientation regarding the nature and operation of the Resulting Issuer’s business and the affairs of the Resulting Issuer and as to the role of the Resulting Issuer Board and its committees, as well as the legal obligations of a director of the Resulting Issuer. Existing directors will also be periodically updated on these matters.

 

In order to orient new directors as to the nature and operation of the Resulting Issuer’s business, they will be given the opportunity to meet with key members of the management team to discuss the Resulting Issuer’s business and activities. In addition, new directors will receive copies of Board materials, corporate policies and procedures, and other information regarding the business and operations of the Resulting Issuer.

 

Resulting Issuer Board members will be expected to keep themselves current with industry trends and developments and will be encouraged to communicate with management and, where applicable, auditors, advisors and other consultants of the Resulting Issuer. Board members will have access to the Resulting Issuer’s in-house and external legal counsel in the event of any questions or matters relating to Resulting Issuer Board members’ corporate and director responsibilities and to keep themselves current with changes in legislation. Resulting Issuer Board members have full access to the Resulting Issuer’s records.

 

It is expected that the Resulting Issuer will provide on-going continuous education programs through key business area presentations, business updates and operations site visits as appropriate.

 

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Social Responsibility

 

The Resulting Issuer’s Board’s role is expected to include considering and reviewing with management the Resulting Issuer’s fundamental policies and internal controls pertaining to environment, health and safety, and sustainability, and review procedures designed to minimize environmental, occupational health and safety and other risks while undertaking due consideration of opportunities and performance enhancement thereto. The Resulting Issuer’s Board’s role is also expected to include seeking to verify that management proactively identifies and monitors the impact of proposed legislation and other emerging issues in environmental and sustainability areas, that the Resulting Issuer’s business is conducted in a socially responsible and ethical manner and that management engages, respects and supports the communities in which the Resulting Issuer works.

 

Nomination of Directors

 

The C&CG Committee’s role will be to recommend to the Resulting Issuer Board candidates for election as directors and candidates for appointment to Resulting Issuer Board committees as set out in the C&CG Committee Mandate. BRND’s Chairman is also expected to consult with the C&CG Committee regarding candidates for nomination or appointment to the Resulting Issuer Board.

 

Board and Committee Assessment

 

The C&CG Committee’s role is expected to be to assess the effectiveness of the Resulting Issuer Board as a whole, the committees of the Resulting Issuer Board and the contribution of individual directors.

 

Audit Committee

 

The Audit Committee is expected to be comprised of three (3) directors of the Resulting Issuer: (i) Lameck Humble Lukanga; (ii) Jocelyn Rosenwald; and (iii) Hector De La Torre, all of whom will be independent for purposes of NI 52-110. The role and operation of the Audit Committee are set out in the Resulting Issuer’s proposed Audit Committee Mandate, the text of which is included as Appendix E to this prospectus. See “Audit Committee”.

 

The members of the Audit Committee will be appointed annually by the Resulting Issuer Board, and each member of the Audit Committee will serve at the pleasure of the Resulting Issuer Board until the member resigns, is removed, or ceases to be a member of the Resulting Issuer Board.

 

Compensation, Nomination & Corporate Governance Committee

 

The Resulting Issuer will establish a majority or fully independent C&CG Committee following completion of the Transaction. It is expected that the C&CG Committee will conduct its business on the basis of majority approval, which encourages an objective process for determining compensation.

 

The members of the C&CG Committee are anticipated to be appointed annually by the Resulting Issuer Board, and it is expected that each member of the C&CG Committee will serve at the pleasure of the Resulting Issuer Board until the member resigns, is removed, or ceases to be a member of the Resulting Issuer Board.

 

To fulfil its role in developing the Resulting Issuer’s approach to compensation issues, it is anticipated that the C&CG Committee shall:

 

(i) review and approve corporate goals and objectives relevant to the compensation of the Resulting Issuer’s CEO;

 

(ii) evaluate the performance of the Resulting Issuer’s CEO in light of those corporate goals and objectives, and make recommendations to the Resulting Issuer Board with respect to the compensation level of the Resulting Issuer’s CEO based on its evaluation;

 

(iii) review the recommendations to the C&CG Committee of the Resulting Issuer’s CEO respecting the appointment, compensation and other terms of employment of the Resulting Issuer’s CFO, all senior management reporting directly to the Resulting Issuer’s CEO and all other officers appointed by the Resulting Issuer Board and, if advisable, approve and recommend for board approval, with or without modifications, any such appointment, compensation and other terms of employment;

 

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(iv) administer and interpret the Resulting Issuer’s share compensation agreements and its policies respecting the grant of options or other share-based compensation or the sale of shares thereunder, and review and recommend for approval of the Resulting Issuer Board the grant of options thereunder and the terms thereof;

 

(v) review the Resulting Issuer’s pension and retirement Transactions in light of the overall compensation policies and objectives of the Resulting Issuer;

 

(vi) review employment agreements between the Resulting Issuer and the Resulting Issuer’s CEO, and between the Resulting Issuer and executive officers, and amendments to the terms of such agreements shall be subject to review and recommendation by the C&CG Committee and approval by the Resulting Issuer Board;

 

(vii) review management’s policies and practices respecting the Resulting Issuer’s compliance with applicable legal prohibitions, disclosure requirements or other requirements on making or arranging for personal loans to senior officers or directors or amending or extending any such existing personal loans or Transactions;

 

(viii) recommend to the Resulting Issuer Board for its approval the terms upon which directors shall be compensated, including the Chairman (if applicable) and those acting as committee chairs and committee members;

 

(ix) review on a periodic basis the terms of and experience with the Resulting Issuer’s executive compensation programs for the purpose of determining if they are properly coordinated and achieving the purpose for which they were designed and administered;

 

(x) review executive compensation disclosure before the Resulting Issuer publicly discloses this information;

 

(xi) submit a report to the Resulting Issuer Board on human resources matters at least annually; and

 

(xii) prepare an annual report for inclusion in the Resulting Issuer’s management information circular to Resulting Issuer Shareholders respecting the process undertaken by the committee in its review of compensation issues and prepare a recommendation in respect of the compensation of the Resulting Issuer’s CEO.

 

It is expected that the C&CG Committee’s role with respect to corporate governance is expected to include, among other things:

 

(i) developing and updating a long-term plan for the composition of the Resulting Issuer Board that takes into consideration the current strengths, competencies, skills and experience of the Resulting Issuer Board members, retirement dates and the strategic direction of the Resulting Issuer, and reporting to the Resulting Issuer Board thereon at least annually;

 

(ii) undertaking on an annual basis an examination of the size of the Resulting Issuer Board, with a view to determining the impact of the number of directors, the effectiveness of the Resulting Issuer Board, and recommending to the Resulting Issuer Board, if necessary, a reduction or increase in the size of the Resulting Issuer Board;

 

(iii) endeavouring, in consultation with the Resulting Issuer’s Chairman (or Lead Director, if applicable), to seek to ensure that an appropriate system is in place to evaluate the effectiveness of the Resulting Issuer Board as a whole, each of the committees of the Resulting Issuer Board and each individual director of the Resulting Issuer Board with a view to ensuring that they are fulfilling their respective responsibilities and duties;

 

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(iv) in consultation with the Resulting Issuer’s Chairman (or Lead Director, if applicable), and the Resulting Issuer’s CEO, annually or as required, recruiting and identifying individuals qualified to become new board members and recommending to the Resulting Issuer Board new director nominees for the next annual meeting of Resulting Issuer Shareholders;

 

(v) in consultation with the Resulting Issuer’s Chairman (or Lead Director, if applicable), annually or as required, identifying and recommending to the Resulting Issuer Board, the individual directors to serve on the various committees, taking into consideration (A) the competencies and skills that the Resulting Issuer Board considers to be necessary for the Resulting Issuer Board, as a whole, to possess, (B) the diversity of the Resulting Issuer Board composition, including whether targets have been adopted for women, visible minorities, indigenous people and people with disabilities on the Resulting Issuer Board or in executive officer positions, (C) the competencies and skills that the Resulting Issuer Board considers each existing director to possess, and (D) the competencies and skills each new nominee will bring to the boardroom;

 

(vi) conducting a periodic review of the Resulting Issuer’s corporate governance policies and making policy recommendations aimed at enhancing board and committee effectiveness;

 

(vii) reviewing overall governance principles, monitoring disclosure and best practices of comparable and leading companies, and bringing forward to the Resulting Issuer Board a list of corporate governance issues for review, discussion or action by the Resulting Issuer Board or its committees;

 

(viii) reviewing the disclosure in the Resulting Issuer’s public disclosure documents relating to corporate governance practices and preparing recommendations to the Resulting Issuer Board regarding any other reports required or recommended on corporate governance;

 

(ix) proposing agenda items and content for submission to the Resulting Issuer Board related to corporate governance issues and providing periodic updates on recent developments in corporate governance to the Resulting Issuer Board;

 

(x) conducting a periodic review of the relationship between management and the Resulting Issuer Board, particularly in connection with a view to ensuring effective communication and the provision of information to directors in a timely manner;

 

(xi) reviewing annually the Resulting Issuer Board Mandate and the mandates for each committee of the Resulting Issuer Board, together with the position descriptions, if any, of each of the Resulting Issuer’s Chairman, CEO, director and committee chairs, and where necessary, recommending changes to the Resulting Issuer Board;

 

(xii) reviewing and recommending the appropriate structure, size, composition, mandate and members for the committees, and recommending for board approval the appointment of each to board committees;

 

(xiii) recommending procedures to seek to ensure that the Resulting Issuer Board and each of its committees function independently of management;

 

(xiv) monitoring conflicts of interest (real or perceived) of both the Resulting Issuer Board and management in accordance with the Code, and other policies on conflicts of interest and ethics; and

 

(xv) recommending procedures to permit the Resulting Issuer Board to meet on a regular basis without management or non-independent directors.

 

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The C&CG Committee is expected to make recommendations for candidates to the Resulting Issuer Board and candidates for appointment to various committees of the Resulting Issuer Board, and in making such recommendations is expected to consider the competencies and skills that the Resulting Issuer Board considers to be necessary for the Resulting Issuer Board as a whole to possess, the competencies and skills that the Resulting Issuer Board considers each existing director to possess, and the competencies and skills each new nominee will bring to the Resulting Issuer’s boardroom. It is expected that the responsibility for approving new nominees to Resulting Issuer Board will fall to the full Resulting Issuer Board. It is also expected that the C&CG Committee will be able to make, where appropriate, recommendations for the removal of a director from the Resulting Issuer Board or from a committee of the Resulting Issuer Board if he or she is no longer qualified to serve as a director under applicable requirements or for any other reason it considers appropriate.

 

Code of Conduct

 

The Resulting Issuer Board is expected to consider whether to adopt a written code of conduct in due course following the closing of the Transaction that applies to all of its directors, officers and employees. The objective of the code of conduct, if adopted, would be to provide guidelines for maintaining the Resulting Issuer’s integrity, reputation, honesty, objectivity and impartiality. If adopted, the code of conduct is expected to address, among other things, conflicts of interest, protection of assets, confidentiality, fair dealing with shareholders, competitors and employees, insider trading, compliance with laws and reporting any illegal or unethical behaviour. As part of the code of conduct, if adopted, any person subject to the code of conduct would be required to avoid or fully disclose interests or relationships that are harmful or detrimental to the Resulting Issuer’s best interests or that may give rise to real, potential or the appearance of conflicts of interest. The Resulting Issuer Board would have ultimate responsibility for the stewardship of the code of conduct.

 

Key Governance Documents

 

Following completion of the Transaction, it is expected that many policies and practices will support the corporate framework of the Resulting Issuer. The following documents will constitute key components of the Resulting Issuer’s corporate governance system and are expected to be made available by the Resulting Issuer subsequent to completion of the Transaction:

 

Audit Committee Mandate;
C&CG Committee Mandate;
Disclosure and Insider Trading Policy (which Insider Trading Policy shall apply to the Resulting Issuer’s directors, executives and other employees); and
Code of Conduct (if adopted).

 

REGULATORY APPROVALS

 

It is a condition precedent in favour of each of BRND and the sellers under each Definitive GH Group Agreement to the completion of the Transaction that (i) the NEO Exchange shall have approved the Transaction as qualifying as BRND’s “qualifying transaction” within the meaning of the NEO Exchange Listing Manual, (ii) clearance is received from the applicable Canadian securities regulators, including the OSC, in respect of this prospectus, and (iii) clearance is received from the applicable United States antitrust regulators under the HSR Act in respect of the Definitive GH Group Agreement.

 

Notice to and/or the approval or consent by the following U.S. State and local authorities may also be required in connection with completion of the Transaction:

 

California Bureau of Cannabis Control;
California Department of Food and Agriculture;
California Department of Public Health;
City of American Canyon;
City of Port Hueneme;
City of Willits;
City of Mendota;
City of Dunsmuir;
City of Lemon Grove;
City of Eureka;

 

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City of Walnut Creek;
City of Willows;
City of Napa;
City of Lompoc;
City of Chula Vista;
City and County of San Francisco;
City of Salinas;
City of Moreno Valley;
City of San Luis Obispo; and
City of Hesperia.

 

RISK FACTORS

 

The following are certain factors relating to the business of BRND and/or the Resulting Issuer, as applicable. These risks and uncertainties are not the only ones we face. The following information is a summary only of certain risk factors and is qualified in its entirety by reference to, and must be read in conjunction with, the detailed information appearing elsewhere in this prospectus. Additional risks and uncertainties not presently known to BRND or currently deemed immaterial by BRND may also impair the operations of BRND and/or the Resulting Issuer, as applicable. If any such risks actually occur, shareholders of BRND could lose all or part of their investment and the business, financial condition, liquidity, results of operations and prospects of BRND and/or the Resulting Issuer, as applicable, could be materially adversely affected and the ability of the Resulting Issuer to implement its growth plans could be adversely affected.

 

The acquisition of any of the securities of BRND is speculative, involving a high degree of risk and should be undertaken only by persons whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the securities of BRND should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. BRND’s shareholders should evaluate carefully the following risk factors associated with BRND’s securities, along with the risk factors described elsewhere in this prospectus.

 

Risks Related to Legality of Cannabis

 

While legal under applicable U.S. State law, the Resulting Issuer’s business activities are illegal under U.S. federal law.

 

Investors are cautioned that in the United States, cannabis is largely regulated at the State level. To BRND’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. Additional States have pending legislation regarding the same. Although each State in which the Resulting Issuer will operate authorizes, as applicable, medical and/or adult-use cannabis production and distribution by licensed or registered entities, and numerous other States have legalized cannabis in some form, 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 under any and all circumstances under the Substances Act. The concepts of “medical cannabis”, “retail cannabis” and “adult-use cannabis” do not exist under U.S. federal law. Marijuana is a Schedule I drug under the Substances Act. Under 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 BRND and GH Group believe their respective businesses are, and that the business of the Resulting Issuer 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 Resulting Issuer of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Resulting Issuer. Any such proceedings brought against the Resulting Issuer may result in a material adverse effect on the Resulting Issuer.

 

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Since the possession and use of cannabis and any related drug paraphernalia is illegal under U.S. federal law, the Resulting Issuer may be deemed to be aiding and abetting illegal activities. GH Group 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 Resulting Issuer, 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 allege that the Resulting Issuer has “aided and abetted” violations of federal law by providing financing and services to the Corporation. Under these circumstances, the federal prosecutor could seek to seize the assets of the Resulting Issuer, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing. In these circumstances, the Resulting Issuer’s operations would cease, 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 Resulting Issuer.

 

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 BRND, or, following completion of the Transaction, the Resulting Issuer, if it became known to CBP, could have an impact on a 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 Resulting Issuer will derive 100% of its revenues from the cannabis industry in the State of California which industry is illegal under U.S. federal law. Even where the Corporation’s cannabis-related activities are compliant with applicable State and local law, 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, this 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 2021 appropriations deadline of September 30, 2021.

 

In July 2020, the House of Representatives passed the “Blumenauer-McClintock-Norton-Lee amendment,” to the Commerce, Justice, Science (CJS) Appropriations bill. That amendment proposed continuing the Rohrabacher- Blumenauer Amendment’s protections for state medical cannabis programs, and extend those protections to include recreational programs in states where recreational cannabis is legal. The amendment was not included in the final spending bill, so at this time the protections afforded by the Rohrabacher-Blumenauer Amendment apply only to medical cannabis programs.

 

Should the Rohrabacher-Blumenauer Amendment language not be included in the Fiscal Year 2022 appropriations package, 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. Such potential proceedings could involve significant restrictions being imposed upon the Resulting Issuer or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Resulting Issuer, even if such proceedings were concluded successfully in favour of the Resulting Issuer.

 

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 Resulting Issuer, 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 Resulting Issuer 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.

 

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The approach to the enforcement of 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 tendered his resignation as Attorney General at the request of President Donald 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 marijuana, but would not go after marijuana companies in states that legalized it 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.

 

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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, BRND’s Target Business, results of operations, financial condition and prospects and BRND would be materially adversely affected.

 

Such potential proceedings could involve significant restrictions being imposed upon the Resulting Issuer or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Resulting Issuer, as well as the Resulting Issuer’s reputation, even if such proceedings were concluded successfully in favour of the Resulting Issuer. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Resulting Issuer or the seizure of corporate assets; however as of the date hereof, BRND believes that proceedings of this nature are remote.

 

There is no certainty as to how the U.S. DOJ, Federal Bureau of Investigation and other government agencies will handle cannabis matters in the future. BRND regularly monitors the activities of the current administration in this regard.

 

The Resulting Issuer 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 burdensome 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 Resulting Issuer may have limited or no access to banking or other financial services in the United States. The inability, or limitation of the Resulting Issuer’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 Resulting Issuer 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 companies and businesses similar to the Corporation. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep 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 Resulting Issuer when needed or on terms which are acceptable to the Resulting Issuer. The Resulting Issuer’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 Resulting Issuer from achieving 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 regulated markets in the cannabis industry are exactly the same, doing business across State lines may not be possible or commercially practicable. As a result, the Resulting Issuer may be limited to identifying opportunities in individual States, which may have the effect of slowing the growth prospects of the Resulting Issuer.

 

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Risk of legal, regulatory or other political change.

 

The success of the business strategy of the Resulting Issuer depends on the legality of the cannabis industry. The political environment surrounding the cannabis industry in general can be volatile and the regulatory framework remains in flux. To BRND’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 Resulting Issuer’s business, results of operations, financial condition or prospects.

 

Delays in enactment of new State or federal regulations could restrict the ability of the Resulting Issuer to reach strategic growth targets. The growth strategy of the Resulting Issuer is contingent upon certain federal and State 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 Resulting Issuer could be negatively impacted, and thus, the effect on the return of investor capital, could be detrimental.

 

The Resulting Issuer 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 State law, or if existing applicable State laws are repealed or curtailed, the Resulting Issuer’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 marijuana in a manner that will make it extremely difficult or impossible to transact business in that jurisdiction, which may adversely affect the Resulting Issuer’s continued operations. Federal actions against individuals or entities engaged in the cannabis industry or a repeal of applicable marijuana legislation could adversely affect the Resulting Issuer and its business, results of operations, financial condition and prospects.

 

The Resulting Issuer is also aware that multiple States are considering 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 taxation. Should such special taxes or fees be adopted, this could have a material adverse effect upon the Resulting Issuer’s business, results of operations, financial condition or prospects.

 

Overall, the medical and adult-use cannabis industry is subject to significant regulatory change at both the State and federal level. The inability of the Resulting Issuer 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 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 Resulting Issuer’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 Resulting Issuer to succeed. BRND is treating, and upon completion of the Transaction the Resulting Issuer will treat, the cannabis industry as a deregulating industry with significant unsatisfied demand for the Resulting Issuer’s proposed products and will adjust its future operations, product mix and market strategy as the industry develops and matures.

 

The Resulting Issuer’s operations in the U.S. cannabis market may become the subject of heightened scrutiny.

 

For the reasons set forth above, the Resulting Issuer’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 Resulting Issuer 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 Resulting Issuer’s ability to operate or invest in the U.S. or any other jurisdiction, in addition to those described herein.

 

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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 CSE, 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 as 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. BRND views the Staff Notice favourably, 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 Resulting Issuer’s ability to pursue further investment and opportunities in the Resulting Issuer.

 

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 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 Resulting Issuer could expand. Any inability to fully implement the Resulting Issuer’s expansion strategy may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Regulatory scrutiny of the Resulting Issuer’s industry may negatively impact its ability to raise additional capital.

 

The Resulting Issuer’s business activities will rely on newly established and/or developing laws and regulations in the various States in which the Resulting Issuer will operate. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Resulting Issuer’s profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, Securities and Exchange Commission, the U.S. DOJ, the Financial Industry Regulatory Advisory 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 Resulting Issuer’s industry may adversely affect the business and operations of the Resulting Issuer, 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 Resulting Issuer or to find a suitable acquirer, which could reduce, delay or eliminate any return on investment in the Resulting Issuer.

 

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The Resulting Issuer’s investments in the U.S. will be 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 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 Resulting Issuer. See “Risk Factors – The Resulting Issuer 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 Resulting Issuer’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 Resulting Issuer 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 Resulting Issuer to declare or pay dividends on the Equity Shares in the foreseeable future, in the event that a determination was made that the Resulting Issuer’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Resulting Issuer 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 affect the Resulting Issuer’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 Resulting Issuer’s products such as medical cannabis. 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 Resulting Issuer 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 may result in delay of the manufacturing or distribution of the Resulting Issuer’s 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 Resulting Issuer’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.

 

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The availability of favourable 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.

 

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 Resulting Issuer to locate and obtain the rights to operate at various preferred locations. Property owners may violate their mortgages by leasing to the Resulting Issuer, 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 Resulting Issuer), 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

 

Unpredictability caused by the Resulting Issuer’s capital structure.

 

Although other Canadian-based companies have dual class or multiple voting share structures, given the concentration of voting control that will be held indirectly by GH Group Founders by virtue of their Multiple Voting Shares, BRND 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 Resulting Issuer or other adverse consequences.

 

The Resulting Issuer’s multi-class structure will have the effect of concentrating voting control and the ability to influence corporate matters with the GH Group Founders.

 

The Multiple Voting Shares will have 50 votes per share, whereas the Equity Shares are expected to have one (1) vote per share (other than in respect of the election of directors of the Resulting Issuer, for which the Limited Voting Shares will not have any entitlement to vote). Following the Transaction until the expiry of the three (3)-year sunset period, the GH Group Founders will hold approximately 66% of the voting power of the outstanding voting shares of the Resulting Issuer (and approximately 63% on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants)). Accordingly, each GH Group Founder would therefore have significant influence over the management and affairs of the Resulting Issuer 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 will control a majority of the combined voting power of the Resulting Issuer’s voting shares even though the Multiple Voting Shares will represent a substantially reduced percentage of the total outstanding shares of the Resulting Issuer. The concentrated voting control of the holders of Multiple Voting Shares will limit 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 Resulting Issuer’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 will have the ability to influence or control many matters affecting the Resulting Issuer 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. See “Description of the Securities – Equity Shares and Multiple Voting Shares”.

 

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The issuance of Preferred Shares 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 Resulting Issuer 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 Resulting Issuer 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

 

It is anticipated that the Resulting Issuer will be an FPI as defined in Rule 405 under the U.S. Securities Act and Rule 3b-4 under the U.S. Exchange Act. While it is anticipated that we will enact the FPI Capital Structure Amendments in order to avoid such a circumstance, if, as of the last business day of the Resulting Issuer’s second fiscal quarter for any year, more than 50% of the Resulting Issuer’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 Resulting Issuer will no longer meet the definition of an FPI, which may have adverse consequences on the Resulting Issuer’s ability to raise capital in private placements or Canadian prospectus offerings. In addition, the loss of the Resulting Issuer’s FPI status may result in increased reporting requirements and increased audit, legal and administration costs. These increased costs may significantly affect the Resulting Issuer’s business, financial condition and results of operations.

 

General Regulatory and Legal Risks

 

The Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer or GH Group were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Resulting Issuer’s U.S. operations, which could have a material adverse effect on the Resulting Issuer.

 

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BRND Shareholders will only have limited and indirect recourse against the vendors of GH Group.

 

BRND Shareholders will not have a direct statutory right or any other rights against the vendors of GH Group. The sole remedy of the investors against such vendors will be through BRND bringing an action for a breach of the representations and warranties contained in the Definitive GH Group Agreement. While BRND is indemnified for breaches of representations and warranties contained in the Definitive GH Group Agreement recourse for such breaches may be limited due to qualifications related to knowledge of the vendors of GH Group, contractual and time limits on recourse under applicable laws and the ability of the vendors of GH Group to satisfy third-party claims. The inability to recover fully any significant liabilities incurred with respect to breaches of representations and warranties under the Definitive GH Group Agreement may have a material adverse effect on the Resulting Issuer. In addition, GH Group vendors have made representations to BRND as to the disclosure in this prospectus constituting full, true and plain disclosure of all material facts related to GH Group only, and that this prospectus does not contain a misrepresentation with respect to information in respect of GH Group only. Accordingly, the vendors of GH Group will only have limited and indirect liability to BRND Shareholders if the disclosure in this prospectus relating to GH Group does not meet such standard or contains a misrepresentation.

 

The Resulting Issuer 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 Resulting Issuer will be able to legally enforce contracts it enters into if necessary. The Resulting Issuer cannot be assured that it will have a remedy for breach of contract, which would have a material adverse effect on the Resulting Issuer.

 

BRND/the Resulting Issuer may be subject to the risk of changes in Canadian laws or regulations, or a failure to comply with any such laws and regulations.

 

BRND is, and upon completion of the Transaction the Resulting Issuer will be, subject to laws and regulations enacted by the federal and provincial governments of Canada. In particular, upon completion of the Transaction the Resulting Issuer will be 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 Resulting Issuer’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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer is subject to general regulatory and licensing risks.

 

GH Group is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the Resulting Issuer’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 Resulting Issuer may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

GH Group 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 regulatory agencies, public hearings and costly undertakings on the part of GH Group. The duration and success of GH Group’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. GH Group 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 GH Group. To the extent necessary, permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, GH Group 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Many of the licenses held by GH Group 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. Compliance personnel of GH Group check renewal dates for licenses to seek to ensure that licenses are renewed as and when required. Following closing of the Transaction, it is intended that the Resulting Issuer will implement an additional centralized review of such renewal process.

 

While BRND believes that GH Group’s compliance controls have been developed to mitigate the risk of any violations of any licenses they hold arising, there is no assurance that GH Group’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 GH Group could impede the ongoing or planned operations of GH Group and have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer or GH Group 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 Resulting Issuer’s or GH Group’s reputation, require the Resulting Issuer or GH Group to take, or refrain from taking, actions that could harm its operations or require the Resulting Issuer or GH Group 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

California regulatory regime and transfer and grant of licenses.

 

Cannabis business activities are heavily regulated in California. The Resulting Issuer’s operations will be 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 BCC, CDPH and CDFA and local regulatory bodies broad administrative discretion over the activities of the Resulting Issuer in California, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Resulting Issuer’s products and services. Government approvals, including state licenses and local permits, are currently required in connection with the operations of the Resulting Issuer. To the extent such approvals are required and not obtained, the Resulting Issuer may be curtailed or prohibited from cultivating, manufacturing, distributing and selling medical or adult use cannabis in California. Achievement of the Resulting Issuer’s business objectives is contingent, in part, upon compliance with regulatory requirements enacted by the BCC, CDPH and CDFA and local governmental authorities and obtaining all regulatory approvals from the BCC, CDPH and CDFA and local governmental authorities, where necessary, for the cultivation, manufacturing, distribution and sale of its cannabis products.

 

The Resulting Issuer may not be able to obtain or maintain the necessary licenses, permits, certificates, authorizations or accreditations to operate its respective business, including in respect of the acquisition of SoCal Greenhouse and the Element 7 Merger (none of which have yet been obtained), or may only be able to do so at great cost. In addition, the Resulting Issuer may not be able to comply fully with the wide variety of laws and regulations applicable to the Cannabis industry. The Resulting Issuer 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 Resulting Issuer’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 (including in respect of the acquisition of SoCal Greenhouse and the Element 7 Merger), changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Resulting Issuer’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 Resulting Issuer.

 

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Regulatory action and approvals from the Food and Drug Administration.

 

GH Group’s cannabis-based products are supplied to patients diagnosed with certain medical conditions. However, GH Group’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 GH Group 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 GH Group’s production or distribution of its products. Any such event could have a material adverse effect on the Resulting Issuer’s business, prospects, financial condition, and operating results.

 

Risks related to the Qualifying Transaction.

 

As part of the Transaction, it is contemplated that BRND will complete the acquisition of GH Group subject to various closing conditions in respect of each of the acquisitions pursuant to the Transaction. However, BRND has no control over whether or not the conditions will be met and there can be no assurance that all conditions will be satisfied or waived or that the acquisition or any part thereof will ultimately be consummated. There is no assurance that the acquisition of GH Group will be completed or, if completed, will be on terms that are exactly the same as disclosed in this prospectus.

 

If the acquisition of GH Group does not take place as contemplated, BRND expects to use the funds intended for such transactions to fund future acquisitions and for general corporate purposes. If less than all of such acquisitions are completed, BRND may not realize the benefits described in this prospectus and could suffer adverse consequences, including loss of investor confidence. The price of the BRND Class A Restricted Voting Shares may decline to the extent that the relevant current market price reflects a market assumption that the acquisition will be consummated and certain costs related to the acquisition pursuant to the Transaction such as legal, accounting and consulting fees, must be paid even if the Transaction is not completed. BRND may be unable to identify other investments offering financial returns comparable to those pursuant to the acquisition of GH Group.

 

Seller’s liability for misrepresentation or breach of Definitive GH Group Agreement.

 

While certain of the Sellers have reviewed the disclosure related to GH Group, SoCal Greenhouse and Element 7 (the “Target Disclosure”) in this prospectus, the Sellers have no liability to the holders of the BRND Class A Restricted Voting Shares if the Target Disclosure contains a misrepresentation. While the Sellers have provided a warranty in the Definitive GH Group Agreement that the disclosure in this prospectus regarding GH Group shall be full, true and plain disclosure and shall not contain a misrepresentation, such warranty is for the benefit of BRND only. The Sellers’ indemnification obligations to BRND are capped at the Seller Indemnity Cap in respect of a breach by the Sellers of the Definitive GH Group Agreement (including in respect of the warranty disclosed in the immediately preceding sentence).

 

There can be no assurance that the Private Placement will be completed on the expected terms, or at all.

 

Closing of the Private Placement is subject to customary conditions, including the receipt of all required regulatory approvals for the Transaction and the closing of the Transaction. There can be no assurance that the Private Placement will be completed on the expected terms, or at all. If the Private Placement does not close, or does not close on substantially the same terms as are currently agreed to, the Resulting Issuer will have substantially less funds available to fund their growth strategy and ongoing operations. As a result, the Resulting Issuer’s business, results of operations or financial condition could be materially adversely affected, and the trading price of the Equity Shares and the BRND Warrants may be adversely impacted.

 

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Business Risks Related to the Cannabis Industry

 

Scientific research related to the benefits of marijuana 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 early stages. To BRND’s knowledge, there have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids. Any statements made in this prospectus concerning the potential medical benefits of cannabinoids are based on published articles and reports. As a result, any statements made in this prospectus are subject to the experimental parameters, qualifications, assumptions and limitations in the studies that have been completed.

 

Although BRND 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 BRND Shareholders 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 prospectus 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Competition in the cannabis industry is intense and increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition and results of operations of the Resulting Issuer.

 

The Resulting Issuer will face intense competition in the cannabis industry, some of which can be expected to come from companies with longer operating histories and more financial resources, manufacturing and marketing experience than the Resulting Issuer. In addition, there is potential that the cannabis industry will undergo consolidation, creating larger companies with financial resources, manufacturing and marketing capabilities, and products that will be greater than those of the Resulting Issuer. As a result of this competition, the Resulting Issuer may be unable to maintain its operations or develop them as currently proposed 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer will face competition from the illegal cannabis market.

 

The Resulting Issuer will face competition from illegal dispensaries and the illegal market that are unlicensed and unregulated. Such black market entities may sell cannabis and cannabis products with higher concentrations of active ingredients, use flavours or other additives which the Resulting Issuer may not be permitted to use, or engage in advertising and promotion activities from which the Resulting Issuer 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 Resulting Issuer. The perpetuation of the illegal market for cannabis may have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects, as well as the public perception of cannabis use.

 

The Resulting Issuer may be unable to attract and retain customers.

 

The Resulting Issuer’s future success depends on its ability to attract and retain customers. There are many factors which could impact the Resulting Issuer’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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Negative publicity or consumer perception may affect the success of the Resulting Issuer’s business.

 

The success of the cannabis industry may be significantly influenced by the public’s perception of marijuana. Both the medical and adult-use of marijuana are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion and public opinion relating to marijuana will be favourable. The cannabis industry is an early-stage business that is constantly evolving with no guarantee of viability. The market for medical and adult-use marijuana is uncertain, and any adverse or negative publicity, scientific research, limiting regulations, medical opinion and public opinion (whether or not accurate or with merit) relating to the consumption of marijuana, whether in Canada, the U.S. or elsewhere, may have a material adverse effect on the Resulting Issuer’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 favourable to the marijuana 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 favourable 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 marijuana and on the business, results of operations, financial condition, cash flows or prospects of the Resulting Issuer.

 

Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana 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 Resulting Issuer could expand. Any inability to fully implement the Resulting Issuer’s expansion strategy may have a material adverse effect on the Resulting Issuer’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 (such as 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 or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of the Resulting Issuer’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 prospectus 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 Resulting Issuer’s products with the potential to lead to a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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 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 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 Resulting Issuer’s products, product liability claims and increased regulation stemming from unfavourable scientific studies on cannabis vaporizer products could have a material adverse effect on the Resulting Issuer’s business, results of operations, financial condition or prospectus.

 

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The current controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer products and expose the Resulting Issuer 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 flavours or use of such vaporizers. This trend may continue, accelerate and 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 Resulting Issuer’s vaping products. There can be no assurance that the Resulting Issuer will be able to meet any additional compliance requirements or regulatory restrictions, or remain competitive in face of unexpected changes in market conditions.

 

Litigation pertaining to vaporizer products is accelerating and that litigation could potentially expand to include the Resulting Issuer’s products, which would materially and adversely affect the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The cannabis industry is difficult to forecast.

 

The Resulting Issuer 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 Resulting Issuer.

 

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 limited and unreliable. Federal and State laws prevent widespread participation and hinder market research. Therefore, market research and projections by BRND 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 BRND’s management team as of the date of this prospectus.

 

The Resulting Issuer may be subject to the risk of constraints on marketing products.

 

The development of the Resulting Issuer’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 companies’ abilities to compete for market share in a manner similar to other industries. If the Resulting Issuer 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 Resulting Issuer’s sales and results of operations or prospects could be adversely affected.

 

Risks Related to the Resulting Issuer’s Business and GH Group’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 cannot be reasonably estimated at this time, the Corporation has sought to assess the potential impact of the pandemic on its operating results. The Corporation has attempted to assess the impact of the pandemic by identifying risks in the following principle 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 GH Group 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 GH Group to shut down operations its operations in California. GH Group’s ability to generate revenue would be materially impacted by any shut down of its operations.

 

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Customer Impact. GH Group has implemented several initiatives prioritizing its medical patients and customers most susceptible to COVID-19 during the pendency of the COVID-19 outbreak. While GH Group 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”), GH Group made essential changes to promote a healthy and safe operating environment for all of its patients, customers and employees, including:

 

frequently sanitizing high-touch surfaces;

 

deep cleaning and sanitizing workstations;

 

sanitizing or washing hands after each transaction;

 

ensuring hand sanitizer is easily accessible;

 

suspending all use of paper menus, demo products, and demo samples;

 

positioning staff at every other register when possible;

 

taking the temperature of store employees before they begin their shift;

 

requiring all dispensary staff to wear face masks;

 

installed plexi-shields in areas where patients/customers come face to face with staff (check-in and at registers where glass doesn’t already exist); and

 

placed markers on the floor to dictate 6 feet + of space between patients/customers.

 

Supply Chain Disruption. GH Group 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 mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating. At this time, GH Group 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 GH Group’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

 

Staffing Disruption. GH Group 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. GH Group has cancelled nonessential travel by employees, implemented remote meetings where possible, and permitted all staff who can work remotely to do so. For those whose duties require them to work-onsite, 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, GH Group and the Resulting Issuer, upon completion of the Transaction, 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.

 

GH Group 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 may have a material impact on GH Group’s ability to generate revenue, and that of the Resulting Issuer upon completion of the Transaction.

 

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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 GH Group is not currently in financial distress, if its financial situation (or that of the Resulting Issuer upon completion of the Transaction) materially deteriorates as a result of the impact of the pandemic, the Resulting Issuer could eventually be unable to meet its obligations to third parties, which in turn could lead to insolvency and bankruptcy of the Resulting Issuer.

 

The Resulting Issuer may not successfully execute its business strategy.

 

An important part of the Resulting Issuer’s business strategy will involve expanding operations in additional U.S. markets, including in markets where it will not initially operate following completion of the Transaction. The Resulting Issuer may be unable to pursue this strategy in the future at the desired pace or at all. The Resulting Issuer may be unable to, among other things, identify suitable businesses to acquire or invest in, complete acquisitions on satisfactory terms, 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. BRND can give no assurance that it or the Resulting Issuer 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 Resulting Issuer’s business, financial condition or results of operations.

 

If the Resulting Issuer 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 Resulting Issuer’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 will not initially operate flowing completion of the Transaction. Consequently, in order to manage growth effectively, the Resulting Issuer 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 Resulting Issuer’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 Resulting Issuer’s management will have broad discretion in the use of BRND’s escrowed funds and the net proceeds from the Private Placement, and may not use them effectively.

 

The Resulting Issuer’s management will have broad discretion in the application of BRND’s escrowed funds and the net proceeds from the Private Placement and could spend the proceeds in ways that do not improve its results of operations or enhance the value of the Equity Shares. The failure by the Resulting Issuer’s management to apply these funds effectively could result in financial losses that could have a material adverse effect on the Resulting Issuer’s business, results of operations and financial condition.

 

The Resulting Issuer and GH Group have a limited operating history.

 

As a high-growth enterprise, BRND (and GH Group) does not, and the Resulting Issuer will not, have a history of profitability. As such, the Resulting Issuer will have no immediate prospect of generating profit from its intended operations. The Resulting Issuer will therefore be subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Resulting Issuer 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.

 

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The Resulting Issuer will be reliant on its management team.

 

The success of the Resulting Issuer 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 services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Resulting Issuer’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. Resulting Issuer employees traveling from Canada to the U.S. for the benefit of the Resulting Issuer 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 Resulting Issuer employees, then this may reduce our ability to manage effectively our business in the U.S.

 

Certain of the BRND’s officers and directors may now be, and all of them in respect of the Resulting Issuer may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by the Resulting Issuer and, accordingly, may have conflicts of interest in allocating their time and determining to which entity a particular business opportunity should be presented.

 

The Resulting Issuer’s officers and directors also may become aware of business opportunities which may be appropriate for presentation to the Resulting Issuer and the other entities to which they owe duties. In the course of their other business activities, the Resulting Issuer’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 favour, as the Resulting Issuer’s officers and directors are not required to present investment and business opportunities to the Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer’s officers, directors, security holders and their respective affiliates and associates may have interests that conflict with the Resulting Issuer’s interests.

 

The Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The SoCal Greenhouse acquisition and/or Element 7 Merger may not be completed or, if completed, may not be successful.

 

The closing of the proposed acquisition of SoCal Greenhouse and the Element 7 Merger are subject in each case to due diligence and certain other customary closing conditions and may not be completed on the terms negotiated or at all. Certain of these conditions, such as State and local regulatory approvals, are outside of our control. There is no assurance that such approvals or consents will be obtained. Continued delay in obtaining such approvals or consents, the failure to do so or the imposition of unfavourable terms or conditions could have a material adverse effect on the business, financial condition and results of operations of the Resulting Issuer. It is intended that the Resulting Issuer will consummate the acquisition of SoCal Greenhouse and the Element 7 Merger as soon as practicable once such conditions are met. However, we have no control over whether or not certain of the conditions will be met and there is no assurance that such conditions to the closing of the acquisition of SoCal Greenhouse and the Element 7 Merger will be satisfied.

 

Even if the acquisition of SoCal Greenhouse and/or the Element 7 Merger do close, our ability to realize the anticipated benefits of SoCal Greenhouse and/or Element 7 subsidiary assets will depend, to a large extent, on our ability to integrate SoCal Greenhouse and/or the Element 7 subsidiary assets into the business of the Resulting Issuer (including re-purposing the greenhouse farm complex to grow cannabis and operationalizing the licenses obtained in the Element 7 Merger). There can be no assurance that we will successfully integrate or operationalize SoCal Greenhouse and/or the Element 7 subsidiary assets, and the Resulting Issuer could face impediments in its ability to implement its integration strategy. The integration process and operationalizing the acquired assets may also require attention from management and divert its focus and resources from other strategic opportunities and from current operational matters. If we are unable to successfully operate SoCal Greenhouse and/or the Element 7 subsidiary assets, our results of operations could suffer. Any failure to successfully integrate SoCal Greenhouse and/or the Element 7 subsidiary assets into the business of the Resulting Issuer on a timely basis and successfully operate the such assets could result in unanticipated expenses and liabilities.

 

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In addition, while we conducted substantial due diligence in connection with both the acquisition of SoCal Greenhouse and the Element 7 Merger, there are risks inherent in any acquisition.

 

Specifically, there could be unknown or undisclosed risks or liabilities in connection with these assets for which we are not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect the business, financial condition, results of operation or prospects of the Resulting Issuer.

 

Failure to establish and maintain effective internal control over financial reporting may result in the Resulting Issuer 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 Resulting Issuer will be 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. Because the Resulting Issuer will be implementing new financial control and management systems, 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 Resulting Issuer’s ability to raise capital in the future.

 

If management of the Resulting Issuer is unable to certify the effectiveness of its internal controls or if material weaknesses or significant deficiencies in its internal controls are identified, the Resulting Issuer could be subject to regulatory scrutiny and a loss of public confidence, which could harm its business. In addition, if the Resulting Issuer 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 Resulting Issuer’s ability to raise capital.

 

It is not expected that the Resulting Issuer’s disclosure controls and procedures and internal control over financial reporting will prevent all error 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 Resulting Issuer 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 Resulting Issuer 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 marijuana, through the development and distribution of synthetic products which emulate the effects and treatment of organic marijuana. 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 Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects

 

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The Resulting Issuer may be subject to the risks associated with fraudulent or illegal activity by its employees, contractors and consultants.

 

The Resulting Issuer will be 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 Resulting Issuer 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 Resulting Issuer to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Resulting Issuer to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Resulting Issuer 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 Resulting Issuer, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Resulting Issuer’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 Resulting Issuer’s operations, any of which could have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

BRND may be subject to the risk associated with the contractual right of action.

 

The contractual right of action to be provided to the original purchasers of each of the BRND Class A Restricted Voting Shares and BRND Warrants pursuant to the Transaction could expose BRND to one or more actions for rescission or damages, and costs, following the Transaction if this prospectus contains or is alleged to have contained a misrepresentation. In addition, as BRND will indemnify the other parties granting such rights, it could suffer additional expenses. BRND may seek to mitigate its exposure through insurance. These contractual rights may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects. See “Contractual Right of Action”.

 

Certain events or developments in the cannabis industry more generally may impact the Resulting Issuer’s reputation.

 

Damage to the Resulting Issuer’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 Resulting Issuer. 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 regards to the Resulting Issuer 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 it 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 Resulting Issuer’s overall ability to advance its business strategy and realize on its growth prospects, thereby having a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Third parties with whom the Resulting Issuer may do business may perceive themselves as being exposed to reputational risk as a result of their relationship with the Resulting Issuer.

 

The parties with which the Resulting Issuer may do business may perceive that they are exposed to reputational risk as a result of the Resulting Issuer’s cannabis-related business activities. Failure to establish or maintain business relationships due to reputational risk arising in connection with the nature of the Resulting Issuer’s business may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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The Resulting Issuer may be subject to advertising and promotional risk in the event it cannot effectively implement a successful branding strategy.

 

The Resulting Issuer’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 Resulting Issuer’s business in the future, or will generate awareness for any of the Resulting Issuer’s products. In addition, no assurance can be given that the Resulting Issuer 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 stage 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 Resulting Issuer’s ability to conduct sales and marketing activities and to create brand recognition, and could potentially result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

GH Group is subject to product liability regimes and strict product recall requirements.

 

GH Group distributes products designed to be ingested by humans. Accordingly, the Resulting Issuer will face 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 Resulting Issuer 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 Resulting Issuer could result in increased costs, could adversely affect our reputation with the Resulting Issuer’s clients and consumers generally, and may result in a material adverse effect on the Resulting Issuer’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 Resulting Issuer could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Resulting Issuer 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 Resulting Issuer. 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 Resulting Issuer may not be able to successfully develop new products or find a market for their sale.

 

The cannabis industry is in its early stages of development and the Resulting Issuer, and its competitors, may seek to introduce new products in the future. In attempting to keep pace with any new market developments, the Resulting Issuer may need to expend significant amounts of capital in order to successfully develop and generate revenues from new products introduced by the Resulting Issuer. The Resulting Issuer may also be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. The Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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The Resulting Issuer will be reliant on third-party suppliers, manufacturers and contractors.

 

It is intended that the Resulting Issuer will maintain 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 Resulting Issuer’s third-party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Resulting Issuer’s operations. Loss of these suppliers, manufacturers and contractors may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer will be reliant on key inputs.

 

The marijuana 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 Resulting Issuer. 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 Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer.

 

The Resulting Issuer will be reliant on equipment and skilled labour.

 

The ability of the Resulting Issuer to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labour, equipment, parts and components. No assurances can be given that the Resulting Issuer will be successful in maintaining its required supply of skilled labour, equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Resulting Issuer’s capital expenditure plans may be significantly greater than anticipated by the Resulting Issuer’s management, and may be greater than funds available to the Resulting Issuer, in which circumstance the Resulting Issuer may curtail, or extend the timeframes for completing, its capital expenditure plans. This may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Service providers could suspend or withdraw service.

 

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 marijuana or otherwise, third-party service providers to the Resulting Issuer could suspend or withdraw their services, which may have a material adverse effect on the Resulting Issuer’s business, revenues, operating results, financial condition or prospects.

 

The Resulting Issuer may be subject to the risk of litigation.

 

The Resulting Issuer 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 Resulting Issuer becomes involved be determined against the Resulting Issuer, such a decision could adversely affect the Resulting Issuer’s ability to continue operating and the market price for the Equity Shares. Even if the Resulting Issuer is involved in litigation and wins, litigation can redirect significant company resources.

 

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The Resulting Issuer may be subject to risks related to the protection and enforcement of intellectual property rights and may become subject to allegations that the Resulting Issuer 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 Resulting Issuer’s future success. The Resulting Issuer may rely on trade secrets, technical know-how and proprietary information that are not protected by patents to maintain its competitive position. The Resulting Issuer will try to protect such intellectual property by entering into confidentiality agreements with parties that have access to it, such as the Resulting Issuer’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 Resulting Issuer could be materially adversely affected.

 

Unauthorized parties may attempt to replicate or otherwise obtain and use the Resulting Issuer’s products, trade secrets, technical know-how and proprietary information. Policing the unauthorized use the Resulting Issuer’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 Resulting Issuer may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Resulting Issuer’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 Resulting Issuer, 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 Resulting Issuer’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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

In addition, other parties may claim that the Resulting Issuer’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 Resulting Issuer may need to obtain licenses from third parties who allege that the Resulting Issuer has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Resulting Issuer or at all. In addition, the Resulting Issuer may not be able to obtain or utilize on terms that are favourable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.

 

The Resulting Issuer may be subject to risks related to information technology systems, including cyber-attacks.

 

The Resulting Issuer’s operations may 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 Resulting Issuer’s operations may also depend 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 Resulting Issuer’s reputation and results of operations. The Resulting Issuer’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 Resulting Issuer may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

The Resulting Issuer may be subject to risks related to security breaches.

 

Given the nature of GH Group’s product and its lack of legal availability outside of channels approved by the Government 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 GH Group’s facilities could expose the Resulting Issuer 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 Resulting Issuer’s products.

 

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In addition, GH Group collects and stores personal information about its patients 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 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 Resulting Issuer’s business, financial condition and results of operations or prospects.

 

The Resulting Issuer 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 marijuana 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 Resulting Issuer 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 Resulting Issuer’s business.

 

The Resulting Issuer’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labour disputes 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 Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer is not generally available on acceptable terms. The Resulting Issuer might also become subject to liability for pollution or other hazards which may not be insured against or which the Resulting Issuer may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Resulting Issuer to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.

 

The Resulting Issuer may be subject to transportation risks.

 

The Resulting Issuer’s business will involve, both directly and indirectly, the production, sale and distribution of cannabis products. Due to the perishable nature of such products, the Resulting Issuer will depend 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 Resulting Issuer. Rising costs associated with the third-party transportation services which will be used by the Resulting Issuer to ship its proposed products may also adversely impact the business of the Resulting Issuer.

 

The Resulting Issuer’s share price may be vulnerable to rising energy costs.

 

The Resulting Issuer’s business may involve, directly or indirectly, the production of cannabis products which will consume considerable energy, making the Resulting Issuer vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business of the Resulting Issuer and its ability to operate profitably.

 

The Resulting Issuer may be subject to risks inherent in an agricultural business.

 

The Resulting Issuer’s business may involve, directly or indirectly, 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 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 Resulting Issuer’s business, financial condition, results of operations or prospects of the Resulting Issuer.

 

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Management of growth may prove to be difficult.

 

The Resulting Issuer may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Resulting Issuer 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 Resulting Issuer to deal with this growth may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer may be subject to the risks of leverage.

 

It is anticipated that the Resulting Issuer will utilize leverage in connection with the Resulting Issuer’s investments in the form of secured or unsecured indebtedness. Although the Resulting Issuer 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 Resulting Issuer defaults on secured indebtedness, the lender may foreclose and the Resulting Issuer could lose its entire investment in the security of such loan. If the Resulting Issuer defaults on unsecured indebtedness, the terms of the loan may require the Resulting Issuer to repay the principal amount of the loan and any interest accrued thereon in addition to heavy penalties that may be imposed. Because the Resulting Issuer may engage in financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, the Resulting Issuer 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 Resulting Issuer’s investments, the Resulting Issuer may borrow funds 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 Resulting Issuer. If investments fail to cover the cost of such borrowings, the value of the investments held by the Resulting Issuer would decrease faster than if there had been no such borrowings. Additionally, if the investments fail to perform to expectation, the interests of investors in the Resulting Issuer could be subordinated to such leverage, which will compound any such adverse consequences.

 

The Resulting Issuer 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 Resulting Issuer’s ongoing business; (ii) distraction of management; (iii) the Resulting Issuer 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 Resulting Issuer’s operations; and (vi) loss or reduction of control over certain of the Resulting Issuer’s assets. Additionally, the Resulting Issuer may issue additional Equity Shares in connection with such transactions, which would dilute a Resulting Issuer Shareholder’s holdings in the Resulting Issuer or indirect holdings in the Resulting Issuer.

 

The presence of one or more material liabilities of an acquired company that are unknown to the Resulting Issuer at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Resulting Issuer. A strategic transaction may result in a significant change in the nature of the Resulting Issuer’s business, operations and strategy. In addition, the Resulting Issuer may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Resulting Issuer’s operations.

 

Risks related to the difficulty of attracting and retaining personnel.

 

The Resulting Issuer’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 Resulting Issuer’s business. If the Resulting Issuer 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.

 

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Co-investment risk in terms of control over the Resulting Issuer’s investments.

 

The Resulting Issuer 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 Resulting Issuer. Although it is our intent to retain control and other superior rights over the Resulting Issuer’s investments, under certain circumstances it may be possible that the Resulting Issuer 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 Resulting Issuer does maintain a control position with respect to its investments, the Resulting Issuer’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 Resulting Issuer, or may be in a position to take (or block) action in a manner contrary to the Resulting Issuer’s objectives. The Resulting Issuer 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 Resulting Issuer, and such different terms may be disadvantageous to the Resulting Issuer.

 

Liabilities arising from the Resulting Issuer’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 Resulting Issuer sells services or products via web-based links targeting only jurisdictions in which such sales or services are compliant with State law, the Resulting Issuer may face legal action in other jurisdictions which are not the intended object of any of the Resulting Issuer’s marketing efforts for engaging in any web-based activity that results in sales into such jurisdictions deemed illegal under applicable laws.

 

The Resulting Issuer will be subject to the costs of being a public company.

 

As a public issuer, BRND is, and the Resulting Issuer upon completion of the Transaction will be, subject to the reporting requirements and rules and regulations under the applicable Canadian securities laws and rules of any stock exchange on which the Resulting Issuer’s securities may be listed from time to time. Additional or new regulatory requirements may be adopted in the future. The requirements of existing and potential future rules and regulations will increase the Resulting Issuer’s legal, accounting and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on its personnel, systems and resources, which could adversely affect its business and financial condition.

 

In particular, the Resulting Issuer will be subject to reporting and other obligations under applicable Canadian securities laws, including NI 52-109, which requires annual management assessment of the effectiveness of the Resulting Issuer’s internal controls over financial reporting. Effective internal controls, including financial reporting and disclosure controls and procedures, are necessary for the Resulting Issuer to provide reliable financial reports, to effectively reduce the risk of fraud and to operate successfully as a public company. These reporting and other obligations place significant demands on the Resulting Issuer as well as on the Resulting Issuer’s management, administrative, operational and accounting resources.

 

Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Resulting Issuer’s results of operations or cause it to fail to meet its reporting obligations. If the Resulting Issuer or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in the Resulting Issuer’s consolidated financial statements and materially adversely affect the trading price of the applicable Equity Shares.

 

Certain remedies may be limited to the Resulting Issuer.

 

Pursuant to its governing documents, the Resulting Issuer and the shareholders of the Resulting Issuer may be prevented from recovering damages for alleged errors or omissions made by the members of the Resulting Issuer Board and its officers. The Resulting Issuer’s governing documents may also provide that the Resulting Issuer will, to the fullest extent permitted by law, indemnify members of the Resulting Issuer Board and its officers for certain liabilities incurred by them by virtue of their acts on behalf of the Resulting Issuer.

 

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The Resulting Issuer may have difficulty enforcing judgments and effecting service of process on directors and officers.

 

The directors and officers of the BRND 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 BRND 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 BRND 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 GH Group is not indicative of the future operating results of the Resulting Issuer. There can be no assurance that the historical operating results achieved by GH Group or its affiliates will be achieved by the Resulting Issuer, and the Resulting Issuer’s performance may be materially different.

 

Financial projections may prove materially inaccurate or incorrect.

 

Any GH Group or the Resulting Issuer financial estimates, projections and other forward-looking information or statements included in this prospectus were prepared by BRND 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 prospectus. BRND Shareholders should inquire of BRND 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, BRND Shareholders should not rely on any projections to indicate the actual results the Resulting Issuer might achieve.

 

The Resulting Issuer may not pay dividends.

 

It is not intended that the Resulting Issuer will pay any dividends on the Equity Shares in the foreseeable future. Dividends paid by the Resulting Issuer would be subject to tax and, potentially, withholdings.

 

Market and Economy Risks

 

The Resulting Issuer may be vulnerable to currency exchange fluctuations.

 

Due to BRND’s present operations in the United States, and its intention to continue future operations outside Canada, the Resulting Issuer is expected to be 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 Resulting Issuer’s revenue will be earned in US dollars, but a portion of its operating expenses are incurred in Canadian dollars. Fluctuations in the exchange rate between the US dollar and the Canadian dollar may have a material adverse effect on the Resulting Issuer’s business, financial position or results of operations or prospects.

 

The Resulting Issuer 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 Resulting Issuer, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in the business prospects for the Resulting Issuer, general economic conditions, legislative changes, and other events and factors outside of the Resulting Issuer’s control. In addition, stock markets have from time to time 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.

 

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There may be restrictions on the market for the Equity Shares.

 

Notwithstanding that it is a condition of closing that the Equity Shares are listed on the NEO Exchange (and excluding the Multiple Voting Shares which will not be listed securities), 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 Resulting Issuer’s licenses in that State being revoked.

 

There may be a limited market for the Equity Shares.

 

Notwithstanding that it is a condition of closing that the Equity Shares are listed on the NEO Exchange (and excluding the Multiple Voting Shares which will not be listed securities), there can be no assurance that an active and liquid market for such Equity Shares will develop or be maintained and a Resulting Issuer Shareholder may find it difficult to resell any securities of the Resulting Issuer.

 

The Resulting Issuer may be subject to the risks posed by sales by existing BRND Shareholders.

 

Sales of a substantial number of Equity Shares (and excluding the Multiple Voting Shares which will not be listed securities) in the public market could occur at any time by existing holders of such Equity Shares. These sales, or the market perception that the holders of a large number of Equity Shares intend to sell Equity Shares, could reduce the market price of the Equity Shares. If this occurs and continues, it could impair the Resulting Issuer’s ability to raise additional capital through the sale of securities.

 

Subsequent offerings will result in dilution to holders of the Equity Shares.

 

The Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer would result in dilution to holders of Equity Shares. Exercises of issued and outstanding BRND Warrants may also result in dilution to the holders of Equity Shares.

 

The Cashless Exercise feature of the BRND Warrants could result in more volatile financial results.

 

The Cashless Exercise feature of the BRND Warrants could result in more volatile financial results because with the Cashless Exercise feature, the BRND Warrants are classified as a liability and are therefore recorded at fair value. Any fluctuations in the fair value of a BRND Warrant would be reflected in income.

 

Global financial conditions and the future economic shocks may impair the Resulting Issuer’s financial condition.

 

Following the onset of the credit crisis in 2007-2008, global financial conditions were characterized by extreme volatility and several major financial institutions either went into bankruptcy or were rescued by governmental authorities. While global financial conditions subsequently stabilized, there remains considerable risk in the system given the extraordinary measures adopted by government authorities to achieve that stability. Global financial conditions could suddenly and rapidly destabilize in response to future economic shocks, as government authorities may have limited resources to respond to future crises.

 

Future economic shocks may be precipitated by a number of causes, including a rise in the price of oil, geopolitical instability and natural disasters. Any sudden or rapid destabilization of global economic conditions could impact the Resulting Issuer’s ability to obtain equity or debt financing in the future on terms favourable to the Resulting Issuer. Additionally, any such occurrence could cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. Further, in such an event, the Resulting Issuer’s operations and financial condition could be adversely impacted.

 

Furthermore, general market, political and economic conditions, including, for example, inflation, interest and currency exchange rates, structural changes in the cannabis industry, supply and demand for commodities, political developments, legislative or regulatory changes, social or labour unrest and stock market trends will affect the Resulting Issuer’s operating environment and its operating costs, profit margins and share price. Any negative events in the global economy could have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Environmental Risks

 

The Resulting Issuer may be subject to significant environmental regulations and risks.

 

The Resulting Issuer’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 Resulting Issuer’s operations.

 

Government approvals and permits are currently, and may in the future, be required in connection with the Resulting Issuer’s operations. To the extent such approvals are required and not obtained, the Resulting Issuer may be curtailed or prohibited from its proposed production of medical marijuana 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 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 Resulting Issuer 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 Resulting Issuer and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

 

The Resulting Issuer may be subject to unknown environmental risks.

 

There can be no assurance that the Resulting Issuer will not encounter hazardous conditions at the facilities where it operates its businesses, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Resulting Issuer may be suspended. The presence of other hazardous conditions may require significant expenditure of the Resulting Issuer’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Resulting Issuer.

 

Tax Risks

 

U.S. and Canadian tax residence of the Resulting Issuer.

 

It is anticipated that the Resulting Issuer will be treated as a U.S. corporation for U.S. federal income tax purposes under section 7874 of the Code as a result of the Transaction (although no definitive determination of this matter has been reached, and no tax ruling has been sought or obtained in this regard). As a result, it is anticipated that the Resulting Issuer will be considered a U.S. tax resident for U.S. federal income tax purposes and therefore subject to U.S. federal income tax on its worldwide income. For Canadian tax purposes, however, BRND is and the Resulting Issuer will continue to be treated as a Canadian resident company (as defined in the Tax Act) for Canadian federal income tax purposes. Consequently, it is anticipated that the Resulting Issuer would be subject to income tax both in Canada and the U.S., which could have a material adverse effect on its financial condition and results of operations.

 

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The deduction of certain expenses of the Resulting Issuer 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 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. It is expected that the Resulting Issuer will be subject to section 280E of the Code and consequently, section 280E of the Code may adversely affect the Resulting Issuer’s profitability and, in fact, may cause the Resulting Issuer 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 the law, it is anticipated that the Resulting Issuer will be subject to section 280E of the Code.

 

Dividends paid by the Resulting Issuer may be subject to withholding tax.

 

It is unlikely that the Resulting Issuer will pay any dividends on the Equity Shares in the foreseeable future. However, dividends received by holders who are residents of Canada for purpose 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 Resulting Issuer 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 Resulting Issuer, 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 Resulting Issuer, subject to examination of the relevant treaty.

 

The Resulting Issuer 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. It is anticipated that the Transaction will result in an ownership change for purposes of section 382 of the Code. However, BRND currently does not have, and does not expect at the time of the Transaction to 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.

 

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Risk of U.S. tax classification of the Resulting Issuer as a U.S. Real Property Holding Company.

 

As a result of the Transaction, discussed above, it is anticipated that the Resulting Issuer will be 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. Holders (as defined below) may be subject to U.S. federal income tax upon a disposition of their Equity Shares depending on whether the Resulting Issuer is classified as a United States real property holding corporation (a “USRPHC”) under the Code. It is not expected that the Resulting Issuer will be a USRPHC, but we do not intend to seek formal confirmation of its status as a non-USRPHC from the IRS. If the Resulting Issuer were to be considered a USRPHC, Non-U.S. Holders may be subject to U.S. federal income tax on any gain associated with the disposition of their Equity Shares.

 

The discussion of certain U.S. federal income tax and certain Canadian federal income tax risks under “Risk Factors – Tax Risks” is subject in its entirety to the summaries set forth in “Certain Canadian Federal Income Tax Considerations” and “Certain United States Federal Income Tax Considerations”.

 

EACH SHAREHOLDER SHOULD SEEK TAX ADVICE, BASED ON SUCH SHAREHOLDER’S PARTICULAR CIRCUMSTANCES, FROM AN INDEPENDENT TAX ADVISOR.

 

CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 

The following is, as of the date hereof, a general summary of certain Canadian federal income tax considerations under the Tax Act are generally applicable to a beneficial owner of Equity Shares and BRND Warrants (collectively, the “Securities”) following the Transaction who at all relevant times, for purposes of the Tax Act, deals at arm’s length with, and is not affiliated with, the Resulting Issuer and who will acquire and hold such Securities as capital property (a “Holder”), all within the meaning of the Tax Act. A Security will generally be considered to be capital property to a Holder unless the Holder holds (or will hold) such Security in the course of carrying on a business of trading or dealing in securities or has acquired (or will acquire) them in a transaction or transactions considered to be an adventure or concern in the nature of trade.

 

This summary is not applicable to a Holder: (a) that is a “financial institution” for purposes of the “mark-to-market rules” in the Tax Act; (b) an interest in which is a “tax shelter investment” as defined in the Tax Act; (c) that is a “specified financial institution” as defined in the Tax Act; (d) that has made a “functional currency” election under the Tax Act to determine its “Canadian tax results”, as defined in the Tax Act, in a currency other than Canadian currency; (e) that enters into, or has entered into, a “derivative forward agreement” as such term is defined in the Tax Act, with respect to a Security; (f) that is a BRND Founder; or (g) that is an Unsuitable Person. Any such Holder to which this summary does not apply should consult its own tax advisor. In addition, this summary does not address the deductibility of interest by a Holder who has borrowed money or otherwise incurred debt in connection with the acquisition or holding of Securities.

 

This summary does not address the possible application of the “foreign affiliate dumping” rules in section 212.3 of the Tax Act to a Holder that (i) is a corporation resident in Canada and (ii) is or becomes (or does not deal at arm’s length for purposes of the Tax Act with a corporation resident in Canada that is or becomes), as part of a transaction or event or series of transactions or events that includes the acquisition of an Equity Share, controlled by a non-resident corporation, non-resident individual, non-resident trust, or group of any of the foregoing who do not deal at arm’s length with each other for purposes of such rules. Such Holders should consult their own tax advisors with respect to the possible application of these rules.

 

This summary is of a general nature only, is based upon the current provisions of the Tax Act, specific proposals to amend the Tax Act (the “Tax Proposals”) which have been announced by or on behalf the Minister of Finance (Canada) prior to the date hereof, and counsel’s understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency. This summary assumes that the Tax Proposals will be enacted in the form proposed and does not take into account or anticipate any other changes in law, whether by way of judicial, legislative or governmental decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax considerations discussed herein. No assurances can be given that the Tax Proposals will be enacted as proposed or at all, or that legislative, judicial or administrative changes will not modify or change the statements expressed herein.

 

This summary is not exhaustive of all possible Canadian federal income tax considerations applicable to an investment in Securities and is not intended to be, nor should it be construed to be, legal or income tax advice to any particular Holder. Holders are urged to consult their own income tax advisors with respect to the tax consequences applicable to the acquisition, holding and disposition of Securities based on their own particular circumstances.

 

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Residents of Canada

 

This portion of the summary is applicable to a Holder who, for the purposes of the Tax Act and at all relevant times, is or is deemed to be resident in Canada (a “Resident Holder”). A Resident Holder whose Equity Shares might not otherwise qualify as capital property may, in certain circumstances, make the irrevocable election pursuant to subsection 39(4) of the Tax Act to deem their Equity Shares, and every other “Canadian security”, as defined in the Tax Act, owned by such Resident Holder in the taxation year of the election and in all subsequent taxation years, to be capital property. Such election will not apply in respect of BRND Warrants. Resident Holders should consult their own tax advisors with respect to whether an election under subsection 39(4) of the Tax Act is available and advisable having regard to their own particular circumstances.

 

Exercise or Expiry of BRND Warrants

 

No gain or loss will be realized by a Resident Holder of a BRND Warrant upon the exercise of such BRND Warrant. When a BRND Warrant is exercised, the Resident Holder’s cost of the Equity Share acquired thereby will be equal to the adjusted cost base of the BRND Warrant to such Resident Holder, plus the amount paid on the exercise of the BRND Warrant. For the purpose of computing the adjusted cost base to a Resident Holder of each Equity Share acquired on the exercise of a BRND Warrant, the cost of such Equity Share must be averaged with the adjusted cost base to such Resident Holder of all other Equity Shares of that class (if any) held by the Resident Holder as capital property immediately prior to the exercise of such BRND Warrant.

 

Generally, the expiry of an unexercised BRND Warrant will give rise to a capital loss equal to the adjusted cost base to the Resident Holder of such expired BRND Warrant. See “Disposition of Securities” below.

 

Disposition of Securities

 

A Resident Holder who disposes of or is deemed to have disposed of a Security (other than a disposition arising on the exercise of a BRND Warrant by a Resident Holder) will generally realize a capital gain (or incur a capital loss) in the year of disposition equal to the amount by which the proceeds of disposition in respect of the Security exceed (or are exceeded by) the aggregate of the adjusted cost base of such Security and any reasonable expenses associated with the disposition. The tax treatment of capital gains and capital losses is discussed in greater detail below under the subheading “Taxation of Capital Gains and Capital Losses”.

 

Taxation of Capital Gains and Capital Losses

 

Generally, one-half of any capital gain (a “taxable capital gain”) realized by a Resident Holder must be included in computing the Resident Holder’s income for the taxation year in which the disposition occurs. Subject to and in accordance with the provisions of the Tax Act, one-half of any capital loss incurred by a Resident Holder (an “allowable capital loss”) may be used to offset taxable capital gains realized by the Resident Holder in the taxation year of disposition. Allowable capital losses in excess of taxable capital gains for the taxation year of disposition may be applied to reduce net taxable gains realized by the Resident Holder in the three preceding taxation years or in any subsequent year in the circumstances and to the extent provided in the Tax Act.

 

The amount of any capital loss realized on the disposition of an Equity Share by a Resident Holder that is a corporation may, in certain circumstances, be reduced by the amount of dividends which have been previously received or deemed to have been received by the Resident Holder on such share. Similar rules may apply where a corporation is, directly or through a trust or partnership, a member of a partnership or a beneficiary of a trust that owns Equity Shares.

 

A Resident Holder that is, throughout the relevant taxation year, a “Canadian-controlled private corporation” (as defined in the Tax Act) may be subject to pay a refundable tax on its “aggregate investment income”, which is defined in the Tax Act to include capital gains on the disposition or deemed disposition of Securities.

 

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Capital gains realized by an individual and certain trusts may result in the individual or trust paying minimum tax under the Tax Act.

 

A Resident Holder may, in certain specific circumstances, be subject to United States tax on a gain realized on the disposition of a Security (see “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Dispositions of Equity Shares or BRND Warrants”). United States tax, if any, levied on any gain realized on a disposition of a Security may be eligible for a foreign tax credit under the Tax Act to the extent and under the circumstances described in the Tax Act. Generally, a foreign tax credit in respect of a tax paid to a particular foreign country is limited to the Canadian tax otherwise payable in respect of income sourced in that country. Gains realized on the disposition of a Security by a Resident Holder may not be treated as income sourced in the United States for these purposes. Resident Holders should consult their own tax advisors with respect to the availability of a foreign tax credit, having regard to their own particular circumstances.

 

Dividends on Equity Shares

 

Dividends (including deemed dividends) received on Equity Shares by a Resident Holder who is an individual (and certain trusts) will be included in the Resident Holder’s income and be subject to the gross-up and dividend tax credit rules applicable to taxable dividends received by an individual from taxable Canadian corporations, including the enhanced gross-up and dividend tax credit for “eligible dividends” properly designated as such by the Resulting Issuer.

 

Dividends (including deemed dividends) received on Equity Shares by a Resident Holder that is a corporation will be included in the Resident Holder’s income and will generally be deductible in computing such Resident Holder’s taxable income. In certain circumstances, subsection 55(2) of the Tax Act will treat a taxable dividend received by a Resident Holder that is a corporation as proceeds of disposition of the Equity Share or a capital gain. Resident Holders that are corporations should consult their own tax advisors having regard to their own circumstances.

 

A Resident Holder that is a “private corporation” (as defined in the Tax Act) or any other corporation resident in Canada and controlled, whether by reason of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts), may be liable to pay a refundable tax under Part IV of the Tax Act on dividends received on the Equity Shares to the extent that such dividends are deductible in computing the Resident Holder’s taxable income. Dividends received by a Resident Holder that is an individual or a trust, other than certain specified trusts, may give rise to minimum tax under the Tax Act.

 

A Resident Holder may be subject to United States withholding tax on dividends received on the Equity Shares (see “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Distributions on Equity Shares”). Any United States withholding tax paid by or on behalf of a Resident Holder in respect of dividends received on the Equity Shares by a Resident Holder may be eligible for foreign tax credit or deduction treatment where applicable under the Tax Act. Generally, a foreign tax credit in respect of a tax paid to a particular foreign country is limited to the Canadian tax otherwise payable in respect of income sourced in that country. Dividends received on the Equity Shares by a Resident Holder may not be treated as income sourced in the United States for these purposes. Resident Holders should consult their own tax advisors with respect to the availability of any foreign tax credits or deductions under the Tax Act in respect of any United States withholding tax applicable to dividends on the Equity Shares.

 

Conversion of Equity Shares

 

The conversion of shares of a class of Equity Shares into shares of a different class of Equity Shares will be deemed not to constitute a disposition of property for purposes of the Tax Act and, accordingly, will not give rise to a capital gain or capital loss. The cost to a Resident Holder of the Equity Shares received on such conversion will be deemed to be equal to the Resident Holder’s adjusted cost base of the converted shares immediately before the conversion. For the purpose of computing the adjusted cost base to a Holder of each Equity Share of a particular class acquired on such conversion, the cost of such Equity Share must be averaged with the adjusted cost base to such Holder of all other shares of that class (if any) held by the Holder as capital property immediately prior to the conversion.

 

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Eligibility for Investment

 

The Equity Shares and the BRND Warrants will, on the date hereof, be qualified investments for a trust governed by a registered retirement savings plan (“RRSP”), a registered retirement income fund (“RRIF”), a deferred profit sharing plan, a registered education savings plan (“RESP”), a registered disability savings plan (“RDSP”) or a tax-free savings account (“TFSA”), provided that:

 

(i) in the case of the Equity Shares, the Equity Shares are listed on a designated stock exchange for the purposes of the Tax Act (which currently includes the NEO Exchange); and

 

(ii) in the case of the BRND Warrants: (a) the BRND Warrants are listed on a designated stock exchange for purposes of the Tax Act (which currently includes the NEO Exchange); or (b) the shares to be issued on the exercise of the BRND Warrants are qualified investments as described in (i) above, provided that the Resulting Issuer is not, and deals at arm’s length with each person who is, an annuitant, a beneficiary, an employer or a subscriber under or a holder of such registered plan.

 

Notwithstanding the foregoing, the holder of a TFSA or an RDSP, the annuitant under an RRSP or RRIF, or the subscriber of an RESP, will be subject to a penalty tax in respect of the Equity Shares or BRND Warrants held in the TFSA, RRSP, RRIF, RDSP or RESP if such Securities are prohibited investments for the TFSA, RRSP, RRIF, RDSP or RESP. A Security will generally be a “prohibited investment” for a TFSA, RRSP, RRIF, RDSP or RRIF if the holder of the TFSA or RDSP, the annuitant under the RRSP or RRIF, or the subscriber of the RESP does not deal at arm’s length with the Resulting Issuer for the purposes of the Tax Act, or the holder, annuitant or subscriber has a “significant interest” (as defined in subsection 207.01(4) the Tax Act) in the Resulting Issuer. Holders of a TFSA or RDSP, annuitants under an RRSP or RRIF, and subscribers of RESPs should consult their own tax advisors as to whether Securities will be a prohibited investment in their particular circumstances.

 

Non-Residents of Canada

 

This portion of the summary is generally applicable to a Holder who, for purposes of the Tax Act and at all relevant times, is neither resident nor deemed to be resident in Canada and does not use or hold, and will not be deemed to use or hold, Securities in a business carried on in Canada (a “Non-Resident Holder”). Special considerations, which are not discussed in the summary, may apply to a Non-Resident Holder that is an insurer that carries on an insurance business in Canada and elsewhere. Such Holders should consult their own advisers.

 

Exercise or Expiry of BRND Warrants

 

The tax consequences of the exercise and expiry of a BRND Warrant held by a Non-Resident Holder are the same as those described above under “Residents of Canada – Exercise or Expiry of BRND Warrants”.

 

Dividends on Equity Shares

 

Dividends paid or credited, or deemed to be paid or credited, on the Equity Shares to a Non-Resident Holder will be subject to non-resident withholding tax under the Tax Act at the rate of 25%, although such rate may be reduced under the terms of an applicable income tax convention between Canada and the country in which the Non-Resident Holder is resident. For example, the rate of withholding tax applicable to a dividend paid on the Equity Shares to a Non-Resident Holder who is a resident of the U.S. for purposes of the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), who beneficially owns the dividend and who qualifies for the benefits of the Canada-U.S. Tax Convention will generally be reduced to 15% or, if the Non-Resident Holder is a corporation that owns at least 10% of the voting stock of the Resulting Issuer, to 5%. Not all persons who are residents of the U.S. for purposes of the Canada-U.S. Tax Convention will qualify for the benefits of the Canada-U.S. Tax Convention. A Non-Resident Holder who is a resident of the U.S. is advised to consult its tax advisor in this regard.

 

A Non-Resident Holder may be subject to United States withholding tax on dividends received on the Equity Shares (see “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Distributions on Equity Shares”).

 

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Disposition of Securities

 

A Non-Resident Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Security, nor will capital losses arising therefrom be recognized under the Tax Act, unless the Security constitutes “taxable Canadian property” to the Non-Resident Holder for purposes of the Tax Act, and the gain is not exempt from tax pursuant to the terms of an applicable income tax convention between Canada and the country in which the Non-Resident Holder is resident.

 

Generally, provided the Equity Shares are listed on a “designated stock exchange” for the purposes of the Tax Act (which currently includes the NEO Exchange) at the time of disposition, the Equity Shares and the BRND Warrants, as the case may be, generally will not constitute taxable Canadian property of a Non-Resident Holder unless, at any time during the 60-month period immediately preceding the disposition, the following two conditions are met concurrently: (i) the Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at arm’s length, partnerships in which the Non-Resident Holder or persons with whom the Non-Resident Holder did not deal at arm’s length held a membership interest, directly or indirectly through one or more partnerships, or the Non-Resident Holder together with all such persons, owned 25% or more of the issued Equity Shares or any other class or series of shares of the Resulting Issuer; and (ii) more than 50% of the fair market value of the Equity Shares was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, “Canadian resource property” (as defined in the Tax Act), “timber resource property” (as defined in the Tax Act), or any option in respect of, or interest in, or for civil law a right in such properties, whether or not the property exists. Notwithstanding the foregoing, a Security may otherwise be deemed to be taxable Canadian property to a Non-Resident Holder for purposes of the Tax Act.

 

Even if a Security is taxable Canadian property to a Non-Resident Holder, any capital gain realized upon the disposition of such Security may not be subject to tax under the Tax Act if such capital gain is exempt from Canadian tax pursuant to the provisions of an applicable income tax convention. If a Non-Resident Holder to whom Securities are taxable Canadian property is not exempt from tax under the Tax Act by virtue of an income tax convention, the consequences described under “Residents of Canada – Taxation of Capital Gains and Capital Losses” will generally apply.

 

Conversion of Equity Shares

 

The tax consequences of the conversion of shares of a class of Equity Shares into shares of a different class of Equity Shares are the same as those described above under “Residents of Canada Conversion of Equity Shares”.

 

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion sets forth a summary of the principal U.S. federal income tax consequences of (i) the Transaction to U.S. Holders (as defined below) of BRND Class A Restricted Voting Shares and BRND Warrants prior to the Transaction, (ii) the Transaction to the tax classification of the Resulting Issuer, (iii) the redemption of BRND Class A Restricted Voting Shares in connection with the Transaction to U.S. Holders or Non-U.S. Holders that elect to have all or a portion of their BRND Class A Restricted Voting Shares redeemed, and (iv) the ownership and disposition of the Equity Shares issued pursuant to the Transaction to U.S. Holders and Non-U.S. Holders, but does not purport to be a complete analysis of all potential tax matters for consideration in connection with the Transaction. This summary does not address the U.S. federal income tax consequences of any transactions that take place prior to the Transaction, including the sale of any BRND Class A Restricted Voting Shares or BRND Warrants prior to the Transaction.

 

This discussion is based on the provisions of the Code as well as final, temporary and proposed treasury regulations promulgated thereunder (the “Treasury Regulations”) and current administrative rulings and judicial decisions, all as in effect as of the date hereof. Legislative, judicial, or administrative modifications, revocations, or interpretations that occur in the future, which may or may not be retroactive, may result in U.S. federal income tax consequences significantly different from those discussed herein.

 

BRND has not obtained, and will not obtain, a ruling from the IRS or opinion of legal counsel with respect to any U.S. federal tax consequences of the Transaction described herein. This discussion is not binding on the IRS and the IRS may disagree with the discussion and conclusions herein, and its determination may be upheld by a court.

 

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This summary assumes that any shares of the Resulting Issuer are held as capital assets within the meaning of section 1221 of the Code (generally, property held for investment), in the hands of a shareholder at all relevant times and are treated as equity of the Resulting Issuer for U.S. federal income tax purposes. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to particular holders in light of their personal investment or tax circumstances or to persons that are subject to special tax rules. For example, this summary of U.S. tax consequences does not address the tax treatment of special classes of holders who are subject to special rules, including without limitation: (a) financial institutions or financial services entities; (b) insurance companies; (c) taxpayers who have elected mark-to-market accounting for U.S. tax purposes; (d) tax-exempt entities; (e) governments or agencies or instrumentalities thereof; (f) regulated investment companies or real estate investment trusts; (g) brokers, dealers, or traders in securities or currencies; (h) United States expatriates or former long-term residents of the United States; (i) persons subject to the alternative minimum tax; (j) partnerships or other pass-through entities; (k) persons that hold BRND Class A Restricted Voting Shares or BRND Warrants as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; (l) controlled foreign corporations; (m) corporations that accumulate earnings to avoid U.S. federal income tax; (n) passive foreign investment companies; (o) holders who acquired their BRND Class A Restricted Voting Shares or BRND Warrants pursuant to employee stock options, participation in an employee stock purchase plan or otherwise as compensation; (p) except as discussed below in connection with the Conversion (as defined below), holders that own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the Resulting Issuer after the Transaction; and (q) persons whose functional currency is not the U.S. dollar. In addition, this summary does not address any U.S. federal estate, gift, or other non-income tax, or any state, local, or non-U.S. tax considerations of the ownership and disposition of Shares, BRND Class A Restricted Voting Shares or BRND Warrants or the impact of the alternative minimum tax or the Medicare contribution tax on net investment income.

 

If a partnership (including, for this purpose, any other entity either organized within or without the United States that is treated as a partnership for U.S. federal income tax purposes) holds BRND Class A Restricted Voting Shares, BRND Class B Shares or BRND Warrants, the U.S. federal income tax treatment of a partner as a beneficial owner of such shares generally will depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner in a partnership holding BRND Class A Restricted Voting Shares, BRND Class B Shares or BRND Warrants, such U.S. Holder should consult its own tax advisors regarding the tax consequences of the Transaction.

 

As used in this summary, the term U.S. Holder means a beneficial owner of the BRND Class A Restricted Voting Shares or BRND Warrants (or after the Transaction, of the Equity Shares or BRND Warrants) that is for U.S. federal income tax purposes: (a) an individual treated as a citizen or resident of the United States; (b) a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; (c) an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or (d) a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (ii) it has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

 

A beneficial owner of the BRND Class A Restricted Voting Shares or BRND Warrants (or after the Transaction, of the Equity Shares or BRND Warrants) who is not a U.S. Holder and is not a partnership for U.S. federal income tax purposes is referred to as a Non-U.S. Holder.

 

THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. U.S. HOLDERS AND NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME, ESTATE, AND GIFT TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, AND NON-U.S. TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE RESULTING ISSUER, BRND CLASS A RESTRICTED VOTING SHARES OR BRND WARRANTS.

 

Tax Treatment of the Transaction to the Resulting Issuer and Classification of the Resulting Issuer as a U.S. Domestic Corporation

 

As a result of the Transaction, pursuant to section 7874(b) of the Code and the Treasury Regulations promulgated thereunder, notwithstanding that BRND is currently organized under the provisions of the BCBCA in connection with the Transaction, solely for U.S. federal income tax purposes, it is anticipated that the Resulting Issuer will be treated as converting to a U.S. domestic corporation at the end of the day immediately preceding the Effective Date under a tax-deferred reorganization under section 368(a) of the Code (the “Conversion”). We should not recognize any gain or loss as a result of the Conversion.

 

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It is anticipated that we will experience a number of significant and complicated U.S. federal income tax consequences as a result of being treated as a U.S. domestic corporation for U.S. federal income tax purposes, and this summary does not attempt to describe all such U.S. federal income tax consequences. Section 7874 of the Code and the Treasury Regulations promulgated thereunder do not address all the possible tax consequences that arise from the Resulting Issuer being treated as a U.S. domestic corporation for U.S. federal income tax purposes. Accordingly, there may be additional or unforeseen U.S. federal income tax consequences to BRND that are not discussed in this summary.

 

Generally, the Resulting Issuer will be subject to U.S. federal income tax on its worldwide taxable income (regardless of whether such income is “U.S. source” or “foreign source”) and will be required to file a U.S. federal income tax return annually with the IRS. It is anticipated that the Resulting Issuer will also be subject to tax in Canada. It is unclear how the foreign tax credit rules under the Code will operate in certain circumstances, given the treatment of the Resulting Issuer as a U.S. domestic corporation for U.S. federal income tax purposes and the taxation of the Resulting Issuer in Canada. Accordingly, it is possible that the Resulting Issuer will be subject to double taxation with respect to all or part of its taxable income. It is anticipated that such U.S. and Canadian tax treatment will continue indefinitely and that the Equity Shares will be treated indefinitely as shares in a U.S. domestic corporation for U.S. federal income tax purposes, notwithstanding future transfers. The remainder of this summary assumes that the Resulting Issuer will be treated as a U.S. domestic corporation for U.S. federal income tax purposes.

 

Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares

 

Conversion of BRND into a U.S. Domestic Corporation

 

Tax Considerations upon the Conversion

 

Subject to the discussion in “Effects of Section 367(b) of the Code Upon the Conversion” below, the following U.S. federal income tax consequences will result from the Conversion:

 

(i) U.S. Holders will be deemed to exchange their BRND Class A Restricted Voting Shares of a non-U.S. corporation for BRND Class A Restricted Voting Shares in a U.S. domestic corporation;

 

(ii) U.S. Holders should recognize no gain or loss as a result of the Conversion;

 

(iii) the aggregate tax basis of the BRND Class A Restricted Voting Shares after the Conversion will be the same as such U.S. Holder’s aggregate tax basis in the BRND Class A Restricted Voting Shares immediately prior to the Conversion; and

 

(iv) the holding period of the BRND Class A Restricted Voting Shares will include the holding period of the BRND Class A Restricted Voting Shares prior to the Conversion.

 

Effects of Section 367(b) of the Code Upon the Conversion

 

Notwithstanding qualification of the Conversion as a tax-deferred reorganization under section 368(a) of the Code, U.S. Holders may nevertheless, in certain circumstances, recognize taxable income in connection with the Conversion under section 367(b) of the Code. U.S. Holders who own, directly or indirectly under certain stock attribution rules, 10% or more of the value or combined voting power of the Resulting Issuer (each, a “10% U.S. Shareholder”) will be required to recognize as dividend income a proportionate share of the Resulting Issuer’s “all earnings and profits amount” (“All E&P Amount”), if any, as determined under applicable Treasury Regulations.

 

A U.S. Holder that is not a 10% U.S. Shareholder immediately prior to the Transaction is not required to include any part of the All E&P Amount in income unless such U.S. Holder makes an election to do so (a “Deemed Dividend Election”). Absent a Deemed Dividend Election, such U.S. Holder must recognize gain, but will not recognize any loss, upon the deemed exchange of such U.S. Holder’s BRND Class A Restricted Voting Shares of a non-U.S. corporation for BRND Class A Restricted Voting Shares in a U.S. domestic corporation if such BRND Class A Restricted Voting Shares have a fair market value of $50,000 or more on the date the Transaction is completed. The gain recognized will be added to the transferred basis in BRND Class A Restricted Voting Shares that such U.S. Holder will be deemed to receive in the Conversion.

 

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By making a Deemed Dividend Election, a U.S. Holder that is not a 10% U.S. Shareholder will, in lieu of recognizing a gain upon the exchange of BRND Class A Restricted Voting Shares for BRND Class A Restricted Voting Shares in a U.S. domestic corporation under the Transaction as described above, recognize as dividend income a proportionate share of BRND’s All E&P Amount, if any. A Deemed Dividend Election can be made only if BRND provides such U.S. Holder with information as to the All E&P Amount in respect of such U.S. Holder and the U.S. Holder elects and files certain notices with such U.S. Holder’s U.S. federal income tax return for the tax year in which the Transaction occurs.

 

BRND anticipates that it will have a nominal All E&P Amount per share from inception through to the Effective Date. BRND will continue to refine the computation of its All E&P Amount, as well as estimate its All E&P Amount through the date of closing of the Transaction, which closing date All E&P Amount will need to be finally determined after the Effective Date.

 

The rules under section 367 of the Code with respect to the Transaction and the deemed stock exchange are complex, and each U.S. Holder is strongly urged to consult its own tax advisors regarding these rules, including, if applicable, to make the foregoing election to avoid recognize gain on such deemed exchange of stock.

 

Passive Foreign Investment Company Considerations in Connection with the Conversion

 

In addition to the possibility of taxation under section 367(b) of Code as described above, the Conversion may be a taxable event to U.S. Holders if the Resulting Issuer is, or ever was, a passive foreign investment company (“PFIC”) as defined under section 1297 of Code.

 

A non-U.S. corporation is classified as a PFIC if, for a taxable year, (i) 75% or more of its gross income is passive income (as defined for U.S. federal income tax purposes) or (ii) 50% or more (by value) of its assets either produce or are held for the production of passive income, based on the quarterly average of the fair market value of such assets. For purposes of the PFIC provisions, “gross income” generally means sales revenues less cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” generally includes dividends, interest, royalties, rents, and gains from commodities or securities transactions. In determining whether or not it is classified as a PFIC, a non-U.S. corporation is required to take into account its pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest by value.

 

BRND believes that it was a PFIC during its initial tax year ended December 31, 2019, and based on its income, assets and activities during its current tax year, BRND expects that it should be a PFIC for its current tax year. PFIC classification is factual in nature, and generally cannot be determined until after the close of the tax year in question. Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. No opinion of legal counsel or ruling from the IRS concerning the PFIC status of BRND has been obtained and none will be requested. Consequently, there can be no assurances regarding the PFIC status of BRND during its current tax year or any prior or future tax year.

 

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Under proposed Treasury Regulations, if BRND was classified as a PFIC for any tax year during which a U.S. Holder held BRND Class A Restricted Voting Shares, special rules, set forth in the proposed Treasury Regulations, may increase such U.S. Holder’s U.S. federal income tax liability with respect to the Conversion. Such proposed Treasury Regulations generally would require gain recognition by Non-Electing Shareholders (as defined below) as a result of the Conversion. Under such rules:

 

(i) the Conversion may be treated as a taxable exchange to such U.S. Holder even if such transaction otherwise qualifies as a tax-deferred reorganization under section 368(a) of the Code, as discussed above;

 

(ii) any gain on the deemed exchange of the BRND Class A Restricted Voting Shares for BRND Class A Restricted Voting Shares in a U.S. corporation pursuant to the Conversion will be allocated ratably over such U.S. Holder’s holding period;

 

(iii) the amount allocated to the current tax year and any tax year prior to the first tax year in which BRND was classified as a PFIC will be taxed as ordinary income in the current tax year;

 

(iv) the amount allocated to each of the other tax years will be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year; and

 

(v) an interest charge for a deemed deferral benefit will be imposed with respect to the resulting tax attributable to each of the other tax years, which interest charge is not deductible by non-corporate U.S. Holders.

 

A U.S. Holder that has made a “mark-to-market” election under section 1296 of the Code (a “Mark-to-Market Election”) or a timely and effective election to treat BRND as a “qualified electing fund” (a “QEF”) under section 1295 of the Code (a “QEF Election”) may generally mitigate or avoid the PFIC consequences described above with respect to the Conversion. A U.S. Holder who makes a timely and effective QEF Election generally must report on a current basis its share of BRND’s net capital gain and ordinary earnings for any tax year in which BRND is a PFIC, whether or not BRND distributes any amounts to its shareholders. A U.S. Holder who makes the Mark-to-Market Election generally must include as ordinary income each year the excess of the fair market value of relevant shares over the U.S. Holder’s tax basis therein.

 

With respect to any tax year ending on or prior to the Effective Date, BRND will use commercially reasonable efforts to satisfy the record keeping requirements that apply to a QEF and supply U.S. Holders with information, including PFIC annual information statements, that such U.S. Holders require to report under the QEF rules. BRND may choose to provide the PFIC annual information statement on its website. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a QEF Election. A shareholder who does not make a timely QEF Election or a Mark-to-Market Election is referred to for purposes of this summary as a “Non-Electing Shareholder”.

 

The PFIC provisions are complex. U.S. Holders should consult their own tax advisors regarding the application of the PFIC regime, including whether the proposed Treasury Regulations under section 1291(f) of the Code would apply to the Conversion, the impact of making a Mark-to-Market Election or a QEF Election and/or other elections under the PFIC provisions, and the availability of, and procedures for making, such elections under the Code and Treasury Regulations.

 

Conversion of BRND Class A Restricted Voting Shares to Equity Shares

 

The conversion of BRND Class A Restricted Voting Shares into Equity Shares should qualify as a tax-deferred “recapitalization” within the meaning of section 368(a)(1)(E) of the Code (a “Recapitalization”) and/or a tax-deferred exchange under section 1036(a) of the Code. If the conversion qualifies as a Recapitalization or tax-deferred exchange, then the following U.S. federal income tax consequences will result for U.S. Holders:

 

(vi) a U.S. Holder of BRND Class A Restricted Voting Shares who exchanges BRND Class A Restricted Voting Shares for Equity Shares will not recognize a gain or loss as a result of such conversion;

 

(vii) the aggregate tax basis of a U.S. Holder in the Equity Shares acquired in the conversion will be equal to such U.S. Holder’s aggregate tax basis in the BRND Class A Restricted Voting Shares surrendered in exchange therefor; and

 

(viii) the holding period of a U.S. Holder for the Equity Shares acquired in the conversion will include such U.S. Holder’s holding period for the BRND Class A Restricted Voting Shares surrendered in exchange therefor.

 

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Redemption of BRND Class A Restricted Voting Shares

 

We intend to treat a redemption of Class A Restricted Voting Shares in connection with the Transaction as a redemption occurring after the Conversion. The U.S. federal income tax treatment of U.S. Holders who elect to deposit their BRND Class A Restricted Voting Shares for redemption and whose BRND Class A Restricted Voting Shares are redeemed by BRND pursuant to the Transaction will depend on whether the redemption qualifies as a sale of the BRND Class A Restricted Voting Shares under section 302 of the Code. If the redemption qualifies as a sale of the BRND Class A Restricted Voting Shares under that section, the U.S. Holder will be treated as described under “Dispositions of Equity Shares” below with respect to such U.S. Holder’s BRND Class A Restricted Voting Shares. If the redemption does not qualify as a sale of BRND Class A Restricted Voting Shares, the U.S. Holder will be treated as receiving a corporate distribution with the tax consequences described under “Distributions on Equity Shares” below with respect to their BRND Class A Restricted Voting Shares. Whether the redemption qualifies for sale treatment will depend largely on the percentage of the shares of BRND’s outstanding stock treated as held by the U.S. Holder (including any stock constructively owned by the U.S. Holder, for example, as a result of owning BRND Warrants) both before and after the redemption. The redemption of BRND Class A Restricted Voting Shares generally will be treated as a sale (rather than as a corporate distribution) if the redemption (i) is “substantially disproportionate” with respect to such U.S. Holder, (ii) results in a “complete termination” of such U.S. Holder’s interest in BRND or (iii) is “not essentially equivalent to a dividend” with respect to such U.S. Holder. These tests are explained more fully below.

 

In determining whether any of the foregoing tests are satisfied, a U.S. Holder takes into account not only stock actually owned by such U.S. Holder, but also shares that are constructively owned by such U.S. Holder. A U.S. Holder may constructively own, in addition to stock owned directly, stock owned by certain related individuals and entities in which the U.S. Holder has an interest or that have an interest in such U.S. Holder, as well as any stock the U.S. Holder has a right to acquire by exercise of an option, which would generally include Equity Shares which could be acquired pursuant to the exercise of the BRND Warrants. In order to meet the substantially disproportionate test, the percentage of BRND’s outstanding voting stock actually and constructively owned by the U.S. Holder immediately following the redemption of BRND Class A Restricted Voting Shares must, among other requirements, be less than 80% of the percentage of BRND’s outstanding voting stock actually and constructively owned by such U.S. Holder immediately before the redemption. There will be a complete termination of a U.S. Holder’s interest if either (i) all of the shares of BRND’s stock actually and constructively owned by the U.S. Holder are redeemed, or (ii) all of the shares of BRND’s stock actually owned by the U.S. Holder are redeemed and the U.S. Holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of stock owned by certain family members and the U.S. Holder does not constructively own any other stock of BRND. The redemption of the BRND Class A Restricted Voting Shares will not be essentially equivalent to a dividend if a U.S. Holder’s redemption results in a “meaningful reduction” of the U.S. Holder’s proportionate interest in BRND. Whether the redemption will result in a meaningful reduction of a U.S. Holder’s proportionate interest in BRND will depend on the particular facts and circumstances. However, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority stockholder in a publicly-held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.” A U.S. Holder should consult with its own tax advisors as to the tax consequences of a redemption of such U.S. Holder’s BRND Class A Restricted Voting Shares.

 

If none of the foregoing tests are satisfied, then the redemption will be treated as a corporate distribution and the tax effects will be as described under “Distributions on Equity Shares” below with respect to such U.S. Holder’s BRND Class A Restricted Voting Shares. After the application of those rules, any remaining tax basis of the U.S. Holder in the redeemed BRND Class A Restricted Voting Shares will be added to the U.S. Holder’s adjusted tax basis in its remaining BRND Class A Restricted Voting Shares, or, if it has none, to the U.S. Holder’s adjusted tax basis in its BRND Warrants, or possibly in other stock of BRND constructively owned by it.

 

Tax Considerations of Holding and Disposing of Equity Shares after the Transaction

 

Distributions on Equity Shares

 

As discussed above in the section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of Equity Shares in the foreseeable future. If the Resulting Issuer decides to make any such distributions, however, the gross amount of any distribution paid by the Resulting Issuer on the Equity Shares generally should be included in the gross income of a U.S. Holder as a dividend to the extent the distribution is paid out of the Resulting Issuer’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent that the amount of any distribution exceeds the Resulting Issuer’s current and accumulated earnings and profits, the distribution should be treated, first, as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in its Equity Shares, and then, to the extent that the distribution exceeds the U.S. Holder’s adjusted tax basis in such shares, as a capital gain, which will be a long-term capital gain if the U.S. Holder has held such stock at the time of the distribution for more than one year. Distributions on Equity Shares constituting dividend income paid to U.S. Holders that are U.S. corporations may qualify for the dividends received deduction, subject to various limitations. Distributions on Equity Shares constituting dividend income paid to U.S. Holders that are individuals may qualify for the reduced rates applicable to qualified dividend income.

 

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Foreign Tax Credit Limitations

 

Because it is anticipated that the Resulting Issuer will be subject to tax both as a U.S. domestic corporation and as a Canadian corporation, a U.S. Holder may pay, through withholding, Canadian tax, as well as U.S. federal income tax, with respect to dividends paid on its Equity Shares. For U.S. federal income tax purposes, a U.S. Holder may elect for any taxable year to receive either a credit or a deduction for all foreign income taxes paid by the holder during the year. Complex limitations apply to the foreign tax credit, including a general limitation that the credit cannot exceed the proportionate share of a taxpayer’s U.S. federal income tax that the taxpayer’s foreign source taxable income bears to the taxpayer’s worldwide taxable income. In applying this limitation, items of income and deduction must be classified, under complex rules, as either foreign source or U.S.-source. The status of the Resulting Issuer as a U.S. domestic corporation for U.S. federal income tax purposes will cause dividends paid by BRND to be treated as U.S. source rather than foreign source for this purpose. As a result, a foreign tax credit may be unavailable for any Canadian tax paid on dividends received from BRND. Similarly, to the extent a sale or disposition of the Equity Shares by a U.S. Holder results in Canadian tax payable by the U.S. Holder (for example, because the Equity Shares constitute taxable Canadian property within the meaning of the Tax Act), a U.S. foreign tax credit may be unavailable to the U.S. Holder for such Canadian tax. In each case, however, the U.S. Holder should be able to take a deduction for the U.S. Holder’s Canadian tax paid, provided that the U.S. Holder has not elected to credit other foreign taxes during the same taxable year. The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisor regarding these rules.

 

Foreign Currency

 

If the Resulting Issuer makes a distribution in Canadian dollars or a currency other than U.S. dollars, the amount of the distribution that a U.S. Holder must include in income under the foregoing rules will be the U.S. dollar value of the non-U.S. dollar distribution, determined at the spot rate on the date the distribution is includible in the U.S. holder’s gross income, regardless of whether the distribution is converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. Holder includes the distribution in income to the date the holder converts the distribution into U.S. dollars will be treated as ordinary income or loss when recognized and will not be eligible for taxation at the preferential rates applicable to long-term capital gains. Different rules apply to U.S. Holders of Subordinate Voting Shares who use the accrual method of tax accounting. Each U.S. Holder should consult its own tax advisors.

 

Distributions by BRND to a U.S. Holder on Subordinate Voting Shares may be subject to withholding of Canadian tax. See “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada – Dividends on Equity Shares”.

 

Tax on Net Investment Income

 

Certain U.S. Holders that are individuals, estates, or trusts whose income exceeds certain thresholds will be required to pay an additional 3.8% tax on their “net investment income,” which includes, among other things, dividends and net gain from the sale or other disposition of property (other than property held in a trade or business, other than a passive trade or business or a trade or business consisting of trading financial instruments or commodities).

 

Sale or Dispositions of Equity Shares

 

A U.S. Holder will generally recognize gain or loss, if any, on the sale, exchange, or other disposition of Subordinate Voting Shares equal to the difference between the U.S. Holder’s adjusted tax basis in Equity Shares and the U.S. dollar value of the amount realized on such sale or disposition. Such capital gain or loss will be long-term capital gain or loss if a U.S. Holder’s holding period in the Equity Shares disposed of is more than one year at the time of the sale or other disposition. Long-term capital gains recognized by certain non-corporate U.S. Holders (including individuals) will generally be subject to a maximum U.S. federal income tax rate of 20%. Deductions for capital losses are subject to limitations.

 

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Back-Up Withholding and Information Reporting

 

Payments of dividends on or proceeds arising from the sale or other taxable disposition of Equity Shares generally will be subject to information reporting and back-up withholding, at the current federal rate of 24%, if a U.S. Holder (i) fails to furnish such holder’s correct U.S. taxpayer identification number (generally on IRS Form W-9), (ii) furnishes an incorrect U.S. taxpayer identification number, (iii) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to back-up withholding, or (iv) fails to certify under penalties of perjury that the U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified the U.S. Holder that it is subject to back-up withholding.

 

Back-up withholding is not an additional tax. Any amounts withheld under the back-up withholding rules may be refunded or credited against the U.S. Holder’s U.S. federal income tax liability, assuming the required information is timely provided to the IRS. Moreover, certain penalties may be imposed by the IRS on a U.S. Holder who is required to furnish information but does not do so in the proper manner.

 

U.S. Holders should consult with their own tax advisors regarding the effect, if any, of the foregoing summary on their ownership and disposition of Equity Shares.

 

Tax Consequences of the Transaction to U.S. Holders of BRND Warrants

 

Investment Unit

 

The BRND Warrants and Class A Restricted Voting Share originally purchased with each BRND Warrant (and the Subordinate Voting Share into which such Class A Restricted Voting Share converts) should be treated for U.S. federal income tax purposes as an investment unit consisting of one Equity Share and one-half BRND Warrant to acquire one-half Equity Share. For U.S. federal income tax purposes, the purchase price paid for each investment unit will be allocated between the Equity Shares and BRND Warrants based on their respective relative fair market values. This allocation will be based upon our determination of the relative values of the BRND Warrants and of the Equity Shares.

 

U.S. Holders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of an investment in a unit, and the allocation of the purchase price paid for a unit.

 

Exercise or Lapse of BRND Warrants

 

A U.S. Holder generally will not recognize gain or loss on exercise of the BRND Warrant and will have a tax basis in the Equity Shares received upon exercise equal to the U.S. Holder’s tax basis in the BRND Warrants, plus the exercise price of the BRND Warrants. The holding period for the Equity Shares purchased pursuant to the exercise of BRND Warrant will begin on the date following the date of exercise of the BRND Warrant (or possibly the date of exercise) and will not include the period during which the U.S. Holder held the applicable BRND Warrant.

 

If a BRND Warrant is allowed to lapse unexercised, a U.S. Holder will recognize a capital loss in an amount equal to its tax basis in the applicable BRND Warrant. Such loss will be long-term capital loss if the BRND Warrant has been held for more than one year as of the date the applicable BRND Warrant lapsed. The deductibility of capital losses is subject to certain limitations.

 

Sale or Disposition of BRND Warrants

 

A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of a BRND Warrant in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in the BRND Warrant sold or otherwise disposed of. Any such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if the BRND Warrant is held for more than one year. Deductions for capital losses are subject to various limitations under the Code.

 

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Tax Consequences to Non-U.S. Holders

 

Distributions on Equity Shares

 

The gross amount of any distribution by the Resulting Issuer to a Non-U.S. Holder on Equity Shares will be treated as a dividend to the extent such distribution is paid out of the Resulting Issuer’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent that the amount of any distribution exceeds the Resulting Issuer’s current and accumulated earnings and profits for a taxable year, the distribution will be treated as a tax-free return of capital to the extent of the Non-U.S. Holder’s tax basis in its Equity Shares. Then, to the extent that such distribution exceeds the Non-U.S. Holder’s tax basis in its Equity Shares, it will be treated as gain from the sale or exchange of the Non-U.S. Holder’s Equity Shares (see “Dispositions of Equity Shares” below). Any such distribution that constitutes a dividend is treated as U.S.-source gross income and is subject to withholding under section 1441 of the Code (unless it is treated as “effectively connected” income as described below and appropriate documentation is provided). The withholding rate on dividends under section 1441 of the Code is generally 30%, but may be reduced pursuant to a tax treaty between the U.S. and the jurisdiction of the Non-U.S. Holders. Non-U.S. Holders will be required to provide documentation to claim a treaty exemption or reduced rate of withholding with respect to the distribution. Non-U.S. Holders should also review the discussion of the FATCA rules below. Distributions by the Resulting Issuer to a Non-U.S. Holder on Equity Shares may also be subject to withholding of Canadian tax. See “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada – Dividends on Equity Shares”. Non-U.S. Holders should consult their own tax advisors regarding the extent to which they may be entitled to claim a credit or deduction in their jurisdiction of residence for any taxes withheld on distributions by the Resulting Issuer on the Subordinate Voting Shares.

 

Dispositions of Equity Shares or BRND Warrants

 

A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized upon the disposition of Equity Shares or BRND Warrants unless:

 

(i) such Non-U.S. Holder is a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the taxable year of disposition and certain other conditions are met;

 

(ii) such gain is effectively connected with such Non-U.S. Holder’s conduct of a U.S. trade or business (and, where a tax treaty applies, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder); or

 

(iii) Equity Shares or BRND Warrants constitute a U.S. real property interest by reason of the Resulting Issuer’s status as a “United States real property holding corporation” within the meaning of section 897 of the Code.

 

A Non-U.S. Holder described in the first bullet above is required to pay tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, which may be offset by U.S.-source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses. A Non-U.S. Holder described in the second bullet above, or if the third bullet applies, is required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and corporate Non-U.S. Holders described in the second bullet above may also be subject to branch profits tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty). With respect to the third bullet point above, BRND believes it currently is not, and does not anticipate becoming, a USRPHC. Because the determination of whether BRND is a USRPHC depends, however, on the fair market value of BRND’s USRPIs relative to the fair market value of BRND’s non-U.S. real property interests and other business assets, there can be no assurance BRND currently is not a USRPHC or will not become one in the future. Even if BRND is or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of Equity Shares will not be subject to U.S. federal income tax if the Equity Shares are “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market and such Non-U.S. Holder owned, actually and constructively, 5% or less of the Equity Shares throughout the shorter of the five (5)-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

 

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Non-U.S. Holders should consult any applicable income tax treaties that may provide for different results. Non-U.S. Holders should also review the discussion of the FATCA rules, below.

 

Back-Up Withholding and Information Reporting

 

Generally, BRND must report annually to the IRS and to Non-U.S. Holders the amount of dividends paid and the amount of tax, if any, withheld with respect to those payments. These information reporting requirements apply even if withholding is not required. Pursuant to tax treaties or other agreements, the IRS may make such information available to tax authorities in the Non-U.S. Holder’s country of residence. The payment of proceeds from the sale of Subordinate Voting Shares by a broker to a Non-U.S. Holder is generally not subject to information reporting if:

 

(i) the Non-U.S. Holder certifies its non-U.S. status under penalties of perjury by providing a properly executed IRS Form W-8BEN, or otherwise establishes an exemption; or

 

(ii) the sale of Equity Shares is effected outside the United States by a foreign office of a broker, unless the broker is: (1) a U.S. person; (2) a foreign person that derives 50% or more of its gross income for certain periods from activities that are effectively connected with the conduct of a trade or business in the United States; (3) a “controlled foreign corporation” for U.S. federal income tax purposes; or (4) a foreign partnership more than 50% of the capital or profits interest of which is owned by one or more U.S. persons or which engages in a U.S. trade or business.

 

A back-up withholding may apply to amounts paid to a Non-U.S. Holder if the Non-U.S. Holder fails to properly establish its foreign status on the applicable IRS Form W-8 or if certain other conditions are met. Back-up withholding is not an additional tax. Any amounts withheld under the back-up withholding rules may be refunded or credited against the Non-U.S. Holder’s U.S. federal income tax liability, assuming the required information is timely provided to the IRS.

 

Foreign Account Tax Compliance Act

 

Withholding taxes may be imposed under sections 1471 to 1474 of the Code (such sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”), on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on Equity Shares paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (a) the foreign financial institution undertakes certain diligence and reporting obligations, (b) the non-financial foreign entity either certifies it does not have any “substantial United States owners,” as defined in the Code, or furnishes identifying information regarding each substantial United States owner, or (c) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (a) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on the Equity Shares. Under currently proposed Treasury Regulations, “withholdable payments” do not include any gross proceeds from the disposition of property of a type that can produce U.S.-source dividends or interest. Non-U.S. Holders should consult their tax advisors regarding of withholding under FATCA to their investment in Equity Shares.

 

PROMOTER

 

Mercer, BRND’s sponsor (who is also a BRND Founder), is considered a promoter of BRND within the meaning of applicable securities legislation.

 

As of the date of this prospectus, Mercer owns, of record and beneficially, (i) 10,178,751 BRND Class B Shares (comprised of 10,089,750 BRND Founders’ Shares, the 109,000 BRND Class B Shares forming part of the 109,000 (former) BRND Class B Units, and 1 Class B Share representing the Incorporation Share), representing approximately 20% of BRND’s currently issued and outstanding shares, and (ii) 9,864,500 BRND Warrants (comprised of 9,810,000 BRND Founders’ Warrants and the 54,5000 BRND Warrants forming part of the (former) 109,000 BRND Class B Units), representing approximately 32.89% of the issued and outstanding BRND Warrants.

 

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As of the Effective Date, and assuming that no BRND Shareholders elect to redeem their BRND Class A Restricted Voting Shares and before any exchange of Exchangeable Shares for Equity Shares, Mercer is expected to own 10,178,751 Equity Shares, representing (i) a total voting power of approximately 3.4% over the Resulting Issuer, and (ii) approximately 20% of the issued and outstanding Equity Shares.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

BRND is not party to any legal proceedings, nor, to the knowledge of BRND, are any such proceedings contemplated by or against BRND.

 

INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

 

Except as described in this prospectus, none of the proposed directors or executive officers of BRND, or any person or company that is expected to beneficially own, or control or direct more than 10% of any class or series of shares of BRND, or any associate or Affiliate of any of the foregoing persons, has or has had any material interest in any past transaction within the three years before the date of the prospectus, or any proposed transaction, that has materially affected or would materially affect BRND or any of its expected subsidiaries.

 

As at December 31, 2020, the amount due to Mercer by BRND was $205,000 for out-of-pocket expenses paid by Mercer on behalf of BRND and the terms of the administrative services agreement which was entered into by Mercer and BRND as part of the 2019 initial public offering of BRND. The amounts due are unsecured, non-interest bearing and are payable no earlier than the date of the consummation of the Transaction, with no recourse against the funds held in BRND’s escrow account.

 

Since the BRND Founders (including our sponsor, Mercer) will lose their investment in BRND if a qualifying transaction is not completed, they may have different interests than holders of Class A Restricted Voting Shares in evaluating whether a proposed qualifying transaction, such as the Qualifying Transaction, is appropriate. The BRND Founders will not be entitled to redeem their BRND Founders’ Shares in connection with a qualifying transaction or be entitled to access to BRND’s escrow account in respect thereof upon BRND’s winding-up. The personal and financial interests of the BRND Founders may influence the identifying and selecting of the qualifying transaction, the voting on the qualifying transaction and the operation of the business following the qualifying transaction.

 

AUDITORS

 

The auditor of BRND is MNP LLP, having an address at 111 Richmond Street West, Suite 300, Toronto, Ontario, Canada M5H 2G4. Such firm is independent of BRND within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario (registered name of The Institute of Chartered Accountants of Ontario) and within the meaning of PCAOB Rule 3520, Auditor Independence.

 

The auditor of GH Group is Macias Gini & O’Connell, LLP, having an address at 700 South Flower Street, Suite 800, Los Angeles, CA 90017. Such firm is independent of GH Group and BRND within the meaning of the CPA Code of Professional Conduct and within the meaning of PCAOB Rule 3520, Auditor Independence.

 

Upon completion of the Transaction it is proposed that Macias Gini & O’Connell, LLP will be the auditor of the Resulting Issuer.

 

REGISTRAR AND TRANSFER AGENT

 

The transfer agent and registrar of the Equity Shares and the Multiple Voting Shares will be Odyssey Trust Company at its principal offices in Calgary, Alberta.

 

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MATERIAL CONTRACTS

 

The following are expected to be the material contracts of the Resulting Issuer following closing of the Transaction, other than contracts entered into in the ordinary course of business:

 

the Warrant Agreement;

 

the Investor Rights Agreement;

 

the Registration Rights Agreement;

 

the Lockup Agreement;

 

the Exchange Rights Agreement; and

 

the SoCal Greenhouse Agreements.

 

At this time, the following leases of GH Group, which represent GH Group’s two (2) most significant leases, are considered to be material contracts entered into for the purposes of this prospectus:

 

the lease dated as of June 4, 2017 by and between 3243 Sacramento LLC, as lessor, and Farmacy Berkeley, as lessee; and

 

the lease dated as of October 1, 2018 between Neo Street Partners LLC and Lompoc TIC, LLC, as lessor, and CA Manufacturing Solutions LLC, as lessee.

 

No lease represents more than 10% of the consolidated revenues of GH Group.

 

To the extent that cannabis-related licenses could also be considered to be material contracts, see “The Business of GH Group – Cultivation Licenses”, “The Business of GH Group – Manufacturing and Distribution Licenses”, “The Business of GH Group – The Pottery License” and “The Business of GH Group – Bud and Bloom License”.

 

Copies of the above material contracts will be available following completion of the Transaction on the Resulting Issuer’s SEDAR profile at www.sedar.com. Set out below are the particulars of certain material contracts not described elsewhere in this prospectus.

 

CONTRACTUAL RIGHT OF ACTION

 

Original purchasers of BRND Class A Restricted Voting Shares and BRND Warrants from the underwriters in BRND’s initial public offering who continue to hold those securities up to the Redemption Deadline will have a contractual right of action for rescission or damages against BRND (as well as a contractual right of action for damages alone against: (a) the directors of BRND as of the Redemption Deadline (the “BRND directors”), and (b) every person or company who signs this prospectus, which, for greater certainty, includes Mercer as a promoter of BRND (collectively, the “signatories”)).

 

In the event that BRND’s qualifying transaction is completed and if this prospectus or any amendment hereto contains a misrepresentation (as defined in the Securities Act (Ontario)), provided that such claims for rescission or damages are commenced by the purchaser not later than: (a) in the case of an action for rescission, 180 days after the Redemption Deadline, or (b) in the case of an action for damages, the earlier of: (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or (ii) three (3) years after the Redemption Deadline, a purchaser who purchased BRND Class A Restricted Voting Shares and BRND Warrants from BRND in its initial public offering shall, in respect of such BRND Class A Restricted Voting Shares, as re-designated pursuant to the Transaction as the applicable Equity Shares, and such BRND Warrants be entitled to, in addition to any other remedy available at the time to such holder, (i) as against BRND, in the case of rescission, the amount paid for such BRND Class A Restricted Voting Shares and/or such BRND Warrants, as applicable, upon surrender of such securities, and (ii) as against BRND, the BRND directors and the signatories, in the case of a damages election, their proven damages.

 

These parties have attorned to the jurisdiction of the courts of Ontario in respect of such rights of action.

 

In addition, the following additional provisions apply to actions against the BRND directors or the signatories (including the promoter):

 

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(i) each has a due diligence defence and the other defences and rights contemplated in section 130 of the Securities Act (Ontario) and at law; and

 

(ii) each is entitled to be indemnified by BRND to the maximum extent permitted by law.

 

This contractual right of action for rescission or damages will, subject to the foregoing, be consistent with the statutory right of rescission or damages described under section 130 of the Securities Act (Ontario). In no case shall the amount recoverable exceed the original purchase price of the BRND Class A Restricted Voting Units. In addition, for non-residents of Canada, the contractual right shall be subject to the same interpretational or constitutional defences, if any, as would apply to a claim against a resident Canadian issuer under section 130 of the Securities Act (Ontario), and, as a result, the argument that non-residents are not entitled to take advantage of the contractual right shall not be precluded.

 

The directors of BRND as at the date of the final prospectus (or any amendment), namely Jonathan Sandelman, Charles Miles, Lawrence Hackett and Andrew Smith, will, subject to the terms thereof, be potentially liable for misrepresentations in this final prospectus (as it may be amended) under Part XXIII.1 of the Securities Act (Ontario) and the “Contractual Right of Action” as described above. New directors of BRND appointed after such date will not be subject to such liability as such.

 

SECURITIES LAWS EXEMPTIONS

 

BRND has applied to the applicable Canadian securities regulatory authorities for relief from the requirement in sections 3.2 and 3.3 of NI 52-107 that the financial statements included in this prospectus be prepared in accordance with International Financial Reporting Standards and audited as required in accordance with Canadian generally accepted auditing standards, respectively (the “Accounting Standards Relief”). The Accounting Standards Relief will allow this prospectus to include financial statements prepared in accordance with U.S. GAAP and audited as required in accordance with the standards of the U.S. PCAOB GAAS.

 

BRND’s application for the Accounting Standards Relief is based on the fact that: (i) prior to the filing of its final prospectus, BRND will have filed a Form 40-F registration statement with the Securities and Exchange Commission (“SEC”) in the United States and became an SEC issuer (as such term is defined in NI 52-107); and (ii) the use of U.S. GAAP and U.S. PCAOB GAAS is permitted by NI 52-107 for reporting issuers that are SEC issuers. An order signed by the securities regulatory authority in Ontario will constitute evidence that the Accounting Standards Relief has been granted.

 

The Corporation has applied for exemptive relief from the Canadian securities regulatory authorities such that, inter alia, upon closing of the Transaction, each class of Equity Shares may be aggregated for the purposes of certain securities law reporting thresholds, including in respect of certain take-over bid and issuer bid rules and the early warning requirements under National Instrument 62-104 – Take-Over Bid and Issuer Bids.

 

FINANCIAL STATEMENTS

 

Please see attached the following financial statements:

 

audited financial statements of BRND as of and for the year ended December 31, 2020 and December 31, 2019, in each case with the notes thereto and the auditors’ report thereon, attached to this prospectus as Appendix A (the “BRND Audited Annual Financial Statements”);

 

audited consolidated financial statements of GH Group as of and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, in each case with the notes thereto and the auditors’ report thereon, attached to this prospectus as Appendix C (the “GH Group Audited Annual Financial Statements”);

 

audited combined financial statements as of and for the eight (8)-month period ended August 31, 2019 and the year ended December 31, 2018, in each case with the notes thereto and the auditor’s report thereon, attached to this prospectus as Appendix F (the “Bud and Bloom Audited Financial Statements”);

 

171

 

audited financial statements of Farmacy Berkeley as of and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, in each case with the notes thereto and the auditor’s report thereon, attached to this prospectus as Appendix H (the “Farmacy Berkeley Audited Annual Financial Statements”);

 

audited consolidated financial statements of the applicable subsidiaries of Element 7 as of and for the years ended December 31, 2020 and December 31, 2019, in each case with the notes thereto and the auditor’s report thereon, attached to this prospectus as Appendix J (the “Element 7 Audited Annual Financial Statements”); and

 

unaudited pro forma financial statements of BRND, after giving effect to the Transaction, as of and for the year ended December 31, 2020, together with the notes thereto, and attached to this prospectus as Appendix K (the “Resulting Issuer Pro Forma Financial Statements”).

 

172

 

APPENDIX A – BRND AUDITED ANNUAL FINANCIAL STATEMENTS

(YEARS ENDED DECEMBER 31, 2020 AND 2019)

 

(See attached)

 

  A-1  

 

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

FINANCIAL STATEMENTS

 

YEAR ENDED DECEMBER 31, 2020

 

AND

 

APRIL 16, 2019 (DATE OF INCORPORATION)

 

TO DECEMBER 31, 2019

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders of Mercer Park Brand Acquisition Corp.

 

Opinion

 

We have audited the accompanying balance sheets of Mercer Park Brand Acquisition Corp. (“the Corporation”) as of December 31, 2020 and 2019 and the related statements of operations and comprehensive income, shareholders’ deficiency, and cash flows for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019, and the related notes (collectively referred to as the financial statements).

 

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Material Uncertainty Related to Going Concern

 

The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 1 to the financial statements, the Corporation is dependent on the continued support of its Sponsor and/or the completion of the Qualifying Transaction within the permitted timeline, that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Change in Accounting Framework

 

The Corporation has elected to change its accounting framework from International Financial Reporting Standards as issued by the International Accounting Standards Board to accounting principles generally accepted in the United States of America for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019.

 

Basis for Opinion

 

These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the Public Corporation Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ MNP LLP

Chartered Professional Accountants

Licensed Public Accountants

 

We have served as the Corporation’s auditor since 2019.

 

Toronto, Canada

March 29, 2021

 

     

 

 

Mercer Park Brand Acquisition Corp.

Balance Sheets

(Expressed in United Stated Dollars)

 

As at December 31,   2020     2019  
ASSETS                
                 
Current                
Cash   $ 2,095,023     $ 4,127,262  
Income tax recoverable     1,209,852       -  
Prepaid expenses     -       140,869  
      3,304,875       4,268,131  
Marketable securities held in a escrow account (note 5)     407,537,056       405,796,047  
Deferred tax asset (note 14)     598,435       713,425  
Total assets   $ 411,440,366     $ 410,777,603  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIENCY                
                 
Current                
Accounts payable and accrued liabilities   $ 396,779     $ 144,757  
Income tax payable (note 14)     -       713,425  
Due to related parties (note 12)     349,034       172,214  
      745,813       1,030,396  
Deferred underwriters’ commission (note 9)     16,100,000       16,100,000  
Total liabilities     16,845,813       17,130,396  
                 
Commitments and contingencies                
Class A Restricted Voting Shares subject to redemption, 40,250,000 shares (at a redemption value of $10.00 per share) (note 6)     402,500,000       402,500,000  
                 
Shareholders’ deficiency                
Class B shares, unlimited authorized, 10,198,751 issued (note 8(a))     -       -  
Additional paid-in-capital     (11,684,284 )     (11,684,284 )
Retained earnings     3,778,837       2,831,491  
Total shareholders’ deficiency     (7,905,447 )     (8,852,793 )
Total liabilities and shareholders’ deficiency   $ 411,440,366     $ 410,777,603  

 

The accompanying notes are an integral part of these financial statements.

 

Description of organization and business operations and going concern (note 1)

Subsequent event (note 15)

 

Approved on behalf of the Board:

 

“Jonathan Sandelman”, Director  
   
“Charles Miles”, Director  

 

- 3 -

 

Mercer Park Brand Acquisition Corp.

Statements of Operations and Comprehensive Income

(Expressed in United States Dollars)

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Income                
Interest income   $ 1,742,747     $ 3,296,977  
                 
Expenses                
General and administrative (note 11)     702,259       381,137  
Travel     50,000       85,000  
Foreign exchange loss (gain)     43,142       (651 )
      795,401       465,486  
Net income before income taxes     947,346       2,831,491  
                 
Income taxes (note 14)                
Current tax (recovery) expense     (114,990 )     713,425  
Deferred tax expense (recovery)     114,990       (713,425 )
      -       -  
Net income and comprehensive income for the year/period   $ 947,346     $ 2,831,491  
                 
Basic and diluted net income per Class B share   $ 0.09     $ 0.31  
Weighted average number of Class B Shares outstanding (basic and diluted)     10,198,751       9,253,693  

 

The accompanying notes are an integral part of these financial statements.

 

- 4 -

 

Mercer Park Brand Acquisition Corp.

Statements of Cash Flows

(Expressed in United States Dollars)

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Operating activities                
Net income for the year/period   $ 947,346     $ 2,831,491  
Items not affecting cash:                
Deferred tax     114,990       (713,425 )
Changes in non-cash working capital items:                
Prepaid expenses     140,869       (140,869 )
Accounts payable and accrued liabilities     252,022       144,757  
Due to related parties     176,820       172,214  
Income tax payable/(recoverable)     (1,923,277 )     713,425  
Net cash (used in) provided by operating activities     (291,230 )     3,007,593  
                 
Investing activity                
Investment in marketable securities held in a escrow account, net     (1,741,009 )     (405,796,047 )
Net cash used in investing activity     (1,741,009 )     (405,796,047 )
                 
Financing activities                
Proceeds from issuance of Class B Shares to Founders (note 8(a))     -       25,010  
Proceeds from issuance of Class B Units (note 8(a))     -       1,090,000  
Proceeds from issuance of Warrants to Founders (note 7)     -       9,810,000  
Proceeds from issuance of Class A Restricted Voting Units (note 6)     -       402,500,000  
Transaction costs (note 9)     -       (6,509,294 )
Net cash provided by financing activities     -       406,915,716  
                 
Net change in cash during the year/period     (2,032,239 )     4,127,262  
Balance, beginning of year/period     4,127,262       -  
Balance, end of year/period   $ 2,095,023     $ 4,127,262  
                 
Supplementary information                
Income taxes paid   $ 1,808,297     $ -  
Interest received in cash     1,742,747       2,506,813  

 

The accompanying notes are an integral part of these financial statements.

 

- 5 -

 

Mercer Park Brand Acquisition Corp.

Statement of Changes in Shareholders’ Deficiency

(Expressed in United States Dollars)

 

                      Total  
    Class B shares     Additional Paid-in capital           Shareholder’s  
    Number     Amount     Number     Amount     Retained Earnings     Deficiency  
From commencement of operations on April 16, 2019     -     $              -       -     $ -     $ -     $ -  
Issuance of Class B Shares in connection with organization of the Corporation (note 8(a))     1       -       -       10       -       10  
Issuance of Class B Shares to Founders (note 1 and note 8(a))     10,089,750       -       -       25,000       -       25,000  
Issuance of Warrants to Founders     -       -       9,810,000       9,810,000       -       9,810,000  
Issuance of Class B Units to Sponsor (note 1 and note 8(a)) (share portion)     109,000       -       -       1,056,210       -       1,056,210  
Issuance of Class B Units to Sponsor (note 1 and note 8(a)) (Warrant portion)     -       -       54,500       33,790       -       33,790  
Issuance of Class A Restricted Voting Units pursuant to the Offering (note 6) (share portion)     -       -       40,250,000       390,022,500       -       390,022,500  
Issuance of Class A Restricted Voting Units pursuant to the Offering (note 6) (Warrant portion)     -       -       20,125,000       12,477,500       -       12,477,500  
Class A Restricted Voting Shares subject to possible redemption; 40,250,000 Shares at a redemption value of $10 per share     -       -       (40,250,000 )     (402,500,000 )     -       (402,500,000 )
Transaction costs (note 9)             -       -       (22,609,294 )     -       (22,609,294 )
Net income and comprehensive income for the period     -             -       -       2,831,491       2,831,491  
Balance, December 31, 2019     10,198,751       -       29,989,500       (11,684,284 )     2,831,491       (8,852,793 )
Net income and comprehensive income for the year     -               -       -       947,346       947,346  
Balance, December 31, 2020     10,198,751     $ -       29,989,500     $ (11,684,284 )   $ 3,778,837     $ (7,905,447 )

 

The accompanying notes are an integral part of these financial statements.

 

- 6 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

1. Description of organization and business operations and going concern

 

Mercer Park Brand Acquisition Corp. (the “Corporation”) 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.

 

The Corporation’s ability to continue as a going concern is dependent on the continued support of its Sponsor, Mercer Park CB II, L.P. and/or upon the completion of the Qualifying Transaction within the permitted timeline which is prior to May 13, 2021. There can be no assurance that we will be successful in completing our Qualifying Transaction. Under the NEO rules, the Corporation is able to borrow funds from the Sponsor (see Note 10). In the event our Qualifying Transaction does not occur the escrowed cash will be returned to the Class A restricted voting shareholders and the Sponsor will have no recourse against the escrowed cash.

 

These uncertainties cast significant doubt upon the Corporation’s ability to continue as a going concern and the ultimate appropriateness of using accounting principles applicable to a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Corporation be unable to continue as a going concern. If the Corporation is not able to continue as a going concern, the Corporation may be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in these financial statements. These differences could be material.

 

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 (“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 IPO. As a result of the exercise of the over-allotment option, 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”), own an aggregate of 10,089,750 Class B Shares, including 109,000 Class B Units and 9,810,000 Founders’ Warrants.

 

- 7 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

1. Description of organization and business operations (continued)

 

Concurrent with the completion of the Offering, the Founders purchased an aggregate of 10,089,750 Class B Shares (“Founders’ 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 and purchased 109,000 Class B Units.

 

Upon closing of the Qualifying Transaction, the Class B Shares will, 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 or 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.

 

- 8 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

1. Description of organization and business operations (continued)

 

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. 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.

 

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 outbreak 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.

 

2. Summary of significant accounting policies

 

The significant accounting policies adopted by the Corporation in the preparation of its financial statements are set out below.

 

Basis of presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules of the Securities and Exchange Commission (“SEC”).

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.

 

Cash and cash equivalents

 

The Corporation considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Corporation did not have any cash equivalents as of December 31, 2020 and 2019.

 

- 9 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

2. Summary of significant accounting policies (continued)

 

Cash held in escrow

 

At December 31, 2020, the Corporation had $nil (December 31, 2019 - $140,869) in an escrow account maintained by the Corporation’s former legal counsel (the “Escrowed Amount”). The Escrowed Amount was being held in a non-interest bearing account and was under the Corporation’s full control.

 

Marketable securities held in Escrow Account

 

At December 31, 2020 and 2019, the assets held in the Escrow Account were substantially held in U.S. Treasury Bills.

 

Common stock subject to possible redemption

 

The Corporation accounts for its Class A Restricted Voting Shares subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares subject to mandatory redemption are classified as a liability instrument and is measured at fair value. Conditionally redeemable shares (including shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Corporation’s control) is classified as temporary equity. At all other times, shares are classified as shareholders’ equity. The Corporation’s Class A Restricted Voting Shares features certain redemption rights that are considered to be outside of the Corporation’s control and subject to occurrence of uncertain future events. Accordingly, Class A Restricted Voting Shares subject to possible redemption is presented at redemption value as temporary equity, outside of the shareholders’ deficiency section of the Corporation’s consolidated balance sheets.

 

Income Taxes

 

The Corporation complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Corporation recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2020 and 2019, there were no unrecognized tax benefits and no amounts accrued for interest and penalties. The Corporation is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

 

Net Income (Loss) Per Share

 

The Corporation complies with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net income per share is computed by dividing net income by the weighted average number of Class B Shares outstanding during the period. At December 31, 2020 and 2019, the Corporation did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into Class B Shares and then share in the income of the Corporation. As a result, diluted income per share is the same as basic income per share for the periods presented.

 

- 10 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

2. Summary of significant accounting policies (continued)

 

Concentration of credit risk

 

Financial instruments that potentially subject the Corporation to concentration of credit risk consist of cash accounts in a financial institution, which, at times may exceed the Canada Deposit Insurance Corporation coverage of $100,000. At December 31, 2020 and 2019, the Corporation had not experienced losses on these accounts and management believes the Corporation is not exposed to significant risks on such accounts.

 

Fair value of financial instruments

 

The fair value of the Corporation’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the accompanying balance sheets, primarily due to their short-term nature.

 

Recently issued accounting standards

 

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Corporation’s financial statements.

 

3. Critical accounting judgments, estimates and assumptions

 

The preparation of these financial statements requires the Corporation to make judgments in applying its accounting policies and estimates and assumptions about the future. These judgments, estimates and assumptions affect the Corporation’s reported amounts of assets, liabilities, and items in net income or loss, and the related disclosure of contingent assets and liabilities, if any. The Corporation evaluates its estimates on an ongoing basis. Such estimates are based on various 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 amounts 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. The following discusses the most significant accounting judgments, estimates and assumptions that the Corporation has made in the preparation of its December 31, 2020 and 2019 financial statements.

 

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.

 

- 11 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

3. Critical accounting judgments, estimates and assumptions (continued)

 

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 in order 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.

 

4. The Offering

 

Pursuant to the Offering, the Corporation sold 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 of the Corporation and one-half of a Warrant. See note 1.

 

5. Marketable securities held in Escrow Account

 

As at December 31,   2020     2019  
Restricted cash   $ 981     $ 35,460  
Investments in United States Treasury Bills     407,509,774       404,970,423  
Accrued interest     26,301       790,164  
Marketable securities held in Escrow Account   $ 407,537,056     $ 405,796,047  

 

6. Class A Restricted Voting Shares Subject to Redemption

 

Authorized

 

The Corporation is authorized to issue an unlimited number of Class A Restricted Voting Shares. Following closing of the Qualifying Transaction, the Corporation will not issue any further Class A Restricted Voting Shares. The holders of Class A Restricted Voting Shares have no preemptive rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Prior to the consummation of a Qualifying Transaction, holders of Class A Restricted Voting Shares are not entitled to vote at, or receive notice of or meeting materials in respect of meetings, held only to consider the election and/or removal of directors and auditors. The holders of Class A Restricted Voting Shares are, however, entitled to vote on and receive notice of meeting materials on all other matters requiring shareholder approval, including approval of an extension of the Permitted Timeline, if applicable, and of a proposed Qualifying Transaction.

 

- 12 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

6. Class A Restricted Voting Shares Subject to Redemption (continued)

 

Redemption rights

 

The holders of Class A Restricted Voting Shares are entitled to redeem their shares, subject to certain conditions, and are entitled to receive the escrow proceeds, net of applicable taxes and other permitted deductions, from the Escrow Account: (i) in the event that the Corporation does not complete a Qualifying Transaction within the Permitted Timeline; (ii) in the event of a Qualifying Transaction; and (iii) in the event of an extension to the Permitted Timeline. Upon such redemption, the rights of holders of Class A Restricted Voting Shares as shareholders will be completely extinguished.

 

Value of Class A Restricted Voting Shares Subject to Redemption

 

The redemption rights embedded in the terms of the Corporation’s Class A Restricted Voting Shares are considered by the Corporation to be outside of the Corporation’s control and subject to uncertain future events. Accordingly, the Corporation has classified its “Class A Restricted Voting Shares subject to redemption” as commitments and contingencies at redemption value.

 

Fair value of Class A restricted voting shares subject to redemption -- issued and outstanding

 

    Number     Amount  
From commencement of operations on April 19, 2019     -     $ -  
Issuance of Class A Restricted Voting Shares pursuant to the Offering     35,000,000       350,000,000  
Issuance of Class A Restricted Voting Shares pursuant to the over-allotment option     5,250,000       52,500,000  
Balance, December 31, 2019 and 2020     40,250,000       402,500,000  

 

7. Warrants

 

As at December 31, 2020 and 2019, the Corporation had 29,989,500 Warrants issued and outstanding, comprised of 20,125,000 Warrants forming part of the Class A Restricted Voting Units, 9,810,000 Founders’ Warrants, and 54,500 Warrants forming part of the Class B Units.

 

All Warrants will become exercisable only commencing 65 days after the completion of our Qualifying Transaction. Each 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) at a price of $11.50 per share. The Warrant Agreement provides that the exercise price and number of Subordinate Voting Shares issuable on exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. The Warrants will not, however, be adjusted for issuances of Subordinate Voting Shares at a price below their exercise price. Once the Warrants become exercisable, the Corporation may accelerate the expiry date of the outstanding Warrants (excluding the Founders’ Warrants but only to the extent still held by our Sponsor at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by our Sponsor of material undisclosed information which could limit their flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Subordinate Voting Shares equals or exceeds $18.00 per Subordinate Voting Share (as adjusted for stock splits or combinations, stock dividends, extraordinary dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30 trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice if provided.

 

The Warrants will not be entitled to the proceeds from the Escrow Account. The Warrant holders do not have the rights or privileges of holders of shares and any voting rights until they exercise their Warrants and receive corresponding Subordinate Voting Shares of the Corporation. After the issuance of corresponding Subordinate Voting Shares upon exercise of the Warrants, each holder is expected to be entitled to one vote for each Subordinate Voting Share held of record on all matters to be voted on by such shareholders.

 

- 13 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

7. Warrants (continued)

 

Restrictions on Transfer of Founders’ Warrants

 

The Founders have agreed not to transfer any of their Founders’ Warrants until after the closing of the Qualifying Transaction without the prior consent of the Exchange, except for transfers required due to the structuring of the Qualifying Transaction or to permitted transferees, with the Exchange’s consent, in which case such restriction will apply to the securities received in connection with the Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Founders’ Warrants, including Subordinate Voting Shares issuable on exercise of the Founders’ Warrants, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

8. Shareholders’ deficiency

 

a) Class B Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of Class B Shares without nominal or par value. Following closing of the Qualifying Transaction, the Corporation will not issue any further Class B Shares. The holders of Founders’ Shares have no pre-emptive rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Holders of Class B Shares are entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, with the exception of (i) meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia), and (ii) meetings to approve an extension of the Permitted Timeline within which the Corporation is required to complete its Qualifying Transaction, which will only be voted upon by holders of Class A Restricted Voting Shares.

 

Redemption rights

 

Holders of Class B Shares do not have any redemption rights, or rights to distributions from the Escrow Account if the Corporation fails to complete a Qualifying Transaction within the Permitted Timeline.

 

Restrictions on transfer, assignment or sale of Founders’ Shares

 

The holders of the Class B Shares have agreed not to transfer, assign or sell any of their Class B Shares, unless transferred, assigned or sold to permitted transferees with the Exchange’s consent, prior to completion of the Corporation’s Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Multiple-Voting Shares into which the Class B Shares are converted, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

- 14 -

 

Mercer Park Brand Acquisition Corp.

Notes to Financial Statements

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019

(Expressed in United States Dollars)

 

8. Shareholders’ deficiency (continued)

 

b) Subordinate Voting Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of subordinate voting shares (“Subordinate Voting Shares”) without nominal or par value. No Subordinate Voting Shares may be issued prior to the closing of a Qualifying Transaction, except in connection with such closing.

 

Voting rights

 

Holders of Subordinate Voting Shares will be entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Subordinate Voting Shares are entitled to vote, each Subordinate Voting Share will be entitled to one vote per Subordinate Voting Share.

 

Dividend rights

 

See Note 8 – Multiple Voting Shares – Dividend rights.

 

Redemption rights

 

Holders of Subordinate Voting Shares will not have any redemption rights.

 

c) Multiple Voting Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of multiple voting shares (“Multiple Voting Shares”) without nominal or par value. No Multiple Voting Shares may be issued prior to the closing of a Qualifying Transaction, except in connection with such closing.

 

Voting rights

 

Holders of Multiple Voting Shares will be entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Multiple Voting Shares are entitled to vote, each Multiple Voting Share will be entitled to 2,500 votes per Multiple Voting Share.

 

Dividend rights

 

Holders of Subordinate Voting Shares will be entitled to receive dividends out of the assets available for the payment or distribution of dividends at such times and in such amount and form as the board of directors of the Corporation may from time to time determine on the following basis, and otherwise without preference or distinction among or between the Subordinate Voting Shares and Multiple Voting Shares: each Multiple Voting Share will be entitled to 100 times the amount paid or distributed per Subordinate Voting Share (including by way of share dividends, which holders of Multiple Voting Shares will receive in Multiple Voting Shares, unless otherwise determined by the board of directors of the Corporation) and each fraction of a Multiple Voting Share will be entitled to the applicable fraction thereof.

 

- 15 -

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019 

(Expressed in United States Dollars)

 

8. Shareholders’ deficiency (continued)

 

c) Multiple Voting Shares (continued)

 

Redemption rights

 

Holders of Multiple Voting Shares will not have any redemption rights.

 

9. Transaction costs

 

Transaction costs consist principally of legal, accounting and underwriting costs incurred through to date of the balance sheet. Transaction costs incurred amounted to $22,609,294 (including $22,137,500 in underwriters’ commission of which $16,100,000 is deferred and payable only upon completion of a Qualifying Transaction) were charged to shareholder’s equity upon completion of the Offering.

 

Underwriter’s commission

 

In consideration for its services in connection with the Offering, the Corporation has agreed to pay the underwriter a commission equal to 5.5% of the gross proceeds of the Class A Restricted Voting Units issued under the Offering. The Corporation paid $ $6,037,500, representing $0.15 per Class A Restricted Voting Unit, to the underwriter upon closing of the Offering. Upon completion of a Qualifying Transaction, the remaining $16,100,000 (representing $0.40 per Class A Restricted Voting Unit) will be payable, 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).

 

10. 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 at December 31, 2020:

 

Balance, December 31, 2020      
Shareholders’ deficiency   $ (7,905,447 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Total   $ 394,594,553

 

Balance, December 31, 2019      
Shareholders’ deficiency   $ (8,852,793 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Total   $ 393,647,207

 

The Corporation’s primary objective in managing capital is to ensure capital preservation in order to benefit from acquisition opportunities as they arise.

 

- 16 -

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019 

(Expressed in United States Dollars)

 

10. Capital management (continued)

 

(b) Liquidity

 

As at December 31, 2020, the Corporation had $2,095,023 (December 31, 2019 - $4,127,262) 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 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.

 

11. General and administrative expenses

 

Year Ended December 31, 2020      
Professional fees   $ 472,525  
Public company filing and listing costs     229,706  
General office expenses     28  
    $ 702,259

 

From April 16, 2019 (Date of Incorporation) to December 31, 2019      
Public company filing and listing costs   $ 205,453  
General office expenses     175,684  
    $ 381,137

 

- 17 -

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019 

(Expressed in United States Dollars)

 

12. 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 December 31, 2020, the Corporation accrued $205,000 (December 31, 2019 - $85,000) 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 year ended December 31, 2020, the Corporation paid professional fees of $26,256 (April 19, 2019 (date of incorporation) to December 31, 2019 - $12,926) 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 December 31, 2020, Marrelli Support was owed $9,034 (December 31, 2019 - $2,214) and was included in accounts payable and accrued liabilities on the Corporation’s balance sheet.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $106 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to DSA Filing Services Limited (“DSA Filing”), an organization which Carmelo Marrelli, the Chief Financial Officer of the Corporation, controls. These services were incurred in the normal course of operation of filing matters to adhere to the Corporation’s continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, DSA Filing was owed $nil by the Corporation (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $1,116 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to Marrelli Press Release Services Limited (“Marrelli Services Limited”), an organization of which Carmelo Marrelli, the Chief Financial of the Corporation, controls. These services were incurred in the Corporation’s normal course of operations in adherence with its continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, Marrelli Services Limited was owed $nil (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

From April 16, 2019 (Date of Incorporation) to December 31, 2019 and for the year ended December 31, 2020, Ayr Strategies Inc. (“Ayr”), a company with common management, incurred travel costs on behalf of the Corporation. As at December 31, 2020, the Corporation owed Ayr $135,000 (December 31, 2019 - $85,000) and which included in due to related parties on the Corporation’s balance sheets. This is based on a cash-call-basis from Ayr.

 

- 18 -

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019 

(Expressed in United States Dollars)

 

13. Fair value measurements

 

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 Company’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 at December 31, 2020 and 2019, and indicates the fair value hierarchy of the valuation inputs the Corporation utilized to determine such fair value:

 

    Carrying value                    
    as at     Fair value as at December 31, 2020  
    December 31, 2020     Level 1     Level 2     Level 3  
    ($)     ($)     ($)     ($)  
Assets                                
Marketable securities held in a escrow account     407,537,056       407,537,056       -       -  

 

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.

 

- 19 -

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019 

(Expressed in United States Dollars)

 

13. Fair value measurements (continued)

 

Market risk (continued)

 

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 to currency risk as the Corporation transacts minimally in any currency other than the United States dollar.

 

14. Income taxes

 

The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 27% (2019 - 27%) to the effective tax rate is as follows:

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Loss before tax at statutory rate   $ 947,346     $ 2,831,491  
Effect on taxes of:                
Expected income tax (recovery) expense     255,790       764,503  
Share issue costs booked through equity     -       (6,512,075 )
Change in tax benefits not recognized     (255,790 )     5,747,572  
Income tax (recovery) expense   $ -     $ -  

 

The Corporation’s income tax (recovery) is allocated as follows:

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Current tax (recovery) expense   $ (114,990 )   $ 713,425  
Deferred tax expense (recovery)     114,990       (713,425 )
    $ -     $ -  

 

- 20 -

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019 

(Expressed in United States Dollars)

 

14. Income taxes (continued)

 

Deferred tax

 

Deferred income tax assets are only given recognition in the Corporation’s financial statements if management has determined that it is more likely than not that such deferred income tax assets may be recovered. In recognition of this uncertainty, management has provided a full valuation allowance on these deferred tax assets as set out below:

 

December 31,   2020     2019  
Deferred underwriters’ commission   $ 4,347,000     $ 4,347,000  
Share issue costs     1,193,090       1,555,687  
      5,540,090       5,902,687  
Valuation allowance     (4,941,655 )     (5,189,262 )
    $ 598,435     $ 713,425  

 

The Corporation may be subject to potential examination by Canadian tax authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and provincial tax laws. The Corporation is currently not subject to any tax examinations.

 

15. Subsequent event

 

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. The letter of intent is non-binding and proceeding with the transaction is subject to a number of conditions, including, among others, satisfactory due diligence and the negotiation and execution of a definitive agreement. The Corporation intends to disclose additional details regarding the transaction following the entry into a definitive agreement, if applicable. There can be no assurance that a definitive agreement will be completed.

 

- 21 -

 

APPENDIX B – MANAGEMENT’S DISCUSSION & ANALYSIS OF BRND

 

(See attached)

 

B- 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

(A SPECIAL PURPOSE ACQUISITION CORPORATION)

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

YEAR ENDED DECEMBER 31, 2020 AND THE PERIOD

 

FROM APRIL 16, 2019 (DATE OF INCORPORATION)

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

Introduction

 

The following management’s discussion and analysis (“MD&A”) of the financial condition and results of the operations of Mercer Park Brand Acquisition Corp. (“Brand”, the “Corporation”, “we”, “our” or “us”) constitutes management’s review of the factors that affected the Corporation’s financial and operating performance for the year ended December 31, 2020. This MD&A was written to comply with the requirements of National Instrument 51-102 – Continuous Disclosure Obligations. This discussion should be read in conjunction with the audited financial statements for the year ended December 31, 2020 and from the April 16, 2019 (Incorporation Date) to December 31, 2019, and the related notes thereto. Results are reported in United States dollars, unless otherwise noted. In the opinion of management, all adjustments (which consist only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results presented for the year ended December 31, 2020, are not necessarily indicative of the results that may be expected for any future period. The financial statements and the financial information contained in this MD&A were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Further information about the Corporation and its operations can be obtained on www.sedar.com.

 

The Corporation intends to focus its search for target businesses that operate branded product businesses in cannabis and/or cannabis-adjacent industries; however, the Corporation is not limited to a particular industry or geographic region for purposes of completing its Qualifying Transaction (as defined below). Please refer to the Corporation’s latest annual information form for risk factors and regulatory information (the “AIF”) regarding the cannabis industry.

 

Cautionary Note Regarding Forward-Looking Information

 

This MD&A contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Corporation’s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of, such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. The following table outlines certain significant forward-looking statements contained in this MD&A and provides the material assumptions used to develop such forward-looking statements and material risk factors that could cause actual results to differ materially from the forward-looking statements.

 

Forward-looking statements Assumptions Risk factors
The Corporation expects to complete a Qualifying Transaction (as defined below). The Corporation expects to identify an asset or business/businesses to acquire and close a Qualifying Transaction, on terms favourable to the Corporation. The Corporation’s inability to find a target to complete a Qualifying Transaction within the Permitted Timeline (as defined below). If we are unable to consummate our Qualifying Transaction within the Permitted Timeline, we will be required to redeem 100% of the outstanding Class A Restricted Voting Shares (as defined below), as described herein.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

The Corporation’s ability to meet its working capital needs at the current level for the twelve-month period ending December 31, 2021.        The operating activities of the Corporation for the twelve-month period ending December 31, 2021,and the costs associated therewith,will be consistent with the Corporation’s current expectations;debt and equity markets, exchange and interest rates and other applicable economic conditions favourable to the Corporation.  Changes in debt and equity markets;timing and availability of external financing on acceptable terms;increases in costs; regulatory compliance and changes in regulatory compliance and other local legislation and regulation; interest rate and exchange rate fluctuations;changes in economic conditions;impact of COVID-19 and timing of a Qualifying Transaction.

 

Inherent in forward-looking statements are risks, uncertainties, and other factors beyond the Corporation’s ability to predict or control. Please also refer to those risk factors referenced in the “Risk Factors” section below and in the AIF. Readers are cautioned that the above chart does not contain an exhaustive list of the factors or assumptions that may affect the forward-looking statements, and that the assumptions underlying such statements may prove to be incorrect. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Corporation’s actual results, performance, or achievements to be materially different from any of its future results, performance or achievements expressed or implied by forward-looking statements. All forward-looking statements herein are qualified by this cautionary statement. Accordingly, readers should not place undue reliance on forward-looking statements. The Corporation undertakes no obligation to update publicly or otherwise revise any forward-looking statements whether because of new information or future events or otherwise, except as may be required by law. If the Corporation does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements, unless required by law.

 

Description of Business

 

Brand is a corporation which was incorporated for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving the Corporation (a “Qualifying Transaction”). The Corporation’s business activities are carried out in a single business segment.

 

The Corporation was incorporated on April 16, 2019 under the Business Corporations Act (British Columbia), commenced operations on April 16, 2019. The head office of the Sponsor (as defined below) is located at 590 Madison Avenue, 26th Floor, New York, New York, 10022.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

Current liabilities as of December 31, 2020 total $745,813 (December 31, 2019 - $1,030,396). Shareholders’ deficiency as of December 30, 2020 is comprised of Class B Shares, unlimited, 10,198,751 issued of $nil (December 31, 2019 - $nil), additional paid-in-capital of ($11,684,284) (December 31, 2019 - ($11,684,284)) and retained earnings of $3,778,837 (December 31, 2019 -$2,831,491) for a net amount of ($7,905,447) (December 31, 2019 – ($8,852,793)) in shareholders’ deficit.

 

Commitments and contingencies as of December 31, 2020 total $402,500,000 (December 31, 2019 - $402,500,000). It is comprised of Class A Restricted Voting Shares subject to redemption, 40,250,000 shares (at a redemption value of $10.00 per share).

 

Working capital, which consists of current assets less current liabilities, is $2,559,062 (December 31, 2019 - $3,237,735) as of December 31, 2020. Management believes the Corporation’s working capital is sufficient for the Corporation to meet its ongoing obligations and meet its objective of completing a Qualifying Transaction.

 

The weighted average number of Class B Shares outstanding for the year ended December 31, 2020 was 10,198,751 (December 31, 2019 – 9,253,693).

 

Liquidity and Capital Resources

 

Marketable securities held in an escrow account   December 31, 2020  
United States Treasury Bills   $ 407,509,774  
Accrued interest   $ 26,301  
Restricted cash   $ 981  
Total marketable securities held in an escrow account   $ 407,537,056  
         
Per Class A Restricted Voting Shares subject to redemption   $ 10.00  
         
Cash held outside the escrow account   $ 2,095,023  

 

We intend to use substantially all the funds held in the Escrow Account, including interest (which interest shall be net of taxes payable and certain expenses) to consummate a Qualifying Transaction. To the extent that, after redemptions, our share capital or debt is used, in whole or in part, as consideration to consummate a Qualifying Transaction, the remaining proceeds held in the Escrow Account may be used as working capital to finance the operations of the target business or businesses, make other acquisitions and/or pursue a growth strategy.

 

As of December 31, 2020, we had cash held outside of our Escrow Account of $2,095,023, which is available to fund our working capital requirements, including any further transaction costs that may be incurred. We expect to generate negative cash flow from operating activities in the future until our Qualifying Transaction is completed and we commence income generation. We intend to employ a proactive acquisition targeting strategy that identifies potential acquisition targets that align with the Corporation’s investment objectives. Consistent with this strategy, we have identified the following general criteria and guidelines that we believe are important in evaluating prospective acquisition targets:

 

Opportunity to consolidate a highly fragmented marketplace where even the largest brands represent less than 10% market share.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

Ability to build an institutional-quality cannabis corporation focused on brands and branded products.

 

Companies with strong marketing and brand development expertise.

 

Companies that will benefit from a defined branding strategy.

 

Companies with additional, strategic capabilities-such as distribution, manufacturing, or product development-that support brand value.

 

Orphaned or underinvested brands within existing companies.

 

Companies exhibiting growth and profitability performance that could be enhanced through improved access to capital and financial expertise.

 

Opportunity to provide rescue financing for undercapitalized operators.

 

Companies that will benefit from being a public company.

 

Management seeks to ensure that our operational and administrative costs are minimal prior to the completion of a Qualifying Transaction, with a view to preserving the Corporation’s working capital.

 

We do not believe that we will need to raise additional funds to meet expenditures required for operating our business until the consummation of our Qualifying Transaction. We believe that we will have sufficient available funds outside of the Escrow Account to operate the business. However, we cannot be assured that this will be the case. To the extent that the Corporation may require additional funding for general ongoing expenses or in connection with sourcing a proposed Qualifying Transaction, we may seek funding by way of unsecured 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.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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:

 

                Basic and Diluted  
    Income     Net (Loss) Income     Loss
per Class B Share
 
    ($)     ($)     ($) (8)  
December 31, 2020     -     $ (144,116 ) (7)     (0.01 )
September 30, 2020     -     $ (161,569 )(6)     (0.02 )
June 30, 2020     -     $ (83,442 )(5)     (0.01 )
March 31, 2020     -     $ 1,336,473 (4)     0.13  
December 31, 2019     -     $ 1,412,880 (3)     0.16  
September 30, 2019     -     $ 1,611,697 (2)     0.16  
Incorporation date to June 30, 2019     -     $ (193,086 )(1)     (0.03 )

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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) 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 of December 31, 2020, the Corporation accrued $205,000 (December 31, 2019 - $85,000) in respect of these services.

 

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Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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 year ended December 31, 2020, the Corporation paid professional fees of $26,256 (April 19, 2019 (date of incorporation) to December 31, 2019 - $12,926) 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 of December 31, 2020, Marrelli Support was owed $9,034 (December 31, 2019 - $2,214) and was included in accounts payable and accrued liabilities on the Corporation’s balance sheet.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $106 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to DSA Filing Services Limited (“DSA Filing”), an organization which Carmelo Marrelli, the Chief Financial Officer of the Corporation, controls. These services were incurred in the normal course of operation of filing matters to adhere to the Corporation’s continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, DSA Filing was owed $nil by the Corporation (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $1,116 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to Marrelli Press Release Services Limited (“Marrelli Services Limited”), an organization which Carmelo Marrelli, the Chief Financial of the Corporation, controls. These services were incurred in the Corporation’s normal course of operations in adherence with its continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, Marrelli Services Limited was owed $nil (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

From April 16, 2019 (Date of Incorporation) to December 31, 2019 and for the year ended December 31, 2020, Ayr Strategies Inc. (“Ayr”), a company with common management, incurred travel costs on behalf of the Corporation. As of December 31, 2020, the Corporation owed Ayr $135,000 (December 31, 2019 - $85,000) and which included in due to related parties on the Corporation’s balance sheets. This is based on a cash-call-basis from Ayr.

 

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.

 

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.

 

Page | 11

 

 

 

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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 December 31, 2020.

 

Page | 12

 

 

 

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation) 

Management’s Discussion and Analysis 

Year Ended December 31, 2020 

Discussion dated: March 29, 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 December 31, 2020 and 2019, and indicates the fair value hierarchy of the valuation inputs the Corporation utilized to determine such fair value:

 

    Carrying value as of                    
    December 31, 2020     Level 1 (*)     Level 2 (*)     Level 3 (*)  
    ($)     ($)     ($)     ($)  
Assets                                
                               
Marketable securities held in an escrow account     407,537,056       407,537,056       nil       nil  

 

(*) Fair values as of December 31, 2020

 

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.

 

Page | 13

 

 

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

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 December 31, 2020:

 

    $  
Shareholders’ deficiency     (7,905,447 )
Class A Restricted Voting Shares        
subject to redemption     402,500,000  
Balance, December 31, 2020     394,594,553  

 

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 December 31, 2020, the Corporation had $2,095,023 (December 31, 2019 - $4,127,262) 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.

 

Page | 14

 

 

 

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

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 40,250,000 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, 109,000 Class B Units and 29,989,500 Warrants 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.

 

Contingency

 

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 Event

 

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. The letter of intent is non-binding and proceeding with the transaction is subject to several conditions, including, among others, satisfactory due diligence and the negotiation and execution of a definitive agreement. The Corporation intends to disclose additional details regarding the transaction following the entry into a definitive agreement, if applicable. There can be no assurance that a definitive agreement will be completed.

 

Page | 15

 

 

 

 

APPENDIX C – GH GROUP ANNUAL FINANCIAL STATEMENTS

(YEAR ENDED DECEMBER 31, 2020; YEAR ENDED DECEMBER 31, 2019; YEAR ENDED

DECEMBER 31, 2018)

 

(See attached)

 

C-1

 

 

 

 

GH GROUP, INC.

 

CONSOLIDATED

AND

COMBINED FINANCIAL STATEMENTS

 

AS OF

DECEMBER 31, 2020 AND 2019

AND FOR THE YEARS ENDED

DECEMBER 31, 2020, 2019 AND 2018

 

 

 

GH GROUP, INC.

Index to Consolidated and Combined Financial Statements

 

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm 1
   
Consolidated and Combined Balance Sheets 2
   
Consolidated and Combined Statements of Operations 3
   
Consolidated and Combined Statements of Changes in Shareholders’ / Members’ Equity 4
   
Consolidated and Combined Statements of Cash Flows 5 – 6
   
Notes to Consolidated and Combined Financial Statements 7 - 35

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders / Members

GH Group, Inc.

 

Opinion on the Consolidated and Combined Financial Statements

 

We have audited the accompanying consolidated balance sheet of GH Group, Inc. (the “Company”) as of December 31, 2020, combined balance sheets as of December 31, 2019 and 2018, and the related consolidated and combined statements of operations, changes in shareholders’/members’ equity, and cash flows for the years then ended, and the related notes to the consolidated and combined financial statements (collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the consolidated and combined results of its operations and its cash flows for the years ended December 31, 2020, 2019 and 2018, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Macias Gini & O’Connell LLP

 

We have served as the Company’s auditor since 2020.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP

 - 1 -  
2029 Century Park East, Suite 1500    
Los Angeles, CA 90067   www.mgocpa.com

 

 

GH GROUP, INC.

Consolidated and Combined Balance Sheets

As of December 31, 2020 and 2019

 

 

 

    2020     2019  
ASSETS            
             
Current Assets:                
Cash and Cash Equivalents   $ 4,535,251     $ 2,631,886  
Accounts Receivable, Net     5,141,021       1,253,891  
Prepaid Expenses and Other Current Assets     1,018,212       377,238  
Inventory     6,866,002       1,396,770  
Notes Receivable     904,534       3,606,398  
                 
Total Current Assets     18,465,020       9,266,183  
                 
Operating Lease Right-of-Use Assets, Net     2,532,629       1,785,083  
Investments     10,701,868       10,950,877  
Property, Plant and Equipment, Net     27,192,027       25,268,313  
Intangible Assets, Net     5,279,000       1,577,333  
Goodwill     4,815,999       2,720,081  
Other Assets     554,266       351,423  
                 
TOTAL ASSETS   $ 69,540,809     $ 51,919,293  
                 
LIABILITIES AND SHAREHOLDERS’ / MEMBERS’ EQUITY                
                 
LIABILITIES:                
Current Liabilities:                
Accounts Payable and Accrued Liabilities   $ 6,570,715     $ 5,344,552  
Income Taxes Payable     4,740,003       864,377  
Derivative Liabilities     7,365,000       -  
Current Portion of Operating Lease Liabilities     327,329       245,646  
Current Portion of Notes Payable     601,187       1,759,839  
Current Portion of Notes Payable - Related parties     -       2,241,262  
                 
Total Current Liabilities     19,604,234       10,455,677  
                 
Operating Lease Liabilities, Net of Current Portion     2,318,852       1,576,187  
Other Non-Current Liabilities     849,358       543,243  
Deferred Tax Liabilities     1,420,583       89,999  
Notes Payable, Net of Current Portion     15,368,892       651,942  
Notes Payable, Net of Current Portion - Related Parties     3,703,966       -  
                 
TOTAL LIABILITIES     43,265,885       13,317,047  
                 
SHAREHOLDERS’ / MEMBERS’ EQUITY:                
Preferred Shares ($0.00001 Par value, 50,000,000 shares authorized and no shares issued and outstanding as of December 31, 2020)     -       -  
Class A Common Shares ($0.00001 Par value, 500,000,000 shares authorized and 205,900,164 issued and outstanding as of December 31, 2020)     2,059       -  
Class B Common Shares ($0.00001 Par value, 33,000,000 shares authorized and 32,295,270 issued and outstanding as of December 31, 2020)     323       -  
Additional Paid-In Capital     42,932,020       -  
Accumulated Deficit     (16,659,478 )     -  
Members’ Equity     -       35,047,515  
                 
Total Equity Attributable to Shareholders / Members of GH Group     26,274,924       35,047,515  
Non-Controlling Interest     -       3,554,731  
                 
TOTAL SHAREHOLDERS’ / MEMBERS’ EQUITY     26,274,924       38,602,246  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ / MEMBERS EQUITY   $ 69,540,809     $ 51,919,293  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

- 2 -

 

GH GROUP, INC.

Consolidated and Combined Statements of Operations

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

    2020     2019     2018  
Revenues, Net   $ 48,259,601     $ 16,941,426     $ 8,967,286  
Cost of Goods Sold     29,519,143       8,461,551       3,749,373  
                         
Gross Profit     18,740,458       8,479,875       5,217,913  
                         
Expenses:                        
General and Administrative     18,637,477       9,354,591       3,094,857  
Sales and Marketing     1,489,664       912,842       143,216  
Professional Fees     2,040,004       5,196,993       1,913,865  
Depreciation and Amortization     2,576,263       1,455,780       767,567  
Total Expenses     24,743,408       16,920,206       5,919,505  
Loss from Operations     (6,002,950 )     (8,440,331 )     (701,592 )
                         
Other Expense (Income):                        
Interest Expense     2,179,137       636,762       597,427  
Interest Income     (115,572 )     (443,523 )     (308,591 )
Loss on Investments     2,126,112       1,147,968       166,059  
Loss (Income) on Change in Fair Value of Derivative Liabilities     251,663       -       -  
Other Expense (Income), Net     (203,345 )     (19,419 )     (202,397 )
                         
Total Other Expense     4,237,995       1,321,788       252,498  
                         
Loss from Operations Before Provision for Income Taxes     (10,240,945 )     (9,762,119 )     (954,090 )
Provision for Income Taxes     6,418,533       972,520       357,352  
                         
Net Loss     (16,659,478 )     (10,734,639 )     (1,311,442 )
                         
Net Income (Loss) Attributable to Non-Controlling Interest     -       (511,465 )     211,396  
                         
Net Loss Attributable to Shareholders / Members of GH Group   $ (16,659,478 )   $ (10,223,174 )   $ (1,522,838 )

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

- 3 -

 

GH GROUP, INC.

Consolidated and Combined Statements of Changes in Shareholders’/ Members’ Equity

For the Years Ended December 31, 2020 and 2019

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

 

 

    $ Amount   Units   $ Amount   Units   $ Amount   Units   $ Amount           TOTAL EQUITY        
                                        ATTRIBUTABLE TO        TOTAL  
                Class A   Class A   Class B   Class B   Additional       SHAREHOLDER   Non -   SHAREHOLDERS ‘  
    Members’   Preferred   Preferred   Common   Common   Common   Common   Paid-In   Accumulated   S’ / MEMBERS’   Controlling   / MEMBERS’  
    Equity   Shares   Shares   Shares   Shares   Shares   Shares   Capital   Deficit   OF GH Group   Interest   EQUITY  
BALANCE AS OF JANUARY 1, 2018   $ 16,793,571     -   $ -     -     -     -   $ -   $ -   -   $ 16,793,571   $ 1,450,000   $ 18,243,571  
                                                                         
Net (Loss) Income     (1,522,838 )   -     -     -     -     -     -     -   -     (1,522,838 )   211,396     (1,311,442 )
Contributions     16,331,834     -     -     -     -     -     -     -   -     16,331,834     100,000     16,431,834  
Distributions     (1,958,000 )   -     -     -     -     -     -     -   -     (1,958,000 )   -     (1,958,000 )
Share based compensation     -     -     -     -     -     -     -     -   -     -     792,000     792,000  
                                                                         
BALANCE AS OF DECEMBER 31, 2018     29,644,568     -     -     -     -     -     -     -   -     29,644,568     2,553,396     32,197,964  
                                                                         
Net Loss     (10,223,174 )   -     -     -     -     -     -     -   -     (10,223,174 )   (511,465 )   (10,734,639 )
Contributions     7,797,336     -     -     -     -     -     -     -   -     7,797,336     272,800     8,070,136  
Distributions     (812,500 )   -     -     -     -     -     -     -   -     (812,500 )   -     (812,500 )
Share based compensation     641,285     -     -     -     -     -     -     -   -     641,285     1,240,000     1,881,285  
Equity issued in conversion of convertible debt     8,000,000     -     -     -     -     -     -     -   -     8,000,000     -     8,000,000  
                                                                         
BALANCE AS OF DECEMBER 31, 2019     35,047,515     -     -     -     -     -     -     -   -     35,047,515     3,554,731     38,602,246  
                                                                         
Net Loss     -     -     -     -     -     -     -     -   (16,659,478 )   (16,659,478 )   -     (16,659,478 )
Contributions     11,835     -     -     -     -     -     -     -   -     11,835     -     11,835  
Issuance of Warrants in Relief of Liabilities     -     -     -     -     -     -     -     426,887   -     426,887     -     426,887  
Share based compensation     -     -     -     -     -     -     -     2,547,792   -     2,547,792     -     2,547,792  
Formation and Rollup     (35,059,350 )   -     -     197,650,255     1,977     32,295,270     323     38,611,781   -     3,554,731     (3,554,731 )   -  
Issuance for Business Acquisition     -     -     -     10,318,807     103     -     -     3,095,539   -     3,095,642     -     3,095,642  
Cancellation of shares for issuance of Convertible Debt     -     -     -     (2,068,898 )   (21 )   -     -     (1,749,979 ) -     (1,750,000 )   -     (1,750,000 )
                                                                         
BALANCE AS OF DECEMBER 31, 2020   $ -     -   $ -     205,900,164     2,059     32,295,270   $ 323   $ 42,932,020   (16,659,478 ) $ 26,274,924   $ -   $ 26,274,924  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

- 4 -

 

GH GROUP, INC.

Consolidated and Combined Statements of Cash Flows

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net Loss   $ (16,659,478 )   $ (10,734,639 )   $ (1,311,442 )
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:                        
Deferred Tax (Recovery) Expense     1,330,584       214,552       (19,532 )
Interest Capitalized To Notes Payable     1,091,341       43,992       148,875  
Interest Income Capitalized to principle balance     (114,113 )     (451,746 )     (295,442 )
Depreciation and Amortization     2,576,263       1,455,780       767,567  
Net Loss on Equity Method Investments     2,126,112       1,147,968       166,059  
Gain on Extinguishment of Liabilities     (184,057 )     -       -  
Non-Cash Operating Lease Costs     919,519       426,552       -  
Accretion of Debt Discount and Loan Origination Fees     1,061,463       -       -  
Loss (Income) on Change in Fair Value of Derivative Liabilities     251,663       -       -  
Share-Based Compensation     2,547,792       1,881,285       792,000  
Changes in Operating Assets and Liabilities:                        
Accounts Receivable     (3,540,684 )     (605,094 )     (529,457 )
Prepaid Expenses and Other Current Assets     (542,533 )     186,812       (36,725 )
Inventory     (3,764,209 )     (78,592 )     (792,621 )
Other Assets     (24,701 )     (14,495 )     109,925  
Accounts Payable and Accrued Liabilities     1,888,335       3,203,741       (234,304 )
Cash Payments - Operating Lease Liabilities     (842,717 )     (389,802 )     -  
Income Taxes Payable     3,875,626       (256,263 )     317,885  
Other Non-Current Liabilities     306,115       535,241       8,002  
                         
NET CASH USED IN OPERATING ACTIVITIES     (7,697,679 )     (3,434,706 )     (909,209 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Purchases of Property and Equipment     (3,850,589 )     (5,724,738 )     (12,738,220 )
Proceeds From Payments on Note Receivable     -       154,746       1,127,238  
Issuance of Note Receivable     (1,140,010 )     (3,512,362 )     (50,000 )
Purchase of Investments     (2,987,061 )     (5,054,945 )     (3,184,061 )
Distributions Received from Equity Method Investments     340,138       261,229       -  
Cash Paid for Business Acquisition     (81,522 )     (1,912,000 )     -  
                         
NET CASH USED IN INVESTING ACTIVITIES     (7,719,045 )     (15,788,070 )     (14,845,042 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from the Issuance of Note Payable, Third Parties and Related Parties     18,449,748       1,680,815       9,925,000  
Payments on Note Payable, Third Parties and Related Parties     (1,141,494 )     (858,343 )     (525,314 )
Contributions - Controlling and Non-Controlling Interest     11,835       8,070,136       16,431,834  
Distributions - Controlling and Non-Controlling Interest     -       (812,500 )     (1,958,000 )
                         
NET CASH PROVIDED BY FINANCING ACTIVITIES     17,320,089       8,080,108       23,873,520  
                         
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     1,903,366       (11,142,668 )     8,119,269  
Cash and Cash Equivalents, Beginning of Period     2,631,886       13,774,554       5,655,285  
                         
CASH AND CASH EQUIVALENTS , END OF PERIOD   $ 4,535,251     $ 2,631,886     $ 13,774,554  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

- 5 -

 

GH GROUP, INC.

Consolidated and Combined Statements of Cash Flows

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

    2020     2019     2018  
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                        
Cash Paid for Interest   $ 316,859     $ 148,875     $ -  
Cash Paid for Taxes   $ 906,209     $ 252,543     $ 58,999  
                         
Non-Cash Investing and Financing Activities:                        
Net Assets acquired from an Acquisition   $ 7,902,973     $ 1,912,000     $ -  
Equity issued in conversion of convertible debt   $ -     $ 8,000,000     $ -  
Conversion of Advances to Convertible Debt   $ 477,007     $ -     $ -  
Issuance of warrants for relief of liabilities   $ 426,887     $ -     $ -  
Acquisition of Non-Controlling Interest   $ 3,554,731     $ -     $ -  
Cancellation of shares for issuance of Convertible Debt   $ 1,750,000     $ -     $ -  
Recognition of Right-of-Use Assets for Operating Leases   $ 1,182,942     $ 1,939,332     $ -  
Conversion of Note Receivable to Equity of Investee   $ 2,045,309     $ -     $ -  
Acquisition of Non-Controlling Interest Upon Roll - Up   $ 3,554,731     $ -     $ -  
Derivative Liability incurred upon issuance of Convertible Debt   $ 3,095,642     $ -     $ -  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

- 6 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

1. NATURE OF OPERATIONS

 

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.

 

On January 31, 2020, pursuant to a Formation and Contribution Agreement (the “Agreement”), a roll-up transaction (“Roll-up”) was consummated whereby the assets and liabilities of a combined group of companies were transferred into GH Group, Inc whereby GH Group, Inc. now owns and controls the majority interest of all the entities previously combined.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

These developments could have a material adverse impact on the Company’s revenues, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation

 

The accompanying consolidated and combined financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of the Company’s subsidiaries in which the Company has a controlling financial interest.

 

All intercompany transactions and balances have been eliminated in consolidation and combination. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated and combined financial position of the Company as of December 31, 2020 and 2019, the consolidated and combined results of operations and cash flows for the years ended December 31, 2020, 2019 and 2018 have been included. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company consolidates any variable interest entity (“VIE”), of which the Company is the primary beneficiary.

 

Basis of Consolidation and Combination

 

These consolidated financial statements as of and for the year ended December 31, 2020 and combined financial statements as of and for the years ended December 31, 2019 and 2018 include the accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control as defined in ASC 810. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company has ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity. In assessing control, potential voting rights that are currently exercisable are considered.

 

- 7 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

The following are the Company’s principal wholly-owned or controlled subsidiaries and or affiliates that are included in these consolidated and combined financial statements as of December 31, 2020 and 2019 and for the years ending December 31, 2020, 2019 and 2018:

  

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Corporate Entities                          
            Ownership  
Entity   Location   Purpose   2020     2019     2018  
LOB Investment Co. LLC   Long Beach, CA   Holding company     100 %     80 %     80 %
SoCal Hemp Co, LLC   San Bernardino Co., CA   Holding company     100 %     100 %     N/A  
Field Investment Co. LLC   Long Beach, CA   Holding company     100 %     80 %     N/A  
Field Taste Matters, Inc.   Long Beach, CA   Holding company     100 %     N/A       N/A  
Glass House Retail, LLC   Long Beach, CA   Holding company     100 %     N/A       N/A  
Glass House Cultivation, LLC   Santa Barbara, CA   Holding company     100 %     N/A       N/A  
Glass House Manufacturing, LLC   Lompoc, CA   Holding company     100 %     N/A       N/A  

  

Management and Operating Entities                      
            Ownership  
Subsidiaries   Location   Purpose   2020     2019     2018  
Lompoc Management Co. LLC   Lompoc, CA   Manufacturing management     100 %     93 %     N/A  
CA Manufacturing Solutions LLC   Lompoc, CA   Cannabis manufacturing     100 %     72 %     73 %
MGF Management LLC   Long Beach, CA   Cultivation management     100 %     99.50 %     100 %
G&K Produce LLC   Carpinteria, CA   Cannabis cultivation     100 %     100 %     100 %
K&G Flowers LLC   Carpinteria, CA   Cannabis cultivation     100 %     100 %     100 %
Saint Gertrude Management Company LLC   Santa Ana, CA   Provides retail management     100 %     85 %     N/A  
G&H Supply Company, LLC   Carpinteria, CA   Provides cultivation management     100 %     100 %     100 %
Farmacy SB, Inc.   Santa Barbara, CA   Cannabis retail     100 %     99 %     100 %
Bud and Bloom   Santa Ana, CA   Cannabis retail     100 %     85 %     N/A  
Mission Health Associates, Inc.   Carpinteria, CA   Cannabis cultivation     100 %     100 %     100 %
Zero One Seven Management, LLC   Long Beach, CA   Manufacturing management     100 %     N/A       N/A  
ATES Enterprises, LLC   Long Beach, CA   Cannabis manufacturing     100 %     N/A       N/A  
Farmacy Isla Vista, LLC   Santa Barbara, CA   Cannabis retail     100 %     N/A       N/A  
Lompoc Manufacturing GHG, LLC   Lompoc, CA   Processing management     100 %     N/A       N/A  

 

Real Estate Entities                          
            Ownership  
Subsidiaries   Location   Purpose   2020     2019     2018  
Magu Farm LLC   Carpinteria, CA   Holds 100% interest in real property     100 %     99.50 %     100 %
East Saint Gertrude 1327 LLC   Santa Ana, CA   Holds 100% interest in real property     100 %     100 %     90 %
Glass House Farm LLC   Carpinteria, CA   Holds 100% interest in real property     100 %     69 %     71 %
2000 De La Vina LLC   Santa Barbara, CA   Real Estate     100 %     100 %     100 %

  

- 8 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Non-Controlling Interest

 

Non-controlling interest represents equity interests owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s ownership interest that do not result in a loss of control are accounted for as equity transactions.

 

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. 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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Accounts Receivable

 

The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the consolidated and combined balance sheets, net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. The reserve for doubtful accounts was $200,000 and $95,016 as of December 31, 2020 and 2019, respectively.

 

Inventory

 

Inventory is comprised of raw materials, finished goods and work-in-process such as pre-harvested cannabis plants and by-products to be extracted. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and supplies, are capitalized into inventory until the time of harvest. All direct and indirect costs related to inventory are capitalized when incurred, and subsequently classified to cost of goods sold in the consolidated and combined statements of operations. Raw materials and work-in-process is stated at the lower of cost or net realizable value, determined using the weighted average cost. Finished goods inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and establishes reserves when warranted. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of December 31, 2020 and 2019, the Company determined that no reserve was necessary.

 

- 9 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investments

 

Investments in unconsolidated and combined affiliates are accounted as follows:

 

Equity Method and Joint Venture Investments

 

The Company accounts for investments in which it can exert significant influence but does not control as equity method investments in accordance with ASC 323, “Investments—Equity Method and Joint Ventures”. In accordance with ASC 825, the fair value option (“FVO”) to measure eligible items at fair value on an instrument-by-instrument basis can be applied. Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for under the equity method. These investments are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.

 

Investments in Equity without Readily Determinable Fair Value

 

Investments without readily determinable fair values (which are classified as Level 3 investments in the fair value hierarchy) use a determinable available measurement alternative in accordance with ASC 321, “Investments—Equity Securities”. The measurement alternative requires the investments to be held at cost and adjusted for impairment and observable price changes, if any.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Land Not Depreciated
Buildings 39 Years
Furniture and Fixtures 5 Years
Leasehold Improvements Shorter of Lease Term or Economic Life
Equipment and Software 3 – 5 Years
Construction in Progress Not Depreciated

 

The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated and combined statements of operations in the period the asset is derecognized.

 

Intangible Assets

 

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. The estimated useful lives, residual values and amortization methods are reviewed at each reporting period, and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization. Amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Dispensary Licenses Indefinite
Intellectual Property 5 Years

 

- 10 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In accordance with ASC 350, “Intangibles—Goodwill and Other”, costs of internally developing, maintaining or restoring intangible assets are expensed as incurred. Inversely, costs are capitalized when certain criteria are met through the point at which the intangible asset is substantially complete and ready for its intended use.

 

Goodwill

 

Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. In accordance with ASC 350, “Intangibles—Goodwill and Other”, goodwill and other intangible assets with indefinite lives are no longer subject to amortization. The Company reviews the goodwill and other intangible assets allocated to each of the Company’s reporting units for impairment on an annual basis as of year-end or whenever events or changes in circumstances indicate carrying amount it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The carrying amount of each reporting unit is determined based upon the assignment of the Company’s assets and liabilities, including existing goodwill, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. In order to determine if goodwill is impaired, the Company measures the impairment of goodwill by comparing a reporting unit’s carrying amount to the estimated fair value of the reporting unit. If the carrying amount of a reporting unit is in excess of its fair value, the Company recognizes an impairment charge equal to the amount in excess. A goodwill impairment loss associated with a discontinued operation is included within the results of discontinued operations.

 

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

 

The Company 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, 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.

 

- 11 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

Prior to the Roll-Up, most of the combined entities flowing into the Company’s investment funds were either single member LLCs or taxed as flow-through entities. Income taxes for such entities are not payable by or provided for by the Company. Members are taxed individually on their share of the entity’s earnings. California imposes an LLC fee based on revenue, which is included with state taxes as a provision for income taxes. Certain entities with cannabis licenses were either corporations or LLCs electing to be taxed as corporations.

 

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”.

 

- 12 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 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 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. Critical estimates and assumptions used in the model are discussed in “Note 12 - Derivative Liabilities”.

 

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 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 Consolidated and combined Statements of Operations immediately as a gain on acquisition. See “Note 8 – Business Acquisitions” for further details on business combinations.

 

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.

 

- 13 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition

 

Revenue is recognized by the Company in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:

 

Identify a customer along with a corresponding contract;

 

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

 

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

 

Allocate the transaction price to the performance obligation(s) in the contract;

 

Recognize revenue when or as the Company satisfies the performance obligation(s).

 

Revenues consist of wholesale and retail sales of cannabis, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. Sales discounts were not material during the years ended December 31, 2020, 2019 and 2018.

 

Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer. Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its consolidated and combined financial statements.

 

Dispensary Revenue

 

The Company recognizes revenue from the sale of cannabis for a fixed price upon delivery of goods to customers at the point of sale since at this time performance obligations are satisfied. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues.

 

Cultivation and Wholesale

 

The Company recognizes revenue from the sale of cannabis for a fixed price upon the shipment of cannabis goods as the Company has transferred to the buyer the significant risks and rewards of ownership of the goods and the Company does not retain either continuing material involvement to the degree usually associated with ownership nor effective control over the goods sold and the amount of revenue can be measured reliably and collectible and the costs incurred in respect of the transaction is reliably measured. Excise taxes due upon sale are recorded as an expense in the accompanying consolidated and combined statement of operations.

 

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 Class 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 Class 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 consolidated and combined statements of operations.

 

- 14 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

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.

 

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments. There have been no transfers between fair value levels during the years ended December 31, 2020, 2019 and 2018.

 

Financial instruments are measured at amortized cost or at fair value. Financial instruments measured at amortized cost consist of accounts receivable, due from and due to related party, other liabilities, and accounts payable and accrued liabilities wherein the carrying value approximates fair value due to its short-term nature. Other financial instruments measured at amortized cost include notes payable and senior secured convertible credit facility wherein the carrying value at the effective interest rate approximates fair value as the interest rate for notes payable and the interest rate used to discount the host debt contract for senior secured convertible credit facility approximate a market rate for similar instruments offered to the Company.

 

Cash and cash equivalents and restricted cash are measured at Level 1 inputs. Acquisition related liabilities resulting from business combinations are measured at fair value using Level 1 or Level 3 inputs. Investments that are measured at fair value use Level 3 inputs. Refer to “Note 6 – Investments” for assumptions used to value investments.

 

The individual fair values attributed to the different components of a financing transaction, notably derivative financial instruments, convertible debentures and loans, are determined using valuation techniques. The Company uses judgment to select the methods used to make certain assumptions and derive estimates. Significant judgment is also used when attributing fair values to each component of a transaction upon initial recognition, measuring fair values for certain instruments on a recurring basis and disclosing the fair values of financial instruments subsequently carried at amortized cost. These valuation estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of instruments that are not quoted or observable in an active market.

 

- 15 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its consolidated and combined financial position and consolidated and combined results of operations.

 

- 16 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash at its physical locations, which are not currently insured and cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of December 31, 2020, 2019 and for the years ended December 31, 2020, 2019 and 2018, the Company has not experienced any losses with regards to its cash balances.

 

The Company provides credit in the normal course of business to customers located throughout California. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were two customers for each of the years ended December 31, 2020, 2019 and 2018 that comprised 37%, 29% and 39%, respectively of the Company’s revenues. As of December 31, 2020, 2019 and 2018, these same customers had balances due the Company of $4,053,718, $744,821 add $367,567, respectively.

 

4. INVENTORY

 

As of December 31, 2020 and 2019, inventory consists of the following:

 

    2020     2019  
Raw Materials   $ 4,109,434     $ 599,813  
Work-in-Process     1,793,094       220,089  
Finished Goods     963,474       576,868  
Total Inventory   $ 6,866,002     $ 1,396,770  

 

5. NOTES RECEIVABLE

 

As of December 31, 2020 and 2019, notes receivable consists of the following:

 

    2020     2019  
Note receivable with an investee maturing in April 2020, bearing interest at 8.00 percent per annum.   $ -     $ 1,657,040  
                 
Note receivable with an investee maturing in July 2020, bearing interest at 2.00 percent per annum. Subsequent to December 31, 2020, the remaining balance was exchanged for equity of the investee.     -       1,108,825  
                 
Note receivable with an investee maturing in May 2020, bearing interest at 8.00 percent per annum. The investee is currently in negotiations with the Company to extend the maturity date.     904,534       840,533  
                 
Total Notes Receivable     904,534       3,606,398  
                 
Less Current Portion of Notes Receivable     (904,534 )     (3,606,398 )
                 
Notes Receivable, Net of Current Portion   $ -     $ -  

 

- 17 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

6. INVESTMENTS

 

The Company has various investments in entities in which it holds a significant but non-controlling influence through voting equity or through company representation on the entities board of directors. Accordingly, the Company was deemed to have significant influence resulting in equity method accounting.

 

As of December 31, 2020 and 2019, investments consist of the following:

 

          NRO                                      
    LOB Group,     Management,     SoCal Hemp                 5042 Venice,     Lompoc TIC,        
    Inc.     LLC     JV, LLC     ICANN, LLC     F/ELD     LLC     LLC     TOTAL  
Fair Value as of January 1, 2019   $ 2,008,173     $ 2,759,266     $ -     $ -     $ -     $ 2,269,035     $ 268,656     $ 7,305,130  
                                                                 
Additions     999,934       -       678,576       -       3,304,113       -       72,322       5,054,945  
Distribution     -       -       -       -       -       (261,230 )             (261,230 )
(Loss) Income on Equity Method Investments     (142,211 )     (303,300 )     (491,869 )     -       (488,983 )     238,058       40,337       (1,147,968 )
                                                                 
Fair Value as of December 31, 2019     2,865,896       2,455,966       186,707       -       2,815,130       2,245,863       381,315       10,950,877  
                                                                 
Additions     -       -       2,987,062       2,045,309       -       -       -       5,032,371  
Distributions                                             (263,656 )     (76,482 )     (340,138 )
Disposition Due to Acquisition     -       -       -       -       (2,815,130 )     -       -       (2,815,130 )
(Loss) Income on Equity Method Investments     (56,484 )     (119,253 )     (2,114,991 )     -       -       240,488       (75,872 )     (2,126,112 )
                                                                 
Fair Value as of December 31, 2020   $ 2,809,412     $ 2,336,713     $ 1,058,778     $ 2,045,309     $ -     $ 2,222,695     $ 228,961     $ 10,701,868  

 

During the years ended December 31, 2020, 2019 and 2018, the Company recorded net losses from equity method investments of $2,126,112, $1,147,968 and $166,059, respectively. These investments are recorded at the amount of the Company’s investment and as adjusted for the Company’s share of the investee’s income or loss, and dividends paid.

 

7. PROPERTY, PLANT AND EQUIPMENT

 

As of December 31, 2020 and 2019, property and equipment consist of the following:

 

    2020     2019  
Land   $ 8,966,874     $ 8,966,874  
Buildings     11,211,573       11,211,573  
Furniture and Fixtures     44,519       33,610  
Leasehold Improvements     7,475,295       4,818,786  
Equipment and Software     4,502,869       3,045,937  
Construction in Progress     315,306       -  
                 
Total Property, Plant and Equipment     32,516,436       28,076,780  
                 
Less Accumulated Depreciation     (5,324,409 )     (2,808,467 )
                 
Property, Plant and Equipment, Net   $ 27,192,027     $ 25,268,313  

 

Depreciation for the years ended December 31, 2020, 2019 and 2018 of $2,387,930, $1,443,113 and $767,567, respectively.

 

- 18 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

8. BUSINESS ACQUISITIONS

 

The purchase price allocations for the acquisitions, as set forth in the table below, reflect various preliminary fair value estimates and analyses that are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company’s consolidated and combined financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could be affected. All the acquisitions noted below were accounted for in accordance with ASC 805, “Business Combinations”.

 

The below are the preliminary (2020) and final (2019) allocations of business acquisitions completed during the years ended December 31, 2020 and 2019 is as follows:

 

Total Consideration   2020       2019  
Cash   $ 81,523     $ 1,912,000  
Equity Investment Converted     2,815,130          
Prior Note Receivable Converted     1,910,678       -  
Fair Value of Equity Issued     3,095,642       -  
Total Consideration   $ 7,902,973     $ 1,912,000  
                 
Net Assets Acquired (Liabilities Assumed)                
Current Assets   $ 2,149,910     $ 724,987  
Property, Plant and Equipment     461,055       590,000  
Non-Current Assets     178,142       36,000  
Deferred Tax Assets, Net     -       103,791  
Current Liabilities Assumed     (814,834 )     (1,131,906 )
Long-Term Liabilities Assumed     (57,218 )     (2,720,953 )
Intangible Assets:                
Intellectual Property     750,000       190,000  
Dispensary License     3,140,000       1,400,000  
Total Identifiable Net Assets Acquired (Net Liabilities Assumed)     5,807,055       (808,081 )
Goodwill (1)     2,095,918       2,720,081  
Total Net Assets Acquired   $ 7,902,973     $ 1,912,000  
                 
Pro Forma Revenues (2)   $ 60,361     $ 3,809,773  
Pro Forma Net Loss (2)   $ (393,743 )   $ (355,127 )

 

On February 11, 2020, the Company completed the acquisition of a licensed concentrate and extractions business for aggregate an consideration of $7,902,973 which is comprised of prior investment with a value of $2,815,130, convertible note receivable, and accrued interest in the amount of $1,910,678, cash at closing in the amount of $81,523, and the issuance of 10,318,807 Class A Common Shares valued at $3,095,642.

 

Subsequent to August 31, 2019, the Company completed the acquisition of a licensed cannabis retail business for an aggregate consideration of $1,912,000 which is comprised of all cash at closing.

 

 

(1)            Goodwill arising from acquisitions represent expected synergies, future income and growth, and other intangibles that do not qualify for separate recognition. Generally, goodwill related to dispensaries acquired within a state adds to the footprint of the GH Group dispensaries within the state, giving the Company’s customers more access to the Company’s branded stores. Goodwill related to cultivation and wholesale acquisitions provide for lower costs and synergies of the Company’s growing and wholesale distribution methods which allow for overall lower costs.

 

(2)            If the acquisition had been completed on January 1, 2020 or 2019 for the 2020 and 2019 acquisitions, respectively, the Company estimates it would have recorded increases in revenues and net loss shown in the pro forma amounts noted above.

 

- 19 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

9. INTANGIBLE ASSETS

 

As of December 31, 2020 and 2019, intangible assets consist of the following:

 

    2020     2019  
Definite Lived Intangibles                
Intellectual Property   $ 940,000     $ 190,000  
                 
Total Intangible Assets     940,000       190,000  
                 
Less Accumulated Amortization     (201,000 )     (12,667 )
                 
Definite Lived Intangible Assets, Net     739,000       177,333  
                 
Indefinite Lived Intangibles                
Cannabis Licenses     4,540,000       1,400,000  
                 
Indefinite Lived Intangibles     4,540,000       1,400,000  
                 
Total Intangibles Assets, Net   $ 5,279,000     $ 1,577,333  

 

For the years ended December 31, 2020, 2019 and 2018, the Company recorded amortization expense of $188,333, $12,667 and $0, respectively.

 

The following is the future minimum amortization expense to be recognized for the years ended December 31:

 

December 31:      
2021   $ 188,000  
2022     188,000  
2023     188,000  
2024     175,000  
         
Total Future Amortization Expense   $ 739,000  

 

10. GOODWILL

 

As of December 31, 2020 and 2019, goodwill was $4,815,999 and $2,720,081, respectively. See “Note 8 – Business Acquisitions” for further information.

 

Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company adopted ASU 2017-04 which eliminates Step 2 from the quantitative assessment of the goodwill impairment test wherein the goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. As amended, the goodwill impairment test consists of one step comparing the fair value of a reporting unit with its carrying amount. The amount by which the carrying amount exceeds the reporting unit’s fair value is recognized as a goodwill impairment loss.

 

The Company conducts its annual goodwill impairment assessment as of the last day of the year. For the purpose of the goodwill impairment test, the Company performed a qualitative assessment wherein management analyzed a wide range of indicators including macroeconomic condition, industry and market considerations, cost factors and overall reporting unit performance and other relevant reporting unit specific events. In accordance with this analysis, management determined there was no impairment of its goodwill for the years ended December 31, 2020 and 2019.

 

- 20 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

As of December 31, 2020 and 2019, accounts payable and accrued liabilities consist of the following:

 

    2020     2019  
Accounts Payable   $ 2,583,910     $ 2,384,500  
Accrued Liabilities     1,082,980       391,604  
Accrued Payroll and Related Liabilities     1,724,921       509,986  
Related Party Payable     -       1,773,879  
Sales Tax and Cannabis Taxes     1,178,904       284,583  
                 
Total Accounts Payable and Accrued Liabilities   $ 6,570,715     $ 5,344,552  

 

The Company offers a customer loyalty rewards program that allows members to earn discounts on future purchases. Unused discounts earned by loyalty rewards program members are included in accrued liabilities and recorded as a sales discount at the time a qualifying purchase is made. The value of points accrued as of December 31, 2020 and 2019 was approximately $1,007,000 and $178,000, respectively. Currently, unused points do not expire in most cases.

 

12. DERIVATIVE LIABILITIES

 

During the year ended December 31, 2020, the Company issued convertible debt to third parties and related parties, See Note 14 and Note 15, respectively. Upon the analysis of the conversion feature of the convertible debt under ASC 815, the Company determined that the conversion features are to be accounted as derivative liabilities. The Company valued the conversion feature using the Binomial Lattice Model using the following level 3 inputs:

 

    2020  
Weighted-Average Risk Free Annual Rate     0.82 %
Weighted-Average Average Probability at Maturity     0.31 %
Weighted-Average Average Probability Before Maturity     59.00 %
Weighted-Average Average Probability at Change of Control     33.00 %
Weighted-Average Expected Annual Dividend Yield     9.0 %
Weighted-Average Expected Stock Price Volatility     70.9 %
Weighted-Average Expected Life in Years     2.28  

 

A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities for the year ended December 31, 2020 is as follows:

 

    2020     2019  
Balance at beginning of year   $ -     $ -  
Derivative Liability incurred upon issuance of Convertible Debt     7,113,337       -  
Change in Fair Value     251,663       -  
                 
Balance at end of year   $ 7,365,000     $ -  

 

Derivative liabilities are included in current liabilities as the holders of the convertible notes can convert at any time.

 

- 21 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

13. LEASES

 

As a result of the adoption of ASC 842 the Company has changed its accounting policy for leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and accrued obligations under operating lease (current and non-current) liabilities in the consolidated and combined balance sheets.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.

 

ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms at its properties that have either been extended or are likely to be extended. The terms used to calculate the ROU assets for these properties include the renewal options that the Company is reasonably certain to exercise.

 

The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes and the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the consolidated and combined balance sheets and are expensed in the consolidated and combined statements of operations on the straight-line basis over the lease term.

 

The below are the details of the lease cost and other disclosures regarding the Company’s leases as of December 31, 2020 and 2019:

 

    2020     2019     2018  
Operating Lease Cost   $ 919,519     $ 426,552     $ -  
                         
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:                        
Operating Cash Flows from Operating Leases   $ 842,717     $ 389,802     $ -  
                         
Non-Cash Additions to Right-of-Use Assets and Lease Liabilities:                        
Recognition of Right-of-Use Assets for Operating Leases   $ 1,182,942     $ 1,939,332     $ -  
                         
Weighted-Average Remaining Lease Term (Years) - Operating Leases     5       7       N/A  
                         
Weighted-Average Discount Rate - Operating Leases     17.00 %     17.00 %     N/A  

 

- 22 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

13. LEASES (Continued)

 

The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Operating Lease Liabilities and Right of Use Assets

 

The Company leases certain business facilities from related parties and third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $2,700 to $44,000 and expire through September 2028. Certain lease monthly payments may escalate up to 5.0% each year. In such cases, the variability in lease payments are included within the current and noncurrent operating lease liabilities.

 

Future minimum operating lease payments under non-cancelable operating leases is as follows:

 

December 31:   Third Parties     Related Parties     Total  
2021   $ 341,709     $ 389,645     $ 731,354  
2022     351,967       393,127       745,094  
2023     362,526       396,783       759,309  
2024     373,396       393,597       766,993  
2025     31,192       320,004       351,196  
Thereafter     -       880,011       880,011  
                         
Total Future Minimum Lease Payments     1,460,790       2,773,167       4,233,957  
                         
Total Amount Representing Interest     (409,511 )     (1,178,265 )     (1,587,776 )
                         
Total Amount Representing Present Value     1,051,279       1,594,902       2,646,181  
                         
Current Portion of Operating Lease Liabilities     (178,940 )     (148,389 )     (327,329 )
                         
Operating Lease Liabilities, Net of Current Portion   $ 872,339     $ 1,446,513     $ 2,318,852  

 

The following are changes in right-of-use assets during the years ended December 31, 2020 and 2019.

 

Balance as of January 1, 2019   $ -  
Recognition of Right-of-Use Assets for Operating Leases     1,939,332  
Non-Cash Operating Lease Costs     (154,249 )
         
Balance as of December 31, 2019     1,785,083  
         
Recognition of Right-of-Use Assets for Operating Leases     1,182,942  
Non-Cash Operating Lease Costs     (435,395 )
         
Balance as of December 31, 2020   $ 2,532,629  

 

- 23 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

14. NOTES PAYABLE

 

As of December 31, 2020 and 2019, notes payable consist of the following:

 

    2020       2019  
Note payable maturing in July 2020, bearing interest at 12.00 percent per annum.   $ -   (i)   $ 1,028,605  
Note payable maturing in June 2021, bearing interest at 7.25 percent per annum.     -         7,860  
Note payable maturing in June 2021, bearing interest at 7.00 percent per annum.     343,435   (ii)     995,375  
Note payable maturing in December 2020, bearing interest at 8.00 percent per annum.     212,821   (iii)     379,941  
Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum.     20,790,514   (iv)     -  
Other - Vehicle Loans     44,931         -  
                   
Total Notes Payable     21,391,701         2,411,781  
                   
Less Unamortized Debt Issuance Costs and Loan Origination Fees     (5,421,622 )       -  
                   
Net Amount   $ 15,970,079       $ 2,411,781  
                   
Less Current Portion of Notes Payable     (601,187 )       (1,759,839 )
                   
Notes Payable, Net of Current Portion   $ 15,368,892       $ 651,942  

 

(i) During the Year ended December 31, 2019, the Company issued debt to an unrelated third party for working capital needs in the amount of $988,157. The debt matures in July 2020 and bears interest at 12.00 percent per year. The balance as of December 31, 2019 was $1,028,605, which includes accrued interest. During the year ended December 31, 2020, as part of the convertible debt offering, the holders of the note payable agreed to settle its debt by converting the balance ($1,041,924 at the time of agreement) into convertible debt.

 

(ii) During the Year ended December 31, 2017, the Company issued debt to an unrelated third party for working capital needs in the amount of $2,000,000. The debt matures in June 2021 and bears interest at 7.00 percent per year. The balance as of December 31, 2020 and 2019 was $343,435 and $995,375, respectively.

 

(iii) During the Year ended December 31, 2019, the Company issued debt to an unrelated third party for working capital needs in the amount of $377,658. The debt matured in December 2020 and bears interest at 7.00 percent per year. The balance as of December 31, 2020 and 2019 was $212,821 and $379,941, respectively. Subsequent to year end, the balance was paid in full.

 

(iv) 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 December 31, 2020 and 2019, the balance due under these Senior Convertible Notes was $20,790,514 and $0, respectively.

 

Scheduled maturities of notes payable are as follows:

 

    Principal  
December 31:   Payments  
2021   $ 601,187  
2025     20,790,514  
         
Total Future Minimum Principal Payments   $ 21,391,701  

 

- 24 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

15. NOTES PAYABLE – RELATED PARTIES

 

As of December 31, 2020 and 2019, notes payable from related parties consist of the following:

 

    2020       2019  
Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum.   $ 2,049,037   (i)   $ -  
                   
Convertible note payable maturing in March 2023, bearing interest at 6.00 percent per annum.     2,189,264   (ii)     1,925,000  
                   
Note payable maturing in October 2020, bearing interest at 1.68 percent per annum.     -   (iii)     316,262  
                   
Total Notes Payable - Related Parties     4,238,301         2,241,262  
                   
Less Unamortized Debt Issuance Costs and Loan Origination Fees     (534,335 )       -  
                   
Net Amount   $ 3,703,966       $ 2,241,262  
                   
Less Current Portion of Notes Payable - Related Parties     -         (2,241,262 )
                   
Notes Payable, Net of Current Portion - Related Parties   $ 3,703,966       $ -  

 

(i) 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 December 31, 2020 and 2019, the balance due under these Senior Convertible Notes from related parties was $2,049,037 and $0, respectively.

 

(ii) 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. KBIC balance which was not converted remained. Effective as of March 1, 2020, KBIC assigned the 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 a result of the modification, the Company 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.

 

- 25 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

15. NOTES PAYABLE- RELATED PARTIES (Continued)

 

(iii) 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, Glass House 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.

 

Scheduled maturities of notes payable are as follows:

 

    Principal  
December 31:   Payments  
2023   $ 2,189,264  
2025     2,049,037  
         
Total Future Minimum Principal Payments   $ 4,238,301  

 

16. SHAREHOLDERS’ AND MEMBERS EQUITY

 

Authorized

 

As of December 31, 2020, the authorized share capital of the Company is comprised of the following:

 

Class A Common Shares

 

The authorized total number of Class A Common Shares is 500,000,000. Holders of Class A Common Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company and are entitled to one vote in respect of each Class A Common Share held. Class A Shares have no dividend preference senior or subordinated to other class of shares. Upon a liquidation event, Class A Common shareholders are entitled to their pro-rata portion of total equity instruments then outstanding.

 

On January 31, 2020, pursuant to the “Agreement, a Roll-up was consummated whereby the assets and liabilities of a combined group of companies were transferred into GH Group, Inc whereby GH Group, Inc. now owns and controls the interest of all the entities previously combined. As a result of the Roll-Up, the Company issued to the investors of the combined entities 197,650,255 Class A Common Shares.

 

On February 11, 2020, the Company issued 10,318,807 Class A Common Shares valued at $3,095,642 related to an acquisition, see Note 8.

 

In February 2020, the Company repurchased 2,068,898 Class A Common Shares from an investor and issued as part of the Convertible Debt raise in February 2020, $1,750,000 convertible notes. The Shares repurchased were simultaneously cancelled.

 

Class B Common Shares

 

The authorized total number of Class B Common Shares is 33,000,000. Holders of Class B Common Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company and are entitled to fifty votes in respect of each Class B Common Share held. Class B Shares have no dividend preference senior or subordinated to other class of shares. Class B Common Shares are convertible at either the option of the holder or automatically upon certain events as defined in the articles of incorporation to shares of Class b Common Shares on a one-to-one basis. Upon a liquidation event, Class B Common shareholders are entitled to their pro-rata portion of total equity instruments then outstanding.

 

In January 2020 as part of the roll up and re-organization, the Company issued 32,295,270 class B Common Shares to related parties, see Note 20.

 

- 26 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

16. SHAREHOLDERS’ AND MEMBERS EQUITY

 

Preferred Shares

 

The authorized total number of Preferred Shares is 50,000,000. Holders of Preferred Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company and are not entitled to votes. Preferred Shares have no dividend preference senior or subordinated to other class of shares and are not convertible into other classes of shares. Upon a liquidation event, Preferred shareholders are entitled to their pro-rata portion of total equity instruments then outstanding.

 

Non-Controlling Interest

 

Non-controlling interest represents equity interests owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s ownership interest that do not result in a loss of control are accounted for as equity transactions.

 

During the years ended December 31, 2020, 2019 and 2018, the Company recorded a (loss) / income attributable to non-controlling interest of $0, ($511,465) and $211,396, respectively. The Company received contributions from non-controlling members in the amount of $272,800 and $100,000 and issued equity interest to non-controlling members valued at $1,240,000 and $792,000 for services performed during the year ended December 31, 2019 and 2018, respectively. The equity issuances to non-controlling interest members were fair valued using the estimated fair value of the equity of the Company as determined by a valuation specialist using level 3 inputs from the Company consisting of, but not limited to future profitability of the Company and industry data. During the year ended December 31, 2020, as part of the roll-up transaction, the Company acquired all the membership interest from the combined entities and the non-controlling members, resulting in the non-controlling interest balance of $3,554,731 being reclassed to controlling interest during the year ended December 31, 2020.

 

17. SHARE-BASED COMPENSATION

 

The Company has an equity incentive plan (the “Incentive Plan”) under which the Company may issue various types of equity instruments or instruments that track to equity, more particularly the Company’s Class A Common stock to any employee, officer, consultants or director. The types of equity instruments issuable under the Incentive Plan encompass, among other things, stock options, stock appreciation rights, restricted stock and or other awards. (together, “Awards”). Share based compensation expenses are recorded as a component of general and administrative to the extent that the Company has not appointed a Compensation Committee, all rights and obligations under the Incentive Plan shall be those of the full Board of Directors. The maximum number of Awards that may be issued under the Incentive Plan shall be 63,753,020. If an Award expires, becomes unexercisable, or is cancelled, forfeited or otherwise terminated without having been exercised or settled in full, as the case may be, the shares allocable to the unexercised portion of the Award shall again become available for future grant or sale under this Incentive Plan (unless this Plan has terminated). Shares that have been issued under this plan shall not be returned to this Incentive Plan. However, the following shares shall again become available for future grant under this Incentive Plan: (i) any shares that are reacquired by the Company pursuant to any forfeiture provision, right of repurchase or redemption; and (ii) any shares that are retained by the Company upon the exercise of or purchase of shares under an Award in order to satisfy the exercise price or purchase price for the Award or to satisfy any withholding taxes due with respect to such exercise or purchase. Vesting of Awards will be determined by the Compensation Committee or Board of Directors in absence of one. The exercise price for Awards (if applicable) will generally not be less than the fair market value of the Award at the time of grant and will generally expire after 5 years.

 

- 27 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

17. SHARE-BASED COMPENSATION (Continued)

 

Stock Options

 

A reconciliation of the beginning and ending balance of stock options outstanding is as follows:

 

          Weighted-  
    Number of     Average  
    Stock Options     Exercise Price  
Balance as of January 1, 2019     -     $ -  
Granted     50,575,080     $ 0.22  
Balance as of December 31, 2019     50,575,080     $ 0.22  
Granted     4,696,786     $ 0.30  
Forfeited     (6,868,242 )   $ 0.22  
Balance as of December 31, 2020     48,403,624     $ 0.23  

 

The following table summarizes the stock options that remain outstanding as of December 31, 2020:

 

    Exercise         Stock Options     Stock Options  
Security Issuable   Price     Expiration Date   Outstanding     Exercisable  
Class A Common Shares   $ 0.22     September 2029     43,706,838       20,880,755  
Class A Common Shares   $ 0.30     April 2030     4,696,786       -  
                  48,403,624       20,880,755  

 

For the years ended December 31, 2020 and 2019, the fair value of stock options granted with a fixed exercise price was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:

 

    2020     2019  
Weighted-Average Risk-Free Annual Interest Rate     0.31 %     1.53 %
Weighted-Average Expected Annual Dividend Yield     0.0 %     0.0 %
Weighted-Average Expected Stock Price Volatility     85.3 %     85.3 %
Weighted-Average Expected Life in Years     4.00       4.00  
Weighted-Average Estimated Forfeiture Rate     0.0 %     0.0 %

 

Stock price volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies. The expected life represents the period of time that stock options granted are expected to be outstanding. The risk-free rate was based on United States Treasury zero coupon bond with a remaining term equal to the expected life of the options.

 

During the years ended December 31, 2020 and 2019, the weighted-average fair value of stock options granted was $0.18 and $0.013, respectively, per option. As of December 31, 2020 and 2019, stock options outstanding have a weighted-average remaining contractual life of 8.8 years and 9.8 years, respectively.

 

For the years ended December 31, 2020 and 2019, the Company recognized $2,547,792 and $641,285, respectively in share-based compensation expense related to these stock options. The remaining share-based compensation recognized for the years ended December 31, 2019 and 2018 are related to equity issued to consultants in the amount of $1240,000 and $792,000, respectively.

 

As of December 31, 2020 and 2019, there were approximately $3,553,000 and $6,192,000 in unrecognized share-based compensation cost.

 

- 28 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

17. SHARE-BASED COMPENSATION (Continued)

 

Warrants

 

A reconciliation of the beginning and ending balance of warrants outstanding is as follows:

 

          Weighted-  
    Number of     Average  
    Warrants     Exercise Price  
Balance as of January 1, 2019     -     $ -  
Granted     -     $ -  
Balance as of December 31, 2019     -     $ -  
Granted     1,968,300     $ 0.16  
Balance as of December 31, 2020     1,968,300     $ 0.16  

 

The following table summarizes the warrants that remain outstanding as of December 31, 2020:

 

    Exercise         Warrants     Warrants  
Security Issuable   Price     Expiration Date   Outstanding     Exercisable  
Class A Common Shares   $ 0.16     July 2023     1,968,300       1,968,300  
                  1,968,300       1,968,300  

 

For the year ended December 31, 2020, the fair value of warrants granted with a fixed exercise price was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:

 

Weighted-Average Risk-Free Annual Interest Rate     0.31 %
Weighted-Average Expected Annual Dividend Yield     0.0 %
Weighted-Average Expected Stock Price Volatility     85.3 %
Weighted-Average Expected Life in Years     3  
Weighted-Average Estimated Forfeiture Rate     0.0 %

 

Stock price volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies. The expected life represents the period of time that stock options granted are expected to be outstanding. The risk-free rate was based on United States Treasury zero coupon bond with a remaining term equal to the expected life of the options.

 

During the year ended December 31, 2020, the weighted-average fair value of warrants granted was $0.22, per warrant. As of December 31, 2020, warrants outstanding have a weighted-average remaining contractual life of 2.6 years. There were no warrants issued our outstanding for the year ended December 31, 2019.

 

The Company evaluated its agreements related to the warrants issued during the year ended December 31, 2019 and determined that the warrants were not derivatives or contained features that qualify as embedded derivatives.

 

- 29 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

18. PROVISION FOR INCOME TAXES AND DEFERRED TAXES

 

Provision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Current:                        
Federal   $ 3,543,578     $ 582,081     $ 247,338  
State     1,544,371       175,887       129,546  
Total Current     5,087,949       757,968       376,884  
Deferred:                        
Federal     1,229,887       221,870       (19,761 )
State     100,697       (7,318 )     229  
Total Deferred     1,330,584       214,552       (19,532 )
Total Provision for Income Taxes   $ 6,418,533     $ 972,520     $ 357,352  

 

As of December 31, 2020 and 2019, the components of deferred tax assets and liabilities were as follows:

 

    2020     2019  
Deferred Tax Assets:                
State taxes   $ 6,130     $ 26,806  
Allowance for doubtful accounts     13,992       -  
Deferred rent     25,995       75,475  
Non-qualified stock options     572,999       -  
Operating losses     5,937,406       469,764  
Total Deferred Tax Assets     6,556,522       572,045  
Valuation Allowance     (6,510,405 )     (423,034 )
Net Deferred Tax Assets   $ 46,117     $ 149,011  

 

      2020       2019  
Deferred Tax Liabilities:                
Property, Plant & Equipment   $ (1,273,724 )   $ (239,010 )
Basis in subsidiary entity     (192,976 )     -  
                 
Total Deferred Tax Liabilities     (1,466,700 )     (239,010 )
                 
Net Deferred Tax Liabilities   $ (1,420,583 )   $ (89,999 )

 

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the year ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Income tax expense at federal rate   $ (505,820 )   $ (1,415,675 )   $ 595,544  
State taxes and fees     1,464,420       136,464       112,227  
IRS Section 280E disallowance     914,042       781,245       30,936  
Uncertain tax position     306,115       98,575       -  
Change in valuation allowance     4,279,589       422,866       15,898  
Interest on convertible debt     160,588       -       -  
Other permanent differences     (200,401 )     (20,475 )     1,844  
Income not taxed at entity level     -       969,520       (399,097 )
                         
Reported Income Tax Expense   $ 6,418,533     $ 972,520     $ 357,352  

 

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GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

18. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for years ended December 31, 2020, 2019 and 2018 is as follows:

 

    2020     2019  
Balance at Beginning of Period   $ 543,243     $ -  
IRS Section 280E Positions     306,115       543,243  
                 
Balance at End of Period   $ 849,358     $ 543,243  

 

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits at December 31, 2020 and 2019, potential benefits of $849,358 and $543,243, respectively, that if recognized would impact the effective tax rate on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

 

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of December 31, 2020, the federal tax returns since 2017 and state tax returns since 2016 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

 

19. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of December 31, 2020 and 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

- 31 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

19. COMMITMENTS AND CONTINGENCIES (Continued)

 

Royalty

 

Effective as of May 9, 2019, Sweet & Salty, Inc., a California corporation (“Lender”) and GH Brands LLC, a California limited liability company (“GH Brands”) entered into the License and Services Agreement, pursuant to which Lender granted to GH Brands an exclusive, transferable, sublicensable, right and license to use, exploit and incorporate the name, nicknames, initials, signature, voice, image, likeness, and photographic or graphic representations of likeness, statements and biography of the artist Annabella Avery Thorne pka Bella Thorne for all purposes relating to or in connection with the development, quality control, cultivation, extraction, manufacture, production, branding, testing, advertising, marketing, promotion, commercialization, packaging, distribution, exploitation and/or sale of the products of GH Brands and its affiliates. The term of License and Service Agreement is 3 years, with the right to renew upon 60-days prior notice for additional 2-year term. Royalty fees for Bella boxes are 10% for the 1st year and 12% for 2-5 years. Royalty fees for flower products and accessories are 6% for the 1st year, 7% for the 2nd year and 8% for 3-5 years. Minimum guarantee fees are recoupable against royalties for an initial term of $1,000,000 ($50,000 initial payment, $200,000 for the 1st year, $375,000 for the 2nd year and $375,000 for the 3rd year). For a renewal term, the minimum guarantee fee is $1,500,000 ($750,000 for the 4th year, $750,000 for the 5th year). During the year ended December 31, 2020, 2019 and 2018, the Company recognized expenses related to these royalties in the amount of $137,500, $166,667 and $0, respectively. As of December 31, 2020 and 2019, the Company has no amounts due under this royalty agreement.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the consolidated and combined financial statements relating to claims and litigations. As of December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

20. RELATED PARTY TRANSACTIONS

 

Incubation Services

 

Effective January 1, 2019, Glass House 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 Glass House (and incur certain fees and expenses on behalf of Glass House as part of and as performance for such services) (collectively, the “Incubation”) in consideration of Glass House’s agreement to issue to Magu Capital, upon a date certain following the closing of the Roll-Up as reasonably determined by the board of directors of Glass House, 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, Glass House issued to Magu Capital a Warrant to Purchase Exercise Shares (the “Magu Capital Warrant”), in full satisfaction of Glass House’s 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. The Company 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 Common Shares for Management Services

 

In January 2020, the Company 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 Class B common shares of Glass House (“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.

 

- 32 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

20. RELATED PARTY TRANSACTIONS (Continued)

 

Asset Management Fees – Related Party

 

The Company has 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, the Company incurred expenses of approximately $0, $822,000 and $590,000, respectively.

 

21. SEGMENTED INFORMATION

 

The Company currently operates in one segment, the production and sale of cannabis products, which is how the Company’s Chief Operating Decision Maker manages the business and makes operating decisions. All the Company’s operations are in the United States of America in the State of California. Intercompany sales and transactions are eliminated in consolidation.

 

22. REVENUES, NET

 

Revenues are disaggregated as follows for the years ending December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Retail   $ 14,503,125     $ 4,176,773     $ -  
Wholesale     33,756,476       12,478,363       8,395,326  
Other     -       286,290       571,960  
Revenues, Net   $ 48,259,601     $ 16,941,426     $ 8,967,286  

 

23. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these consolidated and combined financial statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the consolidated and combined financial statements or disclosure in the notes to the consolidated and combined financial statements.

 

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 a 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 7,554,679 Class A Common shares to holders of iCANN equity interests; and (iv) the Company issued an additional 500,000 Class A Common shares to brokers and consultants.

 

Engagement of Canaccord Genuity

 

Effective as of February 10, 2021 GH Group Inc. (“GH Group”) and Canaccord Genuity Corp. (“Canaccord Genuity”) entered into an Engagement Agreement pursuant to which GH Group agreed to appoint Canaccord Genuity as financial advisor to GH Group in connection with a merger by and between GH Group, Inc. and Mercer Park Brand Acquisitions Corp. (the “SPAC”). The fees: $2,000,000, of which $1,000,000 to be paid in cash and $1,000,000, in freely tradeable shares of the SPAC, where each share of the SPAC is valued at $10.00 per share, payable if merger is completed during the term of the engagement, or within a period of 12 months after the termination of this engagement, plus expenses limited to the amount of $25,000. The term of the engagement: from December 30, 2020 until the earlier of the date the merger is completed and date upon which the engagement is terminated by either party hereto by written notice of termination delivered to the other party.

 

- 33 -

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

23. SUBSEQUENT EVENTS (Continued)

 

Acquisition Agreement – Mercer Park Brand Acquisition Co.

 

On December 29th 2020 the Company and Mercer Park Brand Acquisition Corporation, 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.

 

Proposed Transaction

 

Effective February 23, 2021 GH Group, Inc. entered into a Merger and Exchange Agreement with Element 7 CA, LLC (“E7”) whereby GH Group, Inc. would obtain all of the equity interest held by E7 in seventeen in-process license applications, some of which are partially owned. GH Group, Inc. is obligated to purchase all such interests of each license that meets the conditions for sale and E7 is obligated to sell such equity interests. The consideration of $1,500,000 for 100% of the E7’s equity interests in each license holding entity payable in shares of post-close Mercer Park Brand Acquisition Corp. at $10 per share. Conditions to close include the closing of the Mercer Park merger, the availability of $25,000,000 for development of retail licenses, and the delivery by E7 of certain leases.

 

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 million.

 

Camarillo Farm Transaction

 

CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC (“CEFF Parent”, and together with CEFF Camarillo Propco, the “CEFF Parties”) are the owners of the California Option Assets (as defined in the California Option Agreement (as defined below)), including, without limitation, that certain approximately 160-acre real property and agricultural facility located thereon, located at 645 Laguna Road, City of Camarillo, County of Ventura California (APN: 230-0-071-345) (the “Real Property”).

 

Pursuant to that certain Option Agreement (California Option Assets), dated December 28, 2018, by and among the CEFF Parties and GIPI (as defined below) Glass Investments Projects, Inc., a Delaware corporation (“GIPI”) (the “Original California Option Agreement”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and GIPI (“First Amendment”) and (ii) the Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and among the CEFF Parties and GIPI (“Second Amendment”) (as amended by the First Amendment and Second Amendment, collectively, the “California Option Agreement”), GIPI holds an option to purchase the California Option Assets (the “Option” and collectively with all rights, option and interests held by GIPI in, to and under the California Option Agreement including, without limitation, the Real Property and other California Option Assets, the “Option Rights”).

 

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GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018
 

 

23. SUBSEQUENT EVENTS (Continued)

 

Effective as of February 13, 2021, Glass House, Mercer Park Brand Acquisition Corp., a British Columbia corporation (“Mercer Park”, together with Glass House, “GH/MPBAC”) and GIPI entered into that certain letter agreement (the “Camarillo Acquisition Agreement”), pursuant to which, among other things, (i) GIPI agreed to sell the Option Rights to GH/MPBAC or their designee, and (ii) in acknowledgment of the Camarillo Acquisition Agreement being an interim agreement, GH/MPBAC and GIPI agreed to negotiate and document, for the transactions contemplated by the Camarillo Acquisition Agreement, the terms and conditions of the Definitive Agreements (as defined in the Camarillo Acquisition Agreement), including, without limitation, an Agreement to Assign an Option to Acquire Real Estate to be entered into by and among, GIPI, GH Camarillo LLC, a Delaware limited liability company and wholly-owned subsidiary of Glass House (“GH Camarillo”), as the designee of Glass House pursuant to the Camarillo Acquisition Agreement, and Mercer Park (the “Definitive Option PSA”). As of the date hereof, the Definitive Option PSA has not been finalized.

 

Effective as of February 20, 2021, GIPI exercised the Option via a letter which was delivered to the CEFF Parties pursuant to Section 2.3 of the California Option Agreement (the “Exercise Notice”). The Exercise Notice has been signed by the CEFF Parties to acknowledge, among other things, that GIPI has validly exercised the Option in accordance with the California Option Agreement.

 

Prior to the expiration of the Contingency Period (as defined in the Second Amendment), the CEFF Parties, as seller, and GH Camarillo, as buyer, will have agreed to negotiate in good faith and attempt to finalize a definitive purchase and sale agreement for the Real Property (the “Definitive Property PSA”) and other related agreements and instruments for the transactions contemplated by the California Option Agreement.

 

Effective as of February 20, 2021, and in connection with the Camarillo Acquisition Agreement, GIPI, GH Camarillo and Peninsula Escrow, Inc., a California corporation (“Escrow Holder”), have entered into that certain Escrow Agreement (Camarillo Acquisition Agreement) (the “Camarillo Acquisition Escrow Agreement”), pursuant to which, among other things, the Escrow Holder has agreed to hold, administer, and disburse a $2,000,000 cash deposit (the “COA Deposit”) in one or more segregated, interest-bearing money market accounts in accordance with the terms of the Camarillo Acquisition Agreement, and the express instructions provided by GH Camarillo.

 

Effective as of February 20, 2021, and in connection with the California Option Agreement, GH Camarillo, the CEFF Parties and Escrow Holder, have entered into that certain Escrow Agreement (California Option Agreement), pursuant to which, among other things, the Escrow Holder has agreed to hold, administer, and disburse the COA Deposit, and assuming GH Camarillo has not terminated the Camarillo Acquisition Agreement, the Camarillo Acquisition Escrow Agreement, the Definitive Option PSA or the Definitive Property PSA, on or before the expiration of the Contingency Period, an additional $8,000,000 cash deposit (the “Additional Deposit”) in one or more segregated, interest-bearing money market accounts in accordance with the terms of the California Option Agreement, and the express instructions provided by GH Camarillo.

 

Effective as of February 22, 2021, BFP made a $2,000,000 unsecured bridge loan to Glass House at market terms for the express and only purpose of funding the COA Deposit, pursuant to an Unsecured Promissory Note issued to BFP (the “BFP Bridge Note”). Further, assuming GH Camarillo has not terminated the Camarillo Acquisition Agreement, the Camarillo Acquisition Escrow Agreement, the Definitive Option PSA or the Definitive Property PSA, Glass House intends to complete on or before March 22, 2021, an approximately $12,000,000 Qualified Financing (as defined in the Senior Convertible Notes), pursuant to which it will repay the BFP Bridge Note, fund the Additional Deposit, and fund certain other required expenditures of Glass House.

 

Effective as of March 3, 2021 Glass House assigned all of its membership interests in Field Investment Co., LLC a subsidiary and its subsidiaries Field Taste Matters, Inc., ATES Enterprises, LLC, and Zer One Seven Management, LLC for de minimis consideration to an unrelated party.

 

- 35 -

 

APPENDIX D – MANAGEMENT’S DISCUSSION AND ANALYSIS OF GH GROUP, INC.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended December 31, 2020, December 31, 2019 and December 31, 2018

 

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.

 

See “Description of Business” for an overview of the GH Group and “Regulatory Overview” for details regarding the California regulatory framework.

 

Recent Developments

 

Acquisition of Farmacy Berkeley

 

On January 1, 2021 the Company completed an acquisition of 100% of the equity interests of iCANN, LLC d/b/a 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 $2,00,000 and accrued interest of $45,321 into equity interests of iCANN; (ii) the Company paid $400,000 in cash to four holders of iCANN equity interests: (iii) the Company issued 7,554,679 Series A Common shares to holders of iCANN equity interests; and (iv) the Company issued an additional 500,000 Series A Common shares to brokers and consultants.

 

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 southern California (the “Greenhouse Option Acquisition”). GH Group is currently conducting due diligence on the Greenhouse Option Acquisition.

 

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 million. The Greenhouse is uniquely suited to meet the license requirements for cannabis cultivation in southern California. The Filer and GH Group are 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). They believe, 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 million (before including any earn-out consideration), and then exercise it at a cost of approximately $120 million, payable in cash. The $100 million would be payable in common or subordinate voting shares of the Filer (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.

 

D-1

 

 

(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

 

The Element Acquisition

 

GH Group is seeking to acquire a series of related limited liability companies that are currently in the application stage for 17 cannabis retail dispensary licenses for locations in California (the “Element Acquisitions”). GH Group is currently conducting due diligence on the Element Acquisitions.

 

The Element Acquisitions involve the proposed acquisitions of 100% of the shares owned by Element 7 Inc. (“Element 7”) of a company or series of related companies that are currently in the application stage for licenses for 17 cannabis retail dispensaries in California. None of the licenses have been obtained. The Filer and GH Group are interested in this opportunity and are in the process of negotiating a non-binding memorandum of understanding with Element 7. The proposed transaction is as follows:

 

(a) GH Group would acquire, directly or indirectly, the shares of the limited liability company or series of related companies currently applying for the licenses from Element 7 for a value of approximately $1,500,000 for each license, up to a maximum amount of $25,500,000 for all 17 license applications.

 

(b) The proposed up to $25,500,000 purchase price to be paid by the Filer or GH Group for the Element Acquisitions is proposed to be paid in newly-issued common or subordinate voting shares of the Filer (or shares of a subsidiary exchangeable therefor) at a value of $10.00 per share.

 

(c) The purchase of each entity currently applying for a license would be subject to the satisfaction of certain conditions, which may be waived in GH Group’s discretion. In the event such conditions are not satisfied in respect of any such purchase, GH Group would not be obligated to purchase such entity, and the price would be reduced accordingly.

 

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 and Santa Ana, 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 year ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Revenue, Net   $ 48,259,601     $ 16,941,426     $ 8,967,286  
Cost of Goods Sold     29,519,143       8,461,551       3,749,373  
                         
Gross Profit     18,740,458       8,479,875       5,217,913  
                         
Expenses:                        
General and Administrative     18,637,477       9,354,591       3,094,857  
Sales and Marketing     1,489,664       912,842       143,216  
Professional Fees     2,040,004       5,196,993       1,913,865  
Depreciation and Amortization     2,576,263       1,455,780       767,567  
                         
Total Expenses     24,743,408       16,920,206       5,919,505  
                         
Loss from Operations     (6,002,950 )     (8,440,331 )     (701,592 )
                         
Other Expense (Income):                        
Interest Expense     2,179,137       636,762       597,427  
Interest Income     (115,572 )     (443,523 )     (308,591 )
Loss on Investments     2,126,112       1,147,968       166,059  
Loss (Income) on Change in Fair Value of Derivative Liabilities     251,663       -       -  
Other Expense (Income), Net     (203,345 )     (19,419 )     (202,397 )
                         
Total Other Expense     4,237,995       1,321,788       252,498  
Loss from Operations Before Provision for Income Taxes     (10,240,945 )     (9,762,119 )     (954,090 )
Provision for Income Taxes     6,418,533       972,520       357,352  
                         
Net Loss     (16,659,478 )     (10,734,639 )     (1,311,442 )
                         
Net Income (Loss) Attributable to Non-Controlling Interest     -       (511,465 )     211,396  
                         
Net Loss Attributable to Shareholders / Members of GH Group   $ (16,659,478 )   $ (10,223,174 )   $ (1,522,838 )

 

Revenue

 

2020

 

Revenue for the year ended December 31, 2020 was $48.3 million, which represents an increase of $31.3 million or 185% from $16.9 million for the year ended December 31, 2019. Revenue growth in 2020 was primarily driven by an increase in cannabis production from the Company’s 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. The Company’s 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 the Company’s first greenhouse cultivation facility, which operated at full capacity throughout 2019, and at partial capacity in 2018 while the Company ramped up operations. The Company 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 the Company’s 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 the Company’s expanding cannabis cultivation operation which grew over 300% from the prior year. The Company’s 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 the Company’s grow operations being fully operational throughout 2019 and only partially operational in 2018. The Company 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. The Company’s cost of goods sold is a direct result of the Company’s 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. The Company’s 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 the Company’s retail operations, which began Q3 2019.

 

2018

 

For the year ended December 31, 2018, The Company 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, the Company 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 the Company’s 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 a 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 from our notes receivables.

 

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. 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 year end December 31:

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
NET CASH USED IN OPERATING ACTIVITIES   $ (7,697,679 )   $ (3,434,706 )   $ (909,209 )
CASH FLOWS FROM INVESTING ACTIVITIES:                        
NET CASH USED IN INVESTING ACTIVITIES     (7,719,045 )     (15,788,070 )     (14,845,042 )
CASH FLOWS FROM FINANCING ACTIVITIES:                        
NET CASH PROVIDED BY FINANCING ACTIVITIES     17,320,089       8,080,108       23,873,520  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     1,903,366       (11,142,668 )     8,119,269  
Cash and Cash Equivalents, Beginning of Period     2,631,886       13,774,554       5,655,285  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 4,535,251     $ 2,631,886     $ 13,774,554  

 

Cash Flow Provided by Operating Activities

 

2020

 

Cash used in operating activities totaled $7.7 million in 2020. This was primarily driven by the net loss incurred of $16.7 million during the year, increases in accounts receivable ($3.5 million) and buildup of inventory ($3.8 million) resulting from increased operations. The use of cash in operations was offset by the increase in trade payables and accrued liabilities ($1.9 million), increase in income taxes payable ($3.9 million), Increases in deferred tax liabilities, net ($1.3 million) and non-cash expense from interest capitalized to notes payable ($1.1 million), share-based compensation ($2.5 million), accretion of debt discounts on loans ($1.1 million), loss on equity method investments ($2.1 million) and depreciation and amortization ($2.6 million).

 

2019

 

Cash used in operating activities totaled $3.4 million in 2019. This was primarily driven by the net loss incurred of $10.8 million during the year as a result from increased operations. The use of cash in operations was offset by the increase in trade payables and accrued liabilities ($3.2 million) and non-cash expense from share-based compensation ($1.9 million), unrealized loss on equity method investments ($1.1 million) and depreciation and amortization ($1.5 million).

 

 

 

 

2018

 

Cash used in operating activities totaled $0.9 million in 2018. This was primarily driven by the net loss incurred of $1.4 million during the year, increases in accounts receivable ($0.5 million) and buildup of inventory ($0.8 million) resulting from increased operations. The use of cash in operations was offset by non-cash expense from share-based compensation ($0.8 million) and depreciation and amortization ($0.8 million).

 

Cash Flow Provided by (Used in) Investing Activities

 

2020

 

Cash used in investing activities totaled $7.7 million in 2020. This was primarily driven by the purchase of property and equipment ($3.9 million) purchase of investments ($2.9 million) and issuance of notes receivables ($1.1 million).

 

2019

 

Cash used in investing activities totaled $15.8 million in 2019. This was primarily driven by the purchase of property and equipment ($5.7 million), purchase of investments ($5.1 million), issuance of notes receivables ($3.5 million) and cash paid for an acquisition ($1.9 million).

 

2018

 

Cash used in investing activities totaled $14.8 million in 2018. This was primarily driven by the purchase of property and equipment ($12.7 million) and the purchase of investments ($3.2 million). Cash outflows from investing activities were offset by repayments on notes receivables during the year ($1.1 million).

 

Cash Flow Provided by (Used in) Financing Activities

 

2020

 

Cash provided by financing activities totaled $17.3 million in 2020. This was primarily driven by cash proceeds from the issuance of notes and convertible notes payable during the year ($18.4 million) which was offset by payments on notes payable ($1.1 million).

 

2019

 

Cash provided by financing activities totaled $8.1 million in 2019. This was primarily driven by cash proceeds from the issuance of notes payable during the year ($1.7 million), cash contributions from investors ($8.1 million) offset by payments of notes payable during the year ($0.9 million).

 

2018

 

Cash provided by financing activities totaled $23.9 million in 2018. This was primarily driven by cash proceeds from the issuance of notes and convertible notes payable during the year ($9.9 million), cash contributions from investors ($16.4 million) offset by payments of distributions to shareholders during the year ($2.0 million).

 

As previously noted, 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 December 31, 2020:

 

    2021     2022     2023 - 2024     After 2024     Total  
Notes Payable from Third Parties and Related Parties   $ 601,187     $ -     $ 2,189,264     $ 22,839,551     $ 25,630,002  
Leases obligations     731,354       745,094       1,526,302       1,231,207       4,233,957  
                                         
Total Contractual Obligations   $ 1,332,541     $ 745,094     $ 3,715,566     $ 24,070,758     $ 29,863,959  

 

Transactions with Related Parties

 

Reposition Debt Transactions

 

Reposition Investments, LLC, a Texas limited liability company (“Reposition”) and an affiliate of a shareholder of the Company, agreed to make a $1,000,000 unsecured bridge loan to the Company at an interest rate of 8% per annum to fund the Company until the initial close of Senior Notes Offering, pursuant to that certain Promissory Note, dated as of January 24, 2020, issued by the Company in favour of Reposition. In February 2020, the Company 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 Repositions 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 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. KBIC balance which was not converted remained. Effective as of March 1, 2020, KBIC assigned the 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 GH Group’s subsidiaries but expressly subordinated to the holders of the Senior Convertible Notes. As a result of the modification, the Company 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 favour 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, GH Group 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 expenses of the Company. Effective as of June 30, 2020: (a) Magu Capital assigned to the Company, the Company assumed and Magu Capital was released from, all of Magu Capital’s rights, duties and obligations under the BFP Loans; and (b) the Company 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, GH Group 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 GH Group (and incur certain fees and expenses on behalf of GH Group as part of and as performance for such services) (collectively, the “Incubation”) in consideration of GH Group’s agreement to issue to Magu Capital, upon a date certain following the closing of the Roll-Up as reasonably determined by the board of directors of GH Group, 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, GH Group issued to Magu Capital a Warrant to Purchase Exercise Shares (the “Magu Capital Warrant”), in full satisfaction of GH Group’s 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. The Company 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, The Company 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 Class B common stock of GH Group (“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

 

The Company has 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, the Company incurred expenses of approximately $0, 822,000 and $590,000, respectively.

 

 

 

 

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. 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

 

The Company 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, 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 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 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. Critical estimates and assumptions used in the model are discussed in “Note 12 - Derivative Liabilities”.

 

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 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 Consolidated and combined Statements of Operations immediately as a gain on acquisition. See “Note 8 – Business Acquisitions” for further details on business combinations.

 

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 consolidated and combined 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” 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 is currently evaluating the adoption date and impact, if any, adoption will have on its 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its consolidated and combined financial position and consolidated and combined results of operations.

 

 

 

 

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 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 the Company 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. 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 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

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company’s main risk is associated with fluctuations in Canadian dollars. The Company holds 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, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has 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. 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.

 

 

 

 

APPENDIX E – CHARTER OF THE AUDIT COMMITTEE OF GLASS HOUSE BRANDS INC.

 

PURPOSE

 

The audit committee (the “Audit Committee”) is a committee of the board of directors (the “Board”) of Glass House Brands Inc. (the “Company”). The primary function of the Audit Committee is to assist the directors of the Company in fulfilling their applicable roles by:

 

a) recommending to the Board the appointment and compensation of the Company’s external auditor;

 

b) overseeing the work of the external auditor, including the resolution of disagreements between the external auditor and management;

 

c) pre-approving all non-audit services (or delegating such pre-approval if and to the extent permitted by law) to be provided to the Company by the Company’s external auditor;

 

d) satisfying themselves that adequate procedures are in place for the review of the Company’s public disclosure of financial information, other than those described in (g) below, extracted or derived from its financial statements, including periodically assessing the adequacy of such procedures;

 

e) establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters;

 

f) reviewing and approving any proposed hiring of current or former partners or employees of the current auditor of the Company; and

 

g) reviewing and approving the annual and interim financial statements, related Management Discussion and Analysis (“MD&A”) and other financial information provided by the Company to any governmental body or the public.

 

The Audit Committee should primarily fulfill these roles by carrying out the activities enumerated in this Charter. However, it is not the duty of the Audit Committee to prepare financial statements, to plan or conduct internal or external audits, to determine that the financial statements are complete and accurate and are in accordance with United States generally accepted accounting principles, to conduct investigations, or to assure compliance with laws and regulations or the Company’s internal policies, procedures and controls, as these are the responsibility of management, and in certain cases, the external auditor.

 

LIMITATIONS ON AUDIT COMMITTEE’S DUTIES

 

In contributing to the Audit Committee’s discharge of its duties under this Charter, each member of the Audit Committee shall be obliged only to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Nothing in this Charter is intended to be, or may be construed as, imposing on any members of the Audit Committee a standard of care or diligence that is in any way more onerous or extensive than the standard to which the directors are subject.

 

Members of the Audit Committee are entitled to rely, absent actual knowledge to the contrary, on (i) the integrity of the persons and organizations from whom they receive information, (ii) the accuracy and completeness of the information provided, (iii) representations made by management as to the non-audit services provided to the Company by the external auditor, (iv) financial statements of the Company represented to them by a member of management or in a written report of the external auditors to present fairly the financial position of the Company in accordance with generally accepted accounting principles, and (v) any report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.

 

E-1

 

 

COMPOSITION AND MEETINGS

 

The Audit Committee should be comprised of not less than three directors as determined by the Board, all of whom shall be independent within the meaning of National Instrument 52-110 – Audit Committees (“NI 52-110”) of the Canadian Securities Administrators (or exempt therefrom), and free of any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Audit Committee. All members of the Audit Committee should have (or should gain within a reasonable period of time after appointment) a working familiarity with basic finance and accounting practices. Each member must be “financially literate” within the meaning of NI 52-110 or must become financially literate within a reasonable period of time following his or her appointment. The Audit Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or an outside consultant.

 

The members of the Audit Committee shall be elected by the Board on an annual basis or until their successors shall be duly appointed. Unless a Chair of the Audit Committee (the “Chair”) is elected by the full Board, the members of the Audit Committee may designate a Chair by majority vote of the full Audit Committee membership.

 

In addition, the Audit Committee members should meet all of the requirements for members of audit committees as defined from time to time under applicable legislation and the rules of any stock exchange on which the Company’s securities are listed or traded.

 

The Audit Committee should meet at least four times annually, or more frequently as circumstances require. The Audit Committee should meet within forty-five (45) days following the end of the first three financial quarters to review and discuss the unaudited financial results for the preceding quarter and the related MD&A, and should meet within 90 days following the end of the fiscal year end to review and discuss the audited financial results for the preceding quarter and year and the related MD&A.

 

The Audit Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. For purposes of performing their duties, members of the Audit Committee shall have full access to all corporate information and any other information deemed appropriate by them, and shall be permitted to discuss such information and any other matters relating to the financial position of the Company with senior employees, officers and the external auditor of the Company, and others as they consider appropriate.

 

For greater certainty, management is indirectly accountable to the Audit Committee and is responsible for the timeliness and integrity of the financial reporting and information presented to the Board.

 

In order to foster open communication, the Audit Committee or its Chair should meet at least annually with management and the external auditor in separate sessions to discuss any matters that the Audit Committee or each of these groups believes should be discussed privately. In addition, the Audit Committee or its Chair should meet with management quarterly in connection with the Company’s interim financial statements.

 

A quorum for the transaction of business at any meeting of the Audit Committee shall be a majority of the number of members of the Audit Committee or such greater number as the Audit Committee shall by resolution determine.

 

Meetings of the Audit Committee shall be held from time to time and at such place as any member of the Audit Committee shall determine upon 48 hours’ notice to each of its members. The notice period may be waived by all members of the Audit Committee. Each of the Chair of the Board, the external auditor, the Chief Executive

 

Officer, the Chief Financial Officer or the Secretary shall be entitled to request that any member of the Audit Committee call a meeting.

 

This Charter is subject in all respects to the Company’s articles from time to time.

 

ROLE

 

As part of its function in assisting the Board in fulfilling its oversight role (and without limiting the generality of the Audit Committee’s role), the Audit Committee should:

 

(1) Determine any desired agenda items;

 

(2) Review and recommend to the Board changes to this Charter, as considered appropriate from time to time;

 

(3) Review the public disclosure regarding the Audit Committee required by NI 52-110;

 

 

 

(4) Review and seek to ensure that disclosure controls and procedures and internal control over financial reporting frameworks are operational and functional;

 

(5) Summarize in the Company’s annual information form the Audit Committee’s composition and activities, as required; and

 

(6) Submit the minutes of all meetings of the Audit Committee to the Board upon request.

 

Documents / Reports Review

 

(7) Review and recommend to the Board for approval the Company’s annual and interim financial statements, including any certification, report, opinion, undertaking or review rendered by the external auditor and the related MD&A, as well as such other financial information of the Company provided to the public or any governmental body as the Audit Committee or the Board require.

 

(8) Review other financial information provided to any governmental body or the public as they see fit.

 

(9) Review, recommend and approve any of the Company’s press releases that contain financial information.

 

(10) Seek to satisfy itself and ensure that adequate procedures are in place for the review of the Company’s public disclosure of financial information extracted or derived from the Company’s financial statements and related MD&A and periodically assess the adequacy of those procedures.

 

External Auditor

 

(11) Recommend to the Board the selection of the external auditor, considering independence and effectiveness, and review and recommend the fees and other compensation to be paid to the external auditor. The Audit Committee shall have the ultimate authority to approve all audit engagement terms and fees, including the auditors’ audit plan.

 

(12) Review and seek to ensure that all financial information provided to the public or any governmental body, as required, provides for the fair presentation of the Company’s financial condition, financial performance and cash flow.

 

(13) Instruct the external auditor that its ultimate client is not management and that it is required to report directly to the Audit Committee, and not management.

 

(14) Monitor the relationship between management and the external auditor including reviewing any management letters or other reports of the external auditor and discussing any material differences of opinion between management and the external auditor.

 

(15) Review and discuss, on an annual basis, with the external auditor all significant relationships it has with the Company to determine the external auditor’s independence.

 

(16) Pre-approve all non-audit services (or delegate such pre-approval, as the Audit Committee may determine and as permitted by applicable Canadian securities laws) to be provided by the external auditor.

 

(17) Review the performance of the external auditor and any proposed discharge of the external auditor when circumstances warrant.

 

(18) Periodically consult with the external auditor out of the presence of management about significant risks or exposures, internal controls and other steps that management has taken to control such risks, and the fullness and accuracy of the financial statements, including the adequacy of internal controls to expose any payments, transactions or procedures that might be deemed illegal or otherwise improper.

 

(19) Communicate directly with the external auditor and arrange for the external auditor to be available to the Audit Committee and the full Board as needed.

 

 

 

(20) Review and approve any proposed hiring by the Company of current or former partners or employees of the current (and any former) external auditor of the Company.

 

Audit Process

 

(21) Review the scope, plan and results of the external auditor’s audit and reviews, including the auditor’s engagement letter, the post-audit management letter, if any, and the form of the audit report. The Audit Committee may authorize the external auditor to perform supplemental reviews, audits or other work as deemed desirable.

 

(22) Following completion of the annual audit and quarterly reviews, review separately with each of management and the external auditor any significant changes to planned procedures, any difficulties encountered during the course of the audit and, if applicable, reviews, including any restrictions on the scope of work or access to required information and the cooperation that the external auditor received during the course of the audit and, if applicable, reviews.

 

(23) Review any significant disagreements among management and the external auditor in connection with the preparation of the financial statements.

 

(24) Where there are significant unsettled issues between management and the external auditor that do not affect the audited financial statements, the Audit Committee shall seek to ensure that there is an agreed course of action leading to the resolution of such matters.

 

Financial Reporting Processes

 

(25) Review the integrity of the financial reporting processes, both internal and external, in consultation with the external auditor as they see fit.

 

(26) Consider the external auditor’s judgments about the quality, transparency and appropriateness, not just the acceptability, of the Company’s accounting principles and financial disclosure practices, as applied in its financial reporting, including the degree of aggressiveness or conservatism of its accounting principles and underlying estimates, and whether those principles are common practices or are minority practices.

 

(27) Review all material balance sheet issues, material contingent obligations (including those associated with material acquisitions or dispositions) and material related party transactions.

 

(28) Review with management and the external auditor the Company’s accounting policies and any changes that are proposed to be made thereto, including all critical accounting policies and practices used, any alternative treatments of financial information that have been discussed with management, the ramification of their use and the external auditor’s preferred treatment and any other material communications with management with respect thereto.

 

(29) Review the disclosure and impact of contingencies and the reasonableness of the provisions, reserves and estimates that may have a material impact on financial reporting.

 

(30) If considered appropriate, establish separate systems of reporting to the Audit Committee by each of management and the external auditor.

 

(31) Periodically consider the need for an internal audit function, if not present.

 

Risk Management

 

(32) Review program of risk assessment and steps taken to address significant risks or exposures of all types, including insurance coverage and tax compliance.

 

 

 

General

 

(33) The Audit Committee may at its discretion retain independent counsel, accountants and other professionals to assist it in the conduct of its activities and to set and pay (as an expense of the Company) the compensation for any such advisors.

 

(34) Respond to requests by the Board with respect to the functions and activities that the Board requests the Audit Committee to perform.

 

(35) Periodically review this Charter and, if the Audit Committee deems appropriate, recommend to the Board changes to this Charter.

 

(36) Review the public disclosure regarding the Audit Committee required from time to time by applicable Canadian securities laws, including:

 

· The Charter of the Audit Committee;

 

· the composition of the Audit Committee;

 

· the relevant education and experience of each member of the Audit Committee;

 

· the external auditor services and fees; and

 

· such other matters as the Company is required to disclose concerning the Audit Committee.

 

(37) Perform any other activities as the Audit Committee deems necessary or appropriate including seeking to ensure all regulatory documents are compiled to meet Committee reporting obligations under NI 52-110.

 

AUDIT COMMITTEE COMPLAINT PROCEDURES

 

The Audit Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

 

The Audit Committee is a committee of the Board and is not and shall not be deemed to be an agent of the Company’s securityholders for any purpose whatsoever. The Board may, from time to time, permit departures from the terms hereof, either prospectively or retrospectively, and no provision contained herein is intended to give rise to civil liability to the Company securityholders or other liability whatsoever.

 

 

 

APPENDIX F –BUD AND BLOOM AUDITED FINANCIAL STATEMENTS

(FOR THE PERIOD ENDED AUGUST 31, 2019 AND THE YEAR ENDED DECEMBER 31, 2018)

 

(See attached)

 

F-1

 

 

BUD AND BLOOM

 

COMBINED FINANCIAL STATEMENTS

 

AS OF

 

AUGUST 31, 2019 AND DECEMBER 31, 2018

 

AND FOR THE PERIOD ENDED

 

AUGUST 31, 2019 AND YEAR ENDED DECEMBER 31, 2018

 

 

 

BUD AND BLOOM 

Index to Combined Financial Statements

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm 1
   
Combined Balance Sheets 2
   
Combined Statements of Operations 3
   
Combined Statements of Changes in Members’ Deficit 4
   
Combined Statements of Cash Flows 5
   
Notes to Combined Financial Statements 6 - 14

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members

Bud and Bloom

 

Opinion on the Combined Financial Statements

 

We have audited the accompanying combined balance sheets of Bud and Bloom (the “Company”) as of August 31, 2019 and December 31, 2018, and the related combined statements of operations, changes in members’ equity, and cash flows for the period ended August 31, 2019 and for the year ended December 31, 2018, and the related notes to the combined financial statements (collectively referred to as the “combined financial statements”). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and December 31, 2018, and the combined results of its operations and its cash flows for the period ended August 31, 2019 and for the year ended December 31, 2018, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Macias Gini & O’Connell LLP

 

We have served as the Company’s auditor since 2020.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP

2029 Century Park East, Suite 1500

Los Angeles, CA 90067

- 1 - www.mgocpa.com

 

 

BUD AND BLOOM

Combined Balance Sheets

As of August 31, 2019 and December 31, 2018

 

 

    2019     2018  
ASSETS                
Current Assets:                
Cash and Cash Equivalents   $ 390,290     $ 234,630  
Prepaid Expenses and Other Current Assets     46,287       21,157  
Inventory     289,797       141,963  
                 
Total Current Assets     726,374       397,750  
                 
Deferred Tax Assets     103,611       138,635  
Property and Equipment, Net     589,857       638,599  
Other Assets     36,000       20,000  
                 
TOTAL ASSETS   $ 1,455,842     $ 1,194,984  
LIABILITIES AND MEMBERS’ DEFICIT                
LIABILITIES :                
Current Liabilities:                
Accounts Payable and Accrued Liabilities   $ 358,240     $ 385,496  
Income Taxes Payable     776,428       434,547  
Current Portion of Notes Payable to Related Parties     2,720,457       -  
                 
Total Current Liabilities     3,855,125       820,043  
                 
Deferred Rent     220,018       210,602  
Notes Payable to Related Parties, Net of Current Portion     -       2,678,642  
                 
TOTAL LIABILITIES     4,075,143       3,709,287  
                 
MEMBERS’ DEFICIT:                
Members’ Deficit     (2,619,301 )     (2,514,303 )
                 
Total Members’ Deficit     (2,619,301 )     (2,514,303 )
                 
TOTAL LIABILITIES AND MEMBERS’ DEFICIT   $ 1,455,842     $ 1,194,984  

 

The accompanying notes are an integral part of these combined financial statements.

 

- 2 -

 

 

BUD AND BLOOM

Combined Statements of Operations

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

    2019     2018  
Revenues, Net   $ 3,809,773     $ 4,249,638  
Cost of Goods Sold     2,232,857       2,890,836  
                 
Gross Profit     1,576,916       1,358,802  
                 
Expenses:                
General and Administrative     920,442       1,350,857  
Sales and Marketing     129,010       173,918  
Professional Fees     70,592       127,500  
Depreciation and Amortization     62,374       90,238  
                 
Total Expenses     1,182,418       1,742,513  
                 
Income (Loss) from Operations     394,498       (383,711 )
                 
Other Expense (Income):                
Interest Expense     354,162       256,343  
Other Income, Net     (34,742 )     (5,092 )
                 
Total Other Expense     319,420       251,252  
                 
Income (Loss) from Operations Before Provision for Income Taxes     75,078       (634,962 )
Provision for Income Taxes     430,205       250,493  
                 
Net Loss   $ (355,127 )   $ (885,455 )

 

The accompanying notes are an integral part of these combined financial statements.

 

- 3 -

 

 

BUD AND BLOOM

Combined Statements of Changes in Members’ Equity

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

BALANCE AS OF JANUARY 1, 2018   $ (1,624,632 )
         
Net Loss     (885,455 )
         
Distributions     (4,216 )
         
BALANCE AS OF DECEMBER 31, 2018     (2,514,303 )
         
Net Loss     (355,127 )
         
Non-Cash Contributions     `250,129  
         
BALANCE AS OF AUGUST 31, 2019   $ (2,619,301 )

 

The accompanying notes are an integral part of these combined financial statements.

 

- 4 -

 

 

BUD AND BLOOM

Combined Statements of Cash Flows

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Loss   $ (355,127 )   $ (885,455 )
Adjustments to Reconcile Net Loss                
to Net Cash Provided by Operating Activities:                
Deferred Tax (Recovery) Expense     35,024       (66,856 )
Accrued Interest Capitalized to Notes Payable     153,090       185,376  
Amortization of Debt Discount     201,072       70,967  
Depreciation and Amortization     62,374       90,238  
Changes in Operating Assets and Liabilities:                
Prepaid Expenses and Other Current Assets     (25,129 )     (21,157 )
Inventory     (147,833 )     67,459  
Other Assets     (16,000 )     2,700  
Accounts Payable and Accrued Liabilities     (27,256 )     356,986  
Income Taxes Payable     341,880       246,529  
Deferred Rent     9,416       64,124  
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES     231,512       110,911  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of Property and Equipment     (13,632 )     (15,600 )
                 
NET CASH USED IN INVESTING ACTIVITIES     (13,632 )     (15,600 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from the Issuance of Notes Payable to Related Parties     -       50,000  
Payments on Notes Payable to Related Parties     (62,219 )     (28,401 )
Distributions     -       (4,216 )
                 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES     (62,219 )     17,383  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS     155,661       112,694  
Cash and Cash Equivalents, Beginning of Period     234,630       121,936  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 390,291     $ 234,630  
                 
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                
Cash Paid for Interest   $ 354,162     $ 256,343  
Cash Paid for Taxes   $ 330,570     $ 214,738  
                 
NON - CASH TRANSACTIONS                
Increase in Notes Payable to Related Parties for relief of Accrued Liabilities   $ -     $ 43,500  
Non-Cash Contribution for the Relief of Owner Notes Payable   $ 250,129     $ -  

 

The accompanying notes are an integral part of these combined financial statements.

 

- 5 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

1. NATURE OF OPERATIONS

 

Bud and Bloom (“the Company”) consists of the combined financial statements of Saint Gertrude Management Company, LLC (“SGMC”) and Bud and Bloom (“BNB”). The Company is a cannabis company that operates a dispensary in the city of Santa Ana, California.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

These developments could have a material adverse impact on the Company’s combined revenues, combined results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s combined results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation

 

The accompanying combined financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of the Company’s subsidiaries in which the Company has a controlling financial interest.

 

All intercompany transactions and balances have been eliminated in combination. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the combined financial position of the Company as of August 31, 2019 and December 31, 2018 and the combined results of operations and cash flows for the period ended August 31, 2019 and the year ended December 31, 2018 have been included. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company consolidates any variable interest entity (“VIE”), of which the Company is the primary beneficiary.

 

Basis of Combination

 

These combined financial statements as of August 31, 2019 and December 31, 2018 and for period ended August 31, 2019 and the year ended December 31, 2018 include the accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control or common ownership as defined in ASC 810. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company has ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity. In assessing control, potential voting rights that are currently exercisable are taken into account.

 

Use of Estimates

 

The preparation of the 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 combined 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, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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.

 

- 6 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Inventory

 

Inventory is comprised entirely of finished goods and is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of August 31, 2019 and December 31, 2018, the Company determined that no reserve was necessary.

 

Property and Equipment

 

Property and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Furniture and Fixtures 5 Years
Leasehold Improvements Shorter of Lease Term or Economic Life
Equipment and Software 3 – 5 Years

 

The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the combined statements of operations in the period the asset is derecognized.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property and equipment 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.

 

- 7 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income taxes

 

BNB accounts for income taxes under the liability approach. Under the liability approach, deferred income taxes are computed by applying enacted laws and currently enacted tax rates to the “temporary” differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

SGMC is treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by or provided for SGMC. Members are taxed individually on their share of SGMC’s earnings. Since the members are liable for individual federal and state income taxes on the SGMC’s taxable income, the SGMC may disburse funds necessary to satisfy the members’ estimated personal income tax liabilities. California imposes an LLC fee based on revenue, which is included in the provision for income tax.

 

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 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.

 

- 8 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition

 

Revenue is recognized by the Company in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:

 

· Identify a customer along with a corresponding contract;
· Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;
· Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;
· Allocate the transaction price to the performance obligation(s) in the contract;
· Recognize revenue when or as the Company satisfies the performance obligation(s).

 

Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues. Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its combined financial statements.

 

Cost of Sales

 

Cost of sales includes the costs directly attributable to product sales.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. There were approximately $129,000 and $174,000 in advertising costs during the period ended August 31, 2019 and the year ended December 31, 2018, respectively.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheets and combined results of operations.

 

Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long-term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to members’ equity (deficit) upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.

 

- 9 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash at its physical location, which is not currently insured and cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of August 31, 2019 and December 31, 2018 and for the period ended August 31, 2019 and the year ended December 31, 2018, the Company has not experienced any losses with regards to its cash balances.

 

The Company provides credit in the normal course of business to customers located throughout California. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were no customers that comprised more than 10% of the Company’s revenue for the period ended August 31, 2019 and the year ended December 31, 2018.

 

4. PROPERTY AND EQUIPMENT

 

As of August 31, 2019 and December 31, 2018, property and equipment consist of the following:

 

    2019     2018  
Furniture and Fixtures   $ 7,401     $ 7,401  
Leasehold Improvements     738,178       738,178  
Equipment and Software     91,122       77,491  
                 
Total Property and Equipment     836,701       823,070  
                 
Less Accumulated Depreciation     (246,844 )     (184,471 )
                 
Property and Equipment, Net   $ `589,857     $ 638,599  

 

Depreciation for the period ended August 31, 2019 and the year ended December 31, 2018 was $62,374 and $90,238, respectively.

 

5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

As of August 31, 2019 and December 31, 2018, accounts payable and accrued liabilities consist of the following:

 

    2019     2018  
Accounts Payable   $ 243,943     $ 298,874  
Accrued Liabilities     3,783       -  
Accrued Payroll and Related Liabilities     12,151       15,180  
Sales Tax and Cannabis Taxes     98,363       71,442  
                 
Total Accounts Payable and Accrued Liabilities   $ 358,240     $ 385,496  

 

- 10 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

6. NOTES PAYABLE TO RELATED PARTIES

 

As of August 31, 2019 and December 31, 2018, notes payable consist of the following:

 

    2019     2018  
Loans to Owners and Officers   $ -     $ 256,967  
                 
Loan to related Parties     2,720,457       2,421,675  
                 
Total Notes Payable     2,720,457       2,678,642  
                 
Less Current Portion of Notes Payable     (2,720,457 )     -  
                 
Notes Payable, Net of Current Portion   $ -     $ 2,678,642  

 

The above noted notes payable are all due to related parties of the Company consisting of owners, officers and entities related to the Company’s members or board members of the Company.

 

The loans to related parties with an outstanding balance of $2,720,457 and $2,421,675 as of August 31, 2019 and December 31, 2018, respectively, were originally issued in October 2016 and matures in October 2021. The holders have the option to convert all but not less than all the outstanding principal and unpaid accrued interest into 50 percent of issued and authorized units of the Company.

 

On August 31, 2019, the owners of the Company forgave their notes payable due by the Company in the amount of $250,129. The note payable forgiven by the owners of the Company was recorded as a non-cash contribution to the Company.

 

Subsequent to August 31, 2019 as part of the acquisition by GH Group, Inc., $2,720,457 of related party convertible debt was converted to equity of the Company subsequent to the sale of the Company. See Note 10.

 

7. MEMBERS’ DEFICIT

 

The Company is a limited liability company whereby allocations of profits, losses and distributions, if any, for each fiscal period or year are allocated pro rata in proportion to the member’s capital interest account.

 

8. PROVISION FOR INCOME TAXES AND DEFERRED TAXES

 

Provision for income taxes consists of the following for the period ended August 31, 2019 and the year ended December 31, 2018:

 

    2019     2018  
Current:                
Federal   $ 391,959     $ 314,669  
State     3,222       2,680  
                 
Total Current     395,181       317,349  
                 
Deferred:                
Federal     (8,414 )     (38,339 )
State     43,438       (28,517 )
                 
Total Deferred     35,024       (66,856 )
                 
Total Provision for Income Taxes   $ 430,205     $ 250,493  

 

- 11 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

8. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

As of August 31, 2019 and December 31, 2018, the components of deferred tax assets and liabilities were as follows:

 

    2019     2018  
Deferred Tax Assets:                
State taxes   $ 320     $ 168  
Accrued Liabilities     -       4,551  
Deferred rent     65,654       58,933  
Operating losses     39,478       84,870  
                 
Total Deferred Tax Assets   $ 105,452     $ 148,522  

 

    2019     2018  
Deferred Tax Liabilities:                
Property and Equipment   $ (1,841 )   $ (1,194 )
Other     -       (8,693 )
                 
Total Deferred Tax Liabilities     (1,841 )     (9,887 )
                 
Net Deferred Tax Assets   $ 103,611     $ 138,635  

 

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the period ended August 31, 2019 and the year ended December 31, 2018:

 

    2019     2018  
Income tax expense at federal rate   $ 21,812     $ (159,404 )
State taxes and fees     3,222       2,512  
IRS Section 280E disallowance     138,196       189,953  
Uncertain tax positions     146,312       142,560  
Other permanent differences     34,718       (25,450 )
Income not taxed at entity level     85,945       100,322  
                 
Reported Income Tax Expense   $ 430,205     $ 250,493  

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

- 12 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

8. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for period ended August 31, 2019 and year ended December 31, 2018 is as follows:

 

    2019     2018  
Balance at Beginning of Period   $ 298,356     $ 155,796  
IRS Section 280E Positions     146,312       142,560  
                 
Balance at End of Period   $ 444,668     $ 298,356  

 

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits at August 31, 2019 and December 31, 2018, potential benefits of $444,668 and $298,356, respectively, that if recognized would impact the effective tax rate on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

 

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of the August 31, 2019, the federal tax returns since 2017 and state tax returns since 2016 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

 

9. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases property from a related party under a operating lease agreement that specifies minimum rentals. The lease expires in October 2027 and contains certain renewal provisions. The Company records rent expense on a straight-line basis. As of August 31, 2019 and December 31, 2018, deferred rent was $220,018 and $210,602, respectively. The Company’s rent expense was approximately $249,000 and $374,000 for the period ended August 31, 2019 and the year ended December 31, 2018, respectively, and is recorded in general and administrative expenses in the accompanying combined statements of operations.

 

Future minimum lease payments under non-cancelable operating leases with the related party having an initial or remaining term of more than one year are as follows:

 

December 31:        
Four Months Remaining 2019     $ 121,800  
2020       372,654  
2021       383,834  
2022       395,350  
2023       407,206  
Thereafter       1,220,396  
           
Total Future Minimum Lease Payments     $ 2,901,240  

 

- 13 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

9. COMMITMENTS AND CONTINGENCIES (Continued)

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of August 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of August 31, 2019, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the combined financial statements relating to claims and litigations. As of August 31, 2019, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

10. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these combined financial statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the combined financial statements or disclosure in the notes to the combined financial statements.

 

Acquisition by GH Group, Inc.

 

Subsequent to August 31, 2019, GH Group, Inc. completed the acquisition of the Company for an aggregate consideration of $1,912,000 which is comprised of all cash at closing.

 

- 14 -

 

 

APPENDIX G – MANAGEMENT’S DISCUSSION AND ANALYSIS OF BUD AND BLOOM

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Period Ended August 31, 2019 and the Year Ended December 31, 2018

 

Overview

 

Bud and Bloom (“the Company”) consists of the combined financial statements of Saint Gertrude Management Company, LLC (“SGMC”) and Bud and Bloom (“BNB”). The Company is a cannabis company that operates a dispensary in the city of Santa Ana, California.

 

See “Description of Business” for an overview of the Company and “Regulatory Overview” for details regarding the California regulatory framework.

 

Recent Developments

 

Acquisition by GH Group, Inc.

 

On August 31, 2019, GH Group, Inc (“GH Group”). completed the acquisition of the Company for aggregate consideration of $1,912,000 which is comprised of all cash at closing.

 

Major Business Lines and Geographies

 

The Company views its financial results under one business line – the procurement and sale of cannabis retail products in the city of Santa Ana, California.

 

Geographic Areas

 

All of the Company’s revenue is derived from the city of Santa Ana, 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, and with the acquisition of the Company by GH Group, GH Group along with its other retail dispensaries look to expand its retail presence and brand name that allow GH Group to outperform competitors and build superior brand awareness and loyalty.

 

G-1

 

 

Results of Operations

 

The following are the results of our operations for the period end August 31, 2019 and the year ended December 31, 2018:

 

    2019     2018  
Revenues, Net   $ 3,809,773     $ 4,249,638  
Cost of Goods Sold     2,232,857       2,890,836  
Gross Profit     1,576,916       1,358,802  
Expenses:                
General and Administrative     920,442       1,350,857  
Sales and Marketing     129,010       173,918  
Professional Fees     70,592       127,500  
Depreciation and Amortization     62,374       90,238  
Total Expenses     1,182,418       1,742,513  
Income (Loss) from Operations     394,498       (383,711 )
Other Expense (Income):                
Interest Expense     354,162       256,343  
Other Income, Net     (34,742 )     (5,092 )
Total Other Expense     319,420       251,252  
Income (Loss) from Operations Before Provision for Income Taxes     75,078       (634,962 )
Provision for Income Taxes     430,205       250,493  
Net Loss   $ (355,127 )   $ (885,455 )

 

Revenue

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, revenue was $3.8 million ($5.7 million annualized, which represents an increase of $1.5 million or 34% annualized from $4.2 million for the year ended December 31, 2018. Revenue growth in 2019 was primarily driven by an increase in awareness of the Company’s operations. The Company began operations in Q1 of 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, revenue was $4.2 million. Revenues during 2018 consists of all retail products sold at its Santa Ana, California location which began sales in Q1 2018.

 

Cost of Goods Sold

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, cost of goods sold was $2.2 million, which represents an increase of $3.3 million or 16% annualized from the prior year amount of $2.9 million. Cost of goods sold growth in 2019 was primarily driven by an increase in awareness of the Company’s operations. The Company began operations in Q1 of 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, cost of goods sold was $2.9 million. The Company’s cost of goods sold is a direct result of the Company’s retail operations during 2018.

 

General and Administrative

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, general and administrative expenses was $0.9 million, which represents a negligible increase (less than 2% increase on an annualized basis) from $1.4 million in 2018.

 

 

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, general and administrative expenses was $1.4 million. General and administrative expenses include salary expenses, employee benefits, selling costs and incidental expenses related to its retail operations.

 

Sales & Marketing

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, sales and marketing expenses was $0.1 million, which represents an increase of $0.2 million or 11% annualized from the prior year amount of $0.2 million. Marketing expenses increased year over year to support the Company’s retail operations, which began Q1 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, The Company incurred $0.2 million of sales and marketing expenses for general advertising and promotions in various media outlets.

 

Professional Fees

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, professional fees were $0.1 million, which represents a negligible increase on an annualized basis from $0.1 million in 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, professional fees were $0.1 million. Professional fees in 2018 represent fees paid to part time operational and accounting consultants and for legal and advisory fees.

 

Other Expense

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, net other expenses were $0.3 million, which represents a increase of $0.2 million or 91% annualized from the prior year amount of $0.3 million. The increase from 2018 was primarily a result of the increase in our interest expense due to increased debt borrowings in 2019.

 

For the year ended December 31, 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 ($0.3 million).

 

Liquidity and Capital Resources

 

Overview

 

Historically, the Company’s primary source of liquidity has been capital contributions by investors and debt issuances. The Company 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 fund the Company from its capital resources in order to meet liquidity needs.

 

Financial Condition

 

Cash Flows

 

 

 

The following table summarizes the Company’s combined statement of cash flows from operations for the year end period ended August 31, 2019 and the year ended December 31, 2018:

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES   $ 231,512     $ 110,911  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
                 
NET CASH USED IN INVESTING ACTIVITIES     (13,632 )     (15,600 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
                 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES     (62,219 )     17,383  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS     155,660       112,694  
Cash and Cash Equivalents, Beginning of Period     234,630       121,936  
                 
CASH AND CASH EQUIVALENTS , END OF PERIOD   $ 390,291     $ 234,630  

 

Cash Flow Provided by Operating Activities

 

For the period ended August 31, 2019

 

Cash provided by operating activities totaled $0.2 million for the period ended August 31, 2019. This was primarily driven by the net loss incurred of $0.4 million during the period ended August 31, 2019. The use of cash in operations was offset by the increase in income taxes payable ($0.3 million) and non-cash expense of amortization of debt discount ($0.2 million).

 

For the year ended December 31, 2018

 

Cash provided by operating activities totaled $0.1 million in 2018. This was primarily driven by the net loss incurred of $0.9 million during the year, offset by increases in accounts payable and accrued liabilities ($0.3) million, increases in income taxes payable ($0.2 million), reduction of inventory ($0.1 million) and non-cash expense from depreciation ($0.1 million) and non-cash interest expense capitalized to notes payable ($0.2 million)

 

Cash Flow Used in Investing Activities

 

For the period ended August 31, 2019

 

Cash used in investing activities totaled $0.01 million for the period ended August 31, 2019 all related to the purchase of property equipment.

 

For the year ended December 31, 2018

 

Cash used in investing activities totaled $0.02 million for 2018 all related to the purchase of property and equipment.

 

Cash Flow (Used In) Provided by Financing Activities

 

For the period ended August 31, 2019

 

Cash used in financing activities totaled $0.1 million for the period ended August 31, 2019. This was primarily driven by cash payments on notes payable to related parties ($0.1 million).

 

 

 

For the year ended December 31, 2018

 

Cash provided by financing activities totaled $0.02 million for 2018. This was primarily driven by cash proceeds from the issuance of notes payable during the period ($0.05 million), offset by payments on notes payable ($0.03 million).

 

As previously noted, the Company’s primary source of liquidity has been capital contributions and debt capital made available from investors. The Company 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 fund the Company from its capital resources in order to meet liquidity needs. The Company does not have any committed sources of financing, nor significant outstanding capital expenditure commitments.

 

Contractual Obligations

 

The Company 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 August 31, 2019:

 

    2020     2021     2022 - 2023     After 2023     Total  
Notes Payable   $ 2,720,457     $ -     $ -     $ -     $ 2,720,457  
Leases     121,800       372,654       779,184       1,627,602       2,901,240  
                                         
Total Contractual Obligations   $ 2,842,257     $ 372,654     $ 779,184     $ 1,627,602     $ 5,621,697  

 

Transactions with Related Parties

 

Related Party Debt

 

The loans to related parties with an outstanding balance of $2,720,457 and $2,421,675 as of August 31, 2019 and December 31, 2018, respectively, were originally issued in October 2016 and matures in October 2021. The holders have the option to convert all but not less than all the outstanding principal and unpaid accrued interest into 50 percent of issued and authorized units of the Company.

 

On August 31, 2019, the owners of the Company forgave their notes payable due by the Company in the amount of $250,129. The note payable forgiven by the owners of the Company was recorded as a non-cash contribution to the Company.

 

Subsequent to August 31, 2019 as part of the acquisition by GH Group, Inc., $2,720,457 of related party convertible debt was converted to equity of the Company subsequent to the sale of the Company.

 

Related Party Operating Leases

 

The Company leases property from a related party under an operating lease agreement that specifies minimum rentals. The lease expires in October 2027 and contains certain renewal provisions. The Company records rent expense on a straight-line basis. As of August 31, 2019 and December 31, 2018, deferred rent was $220,018 and $210,602, respectively. The Company’s rent expense was approximately $249,000 and $374,000 for the period ended August 31, 2019 and the year ended December 31, 2018, respectively and recorded in general and administrative expenses in the accompanying statements of operations.

 

 

 

Critical Accounting Estimates

 

Use of Estimates

 

The preparation of the 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 combined 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, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property 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.

 

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.

 

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. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position and combined results of operations.

 

 

 

Financial Instruments and Other Instruments

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, trade payables, accrued 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 the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at June 29, 2019 is the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and 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 June 29, 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

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company’s main risk is associated with fluctuations in Canadian dollars. The Company holds 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 June 29, 2019 and June 30, 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has 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. 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.

 

 

 

APPENDIX H – FARMACY BERKELEY AUDITED ANNUAL FINANCIAL STATEMENTS

(FOR THE YEARS ENDED DECEMBER 31, 2020, DECEMBER 31, 2019 AND DECEMBER 31, 2018)

 

(See attached)

 

H-1

 

 

iCANN, LLC

 

FINANCIAL STATEMENTS

 

DECEMBER 31, 2020, 2019 and 2018

 

 

 

ICANN, LLC

Index to Financial Statements 

 

    Page(s)
     
Report of Independent Registered Public Accounting Firm   1
     
Balance Sheets   2
     
Statements of Operations   3
     
Statements of Changes in Members’ Equity (Deficit)   4
     
Statements of Cash Flows   5
     
Notes to Financial Statements   6 - 14

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members

iCANN, LLC

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of iCANN, LLC (the “Company”) as of December 31, 2020, 2019 and 2018, and the related statements of operations, changes in members’ equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Macias Gini & O’Connell LLP

 

We have served as the Company’s auditor since 2021.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP

 

2029 Century Park East, Suite 1500

   
Los Angeles, CA 90067  - 1 - www.mgocpa.com

 

 

iCANN, LLC

Balance Sheets

As of December 31, 2020, 2019 and 2018

 

 

    2020     2019     2018  
ASSETS                  
Current Assets:                        
Cash and Cash Equivalents   $ 158,928     $ 37,290     $ 28,007  
Prepaid Expenses     61,528       -       -  
Inventory     343,289       -       -  
Total Current Assets     563,745       37,290       28,007  
Property and Equipment, Net     692,645       684,079       137,352  
TOTAL ASSETS   $ 1,256,390     $ 721,369     $ 165,359  
                         
LIABILITIES AND MEMBERS’ EQUITY (DEFICIT)                        
                         
LIABILITIES:                        
Current Liabilities:                        
Accounts Payable and Accrued Liabilities   $ 875,599     $ 47,930     $ 4,902  
Income Taxes Payable     209,466       2,400       1,600  
Current Portion of Related Party Notes Payable     -       125,500       95,500  
Current Portion of Convertible Debt     -       1,084,967       -  
Total Current Liabilities     1,085,065       1,260,797       102,002  
                         
TOTAL LIABILITIES     1,085,065       1,260,797       102,002  
MEMBERS’ EQUITY (DEFICIT):     171,325       (539,428 )     63,357  
                         
TOTAL LIABILITIES AND MEMBERS’ EQUITY (DEFICIT)   $ 1,256,390     $ 721,369     $ 165,359  

 

The accompanying notes are an integral part of these financial statements.

 

- 2 -

 

 

iCANN, LLC

Statements of Operations

For The Years Ended December 31, 2020, 2019 and 2018

 

 

    2020     2019     2018  
Revenues, Net   $ 3,607,307     $ -     $ -  
Cost of Goods Sold     2,621,272       -       -  
Gross Profit     986,035       -       -  
                         
Expenses:                        
General and Administrative     1,798,289       60,142       44,771  
Sales and Marketing     166,784       9,736       2,728  
Professional Fees     71,570       293,208       220,735  
Depreciation and Amortization     108,672       -       -  
Total Expenses     2,145,315       363,086       268,234  
                         
Loss from Operations     (1,159,280 )     (363,086 )     (268,234 )
                         
Other Expense (Income):                        
Interest Expense     327,104       12,169       -  
Interest Income     -       (68 )     (127 )
Other Expense, Net     32,566       -       -  
                         
Total Other Expense (Income), Net     359,670       12,101       (127 )
                         
Loss from Operations Before Provision for Income Taxes     (1,518,950 )     (375,187 )     (268,107 )
Provision for Income Taxes     207,868       800       800  
                         
Net Loss   $ (1,726,818 )   $ (375,987 )   $ (268,907 )

 

The accompanying notes are an integral part of these financial statements.

 

- 3 -

 

 

iCANN, LLC

Statements of Changes in Members’ Equity (Deficit)

For The Years Ended December 31, 2020, 2019 and 2018

 

 

BALANCE AS OF JANUARY 1, 2018   $ (120,086 )
Net Loss     (268,907 )
Contributions     452,350  
BALANCE AS OF DECEMBER 31, 2018     63,357  
Net Loss     (375,987 )
Equity Component of Convertible Debt     27,202  
Distributions     (254,000 )
BALANCE AS OF DECEMBER 31, 2019     (539,428 )
Net Loss     (1,726,818 )
Equity Component of Convertible Debt Amendments     234,462  
Conversion of Convertible Debt     2,045,309  
Conversion of Related Party Notes Payable     157,800  
BALANCE AS OF DECEMBER 31, 2020   $ 171,325  

 

The accompanying notes are an integral part of these financial statements.

 

- 4 -

 

 

iCANN, LLC

Statements of Cash Flows

For The Years Ended December 31, 2020, 2019 and 2018

 

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net Loss   $ (1,726,818 )   $ (375,987 )   $ (268,907 )
Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities:                        
Accrued Interest Capitalized to Convertible Debt     36,484       8,825       -  
Accrued Interest Capitalized to Related Party Notes     32,300       -       -  
Amortization of Debt Discount     258,320       3,344       -  
Depreciation and Amortization     108,672       -       -  
Changes in Operating Assets and Liabilities:                        
Prepaid Expenses     (61,528 )     -       -  
Inventory     (343,289 )     -       -  
Accounts Payable and Accrued Liabilities     827,669       43,028       (30,421 )
Income Taxes Payable     207,066       800       800  
NET CASH USED IN OPERATING ACTIVITIES     (661,124 )     (319,990 )     (298,528 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Purchases of Property and Equipment     (117,238 )     (546,727 )     (137,352 )
NET CASH USED IN INVESTING ACTIVITIES     (117,238 )     (546,727 )     (137,352 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from the Issuance of Convertible Debt     900,000       1,100,000       -  
Proceeds from the Issuance of Related Party Notes Payable     -       30,000       -  
Contributions     -       -       452,350  
Distributions     -       (254,000 )     -  
NET CASH PROVIDED BY FINANCING ACTIVITIES     900,000       876,000       452,350  
                         
NET INCREASE IN CASH AND CASH EQUIVALENTS     121,638       9,283       16,470  
Cash and Cash Equivalents, Beginning of Period     37,290       28,007       11,537  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 158,928     $ 37,290     $ 28,007  
                         
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                        
Cash Paid for Taxes   $ 806     $ -     $ -  
                         
NON - CASH TRANSACTIONS                        
Conversion of Convertible Debt to Equity   $ 2,045,309     $ -     $ -  
Conversion of Related Party Notes Payable to Equity   $ 157,800     $ -     $ -  
Equity Component of Convertible Debt   $ -     $ 27,202     $ -  
Equity Component of Convertible Debt Amendments   $ 234,462     $ -     $ -  

 

The accompanying notes are an integral part of these financial statements.

 

- 5 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

1. NATURE OF OPERATIONS

 

iCANN, LLC (“the Company”) is a cannabis company that operates a dispensary in the city of Berkley, California.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

These developments could have a material adverse impact on the Company’s revenues, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation

 

The accompanying financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company.

 

Use of Estimates

 

The preparation of the 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 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 estimated useful lives, depreciation and amortization of property and equipment, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Inventory

 

Inventory is comprised entirely of finished goods and is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of December 31, 2020, 2019 and 2018, the Company determined that no reserve was necessary.

 

- 6 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Property and Equipment

 

Property and equipment is stated at cost, net of accumulated depreciation, amortization and impairment losses, if any. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Furniture and Fixtures 5 Years
Leasehold Improvements Shorter of Lease Term or Economic Life
Equipment and Software 3 – 5 Years

 

The assets’ residual values, useful lives and methods of depreciation and amortization are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the statements of operations in the period the asset is derecognized.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property and equipment 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.

 

Income taxes

 

The Company is treated as a corporation for federal and state income tax purposes. Consequently the Company accounts for income taxes under the liability approach. Under the liability approach, deferred income taxes are computed by applying enacted laws and currently enacted tax rates to the “temporary” differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

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 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 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.

 

- 7 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

 

Revenue Recognition

 

Revenue is recognized by the Company in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:

 

Identify a customer along with a corresponding contract;

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

Allocate the transaction price to the performance obligation(s) in the contract;

Recognize revenue when or as the Company satisfies the performance obligation(s).

 

Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues. Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its financial statements.

 

Cost of Goods Sold

 

Cost of goods sold includes the costs directly attributable to product sales.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. There were approximately $166,784, $9,736 and $2,728 in advertising costs during the years ended December 31, 2020, 2019 and 2018, respectively.

 

- 8 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Financial Instruments

 

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.

 

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments. There have been no transfers between fair value levels during the years ended December 31, 2020, 2019 and 2018.

 

Financial instruments are measured at amortized cost or at fair value. Financial instruments measured at amortized cost consist of accounts payable, accrued liabilities and income taxes payable wherein the carrying value approximates fair value due to its short-term nature. Other financial instruments measured at amortized cost include notes payable and convertible debt wherein the carrying value at the effective interest rate approximates fair value as the interest rate for notes payable and the interest rate used to discount the host debt contract for convertible debt approximate a market rate for similar instruments offered to the Company.

 

Recently Issued Accounting Standards

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of this ASU during the year ended December 31, 2020 had no material impact on these financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its balance sheets and results of operations.

 

- 9 -

 

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018
   

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long-term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to members’ equity (deficit) upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.

 

3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash at its physical location, which is not currently insured and cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of and for the years ended December 31, 2020, 2019 and 2018, the Company has not experienced any losses with regards to its cash balances.

 

4. PROPERTY AND EQUIPMENT

 

As of December 31, 2020, 2019 and 2018, property and equipment consist of the following:

 

    2020     2019     2018  
Furniture and Fixtures   $ 192,294     $ -     $ -  
Leasehold Improvements     516,878       -       -  
Equipment and Software     92,145       -       -  
Construction in Progress     -       684,079       137,352  
                         
Total Property and Equipment     801,317       684,079       137,352  
                         
Less Accumulated Depreciation and Amortization     (108,672 )     -       -  
                         
Property and Equipment, Net   $ 692,645     $ 684,079     $ 137,352  

 

Depreciation and amortization for the years ended December 31, 2020, 2019 and 2018 was $108,672, $0 and $0, respectively.

 

- 10 -

 

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018
   

 

5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

As of December 31, 2020, 2019 and 2018, accounts payable and accrued liabilities consist of the following:

 

    2020     2019     2018  
Accounts Payable   $ 396,933     $ 37,391     $ 4,902  
Accrued Liabilities     291,739       10,539       -  
Accrued Payroll and Related Liabilities     53,363       -       -  
Sales Tax and Cannabis Taxes     133,564       -       -  
                         
Total Accounts Payable and Accrued Liabilities   $ 875,599     $ 47,930     $ 4,902  

 

During the year ended December 31, 2020, the Company began a customer loyalty rewards program that allows members to earn discounts on future purchases. Unused discounts earned by loyalty rewards program members are included in accrued liabilities and recorded as a sales discount at the time a qualifying purchase is made. The value of points accrued as of December 31, 2020 was $291,000. Currently, unused points do not expire in most cases.

 

6. RELATED PARTY NOTES PAYABLE

 

As of December 31, 2020, 2019 and 2018, related party notes payable consist of the following:

 

    2020     2019     2018  
Related Party Notes Payable   $ -     $ 125,500     $ 95,500  
                         
Less Current Portion of Related Party Notes Payable     -       (125,500 )     (95,500 )
Related Party Notes Payable, Net of Current Portion   $ -     $ -     $ -  

 

The related party notes payable are due on demand and bear no interest. During the year ended December 31, 2020, to induce the holders to convert their amounts due to equity of the Company, the Company agreed to increase the amounts due in the form of additional interest in the amount of $32,300. The total balance converted to equity during the year ended December 31, 2020 was $157,800.

 

7. CONVERTIBLE DEBT

 

As of December 31, 2020, 2019 and 2018, convertible debt consist of the following:

 

    2020     2019     2018  
Convertible Debt   $ -     $ 1,108,825     $ -  
                         
Less Debt Discount     -       (23,858 )     -  
                         
Total Convertible Debt     -       1,084,967       -  
                       
Less Current Portion of Convertible Debt     -       (1,084,967 )     -  
                         
Convertible Debt, Net of Current Portion   $ -     $ -     $ -  

 

In July 2019, the Company entered into a letter of intent and a convertible facility term loan agreement with GH Group, Inc. The convertible facility term loan agreement allows up to a $2,000,000 term loan at a 2 percent interest rate and matures 3 years from the date of the first advance under the convertible facility term loan agreement. No prepayments are allowed. The convertible facility term loan agreement is convertible into 10 percent of the Company’s equity on a fully diluted basis and is only convertible upon the Company the final closing as defined in the letter of intent. During the years ended December 31, 2020 and 2019, the Company received $900,000 and $1,100,000 under the convertible facility term loan agreement, respectively. In December 2020, all outstanding principal and interest of $2,045,309 due under the convertible facility term loan agreement, were converted into equity of the Company.

 

- 11 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018
   

 

8. MEMBERS’ EQUITY (DEFICIT)

 

The Company is a limited liability company whereby allocations of profits, losses and distributions, if any, for each fiscal period or year are allocated pro rata in proportion to the member’s capital interest account. Certain members as defined in the operating agreement have a preference on distributions over other members when certain financial metrics are met for an initial period of 8 years. This initial period is automatically extended one additional 8-year term, if during each of the last three years of the initial term the Company’s revenue is $10,000,000.

 

9. PROVISION FOR INCOME TAXES AND DEFERRED TAXES

 

Provision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Current:                        
Federal   $ 207,068     $ -     $ -  
State     800       800       800  
                         
Total Current     207,868       800       800  
                         
Total Provision for Income Taxes   $ 207,868     $ 800     $ 800  

 

As of December 31, 2020, 2019 and 2018, the components of deferred tax assets were as follows:

 

    2020     2019     2018  
Deferred Tax Assets:                        
Operating losses   $ 174,412     $ 40,137     $ 7,162  
Valuation Allowance     (174,412 )     (40,137 )     (7,162 )
                         
Total Deferred Tax Assets   $ -     $ -     $ -  

 

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Income tax expense at federal rate   $ (318,980 )   $ (78,334 )   $ (60,450 )
State taxes and fees     800       800       800  
IRS Section 280E disallowance     347,335       78,334       60,450  
State Tax Carryforwards     (134,275 )     (32,975 )     (7,162 )
Increase in Valuation Allowance     134,275       32,975       7,162  
Uncertain tax positions     178,713       -       -  
                         
Reported Income Tax Expense   $ 207,868     $ 800     $ 800  

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

- 12 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018
   

 

9. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for years ended December 31, 2020, 2019 and 2018 is as follows:

 

    2020     2019     2018  
Balance at Beginning of Period   $ -     $ -     $ -  
IRS Section 280E Positions     178,713       -       -  
Balance at End of Period   $ 178,713     $ -     $ -  

 

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits at December 31, 2020, 2019 and 2018, potential benefits of $178,713, $0 and $0, respectively, that if recognized would impact the effective tax rate on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

 

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of the December 31, 2020, the federal tax returns since 2018 and state tax returns since 2017 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

 

10. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases property from a related party under an operating lease agreement that specifies minimum rentals. The lease expires in January 2031 and contains certain renewal provisions. The Company’s rent expense was $220,000, $4,955 and $12,576 for the years ended December 31, 2020, 2019 and 2018, respectively, and is recorded in general and administrative expenses in the accompanying statements of operations.

 

Future minimum lease payments under non-cancelable operating leases with the related party having an initial or remaining term of more than one year are as follows:

 

December 31:      
2021   $ 240,000  
2022     240,000  
2023     240,000  
2024     240,000  
2025     240,000  
Thereafter     1,220,000  
         
Total Future Minimum Lease Payments   $ 2,420,000  

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of December 31, 2020, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

- 13 -

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018
   

 

10. COMMITMENTS AND CONTINGENCIES (Continued)

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the financial statements relating to claims and litigations. As of December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

12. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these financial statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

 

Acquisition by GH Group, Inc.

 

Subsequent to December 31, 2020, GH Group, Inc. (“GH Group”) completed the acquisition of 100% of the Company’s equity interests. Pursuant to the terms of the agreement, GH Group elected to convert its earlier issued convertible notes with a principal amount of $2,000,000 and accrued interest of $45,309 into equity interests of the Company, paid $400,000 in cash to four holders of the Company’s equity interests, issued 7,554,679 Class A Common shares to the holders of the Company’s equity interests; and issued an additional 500,000 Class A Common shares to the Company’s brokers and consultants.

 

- 14 -

 

 

APPENDIX I – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FARMACY BERKELEY

 

(See attached)

 

I-1

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended December 31, 2020, 2019 and 2018 – iCann

 

Overview

 

iCann, LLC (“the Company”) is a cannabis company that operates a dispensary in the city of Berkley, California. See “Description of Business” for an overview of the Company and “Regulatory Overview” for details regarding the California regulatory framework.

 

Recent Developments

 

Acquisition by GH Group, Inc.

 

On January 1, 2021, GH Group, Inc. (“GH Group”) completed the acquisition of 100% of the Company’s equity interests. Pursuant to the terms of the agreement, GH Group elected to convert its earlier issued convertible notes with a principal amount of $2,000,000 and accrued interest of $45,309 into equity interests of the Company, paid $400,000 in cash to four holders of the Company’s equity interests, issued 7,554,679 Class A Common shares to the holders of the Company’s equity interests; and issued an additional 500,000 Class A Common shares to the Company’s brokers and consultants.

 

Major Business Lines and Geographies

 

The Company views its financial results under one business line – the procurement and sale of cannabis retail products in the city of Berkley, California.

 

Geographic Areas

 

All of the Company’s revenue is derived from the city of Berkley, 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, and with the acquisition of the Company by GH Group, GH Group along with its other retail dispensaries look to expand its retail presence and brand name 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 years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Revenues, Net   $ 3,607,307     $ -     $ -  
Cost of Goods Sold     2,621,272       -       -  
                         
Gross Profit     986,035       -       -  
                         
Expenses:                        
General and Administrative     1,798,289       60,142       44,771  
Sales and Marketing     166,784       9,736       2,728  
Professional Fees     71,570       293,208       220,735  
Depreciation and Amortization     108,672       -       -  
                         
Total Expenses     2,145,315       363,086       268,234  
                         
Loss from Operations     (1,159,280 )     (363,086 )     (268,234 )
                         
Other Expense (Income):                        
Interest Expense     327,104       12,169       -  
Interest Income     -       (68 )     (127 )
Other Expense, Net     32,566       -       -  
                         
Total Other Expense (Income), Net     359,670       12,101       (127 )
                         
Loss from Operations Before Provision for Income Taxes     (1,518,950 )     (375,187 )     (268,107 )
Provision for Income Taxes     207,868       800       800  
                         
Net Loss   $ (1,726,818 )   $ (375,987 )   $ (268,907 )

 

 

 

Revenue

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, revenue was $3.6 million, an increase from $0 million for the year ended December 31, 2019. The Company began retail sales in February 2020.

 

Cost of Goods Sold

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, cost of goods sold was $2.6 million, an increase from $0 million for the year ended December 31, 2019. The Company began retail sales in February 2020.

 

General and Administrative

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, general and administrative expenses was $1.8 million, an increase of $1.7 million or 2,890% from the prior year amount of $0.1 million. The increase in general and administrative expenses is due to the Company having started sales and ramping up operations in February 2020. In the prior year, the Company was not fully operational and had minor operations.

 

For the year ended December 31, 2019 and 2018

 

For the year ended December 31, 2019, general and administrative expenses was $0.1 million, a negligible increase from 2018. In 2019 and in 2018, the Company was not fully operational and had minor operations.

 

Sales & Marketing

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, sales and marketing expenses was $0.2 million, which represents an increase of $0.2 million or 1,613% from the prior year amount of $0.0 million. Marketing expenses increased year over year to support the Company’s retail operations, which began February 2020.

 

For the year ended December 31, 2019 and 2018

 

For the year ended December 31, 2019 and 2018, sales and marketing expenses was negligible as the Company had not begun operations until February 2020.

 

Professional Fees

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, professional fees were $0.1 million, which represents a decrease of $0.2 million or 76% from $0.3 million in 2019. The decline in professional fees in 2019 was a result of the Company expending much of its up front costs in 2019 and 2018 to start the Company and obtain the cannabis license.

 

For the year ended December 31, 2019 and 2018

 

For the year ended December 31, 2019 professional fees were $0.3 million, which represents an increase of $0.1 million or 33% from $0.2 million in 2018. Professional fees for 2019 and 2018 represents fees paid to consultants, outside accountants and legal fees related to starting up the Company and the process of obtaining the cannabis license.

 

 

 

Liquidity and Capital Resources

 

Overview

 

Historically, the Company’s primary source of liquidity has been capital contributions by investors and debt issuances. The Company 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 fund the Company from its capital resources in order to meet liquidity needs.

 

Financial Condition

 

Cash Flows

 

The following table summarizes the Company’s combined statement of cash flows from operations for the year end year ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
                         
NET CASH USED IN OPERATING ACTIVITIES   $ (661,124 )   $ (319,990 )   $ (298,528 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:                        
                         
NET CASH USED IN INVESTING ACTIVITIES     (117,238 )     (546,727 )     (137,352 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:                        
                         
NET CASH PROVIDED BY FINANCING ACTIVITIES     900,000       876,000       452,350  
                         
NET INCREASE IN CASH AND CASH EQUIVALENTS     121,638       9,283       16,470  
Cash and Cash Equivalents, Beginning of Period     37,290       28,007       11,537  
                         
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 158,928     $ 37,290     $ 28,007  

 

Cash Flow Used In Operating Activities

 

For the year ended December 31, 2020

 

Cash used in operating activities totaled $0.7 million for the year ended December 31, 2020. This was primarily driven by the net loss incurred of $1.7 million during the year ended December 31, 2020. The use of cash in operations was offset by the increase in accounts payable and accrued liabilities ($0.8 million).

 

For the year ended December 31, 2019

 

Cash used in operating activities totaled $0.3 million for the year ended December 31, 2019. This was primarily driven by the net loss incurred of $0.4 million during the year ended December 31, 2019. Cash flows from other operating activities during the year ended December 31, 2019 was negligible.

 

For the year ended December 31, 2018

 

Cash used in operating activities totaled $0.3 million for the year ended December 31, 2018. This was primarily driven by the net loss incurred of $0.3 million during the year ended December 31, 2018. Cash flows from other operating activities during the year ended December 31, 2018 was negligible.

 

Cash Flow Used in Investing Activities

 

For the year ended December 31, 2020

 

Cash used in investing activities totaled $0.1 million for the year ended December 31, 2020 all related to the purchase of property equipment.

 

 

 

For the year ended December 31, 2019

 

Cash used in investing activities totaled $0.5 million for the year ended December 31, 2019 all related to the purchase of property equipment.

 

For the year ended December 31, 2018

 

Cash used in investing activities totaled $0.1 million for the year ended December 31, 2018 all related to the purchase of property equipment.

 

Cash Flow Provided by Financing Activities

 

For the year ended December 31, 2020

 

Cash provided by financing activities totaled $0.9 million for the year ended December 31, 2020. This was primarily driven by the issuance of convertible debt during the year ($0.9 million).

 

For the year ended December 31, 2019

 

Cash provided by financing activities totaled $0.9 million for the year ended December 31, 2019. This was primarily driven by the issuance of convertible debt during the year ($1.13 million), offset by a payment of a distribution to a member ($0.3 million).

 

For the year ended December 31, 2018

 

Cash provided by financing activities totaled $0.5 million for the year ended December 31, 2018. This was primarily driven by a contribution ($0.5 million) from a member during the year.

 

As previously noted, the Company’s primary source of liquidity has been capital contributions and debt capital made available from investors and members. The Company 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 fund the Company from its capital resources in order to meet liquidity needs. The Company does not have any committed sources of financing, nor significant outstanding capital expenditure commitments.

 

Contractual Obligations

 

The Company has contractual obligations to make future payments, on related party lease agreements.

 

The following table summarizes such obligations as of December 31, 2020:

 

    2021     2022     2023 - 2024     After 2024     Total  
Leases   $ 240,000     $ 240,000     $ 480,000     $ 1,460,000     $ 2,420,000  
                                         
Total Contractual Obligations   $ 240,000     $ 240,000     $ 480,000     $ 1,460,000     $ 2,420,000  

 

Transactions with Related Parties

 

The Company leases property from a related party under a operating lease agreement that specifies minimum rentals. The lease expires in January 2031 and contains certain renewal provisions. The Company’s rent expense was $220,000, $4,955 and $12,576 for the years ended December 31, 2020, 2019 and 2018, respectively, and is recorded in general and administrative expenses in the accompanying combined statements of operations.

 

The Company had various loans with related parties throughout 2020, 2019 and 2018. The outstanding balances of $0, $125,500, and $95,500 as of December 31, 2020, 2019 and 2018, respectively, were due on demand and bear no interest. During the year ended December 31, 2020, to induce the holders to convert their amounts due to equity of the Company, the Company agreed to increase the amounts due in the form of additional interest in the amount of $32,300. The total balance converted to equity during the year ended December 31, 2020 was $157,800.

 

 

 

Critical Accounting Estimates

 

Use of Estimates

 

The preparation of the 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 combined 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 and amortization of property and equipment, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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 and Amortization of Property and Equipment

 

Depreciation and amortization 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.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property 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.

 

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.

 

Changes in Accounting Policies Including Adoption

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of this ASU during the year ended December 31, 2020 had no material impact on these financial statements.

 

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. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position and combined results of operations.

 

Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long-term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to members’ equity (deficit) upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.

 

 

 

Financial Instruments and Other Instruments

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, trade payables, accrued 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 the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at December 31, 2020, 2019 and 2018 is the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and 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 December 31, 2020, 2019 and 2018, 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

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company’s main risk is associated with fluctuations in Canadian dollars. The Company holds 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, 2019 and 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has 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. 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.

 

 

 

APPENDIX J – ELEMENT 7 AUDITED ANNUAL FINANCIAL STATEMENTS

 

(FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019)

 

(See attached)

 

J-1

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

 

COMBINED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020 AND 2019

 

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Index to Combined Financial Statements

 

 

 

    Page(s)
     
Report of Independent Registered Public Accounting Firm   1
     
Combined Balance Sheets   2
     
Combined Statements of Operations   3
     
Combined Statements of Changes in Members’ Deficit   4
     
Combined Statements of Cash Flows   5
     
Notes to Combined Financial Statements   6 - 13

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members 

E7 Carve-Out In-Process License Portfolio

 

Opinion on the Combined Financial Statements

 

We have audited the accompanying combined balance sheets of E7 Carve-Out In-Process License Portfolio (the “Company”) as of December 31, 2020 and 2019, and the related combined statements of operations, changes in members’ deficit, and cash flows for the years then ended, and the related notes to the combined financial statements (collectively referred to as the “combined financial statements”). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the combined results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Macias Gini & O’Connell LLP

 

We have served as the Company’s auditor since 2021.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP    
2029 Century Park East, Suite 1500    
Los Angeles, CA 90067 - 1 - www.mgocpa.com

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Balance Sheets

As of December 31, 2020 and 2019

 

 

    2020     2019  
ASSETS                
                 
Current Assets:                
Deposits     61,893       40,393  
Intangible assets, net     153,477       109,900  
Total Current Assets     215,370       150,293  
                 
Operating Lease Right-of-Use Assets, Net     538,066       696,772  
                 
TOTAL ASSETS     753,436       847,065  
                 
LIABILITIES AND MEMBERS’ DEFICIT                
                 
LIABILITIES :                
Current Liabilities:                
Current portion of operating lease liabilities     155,908       107,906  
Due to Element 7 CA, LLC     531,121       244,447  
Total Current Liabilities     687,029       352,353  
                 
Operating lease liabilities, net of current portion     451,258       607,166  
                 
TOTAL LIABILITIES     1,138,287       959,519  
                 
MEMBERS’ DEFICIT     (384,851 )     (112,454 )
                 
TOTAL LIABILITIES AND MEMBERS’ DEFICIT     753,436       847,065  

 

The accompanying notes are an integral part of these combined financial statements

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Statements of Operations

For The Years Ended December 31, 2020 and 2019

 

 

 

    2020     2019  
Revenues, Net     -       -  
Cost of Goods Sold   -       -  
                 
Gross Profit     -       -  
                 
General and Administrative Expenses     38,225       82,223  
Amortization of Operating Lease Right-of-Use Assets     236,172       44,231  
Total Operating Expenses     274,397       126,454  
                 
Net Loss     (274,397 )     (126,454 )

 

The accompanying notes are an integral part of these combined financial statements

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Statements of Changes in Members’ Deficit

For The Years Ended December 31, 2020 and 2019

 

 

 

                Total  
    Members’     Accumulated     Members’  
    Capital     Deficit     Deficit  
BALANCE AS OF JANUARY 1, 2019   $ -     $ -     $ -  
                         
Members’ Contribution     14,000       -       14,000  
Net Loss     -       (126,454 )     (126,454 )
                         
BALANCE AS OF DECEMBER 31, 2019     14,000       (126,454 )     (112,454 )
                         
Members’ Contribution     2,000       -       2,000  
Net Loss     -       (274,397 )     (274,397 )
                         
BALANCE AS OF DECEMBER 31, 2020   $ 16,000     $ (400,851 )   $ (384,851 )

 

The accompanying notes are an integral part of these combined financial statements

 

- 4 -

 

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Combined Statements of Cash Flows 

For The Years Ended December 31, 2020 and 2019

 

 

    2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Loss     (274,397 )     (126,454 )
Adjustmentst to Reconcile Net Loss to Net Cash Used in Operating Activities:                
Amortization of Operating Lease Right-of-Use Assets     236,172       44,231  
Changes in Operating Assets and Liabilities:                
Deposits     (21,500 )     (40,393 )
Operating Lease Right-of-Use Assets, Net     (185,372 )     (25,931 )
                 
NET CASH USED IN OPERATING ACTIVITIES     (245,097 )     (148,547 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of Intangibles Assets     (43,577 )     (109,900 )
                 
NET CASH USED IN INVESTING ACTIVITIES     (43,577 )     (109,900 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Contributions from Members     2,000       14,000  
Proceeds from Related Party Loans     286,674       244,447  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES     288,674       258,447  
                 
CHANGE IN CASH AND CASH EQUIVALENTS     -       -  
Cash and Cash Equivalents, Beginning of Period     -          
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD     -       -  
                 
                 
                 
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                
Recognition of Right-of-Use Assets and Operating Leases     -       727,043  

 

The accompanying notes are an integral part of these combined financial statements

 

- 5 -

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

1. NATURE OF OPERATIONS

 

E7 Carve-Out In-Process License Portfolio (“E7 Carve-Out” or the “Company”), is a collection of 16 in-process applications for cannabis dispensary licenses in the state of California, each held in a dedicated limited liability company that are currently held by sixteen entities that are majority owned by Element 7 CA, LLC and a seventeenth entity that may be created prior to the close of the transaction to apply for a retail cannabis license in Moreno Valley located in Riverside County, California. The E7 Carve-Out is the result of identified opportunities for license development for the retail cannabis industry in the state of California.

 

Going Concern

 

These combined financial statements have been prepared on a going concern basis in accordance with Accounting Standards Update No. 2014-15 (ASU 2014-15), “Presentation of Financial Statements—Going Concern” (Subtopic 205-40). This going concern basis of presentation assumes that the Company will continue in operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

 

The Company will be acquired by GH Group, Inc. as further described in footnote 7. This will further help the Company in financing its operations. As of December 31, 2020, the company is still in its pre-operation stage and has incurred an accumulated deficit of $384,851.

 

These combined financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these combined financial statements, then adjustments would be necessary in the carry value of the assets and liabilities, the reported revenue and expenses and the classifications used in the statement of financial position. Such differences in amounts could be material.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation and Statement of Compliance

 

The combined financial statements as of December 31, 2020 and 2019 (the “financial statements”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Basis of Measurement

 

These combined financial statements have been prepared on the going concern basis, under the historical cost convention, except for certain financial instruments that are measured at fair value as described herein.

 

Basis of Combination

 

The combined financial statements for the years ended December 31, 2020 and 2019 include the accounts of the Company and its affiliates which are under common control of the management.

 

Control exists when the Company has power over an affiliate, when the Company is exposed, or has rights, to variable returns from the affiliate, and when the Company has the ability to affect those returns through its power over the affiliate. The financial statements of entities controlled by the Company by virtue of agreements are fully consolidated from the date that control commences and deconsolidated from the date control ceases.

 

The financial statements of the affiliates are prepared for the same reporting period as the Company, using consistent accounting policies.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Use of Estimates

 

The preparation of the 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 combined financial statements and the reported amounts of total net revenue and expenses during the reporting period. 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.

 

Intangible Assets

 

Intangible assets are recorded at cost, less accumulated amortization and impairment losses. Amortization is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets, which include costs to obtain dispensary licenses including: license and permit fees. The useful life of licenses (when obtained) is determined to be 15 years, with amortization of licenses only commencing at the start of their useful life. Such assets are tested annually for impairment, or more frequently, if events or changes in circumstances indicate that they might be impaired. The estimated useful lives, residual values, and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. The retail cannabis licenses for all 16 entities are all in the application stage at December 31, 2020 and 2019.

 

Basis of Combination

 

These combined financial statements as of and for the years ended December 31, 2020 and 2019 include sixteen (16) entities controlled by Robert DiVito (Founder and CEO of Element 7 CA, LLC) or Joshua Black (Co-Founder), collectively (“Founders) and thereby establishes a common controlling financial interest in the respective entities. As noted under ASC 810-10-55-1B, combined financial statements might be used to present the financial statements of entities under common management. Element 7 CA, LLC is a California limited liability company engaged in the pursuit of cannabis retail dispensary licenses in various jurisdictions in the state of California that holds the ownership interests described in the below table.

 

The following are the Company’s principal wholly-owned or controlled subsidiaries and or affiliates that are included in these combined financial statements as of December 31, 2020 and 2019 and for the years then ended:

 

            Ownership
Entities   Location   Purpose   2020   2019
Element 7 American Canyon LLC   Napa, CA   Cannabis retail   100%   100%
PH Investments Group, LLC   Ventura, CA   Cannabis retail   100%   100%
Element 7 Willits LLC   Medocino, CA   Cannabis retail   100%   N/A
Element 7 Mendota LLC   Fresno, CA   Cannabis retail   100%   100%
E7 Dunsmuir LLC   Siskiyou, CA   Cannabis retail   90%   90%
Element 7 Lemon Grove, LLC   San Diego, CA   Cannabis retail   70%   100%
E7 Eureka LLC   Humboldt, CA   Cannabis retail   100%   100%
Element 7 Walnut Creek, LLC   Contra Costa, CA   Cannabis retail   100%   100%
Element 7 Willows, LLC   Glenn, CA   Cannabis retail   100%   100%
E7 Napa City, LLC   Napa, CA   Cannabis retail   100%   100%
E7 Lompoc LLC   Santa Barbara, CA   Cannabis retail   100%   100%
Element 7 Chula Vista, LLC   San Diego, CA   Cannabis retail   100%   100%
Element 7 SF2 LLC   San Francisco, CA   Cannabis retail   80%   N/A
E7 Salinas, LLC   Monterey, CA   Cannabis retail   92%   92%
Element 7 San Luis Obispo, LLC   San Luis Obispo, CA   Cannabis retail   94%   100%
Element 7 Hesperia LLC   San Bernardino, CA   Cannabis retail   100%   100%

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Leased Assets

 

The Company 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, 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. Based on the implementation of this new standard, the Company recognized right-of-use assets and lease liabilities in its combined financial statements.

 

Income Taxes

 

The E7 Carve-Out are treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by or provided for E7 Carve-Out. Members are taxed individually on their share of E7 Carve-Out’ earnings. Since the members are liable for individual federal and state income taxes on the E7 Carve-Out’ taxable income, the E7 Carve-Out may disburse funds necessary to satisfy the members’ estimated personal income tax liabilities. California imposes an LLC fee based on revenue, which is included in the provision for income tax. However, as none of the in-process license applications comprising the E7 Carve-Out have been granted final licenses, there are no operations and no revenues associated with the E7 Carve-Out, and thus no related California LLC fee.

 

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 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.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recently Issued Accounting Standards

 

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. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheet 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheet 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheet and combined results of operations.

 

3. INTANGIBLE ASSETS

 

As of December 31, 2020, and 2019, intangible assets consist of the following:

 

    2020     2019  
License and Permit Fees   $ 153,477     $ 109,900  
                 
Less Accumulated Amortization     -       -  
                 
Intangible Assets, net   $ 153,477     $ 109,900  

 

The licenses are in the application stage as such, the amortization has not commenced and no indication of events or changes in circumstances that would require impairment as of December 31, 2020 and 2019

 

4. LEASES

 

Operating Lease Liabilities

 

As a result of the adoption of ASC 842 the Company has changed its accounting policy for leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and accrued obligations under operating lease (current and non-current) liabilities in the combined balance sheets.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

4. LEASES (Continued)

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.

 

ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Certain operating leases contain renewal options that provide for rent increases based on prevailing market conditions.

 

The Company leases commercial real estate assets which it plans to use for corporate purposes and the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the combined balance sheets and are expensed in the combined statements of operations on the straight-line basis over the lease term.

 

The below are the details of the lease cost and other disclosures regarding the Company’s leases as of December 31, 2020 and 2019:

 

    2020     2019  
Operating lease cost   $ 236,172     $ 44,231  
                 
Cash flow for amounts included in the measurement of lease liabilities:                
Operating cash flows for operating leases   $ 185,372     $ 25,931  
                 
Non-cash additions to right-of-use assets and lease liabilities:                
Recognition of right-of-use assets and operating leases   $ -     $ 727,043  
                 
Amount representing operating leases   $ 607,166     $ 715,072  
                 
Weight average remaining lease term (years) - operating leases     3       4  
                 
Weighted average discount rate - operating leases     16.50 %     16.50 %

 

The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Operating Lease Liabilities and Right-of-Use Assets

 

The Company leases certain business facilities from third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $2,331 to $16,000 and expire through October 2024.

 

- 10 -

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

4. LEASES (Continued)

 

Future minimum operating lease payments under non-cancelable operating leases is as follows:

 

December 31:      
2021   $ 233,372  
2022     232,441  
2023     224,000  
2024     195,000  
         
Total future minimum lease payments     884,813  
         
Total amount representing interest     (277,647 )
         
Total amount representing present value     607,166  
         
Current portion of operating lease liabilities     (155,908 )
         
Operating lease liabilities, net of current portion   $ 451,258  

 

The following are changes in right-of-use assets during the years ended December 31, 2020 and 2019:

 

Balance as of January 1, 2019   $ -  
         
Recognition of right-of-use assets for operating leases     727,043  
Non-cash operating lease costs     (30,271 )
         
Balance as of December 31, 2019     696,772  
         
Recognition of right-of-use assets for operating leases     -  
Non-cash operating lease costs     (158,706 )
         
Balance as of December 31, 2020   $ 538,066  

 

5. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of December 31, 2020 and 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the combined financial statements relating to claims and litigations. As of December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

- 11 -

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

6. RELATED PARTY TRANSACTIONS

 

Incubation Services

 

Each of the 16 limited liability companies that comprise the E7 Carve-Out have entered into a Services and Incubation Agreement (the “Services and Incubation Agreement”) with Element 7 CA, LLC, pursuant to which Element 7 CA, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out (collectively, the “Incubation”). No payments have been charged by Element 7 CA, LLC at December 31, 2020 and 2019 relating to this.

 

Related Party Loans

 

Element 7 CA, LLC has paid certain fees and expenses on behalf of the E7 Carve-Out entities pursuant to the Services and Incubation Agreements, resulting in the Element 7 CA, LLC being a lender to the E7 Carve-Out via unsecured debt with no payment terms. The total amount outstanding under this arrangement was $531,120 and $244,447 as of December 31, 2020 and 2019, respectively.

 

7. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these combined financial statements were issued and has concluded that the following subsequent events have occurred that would require recognition in the combined financial statements or disclosure in the notes to the combined financial statements.

 

Proposed Transaction

 

Element 7 CA, LLC has executed an agreement with GH Group, Inc. whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to acquire the E7 Carve-Out entities. Each of the E7 Carve-Out entities will be prior to the close of the proposed transaction or 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 the E7 Carve-Out entities, by way of merger, in exchange for shares of a publicly traded entity with which GH Group has entered into a letter of intent to be acquired, with shares issued at $10.00 per share. This could result in the issuance of up to 2,400,000 shares in the amount of up to $24 million.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The COVID-19 pandemic has also led to disruption and volatility in the global capital markets, which could increase the cost of and accessibility to capital. Given that the COVID-19 pandemic has caused a significant economic slowdown, it appears increasingly likely that it could cause a global recession, which could be of an unknown duration, which would have a significant impact on our ongoing operations and cash flows. In addition, there has been a recent spike in the number of reported COVID-19 cases in many states where a substantial portion of the Company’s business and operations is located. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

- 12 -

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

7. SUBSEQUENT EVENTS (Continued)

 

These developments could have a material adverse impact on the Company’s revenues, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

- 13 -

 

 

APPENDIX K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF ELEMENT 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended December 31, 2020 and December 31, 2019

 

Overview

 

E7 Carve-Out In-Process License Portfolio (“E7 Carve-Out” or the “Company”) is a collection of 16 in-process applications for cannabis dispensary licenses in the state of California, each held in a dedicated limited liability company that are currently held by sixteen entities that are majority owned by Element 7 CA, LLC and a seventeenth entity that may be created prior to the close of the transaction to apply for a retail cannabis license in Moreno Valley located in Riverside County, California. The E7 Carve-Out is the result of identified opportunities for license development for the retail cannabis industry in the state of California.

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues or operations associated with the E7 Carve-Out.

 

Major Business Lines and Geographies

 

The Company presents its financial results under one business line representing the deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California.

 

Applications for Cannabis Dispensary Licenses

 

The following are 16 the limited liability companies that comprise the E7 Carve-Out, as well as the percent of owned by the respective limited liability company at December 31, 2020 and December 31, 2019.

 

            Ownership
Entities   Location   Purpose   2020   2019
Element 7 American Canyon LLC   Napa, CA   Cannabis retail   100%   100%
PH Investments Group, LLC   Ventura, CA   Cannabis retail   100%   100%
Element 7 Willits LLC   Medocino, CA   Cannabis retail   100%   N/A
Element 7 Mendota LLC   Fresno, CA   Cannabis retail   100%   100%
E7 Dunsmuir LLC   Siskiyou, CA   Cannabis retail   90%   90%
Element 7 Lemon Grove, LLC   San Diego, CA   Cannabis retail   70%   100%
E7 Eureka LLC   Humboldt, CA   Cannabis retail   100%   100%
Element 7 Walnut Creek, LLC   Contra Costa, CA   Cannabis retail   100%   100%
Element 7 Willows, LLC   Glenn, CA   Cannabis retail   100%   100%
E7 Napa City, LLC   Napa, CA   Cannabis retail   100%   100%
E7 Lompoc LLC   Santa Barbara, CA   Cannabis retail   100%   100%
Element 7 Chula Vista, LLC   San Diego, CA   Cannabis retail   100%   100%
Element 7 SF2 LLC   San Francisco, CA   Cannabis retail   80%   N/A
E7 Salinas, LLC   Monterey, CA   Cannabis retail   92%   92%
Element 7 San Luis Obispo, LLC   San Luis Obispo, CA   Cannabis retail   94%   94%
Element 7 Hesperia LLC   San Bernardino, CA   Cannabis retail   100%   100%

 

K - 1

 

 

Geographic Areas

 

All E7 Carve-Out activities are in the State of California

 

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.

 

Results of Operations

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues or operations associated with the E7 Carve-Out. Expenditures have been capitalized to the E7 Carve-Out balance sheet, represented as a deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California.

 

Revenue

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues associated with the E7 Carve-Out.

 

Cost of Goods Sold

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there is no cost of goods sold associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there is no cost of goods sold associated with the E7 Carve-Out.

 

General and Administrative

 

2020

 

During the year, E7 Carve-Out incurred expenses of $274,397 in relation to the costs of acquiring retail dispensary licenses, these expenses are inclusive of $236,172 relating to the amortization of Right-of-use operating leases.

 

2019

 

During the year, E7 Carve-Out incurred expenses of $126,454 in relation to the costs of acquiring retail dispensary licenses, these expenses are inclusive of $44,231 relating to the amortization of Right-of-use operating leases.

 

Sales & Marketing

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no sales and marketing expenses associated with the E7 Carve-Out.

 

K - 2

 

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no sales and marketing expenses associated with the E7 Carve-Out.

 

Professional Fees

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no professional fees associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no professional fees associated with the E7 Carve-Out.

 

Other Expense

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no other expenses associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no other expenses associated with the E7 Carve-Out.

 

Liquidity and Capital Resources

 

Overview

 

The primary source of liquidity for the E7 Carve-Out has been a series of Services and Incubation Agreements (the “Services and Incubation Agreements”) between each of the 16 limited liability companies that comprise the E7 Carve-Out and Element 7, LLC, whereby Element 7, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out (and incur certain fees and expenses on behalf of these E7 Carve-Out entities as part of and as performance for such services) (collectively, the “Incubation”).

 

Total working capital as of December 31, 2020 and 2019 was ($472K) and ($202K), respectively. The decrease in working capital is related to payments made by a related party on behalf of E7 Carve-Out as E7 Carve-Out is attempting to acquire licenses.

 

Contractual Obligations

 

The E7 Carve-Out has contractual obligations to make future payments, specifically lease agreements from third parties. The Company leases certain business facilities from third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $2,331 to $16,000 and expire through October 2024.

 

K - 3

 

 

Future minimum operating lease payments under non-cancelable operating leases is as follows:

 

December 31:      
2021   $ 233,372  
2022     232,441  
2023     224,000  
2024     195,000  
         
Total future minimum lease payments     884,813  
         
Total amount representing interest     (277,648 )
         
Total amount representing present value     607,165  
         
Current portion of operating lease liabilities     (155,906 )
         
Operating lease liabilities, net of current portion   $ 451,259  

 

Financial Condition

 

Cash Flows

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues or operations associated with the E7 Carve-Out. Expenditures have been capitalized to the E7 Carve-Out balance sheet, represented as a deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California.

 

Pursuant to a series of Services and Incubation Agreements (the “Services and Incubation Agreements”) between each of the 16 limited liability companies that comprise the E7 Carve-Out and Element 7, LLC, whereby Element 7, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out, Element 7, LLC incurred certain fees and expenses on behalf of these E7 Carve-Out entities.

 

Operating Activities

 

Cash flow used in operating activities total ($245,097) and ($148,547) for 2020 and 2019 respectively. This relates to a related party advance for deposits and Operating Right-of-Use Assets.

 

Investing Activities

 

Cash flow for investing activities total ($43,577) and ($109,900) for 2020 and 2019 respectively. This relates to a related party advance for the purchase of intangibles, including permits and licenses.

 

Financing Activities

 

Cash flow provided by financing activities totaled $288,674 and $258,447 for 2020 and 2019 respectively. This relates to a related party advance to fund the costs associated with acquiring licenses, in accordance with the Services and Incubation Agreements.

 

Transactions with Related Parties

 

Incubation Services

 

Each of the 16 limited liability companies that comprise the E7 Carve-Out have entered into a Services and Incubation Agreement (the “Services and Incubation Agreement”) with Element 7, LLC, pursuant to which Element 7, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out (and incur certain fees and expenses on behalf of these E7 Carve-Out entities as part of and as performance for such services) (collectively, the “Incubation”).

 

K - 4

 

 

Related Party Loans

 

Element 7 CA, LLC has paid certain fees and expenses on behalf of the E7 Carve-Out entities pursuant to the Services and Incubation Agreements, resulting in the Element 7 CA, LLC being a lender to the E7 Carve-Out via unsecured debt with no payment terms. The total amount outstanding under this arrangement was $531,121 and $244,447 as of December 31, 2020 and 2019, respectively.

 

Critical Accounting Estimates

 

Use of Estimates

 

The preparation of the 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. 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, stock-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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Income Taxes

 

The Merger Entities are treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by or provided for Merger Entities. Members are taxed individually on their share of Merger Entities’ earnings. Since the members are liable for individual federal and state income taxes on the Merger Entities’ taxable income, the Merger Entities may disburse funds necessary to satisfy the members’ estimated personal income tax liabilities. California imposes an LLC fee based on revenue, which is included in the provision for income tax.

 

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.

 

K - 5

 

 

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.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its consolidated and combined financial position and consolidated and combined results of operations.

 

K - 6

 

 

Financial Instruments and Other Instruments

 

Fair Value of Financial Instruments

 

The E7 Carve-Out’s financial instruments consist of a deferred asset and a current liability. 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. As at December 31, 2020, the E7 Carve-Out has no exposure to a customer or third party to a financial instrument failing to meet its contractual obligations.

 

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 via its Services and Incubation Agreements, under which Element 7, LLC has agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out and incur certain fees and expenses on behalf of these E7 Carve-Out entities as part of and as performance for such services.

 

As of December 31, 2020, no final licenses have been granted pursuant to any of the 16 E7 Carve-Out license applications. As such, there are no cash flows from operating activities associated with the E7 Carve-Out.

 

Currency Risk

 

The operating results and financial position of the Company are reported in U.S. dollars. All expenditures associated with licenses applications, and all assets and liabilities as of December 31, 2020 are U.S. dollar denominated.

 

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. As of December 31, 2020, the Company’s sole financial liability is an unsecured debt with no payment terms and therefore is not subject to interest rate risk.

 

K - 7

 

 

Price Risk

 

Price risk is the risk of variability in fair value due to movements in equity or market prices. As of December 31, 2020, the Company’s sole asset is a deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California. This asset is not subject to price risk.

 

Recent Developments

 

Effective February 23, 2021 GH Group, Inc. entered into a Merger and Exchange Agreement with Element 7 CA, LLC whereby GH Group, Inc. would obtain all of the equity interest held by E7 in seventeen licenses, some of which are partially owned. GH Group, Inc. is obligated to purchase all such interests of each license that meets the conditions for sale and E7 is obligated to sell such equity interests. The consideration if $1,500,000 for 100% of the equity interests in each license holding entity payable in shares of post-close Mercer Park Brand Acquisition Corp. at $10 per share. Conditions to close include the closing of the Mercer Park merger, the availability of $25,000,000 for development of retail licenses, and the delivery by E7 of certain leases.

 

K - 8

 

 

APPENDIX L – BRND UNAUDITED PRO FORMA FINANCIAL STATEMENTS

 

(See attached)

 

L - 1

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2020

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

Mercer Park Brand Acquisition Corp.

 

Pro Forma Consolidated Financial Statements

 

Pro Forma Consolidated Financial Position 1
Pro Forma Consolidated Statement of Operations 2
   
Notes to the Pro Forma Consolidated Financial Statements      3-12

 

 

 

Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Financial Position

 

As at December 31, 2020

 

    Mercer Park
BRAND
    GH Group                 Subtotal         Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     iCann     Element 7     December 31, 2020         Adjustments     December 31, 2020  
US$   $     $     December 31, 2020     December 31, 2020     $     Notes   $     $  
ASSETS                                              
Current                                                              
Cash     2,095,023       4,535,251       158,928               6,789,202       5a     407,537,056       365,936,258  
                                              5d     (118,890,000 )        
                                              5f     (16,100,000 )        
                                              5i     85,000,000          
                                              5l     (400,000 )        
                                              5k     2,000,000          
Deposit                             61,893       61,893       5k     10,000,000       10,061,893  
Accounts receivable, trade, no allowance     -       5,141,021                       5,141,021                     5,141,021  
Income tax recoverable     1,209,852       -                       1,209,852                     1,209,852  
Inventory     -       6,866,002       343,289               7,209,291                     7,209,291  
Prepaid Expenses and other assets     -       1,018,212       61,528               1,079,740                     1,079,740  
Notes Receivables             904,534                       904,534                     904,534  
      3,304,875       18,465,020       563,745       61,893       22,395,533             369,147,056       391,542,589  
Operating Lease Right-of-Use Assets,                                                              
Net             2,532,629               538,065       3,070,694                     3,070,694  
Marketable securities held in a escrow account     407,537,056       -                       407,537,056       5a     (407,537,056 )     -  
Intangible assets     -       5,279,000               153,477       5,432,477       5d     171,920,360       214,103,880  
                                              5e     (153,477 )        
                                              5e     24,000,000          
                                              5l     12,904,520          
Property, plant and equipment     -       27,192,027       692,645               27,884,672       5d     92,420,992       120,305,664  
Goodwill     -       4,815,999                       4,815,999                     4,815,999  
Deferred tax assets     598,435       -                       598,435       5c(iii)     (598,435 )     -  
Investments             10,701,868                       10,701,868       5l     (2,045,309 )     8,656,559  
Other long term assets     -       554,266                       554,266                     554,266  
Total assets     411,440,366       69,540,809       1,256,390       753,435       482,991,000             260,058,651       743,049,651  
                                                               
Liabilities                                                              
Current                                                              
Accounts payable and accrued liabilities     396,779       6,570,715       875,599               7,843,093       5g     6,000,000       13,843,093  
Income tax payable     -       4,740,003       209,466               4,949,469                     4,949,469  
Debts/notes payable - current portion     -       601,188                       601,188                     601,188  
Derivative Liabilities             7,365,000                       7,365,000                     7,365,000  
Operating Lease Liabilities - current portion             327,329               155,906       483,235                     483,235  
Due to related parties     349,034       -               531,121       880,155       5e     (531,121 )     349,034  
      745,813       19,604,235       1,085,065       687,027       22,122,140             5,468,879       27,591,019  
                                                               
Deferred underwriters’ commission     16,100,000       -                       16,100,000       5f     (16,100,000 )     -  
Class A restricted voting shares subject to redemption     402,500,000       -                       402,500,000       5b     (402,500,000 )     -  
Debts payable - Non-current portion     -       19,072,858                       19,072,858       5j     (18,684,492 )     388,366  
Operating Lease Liabilities - Non-current portion             2,318,852               451,259       2,770,111                     2,770,111  
Deferred Tax Liabilities             1,420,583                       1,420,583                     1,420,583  
Other Non- Current Liabilities     -       849,358                       849,358                     849,358  
Total liabilities     419,345,813       43,265,886       1,085,065       1,138,286       464,835,050             (431,815,613 )     33,019,437  
                                                               
Additional paid-in-capital     (11,684,284 )     -                       (11,684,284 )     5b     402,500,000       667,345,361  
                                              5c(ii)     (390,815,716 )        
                                              5d     100,000,000          
                                              5d     45,451,352          
                                              5e     24,000,000          
                                              5e     531,121          
                                              5e     (153,477 )        
                                              5c(i)     393,996,118          
                                              5c(ii)     26,061,981          
                                              5i     85,000,000          
                                              5j     (18,001,529 )        
                                              5e     584          
                                              5l     (171,325 )        
                                              5l     10,630,536          
Preferred Stock                                             5k     12,000,000       48,686,021  
                                              5j     18,684,492          
                                              5j     18,001,529          
Retained earnings     3,778,837       -                       3,778,837       5i     (3,778,837 )     -  
                                              5g     (6,000,000 )     (6,000,000 )
Members’ equity     -       26,274,923       171,325       (384,267 )     26,061,981       5c(ii)     (26,061,981 )     -  
Non-Controlling Interest                             (584 )     (584 )     5e     (584 )     (1,168 )
Total Shareholders’ Equity     (7,905,447 )     26,274,923       171,325       (384,851 )     18,155,950       -     691,874,264       710,030,214  
                                                               
Total liabilities and members’ equity     411,440,366       69,540,809       1,256,390       753,435       482,991,000             260,058,651       743,049,651  

 

1

 

 

Mercer Park Brand Acquisition Corp. 

Unaudited Pro Forma Consolidated Statement of Operations 

As at December 31, 2020

 

  Mercer Park BRAND     GH Group     iCann     Element 7                   Consolidated  
    December 31,
2020
    December 31,
2020
    December 31,
2020
    December 31,
2020
    Subtotal         Pro-Forma
Adjustments
    December 31,
2020
 
US$    $     $           $     $      Notes   $     $  
Revenues, net of discounts   -     48,259,601     3,607,307           51,866,908               51,866,908  
Cost of goods sold   -       29,519,143       2,621,272               32,140,415                     32,140,415  
      -       18,740,458       986,035       -       19,726,493             -       19,726,493  
Gross profit (loss)     -       18,740,458       986,035       -       19,726,493             -       19,726,493  
                                                               
Expenses                                                              
Transaction costs     -       -                       -       5g     6,000,000       6,000,000  
General and administrative     752,259       18,637,477       1,798,289       274,397       21,462,422                     21,462,422  
Sales and marketing     -       1,489,664       166,784               1,656,448                     1,656,448  
Professional Fees     -       2,040,004       71,570               2,111,574                     2,111,574  
Depreciation and Amortization     -       2,576,263       108,672               2,684,935                     2,684,935  
Foreign exchange loss (gain)     43,142       -                       43,142                     43,142  
Total Expenses     795,401       24,743,408       2,145,315       274,397       27,958,521             6,000,000       33,958,521  
                                                               
Net income (loss) from operations     (795,401 )     (6,002,950 )     (1,159,280 )     (274,397 )     (8,232,028 )           (6,000,000 )     (14,232,028 )
                                                               
Other (income) expense                                                              
Share of (income) loss on equity investments     -       2,126,112                       2,126,112                     2,126,112  
Interest expense     -       2,179,137       327,104               2,506,241                     2,506,241  
Interest income     (1,742,747 )     (115,572 )                     (1,858,319 )                   (1,858,319 )
Loss on Change in Fair Value of Derivative Liablities             251,663                       251,663                     251,663  
Other expense (income)     -       (203,345 )     32,566               (170,779 )                   (170,779 )
Total other (income) expense     (1,742,747 )     4,237,995       359,670       -       2,854,918             -       2,854,918  
                                                               
Income tax (recovery) expense     -       6,418,533       207,868               6,626,401                     6,626,401  
                                                               
Net Income (loss) and comprehensive income (loss)     947,346       (16,659,479 )     (1,726,818 )     (274,397 )     (17,713,348 )           (6,000,000 )     (23,713,348 )
                                                               
Net Income (Loss) Attributable to Non-Controlling Interest                             (584 )     (584 )     5e     584       -  
                                                               
Net Loss Attributable to Members Interest     947,346       (16,659,479 )     (1,726,818 )     273,813       (17,713,932 )           (5,999,416 )     (23,713,348 )

 

2

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

1) Description of Transactions

 

The unaudited pro forma combined financial statements (the “Pro Forma Financial Statements”) of Mercer Park Brand Acquisition Corp. (“BRND” or the “Corporation”) reflect various adjustments to give effect to the following proposed acquisitions:

 

Acquisition of GH Group, Inc.

 

On April 8, 2021, BRND announced that it had entered into a definitive purchase agreement (the Definitive Agreement”) with GH Group, Inc. (“GH Group” or the “Target Business”) pursuant to which, among other things, BRND shall indirectly acquire all of the equity of GH Group (collectively, the “Transaction”). The Transaction constitutes BRND’s qualifying transaction. GH Group is a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in California.

 

The Target Business will be acquired in a stock transaction paid via a combination of newly issued subordinate voting shares and multiple voting shares (“MVS”) in BRND (the “Purchase Consideration”), the proportions of which are to be mutually agreed between the parties, with shares issued at $10.00 per share. The Purchase Consideration to be paid at closing is the value of shares equal to (i) the purchase price of $325 million, minus (ii) the amount of indebtedness of GH Group and its direct and indirect subsidiaries as of the data immediately preceding the Transaction, plus (iii) the amount of cash of GH Group and its direct and indirect subsidiaries on the date immediately preceding the Transaction, and further adjusted by (iv) the amount of working capital on the date immediately preceding the Transaction relative to the working capital target of $15 million. The total consideration to be received by GH Group and its shareholders will also include an earn-out component based on share price trading thresholds, together with the Purchase Consideration, the “Aggregate Consideration”. The Aggregate Consideration is subject to post-closing adjustments based on working capital targets, closing cash and the amount of closing indebtedness.

 

In addition to other closing conditions, BRND will be obligated to have a minimum of $185 million in cash at the closing of the Transaction: (i) before any cash consideration, as applicable, is payable for any additional acquisitions; (ii) after any payments due and payable for BRND’s expenses related to the closing of the Transaction, including all costs, fees, expenses and payments contingent on the closing of the Transaction; and (iii) after reduction for the aggregate amount of payments required to be made in connection with the BRND stockholder redemptions; (iv) plus the aggregate PIPE proceeds and other replacement cash proceeds; and (v)after taking into account any debt or payables on BRND’s balance sheet as of the closing of the Transaction (collectively, the “Closing Cash”).

 

3

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

Completed Acquisition by GH Group, Inc.

 

On January 1, 2021 GH Group 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 (“the iCANN Acquisition”). Since the acquisition was a subsequent event as of December 31, 2020, the iCANN financial statements did not meet the criteria for consolidation with GH Group and is therefore presented on a standalone basis for purposes of the pro forma financial statements. Previously iCANN was held by GH Group under the investment method of accounting as a result of significant but non-controlling influence over iCANN. Pursuant to the terms of the merger agreement between GH Group and iCANN the following occurred: (i) GH Group 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) GH Group paid $400,000 in cash to four holders of iCANN equity interests: (iii) GH Group issued 7,554,679 Class A Common shares to holders of iCANN equity interests; and (iv) GH Group issued an additional 500,000 Class A Common shares to brokers and consultants.

 

Proposed Acquisitions by GH Group, Inc.

 

The Greenhouse

 

GH Group has executed an agreement with Glass Investment Project, Inc. whereby GH Group has acquired the option, subject to satisfactory completion of due diligence and other conditions, to acquire real property and a greenhouse (the “Greenhouse”) located in Southern California from CEFF Camarillo Property, LLC. The Greenhouse is currently used to grow tomatoes and cucumbers, but it is anticipated, subject to the receipt of applicable regulatory approvals, that it will be re-purposed to grow cannabis. The purchase price payable to CEFF Camarillo Property, LLC for the real property and Greenhouse will be $118.9 million. In addition, the consideration commits $40 million for capital expenditures required to further develop or repurpose the Greenhouse following closing of the acquisition. Upon closing the transaction, 10 million BRND shares will be issued for total consideration of $100 million to Glass Investment Projects, Inc., the previous owner of the option to purchase the real property and the Greenhouse. In addition, another $75 million payable in the form of BRND shares, can be earned by Glass Investment Projects, Inc. over a period of 12 consecutive months commencing July 1, 2023 and ending June 30, 2024, which vest based on an EBITDA and Capex derived target calculation. The Greenhouse requires two earnest money deposits in the amount of $2 million and $8 million, respectively.

 

4

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

Element 7

 

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 BRND, 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 million.

 

In addition, GH Group has agreed to appoint Element 7, LLC as a consultant to assist with the obtaining of additional licenses in California.

 

US GAAP ASC 805 defines a business as an integrated set of activities and assets that is capable of being conducted and managed to provide a return to investors (or other owners, members or participants) by way of dividends, lower costs or other economic benefits. The Greenhouse and Element 7 acquisitions (the “GH Group Proposed Acquisitions”) did not meet the definition of a business according to ASC 805, and were recorded as an asset acquisition. The acquirer allocates the cost of acquisition to the assets acquired and liabilities assumed based on their relative fair values at the date of acquisition, and no goodwill or bargain purchase gain is recognized.

 

On April 8, 2021, BRND also announced a private placement of $85 million of shares of a subsidiary (the “Private Placement Shares”) at a price of US $10 per share (the “Private Placement”). The closing of the Private Placement will occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares will be exchanged for Equity Shares. The funds from the Private Placement will be used to fund the Resulting Issuer’s growth strategy, for working capital and for general corporate purposes. The Private Placement is subject to customary conditions, including the closing of the Transaction.

 

2) Basis of Presentation

 

The unaudited pro forma consolidated statement of financial position as at December 31, 2020 has been prepared by BRND to give effect to the GH Group Proposed Acquisitions and the iCANN Acquisition, as if they had occurred on December 31, 2020. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2020 have been prepared by BRND to give effect to the acquisitions, as if they had occurred on December 31, 2019.

 

The Pro Forma Financial Statements were prepared using the acquisition method of accounting in accordance with US GAAP ASC 805, Business Combinations, with GH Group being the legal acquiree and accounting acquirer. As such, GH Group is treated as the continuing reporting entity. The acquirer in a business combination is the combining entity that obtains control of the other combining business or businesses. The Pro Forma Financial Statements do not purport to project the future operating results of the combined company.

 

5

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

All financial data in the Pro Forma Financial Statements are presented in United States Dollars, which is the presentation currency of both BRND and GH Group.

 

The Pro Forma Financial Statements are derived from the following:

 

The audited financial statements of BRND as at and for the year ended December 31, 2020 and the related notes;

The audited financial statements of iCANN as at and for the year ended December 31, 2020 and the related notes;

The audited financial statements of GH Group as at and for the year ended December 31, 2020 and the related notes; and

The audited financial statements of Element 7 as at and for the year ended December 31, 2020 and the related notes.

 

Under ASC 805, acquisition-related transaction costs (i.e., advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges are not included as a component of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Since GH Group is treated as the continuing reporting entity for accounting purposes, the accounting for the acquisition is not dependent upon valuations. However, the accounting for the acquisitions by GH Group is dependent upon the allocation of the acquisition cost based on the relative fair values of the assets acquired and liabilities assumed at the date of acquisition. Accordingly, the respective fair values for the acquisitions are provisional and are subject to change.

 

Management will finalize the purchase accounting during the measurement period defined by ASC 805, which is no later than one year from the date of the respective acquisition dates. Accordingly, certain pro forma adjustments are preliminary and have been prepared solely for the purpose of these Pro Forma Financial Statements. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact on BRND’s future financial performance. In addition, the Pro Forma Statements of Operations do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve, the costs to integrate the operations of BRND and the GH Group Proposed Acquisitions, or any costs necessary to achieve these cost savings, operating synergies and revenue enhancements.

 

3) Accounting Policies

 

The accounting policies used in the preparation of these unaudited Pro Forma Consolidated Financial Statements are consistent with those described in the audited financial statements of GH Group for the year ended December 31, 2020. BRND has conducted a review of the accounting policies of iCANN and the GH Group Proposed Acquisitions and has not identified any differences in accounting policies that were applied historically by these entities. Additional accounting policies related to the Target Business will be included in the BRND consolidated financial statements after acquisition on going forward basis. For purposes of these Unaudited Pro Forma Consolidated Financial Statements, certain reclassifications have been made to the historical financial statements (as described in notes 5) to conform to the classifications adopted by BRND.

 

6

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

4) Accounting for Acquisitions

 

Completed Acquisitions by GH Group, Inc.

 

While the iCANN financial statements are presented on a standalone basis as of December 31, 2020, this acquisition has closed as of January 1, 2021 and is not contingent on the Transaction.

 

The following is a summary of the purchase price and allocation for the iCANN Acquisition:

 

          i.  
          ICANN  
          $  
Cash     a)     $ 400,000  
Convertible Note (including interest)     b)     $ 2,045,309  
Share Capital (based on $325M valuation)     c)     $ 10,630,536  
Total Consideration           $ 13,075,845  
                 
Cash           $ 158,928  
Inventory           $ 343,289  
Other assets and liabilities           $ (1,023,537 )
Property, Plant and Equipment           $ 692,645  
Intangible Assets - License in Process           $ 12,904,520  
Net Assets Acquired           $ 13,075,845  

 

i. The iCANN Acquisition

 

Pursuant to the terms of the Definitive Agreement, GH Group satisfied the purchase consideration through the following:

 

a) GH Group paid $400,000 in the form of cash consideration;

 

b) GH Group 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;

 

c) GH Group issued 7,554,679 Class A Common shares to holders of iCANN equity interests; and GH Group issued an additional 500,000 Class A Common shares to brokers and consultants. The shares represented 3.3% of the total outstanding shares of GH Group at the time of acquisition, which were valued at the deemed valuation from the Transaction, for purposes of this estimated purchase price calculation.

 

7

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

Proposed Acquisitions by GH Group, Inc.

 

The Greenhouse and Element 7 acquisitions did not meet the definition of a business according to ASC 805, and were recorded as an asset acquisition. US GAAP ASC 805 defines a business as an integrated set of activities and assets that is capable of being conducted and managed to provide a return to investors (or other owners, members or participants) by way of dividends, lower costs or other economic benefits. The acquirer allocates the cost of acquisition to the assets acquired and liabilities assumed based on their relative fair values at the date of acquisition, and no goodwill or bargain purchase gain is recognized.

 

Each of the GH Group Proposed Acquisitions is subject to specific terms relating to satisfaction of the purchase price by BRND and incorporates payments in cash and shares. In addition, the purchase prices may be adjusted for consideration of acquisition date working capital. No working capital adjustments have been reflected in the Pro Forma Financial Statements. ASC 805 requires that contingent consideration be estimated and recorded at the acquisition date with subsequent changes to estimates reflected in earnings. For purposes of the Unaudited Pro Forma Consolidated Financial Statements, all estimates of contingent consideration are preliminary and subject to change.

 

The following is a summary of the purchase price and allocation for each of the Proposed Acquisitions by GH Group, Inc:

 

    ii.     iii.       iv.        
    BRND     The Greenhouse       Element 7     Total  
    $     $       $     $  
Cash           $ 118,890,000             $ 118,890,000  
Share Capital   $ 393,996,118     $ 100,000,000     $ 24,000,000     $ 517,996,118  
Earn Out           $ 45,451,352             $ 45,451,352  
Total Consideration   $ 393,996,118     $ 264,341,352     $ 24,000,000     $ 682,337,470  
                                 
Cash (net of Underwriters’ Commission)   $ 409,632,079                     $ 409,632,079  
Deferred Underwriters’ Commission   $ (16,100,000 )                   $ (16,100,000 )
Other assets and liabilities   $ 464,039                     $ 464,039  
Property, Plant and Equipment           $ 92,420,992             $ 92,420,992  
Intangible Assets - License in Process           $ 171,920,360     $ 24,000,000     $ 195,920,360  
Net Assets Acquired   $ 393,996,118     $ 264,341,352     $ 24,000,000     $ 682,337,470  

 

8

 

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

ii. GH Group Acquisition

 

Pursuant to the terms of the Definitive Agreement, BRND will satisfy the purchase consideration in the form of shares for GH Group through the following:

 

GH Group purchase price is to be paid in the form of newly issued subordinate voting shares (or exchangeable shares exchangeable thereinto on a 1 for 1 basis) and multiple voting shares of BRND;

 

A portion of the GH Group purchase price is derived from an earn-out provision for additional shares based on stock price trading thresholds of the BRND

 

As GH Group has been determined to be the accounting acquiror, these pro forma financial statements reflect the issuance of equity instruments by GH Group to acquire the net assets of BRND.

 

iii. The Greenhouse Acquisition

 

Pursuant to the terms of the Definitive Agreement, BRND will satisfy the purchase price of $264.3 million for The Greenhouse through the following:

 

$118.9 million is to be paid in the form of cash consideration

 

$100 million is to be paid in the form of shares of BRND pursuant to the exercise of the option

 

A portion of The Greenhouse purchase price is derived from an earn-out provision that may entitle the sellers to earn additional stock consideration, if certain milestones are achieved as it relates to EBITDA and Capex. For the purposes of this pro forma financial statement, the value of the earn out consideration has been estimated at $45.5 million.

 

The property, plant, and equipment of The Greenhouse to be acquired has been valued based on a preliminary fair value estimate. The excess of the purchase price over the value of the property, plant, and equipment has been assigned to the intangible assets representing in process cannabis licenses.

 

iv. Element 7 Acquisition

 

Pursuant to the terms of the Definitive Agreement, BRND will satisfy the purchase price of $24 million for Element 7 by issuance of up to 2.4 million of subordinate voting shares

 

9

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

5) Pro Forma adjustments to the Pro Forma Consolidated Financial Statements in connection with the Acquisitions of the Target Business

 

The following summarizes the pro forma adjustments in connection with the acquisitions of the Target Business to give effect to the acquisitions as if they had occurred on December 31, 2019:

 

a) The release of $407.5 million of marketable securities held in escrow in the form of US Treasury Bills transferred to cash;

 

b) 40,250,000 Class A Restricted Voting Shares valued at $402,500,000 (plus interest) are transferred to equity. The number of Class A Restricted Voting Shares that will be redeemed will occur at the time of completion of the transactions and cannot be known until shortly before the time that the transactions are affected. It is assumed for illustrative purposes in this pro forma statement that no Class A Restricted Voting Shares will be redeemed.

 

From a sensitivity perspective:

 

If this adjustment had been presented assuming a redemption of 25% of Class A Restricted Voting Shares, then $305.63 million of restricted cash and flexible guaranteed investment certificates will be converted into cash resources and $101.87 will be used to settle the redemption of 25% of the Class A Restricted Voting Shares.

 

c) deemed acquisition of BRND by GH Group:

 

(i) the net assets of BRND are acquired in exchange for the deemed purchase price of $393 million described in 4(ii);

(ii) the historical equity of BRND is eliminated and historical equity of GH Group is transferred from Members’ equity to APIC

(iii) the deferred tax assets are eliminated;

 

d) Greenhouse acquisition as described in 4(iii);

 

e) Element 7 acquisition as described in note 4(iv); the carrying values of the intangible assets, minority interest and due to related parties are eliminated;

 

f) Payment of the $16.1 million underwriters’ commission on the Class A voting restricted shares;

 

10

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

g) To incorporate estimated transaction cost of $6 million in connection with the acquisition of the Target Business.

 

h) The tax rate is expected to be approximately 21% as a result of acquisitions. However, no impact of tax other than what is reflected historically on the financial statements of the Issuer and the entities being acquired, has been shown in the Pro Forma statements;

 

i) The Private Placement of $85 million of shares;

 

j) Represent an estimated conversion on the convertible debt instruments, with only $388,366 of non-convertible debt remaining after the acquisition of the Target Business. The $18,684,492 of convertible debt valued at $36,686,021 results in another equity reclassification to preferred stock of $18,001,529;

 

k) GH Group, Inc. is expected to close on a Preferred Stock financing for up to $12 million to pay for the $10 million Greenhouse deposit required as part of the acquisition.

 

l) The iCANN Acquisition as described in 4(i)

 

6) Pro Forma Earnings per Share (“Pro Forma EPS”)

 

The Pro Forma EPS have been adjusted to reflect the pro forma unaudited consolidated statement of operations for the year ended December 31, 2020. In addition, the number of shares used in calculating the unaudited pro forma consolidated basis and diluted earnings per share has been adjusted to reflect the estimated total number of subordinate voting shares of BRND (or exchangeable shares exchangeable thereinto on a 1 for 1 basis) that would be outstanding as of the closing of the acquisition of the Target Business.

 

As a result of the acquisition of the Target Business, the pro forma shares of GH Group are estimated based on expected purchase adjustments summarized below:

 

GH Group Purchase Adjustment   Total  
$325 Million Purchase Price     325,000,000  
Plus: Estimated Cash as of 12.31.20     4,535,251  
Minus: Cash paid for ICANN net of cash received)     (241,072 )
Minus: Remaining Debt     (989,554 )
Minus: Estimated Settlement of Convertible Debt     (36,686,021 )
Plus: Estimated Settlement of Options     28,591,367  
Total Value     320,209,971  
Total Share Value at $10 per Share     32,020,997  

 

11

 

 

Mercer Park Brand Acquisition Corp.

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at December 31, 2020 (expressed in US$)

 

The following is a breakdown of the pro forma shares that will be issued and outstanding immediately following the proposed transaction with the EPS calculation as of December 31, 2020:

 

                      Year Ended  
Shares Outstanding - Assuming No Redemptions                     December 31, 2020  
Net Loss                     $ (23,713,348 )
                                 
      Class A       Class B       Common       Total  
GH Group Shares (net of estimated purchase adjustments)                     32,020,997       32,020,997  
BRND Shares     40,250,000       10,198,751               50,448,751  
Class B Shares convert on 100-1 basis into MVS     101,988       (10,198,751 )             (10,096,763 )
Acquisition of The Greenhouse                     10,000,000       10,000,000  
Acquisition of Element 7                     2,400,000       2,400,000  
The Private Placement                     8,500,000       8,500,000  
Total Shares Outstanding     40,351,988       -       52,920,997       93,272,985  
                                 
Loss per share - basic and diluted                           $ (0.25 )

 

12

 

 

HOW TO CAST YOUR VOTE IN SUPPORT OF THE TRANSACTION RESOLUTION AND THE

EQUITY INCENTIVE PLAN RESOLUTION

 

Time is running short. Vote today, or no later than 11:00 a.m. (Toronto time) on May 31, 2021. In order to ensure that your vote is received in time for the Shareholders’ Meeting, to be held on June 2, 2021, at 11:00 a.m. (Toronto time), in a virtual-only format which will be conducted via live audio webcast at https://web.lumiagm.com/207586819, we recommend that you vote in the following ways as soon as possible.

 

 

          REGISTERED SHAREHOLDERS
      BENEFICIAL SHAREHOLDERS   If your BRND Shares and are held in your name
VOTING     If your BRND Shares are held with a   and represented by a physical certificate or DRS
METHOD     broker, bank or other intermediary   advice
INTERNET     Visit www.proxyvote.com and enter your 16 digit control number located on the enclosed voting instruction form   Visit https://login.odysseytrust.com/pxlogin and enter your 12 digit control number located on the enclosed form of proxy.
TELEPHONE     Canadian/U.S.: Call 1-800-454-8683 and provide your 16 digit control number located on the enclosed voting instruction form   N/A
MAIL     Vote by mailing in your completed, signed voting instruction form, using the business reply envelope included in your package   Odyssey Trust Company
Suite 702, 67 Yonge St.
Toronto, Ontario, Canada M5E 1J8
Attention: Proxy Department

 

If you have any questions or require any assistance in executing your proxy or voting instruction form, please contact Odyssey Trust Company or your tax, financial, legal or other professional advisors.

 

 

 

Exhibit 99.11

 

NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS

 

NOTICE IS HEREBY GIVEN that an annual and special meeting (the “Shareholders’ Meeting”) of the holders (collectively, the “BRND Shareholders”) of (i) Class A restricted voting shares of BRND (the “BRND Class A Restricted Voting Shares”) and (ii) Class B shares of BRND (the “BRND Class B Shares”, and together with the BRND Class A Restricted Voting Shares, the “BRND Shares”) of Mercer Park Brand Acquisition Corp. (“BRND”, the “Corporation” or “our”) is scheduled to be held via live webcast on June 2, 2021 at 11:00 a.m. (Toronto time), for the following purposes:

 

1. To consider, and, if thought advisable, to pass a special separate resolution (the “Transaction Resolution”), the full text of which is set forth in Appendix “A” attached to the accompanying management information circular (the “Circular”), to:

 

· approve BRND’s qualifying transaction (the “Transaction”), pursuant to which, among other things, BRND proposes to merge with GH Group, Inc. (“GH Group”) for a value (payable to sellers of GH Group that are non-accredited investors in cash and payable to all other such sellers in shares) of US$325 million pursuant to the terms of the definitive merger agreement in respect thereof (as it may be amended), which includes authorizing the issuance of: (i) subordinate, restricted or limited voting shares of BRND (“Equity Shares”) issuable upon the exchange of certain exchangeable shares; (ii) nominal value multiple voting shares of BRND (“Multiple Voting Shares”) to the founders of GH Group for nominal consideration; (iii) US$85 million in Equity Shares (priced at US$10.00 per share) upon the conversion of certain private placement shares of a wholly-owned subsidiary of BRND; (iv) US$175 million in Equity Shares (US$100 million of which shall be priced at US$10.00 per share and US$75 million of which shall be priced based on the volume weighted average price of the Equity Shares for twenty (20) consecutive trading days immediately prior to October 31, 2024 and which shall vest pursuant to a defined formula) pursuant to a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm complex located in southern California; and (v) up to US$24 million in Equity Shares (priced at US$10.00 per share) pursuant to a Merger and Exchange Agreement dated as of February 23, 2021 between GH Group and Element 7, LLC (“Element 7”), whereby GH Group has the right, subject to satisfactory completion of due diligence, to merge with up to 17 subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California, by way of a separate merger for each entity;

 

· approve the amendment of the notice of articles and articles of BRND (the “Articles”), as set out in Schedule “A” to the Transaction Resolution attached as Appendix “A” to the Circular, to:

 

· create two new share classes of the Corporation, being the restricted voting shares (“Restricted Voting Shares”) and the limited voting shares (“Limited Voting Shares”), and to attach special rights and restrictions to those shares, including applying coattail terms to such shares similar to those applicable to the existing subordinate voting shares of the Corporation (“Subordinate Voting Shares”);
· amend the special rights and restrictions attached to the existing Subordinate Voting Shares, including without limitation, by amending the requirements on who may hold Subordinate Voting Shares;

  · amend the special rights and restrictions attached to the existing Multiple Voting Shares in order to convert the terms of such class of shares into nominal value preferred shares with a US$0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carrying 50 votes per share, having limited transferability and being subject to a three (3)-year sunset provision, at which time they would be automatically redeemed;

 

 I

 

 

  · amend the special rights and restrictions attached to the BRND Class A Restricted Voting Shares and BRND Class B Shares so that, effective simultaneously with the closing of the acquisition of GH Group, the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares shall be converted on a one-for-one basis into Equity Shares (with the result that, immediately following the closing of the Transaction, the non-redeemed BRND Class A Restricted Voting Shares and BRND Class B Shares will be converted into Equity Shares); and

· create a new class of shares of the Corporation, being the preferred shares, which will be unlimited in number and be issuable in series with such terms as are determined by the board of directors of the Corporation from time to time (it is not intended that such preferred shares will be used for anti-takeover purposes);

 

· approve a second amendment of the notice of articles and Articles, following the redemption and/or conversion of the BRND Class A Restricted Voting Shares and BRND Class B Shares, as applicable, to:

 

· alter the authorized share structure of BRND to remove the BRND Class A Restricted Voting Shares and BRND Class B Shares; and
· adopt amended and restated articles substantially in the form set out in Schedule “B” to the Transaction Resolution attached as Appendix “A” to the Circular.

 

The Transaction Resolution will be required to be approved by: (i) a special separate resolution of the holders of BRND Class A Restricted Voting Shares; (ii) a special separate resolution of the holders of BRND Class B Shares; (iii) an ordinary resolution of the minority holders of BRND Class A Restricted Voting Shares (i.e., other than those held by (A) the GH Group Founders4, and (B) the holders of BRND Class B Shares and other persons not permitted to vote thereon under Ontario Securities Commission Rule 56-501 – Restricted Shares); and (iv) a special resolution of all BRND Shareholders, voting together as if they were a single class.

 

The Transaction Resolution will also provide that, upon closing of the Transaction, the initial auditors of the Corporation will be Macias, Gini and O’Connell LLP and that the directors are authorized to fix the remuneration thereof.

 

2. To consider, and, if thought advisable, to pass an ordinary resolution (the “Equity Incentive Plan Resolution”), the full text of which is set forth in Appendix “B” attached to the accompanying Circular, to approve, conditional on the closing of the Transaction, the proposed Equity Incentive Plan, which includes authorizing the grant of rights to acquire up to 16,406,629 Equity Shares.

 

The Equity Incentive Plan Resolution will be required to be approved by an ordinary resolution of all BRND Shareholders, voting together as if they were a single class of shares.

 

3. To elect Kyle Kazan, Graham Farrar, Jamie Mendola, Jocelyn Rosenwald, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De Le Torre, on an individual basis, as directors of the Corporation (the “Resulting Issuer Board”) to hold office conditional upon closing of the Transaction.

 

The election of the nominees to the Resulting Issuer Board will be required to be approved, on an individual basis, by a simple majority of the votes cast by all BRND Shareholders, voting together as if they were a single class of shares.

 

4. To transact such further or other business as may properly come before the Shareholders’ Meeting or any adjournment(s) or postponement(s) thereof.

 

 

4 The GH Group Founders do not, as of the date hereof, hold, beneficially own or control, directly or indirectly, any BRND Class A Restricted Voting Shares.

 

 II

 

 

Out of an abundance of caution, to proactively deal with the unprecedented public health impact of the novel coronavirus disease, also known as COVID-19, and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, we will hold the Shareholders’ Meeting in a virtual-only format, which will be conducted via live audio webcast. All BRND Shareholders, regardless of their geographic location, will have an equal opportunity to participate in the Shareholders’ Meeting and engage with directors and management of BRND as well as with other BRND Shareholders. BRND Shareholders will not be able attend the Shareholders’ Meeting in person. At the Shareholders’ Meeting, if you virtually attend, you will have the opportunity to ask questions and vote on the Transaction and a number of important related matters. Alternatively, you may vote by proxy (if you are a registered shareholder) or by following the instructions on the voting information form (if you are a beneficial shareholder), in each case, by following the applicable directions.

 

The record date for the determination of registered BRND Shareholders entitled to receive notice of and to vote at the Shareholders’ Meeting is the close of business on May 3, 2021 (the “Record Date”). Only BRND Shareholders whose names are entered in the register of BRND Shareholders as of the close of business on the Record Date will be entitled to receive notice of, and to vote their shares at, the Shareholders’ Meeting. Registered BRND Shareholders and duly appointed proxyholders will be able to virtually attend, participate, vote and ask questions at the Shareholders’ Meeting online at https://web.lumiagm.com/207586819. Beneficial shareholders of BRND (being shareholders who hold their shares through a securities dealer or broker, bank, trust company or trustee, custodian, nominee or other intermediary), who have not duly appointed themselves as their proxy will be able to virtually attend the Shareholders’ Meeting only as guests and to listen to the webcast but not be able to participate, ask questions or vote at the Shareholders’ Meeting. This notice of annual and special meeting of BRND Shareholders is accompanied by (i) the Circular, (ii) a form of proxy (for registered shareholders), and/or (iii) a voting instruction form (for beneficial shareholders). A letter of transmittal will be available upon a request being made to the Corporation.

 

As a result of the foregoing, among other things, all BRND Class A Restricted Voting Shares in respect of which valid notices of redemption in respect of the Transaction have been deposited by the Redemption Deposit Deadline (as defined in the Circular) and not withdrawn will be redeemed by BRND effective immediately prior to the closing of the Transaction (the “Effective Time”), and, upon receipt by each such BRND Shareholder of the redemption amount for their BRND Class A Restricted Voting Shares in accordance with the constating documents of BRND, each such redeeming BRND Shareholder shall cease to have any rights as a registered BRND Shareholder, and such BRND Class A Restricted Voting Shares shall be cancelled and cease to be outstanding.

 

The specific details of the matters proposed to be put before the Shareholders Meeting are set forth in the Circular accompanying this Notice. The full text of the Transaction Resolution and the Equity Incentive Plan Resolution are set out in Appendices “A” and “B”, respectively, to the Circular. A form of proxy or voting instruction form also accompanies this Notice.

 

If the Transaction Resolution is not approved by the registered BRND Shareholders at the Shareholders’ Meeting, the Equity Incentive Plan Resolution will not be proceeded with at the Shareholders’ Meeting.

 

A registered BRND Shareholder may virtually attend the Shareholders’ Meeting or may be represented by proxy. If you are a registered BRND Shareholder and you are unable to virtually attend the Shareholders’ Meeting, we encourage you to vote by completing the enclosed form of proxy or, alternatively, electronically or by telephone, in each case in accordance with the enclosed instructions. Voting by proxy will not prevent you from voting virtually at the Shareholders’ Meeting if you virtually attend the Shareholders’ Meeting and will ensure that your vote will be counted if you are unable to virtually attend. A proxy will not be valid for use at the Shareholders’ Meeting unless the completed form of proxy is delivered to the offices of BRND’s transfer agent, Odyssey Trust Company, at Suite 702, 67 Yonge St., Toronto, Ontario, Canada M5E 1J8, Attention: Proxy Department prior to 11:00 a.m. on May 31, 2021 or, if the Shareholders’ Meeting is adjourned, at least 48 hours (excluding Saturdays, Sundays and holidays) prior to the time set for the reconvening of the Shareholders’ Meeting. A person appointed as a proxyholder need not be a shareholder.

 

If you are a non-registered BRND Shareholder, please refer to the section in the Circular entitled “General Proxy Information — Advice to Beneficial BRND Shareholders” as well as the instructions set out in the voting instruction form or other instructions received from your financial intermediary for information on how to vote your BRND Shares.

 

 III

 

 

Registered holders of BRND Class A Restricted Voting Shares have the right to redeem all or a portion of their BRND Class A Restricted Voting Shares in accordance with their terms, provided that they deposit or, in the case of non-registered shareholders, instruct the applicable participant in the depository, trading, clearing and settlement systems administered by CDS Clearing and Depositary Services Inc. (“CDS”) to cause CDS to deposit their shares for redemption prior to 5:00 p.m. (Toronto time) on June 2, 2021. Notwithstanding the foregoing redemption right, no registered holder of BRND Class A Restricted Voting Shares, together with any affiliate of such holder or other person with whom such holder or affiliate is acting jointly or in concert, will be permitted to redeem more than an aggregate of 15% of the number of BRND Class A Restricted Voting Shares issued and outstanding. Redemptions of BRND Class A Restricted Voting Shares shall be funded out of BRND’s escrow account, which, as of April 29, 2021, consisted of US$407,590,197 or approximately US$10.11 per Class A Restricted Voting Share (net of applicable taxes).

 

DATED at New York, New York, this 12th day of May, 2021.

 

BY ORDER OF THE BOARD OF DIRECTORS

 

(Signed) “Jonathan Sandelman”

 

Jonathan Sandelman

Chairman and Director

 

 IV

 

Exhibit 99.12

 

Mercer Park Brand Acquisition Corp. Files Final Prospectus and Management
Information Circular for Proposed Qualifying Transaction with Glass House
Group

 

Confirms Date of Shareholders Meeting to Vote on the Qualifying Transaction

 

TORONTO, May 7, 2021 -- Mercer Park Brand Acquisition Corp. (NEO: BRND.A.U; OTCQX: MRCQF; “BRND” or the “Company”), a Special Purpose Acquisition Company (SPAC) which has entered into a definitive agreement to merge (the “Glass House Group Transaction”) with GH Group, Inc. (“GH Group”), California’s leading fully-integrated cannabis business, is updating the status of its proposed merger with GH Group.

 

Prospectus and Circular

 

BRND has filed a final non-offering prospectus (the “Prospectus”) with the Canadian securities authorities and a management information circular (the “Circular”) in respect of the upcoming meeting of the Company’s shareholders to approve the Glass House Group Transaction. The Prospectus and the Circular can be found under the Company’s profile at www.sedar.com.

 

As previously announced, the Company and GH Group announced a business combination to create the largest cannabis brand-building platform in California, the world’s largest cannabis market.

 

GH Group will support its existing and future portfolio of brands with unmatched capacity and distribution in the state. The combined company has planned expansions to reach 6 million ft2 of cultivation in state- of-the-art greenhouses, representing by far the largest capacity of any cannabis operator in California and an anticipated retail footprint of 21 operational dispensaries by Q1 2022, more than double the next largest retail operator in the state.

 

Further details of the proposed combination can be found in the Prospectus, the Circular, on the Company’s website at mercerparkbrand.com and in the press release issued by the Company on April 8, 2021.

 

Shareholders Meeting

 

The Company confirms that it plans to hold a shareholder meeting on June 2, 2021 to approve the Glass House Group Transaction. It is anticipated that the Glass House Group Transaction will close shortly thereafter. The expected closing date will be announced around the time of the meeting.

 

Investors who have redeemed their class A shares in conjunction with the extension have the right to withdraw their redemption prior to May 12, 2021 at 7:00 PM (Toronto time). There will be an additional opportunity to redeem class A restricted voting shares for cash before the closing of the Glass House Group Transaction by depositing their shares into the qualifying transaction redemption process, with an expected deposit deadline of June 2, 2021.

 

The Company encourages shareholders to remain fully invested through the closing of the Glass House Group Transaction.

 

 

 

 

About Mercer Park Brand Acquisition Corp.

 

BRND is a special purpose acquisition corporation launched in May 2019 to create the leading branded cannabis company in the U.S. For more information about BRND, please visit the BRND website at www.mercerparkbrand.com.

 

About GH Group, Inc.

 

GH Group is a rapidly growing, vertically integrated, California-focused organization that strives every day to realize its vision of excellence: compelling cannabis brands, produced sustainably, for the benefit of all. Led by a team of expert operators, proven businesspeople, and passionate plant lovers, it is dedicated to delivering rich cannabis experiences with respect for people, for the environment, and for the community, and an abiding commitment to justice, social equity, and sustainability.

 

Risk Factors

 

This investment opportunity involves a high degree of risk. You should carefully consider the risks and uncertainties described under “Risk Factors” in the Prospectus. If any of the risks and uncertainties described thereunder actually occur, alone or together with additional risks and uncertainties not currently known to BRND or GH Group, or that they currently do not deem material, BRND’s and GH Group’s business, financial condition, results of operations and prospects may be materially adversely affected. There can be no assurance that the Glass House Group Transaction will be completed, or, if it is, that the resulting company will be successful.

 

Additional Information About the Proposed Business Combination and Where to Find It

 

BRND and GH Group urge investors, shareholders and other interested persons to read the documents (including the Prospectus and Circular) filed with Canadian securities regulatory authorities in connection with the Glass House Group Transaction, as these materials contain important information about BRND, GH Group, the resulting company and the Glass House Group Transaction.

 

Company Contact:

 

Megan Kulick

T: (646) 977-7914

Email: IR BRND@mercerparklp.com

 

Investor Relations Contact:

 

Cody Cree or Jackie Keshner

Gateway Investor Relations

T: (949) 574-3860

Email: BRND@GatewayIR.com

 

 

 

Exhibit 99.13

 

       
Ontario Commission des 22nd Floor 22e étage
Securities valeurs mobilières 20 Queen Street West 20, rue Queen ouest
Commission de l’Ontario Toronto ON M5H 3S8 Toronto ON M5H 3S8

 

RECEIPT

 

Mercer Park Brand Acquisition Corp.

 

This is the receipt of the Ontario Securities Commission for the Long Form Prospectus of the above Issuer dated May 6, 2021 (the prospectus).

 

The prospectus has been filed under Multilateral Instrument 11-102 Passport System in British Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut. A receipt for the prospectus is deemed to be issued by the regulator in each of those jurisdictions, if the conditions of the Instrument have been satisfied.

 

May 7, 2021  
   
  Sonny Randhawa
   
  Sonny Randhawa
  Director, Corporate Finance Branch
   
  SEDAR Project # 3213714

 

 

 

Exhibit 99.14

GRAPHIC

Bureau of Cannabis Control (833) 768-5880 Adult-Use - Retailer License Provisional Storefront LICENSE NO: C10-0000293-LIC LEGAL BUSINESS NAME: Farmacy SB, Inc PREMISES: 128 W MISSION ST SANTA BARBARA, CA 93101 VALID: 6/26/2019 EXPIRES: 6/25/2021 Non-Transferable Prominently display this license  as required by Title 16 CCR § 5039   

Exhibit 99.15

GRAPHIC

Bureau of Cannabis Control (833) 768-5880 Adult-Use and Medicinal - Retailer License Provisional Storefront LICENSE NO: C10-0000044-LIC LEGAL BUSINESS NAME: BUD AND BLOOM PREMISES: 1327 ST. GERTRUDE PL E SANTA ANA, CA 92705 VALID: 5/10/2019 EXPIRES: 5/9/2021 Non-Transferable Prominently display this license  as required by Title 16 CCR § 5039   

GRAPHIC

Scan to verify this license. Valid: 5/10/2019 Expires: 5/9/2021 License No: C10-0000044-LIC Legal Business Name: BUD AND BLOOM Premises Address: 1327 ST. GERTRUDE PL E SANTA ANA, CA 92705 1.  Use your smartphone camera to scan the QR code for licensing information. 2.  If your camera doesn’t have scanning functionality, you can look up a location at CApotcheck.com using license number C10-0000044-LIC.

Exhibit 99.16

GRAPHIC

STATE OF CALIFORNIA DEPARTMENT OF PUBLIC HEALTH MANUFACTURED CANNABIS SAFETY BRANCH California Department of Public Health P.O. Box 997377, MS-7606 Sacramento, CA 95899-7377 Asif A. Maan Ph.D. Chief, Manufactured Cannabis Safety Branch Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. Asif A. Maan Ph.D. ANNUAL MANUFACTURING LICENSE LICENSE NUMBER: LICENSE TYPE: The licensee named herein is authorized to manufacture cannabis products at the licensed premises listed herein through the expiration date of this license. This annual license issued is in accordance with the provisions of Division 10 of the California Business and Professional Code and is not transferable to any other person or premises. The licensee is required by law to notify the Manufactured Cannabis Safety Branch of changes pertaining to this license. This license shall always be displayed in a prominent place at the licensed premises. This license shall be subject to suspension or revocation by the California Department of Public Health if it is found that manufacturing operation is in violation of Division 10 of the Business and Professions Code or regulations adopted thereunder. LICENSEE: EFFECTIVE DATE: EXPIRATION DATE: LICENSED PREMISES:

Exhibit 99.17

GRAPHIC

Bureau of Cannabis Control (833) 768-5880 Adult-Use and Medicinal - Distributor License Provisional LICENSE NO: C11-0000031-LIC LEGAL BUSINESS NAME: CA Manufacturing Solutions, LLC PREMISES: 1637 W CENTRAL AVE LOMPOC, CA 93436 VALID: 5/1/2019 EXPIRES: 4/30/2022 Non-Transferable Prominently display this license  as required by Title 16 CCR § 5039   

GRAPHIC

Scan to verify this license. Valid: 5/1/2019 Expires: 4/30/2022 License No: C11-0000031-LIC Legal Business Name: CA Manufacturing Solutions, LLC Premises Address: 1637 W CENTRAL AVE LOMPOC, CA 93436 1.  Use your smartphone camera to scan the QR code for licensing information. 2.  If your camera doesn’t have scanning functionality, you can look up a location at CApotcheck.com using license number C11-0000031-LIC.

Exhibit 99.18

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001624 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.19

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001582 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 503561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.20

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001589 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.21

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001599 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.22

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001622 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.23

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001633 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.24

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001652 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.25

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001652 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.26

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 01/03/2021 to 01/02/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001655 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.27

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 01/03/2021 to 01/02/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001664 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.28

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 01/03/2021 to 01/02/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001678 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.29

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 01/03/2021 to 01/02/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001683 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.30

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001703 Main Premises Address: License Type: Adult-Use-Processor 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.31

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 01/03/2021 to 01/02/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001696 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.32

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 01/03/2021 to 01/02/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001700 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.33

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: G&K Produce LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001702 Main Premises Address: License Type: Adult-Use-Nursery 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.34

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001628 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.35

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001629 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.36

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001630 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.37

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001635 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.38

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001654 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.39

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001657 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.40

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 02/21/2021 to 02/20/2022 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001660 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.41

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001647 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.42

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001649 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.43

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001665 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.44

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001667 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.45

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001668 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.46

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001670 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.47

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: K&G Flowers LLC 11/23/2020 to 11/22/2021 Main Premises APN: License Number: Santa Barbara County - 005-280-040 CCL18-0001673 Main Premises Address: License Type: Adult-Use-Small Mixed-Light Tier 1 3561 Foothill Road Carpinteria, CA 93013 Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.48

GRAPHIC

GRAPHIC

Exhibit 99.49

GRAPHIC

Bureau of Cannabis Control (833) 768-5880 Medicinal - Distributor-Transport Only License Provisional LICENSE NO: C13-0000080-LIC LEGAL BUSINESS NAME: MISSION HEALTH ASSOCIATES INC PREMISES: 5601 CASITAS PASS RD CARPINTERIA, CA 93013-3089 VALID: 7/9/2019 EXPIRES: 7/8/2021 Non-Transferable Prominently display this license  as required by Title 16 CCR § 5039   

GRAPHIC

Scan to verify this license. Valid: 7/9/2019 Expires: 7/8/2021 License No: C13-0000080-LIC Legal Business Name: MISSION HEALTH ASSOCIATES INC Premises Address: 5601 CASITAS PASS RD CARPINTERIA, CA 930133089 1.  Use your smartphone camera to scan the QR code for licensing information. 2.  If your camera doesn’t have scanning functionality, you can look up a location at CApotcheck.com using license number C13-0000080-LIC.

Exhibit 99.50

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000505 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road, Carpinteria, CA 93013 Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.51

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 06/08/2021 to 06/07/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0001009 Main Premises Address: License Type: Medicinal-Nursery 5601 Casitas Pass Road Santa Barbara, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.52

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 ---- NON-TRANSFERABLE ---- ---- POST IN PUBLIC VIEW ---- License Number: License Type: Premises APN: Valid: 5601 Casitas Pass Road Santa Barbara, CA 93013 Legal Business Name: 06/08/2020 to 06/07/2021 CCL18-0001009 Mission Health Associates, Inc. Premises Address: Santa Barbara County - 001-060-042 PROVISIONAL CANNABIS CULTIVATION LICENSE --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Medicinal-Nursery

Exhibit 99.53

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/26/2021 to 03/25/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0003034 Main Premises Address: License Type: Medicinal-Processor 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.54

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/16/2021 to 03/15/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000498 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.55

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000500 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.56

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000502 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.57

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/16/2021 to 03/15/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000503 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.58

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000506 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road, Carpinteria, CA 93013 Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.59

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000509 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.60

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000510 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.61

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: Mission Health Associates, Inc. 03/12/2021 to 03/11/2022 Main Premises APN: License Number: Santa Barbara County - 001-060-042 CCL18-0000512 Main Premises Address: License Type: Medicinal-Small Mixed-Light Tier 1 5601 Casitas Pass Road Carpinteria, CA 93013 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.62

GRAPHIC

Bureau of Cannabis Control (833) 768-5880 Adult-Use and Medicinal - Distributor License Provisional LICENSE NO: C11-0000726-LIC LEGAL BUSINESS NAME: THE POTTERY PREMISES: 5042 VENICE BLVD LOS ANGELES, CA 90019 VALID: 7/9/2019 EXPIRES: 7/8/2021 Non-Transferable Prominently display this license  as required by Title 16 CCR § 5039   

GRAPHIC

Scan to verify this license. Valid: 7/9/2019 Expires: 7/8/2021 License No: C11-0000726-LIC Legal Business Name: THE POTTERY Premises Address: 5042 VENICE BLVD LOS ANGELES, CA 90019 1.  Use your smartphone camera to scan the QR code for licensing information. 2.  If your camera doesn’t have scanning functionality, you can look up a location at CApotcheck.com using license number C11-0000726-LIC.

Exhibit 99.63

GRAPHIC

California Department of Food and Agriculture 1220 N Street Sacramento, CA 95814 PROVISIONAL CANNABIS CULTIVATION LICENSE Legal Business Name: Valid: THE POTTERY INC., A CALIFORNIA CORPORATION 04/02/2021 to 04/01/2022 Main Premises APN: License Number: Los Angeles County - 5067002003 CCL18-0000935 Main Premises Address: License Type: Adult-Use-Specialty Indoor 5042 VENICE BLVD Los Angeles, CA 90019 --- PROVISIONAL LICENSE PURSUANT TO BPC 26050.2 --- Additional Premises APN(s): Additional Premises Address(es): ---- POST IN PUBLIC VIEW ---- ---- NON-TRANSFERABLE ---- Page 1 of 1

Exhibit 99.64

GRAPHIC

Bureau of Cannabis Control (833) 768-5880 Adult-Use and Medicinal - Retailer License Provisional Storefront LICENSE NO: C10-0000389-LIC LEGAL BUSINESS NAME: THE POTTERY PREMISES: 5042 VENICE BLVD LOS ANGELES, CA 90019-5310 VALID: 7/9/2019 EXPIRES: 7/8/2021 Non-Transferable Prominently display this license  as required by Title 16 CCR § 5039   

GRAPHIC

Scan to verify this license. Valid: 7/9/2019 Expires: 7/8/2021 License No: C10-0000389-LIC Legal Business Name: THE POTTERY Premises Address: 5042 VENICE BLVD LOS ANGELES, CA 900195310 1.  Use your smartphone camera to scan the QR code for licensing information. 2.  If your camera doesn’t have scanning functionality, you can look up a location at CApotcheck.com using license number C10-0000389-LIC.

 

Exhibit 99.65

 

 

May 6, 2021

 

British Columbia Securities Commission

Alberta Securities Commission

Financial and Consumer Affairs Authority of Saskatchewan

The Manitoba Securities Commission

Ontario Securities Commission

Financial and Consumer Services Commission (New Brunswick)

Nova Scotia Securities Commission

Office of the Superintendent of Securities, Service Newfoundland & Labrador

Office of the Superintendent of Securities, Government of Prince Edward Island

Office of the Superintendent of Securities, Northwest Territories

Office of the Yukon Superintendent of Securities

Nunavut Securities Office

 

Dear Sirs/Mesdames:

 

Re: Mercer Park Brand Acquisition Corp.

 

We refer to the prospectus of Mercer Park Brand Acquisition Corp. (the “Company”) dated May 6, 2021, relating to the acquisition of E7 Carve-Out In-Process License Portfolio (the “Prospectus”).

 

We consent to being named and to the use in the above-mentioned Prospectus, of our report dated May 4, 2021, to the Directors/Shareholders of the Company on the following financial statements:

 

a. Combined Balance Sheets as of December 31, 2020 and 2019.

 

b. Combined Statements of Operations, Changes in Members’ Deficit and Cash Flows for the years ended December 31, 2020 and 2019.

 

c. The related notes to the combined financial statements which comprise a summary of significant accounting policies and other explanatory information.

 

We report that we have read the Prospectus and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such financial statements. We have complied with Canadian generally accepted standards for an auditor’s consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the prospectus as these terms are described in the CPA Canada Handbook - Assurance.

 

Sincerely,

 

/s/ Macias Gini & O’Connell LLP

 

Macias Gini & O’Connell LLP
700 South Flower St., Suite 800
Los Angeles, CA 90017
www.mgocpa.com

 

 

 

Exhibit 99.66

 

 

May 6, 2021

 

British Columbia Securities Commission

Alberta Securities Commission

Financial and Consumer Affairs Authority of Saskatchewan

The Manitoba Securities Commission

Ontario Securities Commission

Financial and Consumer Services Commission (New Brunswick)

Nova Scotia Securities Commission

Office of the Superintendent of Securities, Service Newfoundland & Labrador

Office of the Superintendent of Securities, Government of Prince Edward Island

Office of the Superintendent of Securities, Northwest Territories

Office of the Yukon Superintendent of Securities

Nunavut Securities Office

 

Dear Sirs/Mesdames:

 

Re: Mercer Park Brand Acquisition Corp.

 

We refer to the prospectus of Mercer Park Brand Acquisition Corp. (the “Company”) dated May 6, 2021, relating to the acquisition of GH Group, Inc. (the “Prospectus”).

 

We consent to being named and to the use in the above-mentioned Prospectus, of our report dated May 4, 2021, to the Directors/Shareholders of the Company on the following financial statements:

 

a. Consolidated and combined Balance Sheets as of December 31, 2020 and 2019.

 

b. Consolidated and combined Statements of Operations, Changes in Shareholders’/Members’ Equity and Cash Flows for the years ended December 31, 2020, 2019, and 2018.

 

c. The related notes to the consolidated and combined financial statements which comprise a summary of significant accounting policies and other explanatory information.

 

We report that we have read the Prospectus and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such financial statements. We have complied with Canadian generally accepted standards for an auditor’s consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the prospectus as these terms are described in the CPA Canada Handbook - Assurance.

 

Sincerely,

 

/s/ Macias Gini & O’Connell LLP

 

Macias Gini & O’Connell LLP
700 South Flower St., Suite 800
Los Angeles, CA 90017
www.mgocpa.com

 

 

 

 

Exhibit 99.67

 

 

May 6, 2021

 

British Columbia Securities Commission

Alberta Securities Commission

Financial and Consumer Affairs Authority of Saskatchewan

The Manitoba Securities Commission

Ontario Securities Commission

Financial and Consumer Services Commission (New Brunswick)

Nova Scotia Securities Commission

Office of the Superintendent of Securities, Service Newfoundland & Labrador

Office of the Superintendent of Securities, Government of Prince Edward Island

Office of the Superintendent of Securities, Northwest Territories

Office of the Yukon Superintendent of Securities

Nunavut Securities Office

 

Dear Sirs/Mesdames:

 

Re: Mercer Park Brand Acquisition Corp.

 

We refer to the prospectus of Mercer Park Brand Acquisition Corp. (the “Company”) dated May 6, 2021, relating to the acquisition of iCANN, LLC (the “Prospectus”).

 

We consent to being named and to the use in the above-mentioned Prospectus, of our report dated May 4, 2021, to the Directors/Shareholders of the Company on the following financial statements:

 

a. Balance Sheets as of December 31, 2020, 2019, and 2018.

 

b. Statements of Operations, Changes in Members’ Equity (Deficit) and Cash Flows for the years ended December 31, 2020, 2019, and 2018.

 

c. The related notes to the financial statements which comprise a summary of significant accounting policies and other explanatory information.

 

We report that we have read the Prospectus and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such financial statements. We have complied with Canadian generally accepted standards for an auditor’s consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the prospectus as these terms are described in the CPA Canada Handbook — Assurance.

 

Sincerely,

 

/s/ Macias Gini & O’Connell LLP

 

Macias Gini & O’Connell LLP
700 South Flower St., Suite 800
Los Angeles, CA 90017
www.mgocpa.com

 

 

 

 

Exhibit 99.68

 

 

May 6, 2021

 

British Columbia Securities Commission

Alberta Securities Commission

Financial and Consumer Affairs Authority of Saskatchewan

The Manitoba Securities Commission

Ontario Securities Commission

Financial and Consumer Services Commission (New Brunswick)

Nova Scotia Securities Commission

Office of the Superintendent of Securities, Service Newfoundland & Labrador

Office of the Superintendent of Securities, Government of Prince Edward Island

Office of the Superintendent of Securities, Northwest Territories

Office of the Yukon Superintendent of Securities

Nunavut Securities Office

 

Dear Sirs/Mesdames:

 

Re: Mercer Park Brand Acquisition Corp.

 

We refer to the prospectus of Mercer Park Brand Acquisition Corp. (the “Company”) dated May 6, 2021, relating to the acquisition of Bud and Bloom (the “Prospectus”).

 

We consent to being named and to the use in the above-mentioned Prospectus, of our report dated May 4, 2021, to the Directors/Shareholders of the Company on the following financial statements:

 

a. Combined Balance Sheets as of August 31, 2019 and December 31, 2018.

 

b. Combined Statements of Operations, Changes in Members’ Deficit and Cash Flows for the period ended August 31, 2019 and the year ended December 31, 2018.

 

c. The related notes to the combined financial statements which comprise a summary of significant accounting policies and other explanatory information.

 

We report that we have read the Prospectus and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such fmancial statements. We have complied with Canadian generally accepted standards for an auditor’s consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the prospectus as these terms are described in the CPA Canada Handbook — Assurance.

 

Sincerely,

 

/s/ Macias Gini & O’Connell LLP

 

Macias Gini & O’Connell LLP
700 South Flower St., Suite 800
Los Angeles, CA 90017
www.mgocpa.com

 

 

 

 

Exhibit 99.69

 

 

 

May 6, 2021

 

To:

 

Alberta Securities Commission 

British Columbia Securities Commission 

Financial and Consumer Affairs Authority of Saskatchewan 

Financial and Consumer Services Commission (New Brunswick) 

Nova Scotia Securities Commission 

Office of the Superintendent of Securities (Prince Edward Island) 

Office of the Superintendent of Securities Service Newfoundland and Labrador 

Ontario Securities Commission 

The Manitoba Securities Commission 

Nunavut Securities Office 

Office of the Superintendent of Securities (Northwest Territories) 

Office of the Yukon Superintendent of Securities

 

Dear Sirs/Mesdames:

 

RE: Mercer Park Brand Acquisition Corp. (the “Corporation”)

 

We refer to the non-offering prospectus of the Corporation dated May 6, 2021 relating to the qualifying transaction of the Corporation (the "Prospectus").

 

We, MNP LLP, consent to being named and to the use in the Prospectus, of our report dated March 29, 2021 to the shareholders of the Corporation on the following financial statements:

 

Balance sheets as of December 31, 2020 and 2019;

Statements of operations and comprehensive income, shareholders' deficiency and cash flows for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019, and the related notes.

 

We report that we have read the Prospectus and all information therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such financial statements. We have complied with Canadian generally accepted standards for an auditor's consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the Prospectus as these terms are described in the CPA Canada Handbook - Assurance.

 

Yours truly,

 

/s/ MNP LLP

 

Chartered Professional Accountants

Licensed Public Accountants

 

 

 

 

Exhibit 99.70

 

No securities are being offered pursuant to this prospectus. No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise.

 

PROSPECTUS

 

Non-Offering Prospectus May 6, 2021

 

MERCER PARK BRAND ACQUISITION CORP.

 

(To be renamed Glass House Brands Inc. in connection with its qualifying transaction with GH Group, Inc.)

 

 

 

Mercer Park Brand Acquisition Corp. (“BRND”) intends to derive a substantial portion of its revenues from the cannabis industry in one or more States of the United States, which industry is illegal under United States federal law. The Resulting Issuer (as defined below) intends to be directly involved (through its licensed subsidiaries) in the cannabis industry in the United States where local State laws permit such activities. Currently, the subsidiaries and managed entities of the Target Business (as defined below) are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and/or medicinal cannabis marketplace in the State of California. The Resulting Issuer, after the Transaction (as defined below), will be a vertically-integrated cannabis company in the United States with initial operations in the State of California.

 

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.

 

i

 

 

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 Resulting Issuer would likely be materially adversely affected. See “Risk Factors – Risks Related to Legality of Cannabis” for additional information on this risk.

 

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.

 

The Resulting Issuer’s 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 the Resulting Issuer’s ability to operate in the U.S. or any other jurisdiction. The Target Business has received and continues 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. The Target Business receives such input on an ongoing basis but does not have a formal legal opinion on such matters. There are a number of risks associated with the Target Business. See “Cannabis Market Overview – Legal and Regulatory Matters – United States Federal Overview”, “Cannabis Market Overview – Legal and Regulatory Matters – U.S. Federal Enforcement Priorities”, “Risk Factors – the Resulting Issuer’s operations in the U.S. cannabis market may become the subject of heightened scrutiny” and “Risk Factors - Regulatory scrutiny of – the Resulting Issuer’s industry may negatively impact its ability to raise additional capital”.

 

Jonathan Sandelman, Charles Miles, Lawrence Hackett and Andrew Smith are the current directors of BRND and will be subject to liability as directors for any misrepresentation in this prospectus. The following proposed directors are not current directors of BRND and will not become directors of BRND until the completion of the Transaction and therefore they will not be subject to liability as directors for any misrepresentation in this prospectus: Kyle Kazan, Graham Farrar, Jamie Mendola, Jocelyn Rosenwald, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De La Torre.

 

ii

 

 

No securities are being offered pursuant to this prospectus. This prospectus is being filed with the securities regulatory authorities in each of the provinces and territories of Canada, other than Quebec, by BRND, which is a corporation incorporated under the laws of the Province of British Columbia. BRND is a special purpose acquisition corporation that was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination involving BRND that will qualify as its “qualifying transaction”. Since no securities are being sold pursuant to this prospectus, no proceeds will be raised pursuant to this prospectus.

 

On April 8, 2021, BRND announced that it had entered into a definitive purchase agreement (the “ Definitive GH Group Agreement”) with GH Group, Inc. (“GH Group”, or the “Target Business”) pursuant to which, among other things, BRND shall acquire, directly or indirectly, all of the common equity of GH Group (collectively, the “Transaction”). Up to $12 million of non-convertible Class A preferred shares of GH Group may remain outstanding at closing of the Transaction. See “Corporate Structure – GH Group Financing”. The Transaction constitutes BRND’s qualifying transaction. See “The Business of GH Group” for a summary of the Target Business.

 

GH Group is a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in California. GH Group has been cultivating cannabis since 2015 and was one of the first three (3) recipients of a license to open a retail dispensary in Santa Barbara, California. It possesses (i) an aggregate of 550,000 sq. ft. in two operating greenhouse facilities in Santa Barbara county that both include associated processing facilities, (ii) a volatile and non-volatile manufacturing and distribution facility in Lompec, California, and (iii) an additional non-volatile manufacturing facility in Long Beach, California. GH Group owns three (3) operating retail dispensaries in Santa Barbara, Los Angeles and Berkeley, California and partially owns and manages a fourth located in Los Angeles that includes a specialty indoor cultivation facility.

 

GH Group is brand-focused with cannabis products including flower, oil and concentrate, tinctures, and vaporizer products. GH Group’s brands include Forbidden Flowers, Mama Sue and Glass House Farms, which is the second largest cannabis flower brand in California according to data from BDS Analytics.

 

GH Group has executed a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm complex located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. See “SoCal Greenhouse Acquisition”.

 

GH Group has executed an agreement with Element 7, LLC whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7, LLC which are in the process of applying for up to 17 state and local retail cannabis licenses in California. See “Element 7”.

 

In addition, GH Group has agreed, subject to certain conditions, to appoint Element 7, LLC as a consultant to assist with the obtaining of additional licenses in California. See “Element 7”.

 

This prospectus is being filed in accordance with the NEO Exchange Listing Manual in connection with the completion of BRND’s qualifying transaction. Unless otherwise indicated or where inapplicable, this prospectus has been prepared assuming that the Transaction has been completed.

 

Existing shareholders of BRND who do not redeem their shares will continue to hold an interest in the Resulting Issuer after giving effect to the Transaction. In connection with the completion of the Transaction, BRND intends to change its name to “Glass House Brands Inc.”. Following closing, BRND will indirectly own 100% of the common equity of GH Group. See “Notice to Readers”, “The Business of GH Group” and “Corporate Structure – Definitive GH Group Agreement”.

 

iii

 

 

BRND’s Class A restricted voting shares (the “BRND Class A Restricted Voting Shares”) are currently listed for trading on the Neo Exchange Inc. (the “NEO Exchange”) under the symbol “BRND.A.U”. The closing price of the BRND Class A Restricted Voting Shares on the NEO Exchange on April 8, 2021, the last trading day before the Definitive GH Group Agreement was announced, was $ 10.04. The closing price of the BRND Class A Restricted Voting Shares on the NEO Exchange on May 5, 2021 was $10.08. The share purchase warrants of BRND (the “BRND Warrants”) are also currently listed for trading on the NEO Exchange under the symbol “BRND.WT”. The closing price of the BRND Warrants on April 8, 2021, the last trading day before the Definitive GH Group Agreement was announced, was $1.64. The closing price of the BRND Warrants on May 5, 2021 was $2.26. The completion of the Transaction is conditional upon, among other things, approval by the NEO Exchange.

 

On April 8, 2021, BRND also announced a private placement of $85 million of non-voting shares of Mercer Park Brand Pipe Inc. (“MPB PipeCo”), currently a wholly owned subsidiary of BRND (the “Private Placement Shares”) at a price of $10.00 per share (the “Private Placement”). The closing of the Private Placement is scheduled to occur contemporaneously with the closing of the Transaction and, in connection therewith, the Private Placement Shares issued will be exchanged for Equity Shares (as defined below) on a one-for-one basis. The Private Placement is subject to customary conditions, including the closing of the Transaction.

 

An investment in BRND or the Resulting Issuer is subject to a number of risks that should be carefully considered by investors. In reviewing this prospectus, an investor should carefully consider the matters described under the heading “Risk Factors”.

 

As the Transaction constitutes BRND’s proposed qualifying transaction, holders of BRND Class A Restricted Voting Shares can elect to redeem (conditional on closing) all or a portion of their BRND Class A Restricted Voting Shares, whether they vote for or against, or do not vote on, the Transaction, provided that they deposit (and do not validly withdraw) their BRND Class A Restricted Voting Shares for redemption prior to 5:00 p.m. (Toronto time) on the fifth (5th) business day before the BRND Meeting (as defined below), or 5:00 p.m. (Toronto time) on the fifth (5th) business day before any adjournment(s) or postponement(s) thereof (the “Redemption Deadline”).

 

A redeeming BRND Shareholder is entitled (conditional on closing) to receive an amount per BRND Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion (per BRND Class A Restricted Voting Share) of: (A) the escrowed funds available in the BRND’s escrow account at the time of the meeting of the BRND Shareholders at which the Transaction is approved, including interest and other amounts earned thereon; less (B) an amount equal to the total of (i) applicable taxes payable by BRND 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 BRND. For greater certainty, such amount will not be reduced by the amount of any tax of BRND under Part VI.1 of the Income Tax Act (Canada) (the “Tax Act”) or the deferred underwriting commissions per BRND Class A Restricted Voting Share held in escrow. This redemption amount is anticipated to be $10.11 per BRND Class A Restricted Voting Share, assuming a June 4, 2021 redemption date.

 

Original purchasers of BRND Class A Restricted Voting Shares and/or BRND Warrants from the underwriters in BRND’s initial public offering may have a contractual right of action for rescission or damages against BRND and certain other persons in the event of a misrepresentation in this prospectus. See “Contractual Right of Action”.

 

This prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities. No underwriters have been involved in the preparation of this prospectus or performed any review or independent due diligence of the contents of this prospectus.

 

BRND Shareholders should be aware that the acquisition, holding and disposition of the securities described in this prospectus may have tax consequences in Canada, the United States and elsewhere depending on each particular shareholder’s specific circumstances. BRND Shareholders should consult their own tax advisors with respect to such tax considerations. See “Certain Canadian Federal Income Tax Considerations” and “Certain United States Federal Income Tax Considerations”.

 

iv

 

 

The directors and the chief executive officer of BRND reside outside of Canada and certain experts retained by BRND are organized outside of Canada. Each of these individuals and entities have appointed the following agents for service of process:

 

Name of Director or Officer   Name and Address of Agent
Jonathan Sandelman, Director   152928 Canada Inc., c/o Stikeman Elliott LLP, 5300 Commerce
    Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9
     
Lawrence Hackett, Director   152928 Canada Inc., c/o Stikeman Elliott LLP, 5300 Commerce
    Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9
     
Charles Miles, Director   152928 Canada Inc., c/o Stikeman Elliott LLP, 5300 Commerce
    Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9
     
Louis F. Karger, Chief Executive Officer   152928 Canada Inc., c/o Stikeman Elliott LLP, 5300 Commerce
    Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9

 

Name of Expert   Name and Address of Agent
     
Macias Gini & O’Connell LLP 152928 Canada Inc., c/o Stikeman Elliott LLP, 5300 Commerce
    Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9

 

BRND Shareholders are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that resides outside of Canada, even if the party has appointed an agent for service of process.

 

The global outbreak of 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, store closures, self-imposed quarantine periods and social distancing, have caused and may continue to cause material disruption to businesses globally, resulting in an economic slowdown. The full extent of the impact that COVID-19, including government and/or regulatory responses to the pandemic, will have on the Resulting Issuer is highly uncertain and difficult to predict at this time. See “COVID-19”.

 

The head office of BRND is currently located at 590 Madison Avenue, 26th Floor, New York, New York, USA. The head office of the Resulting Issuer is expected to be located at 3645 Long Beach Blvd., Long Beach, California, USA.

 

Increasingly, Canadian public companies with U.S. cannabis businesses that are going public in Canada are using multiple voting share structures. The GH Group Founders (as defined below) wish to be able to continue to build the Resulting Issuer’s business during the current and expected future volatile period in the industry. Accordingly, subject to obtaining applicable consents, including under Ontario Securities Commission Rule 56-501 – Restricted Shares, which requires majority of minority approval by a majority of votes cast by the holders of BRND Class A Restricted Voting Shares, excluding any votes attached to BRND Class A Restricted Voting Shares held directly or indirectly by persons who also hold BRND Class B Shares (as defined below), BRND intends to issue Multiple Voting Shares (as defined below) to the GH Group Founders in connection with the closing of the Transaction. The Multiple Voting Shares are expected to be nominal value preferred shares with a $0.001 per share redemption and liquidation value (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder), carry 50 votes per share (voting together with the other classes of Equity Shares as if they were a single class except where otherwise required by law or stock exchange requirements), and have no entitlement to dividends and no conversion rights. In addition, unless redeemed earlier by the holder, the Multiple Voting Shares would be subject to a three (3)-year sunset provision, at which time they would be redeemed by the Resulting Issuer. The Multiple Voting Shares will not be transferable. See “Description of Securities – Capital Structure” for a description of the intended structure.

 

v

 

 

TABLE OF CONTENTS

 

GLOSSARY OF TERMS     1
PROSPECTUS SUMMARY     15
NOTICE TO READERS     23
U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES     24
CAUTION REGARDING FORWARD-LOOKING STATEMENTS     24
COVID-19     28
MARKET AND INDUSTRY DATA     28
RECENT DEVELOPMENTS     28
CORPORATE STRUCTURE     29
Mercer Park Brand Acquisition Corp.     29
Definitive GH Group Agreement     30
Registration Rights Agreement     36
Piggy-back Registration Rights     37
Accounting Treatment     37
Proposed Transactions     37
Private Placement     38
Inter-Corporate Relationships     40
Warrant Agreement     41
Exchangeable Shares and Exchange Rights Agreements     42
CANNABIS MARKET OVERVIEW     50
Exposure to U.S. Marijuana Related Activities     54
Use of Cannabis     54
California Cannabis Market     54
Legal and Regulatory Matters     54
Compliance with License Requirements     61
Non-Compliance with State and Local Cannabis Laws     68
Ability to Access Public and Private Capital     68
THE BUSINESS OF GH GROUP     69
History of GH Group and Business Overview     69
Cultivation     69
Manufacturing and Distribution     74
Wholesale Sales     75
Brand, Product and Marketing     76
Retail     77
Information Technology & Inventory Management     79
Banking & Processing     80
Competitive Conditions     80
Environmental Protection Requirements     80
SOCAL GREENHOUSE ACQUISITION     80
SoCal Greenhouse Acquisition Agreements     81
ELEMENT 7     83
Element 7 Merger Agreement     83
Element 7 Consulting Agreement     84
MERCER PARK BRAND ACQUISITION CORP.     85
OUTLOOK     86
USE OF ESCROWED FUNDS     88

 

vi

 

 

NON-U.S. GAAP MEASURES     88
SELECTED CONSOLIDATED FINANCIAL INFORMATION     89
Pro Forma Consolidated Capitalization     89
Summary Pro Forma Consolidated Financial Information     90
DIVIDEND POLICY     94
MANAGEMENT’S DISCUSSION AND ANALYSIS     94
DESCRIPTION OF SECURITIES     94
Equity Shares and Multiple Voting Shares     95
Advance Notice Requirements for Director Nominations     101
EQUITY INCENTIVE PLAN DESCRIPTION     101
Summary of Equity Incentive Plan     101
OPTIONS TO PURCHASE SECURITIES     105
Options     105
BRND Warrants     105
SECURITIES SUBJECT TO CONTRACTUAL RESTRICTIONS ON TRANSFER     107
Mercer Park Brand Acquisition Corp. Founders’ Shares     107
Exchangeable Shares     107
PRIOR SALES     107
PRINCIPAL SHAREHOLDERS     108
DIRECTORS AND EXECUTIVE OFFICERS     109
Biographies     110
Cease Trade Orders, Bankruptcies, Penalties or Sanctions     113
Majority Voting Policy     114
Forum Selection Provisions     114
Conflicts of Interest     114
Directors’ and Officers’ Liability Insurance     114
DIRECTORS’ AND EXECUTIVE OFFICERS’ COMPENSATION     114
Benchmarking     115
Elements of Compensation     115
Compensation, Employment Agreements, Termination and Change of Control Benefits     116
Director Compensation     116
INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS     117
AUDIT COMMITTEE     117
Composition of the Resulting Issuer Audit Committee     117
Pre-Approval Policies and Procedures     117
External Audit Service Fees     117
CORPORATE GOVERNANCE     117
Statement of Corporate Governance Practices     118
Board of Directors     118
Director Term Limits/Mandatory Retirement     120
Diversity     120
Orientation and Continuing Education     121
Social Responsibility     122
Nomination of Directors     122
Board and Committee Assessment     122
Audit Committee     122
Compensation, Nomination & Corporate Governance Committee     122
Code of Conduct     125
Key Governance Documents     125

 

vii

 

 

REGULATORY APPROVALS     125
RISK FACTORS     126
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS     156
Residents of Canada     157
Non-Residents of Canada     159
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS     160
Tax Treatment of the Transaction to the Resulting Issuer and Classification of the Resulting Issuer as a U.S. Domestic Corporation     162
Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares     162
Tax Consequences of the Transaction to U.S. Holders of BRND Warrants     167
Tax Consequences to Non-U.S. Holders     168
PROMOTER     169
LEGAL PROCEEDINGS AND REGULATORY ACTIONS     170
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS     170
AUDITORS     170
REGISTRAR AND TRANSFER AGENT     170
MATERIAL CONTRACTS     171
CONTRACTUAL RIGHT OF ACTION     171
SECURITIES LAWS EXEMPTIONS     172
FINANCIAL STATEMENTS     172
APPENDIX A – BRND AUDITED ANNUAL FINANCIAL STATEMENTS (YEARS ENDED DECEMBER 31, 2020 AND 2019)     A-1
APPENDIX B – MANAGEMENT’S DISCUSSION & ANALYSIS OF BRND     B-1
APPENDIX C – GH GROUP ANNUAL FINANCIAL STATEMENTS (YEAR ENDED DECEMBER 31, 2020; YEAR ENDED DECEMBER 31, 2019; YEAR ENDED DECEMBER 31, 2018)     C-1
APPENDIX D – MANAGEMENT’S DISCUSSION AND ANALYSIS OF GH GROUP, INC.     D-1
APPENDIX E – CHARTER OF THE AUDIT COMMITTEE OF GLASS HOUSE BRANDS INC.     E-1
APPENDIX F – BUD AND BLOOM AUDITED FINANCIAL STATEMENTS (FOR THE PERIOD ENDED AUGUST 31, 2019 AND THE YEAR ENDED DECEMBER 31, 2018)     F-1
APPENDIX G – MANAGEMENT’S DISCUSSION AND ANALYSIS OF BUD AND BLOOM     G-1
APPENDIX H – FARMACY BERKELEY AUDITED ANNUAL FINANCIAL STATEMENTS (FOR THE YEARS ENDED DECEMBER 31, 2020, DECEMBER 31, 2019 AND DECEMBER 31, 2018)     H-1
APPENDIX I – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FARMACY BERKELEY     I-1
APPENDIX J – ELEMENT 7 AUDITED ANNUAL FINANCIAL STATEMENTS (FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019)     J-1
APPENDIX K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF ELEMENT 7     K-1
APPENDIX L – BRND UNAUDITED PRO FORMA FINANCIAL STATEMENTS     L-1
CERTIFICATE OF MERCER PARK BRAND ACQUISITION CORP AND PROMOTER     CT-1

 

viii

 

 

GLOSSARY OF TERMS

 

10% U.S. Shareholder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Effects of Section 367(b) of the Code upon the Conversion”;

 

20-day VWAP” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

2014 Cole Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

2014 Farm Bill” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

2018 Farm Bill” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – United States Federal Overview”;

 

Accounting Standards Relief” has the meaning ascribed to it under the heading “Securities Law Exemptions”;

 

Adjusted EBITDA” has the meaning ascribed to it under the heading “Non-U.S. GAAP Measures – Adjusted EBITDA”;

 

Advance Notice Provisions” has the meaning ascribed to it under the heading “Description of Securities – Advance Notice Requirements for Director Nominations”;

 

Affiliate” has the meaning ascribed to it in NI 45-106;

 

All E&P Amount” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Effects of Section 367(b) of the Code upon the Conversion”;

 

allowable capital loss” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Taxation of Capital Gains and Capital Losses”;

 

Ancillary Rights” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – General”;

 

Anti- Dilution Payment” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Audit Committee” has the meaning ascribed to it under the heading “Audit Committee”;

 

AUMA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

Automatic Exchange Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Automatic Exchange Right on Liquidation of BRND”;

 

Awards” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan - Purpose”;

 

BCBCA” means the Business Corporations Act (British Columbia), as it may be amended from time to time;

 

BCC” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

1

 

 

BRND” means Mercer Park Brand Acquisition Corp., and shall include, when appropriate, its subsidiaries from time to time;

 

BRND Audited Annual Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

BRND Class A Restricted Voting Shares” means the Class A restricted voting shares in the capital of BRND, and each a “BRND Class A Restricted Voting Share”;

 

BRND Class A Restricted Voting Units” means the Class A restricted voting units offered to the public under BRND’s initial public offering at an offering price of $10.00 per BRND Class A Restricted Voting Unit, each comprised of one BRND Class A Restricted Voting Share and one-half of a BRND Warrant, and each a “BRND Class A Restricted Voting Unit”;

 

BRND Class B Shares” means the Class B shares in the capital of BRND (and for greater certainty, includes the BRND Founders’ Shares), and each a “BRND Class B Share”;

 

BRND Class B Units” means the Class B units of BRND, each comprised of one BRND Class B Share and one-half of a BRND Warrant, and each a “BRND Class B Unit”;

 

BRND directors” has the meaning ascribed to it under the heading “Contractual Right of Action”;

 

BRND Founders” means, collectively, Mercer, Charles Miles and Sean Goodrich (or persons or companies controlled by them), as the collective holders of the BRND Founders’ Shares and of the BRND Founders’ Warrants (each as defined herein);

 

BRND Founders’ Shares” means the Class B shares in the capital of BRND issued to the BRND Founders (other than as part of the BRND Class B Units), and each a “BRND Founders’ Share”;

 

BRND Founders’ Warrants” means the share purchase warrants in the capital of BRND issued to Mercer, and each a “BRND Founders’ Warrant”;

 

BRND Meeting” means the special meeting of shareholders of BRND to be held to vote on the Transaction;

 

BRND Shareholders” means the registered or beneficial holders of the BRND Class A Restricted Voting Shares and/or the BRND Class B Shares, as the context requires;

 

BRND Warrant Holders” means the holders of the BRND Warrants, and each, a “BRND Warrant Holder”;

 

BRND Warrants” means, collectively, (A) the 20,125,000 share purchase warrants underlying the BRND Class A Restricted Voting Units, (B) the 9,810,000 BRND Founders’ Warrants, and (C) the 54,500 share purchase warrants underlying the BRND Class B Units, each of which having been issued under the Warrant Agreement and in respect of which, 65 days following the completion of the Transaction, will each entitle the holder thereof to purchase one BRND Class A Restricted Voting Share (which, at such time, will represent one Subordinate Voting Share) at a price of $11.50 and each a “BRND Warrant”;

 

Bud and Bloom” means Bud and Bloom, a California corporation;

 

Bud and Bloom Audited Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

Buyer” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Call Rights” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – General”;

 

C&CG Committee” means the Compensation, Nominating and Corporate Governance Committee of BRND;

 

2

 

 

California Option Agreement” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Canaccord” has the meaning ascribed to it under the heading “Corporate Structure – Private Placement”;

 

Canada-U.S. Tax Convention” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada – Dividends on Equity Shares”;

 

Cap” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Capital Based Earnout Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Cashless Exercise” has the meaning ascribed to it under the heading “Corporate Structure – Warrant Agreement”;

 

Casitas” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

CBD” has the meaning ascribed to it under the heading “Cannabis Market Overview – Use of Cannabis”;

 

CBP” has the meaning ascribed to it under the heading “Risk Factors – Risks Related to Legality of Cannabis – While legal under applicable U.S. State law, the Resulting Issuer’s business activities are illegal under U.S. federal law”;

 

CDC” has the meaning ascribed to it under the heading “Risk Factors – Risks Related to the Resulting Issuer’s Business and GH Group’s Business – Covid-19 pandemic”;

 

CDFA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Overview”;

 

CDPH” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

CDS” means CDS Clearing and Depository Services Inc.;

 

CEFF Camarillo Propco” means CEFF Camarillo Property, LLC;

 

CEFF Parent” means CEFF Camarillo Holdings, LLC;

 

CEFF Parties” means CEFF Parent together with CEFF Camarillo Propco;

 

Change of Control Transaction” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares – Exercise of Voting Rights”;

 

Closing” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

CMS Asset” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

Code” means the United States Internal Revenue Code of 1986, as amended;

 

Cole Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

Company Stock” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

3

 

 

Compliance Provisions” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Multiple Voting Shares – Compliance Provisions”;

 

Control Transaction” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Conversion” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Consideration – Tax Treatment of the Transaction to BRND and Classification of BRND as a U.S. Domestic Corporation”;

 

CPG” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

CUA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

DEA” has the meaning ascribed to it under the heading “Risk Factors – Risks Related to Legality of Cannabis – Any re-classification of cannabis or changes in U.S. controlled substance laws and regulations may affect the Resulting Issuer’s business”;

 

Deemed Dividend Election” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Effects of Section 367(b) of the Code upon the Conversion”;

 

Definitive GH Group Agreement” means the definitive purchase agreement among BRND, GH Group and its shareholders relating to the Transaction, as may be amended, supplemented or otherwise modified from time to time;

 

Definitive Option PSA” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Definitive Property PSA” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Demand Registration” has the meaning ascribed to it under the heading “Registration Rights Agreement – Demand Registration Rights”;

 

=” shall mean the aggregate Equity Shares issued and outstanding, including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exchange of the BRND Warrants, excluding the Cashless Exercise, provided they are not determined to be “out of the money” by the Resulting Issuer Board;

 

DOJ” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

Effective Date” means the closing date of the Transaction;

 

Element 7” means Element 7, LLC;

 

Element 7 Audited Annual Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

Element 7 Consulting Agreement” has the meaning ascribed to it under the heading “Element 7 –Element 7 Consulting Agreement”;

 

Element 7 Merger” has the meaning ascribed to it under the heading “Element 7”;

 

4

 

 

Element 7 Merger Agreement” has the meaning ascribed to it under the heading “Element 7 – Element 7 License Acquisition Agreement”;

 

Equity Incentive Plan” means the new equity incentive plan to be approved by BRND Shareholders at the BRND Meeting and adopted by BRND;

 

Equity Shares” means, collectively, subordinate, restricted and/or limited voting shares of the Resulting Issuer;

 

Escrowed Funds” has the meaning ascribed to it under the heading “Use of Escrowed Funds”.

 

Exchange Agreement and Undertaking” means the exchange agreement and undertaking dated May 7, 2019, entered into by each of the BRND Founders in favour of BRND;

 

Exchangeable Share Consideration” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”;

 

Exchangeable Shareholder Put Event” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Grant of Exchange Rights”;

 

Exchangeable Shareholders’ Put Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Grant of Exchange Rights”;

 

Exchangeable Share Provisions” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Grant of Exchange Rights”;

 

Exchangeable Shares” means the exchangeable common stock of MPB AcquisitionCo which, pursuant to the applicable Exchange Rights Agreements, are exchangeable on a one-for-one basis into Equity Shares;

 

Exchangeable Shareholders” means the holders of the Exchangeable Shares;

 

Exchanged Shares” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Grant of Exchange Rights”;

 

Exchange Rights Agreements” has the meaning ascribed to it under the heading “ Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchangeable Share Procedures”;

 

Exercise Notice” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Existing Leases” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition”;

 

Extraordinary Dividends” means any dividend paid by BRND, together with all other dividends payable by BRND in the same calendar year, that has an aggregate absolute dollar value which is greater than $ 0.25 per share, with the adjustment to the applicable price, if applicable, being a reduction equal to the amount of the excess;

 

Farmacy Berkeley” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

FATCA” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Foreign Account Tax Compliance Act”;

 

FDA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – United States Federal Overview”;

 

FDCA” has the meaning ascribed to it under the heading “Risk Factors – Risks Related to Legality of Cannabis – Regulatory action and approvals from the U.S. Food and Drug Administration”;

 

5

 

 

FinCEN” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

FinCEN Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

forward-looking information” has the meaning ascribed to it under the heading “Caution Regarding Forward-Looking Statements”;

 

forward-looking statements” has the meaning ascribed to it under the heading “Caution Regarding Forward-Looking Statements”;

 

“FPI Capital Structure Amendments” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares”;

 

FPI Threshold” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Equity Shares – Conversion”;

 

Fully-Diluted Share Number” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

GH EIP” has the meaning ascribed to it under the heading “Options to Purchase Securities – GH Group Equity Incentive Plan”;

 

GH Group” means GH Group, Inc.;

 

GH Group Audited Annual Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

GH Group Company Incentive Plan” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

GH Group Financing” has the meaning ascribed to it under the heading “Corporate Structure – GH Group Financing”;

 

GH Group Founders” means, collectively, Kyle Kazan, Graham Farrar, Jamie Rosenwald, Benjamin Persky, Kris Hulgreen, Steven Persky, Hans Tiedemann and certain of their respective trusts and affiliates;

 

GH Options” has the meaning ascribed to it under the heading “Options to Purchase Securities – GH Group Equity Incentive Plan”;

 

GH Participant” has the meaning ascribed to it under the heading “Options to Purchase Securities – GH Group Equity Incentive Plan”;

 

GIPI” means Glass Investments Projects, Inc.;

 

Guidelines” has the meaning ascribed to it under the heading “Corporate Governance – Statement of Corporate Governance Practices”;

 

held of record” has the meaning ascribed to it under Rule 12g5-1 of the Securities Exchange Act of 1934, as amended;

 

Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

HSR Act” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement;

 

6

 

 

iCANN” has the meaning ascribed to it under the heading “The Business of GH Group – History of GH Group and Business Overview”;

 

IMS” has the meaning ascribed to it under the heading “The Business of GH Group – Information Technology and Inventory Management”;

 

Incorporation Share” means the initial BRND Class B Share issued to Mercer in connection with the incorporation of BRND;

 

Insolvency Event” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

IPM” has the meaning ascribed to it under the heading “Cannabis Market Overview – Compliance with License Requirements – Cultivation Operations Compliance”;

 

IRS” means the U.S. Internal Revenue Service;

 

ISOs” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan - Purpose”;

 

Later Redemption Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Call Right”;

 

Limited Voting Shares” means limited voting shares of the Resulting Issuer;

 

Liquidation Amount” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”;

 

Liquidation Call Purchase Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Liquidation Call Right”;

 

Liquidation Call Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Liquidation Call Right”;

 

Liquidation Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”;

 

Liquidation Event” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Automatic Exchange Right on Liquidation of BRND”;

 

Liquidation Event Effective Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Automatic Exchange Right on Liquidation of BRND”;

 

Lockup Agreement” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Long Form Demand Registration” has the meaning ascribed to it under the heading “Registration Rights Agreement – Demand Registration Rights”;

 

Mark-to-Market” has the meaning ascribed to it under the heading “ Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

MAUCRSA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

7

 

 

MCRSA” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview”;

 

MCSB” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters – California State Level Overview – California Licenses and Regulations - Manufacturing”;

 

MD&A” means management’s discussion and analysis;

 

Mercer” means Mercer Park Brand, L.P. (formerly Mercer Park CB II, L.P.), a limited partnership formed under the laws of the State of Delaware, and BRND’s sponsor;

 

Merger” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Merger Consideration” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Merger Parties” means BRND, Buyer, Merger Sub, GH Group, Sellers and Sellers’ Representative, and referred to individually as a “Merger Party”;

 

Merger Sub” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement;

 

METRC” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal Regulatory Matters – California State Level Overview – California Licenses and Regulations – Reporting Requirements”;

 

MPB AcquisitionCo” means MPB Acquisition Corp.;

 

MPB PipeCo” means Mercer Park Brand Pipe Inc.;

 

Multiple Voting Shares” means multiple voting shares of the Resulting Issuer;

 

NEO” means a Named Executive Officer, as such term is defined in Form 51-102F6 – Statement of Executive Compensation under NI 51-102, and collectively the “NEOs”;

 

NEO Exchange” means the Neo Exchange Inc.;

 

NEO Exchange Policies” means the rules and policies of the NEO Exchange in effect from time to time; “NI 45-106” means National Instrument 45-106 – Prospectus Exemptions;

 

NI 51-102” means National Instrument 51-102 – Continuous Disclosure Obligations;

 

NI 52-107” means National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards;

 

NI 52-109” means National Instrument 52-109 – Certification of Disclosure in Issuer’s Annual and Interim Filings;

 

NI 52-110” means National Instrument 52-110 – Audit Committees;

 

NI 58-101” means National Instrument 58-101 – Disclosure of Corporate Governance Practices;

 

NI 62-104” means National Instrument 62-104 – Take-Over Bids and Special Transactions;

 

Nominating Shareholder” has the meaning ascribed to it under the heading “Description of Securities – Advance Notice Requirements for Director Nominations”;

 

Non-Electing Shareholder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

8

 

 

Non-Resident Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada”;

 

non-U.S. GAAP” has the meaning ascribed to it under the heading “Non-U.S. GAAP Measures”;

 

Non-U.S. Holder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations”;

 

Notice Date” has the meaning ascribed to it under the heading “Description of Securities — Advance Notice Requirements for Director Nominations”;

 

NP 58-201” means National Policy 58-201 – Corporate Governance Guidelines;

 

NQSOs” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan – Purpose”;

 

Option” the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Option Holder” means the Glass Investments Projects, Inc.;

 

Optionholder” has the meaning ascribed to it under the heading “Management’s Discussion and Analysis – Management’s Discussion and Analysis of GH Group for the Years Ended December 31, 2020, December 31, 2019 and December 31, 2018 – Recent Developments – Greenhouse Option Acquisition”;

 

Option Rights” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Options” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan – Purpose”;

 

OSC” means the Ontario Securities Commission;

 

Outside Date” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Owning or Controlling” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Multiple Voting Shares – Compliance Provisions”;

 

Padaro” has the meaning ascribed to it under the heading “History of GH Group and Business Overview – Cultivation”;

 

Participants” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan – Eligibility”;

 

Per Share Merger Consideration” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

PFIC” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

Piggyback Shareholders” has the meaning ascribed to it under the heading “Corporate Structure – Registration Rights Agreement”;

 

9

 

 

Polar” has the meaning ascribed to it under the heading “Recent Developments”;

 

Post Closing Cash” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Preferred Shares” has the meaning ascribed to it under the heading “Description of Securities”;

 

Price Based Earn-out Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Private Placement” has the meaning ascribed to it under the heading “Corporate Structure – Private Placement”;

 

Private Placement Shares” has the meaning ascribed to it under the heading “Corporate Structure – Private Placement”;

 

Programs and Policies” has the meaning ascribed to it under the heading “Notice to Readers”;

 

Purchase Price” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Purchaser” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

QEF” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

QEF Election” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND into a U.S. Domestic Corporation – Passive Foreign Investment Company Considerations in Connection with the Conversion”;

 

qualifying transaction” has the meaning ascribed to it under the heading “Notice to Readers”;

 

RDSP” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment;

 

Recapitalization” has the meaning ascribed to it under the heading “ Certain United States Federal Income Tax Considerations – Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares – Conversion of BRND Class A Restricted Voting Shares to Subordinate Voting Shares”;

 

Redemption Call Purchase Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Call Right”;

 

Redemption Call Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Call Right”;

 

Redemption Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Redemption Deadline” means 5:00 p.m. (Toronto time) on the fifth business day before the meeting of BRND Shareholders to consider, among other things, the Transaction, or 5:00 p.m. (Toronto time) on the fifth business day before any adjournment(s) or postponement(s) thereof;

 

Redemption Event” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

10

 

 

Redemption Notice” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Redemption Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Registering Shareholders” has the meaning ascribed to it under the heading “Corporate Structure – Registration Rights Agreement;

 

Registration Rights Agreement” has the meaning ascribed to it under the heading “Corporate Structure – Registration Rights Agreement;

 

Related Person” has the meaning ascribed to it in the NEO Exchange Policies;

 

Resident Holder” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada”;

 

RESP” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

Restricted Voting Shares” means restricted voting shares of the Resulting Issuer;

 

Resulting Issuer” has the meaning ascribed to it under the heading “Notice to Readers”;

 

Resulting Issuer Board” means the board of directors of BRND immediately following the closing of the Transaction;

 

Resulting Issuer Pro Forma Financial Statements” has the meaning ascribed to it under the heading “Financial Statements”;

 

Resulting Issuer Shareholders” means the registered or beneficial holders of the Subordinate Voting Shares and/or the Multiple Voting Shares, as the context requires;

 

Retraction Call Notice” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Retraction Call Right”;

 

Retraction Call Right” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Retraction Call Right”;

 

Retraction Date” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Retraction Price” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Retraction Request” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Retracted Shares” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Exchange of Exchangeable Shares for Subordinate Voting Shares”;

 

Rohrabacher-Blumenauer Amendment” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

RRIF” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

11

 

 

RRSP” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

RSUs” has the meaning ascribed to it under the heading “Equity Incentive Plan Description – Summary of Equity Incentive Plan – Purpose”;

 

SEC” has the meaning ascribed to it under the heading “Securities Laws Exemptions”;

 

Second Amendment” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

Securities” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

Seller Indemnity Cap” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Sellers” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement;

 

Sellers’ Representative” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Sessions Memorandum” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

Shareholder Redemption Notice ” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Redemption Rights”;

 

Short Form Demand Registration” has the meaning ascribed to it under the heading “Registration Rights Agreement – Demand Registration Rights”;

 

Short-Term Lease” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition”; “Short-Term Tenant” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition”;

 

signatories” has the meaning ascribed to it under the heading “Contractual Right of Action”;

 

SOPs” has the meaning ascribed to it under the heading “ Cannabis Market Overview – Legal Regulatory Matters – California State Level Overview – California Licenses and Regulations – Operating Procedure Requirements”;

 

SPAC” has the meaning ascribed to it under the heading “Notice to Readers”;

 

SPAC Closing Cash Minimum” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Investor Rights Agreement” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Series A Preferred Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Series A Warrants” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

SoCal Greenhouse” has the meaning ascribed to it under the heading “Corporate Structure – Proposed Transactions”;

 

SoCal Greenhouse Facility Acquisition Agreement” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – California Option Agreement”;

 

12

 

 

SoCal Greenhouse Agreements” has the meaning ascribed to it under the heading “SoCal Greenhouse Acquisition – SoCal Greenhouse Acquisition Agreements”;

 

Sponsor Shares” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Staff Notice 51-352” has the meaning ascribed to it on the cover page hereto;

 

State” means a state of the United States, as the context requires;

 

Subordinate Voting Shares” means subordinate voting shares of BRND or the Resulting Issuer, as applicable;

 

Substances Act” has the meaning ascribed to it under the heading “Cannabis Market Overview”;

 

Target Business” means, GH Group, Inc.;

 

Target Disclosure” has the meaning ascribed to it under the heading “Risk Factors – General Legal and Regulatory Risks – Seller Indemnity Cap”;

 

taxable capital gain” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Taxation of Capital Gains and Capital Losses”;

 

Tax Act” means the Income Tax Act (Canada), as amended from time to time, including the regulations thereunder;

 

Tax Proposals” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations”;

 

TFSA” has the meaning ascribed to it under the heading “Certain Canadian Federal Income Tax Considerations – Residents of Canada – Eligibility for Investment”;

 

THC” has the meaning ascribed to it under the heading “Cannabis Market Overview – Use of Cannabis”;

 

The Pottery” means The Pottery, Inc.;

 

TMX MOU” has the meaning ascribed to it under the heading “Risk Factors – Risks Related to Legality of Cannabis – The Resulting Issuer’s operations in the U.S. cannabis market may become the subject of heightened scrutiny”;

 

Total Cash” has the meaning ascribed to it under the heading “Corporate Structure – Definitive GH Group Agreement”;

 

Transaction” has the meaning ascribed to it on the cover page hereto;

 

Treasury Regulations” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations”;

 

T&T” has the meaning ascribed to it under the heading “ Cannabis Market Overview – Legal Regulatory Matters – California State Level Overview – California Licenses and Regulations – Cultivation”;

 

UIDs” has the meaning ascribed to it under the heading “Cannabis Market Overview – Compliance with License Requirements – Cultivation Operations Compliance”;

 

United States” or “U.S.” means the United States of America, its territories and possessions, any State of the United States and the District of Columbia;

 

Unsuitable Person” has the meaning ascribed to it under the heading “Description of Securities – Equity Shares and Multiple Voting Shares – Multiple Voting Shares – Compliance Provisions”;

 

13

 

 

USAM” has the meaning ascribed to it under the heading “Cannabis Market Overview – Legal and Regulatory Matters United States Federal Overview”;

 

U.S. GAAP” has the meaning ascribed to it under the heading “U.S. Generally Accepted Accounting Principles”;

 

U.S. Holder” has the meaning ascribed to it under the heading “Certain United States Federal Income Tax Considerations” or under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”, as the context applies;

 

U.S. PCAOB GASS” has the meaning ascribed to it under the heading “U.S. Generally Accepted Accounting Principles”;

 

U.S. Resident” has the meaning ascribed to it under the heading “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Ranking and Liquidation Rights”;

 

U.S. Securities Act” means the Securities Act of 1933;

 

USRPHC” has the meaning ascribed to it under the heading “Risk Factors – Tax Risks – U.S. tax classification of BRND as a U.S. Real Property Holding Company”;

 

Warrant Agent” means Odyssey Trust Company, in its capacity as warrant agent in respect of the Warrant Agreement; and

 

Warrant Agreement” means the warrant agency agreement between BRND and Odyssey Trust Company, as warrant agent, dated May 13, 2019, as it may be amended from time to time.

 

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PROSPECTUS SUMMARY

 

The following is a summary of this prospectus and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus.

 

Unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “$” or “US$” are to United States dollars. References to “C$” are to Canadian dollars.

 

Description of Mercer Park Brand Acquisition Corp.

 

BRND is a corporation incorporated under the laws of the Province of British Columbia. BRND is a special purpose acquisition corporation that was organized for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving BRND, which is referred to throughout this prospectus as BRND’s “qualifying transaction”.

 

BRND’s sponsor, Mercer, is a limited partnership of which Mercer Park CB II GP, LLC is the general partner, and which is indirectly controlled by Jonathan Sandelman. Mercer Park, L.P., the parent of Mercer, is a privately- held family office based in New York, New York, the executive leadership and entrepreneurial expertise, investment and deal experience and network of which have been a critical component of BRND’s identification and consummation process in respect of the Transaction.

 

On April 8, 2021, BRND announced that it had entered into the Definitive GH Group Agreement with GH Group pursuant to which, among other things, BRND shall acquire, directly or indirectly, all of the common equity of GH Group. Up to $12 million of non-convertible Class A preferred shares of GH group may remain outstanding at closing of the Transaction. This acquisition is intended to collectively constitute BRND’s “qualifying transaction”. Subject to obtaining certain approvals and the satisfaction of certain conditions stipulated therein, it is anticipated that these acquisitions will be completed by mid-2021.

 

The post-closing head office of the Resulting Issuer will be located at 3645 Long Beach Blvd., Long Beach, California, USA.

 

See “Corporate Structure – Mercer Park Brand Acquisition Corp.” and “Corporate Structure – Definitive GH Group Agreement” at page  29 of this prospectus.

 

On April 8, 2021, BRND also announced a private placement of $ 85 million of non-voting shares of MPB PipeCo, a wholly owned subsidiary of BRND at a price of $10.00 per share. The closing of the Private Placement is scheduled to occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares issued will be exchanged for Equity Shares on a one- for-one basis. The Private Placement is subject to customary conditions, including the closing of the Transaction. See “Corporate Structure – Private Placement” at page  38 of this prospectus.

 

Definitive GH Group Agreement

 

On April 8, 2021, BRND, and its wholly owned subsidiary MPB AcquisitionCo, and its wholly owned subsidiary Merger Sub, entered into the Definitive GH Group Agreement with GH Group, the sellers listed on the signature page thereto, Kyle Kazan as sellers’ representative and certain GH Group Founders, whereby BRND intends to effectuate a merger of Merger Sub with and into GH Group, with GH Group continuing as the surviving corporation and a majority-owned subsidiary of MPB AcquisitionCo.

 

The description of the Definitive GH Group Agreement, both in this section and elsewhere in this prospectus (see “Corporate Structure – Definitive GH Group Agreement” at page  30 of this prospectus), is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Definitive GH Group Agreement, which may be found on BRND’s profile on SEDAR at www.sedar.com.

 

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Proposed Transactions

 

GH Group has executed a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. See “SoCal Greenhouse Acquisition” at page  80 of this prospectus.

 

GH Group has executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California. See “Element 7” at page  80 of this prospectus.

 

In addition, GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional licenses in California. See “Element 7” at page  80 of this prospectus.

 

Cannabis Market Overview

 

The legalization and regulation of marijuana for medical and adult use is being implemented at the State level in the United States. State laws regulating cannabis are in direct conflict with U.S. federal law, which makes cannabis use and possession federally illegal. Although certain States and territories of the U.S. 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 under any and all circumstances under the Substances Act. Although the Target Business’ activities are compliant with applicable United States State and local law, strict compliance with State and local laws with respect to cannabis may neither absolve BRND of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against BRND. The risk of federal enforcement and other risks associated with BRND’s business are described under “Risk Factors”.

 

As of December 31, 2020, the date of the Audited GH Group Financial Statements, 100% of GH Group’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of GH Group. As such, GH Group’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

 

See “Cannabis Market Overview” at page  50 of this prospectus for further details on the legal and regulatory environment of the cannabis market.

 

The Business of GH Group

  

Key Assets   Description
2 Greenhouse/Cultivation Facilities

1 Manufacturing and Distribution Facility

4 Dispensaries
 

GH Group is a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in California. GH Group has been cultivating cannabis since 2015 and was one of the first three (3) recipients of a license to open a retail dispensary in Santa Barbara, California. It possesses (i) an aggregate of 550,000 sq. ft. in two operating greenhouse facilities in Santa Barbara county that both include associated processing facilities, (ii) a volatile and non-volatile manufacturing and distribution facility in Lompec, California, and (iii) an additional non-volatile manufacturing facility in Long Beach, California. GH Group owns three (3) operating retail dispensaries in Santa Barbara, Los Angeles and Berkeley, California and partially owns and manages a fourth located in Los Angeles that includes a specialty indoor cultivation facility. GH Group is brand- focused with cannabis products including flower, oil and concentrate, tinctures, and vaporizer products. GH Group’s brands include Forbidden Flowers, Mama Sue and Glass House Farms, which is the second largest cannabis flower brand in California according to data from BDS Analytics. See “The Business of GH Group” at page  69 of this prospectus.

 

GH Group has agreed to acquire additional dispensaries (see “Element 7” at page  80 of this prospectus) and a greenhouse complex in Southern California (see “SoCal Greenhouse Acquisition” at page  80 of this prospectus). Each such transaction is conditional upon closing of the Transaction and is subject to customary closing conditions, including regulatory approval.

  

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Mercer Park Brand Acquisition Corp. – Company Overview

 

The Resulting Issuer, after the Transaction, will be a leading vertically-integrated cannabis company in the United States focused on recreational and wellness applications, with an initial portfolio of high quality vertically-integrated operations in California.1 GH Group was selected based on its anticipated 2021 financial results and strength of the resulting platform for future growth, with a focus on positive Adjusted EBITDA2 and vertical integration in the largest state cannabis market in the United States of America.

 

The Resulting Issuer’s combined operations will initially employ over approximately 300 people across four (4) cultivation and production facilities (including the proposed SoCal Greenhouse) and four (4) dispensaries across the State of California. The Resulting Issuer’s post- closing operations, which will be made up of the existing operations of GH Group, will be led by proven operators with deep talent pools and expertise to contribute to the Resulting Issuer’s future growth.

 

The Resulting Issuer’s executive team comprises proven leaders in marketing, healthcare, operations and finance, areas essential for the future success of the Resulting Issuer.

 

Kyle Kazan, Chairman, Chief Executive Officer and Director

 

A seasoned investor and expert manager of private equity funds with over two (2) decades of domestic and international experience, Kyle has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. Kyle also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the vertically integrated GH Group.

 

Graham Farrar, President and Director

 

Graham is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Farrar served as a board member for Heal the Ocean, was a founder and partner of ebook publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry.

 

Derek Higgins, Chief Financial Officer

 

Derrek Higgins serves as Chief Financial Officer for GH Group. Derrek has day to day responsibility managing the financial actions and planning of GH Group, overseeing cash flow, leading capital raises, analyzing mergers and acquisitions, and implementing growth strategies. He has more than 20 years of public and private company financial expertise in preparing venture-backed startups for public listings, representing shareholders and implementing comprehensive profitability and working capital plans.

 

 

1 Subject to receipt of any necessary State and local regulatory approvals in California.

2 See “Non-U.S. GAAP Measures”.

 

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Jamin Horn, Corporate Secretary

 

Jamin has over a decade of legal experience in counseling high-growth private and public companies, principally in the medical and digital technology sectors, and over six years of experience advising California and multi-state cannabis operators and associated technology service providers. Prior to becoming an attorney, he worked on investor-side early-stage financing and intellectual property commercialization planning and analysis. He is a member of the California bar, the Association of Corporate Counsel and the International Cannabis Bar Association.

 

Daryl Kato, Chief Operating Officer

 

Daryl is a seasoned leader with over 20 years of experience in operations, finance, accounting, and technology across multiple industry sectors and consumer packaged goods categories. Most recently, he served as the Chief Financial Officer and Board Director at Nissin Foods USA. Prior to that, he co-founded and sold a digital out-of-home advertising company and completed several business transformation projects while with Nestlé USA, Global Nestle Professional, Farmer Brothers (NASDAQ: FARM), and Mitsubishi UFJ Financial Group (NYSE: MUFG). Kato began his career in Deloitte’s audit practice where he earned his CPA license.

 

Joe Andreae, Vice President, Business Development

 

Joe is a true veteran of legal cannabis markets, having spent over a decade as a serial cannabis entrepreneur. With multiple endeavors spanning 3 states, he has acquired a range of expertise that encompasses nearly every aspect of the cannabis business, beginning in the cultivation supply sector with lighting and hydroponic equipment for the medical market. From there, he dove ever-deeper into the industry, as a pioneer of the extraction sector in Colorado, co-owner of a medical cannabis dispensary in California, founder/owner of Madrone Oregon, which held 11 state cultivation licenses, and President of the ceramic accessories brand, Hive. Most recently, he served as the CEO of a premium California concentrates brand for three years, before bringing his extensive industry knowledge and leadership to GH Group.

 

It is intended that the Resulting Issuer will continue to seek opportunities to broaden its existing footprint in California and elsewhere with potential for branding and other synergies, while maintaining a focus on vertical integration. Such acquisitions may be directly “plant-touching” or may be in related businesses whose inclusion within the Resulting Issuer portfolio would be accretive to future growth prospects.

 

Risk Factors

 

The acquisition of any of the securities of BRND is speculative, involving a high degree of risk. An investment in the securities of BRND should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. BRND’s shareholders should evaluate carefully the risks identified in this prospectus under the heading “Risk Factors” associated with BRND’s securities, along with the risk factors described elsewhere in this prospectus.

 

Summary of Certain Canadian Federal Income Tax Considerations

 

For a summary of certain Canadian federal income tax considerations applicable to a beneficial owner of the Securities following the Transaction, see “Certain Canadian Federal Income Tax Considerations” at page  156 of this prospectus.

 

Holders are urged to consult their own income tax advisors with respect to the tax consequences applicable to the acquisition, holding and disposition of Securities based on their own particular circumstances.

 

Summary of Certain United States Federal Income Tax Considerations

 

For a summary of certain United States federal income tax considerations of the Transaction applicable to a U.S. Holders, please see “Certain United States Federal Income Tax Considerations” at page  160 of this prospectus.

 

Holders are urged to consult their own income tax advisors with respect to the tax consequences applicable to the acquisition, holding and disposition of Securities based on their own particular circumstances.

 

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Summary of Financial Information

 

Pro Forma Consolidated Capitalization

 

Completion of the Transaction requires, among other things, shareholder approval of the BRND Shareholders at a meeting of the BRND Shareholders, which meeting has not yet taken place. In addition, as the Transaction constitutes BRND’s qualifying transaction, holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, whether they vote for or against, or do not vote on, the qualifying transaction, provided that they deposit (and do not validly withdraw) their shares for redemption prior to the Redemption Deadline. A description of the redemption rights will be included in the management information circular to be mailed to BRND Shareholders in connection with the shareholders meeting. A redeeming BRND shareholder is entitled (conditional on closing) to receive an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion (per BRND Class A Restricted Voting Share) of: (A) the escrowed funds available in the BRND’s escrow account at the time of the BRND Meeting, including interest and other amounts earned thereon; less (B) an amount equal to the total of (i) applicable taxes payable by BRND 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 BRND. For greater certainty, such amount will not be reduced by the amount of any tax of BRND under Part VI.1 of the Tax Act or the deferred underwriting commissions per BRND Class A Restricted Voting Share held in escrow. This redemption amount is anticipated to be $10.11 per BRND Class A Restricted Voting Share, assuming a June 4, 2021 redemption date.

 

The following table sets forth the consolidated capitalization of the Resulting Issuer as of December 31, 2020 adjusted to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing, assuming a zero and 25% level of redemptions of Class A Restricted Voting Shares. Since December 31, 2020, other than in the normal course of business, there has been no material change in the equity and debt capital of GH Group.

 

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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix F, Appendix H, Appendix J and Appendix L, respectively.

 

    As of December 31, 2020, as adjusted after giving     As of December 31, 2020, as adjusted after giving  
    effect to (i) the Transaction and the acquisition of     effect to the Transaction and the acquisition of  
    Farmacy Berkeley, (ii) the proposed acquisition of     Farmacy Berkeley, (ii) the proposed acquisition of  
    SoCal Greenhouse, (iii) the proposed Element 7     SoCal Greenhouse, (iii) the proposed Element 7  
    Merger, (iv) the Private Placement, and (v) the GH     Merger, (iv) the Private Placement, and (v) the GH  
    Group Financing and assuming no redemptions of     Group Financing and assuming 25% redemptions of  
    BRND Class A Restricted Voting Shares     BRND Class A Restricted Voting Shares  
Cash and cash equivalents     381,177,330       177,408,802  
Debt     989,554       989,554  
Shareholders’ equity(1)     713,882,057       512,632,057  
Total Capitalization     714,871,611       513,621,611  
                 
Debt, net of cash     (380,187,776 ) (176,419,248 )

 

Notes:

(1) Excludes the Equity Shares issuable upon the exercise of the BRND Warrants, which are exercisable commencing 65 days after the completion of the Transaction. See “Corporate Structure – Warrant Agreement” at page  41 of this prospectus.

 

Summary Pro Forma Consolidated Financial Information

 

The unaudited pro forma consolidated statement of financial position of BRND as at December 31, 2020 (see “Mercer Park Brand Acquisition Corp. Unaudited Pro Forma Consolidated Statement of Financial Position As at December 31, 2020” at page  92 of this prospectus) has been prepared by BRND to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2020. The unaudited pro forma consolidated statement of operations of BRND for the year ended December 31, 2020 (see “Mercer Park Brand Acquisition Corp. Unaudited Pro Forma Consolidated Statements of Operations For the Year Ended December 31, 2020” at page  93 of this prospectus) has been prepared by BRND to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2019.

 

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This summary pro forma financial information 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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix F, Appendix H, Appendix J, and Appendix L, respectively.

 

The pro forma financial information has been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would have been achieved if (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing had been completed on the date or for the periods noted above, nor does it purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro forma adjustments that comprise this pro forma financial information, various other factors will have an effect on the financial condition and results of operations of BRND following the completion of (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing including an adjustment as it relates to the closing of the Transaction which assumes no redemption of BRND Class A Restricted Voting Shares (the actual redemption level is uncertain, but see Note 5 of the Resulting Issuer Pro Forma Financial Statements for the illustrative effect of 0% and 25% redemption levels). See “Notes to Pro Forma Condensed Consolidated Combined Financial Information” included in Appendix L for a discussion of pro forma adjustments. See also “Caution Regarding Forward-Looking Statements” at page  24 of this prospectus.

 

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Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Financial Position

 

As at December 31, 2020

 

    Mercer Park BRAND     GH Group     iCann     Element 7     Subtotal         Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     December 31, 2020     December 31, 2020     December 31, 2020     Notes   Adjustments     December 31, 2020  
US$   $     $                 $         $     $  
ASSETS                                                            
Current                                                            
Cash     2,095,023       4,535,251       158,928               6,789,202     5a     407,537,056       365,936,258  
                                            5d     (118,890,000 )        
                                            5f     (16,100,000 )        
                                            5i     85,000,000          
                                            5l     (400,000 )        
                                            5k     2,000,000          
Deposit                             61,893       61,893     5k     10,000,000       10,061,893  
Accounts receivable, trade, no allowance     -       5,141,021                       5,141,021                   5,141,021  
Income tax recoverable     1,209,852       -                       1,209,852                   1,209,852  
Inventory     -       6,866,002       343,289               7,209,291                   7,209,291  
Prepaid Expenses and other assets     -       1,018,212       61,528               1,079,740                   1,079,740  
Notes Receivables             904,534                       904,534                   904,534  
      3,304,875       18,465,020       563,745       61,893       22,395,533           369,147,056       391,542,589  
Operating Lease Right-of-Use Assets,                                                            
Net             2,532,629               538,065       3,070,694                   3,070,694  
Marketable securities held in a escrow account     407,537,056       -                       407,537,056     5a     (407,537,056 )     -  
Intangible assets     -       5,279,000               153,477       5,432,477     5d     171,920,360       214,103,880  
                                            5e     (153,477 )        
                                            5e     24,000,000          
                                            5l     12,904,520          
Property, plant and equipment     -       27,192,027       692,645               27,884,672     5d     92,420,992       120,305,664  
Goodwill     -       4,815,999                       4,815,999                   4,815,999  
Deferred tax assets     598,435       -                       598,435     5c(iii)     (598,435 )     -  
Investments             10,701,868                       10,701,868     5l     (2,045,309 )     8,656,559  
Other long term assets     -       554,266                       554,266                   554,266  
Total assets     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  
                                                             
Liabilities                                                            
Current                                                            
Accounts payable and accrued liabilities     396,779       6,570,715       875,599               7,843,093     5g     6,000,000       13,843,093  
Income tax payable     -       4,740,003       209,466               4,949,469                   4,949,469  
Debts/notes payable - current portion     -       601,188                       601,188                   601,188  
Derivative Liabilities             7,365,000                       7,365,000                   7,365,000  
Operating Lease Liabilities - current portion             327,329               155,906       483,235                   483,235  
Due to related parties     349,034       -               531,121       880,155     5e     (531,121 )     349,034  
      745,813       19,604,235       1,085,065       687,027       22,122,140           5,468,879       27,591,019  
                                                             
Deferred underwriters' commission     16,100,000       -                       16,100,000     5f     (16,100,000 )     -  
Class A restricted voting shares subject to redemption     402,500,000       -                       402,500,000     5b     (402,500,000 )     -  
Debts payable - Non-current portion     -       19,072,858                       19,072,858     5j     (18,684,492 )     388,366  
Operating Lease Liabilities - Non-current portion             2,318,852               451,259       2,770,111                   2,770,111  
Deferred Tax Liabilities             1,420,583                       1,420,583                   1,420,583  
Other Non-Current Liabilities     -       849,358                       849,358                   849,358  
Total liabilities     419,345,813       43,265,886       1,085,065       1,138,286       464,835,050           (431,815,613 )     33,019,437  
                                                             
Additional paid-in-capital     (11,684,284 )     -                       (11,684,284 )   5b     402,500,000       667,345,361  
                                            5c(ii)     (390,815,716 )        
                                            5d     100,000,000          
                                            5d     45,451,352          
                                            5e     24,000,000          
                                            5e     531,121          
                                            5e     (153,477 )        
                                            5c(i)     393,996,118          
                                            5c(ii)     26,061,981          
                                            5i     85,000,000          
                                            5j     (18,001,529 )        
                                            5e     584          
                                            5l     (171,325 )        
                                            5l     10,630,536          
Preferred Stock                                           5k     12,000,000       48,686,021  
                                            5j     18,684,492          
                                            5j     18,001,529          
Retained earnings     3,778,837       -                       3,778,837     5i     (3,778,837 )     -  
                                            5g     (6,000,000 )     (6,000,000 )
Members' equity     -       26,274,923       171,325       (384,267 )     26,061,981     5c(ii)     (26,061,981 )     -  
Non-Controlling Interest                             (584 )     (584 )   5e     (584 )     (1,168 )
Total Shareholders' Equity     (7,905,447 )     26,274,923       171,325       (384,851 )     18,155,950     -     691,874,264       710,030,214  
                                                             
Total liabilities and members' equity     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  

 

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Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Operations

 

As at December 31, 2020

 
    Mercer Park BRAND     GH Group     iCann     Element 7               Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     December 31, 2020     December 31, 2020     Subtotal     Notes   Adjustments     December 31, 2020  
US$   $     $           $     $         $     $  
Revenues, net of discounts     -       48,259,601       3,607,307               51,866,908                 51,866,908  
Cost of goods sold     -       29,519,143       2,621,272               32,140,415                 32,140,415  
      -       18,740,458       986,035       -       19,726,493           -     19,726,493  
Gross profit (loss)     -       18,740,458       986,035       -       19,726,493           -     19,726,493  
                                                           
Expenses                                                          
Transaction costs     -       -                       -     5g     6,000,000     6,000,000  
General and administrative     752,259       18,637,477       1,798,289       274,397       21,462,422                 21,462,422  
Sales and marketing     -       1,489,664       166,784               1,656,448                 1,656,448  
Professional Fees     -       2,040,004       71,570               2,111,574                 2,111,574  
Depreciation and Amortization     -       2,576,263       108,672               2,684,935                 2,684,935  
Foreign exchange loss (gain)     43,142       -                       43,142                 43,142  
Total Expenses     795,401       24,743,408       2,145,315       274,397       27,958,521           6,000,000     33,958,521  
                                                           
Net income (loss) from operations     (795,401 )     (6,002,950 )     (1,159,280 )     (274,397 )     (8,232,028 )         (6,000,000 )   (14,232,028 )
                                                           
Other (income) expense                                                          
Share of (income) loss on equity investments     -       2,126,112                       2,126,112                 2,126,112  
Interest expense     -       2,179,137       327,104               2,506,241                 2,506,241  
Interest income     (1,742,747 )     (115,572 )                     (1,858,319 )               (1,858,319 )
Loss on Change in Fair Value of Derivative Liablities             251,663                       251,663                 251,663  
Other expense (income)     -       (203,345 )     32,566               (170,779 )               (170,779 )
Total other (income) expense     (1,742,747 )     4,237,995       359,670       -       2,854,918           -     2,854,918  
                                                           
Income tax (recovery) expense     -       6,418,533       207,868               6,626,401                 6,626,401  
                                                           
Net Income (loss) and comprehensive income (loss)     947,346       (16,659,479 )     (1,726,818 )     (274,397 )     (17,713,348 )         (6,000,000 )   (23,713,348 )
                                                           
Net Income (Loss) Attributable to Non-Controlling Interest                             (584 )     (584 )   5e     584     -  
                                                           
Net Loss Attributable to Members Interest     947,346       (16,659,479 )     (1,726,818 )     273,813       (17,713,932 )         (5,999,416 )   (23,713,348 )

 

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NOTICE TO READERS

 

This prospectus is being filed by BRND, which is a corporation incorporated under the laws of the Province of British Columbia. BRND is a special purpose acquisition corporation (“ SPAC”) that was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination involving BRND that will qualify as its “qualifying transaction”.

 

On April 8, 2021, BRND announced that it had entered into the Definitive GH Group Agreement (as defined below) with GH Group pursuant to which, among other things, BRND shall acquire, directly or indirectly, all of the common equity of GH Group. Up to $12 million of non-convertible Series A Preferred Shares of GH Group may remain outstanding at closing of the Transaction. Existing shareholders of BRND (who, in the case of holders of BRND Class A Restricted Voting Shares (as defined below), do not choose to redeem their shares) will continue to hold an interest in BRND after giving effect to the Transaction. In connection with the completion of the Transaction, BRND intends to change its name to “Glass House Brands Inc.”.

 

BRND will indirectly own 100% of the common equity of GH Group. See “The Business of GH Group” and “Corporate Structure – Definitive GH Group Agreement”. See “Description of Securities – Capital Structure” for a description of the intended capital structure of the Resulting Issuer (as defined below).

 

This prospectus is being filed in accordance with the NEO Exchange Listing Manual in connection with the completion of BRND’s qualifying transaction. Unless otherwise indicated or where inapplicable, the disclosure in this prospectus has been prepared assuming that the Transaction has become effective. References to the “Resulting Issuer” in this prospectus are to BRND after giving effect to the Transaction, as the context requires.

 

The information provided herein concerning the Resulting Issuer following the completion of the Transaction is provided as of the date of this prospectus. Accordingly, the information provided herein is subject to change prior or subsequent to the date hereof. See “Caution Regarding Forward-Looking Statements”.

 

Unless otherwise indicated, references herein to the programs, policies, procedures, practices, guidelines, mandates and plans (collectively, the “Programs and Policies”) of BRND refer, in each case, to the Programs and Policies of the Resulting Issuer which are expected to be formally ratified and adopted by the Resulting Issuer’s board of directors (the “Resulting Issuer Board”) subsequent to the Transaction. Unless otherwise indicated, the disclosure in respect of the Programs and Policies contained in this prospectus is presented on the assumption that the Programs and Policies have been formally ratified by the Resulting Issuer Board in such form and have been instituted by the Resulting Issuer. Notwithstanding the foregoing, prior to the formal ratification and adoption of each of the Programs and Policies, it is expected that the Resulting Issuer Board will review and adjust such Programs and Policies to the extent necessary to seek to ensure that the specific requirements of the Resulting Issuer and its operations are met. Accordingly, the disclosure contained in this prospectus in respect of such Programs and Policies remains subject to revision.

 

Unless otherwise specified, all dollar amounts are expressed in United States dollars and all references to “$” or “US$” are to United States dollars. References to “C$” are to Canadian dollars.

 

The following table sets forth, for the periods indicated, the high, low, average and period-end rates of exchange for one U.S. dollar, expressed in Canadian dollars, published by the Bank of Canada during the respective periods, based on the daily average exchange ratee published by the Bank of Canada.

 

    Year Ended
December 31
 
    2020   2019   2018  
Rate at end of period   C$ 1.2732   C$ 1.2988   C$ 1.3642  
Average rate during period   C$ 1.3415   C$ 1.3269   C$ 1.2957  
High rate for period   C$ 1.4496   C$ 1.3600   C$ 1.3642  
Low rate for period   C$ 1.2718   C$ 1.2988   C$ 1.2288  

 

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GH Group reports certain non-U.S. GAAP (as defined below) measures that are used to evaluate the performance of the business and the performance of its segments, as well as to manage its capital structures. As non-U.S. GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined and reconciled with their most directly comparable U.S. GAAP (as defined below) measure. See “Non-U.S. GAAP Measures”.

 

The Resulting Issuer Pro Forma Financial Statements included in Appendix L to this prospectus assume the completion of the Transaction. The Resulting Issuer Pro Forma Financial Statements 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 Element 7 Audited Annual Financial Statements included in Appendix A, Appendix C, Appendix F, Appendix H and Appendix K, respectively.

 

U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

 

The BRND Audited Annual Financial Statements and the summary pro forma financial information of the Resulting Issuer attached as Appendix A and Appendix L, respectively, to this prospectus have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and the BRND Audited Annual Financial Statements are being audited in accordance with the standards of the U.S. Public Company Accounting Oversight Board (“U.S. PCAOB GAAS”). The GH Group Audited Annual Financial Statements, the Bud and Bloom Audited Financial Statements, the Farmacy Berkeley Audited Annual Financial Statements and the Element 7 Audited Annual Financial Statements, attached as Appendix C, Appendix F, Appendix H and Appendix K, respectively, to this prospectus, are being prepared in accordance with U.S. GAAP and audited in accordance with U.S. PCAOB GAAS. See “Securities Laws Exemptions”.

 

After the completion of the Transaction, the Resulting Issuer intends to file its financial statements required by Canadian securities laws prepared in accordance with U.S. GAAP and audited as required in accordance with U.S. PCAOB GAAS under Sections 3.7 and 3.8 of National Instrument 52-107 – Acceptable Accounting Principles and Auditing Standards (“NI 52-107”), permitting the continued use of U.S. GAAP and U.S. PCAOB GAAS by the Resulting Issuer.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements in this prospectus are prospective in nature and include forward-looking information and/or forward-looking statements within the meaning of applicable securities laws (collectively, “forward- looking statements”). All information, other than statements of historical facts, included in this prospectus that address activities, events or developments that BRND expects or anticipates will or may occur in the future is “forward-looking information”. Forward-looking statements include, but are not limited to:

 

the extent of the impact of COVID-19, including government and/or regulatory responses to the outbreak (see “COVID-19”);

 

statements concerning the completion of, and matters relating to, the Transaction and the expected timing related thereto;

 

the likelihood of the Transaction being completed;

 

the likelihood of the Private Placement (as defined below) being completed;

 

the redemption amount, if any, in respect of the BRND Class A Restricted Voting Shares;

 

the members of the Resulting Issuer Board and the executive officers of the Resulting Issuer following the Transaction;

 

the expected operations, financial results and condition of the Resulting Issuer following the Transaction;

 

general economic trends;

 

the regulatory and legal environment relating to cannabis in the United States and Canada;

 

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 in which the Resulting Issuer operates;

 

cannabis cultivation, production and extraction capacity estimates and projections;

 

24

 

 

additional funding requirements;

 

statements based on the BRND Pro Forma Financial Statements;

 

the Resulting Issuer’s Programs and Policies;

 

the Resulting Issuer’s future objectives and strategies to achieve those objectives;

 

the listing or continued listing of the Equity Shares (excluding the Multiple Voting Shares which will not be listed securities) and BRND Warrants on the NEO Exchange;

 

any market created for the Resulting Issuer’s or BRND’s securities;

 

the estimated cash flow, capitalization and adequacy thereof for the Resulting Issuer following the Transaction;

 

the expected benefits of the Transaction to, and resulting treatment of, holders of BRND Class A Restricted Voting Shares, BRND Class B Shares (as defined below), and BRND Warrants;

 

the amount and frequency of any dividend which may be paid on Equity Shares in the future;

 

the anticipated effects of the Transaction;

 

the number of Equity Shares outstanding following the Transaction;

 

the Resulting Issuer’s compensation of its directors and executive officers;

 

the satisfaction of the conditions to consummate the Transaction; 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.

 

Forward-looking statements generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “would”, “could”, “will”, “intend”, “target”, “forecast”, “project”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “design”, “goal”, “plans” or “continue”, or similar expressions suggesting future outcomes or events.

 

Forward-looking statements reflect BRND’s and/or GH Group’s management’s current beliefs, expectations and assumptions and are based on information currently available to management, management’s historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. With respect to the forward-looking statements included in this prospectus, BRND and GH Group have made certain assumptions with respect to, among other things:

 

the anticipated approval of the Transaction by the BRND Shareholders;

 

the anticipated acquisition of SoCal Greenhouse by GH Group:

 

the anticipated merger of GH Group with certain subsidiary entities of Element 7 that are in the process applying for up to 17 state and local retail cannabis licenses in California;

 

the anticipated entry into the Element 7 Consulting Agreement between Element 7 and GH Group;

 

the anticipated receipt of any required regulatory approvals and consents (including the final approval of the NEO Exchange);

 

the expectation that both BRND and GH Group will comply with the terms and conditions of the Definitive GH Group Agreement;

 

the expectation that no event, change or other circumstance will occur that could give rise to the termination of the Definitive GH Group Agreement;

 

that no unforeseen changes in the legislative and operating frameworks for the Resulting Issuer will occur;

 

that the Resulting Issuer will meet its future objectives and priorities;

 

that the Resulting Issuer will have access to adequate capital to fund its future projects and plans;

 

that the Resulting Issuer’s future projects and plans will proceed as anticipated;

 

that there will be no material changes in the U.S. legal and regulatory environment relating to cannabis;

 

taxes payable;

 

customer growth, pricing, usage and churn rates; technology deployment;

 

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.

 

25

 

 

Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the future circumstances, outcomes or results anticipated or implied by such forward-looking statements will occur or that the plans, intentions or expectations upon which the forward- looking statements are based will occur. By their nature, forward-looking statements involve known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from those contemplated by such statements. Factors that could cause such differences include, but are not limited to:

 

cannabis is a controlled substance under the Substances Act (as defined below);

 

enforcement of cannabis laws could change;

 

the Resulting Issuer may be subject to restricted access to banking services in the United States and Canada;

 

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;

 

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 or Canada;

 

risks associated with the Multiple Voting Shares, including unpredictability caused by the Resulting Issuer’s capital structure and the concentration of voting control and the ability to influence corporate matters by the holders of the Multiple Voting Shares;

 

the issuance of Preferred Shares (as defined below) could decrease earnings and assets available to holders of the Equity Shares and may decrease the market price of the Equity Shares;

 

risk of civil asset forfeiture;

 

lack of access to U.S. bankruptcy protection;

 

BRND Shareholders will only have limited and indirect recourse against the vendors of the Target Business;

 

enforceability of contracts;

 

changes in Canadian regulation;

 

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;

 

conditions precedent or approvals required for the Transaction not being obtained;

 

the potential benefits of the Transaction not being realized;

 

BRND and GH Group’s abilities to delay or amend the implementation of all or part of the Transaction or to proceed with the Transaction even if certain consents and approvals are not obtained on a timely basis;

 

future factors that may arise making it inadvisable to proceed with, or advisable to delay, all or part of the Transaction;

 

the costs related to the Transaction that must be paid even if the Transaction is not completed;

 

no assurance that the Private Placement will be completed;

 

risks inherent in the current state of scientific research related to the benefits of cannabis;

 

competition;

 

ability to attract and retain customers;

 

unfavourable publicity or consumer perception;

 

results of future clinical research;

 

future research may lead to findings that vaporizers and related products are not safe for their intended use;

 

controversy surrounding vaporizers and vaporizer products;

 

limited market data and difficulty to forecast;

 

constraints on marketing products;

 

effects of the COVID-19 pandemic;

 

26

 

 

execution of the Resulting Issuer’s business strategy;

 

effective use of BRND’s non-redeemed escrowed funds and the net proceeds from the Private Placement;

 

limited operating history of BRND and GH Group;

 

reliance on management;

 

conflicts of interests;

 

the SoCal Greenhouse 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;

 

developments in the cannabis industry;

 

reputational risks for BRND, the Resulting Issuer and third parties;

 

advertising and promotional risk;

 

product liability;

 

product 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;

 

website accessibility;

 

costs of being a public company;

 

difficulty in enforcing judgments and effecting service of process on directors and officers;

 

past performance not being indicative of future results;

 

financial projections may prove materially inaccurate or incorrect;

 

currency fluctuations;

 

market price volatility risks;

 

restrictions on and limited markets for securities of the Resulting Issuer;

 

sales by existing shareholders;

 

subsequent offers will result in dilution to holders of the Equity Shares;

 

the Cashless Exercise (as defined below) feature of the BRND Warrants;

 

global financial conditions;

 

environmental regulation;

 

unknown environmental risks;

 

the dual United States and Canadian tax residence and tax classification of the Resulting Issuer;

 

the deduction of certain expenses of the Resulting Issuer may be restricted;

 

dividends paid by the Resulting Issuer may be subject to withholding tax; and

 

the Resulting Issuer may be subject to net operating loss limitations.

 

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For a further description of these and other factors that could cause actual results to differ materially from the forward-looking statements included in this prospectus, see the risk factors discussed under the heading “Risk Factors” and as described from time to time in the reports and disclosure documents filed by BRND and, following the Transaction, the Resulting Issuer with the Canadian securities regulatory agencies and commissions. This list is not exhaustive of the factors that may impact the forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on forward-looking statements. As a result of the foregoing and other factors, there can be no assurance that actual results will be consistent with these forward-looking statements.

 

All forward-looking statements included in and incorporated into this prospectus are qualified by these cautionary statements. Unless otherwise indicated, the forward-looking statements contained herein are made as of the date of this prospectus and, except as expressly required by applicable law, BRND, its promoter, GH Group, and the Resulting Issuer and its directors and officers undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

 

Readers are cautioned that the actual results achieved may vary from the information provided herein and that such variations may be material. Consequently, there are no representations that actual results achieved will be the same in whole or in part as those set out in the forward-looking statements.

 

COVID-19

 

The global outbreak of 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, store closures, self-imposed quarantine periods and social distancing, have caused and may continue to cause material disruption to businesses globally, resulting in an economic slowdown. The full extent of the impact that COVID-19, including government and/or regulatory responses to the pandemic, will have on the Resulting Issuer is highly uncertain and difficult to predict at this time.

 

GH Group evaluated the risk of supply chain disruption as well as staffing disruption from COVID-19. While GH Group has not to date experienced any failure to secure critical supplies or services, future disruptions in the supply chain are possible and may significantly increase costs or delay production times. To remediate the risk of staffing disruption, GH Group has sought to implement new safety procedures in accordance with the guidance of the U.S. Centers for Disease Control and Prevention at all locations to better protect the health and safety of both employees and customers. These changes include, but are not limited to: (i) all GH Group dispensaries have had plexiglass dividers installed; and (ii) all floors and waiting areas, including exteriors, have had physical distancing signage and posted guidelines installed to seek to ensure physical distancing within facilities. GH Group staff have personal protective equipment and are required to follow necessary sanitary protocols after every transaction. GH Group is re-assessing the response of GH Group to the COVID- 19 pandemic on an ongoing basis. Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact of these developments on all aspects of the Resulting Issuer.

 

MARKET AND INDUSTRY DATA

 

This prospectus relies on and refers to information regarding various companies and certain market and industry data. BRND and/or GH Group have obtained this information and industry data from independent market research reports and/or information made publicly available by such companies. Such reports generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy or completeness of such information is not guaranteed. Although BRND and GH Group believe the market research and publicly available information is reliable, BRND and GH Group have not independently verified and cannot guarantee the accuracy or completeness of that information and investors should use caution in placing reliance on such information.

 

RECENT DEVELOPMENTS

 

On March 10, 2021, Polar Asset Management Partners Inc. (“Polar”) disclosed pursuant to an Alternative Monthly Report under National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues that as at February 28, 2021, Polar, on behalf of client accounts over which it has discretionary trading authority, exercised control or direction over 4,468,143 BRND Class A Restricted Voting Shares, representing approximately 11.1% of the issued and outstanding BRND Class A Restricted Voting Shares. Polar exercises control or direction, but not beneficial or registered ownership, over such BRND Class A Restricted Voting Shares.

 

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CORPORATE STRUCTURE

 

Mercer Park Brand Acquisition Corp.

 

Name, Address and Incorporation

 

BRND was incorporated under the BCBA on April 16, 2019. The head office of BRND is located at 590 Madison Avenue, 26th Floor, New York, New York, USA. The authorized capital of BRND includes an unlimited number of BRND Class A Restricted Voting Shares and an unlimited number of BRND Class B Shares, each without nominal or par value. In addition, BRND’s authorized capital currently includes an unlimited number each of Subordinate Voting Shares and Multiple Voting Shares, but the terms of such shares are expected to be amended. As described below.

 

BRND intends to change its name to “Glass House Brands Inc.” and amend its capital structure in connection with the completion of the Transaction.

 

The Transaction

 

As of the date of this prospectus, BRND is a SPAC that was incorporated under the laws of the Province of British Columbia for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combination involving BRND, which is referred to throughout this prospectus as BRND’s “qualifying transaction”.

 

BRND’s sponsor, Mercer, is a limited partnership of which Mercer Park CB GP II, LLC is the general partner, and which is indirectly controlled by Jonathan Sandelman. Mercer is a privately-held family office based in New York, New York, the executive leadership and entrepreneurial expertise, investment and deal experience and network of which have been a critical component of BRND’s identification and consummation process in respect of the Transaction.

 

On April 8, 2021, BRND announced that it had entered into the Definitive GH Group Agreement to acquire GH Group, which is intended to constitute BRND’s “qualifying transaction”. Subject to obtaining certain approvals and the satisfaction of certain conditions stipulated therein, it is anticipated that this acquisition will be completed by mid-2021.

 

In connection with the Transaction, BRND intends to amend its constating documents to, among other things, (i) create and set the terms of the proposed Restricted Voting Shares and Limited Voting Shares, including applying coattail terms to such shares similar to those applicable to the Subordinate Voting Shares as more particularly described below, (ii) amend the terms of the BRND Class A Restricted Voting Shares to provide that, upon completion of the Transaction, the BRND Class A Restricted Voting Shares shall be converted into Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as applicable (rather than solely into Subordinate Voting Shares), (iii) provide that, upon completion of the Transaction, the BRND Class B Shares shall be directly or indirectly converted on a one-for-one basis into Equity Shares, (iv) amend the terms of the 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, (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder) and (v) amend the terms of the Subordinate Voting Shares issuable on conversion of the BRND Class A Restricted Voting Shares, including by amending the requirements in respect of who may hold Subordinate Voting Shares. BRND intends to issue Multiple Voting Shares to the GH Group Founders in connection with the closing of the Transaction. See “Description of Securities”.

 

Following the closing of the acquisition of GH Group, BRND will indirectly own 100% of the common equity of GH Group. See “Notice to Readers”, “The Business of GH Group”, “Corporate Structure – Definitive GH Group Agreement” and “Risk Factors”.

 

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The head office of the Resulting Issuer is expected be located at 3645 Long Beach Blvd., Long Beach, California. The Resulting Issuer will be a reporting issuer in all of the provinces and territories of Canada, other than Quebec.

 

There is no assurance that the acquisition of GH Group will be completed or, if completed, will be on terms that are exactly the same as disclosed in this prospectus.

 

Definitive GH Group Agreement

 

On April 8, 2021, BRND, and its wholly owned subsidiary MPB AcquisitionCo (“Buyer”), and its wholly owned subsidiary MPB Mergersub Corp. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Definitive GH Group Agreement”) with GH Group, the sellers listed on the signature page thereto (“Sellers”), Kyle Kazan as sellers’ representative (in such capacity, “Sellers’ Representative”) and certain GH Group Founders, whereby BRND intends to effectuate a merger of Merger Sub with and into GH Group (the “Merger”), with GH Group continuing as the surviving corporation and a majority-owned subsidiary of Buyer. BRND, Buyer, Merger Sub, GH Group, Sellers and Sellers’ Representative are referred to individually as a “Merger Party” and collectively as the “Merger Parties”.

 

Pursuant to the terms of the Definitive GH Group Agreement, including the fulfillment of the closing conditions specified therein, all of the issued and outstanding shares of common stock of GH Group prior to the effective time of the merger (“Company Stock”), other than any dissenting shares of Company Stock, will be converted into the right to receive the Per Share Merger Consideration (as defined below) upon the Closing (as defined below). The “Per Share Merger Consideration” is the amount equal to the Merger Consideration divided by the Fully-Diluted Share Number (as defined below). The “Merger Consideration” is the value equal to: (i) the purchase price of $325,000,000 (the “Purchase Price”); minus (ii) the amount of indebtedness of GH Group and its direct and indirect subsidiaries as of the date immediately preceding the closing of the Transaction (the “Closing”); plus (iii) the amount of cash of GH Group and its direct and indirect subsidiaries on the date immediately preceding the Closing; plus (iv) the amount (if any) by which the working capital on the date immediately preceding the Closing exceeds the working capital target of $15,000,000; minus (v) the amount (if any) by which the working capital target of $15,000,000 exceeds working capital on the date immediately preceding the Closing; minus (vi) the number of shares of Series A Preferred Shares outstanding immediately preceding the Closing multiplied by $ 1.27 plus all accrued and unpaid dividends thereon. The “Fully-Diluted Share Number” is the aggregate number of shares of Class A common stock of GH Group outstanding (assuming the conversion of all shares of the Class B common stock of GH Group) and issuable upon the exercise of outstanding warrants and conversion of convertible promissory notes in GH Group at the effective time of the merger.

 

The Fully-Diluted Share Number excludes (i) the aggregate number of shares of Company Stock issuable upon the full exercise of all unvested GH Group options, (ii) any shares of Company Stock (or shares of Company Stock issued upon exercise or conversion of securities convertible into or exercisable for Company Stock) issued in connection with the consummation of the other transactions described below, and (iii) any shares of Company Stock into which the Series A Preferred Shares and Series A Warrants were convertible or exercisable, as applicable, prior to the Closing (unless converted into or exercised for, as applicable, Company Stock prior to the Closing), all of which will remain as obligations of GH Group after the Closing, including the assumption by BRND of the incentive plan of GH Group (the “GH Group Company Incentive Plan”). Each incentive stock option under the GH Group Company Incentive Plan will cease to represent the right to purchase Company Stock and will become an option to purchase a number of Equity Shares. Each vested option under the GH Group Company Incentive Plan that is not an incentive stock option will be converted into the right to receive an economically equivalent number of Exchangeable Shares. Each unvested option under the GH Group Company Incentive Plan that is not an incentive stock option will converted into an economically equivalent number of restricted units of Exchangeable Shares.

 

At the Closing, the Per Share Merger Consideration will be issued in the form of common shares in the capital of Buyer with a value of $10.00 per share that are exchangeable on a one-for-one basis into Equity Shares. The Per Share Merger Consideration will be allocated among the GH Group shareholders in the proportions set forth in the Definitive GH Group Agreement. Upon the consummation of the Closing, the shares of Merger Sub owned by Buyer will automatically be cancelled and retired and will cease to exist, and no consideration will be delivered in exchange therefor.

 

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It is a condition of closing under the Definitive GH Group Agreement that if the SPAC Closing Cash (as such term is defined in the Definitive GH Group Agreement) is less than $250,000,000, the holders of at least two-thirds (2/3rds) of the then outstanding shares of Class B common stock of GH Group shall have approved the consummation of the Closing.

 

The Definitive GH Group Agreement contains a post-closing adjustment mechanism for (i) the level of working capital actually delivered at Closing compared to the closing estimate of working capital, (ii) the actual amount cash at Closing compared to the closing estimate of cash, and (iii) the actual amount of indebtedness at Closing compared to the closing estimate of indebtedness. The amount of actual Merger Consideration will be increased by any excess working capital, any increase in cash and any decrease in indebtedness. The amount of actual Merger Consideration will be decreased by any shortfall in working capital, any decrease in cash and any increase in indebtedness. If the actual Merger Consideration is less than the closing estimate of Merger Consideration by more than $500,000, BRND may reduce the Merger Consideration by the shortfall. If the actual Merger Consideration exceeds the closing estimate of Merger Consideration by more than $500,000, the Merger Consideration will be increased by the excess. Exchangeable Shares with a value (based on $10.00 per share) of $7,500,000 (which make up part of the Merger Consideration) will be held back at Closing for any adjustment to Merger Consideration.

 

The Definitive GH Group Agreement requires the Merger Parties to enter into certain ancillary agreements, including:

 

BRND, Buyer and the Sellers’ Representative, on behalf of the GH Group Shareholders (as defined in the Definitive GH Group Agreement), must enter into an exchange rights agreement setting forth the rights and obligations of the holders of the Exchangeable Shares;

 

the GH Group Founders and the BRND Founders must enter into a lockup agreement, pursuant to which (i) 50% of the Exchangeable Shares issued to the GH Group Founders will be subject to a six (6) month lock-up period and the remaining 50% of the Exchangeable Shares issued to the GH Group Founders will be subject to a 12-month lock-up period, and (ii) the Equity Shares issued to the BRND Founders at Closing will be subject, in addition to certain forfeiture-based restrictions, to similar lock-up restrictions (collectively, the “Lockup Agreement”);

 

Mercer and the GH Group Founders shall be granted registration rights by the Resulting Issuer pursuant to a registration rights agreement (see “Corporate Structure – Registration Rights Agreement”);

 

The BRND Founders will enter into an investor rights agreement with BRND (the “Investor Rights Agreement”), whereby the BRND Founders agree (i) to vote all of their shares of BRND in favour of the transactions contemplated by the Merger Agreement, (ii) that for a period of up to three (3) years following the Closing the BRND Founders may put forward one nominee for the Resulting Issuer Board for as long as the BRND Founders holds at least 50% of their respective Sponsor Shares owned by each of them, respectively, at Closing (assuming forfeited shares to be continued to be owned), and (iii) that the ultimate number of Equity Shares to be issued to the BRND Founders on Closing in exchange for the BRND Class B Shares that were issued to them for nominal consideration in connection with BRND’s initial public offering (the “Sponsor Shares”) be subject to forfeiture as follows:

 

o 50% of the Sponsor Shares (which equals approximately 5,044,875 Sponsor Shares) will be earned upon closing of the Merger and not subject to forfeiture;

 

o 25% of the Sponsor Shares (which equals approximately 2,522,438 Sponsor Shares) will be earned based on meeting the following share price trading thresholds (the “Price Based Earn-out Shares”):

 

§ if within two (2) years following the Closing, the volume weighted average price per share of the Equity Shares on the NEO Exchange or other nationally recognized Canadian or United States stock exchange for 20 consecutive trading days’ (the “20-day VWAP”) meets or exceeds $13.00 (subject to customary adjustments), BRND Founders will earn and retain 2/3 of the Price Based Earn-out Shares; and

 

§ if within two (2) years following the Closing, the 20-day VWAP meets or exceeds $15.00 (subject to customary adjustments), the BRND Founders will earn and retain the remaining 1/3 of the Price Based Earn-out Shares.

 

o in the event the BRND Founders earn any Price Based Earn-out Shares pursuant to the foregoing, BRND will promptly issue to those shareholders of GH Group who were eligible to receive Merger Consideration under the Merger Agreement 1.5 Equity Shares for every Price Based Earn-out Share earned and retained by the BRND Founders;

 

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o 25% of the Sponsor Shares (which equals approximately 2,522,438 Sponsor Shares) (the “Capital Based Earn-out Shares”) will be earned and retained based on the amount of BRND’s closing cash (as such term is defined in the Definitive GH Group Agreement), plus any net proceeds from equity or equity-linked financings (e.g., issuance of convertible debt, sale of common or preferred stock, etc.) closed within one (1) year following the Closing (the “Post Closing Cash”, together with BRND’s Closing Cash, the “Total Cash”, not to exceed $402.5 million);

 

o the Capital Based Earn-out Shares to be earned and retained by Mercer will be calculated based on the following formula (but in no event will more than 2,522,438 Capital Based Earn-out Shares be deemed earned): (Total Cash - $185.0 million) / $202.5 million * 2,522,438;

 

o notwithstanding the provisions above:

 

§ in the event that less than $185.0 million in BRND’s Closing Cash is available immediately following the Closing, as reflected on BRND’s balance sheet (“the “SPAC Closing Cash Minimum”), then no Capital Based Earn-out Shares will be earned by Mercer; and

 

§ in the event the 20-day VWAP reaches $17.00 (subject to customary adjustments) within two (2) years following the Closing, Mercer will earn and retain 100% of the Capital Based Earn-out Shares; provided that, (i) if the SPAC Closing Cash Minimum was not met, no Capital Based Earn-out Shares will be earned and retained, and (ii) if an Anti-Dilution Payment (as defined below) was paid to the GH Group Shareholders, the amount of Capital Based Earn-out Shares to be earned and retained by Mercer will be reduced by the number of Equity Shares issued to the Selling Shareholders under the Anti-Dilution Payment.

 

o if any Post Closing Cash is raised below $10.00 per Equity Share, the GH Group Shareholders will have the benefit of anti-dilution protection whereby additional Equity Shares will be issued by BRND to the GH Group Shareholders (the “Anti-Dilution Payment”);

 

o if BRND consummates a transaction which results in the holders of Equity Shares having the right to exchange their shares for cash, securities or other property having a value equaling or exceeding a 20-day VWAP threshold set forth above (for any non-cash proceeds, as determined based on the agreed valuation set forth in the applicable definitive agreements for such transaction or, in the absence of such valuation, their fair market value), the 20-day VWAP threshold will be considered met and the applicable Sponsor Shares will be considered earned and retained and may participate in such transaction; and

 

o Mercer will use its reasonable best efforts to assist the Resulting Issuer with fundraising efforts and to leverage its capital markets expertise and relationships for a period of at least one (1) year after the Closing.

 

The Definitive GH Group Agreement contains representations and warranties made by (i) BRND, Buyer and Merger Sub to GH Group and the GH Group Shareholders and (ii) GH Group and the GH Group Shareholders to BRND, Buyer and Merger Sub, including representations and warranties related to due organization and qualification, capitalization and authorization to enter into the Definitive GH Group Agreement and carry out their respective obligations thereunder. In addition, GH Group and the GH Group Shareholders made certain customary representations and warranties particular to the conduct of GH Group’s business, the ownership of GH Group’s equity, the ownership, sufficiency and quality of GH Group’s assets, required consents to the Merger, the accuracy of GH Group’s books and records and financial statements, taxes, litigation, certain employee matters, related party transactions, compliance with applicable laws and the lack of any claims, actions or proceedings that may cause a material adverse effect. In addition, BRND, Buyer and Merger Sub made certain representations with respect to required consents, securities law matters, its financial statements, tax matters, related party transactions, prospectus disclosures, and subsidiaries. These representations and warranties may be subject to important qualifications, limitations and exceptions agreed to by the Merger Parties, including the uncertainty surrounding the legality of cannabis under U.S. federal law.

 

The representations and warranties of GH Group and the GH Group Shareholders and BRND, Buyer and Merger Sub contained in the Definitive GH Group Agreement have customary survival periods following the Closing, during which time indemnification for breaches may be sought against GH Group and the GH Group Shareholders or against BRND, Buyer and Merger Sub for any breaches or inaccuracies, subject to negotiated limitations, baskets and caps.

 

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The Definitive GH Group Agreement contains pre-Closing and post-Closing covenants by each party (including confidentiality, non- compete and non-solicit provisions imposed on certain of the GH Group Shareholders). Prior to Closing, the Merger Parties agree to cooperate and use commercially reasonable efforts to complete the transaction and to secure the necessary approvals, consents, registrations, permits, authorizations and other confirmations for Closing. Additionally, GH Group and the GH Group Shareholders agreed not to solicit or enter into any discussions regarding a similar transaction with any other third party. Prior to the Closing, GH Group will be required to be operated in the ordinary course of its business (except for certain agreed upon fund raising necessary for the other transactions described below). Meanwhile, BRND agrees to file a prospectus with the Ontario Securities Commission and the NEO Exchange and prepare a circular, if applicable, hold shareholder meetings and, if applicable, hold Warrantholder meetings for all necessary approvals for the acquisition, as required by the NEO Exchange and applicable Canadian securities regulators. Post-Closing, the Resulting Issuer will adopt an equity incentive plan as approved by the Resulting Issuer Board.

 

The lockup restrictions in the Lockup Agreeement may be eliminated if Buyer or BRND undergoes certain fundamental changes within the 12-month period following the closing, such as liquidation or winding up, change of control pursuant to a merger or similar business combination transaction or sale of a majority of their shares or all or substantially all of their consolidated assets.

 

The Definitive GH Group Agreement contains customary closing conditions and other conditions that are specific to the transaction, including:

 

For the benefit of both parties:

 

o no governmental authority making the transactions contemplated in the Definitive GH Group Agreement illegal (other than existing federal cannabis laws);

 

o no proceeding will have been commenced and remain pending against any Merger Party which would reasonably be expected to prevent the Closing; provided, that such proceeding is not attributable to any breach or violation of Buyer or BRND of the terms of the Definitive GH Group Agreement or any Other Transaction (as defined in the Definitive GH Group Agreement);

 

o receipt of all required consents and approvals;

 

o BRND will have received shareholder approval from the shareholders of BRND;

 

o the U.S. Hart-Scott-Rodino Antitrust Improvements Act (the “HSR Act”) waiting period applicable to the transactions contemplated by the Definitive GH Group Agreement will have expired;

 

o the approval of the NEO Exchange will have been obtained by BRND to enable the Merger to qualify as BRND’s qualifying transaction and the listing of the Equity Shares on the NEO Exchange after the Closing Date;

 

o a final receipt for this prospectus will have been issued by or on behalf of the OSC (as defined below);

 

o the strategic opportunities agreement between BRND and one of its affiliates shall have been terminated;

 

o on or prior to the effective time of the Merger, all of the unredeemed BRND Class A Restricted Voting Shares and BRND Class B Shares outstanding immediately prior to the Closing will have been converted directly or indirectly into Equity Shares; and

 

o the Investor Rights Agreement will be in full force and effect, and neither BRND nor Mercer will be in breach thereof, will have failed to perform thereunder or will have threatened to terminate or repudiate the Investor Rights Agreement.

 

For the benefit of Buyer:

 

o the representations and warranties of the GH Group Shareholders and GH Group contained in the Definitive GH Group Agreement will be true and correct in all material respects as of the date of Closing (without giving effect to any materiality qualifiers), except where the failure to be so true and correct has not had and would not be reasonably likely to have a material adverse effect on GH Group; provided that certain specified representations and warranties of GH Group and the GH Group Shareholders contained in the Definitive GH Group Agreement shall be true and correct in all material respects as of the date of the Closing;

 

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o the GH Group Shareholders and GH Group will have duly performed and complied in all material respects with all agreements, covenants and conditions required by the Definitive GH Group Agreement;

 

o all of the documents, instruments and agreements to be executed and/or delivered pursuant to the Definitive GH Group Agreement will have been executed by the Merger Parties;

 

o no Material Adverse Effect (as defined in the Definitive GH Group Agreement) in respect of GH Group and its direct and indirect subsidiaries will have occurred and be continuing;

 

o the GH Group Shareholders will have delivered the audited financial statements of GH Group for the fiscal years ended December 31, 2018, December 31, 2019, and December 31, 2020 to Buyer;

 

o GH Group Shareholders holding no more than 10% of the outstanding Company Stock shall have exercised their appraisal rights under Delaware law;

 

o the GH Group Shareholders will have delivered to Buyer regulatory legal opinions by GH Group’s cannabis regulatory counsel, which meet the requirement of the NEO Exchange; and

 

o the amount of cash payable by BRND at the Closing to the GH Group Shareholders who are not accredited investors shall not exceed $750,000.

 

For the benefit of Sellers and GH Group:

 

o the representations and warranties of Buyer, Merger Sub and BRND contained in the Definitive GH Group Agreement will be true and correct in all material respects as of the date of Closing, except where the failure to be so true and correct has not had and would not be reasonably likely to have a material adverse effect on BRND, Buyer and Merger Sub; provided that certain specified representations and warranties of BRND, Buyer and Merger Sub contained in the Definitive GH Group Agreement shall be true and correct in all material respects as of the date of the Closing;

 

o Buyer, Merger Sub and BRND will have duly performed and complied in all material respects with all agreements, covenants and conditions required by the Definitive GH Group Agreement;

 

o all of the documents, instruments and agreements to be executed and/or delivered pursuant to the Definitive GH Group Agreement will have been executed by the Merger Parties;

 

o no Material Adverse Effect on Buyer or BRND will have occurred and be continuing;

 

o each of Kyle Kazan, Graham Farrar, Derrek Higgins and Jamin Horn will have executed and delivered an employment agreement with the Resulting Issuer, with annual compensation that is the same as his annual compensation preceding the date of the Definitive GH Group Agreement, the effectiveness of which agreements is only conditioned upon the occurrence of the Closing;

 

o Buyer will have delivered to Kyle Kazan an opinion of legal counsel for BRND as to common shares in the capital of Buyer that are exchangeable on a one-for-one basis into Equity Shares regarding, among others, valid issuance of such securities on a fully paid, non-assessable basis and freely-tradable nature of such securities subject to the applicable lockup terms set forth in the Lockup Agreement and applicable law, in the form mutually acceptable to the Merger Parties, acting reasonably;

 

o at the Closing, BRND will have a minimum of $185,000,000 in cash: (i) before any cash consideration, as applicable, is payable for any Other Transactions; (ii) after any payments due and payable for BRND’s, the Merger Sub’s and the Buyer’s expenses related to the closing of the Merger, including all costs, fees, expenses and payments contingent on the closing of the Merger; (iii) after reduction for the aggregate amount of payments required to be made in connection with the exercise by one or more BRND shareholders of their rights to redeem BRND Class A Restricted Voting Shares held by them in accordance with BRND’s organizational documents; (iv) plus the cash proceeds actually received by BRND in respect of the Private Placement or certain other equity or debt offerings; and (v) after taking into account any estimated debt or payables on BRND’s balance sheet as of the closing of the Merger, and the GH Group Shareholders will have received a certificate signed on behalf of Buyer, Merger Sub and BRND such effect;

 

o Buyer and BRND will have delivered to the exchange agent the common shares in the capital of Buyer that are exchangeable on a one-for-one basis into Equity Shares, to be held and delivered by the exchange agent to all of the GH Group Shareholders in accordance with the Definitive GH Group Agreement;

 

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o GH Group will have received a certified pro forma capitalization statement and pro forma balance sheet of BRND as of the Closing;

 

o BRND will have issued to certain of the GH Group Founders certain Multiple Voting Shares (see “Principal Shareholders” and “Description of Securities – Equity Share and Multiple Voting Share Structure – Multiple Voting Shares”); and

 

o If BRND’s Closing Cash is less than $250,000,000, the holders of at least two-thirds of the outstanding Class B common stock of GH Group will have approved the Closing.

 

If these conditions are not satisfied or waived prior to July 31, 2021 (the “Outside Date”) (subject to extension as described below), the Closing will not occur.

 

Post-Closing, the Resulting Issuer Board will initially consist of eight (8) total members of which (i) the Sponsor will put forward one (1) nominee, represented initially by Jamie Mendola, (ii) GH Group will put forward four (4) nominees, initially represented by Kyle Kazan, Graham Farrar and two (2) independent nominees, (iii) Element 7 will put forward one (1) independent nominee, represented initially be Bob Hoban, and (iv) two (2) additional independent nominees will be chosen by unanimous consent of the Sponsor, Kyle Kazan and Graham Farrar. All of such directors will be subject to customary regulatory approvals. Appropriate recusal, independence, special committee and/or resignation provisions will be enacted and adhered to as it relates to potential competitor and conflicting outside interests. In addition, Kyle Kazan will serve as the Executive Chairman and Chief Executive Officer of the Resulting Issuer, Graham Farrar will serve as the President of the Resulting Issuer and Derrek Higgins will serve as the Chief Financial Officer of the Resulting Issuer. The compensation of each of the above-named officers will be public market-based, compliant with NEO Exchange rules and applicable laws, and as mutually agreed by the Merger Parties.

 

The Definitive GH Group Agreement may be terminated and the merger may be abandoned at any time prior to the Closing:

 

by mutual written consent of Buyer and the Seller’s Representative;

 

by either Buyer or Sellers’ Representative if:

 

o the Closing has not occurred on or before the Outside Date; provided, that the right to terminate the Definitive GH Group Agreement will not be available to any Merger Party whose failure to fulfill any material obligation under the Definitive GH Group Agreement has been the cause of, or resulted in, the failure of the Closing to have occurred on or before such date; provided, further that if the only closing condition that remains to be satisfied (other than closing conditions that, by their terms, can only be satisfied as of Closing) is approval under the HSR Act, the Outside Date may, at the option of Buyer, be extended for successive thirty (30)-day periods upon Buyer providing the Sellers’ Representative with written notice of such extension on or prior to the then-current Outside Date; provided, further, that in no event will the Outside Date be extended beyond September 30, 2021;

 

o a governmental authority will have issued an order or taken any other action (excluding any order or action arising under, relating to or in connection with the Federal Cannabis Laws (as defined in the Definitive GH Group Agreement)), in each case that has become final and non-appealable and that restrains, enjoins or otherwise prohibits the merger or any part of it; provided, that the right to terminate the Definitive GH Group Agreement will not be available to any Merger Party whose failure to fulfill any material obligation under the Definitive GH Group Agreement has been the cause of, or resulted in, the issuance of such order or such action; or

 

o shareholder approval from the shareholders of BRND is not obtained at the shareholder meeting of BRND shareholders in respect of the Transaction (subject to any adjournment or postponement of the shareholder meeting of BRND shareholders in respect of the Transaction); provided that the right to terminate the Definitive GH Group Agreement will not be available to Buyer if, at the time of such termination, Buyer, Merger Sub or BRND is in material uncured breach of the Definitive GH Group Agreement;

 

by Buyer, if any of the representations and warranties of the GH Group Shareholders and GH Group in the Definitive GH Group Agreement become untrue or inaccurate or there has been a material breach on the part of GH Group or any of the GH Group Shareholders of any of its covenants or agreements contained in the Definitive GH Group Agreement; provided that Buyer will not have the right to terminate the Definitive GH Group Agreement if Buyer, Merger Sub, or BRND is then in material breach of any of its representations, warranties, covenants or agreements set forth in the Definitive GH Group Agreement; and

 

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by Sellers’ Representative, if any of the representations and warranties of Buyer, Merger Sub, or BRND in the Definitive GH Group Agreement become untrue or inaccurate or there has been a material breach on the part of Buyer, Merger Sub, or BRND of any of its covenants or agreements contained in the Definitive GH Group Agreement; provided that the Sellers’ Representative will not have the right to terminate the Definitive GH Group Agreement if any of the GH Group Shareholders or GH Group is then in material breach of any of its representations, warranties, covenants or agreements set forth in the Definitive GH Group Agreement.

 

The threshold or deductible for losses resulting from breaches of representations and warranties under the Definitive GH Group Agreement is $3,000,000.

 

Sellers’ aggregate liability for all losses resulting from breaches of representations and warranties of Sellers or GH Group shall not exceed $40,625,000 (the “Cap”). The aggregate liability of an individual Seller for all losses resulting from breaches of such Seller’s individual representations and the representations and warranties of GH Group shall not exceed an amount equal to such Seller’s pro rata share of the Cap.

 

Buyer’s, Merger Sub’s and BRND’s aggregate liability for all indemnifiable losses will not exceed an amount equal to the Purchase Price.

 

In no event will any Seller have any liability for indemnification obligations or otherwise arising under, relating to, or in connection with, the Definitive Merger Agreement for any amount, individually or in the aggregate, in excess of the amount equal to the lesser of the following (the “Seller Indemnity Cap”): (i) the product of (x) such Seller’s pro rata share of GH Group’s common equity, and (y) the Purchase Price; or (ii) the then-current value of such Seller’s pro rata share of the Merger Consideration as of the date of the indemnification claim to the extent such Seller has not sold the underlying shares prior to such date, (x) with each Exchangeable Share deemed to have a value equal to the number of Equity Shares into which such Exchangeable Share is convertible as of such determination date multiplied by the closing trading price for an Equity Share on the principal securities exchange on which such security is traded on the date immediately preceding such determination date, and (y) each Equity Share being valued at the closing trading price for an Equity Share on the principal securities exchange on which such security is traded on the date immediately preceding such determination date.

 

The above limitations do not apply to any losses (i) incurred by Buyer as a result of Sellers’ failure to comply with covenants made in the Definitive GH Group Agreement or breach of certain excluded representations of Sellers, and (ii) incurred by Sellers as a result of Buyer, Merger Sub or BRND’s failure to comply with covenants made in the Definitive GH Group Agreement or breach of certain excluded representations of Buyer.

 

Sellers, their related indemnitees and their respective affiliates will have no recourse against BRND’s escrow account for any indemnifiable losses suffered by them.

 

Each Seller will be liable only for such Sellers’ own breach of such Seller’s individual representations or breach of or failure to comply with covenants or agreements of such Seller contained in the Definitive GH Group Agreement and no Seller will be liable for any other Seller’s breach or inaccuracy of such other Seller’s individual representations or breach of or failure to comply with covenants or agreements of such other Seller contained in the Definitive GH Group Agreement.

 

The description of the Definitive GH Group Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Definitive GH Group Agreement, which will be made available on BRND’s profile on SEDAR at www.sedar.com.

 

Registration Rights Agreement

 

Concurrently with Closing, BRND will enter into a registration rights agreement (the “Registration Rights Agreement”) with the GH Group Founders and Mercer (the “Registering Shareholders” or the “Piggyback Shareholders”, as applicable). The Registration Rights Agreement will provide the Registering Shareholders with the registration rights outlined below in respect of the Equity Shares held by such holders from time to time. These Equity Shares are referred to as “registrable securities”.

 

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Demand Registration Rights

 

Each of the Registering Shareholders can request that the Resulting Issuer qualify by prospectus (a “Long-Form Demand Registration”) or short-form prospectus (a “Short-Form Demand Registration”, and together with the Long-Form Demand Registration, a “Demand Registration”) in Canada all or a portion of their registrable securities, provided that the aggregate offering price is at least $15 million in the case of a Long-Form Demand Registration or at least $10 million in the case of a Short-Form Demand Registration. No prospectus need be filed by the Resulting Issuer within 120 days of the last prospectus for a Demand Registration. The Resulting Issuer can postpone the filing of a prospectus for up to 90 days twice in a 12-month period if the Board determines that a Demand Registration would materially interfere with any material financing, acquisition, corporate reorganization or merger or other transaction or which would require disclosure of information at a time when the Resulting Issuer has a bona fide business purpose not to immediately disclose such information. The underwriters for any Demand Registration will be selected by the Registering Shareholders in consultation with the Resulting Issuer. The Resulting Issuer may participate in a proposed Demand Registration by selling Equity Shares from treasury if the underwriters of the Demand Registration, acting reasonably, are of the view that to do so would facilitate the offering.

 

Piggy-back Registration Rights

 

If the Resulting Issuer proposes to register or qualify its securities for sale to the public, it must provide notice to each Registering Shareholder and the Piggyback Shareholders and use its reasonable commercial efforts to cause to be registered all registrable securities that the holders of such registrable securities request in writing be so registered. These piggy-back registration rights are unlimited in number. If a public offering of securities is being effected, those securities offered shall be allocated first to the Resulting Issuer then, to the Registering Shareholders (pro rata based on the amount owned by each), and then, to the Piggyback Shareholders (pro rata based on the amount owned by each).

 

The Resulting Issuer will agree to pay certain costs and expenses in connection with each demand and piggy-back registration, except underwriting fees applicable to the securities sold by the holders of registrable securities and any legal fees of independent counsel exceeding $75,000 to such holders of registrable securities. In the case of both demand and piggy-back registration rights, all person(s) holding either type of right must agree to enter into such lockup agreements as may be reasonably requested by the lead underwriter of any public offering, not to exceed 180 days following Closing.

 

The description of the Registration Rights Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Registration Rights Agreement, which may be found on BRND’s profile on SEDAR at www.sedar.com.

 

Accounting Treatment

 

The Transaction will be accounted for on the basis that GH Group is the accounting acquirer. As a result, BRND will be treated as the “acquired” company for accounting purposes and the Transaction will be treated as the equivalent of the Resulting Issuer issuing shares for the net assets of BRND, accompanied by a recapitalization. The net assets of BRND will be stated at historical cost, with no goodwill or other intangible assets recorded.

 

Proposed Transactions

 

GH Group has entered into a series of agreements whereby GH Group has the option, subject to satisfactory completion of due diligence and other conditions, to acquire a large greenhouse farm complex (“SoCal Greenhouse”) located in southern California which, while currently used to grow tomatoes and cucumbers, is anticipated, subject to the receipt of applicable regulatory approvals, to be re-purposed to grow cannabis. See “SoCal Greenhouse Acquisition”.

 

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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 merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California. See “Element 7”.

 

In addition, GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional licenses in California. See “Element 7”.

 

NEO Exchange Guidance Regarding Companies with U.S. Marijuana-Related Activities

 

Subject to satisfactory compliance with all listing requirements set out in the NEO Exchange Listing Manual and the additional items reflected below, the NEO Exchange currently does not have a policy prohibiting the listing of companies established and/or holding assets in the U.S. with marijuana-related activities, provided such activities are conducted in compliance with the current laws and regulations of a U.S. State where such activities are legal.

 

In addition to the listing requirements in the NEO Exchange Listing Manual, which include the standard requirements for timely and accurate disclosure as defined by the Canadian Securities Administrators and as further enhanced by their specific disclosure requirements set out in Staff Notice 51-352, the NEO Exchange expects issuers with U.S. marijuana-related activities, among other things, to: (i) undertake that they are respecting and will continue to respect, within the realm of their control, the U.S. DOJ (as defined below) marijuana enforcement priorities as they were defined in the now-rescinded Cole Memorandum (as defined below) (see “Cannabis Market Overview – Legal and Regulatory Matters – United States Federal Overview”); and (ii) undertake that they are neither importing nor exporting marijuana to or from the United States.

 

Private Placement

 

On April 8, 2021, BRND announced a private placement of $85 million of non-voting shares of MPB PipeCo, a wholly owned subsidiary of BRND (the “Private Placement Shares”) at a price of $10.00 per Private Placement Share (the “Private Placement”). Canaccord Genuity Corp. (“Canaccord”), the underwriter in respect of BRND’s initial public offering and the sole agent in respect of the Private Placement, has subscribed for $ 4.9 million of Private Placement Shares under the Private Placement, which subscription is expected to be funded by Canaccord directing to BRND an equal amount from the non-discretionary portion of deferred underwriting fees that will be owed by BRND to Canaccord in connection with the Closing. Canaccord is currently expected to assign its subscription agreement to an affiliate. Under the terms of the Private Placement, Canaccord shall be 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 Private Placement subscriber that has subscribed for $20.1 million of Private Placement Shares will be transferred 223,333 free-trading Equity Shares by the Sponsor for no additional consideration in order make the effective price of such subscription $9.00 per Private Placement Share.

 

The closing of the Private Placement is scheduled to occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares issued will be exchanged for Equity Shares on a one-for-one basis. The Private Placement is subject to customary conditions, including the closing of the Transaction.

 

The funds from the Private Placement are expected to be used to fund the Resulting Issuer’s growth strategy, for working capital and for general corporate purposes.

 

GH Group Financing

 

GH Group is expected to complete an up to $12 million equity financing in the United States before the end of May 2021 (the “GH Group Financing”). Investors in the GH Group Financing will receive, for each $1.27 invested, one (1) Series A preferred share of GH Group (the “Series A Preferred Shares”) and one (1) warrant (the “Series A 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 warrant.


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Series A Preferred Shares

 

The proposed terms of the Series Preferred Shares are as follows, but remain subject to change.

 

The Series Preferred Shares will rank with respect to dividends and on liquidation ahead of the common shares of GH Group.

 

In the event of liquidation, the holders of Series Preferred Shares will be entitled, in priority to the holders of common shares, but after payment to any senior claimants, to their liquidation value, which is their original issue price, plus all accrued and unpaid dividends. A similar amount must be paid in the event of certain mergers, asset sales or other liquidity-equivalent events.

 

The Series A Preferred Shares will be entitled to quarterly compounding cumulative dividends at the rate of 15% per annum based on their liquidation value, payable on the last day of March, June, September and December, commencing in June 2021, or upon earlier liquidation or redemption. If the Series A Preferred Shares are still outstanding one (1) year following their date of issuance, the dividend rate shall increase to 20% per annum. No cash dividends may be paid on the common shares of GH group unless all accrued and unpaid dividends on the Series Preferred Shares have been paid.

 

The Series A Preferred Shares are generally non-voting, except in the event that they would be adversely affected by a proposed amendment to the Articles or By-laws of GH Group, as the same may be amended from time to time.

 

The Series A Preferred Shares are redeemable by GH Group at any time for their liquidation value, which is their original issue price, plus all accrued and unpaid dividends.

 

The Series A Preferred Shares are convertible at the option of the holder into common shares of GH Group prior to the date that is 60 days following the date of issuance of such shares.

 

Assuming that the GH Group Financing is successfully completed, it is currently expected by GH Group that some of the Series A Preferred Shares will be converted into Class A common shares of GH Group prior to the closing of the Transaction, such that they will be exchanged for Exchangeable Shares at closing of the Transaction. If all of the Series A Preferred Shares in the amount of $12 million were so converted before the Closing, they would represent a total of 1,200,000 Exchangeable Shares at the effective time. However, it is possible that some or all of the Series A Preferred Shares may remain outstanding following the closing of the Transaction, in which case it is intended that they will be redeemed as soon as practicable thereafter, subject to the availability of cash.

 

Series A Warrants

 

As part of the GH Group Financing, for every $1.27 invested in respect of Series A Preferred Shares, each investor will also receive one Series A Warrant to purchase one common share of GH Group at an exercise price per share equal to the fair market value of one Class A common share of GH Group as of the date of issuance of such warrant. Assuming for illustrative purposes only that the closing of the GH Group Financing were to occur on the date of this prospectus, the exercise price per share would be $1.06. If the GH Group Financing is fully subscribed, Series A Warrants to purchase a total of 9,448,819 Class A common shares of GH Group will be issued at the closing of the GH Group Financing.

 

Following the closing of the Transaction, the Series A Warrants will, assuming the GH Group Financing is fully subscribed, represent the right to acquire 1,200,000 Equity Shares at a price of $10.00 per share. Fractional shares will be paid in cash. The Series A Warrants will be subject to customary anti-dilution protections.

 

The Series A Warrants will expire 36 months after their date of issuance. That expiration date can be accelerated on 30 days’ prior notice in GH Group’s discretion if the closing market price of the Equity Shares equals or exceeds a specified threshold for 20 trading days within any thirty (30) trading day period. In that event, GH Group will have the option to require any holder wishing to exercise its Series A Warrants to do so on a cashless basis in whole or in part.

 

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Inter-Corporate Relationships

 

The organizational chart below indicates the proposed inter-corporate relationships of the Resulting Issuer and its material subsidiaries, including their jurisdiction of incorporation in parentheses, after giving effect to the Transaction:

 

 

 

Notes:

 

(1) After giving effect to the Transaction, before the exchange of any Exchangeable Shares and assuming no redemptions of the BRND Class A Restricted Voting Shares, the GH Group Founders are expected to beneficially own or control, directly or indirectly, approximately 69.1% of voting power over the Resulting Issuer as result of their direct or indirect beneficial ownership or control over the Multiple Voting Shares.

 

(2) On closing of the Transaction, the BRND Class A Restricted Voting Shares, BRND Class B Shares and Private Placement Shares will convert into Equity Shares on a one-for-one basis.

 

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(3) See “Corporate Structure – GH Group Financing”.

 

(4) As of December 31, 2020, the date of the Audited GH Group Financial Statements, 100% of GH Group’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of GH Group. As such, GH Group’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

 

On closing of the Transaction, (a) assuming (i) zero redemptions of BRND Class A Restricted Voting Shares, (ii) no exchanges of Exchangeable Shares, and (iii) no exercises of BRND Warrants, and (b) prior to the issuance of any Equity Shares in connection with (i) the acquisition of SoCal Greenhouse, and (ii) any Element 7 Merger, the former holders of BRND Class A Restricted Voting Shares are expected to hold an approximately 68.2% economic interest in the Resulting Issuer.

 

Warrant Agreement

 

All BRND Warrants will become exercisable only commencing 65 days after the completion of BRND’s qualifying transaction (which is expected to consist of the Transaction). Each BRND Warrant is exercisable to purchase one BRND Class A Restricted Voting Share (which, following the closing of the Transaction, will become one Equity Share) at a price of $11.50 per share, subject to the following adjustments. The BRND Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. No adjustments shall be made to the BRND Warrants, however, if the issue of Equity Shares, rights, options warrants or securities exchangeable therefor is made at a price below their respect exercise prices, including the exercise price in respect of the BRND Warrants. Once the BRND Warrants become exercisable, BRND may accelerate the expiry date of the outstanding BRND Warrants (excluding the BRND Founders’ Warrants but only to the extent still held by Mercer at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by Mercer of material undisclosed information which could limit its flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Equity Shares equals or exceeds $18.00 per share (as adjusted for stock splits or combinations, stock dividends, Extraordinary Dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30-trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice is provided.

 

The right to exercise will be forfeited unless the BRND Warrants are exercised prior to the date specified in the notice of acceleration of the expiry date. On and after the accelerated expiry date, a record holder of a BRND Warrant will have no further rights. BRND Warrants may be exercised only for a whole number of shares. No fractional shares will be issued upon exercise of the BRND Warrants. If, upon exercise of the BRND Warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round down to the nearest whole number of shares to be issued to the BRND Warrant Holder and such BRND Warrant Holder will not be entitled to any cash or other consideration in lieu of fractional interest held.

 

The exercise of the BRND Warrants by any holder in the United States, or that is a “U.S. Person” (as defined in Rule 902(k) of the U.S. Securities Act), may only be effected in compliance with an exemption from the registration requirements of the U.S. Securities Act and applicable state “blue sky” securities laws.

 

The BRND Warrant Holders do not have the rights or privileges of holders of shares and any voting rights until they exercise their BRND Warrants and receive corresponding Equity Shares. After the issuance of corresponding Equity Shares upon exercise of the BRND Warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders (other than in respect of the election of members of the Resulting Issuer Board, in respect of which the holders of Limited Voting Shares will not have any right to vote). On the exercise of any BRND Warrant, the BRND Warrant exercise price will be $11.50, subject to adjustments as described herein.

 

The Warrant Agreement contemplates that the BRND Warrants may be exercised through Cashless Exercise. A Cashless Exercise permits a BRND Warrant Holder, in lieu of making a cash payment on exercise, to instead elect to surrender the BRND Warrant Holder’s BRND Warrants and to receive the number of shares in the capital of BRND for which the BRND Warrants are conferred the right to acquire that is equal to the quotient obtained by multiplying (i) the number of Equity Shares for which the BRND Warrants are being exercised by (ii) the difference between, if positive, (A) the volume weighted average price of the Equity Shares trading on the NEO Exchange for the 20 trading days immediately prior to (but not including) the date of exercise of such BRND Warrants and (B) $11.50, and dividing such product by the volume weighted average price of the Equity Shares trading on the NEO Exchange for the 20 trading days immediately prior to (but not including) the date of exercise of such BRND Warrants (the “Cashless Exercise”).

 

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The Warrant Agent shall, on receipt of a written request of BRND or holders of not less than 25% of the aggregate number of BRND Warrants then outstanding, convene a meeting of holders of BRND Warrants upon at least 21 calendar days’ written notice to holders of BRND Warrants. Every such meeting shall be held in Toronto, Ontario or at such other place as may be approved or determined by the Warrant Agent. A quorum at meetings of holders of BRND Warrants shall be two persons present in person or represented by proxy holding or representing more than 20% of the aggregate number of BRND Warrants then outstanding.

 

From time to time, BRND and the Warrant Agent, without the consent of the holders of BRND Warrants, may amend or supplement the Warrant Agreement for certain purposes including curing defects or inconsistencies or making any change that does not adversely affect the rights of any holder of BRND Warrants. Any amendment or supplement to the Warrant Agreement that adversely affects the interests of the holders of BRND Warrants may only be made by an “extraordinary resolution”, which is defined in the Warrant Agreement as a resolution either (i) a resolution passed at a duly-convened meeting of BRND Warrant Holders, at which, by the affirmative vote of holders of BRND Warrants representing not less than 66 2/3% of the aggregate number of the then outstanding BRND Warrants represented at the meeting and voted on such resolution, or (ii) adopted by an instrument in writing signed by the holders of BRND Warrants representing not less than two-thirds of the aggregate number of the then outstanding BRND Warrants.

 

The BRND Warrants will expire at 5:00 p.m. (Toronto time) on the day that is five years after the completion of the qualifying transaction of BRND (which is expected to consist of the Transaction) or may expire earlier if a qualifying transaction does not occur by May 13, 2021, or if the expiry date is accelerated, as described above.

 

Exchangeable Shares and Exchange Rights Agreements

 

For tax reasons, rather than receiving Equity Shares, the sellers of GH Group will receive, following the closing of the Transaction, Exchangeable Shares of MPB AcquisitionCo as part of their consideration.

 

Broadly speaking, the Exchangeable Shares will entitle their holders to rights that are comparable (without taking into account tax consequences) to those rights attaching to the Subordinate Voting Shares, except that (i) the Exchangeable Shares will have 1.1 votes per share (this will expire after one (1) year, after which they will have one vote per share), and (ii) the aggregate voting power of the Exchangeable Shares will not exceed 49.9% of the total voting power of all classes of shares of MPB AcquisitionCo. Until their Exchangeable Shares are exchanged for the applicable Equity Shares pursuant to the Exchange Rights Agreement or the Exchangeable Share Provisions, holders of Exchangeable Shares will not have the right to vote at meetings of Resulting Issuer Shareholders, though it is anticipated that they will have the right to at meetings of the shareholders of MPB AcquisitionCo, including at meetings of the shareholders of MPB AcquisitionCo with respect to altering the rights of holders of any of the Exchangeable Shares, or if MPB AcquisitionCo decides to take certain actions without fully protecting the holders of any of the Exchangeable Shares, or as otherwise required by law. The Exchangeable Shares will be exchangeable at any time, on a one-for-one basis, for Equity Shares, at the option of the holder, subject to certain contractual lockup restrictions. Certain ancillary rights, as further described below, will be provided to the holders of the Exchangeable Shares pursuant to the terms of the Exchange Rights Agreement.

 

Exchangeable Share Procedures

 

In connection with the Definitive GH Group Agreement, at the Effective Date, BRND will enter into an exchange rights agreement with MPB AcquisitionCo and the Sellers’ Representative on behalf of the holders of the Exchangeable Shares (the “ Exchange Rights Agreement”), whereby BRND has agreed to make certain covenants in favour of the sellers to protect their rights as holders of Exchangeable Shares. BRND agrees to reserve the necessary amount of Equity Shares for issuance upon exchange of the Exchangeable Shares, and ensure such shares remain protected from pre-emptive and other rights. Upon notice to the Resulting Issuer and MPB AcquisitionCo and as required under the Exchangeable Share Provisions, the Resulting Issuer will issue such number of Equity Shares to a holder of Exchangeable Shares in exchange for the Exchangeable Shares of such holder, subject to the terms specified in the Exchange Rights Agreement. Additionally, the Resulting Issuer will have an overriding liquidation call right under the Exchange Rights Agreement to purchase all, but not less than all, of the Exchangeable Shares from the holders thereof upon a proposed liquidation, dissolution or winding-up of MPB AcquisitionCo, as well as a redemption call right and retraction call right on the Exchangeable Shares, in each case for the consideration set forth in such agreements.

 

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General

 

The Exchangeable Shares, together with the Ancillary Rights (as defined below), are intended to be economically comparable to the applicable Equity Shares. The dividends and other rights attaching to the Exchangeable Shares, together with the Ancillary Rights, are designed to place holders of Exchangeable Shares, as nearly as practicable, in the same economic position as holders of Equity Shares, except that the holders of Exchangeable Shares will have no right to vote as Resulting Issuer Shareholders, except as described in this prospectus and except for the enhanced rights as described above. As used in this prospectus, a reference to the phrase “comparable” (or words to similar effect) between the Exchangeable Shares and the Equity Shares does not take into account any tax implications or different tax treatment with respect to the Exchangeable Shares and the Equity Shares, which vary depending upon each holder, such holder’s residence for tax purposes and the residence of the paying company.

 

The ancillary rights, consisting of the Automatic Exchange Right (as defined below) and the Exchangeable Shareholders’ Put Right (as defined below) (collectively, the “ Ancillary Rights”), are rights established for the benefit of the holders of Exchangeable Shares pursuant to the Exchange Rights Agreement and are intended to ensure that such holders have the right to receive the applicable Subordinate Voting Shares in the event of: (i) a Liquidation Event (as defined below) (by the operation of the Automatic Exchange Right); or (ii) an Insolvency Event (as defined below) (by the operation of the Exchangeable Shareholders’ Put Right).

 

In connection with the issuance of the Exchangeable Shares, call rights are provided in favour of BRND, which are triggered in certain circumstances. The call rights, consisting of the Liquidation Call Right, the Redemption Call Right and the Retraction Call Right (in each case, as defined below) (collectively, the “ Call Rights”), are rights established in favour of BRND to allow it to purchase Exchangeable Shares: (i) in the event of the liquidation, dissolution or winding-up of MPB AcquisitionCo (by the operation of the Liquidation Call Right); or (ii) that would otherwise be redeemed by MPB AcquisitionCo (by the operation of the Redemption Call Right or the Retraction Call Right). The consideration received by a holder of Exchangeable Shares will be the same whether such holder’s Exchangeable Shares are redeemed by MPB AcquisitionCo or purchased by the Resulting Issuer.

 

Voting and Dividend Rights

 

Holders of Exchangeable Shares will not be entitled to vote at any meeting of the Resulting Issuer Shareholders or on any matter or resolution otherwise submitted by BRND to its shareholders. The Exchangeable Shares will have voting rights in MPB AcquisitionCo (as described above).

 

Holders of Exchangeable Shares will be entitled to receive, subject to applicable law, dividends comparable to all dividends paid on the Equity Shares. Cash dividends on the Exchangeable Shares are payable in an amount equal to and in the currency of the corresponding cash dividend payable on Subordinate Voting Shares, or the U.S. dollar equivalent. Stock dividends declared on the Equity Shares to be paid in Equity Shares will be satisfied for each Exchangeable Share by the issue or transfer of such number of Exchangeable Shares as is equal to the number of Equity Shares to be paid on each Equity Share (or by way of an economically equivalent stock split). Dividends declared on Equity Shares in property other than cash or Equity Shares will be satisfied by such type and amount of property for each Exchangeable Share as is the same as, or economically equivalent to, the type and amount of property declared as a dividend on each Equity Share. The declaration date, record date and payment date for dividends on the Exchangeable Shares will be the same as the relevant date for the corresponding dividends on the Equity Shares.

 

The record date for the determination of the holders of Exchangeable Shares entitled to receive payment of, and the payment date for, any dividend or distribution declared on the Exchangeable Shares shall be the same dates as the record date and payment date, respectively, for the corresponding dividend or distribution declared on the Equity Shares.

 

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Any dividend which should have been declared or paid on the Exchangeable Shares but was not so declared or paid due to the provisions of applicable law shall be declared and paid by MPB AcquisitionCo as soon as payment of such dividend is permitted by such law.

 

If, on any payment date for any dividends or distributions declared on the Exchangeable Shares, the dividends or distributions are not paid in full on all of the Exchangeable Shares then outstanding, any such dividends or distributions that remain unpaid shall be paid on the first subsequent date or dates determined by the MPB AcquisitionCo board of directors on which MPB AcquisitionCo shall have sufficient moneys, assets or other property properly applicable to the payment of such dividend or distribution.

 

Notwithstanding any provisions in the constating documents of MPB AcquisitionCo or the Exchange Rights Agreement to the contrary, no holder of Exchangeable Shares shall receive duplicate rights and privileges upon the occurrence of the same event. This prohibition on duplication applies to all classes of Exchangeable Shares and with respect to all dividends, distributions, rights offerings, stock splits, consolidations, recapitalization, reorganizations and any other right or privilege applicable to them. For greater certainty, no dividend will be paid on the Exchangeable Shares unless an equivalent per share dividend is paid on the Equity Shares.

 

The MPB AcquisitionCo board of directors shall determine, in good faith and acting reasonably (with the assistance of such reputable and qualified independent financial advisors and/or other experts as it may require), economic equivalence for these purposes, and shall provide the Exchangeable Shareholders with a copy of a written determination of economic equivalence and the underlying calculations supporting such determination and the final version of any written report provided by such financial advisors and/or other experts supporting such determination, if requested. For greater certainty, the MPB AcquisitionCo board of directors shall not be under any obligation to procure any such assistance in support of their determination of economic equivalence for these purposes.

 

Ranking and Liquidation Rights

 

Except for the exchange features and any related rights, dividend rights corresponding to dividends paid on Equity Shares, as well as the voting rights of the Exchangeable Shares , the Exchangeable Shares rank pari passu with the MPB AcquisitionCo Class A common voting shares. Subject to applicable law and the due exercise by BRND of its Liquidation Call Right, in the event of the liquidation, dissolution or winding-up of BRND, or MPB AcquisitionCo, as applicable, a holder of Exchangeable Shares shall be entitled to receive in respect of each Exchangeable Share held by such holder on the effective date (the “Liquidation Date”) of such liquidation, dissolution or winding-up, before any distribution of any part of the assets of BRND or MPB AcquisitionCo, an amount per Exchangeable Share equal to the Exchangeable Share Consideration applicable on the last business day prior to the Liquidation Date (the “Liquidation Amount”).

 

On or promptly after the Liquidation Date, and subject to the exercise by BRND of its Liquidation Call Right in accordance with the terms of the Exchange Rights Agreement, MPB AcquisitionCo shall cause to be delivered to the holders of the Exchangeable Shares the Liquidation Amount for each such Exchangeable Share upon presentation and surrender of the certificates representing such Exchangeable Shares and a document (in the case of a holder who is a U.S. Resident (as defined below)) containing a representation and warranty that the holder is a U.S. Resident, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under applicable law and the articles and by-laws of MPB AcquisitionCo at the registered office of MPB AcquisitionCo. Upon such payment of the total Liquidation Amount, the holders of the Exchangeable Shares (other than any holder which is an affiliate (as such term is defined in the Exchange Rights Agreement) of BRND) shall thereafter be considered and deemed for all purposes to be holders of the Equity Shares delivered to them as part or all of the Exchangeable Share Consideration notwithstanding that the certificate or certificates representing such Exchangeable Shares have not been delivered by the holder or holders thereof to BRND, and such holders shall not be entitled, in respect of the Exchangeable Shares, to share in any further distribution of the assets of MPB AcquisitionCo.

 

For the purposes hereof, a “U.S. Resident” means a person who is a resident of the United States for purposes of the Internal Revenue Code of 1986, as amended or, if a partnership, all of whose partners are U.S. Residents, and the “Exchangeable Share Consideration” per Exchangeable Share means one Equity Share and any unpaid dividend entitlements, less applicable withholding taxes.

 

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Exchange of Exchangeable Shares for Equity Shares

 

Subject to the exercise by BRND of its Retraction Call Right, a holder of Exchangeable Shares will be entitled at any time following the closing of the Transaction to retract (meaning require MPB AcquisitionCo to redeem) any or all of the Exchangeable Shares held by such holder for a retraction price per share equal to the then Retraction Price (as defined below). A holder of Exchangeable Shares may affect such retraction by presenting: (i) a certificate or certificates to MPB AcquisitionCo or Odyssey Trust Company, acting as BRND’s transfer agent (or any successor thereto), representing the number of Exchangeable Shares the holder desires to retract, duly endorsed in blank; (ii) a duly executed request (a “Retraction Request”) indicating the number of Exchangeable Shares the holder desires to retract (the “Retracted Shares”) and the date of retraction (the “Retraction Date”) and acknowledging the Retraction Call Right; and (iii) such other documents as may be required to effect the retraction of the Retracted Shares.

 

When a holder requests MPB AcquisitionCo to redeem Exchangeable Shares, BRND will have an overriding Retraction Call Right to purchase on the Retraction Date all but not less than all of the Retracted Shares, at a purchase price per share equal to the then Retraction Price. Upon receipt of a Retraction Request, MPB AcquisitionCo is required to immediately notify BRND in writing of the Retraction Request. BRND must then advise MPB AcquisitionCo and the Exchangeable Shareholder within five business days as to whether the Retraction Call Right will be exercised. If BRND advises MPB AcquisitionCo that BRND will exercise the Retraction Call Right within such five business day period, then, provided the Retraction Request is not validly revoked by the holder, the Retraction Request shall be considered to be an offer by the holder to sell the Retracted Shares to BRND in accordance with the Retraction Call Right.

 

On and after the close of business on the Retraction Date, the holder of the Retracted Shares shall cease to be a holder of such Retracted Shares and shall not be entitled to exercise any of the rights of a holder in respect thereof, other than the right to receive the Retraction Price, unless upon presentation and surrender of certificates in accordance with the foregoing provisions, payment of the total Retraction Price payable to such holder shall not be made, in which case the rights of such holder shall remain unaffected until the total Retraction Price has been paid in the manner hereinbefore provided. On and after the close of business on the Retraction Date, provided that presentation and surrender of certificates and payment of the total Retraction Price has been made in accordance with the foregoing provisions, the holder of the Retracted Shares so redeemed by MPB AcquisitionCo shall thereafter be considered and deemed for all purposes to be a holder of the Equity Shares delivered to such holder.

 

Notwithstanding the foregoing, MPB AcquisitionCo shall not be obligated to redeem Retracted Shares specified by a holder in a Retraction Request to the extent that such redemption of Retracted Shares would be contrary to solvency requirements or other provisions of applicable law. If MPB AcquisitionCo believes that on any Retraction Date it would not be permitted by any of such provisions to redeem the Retracted Shares tendered for redemption on such date, MPB AcquisitionCo shall only be obligated to redeem Retracted Shares to the extent of the maximum number that may be so redeemed (rounded down to the next whole number of shares) as would not be contrary to such provisions. In any case in which the redemption by MPB AcquisitionCo of Retracted Shares would be contrary to solvency requirements or other provisions of applicable law, and more than one holder has duly delivered a Retraction Request, MPB AcquisitionCo shall redeem Retracted Shares on a pro rata basis. Provided that the Retraction Request is not revoked by the holder, the holder of any such Retracted Shares not redeemed by MPB AcquisitionCo as a result of solvency requirements or other provisions of applicable law shall be deemed by giving the Retraction Request to require BRND to purchase such Retracted Shares from such holder on the Retraction Date or as soon as practicable thereafter on payment by BRND to such holder of the Retraction Price for each such Retracted Share.

 

For the purposes hereof, the “Retraction Price” per Exchangeable Share means one Equity Share and any unpaid dividend entitlements, less applicable withholding taxes.

 

It is anticipated that upon exchange of the Exchangeable Shares into Equity Shares and any other event requiring the issuance of Equity Shares, MPB AcquisitionCo will issue an equivalent number of Class A common voting shares of MPB AcquisitionCo to BRND.

 

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Redemption Rights

 

Subject to applicable law, and provided that the Resulting Issuer has not exercised the Redemption Call Right or an Exchangeable Shareholder has not exercised the Exchangeable Shareholders’ Put Right pursuant to the Exchange Rights Agreement, upon the occurrence of a Redemption Event (as defined below), MPB AcquisitionCo shall have the right to redeem all but not less than all of the then outstanding Exchangeable Shares for an amount per Exchangeable Share equal to the Exchangeable Share Consideration on the last business day prior to the Redemption Date (the “Redemption Price”). “Redemption Date” means the date for redemption as established in accordance with the terms of the Exchangeable Shares.

 

In the case of a proposed redemption by MPB AcquisitionCo of Exchangeable Shares, MPB AcquisitionCo shall:

 

at least 15 days before the Redemption Date (other than a Redemption Date established in connection with a Control Transaction (as defined below)), notify BRND in writing (the “Redemption Notice”) of the intention of MPB AcquisitionCo to redeem the Exchangeable Shares; and

 

at least 10 days before the Redemption Date (other than a Redemption Date established in connection with a Control Transaction), send or cause to be sent to BRND and each holder of Exchangeable Shares a notice in writing (the “Shareholder Redemption Notice”) of the proposed redemption by MPB AcquisitionCo of the Exchangeable Shares held by such holder.

 

In the case of a Redemption Date established in connection with a Control Transaction, the Redemption Notice and the Shareholder Redemption Notice must be sent on or before the Redemption Date, on as many days prior written notice as may be determined by the MPB AcquisitionCo board of directors, to be reasonably practicable in the circumstances (provided that at least ten business days’ notice is given). In any such case, such notice shall set out the Redemption Date.

 

On the Redemption Date and subject to the exercise by the Resulting Issuer of the Redemption Call Right or the exercise of the Exchangeable Shareholders’ Put Right pursuant to the Exchange Rights Agreement, MPB AcquisitionCo shall cause to be delivered to the holders of the Exchangeable Shares to be redeemed the Exchangeable Share Consideration representing the full Redemption Price for each such Exchangeable Share, upon presentation and surrender at the registered office of MPB AcquisitionCo of the certificates representing such Exchangeable Shares, together with such other documents and instruments as may be required to effect a transfer of Exchangeable Shares under the applicable law and (in the case of a holder who is a U.S. Resident) a representation and warranty by such holder of Exchangeable Shares to be redeemed that such holder is a U.S. resident. On and after the Redemption Date, the holders of the Exchangeable Shares called for redemption shall cease to be holders of such Exchangeable Shares and shall not be entitled to exercise any of the rights of holders in respect thereof, other than the right to receive their proportionate part of the total Redemption Price, unless payment of the total Redemption Price delivered to a holder for such Exchangeable Shares shall not be made upon presentation and surrender of share certificates in accordance with the foregoing provisions, in which case the rights of the holders shall remain unaffected until the total Redemption Price has been paid in the manner hereinbefore provided. Upon such payment of the total Redemption Price, the holders of the Exchangeable Shares shall thereafter be considered and deemed for all purposes to be holders of the Equity Shares delivered to them.

 

For the purposes hereof, a “Redemption Event” means (a) the occurrence of a Control Transaction, (b) the occurrence of an Insolvency Event, (c) the day upon which U.S. tax legislation is amended and becomes effective such that all U.S. resident holders of Exchangeable Shares may receive Equity Shares in exchange for their Exchangeable Shares on a tax-deferred basis for U.S. income tax purposes, or (d) the seventh (7th) anniversary of the closing or any date thereafter; a “Control Transaction” means any of the following: (i) any person or group of persons acting jointly or in concert (within the meaning of NI 62-104) acquires, directly or indirectly, control (as defined in NI 62-104) of BRND; (ii) the shareholders of the Resulting Issuer shall have approved merger, consolidation, recapitalization or reorganization of the Resulting Issuer, or, if shareholder approval is not sought or obtained, any such transaction shall have been consummated, in either case other than any such transaction which would result in at least 50% of the total voting power represented by the voting securities of the resulting entity outstanding immediately after such transaction being beneficially owned by holders of outstanding voting securities of the Resulting Issuer immediately prior to the transaction, with the voting power of each such continuing holder relative to such other continuing holders being not altered substantially in the transaction; or (iii) the shareholders of the Resulting Issuer shall approve an agreement for the sale or disposition by the Resulting Issuer of all or substantially all of the Resulting Issuer’s assets; and an “Insolvency Event” means the institution by MPB AcquisitionCo of any proceeding to be adjudicated as bankrupt or insolvent or to be liquidated, dissolved or wound-up, or the consent of MPB AcquisitionCo to the institution of bankruptcy, insolvency, liquidation, dissolution or winding up proceedings against it, or the filing of a petition, answer or consent seeking liquidation, dissolution or winding up under any bankruptcy, insolvency or analogous laws in any jurisdiction, and the failure by MPB AcquisitionCoto contest in good faith any such proceedings instituted by any person other than MPB AcquisitionCo commenced in respect of MPB AcquisitionCo within 30 days of becoming aware thereof, or the consent by MPB AcquisitionCo to the filing of any such petition or to the appointment of a receiver, or the making by MPB AcquisitionCo of a general assignment for the benefit of creditors, or the admission in writing by MPB AcquisitionCo of its inability to pay its debts generally as they become due, or MPB AcquisitionCo not being permitted, pursuant to solvency requirements of applicable law, to purchase any Retracted Shares (as defined below).

 

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Purchase for Cancellation

 

Subject to applicable law, MPB AcquisitionCo may at any time and from time to time purchase for cancellation all or any part of the Exchangeable Shares by private contract with any holder of Exchangeable Shares at any price agreed to between MPB AcquisitionCo and such holder of Exchangeable Shares.

 

Amendments and Approval

 

The rights, privileges, restrictions and conditions attaching to the Exchangeable Shares in the Exchange Rights Agreement may be added to, changed or removed but only with the approval of BRND and the holders of the Exchangeable Shares given as hereinafter specified.

 

Any approval given by the holders of the Exchangeable Shares to add to, change or remove any right, privilege, restriction or condition attaching to the Exchangeable Shares or any other matter requiring the approval or consent of the holders of the Exchangeable Shares shall be deemed to have been sufficiently given if it shall have been given in accordance with applicable law subject to a minimum requirement that such approval be evidenced by resolution passed by not less than two-thirds of the votes cast on such resolution at a meeting of holders of Exchangeable Shares duly called and held at which the holders of at least 50% of the outstanding Exchangeable Shares at that time are present or represented by proxy. If at any such meeting the holders of at least 50% of the outstanding Exchangeable Shares at that time are not present or represented by proxy within one-half hour after the time appointed for such meeting, then the meeting shall be adjourned to such date not less than five days thereafter and to such time and place as may be designated by the chairperson of such meeting. At such adjourned meeting the holders of Exchangeable Shares present or represented by proxy thereat shall form a quorum and may transact the business for which the meeting was originally called and a resolution passed thereat by the affirmative vote of not less than two- thirds of the votes cast on such resolution at such meeting shall constitute the approval or consent of the holders of the Exchangeable Shares.

 

Certain Restrictions

 

So long as any of the Exchangeable Shares are outstanding, MPB AcquisitionCo shall not at any time without, but may at any time with, the approval of the holders of the Exchangeable Shares by special resolution:

 

(a) amend the articles of MPB AcquisitionCo; or

 

(b) initiate the voluntary liquidation, dissolution or winding-up of MPB AcquisitionCo, nor take any action or omit to take any action that is designed to result in the liquidation, dissolution or winding-up of MPB AcquisitionCo.

 

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Reciprocal Changes

 

Except for the issuance of employee incentive stock-based compensation in accordance with the terms of any employee stock option plan, in the event that the Resulting Issuer, without the prior approval of MPB AcquisitionCo and the prior approval of the holders of the Exchangeable Shares given by special resolution:

 

(a) issues or distributes Equity Shares or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares to the holders of the then outstanding Equity Shares by way of stock dividend or other distribution, other than an issue of Equity Shares pursuant to a distribution which is accompanied by an economically equivalent distribution on the Exchangeable Shares as described under “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Voting and Dividend Rights” above or an issue of Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares) to holders of Equity Shares who exercise an option to receive dividends of Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares) in lieu of receiving cash dividends, provided that the holders of Exchangeable Shares shall receive the same option to either receive such cash dividends or receive dividends of Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares) or have their Exchangeable Shares sub-divided as provided above, all as applicable and without duplication;

 

(b) issues or distributes rights, options or warrants to the holders of the-then outstanding Equity Shares entitling them to subscribe for or to purchase Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares, all as applicable and without duplication); or

 

(c) issues or distributes to the holders of the-then outstanding Equity Shares:

 

(i) shares or securities of the Resulting Issuer of any class other than Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares;

 

(ii) rights, options or warrants other than those referred to in clause (b); or

 

(iii) evidences of indebtedness of the Resulting Issuer;

 

MPB AcquisitionCo will provide at least five (5) business days’ prior notice to the holders of Exchangeable Shares and will ensure that the economic equivalent on a per share basis of such Equity Shares (or securities exchangeable for or convertible into or carrying rights to acquire Equity Shares), rights, options, securities, shares, evidences of indebtedness or other assets is issued or distributed simultaneously to holders of the Exchangeable Shares, all as applicable and without duplication.

 

In the event that the Resulting Issuer, without the prior approval of MPB AcquisitionCo and the prior approval of the holders of the Exchangeable Shares given by special resolution:

 

(a) subdivides, redivides or changes the then outstanding Equity Shares into a greater number of Equity Shares;

 

(b) reduces, combines, consolidates or changes the then outstanding Equity Shares into a lesser number of Equity Shares; or

 

(c) reclassifies or otherwise changes the Equity Shares or effects an amalgamation, merger, reorganization or other similar transaction affecting the Equity Shares;

 

MPB AcquisitionCo will ensure that the same or an economically equivalent change as effected in respect of the Equity Shares shall simultaneously be made to, or in, the rights of the holders of the Exchangeable Shares.

 

Grant of Exchange Rights

 

Subject to the Resulting Issuer’s Call Rights under the Exchange Rights Agreement, the Resulting Issuer will grant to each of the Exchangeable Shareholders the right, exercisable at any time (each an “Exchangeable Shareholder Put Event”), to require the Resulting Issuer to purchase from such Exchangeable Shareholder all or any part of the Exchangeable Shares held by such Exchangeable Shareholder (the “Exchanged Shares”), all in accordance with the provisions of the Exchange Rights Agreement and the share terms (the “Exchangeable Share Provisions”) of MPB AcquisitionCo governing the Exchangeable Shares (the “Exchangeable Shareholders’ Put Right”).

 

The purchase price payable by the Resulting Issuer for each Exchangeable Share to be purchased by the Resulting Issuer upon the exercise of the Exchangeable Shareholders’ Put Right shall be an amount per Exchangeable Share equal to the Exchangeable Share Consideration.

 

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The Resulting Issuer will also grant the Automatic Exchange Right to the Exchangeable Shareholders.

 

Automatic Exchange Right on Liquidation of the Resulting Issuer

 

The Resulting Issuer will give each Exchangeable Shareholder written notice of each of the following events (each a “Liquidation Event”) at the time set forth below:

 

(a) in the event of any determination by the Resulting Issuer Board to institute voluntary liquidation, dissolution or winding-up proceedings with respect to the Resulting Issuer or to affect any other distribution of assets of the Resulting Issuer among its stockholders for the purpose of winding up its affairs, at least 30 days prior to the proposed effective date of such liquidation, dissolution, winding-up or other distribution; and

 

(b) as soon as practicable following the earlier of:

 

(i) receipt by the Resulting Issuer of notice of; and

 

(ii) BRND’s otherwise becoming aware of,

 

any threatened or instituted claim, suit, petition or other proceedings with respect to the involuntary liquidation, dissolution or winding-up of the Resulting Issuer or to affect any other distribution of assets of the Resulting Issuer among its stockholders for the purpose of winding up its affairs, in each case where the Resulting Issuer has failed to contest in good faith any such proceeding commenced in respect of the Resulting Issuer within 30 days of becoming aware thereof.

 

Such notice shall include a brief description of the automatic exchange of Exchangeable Shares for Equity Shares (the “Automatic Exchange Right”).

 

In order for the Exchangeable Shareholders to participate on a pro-rata basis with the holders of the Equity Shares in the distribution of assets of the Resulting Issuer in connection with a Liquidation Event, immediately prior to the effective date of a Liquidation Event (the “Liquidation Event Effective Date”), subject to each of the Liquidation Call Right and Exchangeable Shareholders’ Put Right (if applicable) not having been exercised, each of the then outstanding Exchangeable Shares shall be automatically exchanged for Equity Shares. To effect such automatic exchange, the Resulting Issuer shall be deemed to have purchased each Exchangeable Share outstanding on the Liquidation Event Effective Date held by Exchangeable Shareholders, and each Exchangeable Shareholder shall be deemed to have sold the Exchangeable Shares held by it at such time to the Resulting Issuer, for an amount per share equal to the Exchangeable Share Consideration applicable on the business day prior to the Liquidation Event Effective Date.

 

Liquidation Call Right

 

The Resulting Issuer shall have the overriding right (the “Liquidation Call Right”), in the event of and notwithstanding the proposed liquidation, dissolution or winding-up of the Resulting Issuer and notwithstanding the Exchangeable Share Provisions, to purchase from all, but not less than all, of the Exchangeable Shareholders (other than any Exchangeable Shareholder which is an affiliate of the Resulting Issuer) on the Liquidation Date all, but not less than all, of the Exchangeable Shares held by each such Exchangeable Shareholder on payment by the Resulting Issuer to each such Exchangeable Shareholder an amount per Exchangeable Share equal to the Exchangeable Share Consideration applicable on the business day prior to the Liquidation Date (the “Liquidation Call Purchase Price”). In the event of the exercise of the Liquidation Call Right by the Resulting Issuer, each Exchangeable Shareholder (other than any Exchangeable Shareholder which is an affiliate of the Resulting Issuer) shall be obligated to sell all the Exchangeable Shares held by such Exchangeable Shareholder to the Resulting Issuer on the Liquidation Date on payment by the Resulting Issuer to the Exchangeable Shareholder of the Liquidation Call Purchase Price, less any applicable withholding taxes, for each such Exchangeable Share and MPB AcquisitionCo shall have no obligation to pay the Liquidation Amount to the holders of such Exchangeable Shares so purchased by the Resulting Issuer.

 

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Redemption Call Right

 

Upon the receipt of a Redemption Notice, the Resulting Issuer shall have the overriding right (the “Redemption Call Right”), notwithstanding the proposed redemption of the Exchangeable Shares by the Resulting Issuer pursuant to the Exchangeable Share Provisions, to purchase from all but not less than all of the Exchangeable Shareholders (other than any Exchangeable Shareholder which is an affiliate of the Resulting Issuer) on the Redemption Date or, if the Exchangeable Shares have not otherwise been redeemed or retracted by such date, any date following the Redemption Date (the “Later Redemption Date”), all but not less than all of the Exchangeable Shares held by each such holder on payment by the Resulting Issuer to each Exchangeable Shareholder an amount per Exchangeable Share (the “Redemption Call Purchase Price”) equal to the Exchangeable Share Consideration on the last business day prior to the Redemption Date or the Later Redemption Date, as applicable. In the event of the exercise of the Redemption Call Right by the Resulting Issuer, each Exchangeable Shareholder shall be obligated to sell all the Exchangeable Shares held by the Exchangeable Shareholder to the Resulting Issuer on the Redemption Date or the Later Redemption Date, as applicable, on payment by the Resulting Issuer to the Exchangeable Shareholder of the Redemption Call Purchase Price for each such Exchangeable Share, and MPB AcquisitionCo shall have no obligation to redeem such Exchangeable Shares so purchased by the Resulting Issuer.

 

Retraction Call Right

 

Upon receipt by the Resulting Issuer of a Retraction Request, MPB AcquisitionCo shall immediately notify the Resulting Issuer in writing thereof (a “Retraction Call Notice”) and shall provide to the Resulting Issuer a copy of the Retraction Request. Upon receipt by the Resulting Issuer of a Retraction Call Notice, the Resulting Issuer shall have the right (the “Retraction Call Right”), notwithstanding the Exchangeable Share Provisions, to purchase from each such Exchangeable Shareholder that has delivered a Retraction Request, on the Retraction Date, all but not less than all of the Exchangeable Shares held by such holder on payment by the Resulting Issuer to each such Exchangeable Shareholder an amount per Exchangeable Share equal to the Exchangeable Share Consideration on the last business day prior to the Retraction Date.

 

Resulting Issuer Shareholder Information

 

The Resulting Issuer, its affiliates or its representatives shall promptly mail or cause to be mailed (or otherwise communicate in the same manner as the Resulting Issuer utilizes in communications to Resulting Issuer Shareholders, subject to applicable regulatory requirements) to each of the Exchangeable Shareholders copies of all mailings and communications that it sends to Resulting Issuer Shareholders, such mailing or communication to commence on or about the same day as the mailing or notice (or other communication) with respect thereto is commenced by the Resulting Issuer to the Resulting Issuer Shareholders.

 

Any written materials distributed by the Resulting Issuer shall be sent by mail (or otherwise communicated in the same manner as the Resulting Issuer utilizes in communications to the Resulting Issuer Shareholders, subject to applicable regulatory requirements) to each Exchangeable Shareholder at its address as shown on the books of MPB AcquisitionCo.

 

Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders

 

For a description of the lockup restrictions applicable to the Exchangeable Shareholders, see “Corporate Structure – Definitive GH Group Agreement”.

 

CANNABIS MARKET OVERVIEW

 

In accordance with Staff Notice 51-352, below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where GH Group is currently directly or indirectly involved through its subsidiaries. In accordance with Staff Notice 51-352, BRND intends to evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended and made available to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non- compliance, citations or notices of violation which may have an impact on BRND’s licensing, business activities or operations are required by Staff Notice 51-352 to be promptly disclosed by BRND.

 

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The legalization and regulation of marijuana for medical and adult-use purposes is being implemented at the State level in the United States. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act (the “Substances Act”), which makes cannabis use and possession federally illegal. Although certain States and territories of the U.S. 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 under any and all circumstances under the Substances Act. Although GH Group’s activities are compliant with applicable United States State and local law, strict compliance with State and local laws with respect to cannabis may neither absolve BRND of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against BRND. The risk of federal enforcement and other risks associated with BRND’s business are described under “Risk Factors”.

 

The following table is intended to assist readers in identifying those parts of this prospectus that address the disclosure expectations outlined in Staff Notice 51- 352 for issuers that currently have marijuana-related activities in U.S. States where such activity has been authorized within a State regulatory framework.

 

  Specific Disclosure Necessary to Fairly    
Industry Present all Material Facts, Risks and    
Involvement Uncertainties Prospectus Cross-Reference  

All Issuers with U.S. Marijuana-Related Activities

 

 

 

 

 

 

 

 

 

Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table.

- Mercer Park Brand Acquisition Corp.

 
 
 
   
   

Prominently State that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk.

 

 

- Cover Page (bold typeface)  
- Legal and Regulatory Framework – United States Federal Overview  
 
- Regulatory Framework – U.S. Federal Enforcement Priorities  
 

- Risk Factors – The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined

 

 
 
   
     
 

Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. 

 

- Cover Page (bold typeface)  
  - Legal and Regulatory Framework – United States Federal Overview  
   
  - Legal and Regulatory Framework – U.S. Federal Enforcement Priorities  
   
  -Legal and Regulatory Framework – California State Level Overview  
   
     
 

Outline related risks including, among others, the risk that third-party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.

 

 

 

 

- Cover Page (bold typeface)  
  - Legal and Regulatory Framework – United States Federal Overview  
   
  - Legal and Regulatory Framework – U.S. Federal Enforcement Priorities  
   
  -Legal and Regulatory Framework – California State Level Overview  
   
  - Risk Factors – Service providers could suspend or withdraw service  
   
  - Risk Factors - While legal under applicable U.S. State law, BRND’s business activities are illegal under U.S. federal law  
   
   
     

 

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  Specific Disclosure Necessary to Fairly    
Industry Present all Material Facts, Risks and    
Involvement Uncertainties Prospectus Cross-Reference  
 

Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations.

- Cannabis Market Overview - Ability to Access Public and Private Capital
- Risk Factors – The Resulting Issuer may be subject to restricted access to banking in the United States and Canada
- Risk Factors – The Resulting Issuer’s investments in the U.S. are subject to applicable anti-money laundering laws and regulations
Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities. - Mercer Park Brand Acquisition Corp. 
Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable State regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.  GH Group has received and continues to receive legal input regarding (a) compliance with applicable State regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law in certain respects. GH Group receives such input on an ongoing basis but does not have a formal legal opinion on such matters.

U.S. Marijuana Issuers with direct involvement in cultivation or distribution

 

Outline the regulations for U.S. States in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. State.  - Cover Page (bold typeface)
- Legal and Regulatory Framework – United States Federal Overview
- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
- Legal and Regulatory Framework – California State Level Overview
- Legal and Regulatory Framework – Compliance with State Regulatory Framework
- Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws

Discuss the issuer’s program for monitoring compliance with U.S. State law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. State law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations.

 

 

 

- Cover Page (bold typeface)
- Legal and Regulatory Framework – United States Federal Overview
- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
- Legal and Regulatory Framework – California State Level Overview
- Legal and Regulatory Framework – Compliance with State Regulatory Framework
- Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws 
U.S. Marijuana Issuers with indirect involvement in cultivation or distribution

Outline the regulations for U.S. states in which the issuer's investee(s) operate.

 

- Cover Page (bold typeface)
- Legal and Regulatory Framework – United States Federal Overview
- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
- Legal and Regulatory Framework –

 

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  Specific Disclosure Necessary to Fairly  
Industry Present all Material Facts, Risks and  
Involvement Uncertainties Prospectus Cross-Reference
    California State Level Overview
- Legal and Regulatory Framework –Compliance with State Regulatory Framework
-Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws 
  Provide reasonable assurance, through either positive or negative statements, that the investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee's license, business activities or operations. - Cover Page (bold typeface)
- Legal and Regulatory Framework – United States Federal Overview
- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
-Legal and Regulatory Framework – California State Level Overview
- Legal and Regulatory Framework –Compliance with State Regulatory Framework
-Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws
-Risk Factors - California Regulatory Regime and Transfer and Grant of Licenses 
U.S. Marijuana Issuers with material ancillary involvement Provide reasonable assurance, through either positive or negative statements, that the applicable customer's or investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. - Cover Page (bold typeface)
- Legal and Regulatory Framework – United States Federal Overview
- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
-Legal and Regulatory Framework –California State Level Overview
- Legal and Regulatory Framework –Compliance with State Regulatory Framework
-Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws
    -Risk Factors - California Regulatory Regime and Transfer and Grant of Licenses
 
     

 

In accordance with Staff Notice 51-352, below is a discussion of the federal and State-level U.S. regulatory regimes in those jurisdictions where GH Group is, and the Resulting Issuer will be, directly or indirectly involved through its subsidiaries. GH Group and its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the adult-use and/or medicinal cannabis marketplace in the State of California. In accordance with Staff Notice 51-352, BRND will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding cannabis regulation. As noted under “Non-Compliance with State and Local Cannabis Laws” below, the Resulting Issuer intends to cause GH Group to promptly remedy any known occurrences of non-compliance with applicable State and local cannabis rules and regulations, and the Resulting Issuer intends to publicly disclose any non-compliance, citations or notices of violation which may have an impact on its licenses, business activities or operations.

 

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See “Corporate Structure - NEO Exchange Guidance Regarding Companies with U.S. Marijuana-Related Activities” for a discussion on the NEO Exchange’s additional expectations for issuers with U.S. marijuana-related activities.

 

Exposure to U.S. Marijuana Related Activities

 

As of December 31, 2020, the date of the Audited GH Group Financial Statements, 100% of GH Group’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of GH Group. As such, GH Group’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

 

Use of Cannabis

 

Marijuana is a preparation of the leaves and flowering tops of cannabis sativa, the hemp plant, which contains a number of pharmacologically-active principles (cannabinoids). It is used for its euphoric properties and can be considerably more potent when smoked and inhaled than when simply eaten.

 

Medical cannabis refers to the use of cannabis and its constituent cannabinoids, such as tetrahydrocannabinol (“THC”) and cannabidiol (“CBD”), as medical therapy to treat disease or alleviate symptoms. The cannabis plant has a history of medicinal use dating back thousands of years across many cultures.

 

Smoking cannabis is the most traditional form of ingestion and consists of smoking the dried flowers or leaves of the cannabis plant. Cannabis can be smoked through a pipe, rolled into a joint (or cigarette), or smoked using a water pipe (also known as a “bong”). Vaporizing involves using a vaporizer, which is a device that is able to extract the therapeutic ingredients in the cannabis plant material at a much lower temperature than required for burning. This allows user to inhale the active ingredients as a vapor instead of smoke. Many medical marijuana patients find that vaporizing offers an improved medical effectiveness, compared to smoking.

 

Topical cannabis encompasses herbal medicines that are applied directly to the skin or muscles. They include lotions, salves, balms, sprays, oils, and creams. Some patients report they are effective for skin conditions like psoriasis, joint diseases like rheumatoid arthritis, migraines, restless leg syndrome, some spasms, and everyday muscle stress and soreness. Unlike smoking, vaporizing or eating cannabis, topical products are generally non-psychoactive.

 

California Cannabis Market

 

Management believes that California is the most strategic base for post-prohibition expansion given its talent pool, wealth of brand and product expertise, mature consumer trends and agricultural conditions. It is management’s view that California has significant impact on global consumer trends, especially the consumer-packaged goods industry. California brands and retailers are often perceived as the “gold standard” influencing the global industry. With approximately 31 million adult residents and 279 million adult visitors annually, the California cannabis market grew to nearly $3 billion in annual spending in 2017, the largest market in the world. Annual legal cannabis spending in the State decreased to $ 2.5 billion in 2018, including as a direct result of burdensome regulations and taxes and recalcitrant or unprepared county and city authorities. Legal spending increased to $2.9 billion in 2019. California represents approximately 22% of the total 2025 U.S. cannabis market opportunity, and 16% of the estimated 2025 global recreational adult-use industry. According to BDS Analytics, the California cannabis market is expected to reach $7.4 billion in 2025, more than 2.7 times larger than Florida, the next largest market in the United States. 3

 

Legal and Regulatory Matters

 

United States Federal Overview

 

A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (“DOJ”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The United States Food and Drug Administration (“FDA”) has not approved marijuana as a safe and effective drug for any indication. 4

 

 

3 Arcview Market Research (2020). The State of Legal Cannabis Markets, 8th edition. Available at: https://research.arcviewgroup.com/solcm8/.

4 United States Drug Enforcement Administration (2018). Drug Scheduling. Available at: https://www.dea.gov/drug-scheduling.

 

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As of March 1, 2021, 47 States, the District of Columbia and the territories of Guam and Puerto Rico have now, under State law, legalized cannabis for medical and/or recreational purposes and public acceptance of cannabis continues to increase across the United States at a rapid pace. In 15 States, the sale and possession of both medical-use and adult-use cannabis is legal, and the District of Columbia has legalized adult-use cannabis but does not permit commercial sales. The sale and possession of both medical-use and adult-use cannabis is legal in the State of California.

 

Notwithstanding the permissive regulatory environment of medical and/or recreational cannabis at the State level, and the increasing number of States with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the Substances Act. Dozens of pieces of legislation have been introduced in the United States Congress that would legitimize the use and sale of cannabis, including the “Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act” that would remove marijuana from the Substances Act, and the “Strengthening the Tenth Amendment through Entrusting States (STATES) Act” that would lift the Substances Act’s restrictions on cannabis for individuals or corporations operating in compliance with State law. The MORE Act passed the House of Representatives on December 4, 2020, but was not considered in the Senate. Following the 2020 election, the Democratic Party now controls both the House of Representatives and the Senate. Democratic Senate Majority Leader Chuck Schumer, Senator Cory Booker and Senator Ron Wyden released a public statement on February 1, 2021 stating their intention to introduce comprehensive cannabis reform legislation. They plan to release a unified discussion draft of the reform legislation in the early part of 2021. However, there can be no assurances as to when any such bill will pass, if any such bill will pass at all or if any such bill will be accepted and made law by the President. As a result, cannabis-related practices or activities, including without limitation, the manufacture, importation, possession, use, or distribution of cannabis, remain illegal under United States federal law.

 

As a result of the conflict between state and federal law regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. On August 29, 2013, the U.S. DOJ attempted to address this inconsistency and to provide guidance to enforcement agencies when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States 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 and recreational purposes.

 

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 prosecutorial 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.

 

The Cole Memorandum outlined the following priorities for the U.S. DOJ relating to the prosecution of cannabis offenses:

 

Preventing the distribution of marijuana to minors;

 

Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

 

Preventing the diversion of marijuana from States where it is legal under State law in some form to other States;

 

Preventing State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

 

Preventing violence and the use of firearms in the cultivation and distribution of marijuana;

 

Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

 

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Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

 

Preventing marijuana possession or use on federal property.

 

While not legally binding, and merely prosecutorial guidance, the Cole Memorandum laid a framework for managing the tension between State and federal laws concerning State-regulated cannabis businesses.

 

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, the Cole Memorandum was rescinded by Attorney General Sessions. While this did not create a change in federal law, as the Cole Memorandum was not itself law, the revocation removed the U.S. DOJ’s guidance to U.S. Attorneys that State-regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority.

 

In addition to the rescission of the Cole Memorandum, Attorney General Sessions issued a memorandum (the “Sessions Memorandum”) which confirmed the rescission of the Cole Memorandum on the basis that the prosecutorial guidelines therein were “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 United States Attorneys’ Manual (“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.

 

While the Sessions Memorandum emphasizes that marijuana is a Schedule I controlled substance, and reiterates the statutory view that cannabis is a “dangerous drug and that marijuana activity is a serious crime,” it does not otherwise indicate that the prosecution of marijuana-related offenses is now a DOJ priority. Furthermore, the Sessions Memorandum explicitly describes itself as a guide to prosecutorial discretion. Such discretion is in the hands of U.S. Attorneys in deciding whether or not to prosecute marijuana-related offenses; resultantly, it is uncertain how active U.S. federal prosecutors will be in relation to such activities. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed.

 

To the knowledge of management of BRND, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the State of California.

 

Cannabis remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor the Sessions Memorandum has changed that fact. The federal government of the United States has always reserved the right to enforce federal law in regard to the sale and disbursement of medical or recreational cannabis, even if State law sanctioned such sale and disbursement. From a purely legal perspective, the criminality of cannabis activities at the federal level today is identical to what it was on January 3, 2018 and it remains unclear whether the risk of enforcement has been altered. Attorney General Sessions resigned on November 7, 2018 and was later replaced by Attorney General William Barr. During his Senate confirmation hearing, Mr. Barr stated that he disagrees with efforts by States to legalize marijuana, but would not go after marijuana companies in states that legalized it under Obama administration policies. He stated further that he would not upset settled expectations that have arisen as a result of the Cole Memorandum (as defined below). Federal enforcement of cannabis-related activity remained consistent with the priorities outlined in the Cole Memorandum throughout Attorney General Barr’s tenure.

 

Current U.S. President Biden publicly stated during his campaign a policy goal to decriminalize possession of cannabis at the federal level. 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. Additionally, under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to accept any proceeds from cannabis sales or any other Schedule I narcotics. As a result, both U.S. and Canadian banks have been reluctant to transact with cannabis companies, due to the uncertain legal and regulatory framework characterizing the industry at present. There is a risk that banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. More specifically, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be prosecuted for money laundering or conspiracy. Despite these laws, in February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department issued a memorandum (the “FinCEN Memorandum”) providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memorandum, which is covered in more detail below, 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 (the “2014 Cole Memorandum”) to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the Substances Act. The 2014 Cole Memorandum was also rescinded by the Sessions Memorandum. However, the FinCEN Memorandum was not rescinded, and the then Treasury Secretary Steve Mnuchin publicly stated that the U.S. Treasury Department was not informed of Attorney General Sessions’ intent to rescind the Cole Memorandum and that there is no desire to rescind the FinCEN Memorandum.

 

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While the Sessions Memorandum introduced further uncertainty and added to the State-federal divide concerning the legislation and prosecution of cannabis, the United States Congress has repeatedly enacted legislation to protect the medical marijuana industry from prosecution. The United States Congress has passed appropriations bills each year since 2014 that included a so-called “rider” provision (known then as the “Rohrabacher-Blumenauer Amendment”) which by its terms does not appropriate any federal funds to the U.S. DOJ for the prosecution of medical cannabis offenses of individuals who are in compliance with State medical cannabis laws. Subsequent to the issuance of the Sessions Memorandum on January 4, 2018, the United States Congress continued to include the Rohrabacher-Blumenauer Amendment in each subsequent omnibus appropriations bill for fiscal years 2018, 2019, 2020 and 2021, thus preserving the protections for the medical cannabis marketplace and its lawful participants from interference by the U.S. DOJ up and through the 2021 appropriations deadline of September 30, 2021.

 

Notably, the Amendment has always applied only to medical cannabis programs, and have no effect on pursuit of recreational cannabis activities. There have been attempts by Congressional supporters of cannabis legalization to extend the protections afforded by the Rohrabacher-Blumenauer Amendment to recreational cannabis activities, but those efforts have been unsuccessful.

 

American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals are operating in strict compliance with State law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the Substances Act, any individual or business—even those that have fully complied with State law—could be prosecuted for violations of federal law. If Congress restores funding, the U.S. government will have the authority to prosecute individuals for violations of the law within the past five years under the Substances Act’s statute of limitations.

 

Prior to 2018, the cultivation of hemp in the U.S. was governed by (i) Section 7606 of the Agricultural Act of 2014, codified at U.S.C. Chapter 7, Section 5490 (the “2014 Farm Bill”) and (ii) applicable State law. Section 7606 allowed for the cultivation of industrial hemp for research purposes under State agricultural pilot programs. Although the 2014 Farm Bill expired on September 30, 2018, Section 7606 remained in place.

 

On December 20, 2018, the Agriculture Improvement Act of 2018 (the “ 2018 Farm Bill”) became law. The law legalizes hemp as an agricultural commodity by removing hemp, its derivatives, cannabinoids, and extracts (including CBD and any part of the cannabis plant which contains 0.3% THC or less on a dry weight basis) from the list of controlled substances in the Substances Act. 5 Each State can now develop a plan for the regulation of hemp production, which will be administered subject to the approval and oversight of the United States Department of Agriculture. On January 15, 2021, USDA published a final rule that provides regulations for the production of hemp in the United States and is effective on March 22, 2021. With the passage of the 2018 Farm Bill, hemp and its derivatives cultivated and produced in compliance with federal and state laws and regulations is now legal.

 

 

5 Specifically, the law defines “hemp” as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

 

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However, cultivation is still subject to serious restrictions that, ultimately, may vary greatly between different jurisdictions.

 

Notwithstanding the comments made by Attorney General Garland, there is no guarantee that the current presidential administration will not change its stated policy regarding the low-priority enforcement of U.S. federal cannabis laws that conflict with State laws. The Biden administration and Congress could reverse course and decide to enforce U.S. federal cannabis laws vigorously.

 

An additional challenge to marijuana-related businesses is that the provisions of the United States Internal Revenue Code (“Code”) (specifically, section 280E thereof) are being applied by the U.S. Internal Revenue Service (“IRS”) to businesses operating in the medical and adult-use marijuana industry. Section 280E of the Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing them to pay higher effective U.S. federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.

 

U.S. Federal Enforcement Priorities

 

For the reasons set forth above, GH Group, and any future investments of the Resulting Issuer, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada and the U.S. As a result, the Resulting Issuer 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 Resulting Issuer’s ability to invest in the U.S. or any other jurisdiction. See “Risk Factors”.

 

Changes in government policy or public opinion can significantly influence the regulation of the cannabis industry in Canada, the United States and elsewhere. A negative shift in the public’s perception of cannabis in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause State jurisdictions to abandon initiatives or proposals to legalize cannabis, thereby limiting the number of new State jurisdictions into which the Resulting Issuer could expand. Any inability to fully implement the Resulting Issuer’s expansion strategy may have a material adverse effect on the Resulting Issuer’s business, financial condition and results of operations. See “Risk Factors”.

 

Further, violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from criminal charges or civil proceedings conducted by either the U.S. federal government or private citizens (who have the right to seek private relief for BRND’s “aiding and abetting” activities that violate U.S. federal law), including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on BRND, including on its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licenses in the U.S., the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity, or the market price of its publicly-traded shares. In addition, it is difficult for BRND to estimate the time or resources that would be needed for the investigation or final resolution of any such matters 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. See “Risk Factors”.

 

California State Level Overview

 

In 1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act (“CUA”). This legalized the use, possession and cultivation of medical marijuana by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine or any other illness for which marijuana provides relief. In 2003, Senate Bill 420 was signed into law establishing an optional identification card system for medical marijuana patients.

 

In September 2015, the California legislature passed three bills collectively known as Medical Cannabis Regulation and Safety Act (“MCRSA”). MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies, and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California overwhelmingly passed Proposition 64, the Adult Use of Marijuana Act (“AUMA”) creating an adult use marijuana program for adult use 21 years of age or older. AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed Senate Bill No. 94, known as the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which amalgamates MCRSA and AUMA to provide a set of regulations to govern medical and adult use licensing regime for cannabis businesses in the State of California. MAUCRSA went into effect on January 1, 2018. The Bureau of Cannabis Control (“BCC”), the California Department of Food and Agriculture (“CDFA”), the California Department of Public Health (“CDPH”), and the California Department of Tax and Fee Administration all have some degree of regulatory responsibility for marijuana operations. MAUCRSA became effective on January 1, 2018.

 

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In July 2019, California enacted A.B. 97. In relevant part, this bill authorizes licensing authorities to issue citations and fines to a licensee or an unlicensed person who violates MAUCRSA. The maximum fine is $5,000 per violation for licensees and $30,000 per violation for unlicensed persons. Each day of a violation constitutes a separate violation. A.B. 97 also repeals a prior requirement that an applicant for a provisional license first hold a temporary license. The bill also requires applicants for provisional licenses to submit evidence of compliance with the California Environmental Quality Act, limits the validity of a provisional license to 12 months with subsequent renewals as-approved by the relevant licensing authority, and allows licensing authorities to revoke provisional licenses for failing to diligently pursue final licensure. Finally, the bill requires the CDPH to establish a certification program for manufactured cannabis products comparable to the National Organic Program and the California Organic Food and Farming Act. In October 2019, California enacted A.B. 1529. This bill mandates that all cannabis vaping cartridges and cannabis vaporizers must include a universal symbol identifying the product as a vaping product.

 

In order to legally operate a medical or adult use cannabis business in California, the operator must have both a local and state license. This requires license holders to operate in cities with marijuana licensing programs. Therefore, cities in California are allowed to determine the number of licenses they will issue to marijuana operators or can choose to outright ban marijuana.

 

In the State of California, only marijuana that is grown in the state can be sold in the state. Although California is not a vertically- integrated system, the state allows licensees to only make wholesale purchase of marijuana from, or a distribution of marijuana to, another licensed entity within the state.

 

To the knowledge of management of BRND, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the State of California. For more information on federal enforcement and the risks associated with the U.S. cannabis regulatory environment generally, see, without limitation, “Risk Factors – Risks Related to the Regulatory Environment – U.S. federal law and enforcement pertaining to cannabis and hemp” and “Risk Factors – Risks Related to the Regulatory Environment – Risks related to heightened scrutiny by regulatory authorities”.

 

California Licenses and Regulations

 

In California, State and local medical and adult use cannabis business licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by BCC. While renewals are annual, there is no limit to the number of renewals a licensee may obtain. Assuming requisite renewal fees are paid, renewal applications are submitted in a timely manner, the establishment has not been cited for material violations, renewal applicants can anticipate approval in the ordinary course of business. However, any unexpected denials, delays or costs associated with a licensing renewal could impede planned operations and may have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Retail

 

The BCC is responsible for licensing and regulating cannabis retailers in California. Adult use retailer licenses permit the sale of cannabis and cannabis products to any individual age 21 years of age or older who do not possess a physician’s recommendation. Thus, should a Resulting Issuer subsidiary be awarded a license, it will be authorized to sell cannabis and cannabis products to adults over the age of 21 subject to customer presentation of a valid government-issued photo ID. As with all state-legal marijuana programs, only cannabis grown in California can be sold in California and retail licensees may only sell cannabis products procured from a duly licensed distributor or licensed microbusiness authorized to engage in distribution. All cannabis products are subject to appropriate laboratory testing, packaging, labeling, and tracking requirements. Upon receipt, licensed retailers must confirm cannabis products have not expired, are properly packaged and bear batch numbers which correspond with tracking and laboratory analysis documentation. Cannabis and cannabis products may only be displayed for inspection and sale on the sales floor of the facility, and may only be removed from packaging for customer inspection if placed in a proper container provided by the licensee and not readily accessible without the assistance of licensee staff (who must remain with the customer throughout such inspection). Any cannabis product displayed or inspected in this manner must be destroyed following inspection or when no longer being using for display purposes and may not be sold or consumed. Retailers may only provide free cannabis products under certain, very limited circumstances and may not sell other goods, with the exception of cannabis accessories and branded merchandise.

 

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Medicinal retailer licenses permit the sale of medicinal cannabis and cannabis products for use pursuant to the CUA, found at Section 11362.5 of the Health and Safety Code, by a medicinal cannabis patient in California who possesses a physician’s recommendation. Only certified physicians may provide medicinal marijuana recommendations.

 

Distribution

 

The BCC is responsible for licensing and regulating cannabis distributors in California. Cannabis distribution licenses permit the licensee to transport cannabis goods between licensees, arrange for testing of cannabis goods, and conduct the quality assurance review of cannabis goods to ensure compliance with all packaging and labeling requirements. A licensed cannabis distributor may only distribute cannabis goods, cannabis accessories and licensees’ branded merchandise or promotional materials.

 

Manufacturing

 

The CDPH’s Manufactured Cannabis Safety Branch (“MCSB”) is responsible for licensing and regulating cannabis manufacturers and for establishing statewide standards for packaging and labeling of cannabis and cannabis products. A cannabis manufacturer is anyone who makes or packages a prepared cannabis product, including edibles, topicals, tinctures, extracts, vape cartridges, capsules and more. Cannabis manufacturers can also package flower and roll and package pre- rolls on their licensed premises. Manufacturing licenses are issued based on the type of manufacturing operations to be conducted on the licensed premises. License types issued by MCSB include extraction (using volatile and nonvolatile solvents), infusion, packaging and labeling, and shared-use facilities.

 

Cultivation

 

The CalCannabis division of the CDFA is responsible for licensing and regulating cannabis cultivators, nurseries and processors. CDFA is authorized to issue 17 different types of cannabis cultivation licenses, depending on the type of cultivation (outdoor, indoor, mixed-light) and the size (small, medium, large). CDFA also issues licenses to nurseries and processors. CDFA manages the California Cannabis Track-and-Trace system (“T&T”), which tracks all commercial cannabis and cannabis products.

 

Reporting Requirements

 

The state of California has selected Franwell Inc.’s METRC solution (“METRC”) as the State’s T&T system system used to track commercial cannabis activity and movement along the legal supply chain. While METRC is interoperable with other third-party systems via application programming interface, only licensees have access to METRC itself.

 

Operating Procedure Requirements

 

Licensing applicants must submit standard operating procedures (“SOPs”) describing how the operator will, among other requirements, secure the facility, manage inventory, comply with seed-to-sale requirements, dispense cannabis, and handle waste. Once SOPs approved by the governing regulating body(ies), licensees must provide their employees with SOP training and seek written approval from governing regulating bodies before materially changing their SOPs.

 

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Site-Visits & Inspections

 

The BCC, CDPH and CDFA and their authorized representatives have broad authority, with or without notice, to inspect licensed cannabis operations, including premises, facilitates, equipment, books and records (which may be copied, and such copies retained), and cannabis products. Failure to grant representatives from BCC, CDPH or CDFA full and immediate access to facilities, property, and premises, and to cooperate with inspections and investigations may result in disciplinary action. Laws and regulations enacted by many local jurisdictions grant local cannabis governing bodies and law enforcement agencies similar inspection authority.

 

Storage and Security

 

To ensure the safety and security of cannabis facilities and operations, the BCC requires licensees to:

 

1. Maintain a fully operational security alarm system;

 

2. Contract for security guard services;

 

3. Maintain a video surveillance system that records continuously 24 hours a day;

 

4. Ensure adequate lighting is installed and maintained on and about licensed facilities;

 

5. Only transact business during authorized hours of operations;

 

6. Store cannabis and cannabis product only in areas identified for such purposes on drawings submitted to and approved by the State in connection with licensing;

 

7. Store all cannabis and cannabis products in a secured, locked room or a vault;

 

8. Report to local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis; and

 

9. To the extent applicable based on a licensee’s authorized scope of operations, ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a delivery manifest in any vehicle transporting cannabis and cannabis products. Only vehicles registered with the BCC, that meet BCC distribution requirements, are to be used to transport cannabis and cannabis products.

 

In addition to BCC storage and security requirements, local jurisdictions may have additional storage and security requirements. Such requirements, to the extent they exist, may vary from one locality to another.

 

BRND understands that GH Group is in compliance with the laws of the State of California and the related cannabis licensing framework. There are no current incidences of non-compliance, citations or notices of violation which are outstanding which may have an impact on GH Group’s licenses, business activities or operations in the State of California. Notwithstanding the foregoing, like most businesses, GH Group may from time to time experience incidences of non- compliance with applicable rules and regulations in the states in which GH Group operates, including the State of California, and such non-compliance may have an impact on GH Group’s licenses, business activities or operations in the applicable state. However, GH Group, takes steps to minimize, disclose and remedy all incidences of non-compliance which may have an impact on GH Group’s licenses, business activities or operations in all states in which GH Group operates, including the State of California. See “Regulatory Framework – Compliance”.

 

Compliance with License Requirements

 

GH Group currently has cannabis cultivation, manufacturing, distribution, retail, and delivery operations in the State of California and is in compliance with applicable State licensing requirements and the California cannabis regulatory framework. GH Group maintains the appropriate licenses for its California cultivation, manufacturing, distribution, retail and delivery operations, as applicable.

 

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The licenses of GH Group and its subsidiaries are independently issued for each approved activity for use at the GH Group’s facilities in California. License renewal applications are submitted in accordance with the guidelines published by local cannabis regulators, the BCC, the California Department of Food and Agriculture, and the California Department of Public Health. GH Group has a strong track record of maintaining its licenses in good standing.

 

GH Group has developed and implemented a compliance program designed to achieve its strategic business goals. This compliance program integrates external regulations and requirements with internal procedures and rules to effectively outline the employee duties and standards of work. GH Group has implemented policies and procedures to seek to ensure compliance with applicable laws and regulations.

 

In additions, GH Group employs individuals dedicated to monitoring California law and local regulations for changes and updates. Further, GH Group has contracts with external consultants and external advisors that assist in the monitoring, notification, and interpretation of any changes.

 

GH Group conducts quarterly internal audits to monitor compliance with regulations and to identify the areas for improvement.

 

Cultivation Operations Compliance

 

GH Group’s onsite operations maintain compliance by merging compliant operations into day to day activity. Onsite staff is trained on compliance matters and is required to operate in accordance with SOPs that have merged compliance functions with daily operational activity necessary to propagate, cultivate, harvest, and cure cannabis.

 

Onsite staff are required to understand and adhere to compliance requirements related to cultivation. Cultivation operations include the following departments, each of which has a manager or supervisor responsible for maintaining regulatory compliance, updating the SOPs, confirming with compliance department managers any changes to operations or the premises, and reporting, both within their chain of command but also, in many cases, into systems or reporting chains in compliance and finance.

 

The departments that have material compliance obligations GH Group cultivation operations include:

 

propagation;

 

integrated pest management (“IPM”);

 

general cultivation;

 

track and trace;

 

inventory control;

 

facilities; and

 

operations.

 

Facilities, in conjunction with compliance staff, designate and maintain premises diagram information, including lighting plans and implementation, and canopy areas. Canopy areas are marked using easily identifiable ribbon lines and attaching the relevant licenses to such contiguous canopy spaces. General cultivation staff are aware of the canopy limitations and are required to ensure that all cultivation is kept within canopy boundaries.

 

The track and trace team is led by a Track and Trace Manager and includes four additional staff who manage compliance with respect to track and trace operations, including requesting unique identifiers (“ UIDs”), tagging immature plant lots, upon moving immature plants to mature plant growth area tagging such plants with new UIDs, assisting in harvesting measurement and data input in conjunction with various cultivation team members.

 

The track and trace team members have each completed training to enter the cultivation licenses daily track and trace activities in the METRC system. The Track and Trace Manager oversees all data entry to seek to ensure accuracy and perform corrections within 24 hours of identified data entries. The Track and Trace Manager is also responsible for general track and trace compliance reconciliation, record storage, cross-functional reporting, and notifying the CDFA in the event of any outage that keeps the account offline and are required to maintain a record of track and trace activities which occurred while offline.

 

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The propagation team is responsible for initiating a transfer from nursery licensed areas to mature plant licensed areas. The propagation issues an external transfer sheet containing the UIDs and quantities of plant batches and licensed destination to the track and trace team. Upon receiving a transfer sheet, the track and trace team enters the information into the METRC system, producing a manifest to initiate the movement of plants from the nursery to the Small Mixed Tier 1 licensed areas.

 

The processing team led by the Processing Manager is responsible for oversight of the harvesting and processing of all cannabis batches. This includes working with the track and trace team to in providing the required harvest information, including for each plant and UID the wet weight and waste weight (such waste is required to be processed in accordance with the applicable guidelines).

 

The track and trace team works with Inventory Managers to maintain accurate inventory records and update weights after drying and curing processes. A certified scale is used to weigh the total dry weight of a harvested batch as soon as the drying phase is completed, typically after approximately 10 days from harvest. This total dry weight is recorded prior to any processing activity. The total dry weight is then reconciled upon completion of processing the harvest batch by comparing final product and waste weights.

 

In addition to the general cultivation operations track and trace teams are responsible, along with inventory team members, for issuing manifests for nursery transfers onsite, transfer of cannabis offsite, and any other inbound or outbound cannabis goods processing as well as general inventory management and information collection at the required times and processes. In order to seek to ensure accuracy, a cycle count schedule is in place at each cultivation facility to accomplish a 30-day reconciliation of all cannabis plant and processed inventory.

 

Senior Cultivation Managers are responsible for drafting and updating an IPM plan in conjunction with compliance staff. The IPM plan includes any county-imposed limitations, legal limitations, and label guidelines for application. In addition, GH Group imposes its own strict guidelines on the use of active ingredient products and categorically excludes certain product classes.

 

GH Group’s indoor cultivation operation at The Pottery is a small scale grow opposed to the greenhouse operations. The indoor grow operates with a CDFA Specialty Indoor license. This license is regulated by a maximum of 5,000 sq. ft. of canopy space which suits the premises as the physical design as constructed is just under 5,000 square feet.

 

Additional regulatory requirements for this license type, such as weighmaster licenses and local permits, are maintained by The Pottery’s Cultivation Manager with assistance from third party advisors.

 

Required record retention for the specialty indoor license is as follows:

 

Financial records: the cultivation managers send copies of all receipts & invoices (cash & card) to GH Group’s accounting team. Onsite copies are kept in a filing cabinet at The Pottery cultivation by Cultivation Managers.

 

Personnel records: GH Group’s human resources department keeps all employee files stored in office.

 

Disposal records: the cultivation management maintains a binder with all waste manifests/invoices/destruction certificates.

 

The compliance department is generally responsible for maintaining licenses in good standing, including ancillary cultivation licenses such as weighmasters licenses, State Water Resources Control Board licenses and disclosures, and maintaining information on GH Group’s ability to meet license obligations. The responsibility includes maintaining accurate state level licenses and amending and updating such licenses and related license information, such as the premises diagrams, when required.

 

GH Group’s compliance and licensing team is responsible for audits of onsite activities, implementing reporting guidelines, and acting as a resource to onsite team members. The compliance team calendars license renewals and other regulatory deadlines and submits, or approves the submission through contractors, of all documents to cannabis regulators. The compliance/licensing manager is responsible for preparing and submitting license renewals prior to expiration of both cannabis and other regulatory licenses, for example, State Water Resources Control Board licenses and waivers, weighmasters certificates and local permits.

 

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GH Group has a robust financial reporting and compliance system in place. Financial reporting is reconciled against METRC reporting for maintenance of accuracy and prevention of loss. The cultivation business units are led by a Cultivation Controller who reports to the Corporate Controller who in turn reports to GH Group’s Chief Financial Officer. In conjunction with operations staff, the finance team provides for the payment of local cannabis taxes, California cultivation and excise taxes and the tracking of outbound and inbound products transfers.

 

The finance team is also responsible for maintaining records relating to financial interest holders, tax payments, contracts and transaction records which are produced as needed for regulatory review.

 

Manufacturing Operations Compliance

 

Under applicable State regulatory requirements, licensed cannabis manufacturers are required to establish a security plan to include measures preventing access to the premises by unauthorized persons and to protect physical safety of employees and to install a security alarm system designed to prevent theft or loss.

 

GH Group seeks to comply with such security requirements through the following policies and procedures:

 

Security and Security Plans

 

Security management: The Security Manager, in coordination with managers and security advisors, is responsible for the development, upkeep, and adherence to a security plan.

Security training: All employees receive adequate security training which includes (i) the proper use of security measures and controls for the prevention of diversion, theft, or loss of cannabis or cannabis products, (ii) procedures and instructions for responding to an emergency, and (iii) education of department managers, who are responsible for the ongoing security training in daily operations. Employees are required to report any suspicious activity or security concerns to their supervisor immediately or security officer on duty immediately.

Personnel security: Each person working is supplied with a unique identification code to document entry and egress. This is accomplished with the use of a credentialed fob device that is controlled by the Security Manager. Security codes and fobs are kept secure and inaccessible to any unauthorized person. The Human Resources Manager maintains personnel records (separate from payroll records) to be kept for seven (7) year for each employee The Human Resources Manager is assigned responsibility for personnel policy and procedure documentation, maintenance, implementation, and training.

Security access: Each person employed is supplied with a unique identification code contained in a credentialed fob device for access. Visitors, including outside vendors and consultants, must obtain a visitor identification badge prior to entering an enclosed locked area and will be escorted and monitored by a Manufacturing Manager.

Theft or diversion: Any incident involving theft or diversion will be reported to the City of Lompoc and the Lompoc Police Department as soon as practical but within 24 hours. Any theft in excess of $250 in retail value of cannabis plant materials, extract, cannabis-infused product, or other item containing cannabis shall be reported to the Lompoc Police Department and the City of Lompoc in writing within 24 hours of the theft.

Facility security: Consists of four primary systems: (i) contracted physical security; (ii) CCTV 24-7 recording; (iii) manual code access doors equipped with ID card readers; and (iv) intrusion alarms.

 

Quality Control Program

 

Each cannabis manufacturing licensee is responsible for implementing a quality control program to ensure that cannabis products are not adulterated or misbranded. The quality control program includes quality control operations for all of the following:

 

The grounds, building, and manufacturing premises: This is accomplished by GH Group’s Manufacturing Facilities Manager and staff following internal SOPs to maintain the manufacturing premises so that they remain in a clean condition, free from any contamination or potential disturbance to the quality and safety of products on site.

 

Equipment and utensils: GH Group manufacturing has established procedures for validating that all equipment and machinery is in compliance with design specification, including built as designed with proper materials, capacity, and functions, in addition to properly connected and calibrated. The Equipment Production Supervisor oversees that team performs a visual inspection, looks for any contaminants, foreign objects, or quality issues with the equipment, supplies, raw materials or the facility. If a quality control issue is discovered when performing a visual inspection, staff must immediately notify the Manager on duty so that batch is remediated before further processing. The manufacturing team establish that operating ranges are shown to be capable of being held as long as necessary during routine productions and have a schedule for routine re-verification of all equipment and machinery.

 

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Personnel: The GH Group manufacturing team seeks to ensure that all cannabis and cannabis products are processed, manufactured, packaged, labeled, handled, and stored in a safe and sanitary manner and seeks to ensure that the identity, strength, quality, and purity of cannabis and cannabis products will be maintained. All employees working in direct contact with cannabis must conform to hygienic practices.

 

Cannabis product components: All production materials, packaging components, labeling, and other supplies must be physically inspected and stored under quarantine until they are sampled, if necessary, and released for use. All containers will be inspected for appropriate labeling as to contents, container damage, or broken seals and contamination.

 

Shipment inspection: Shipments unloaded from carriers are inspected for physical damage. If there is slight or moderate physical damage, the material will be more closely inspected. If any consequential damage is found, the material in question will not be permitted into the facility and the Inventory Manager will be immediately notified. The Inventory Manager and/or a Quality Assurance Specialist will make the decision to either accept or return the material. Any damaged material, which cannot be left on the truck, will be brought to the quarantine area and clearly marked as “DAMAGED” or “REJECTED”.

 

Manufacturing Processes and Procedures

 

GH Group’s manufacturing operations have organized their processes and procedures by outlining each process that occurs in designated areas in the following order:

 

Pre-processing/preparation area: This area is used for preparing the raw plant material. Mechanical homogenizers are used to grind the material to a uniform size. Large, super- low temperature freezers are used for storage. After preparation, material is brought to the extraction room.

 

Extraction room: Non-volatile extraction is completed in the designated “extraction room” by an original equipment manufacture-trained and certified technician. After the initial extraction is completed, the product can move into the designated area for post-production and refinement.

 

Post-processing/refinement lab: This room houses solvent reclamation equipment, hazardous/flammable material storage, vacuum ovens, vacuum pumps, small benchtop chillers, water heaters, heating mantels, distillation apparati, etc. The area meets U.S. National Fire Protection Association criteria for class 1B flammable liquids and vapors. All product completed in this section of the facility is deemed safe for handling by the QA Specialist before entering the Packaging Area. When products reach the end of their refinement cycle and pass quality control sampling/testing, they are be moved to the designated finished product area.

 

Commercial food processing/“kitchen”: The area referred to as the food processing facility or “kitchen” is utilized to infuse active cannabis ingredients into consumable goods. All employees working in this area have sufficient training in Hazard Analysis Critical Control Point training and are “Serv Safe” certified. All food products are stored according to their perishability in a clean and efficacious work environment for the purpose of food processing.

 

Packaging/labeling area: Finished products are moved to this area, and products still in need of formulation go to the “formulation and filling room,” where the various derivative products are volumetrically packaged and labeled by way of automated or manual robotic filling machines, then returned to this area. All product prior to being packaged and labeled undergoes a quality assessment to seek to ensure product is free of debris. An enhanced visual inspection and an olfaction inspection may be performed at this time. A log is compiled by every employee delineating employee number, product batch code, date and net batch weight. When a product has been counted and logged, the items are moved to the “secured product storage vault” and locked until further distribution.

 

Formulation and filling room: This area is considered a clean room to create ‘nutraceutical style’ products and can be used as a clean area for future work. Products to be volumetrically filled and formulated primarily consist of vape devices and topical products and tinctures.

 

Secured product storage vault: This area is the most secure space in the facility, surrounded by a U.S. Drug Enforcement Agency-style “cage” comprised of anchored rod iron and Kevlar/steel inserts within the drywall. This area is tightly climate-controlled to seek to ensure hazard controls for any consumable products that are at risk for food-borne bacteria.

 

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Testing: All cannabis received is tested for contaminants and cannabinoid and terpenoid profile, though testing of cannabis that will undergo further processing before sale is not required by State law or regulation. In lieu of initiated testing with an independent testing laboratory, a lot specific report or Certificate of Analysis may be accepted from the supplier of the cannabis provided the results are reported by an independent testing laboratory that is licensed by the State of California. The Quality Assurance department establishes the reliability of the supplier’s analyses through confirmation of the supplier’s test results at appropriate intervals.

 

Inventory Control

 

GH Group has a written inventory control plan capable of tracking the location and disposition of all cannabis and cannabis products at its licensed premises. The Inventory Control Manager follows the internal Inventory Tracking SOP and oversees that the inventory team reports all tracking of inventory items accurately.

 

In addition, GH Group reconciles the on-hand inventory of cannabis and cannabis products at its licensed premises with the records in the track-and-trace database at least once every 30 calendar days. The Inventory Control Manager and team produce a 30-day inventory reconciliation for all inventory in the track and trace system. This is overseen by the Operations Coordinator who reports to the Plant Manager.

 

Retail and Distribution

 

Each GH Group retail location is managed by a General Manager who is responsible for maintaining compliant operations. Track and trace obligations are handled by the inventory and compliance team whose duties include receiving inbound cannabis products, checking the products against the manifest, accepting or rejecting products and updating the track and trace database when accepted, destruction of product, processing returns, compliance training and inventory reconciliation. At the time of delivery, the receiving employee is charged with examining the product packaging to seek to ensure that it meets all of the packaging and labeling requirements.

 

The track and trace system, METRC, is only one of multiple data sets used to manage, track, reconcile, and reduce loss of inventory. GH Group also enters all inventory into its general inventory management system, by porting METRC tags through GH Group’s enterprise resource planning software. Each dispensary has its own assigned tags to be used if necessary. METRC manifests, tags, certificates of analysis and invoices are kept for records retention. Manifests are required to be kept for seven (7) years.

 

The inventory and compliance team reviews and fully assesses all on-hand inventory every 30 days and cross-references to the general inventory database.

 

Safety and security measures are an integral part of each floorplan. Licensed premises are designed to control customer flow and prohibit unauthorized entry to limited- access areas. Limited-access areas include spaces utilized to secure, store, transfer, or receive cash, salable goods, records and surveillance equipment (excluding the sales floor). These areas are accessible only to authorized individuals; authorization is granted by necessity of job function. Additionally:

 

no one under age 21 may enter a limited-access area;

 

only authorized individuals are permitted entry to a limited-access area, which may include:

 

o employees;

 

o outside vendors;

 

o contractors; or

 

o anyone doing business that requires access to the limited-access area;

 

authorized individuals who are not employees must:

 

o be accompanied by an employee at all time;

 

o have their visits recorded in a log (including date, time, name, purpose of visit, areas visited, employee escort name; logs are retained in compliance with State record keeping requirements and available to licensing agencies and authorities upon request); and

 

only employees and contractors are permitted on site outside of retail store hours.

 

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Employees are required to display a laminated identification badge. Visitors are provided a visitors badge. To enter each retail licensed area, a customer is required to present a valid government issued photo ID.

 

Each GH Group retail licensee location has specific access controls related to both inventory and cash management. Cash is secured in specialized vaults as a safety measure against robbery and is regularly deposited.

 

When transporting cash, each GH Group retail store is required to comply with all BCC regulations, security protocols and best business practices defined by the retail finance team in all transportation of cash. Armored car transportation is the preferred method of transportation. This service in combination with retail security protocols are designed to safeguard all transportation of cash to and from the specific site.

 

There are several specific controls related to general retail merchandising, that include limits on customer interactions with samples, product display, and purchasing requirements. Store merchandising is directed and approved by the VP of Retail and implemented by store General Managers and designees. Changes to merchandising are reviewed for any compliance issues, and, where appropriate, proposed changes are reviewed by the corporate compliance managers.

 

To purchase a cannabis product online, a GH Group customer is required to upload a valid California identification and a self-photo, both of which are electronically verified by retail employees. No online sales or home deliveries are made to individuals outside the State of California. On delivery, the GH Group delivery employee electronically scans the customer’s identification and utilizes mobile technology to process electronic payments and to upload data into GH Group’s inventory management system.

 

Delivery operations must be conducted by an employee over the age of 21. A copy of the licensee’s license, the driver’s government identification, and the employee badge are required to be carried by the driver. At the time of delivery, the driver must confirm the age and identify of the customer in accordance with general retail customer data collection procedures.

 

Certain restrictions on where the delivery is allowed to occur include the requirement that it be to a physical address within California, cannot be to a school, youth center, or childcare center, and cannot be delivered to any public or United States land.

 

Retail delivery may only be accomplished by using an enclosed motor vehicle that cannot have markings that indicate that the vehicle might contain cannabis and no passengers or operators outside of employees of the licensee may be in the vehicle. The vehicle is required to have a GPS device owned by the licensee that records all locations traveled and stores such information for 90 days. The total value of goods that can be carried cannot exceed $5,000 at any time, or more than $3,000 in goods that do not have orders associated with them and the delivery driver cannot leave the licensed premises until a delivery order has been received.

 

Cannabis goods are kept in a lockable case (either combination or lock) that is secured to the inside of the vehicle.

 

Distributor obligations include separation of non-cannabis goods storage from cannabis goods, a requirement to store by batches of similar products and not store mixed product batches together. Batch labeling of products must occur and include, manufacturer or processor license number and information, date of entry into storage, UID for each batch, a description of the goods and the unit weight or batch weight and count (as accomplished by licensed weighing devices and personnel), and the best by or any expiration dates.

 

Batch testing is accomplished by licensed laboratories who take samples while products are held. Testing operations, including those accomplished while the goods are held, are highly regulated. A GH Group employee must be present when sampling occurs. The sampling process must be on video with the batch number identified on video and the recording maintained for 90 days. Chain of custody records for anyone possessing and moving the sample are required.

 

All cannabis goods transported by distribution require a manifest in the track and trace system prior to shipment, the information required includes: testing and sampling data, sale of goods, destruction or disposal of goods, description of goods and weight and count of goods. Prior to shipment the manifest must be sent to the purchaser or transferee and the BCC. The receiving licensee is required to check the manifest and reject any non-conforming goods or goods not on the manifest.

 

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While GH Group is compliant with State and local cannabis laws, its cannabis-related activities remain illegal under United States federal law. See “Risk Factors”.

 

Non-Compliance with State and Local Cannabis Laws

 

From time to time, as with all businesses and all rules, it is anticipated that GH Group may experience incidences of non-compliance with applicable rules and regulations, which may include minor matters such as:

 

staying open slightly too late due to an excess of customers at stated closing time;

 

minor inventory discrepancies with regulatory reporting software;

 

missing fields in regulatory reports;

 

cleaning schedules not available on display;

 

educational materials and/or interpreter services not available in an sufficient number of languages;

 

updated staffing plan not immediately available on site;

 

improper illumination of external signage;

 

marijuana infused product utensils improperly stored;

 

labels out of compliance with most recent regulatory guidelines;

 

partial obstruction of camera views; and

 

onsite surveillance room used for any other function (i.e., storage).

 

In addition, either on an inspection basis or in response to complaints, such as from neighbours, customers or former employees, State or local regulators may among other things issue “show cause” letters, give warnings to or cite GH Group for violations, including those listed above. Such regulatory actions could lead to the requirement to remedy the situation, or, in more serious cases, lead to penalties and/or amendments, suspensions or revocations of licenses or otherwise have an impact on the Resulting Issuer’s licenses, business activities or operations.

 

GH Group does conducts internal audits with respect to compliance with applicable State and local cannabis rules and regulations and it is intended that the Resulting Issuer will continue this practice.

 

BRND intends to cause GH Group to promptly remedy any known occurrences of non-compliance with applicable State and local cannabis rules and regulations and BRND intends to publicly disclose any non-compliance, citations or notices of violation which may have an impact on its licenses, business activities or operations.

 

Ability to Access Public and Private Capital

 

BRND has historically, and the Resulting Issuer will continue to have upon closing of the Transaction, access to equity financing from the public capital markets by virtue of its status as a reporting issuer in each of the provinces and territories of Canada other than Quebec.

 

GH Group has historically, and continues to have, access to equity and debt financing from the prospectus exempt (private placement) markets in the U.S. GH Group also has relationships with sources of private capital (such as funds and high net worth individuals) that could be investigated at a higher cost of capital.

 

While GH Group is not currently able to obtain bank financing in the U.S. or financing from other U.S. federally regulated entities, they currently have access to equity financing through the private markets in the U.S. Since the use of marijuana is illegal under U.S. federal law, and in light of concerns in the banking industry regarding money laundering and other federal financial crime related to marijuana, U.S. banks have been reluctant to accept deposit funds from businesses involved with the marijuana industry. Consequently, businesses involved in the marijuana industry often have difficulty finding a bank willing to accept their business. Likewise, marijuana businesses have limited, if any, access to credit card processing services. As a result, marijuana businesses in the U.S. are largely cash-based. This complicates the implementation of financial controls and increases security issues.

 

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Commercial banks, private equity firms and venture capital firms have approached the cannabis industry cautiously to date. However, there are increasing numbers of high net worth individuals and family offices that have made meaningful investments in companies and businesses similar to that of GH Group. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep 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 Resulting Issuer when needed or on terms which are acceptable to the Resulting Issuer. The Resulting Issuer’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. See “Risk Factors – The Resulting Issuer may be subject to restricted access to banking services in the United States and Canada.

 

THE BUSINESS OF GH GROUP

 

History of GH Group and Business Overview

 

GH Group was 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. As of December 31, 2020, GH Group had 294 employees.

 

In 2019, GH Group expanded its retail presence to include one of the three (3) dispensary permits in Santa Barbara, California, under its “Farmacy” brand and established an omnichannel retail approach with web-based ordering capabilities and delivery optionality. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution” for a discussion of GH Group’s online sale and delivery regulatory compliance protocols. At the same time, GH Group strengthened its 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, GH Group completed the acquisition of a fourth (4th) dispensary, iCANN, LCC d/b/a Farmacy Berkeley (“iCANN” or “Farmacy Berkeley”).

 

In 2020, GH Group expanded its cultivation footprint by over 300% with an approximately 355,000 sq. ft. cultivation facility in Padaro, California. GH Group’s 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 Analytics6. In December 2020, the brand held onto its number two spot.

 

GH Group also added additional brands and form factors to its offerings to complement the strong positioning in the flower segment enjoyed by Glass House Farms. In edibles and topicals, GH Group benefits from a partnership with a well-known cannabis activist and entrepreneur under its cannabis wellness brand “Mama Sue”.

 

Through these activities, GH Group established the foundation for its 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. GH Group strives to provide customers with consistently high-quality products across a range of trusted and recognizable brands.

 

Cultivation

 

GH Group’s 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. GH Group uses the sun, the climate and advanced technology to conduct precision agriculture.

 

 

6 BDS Analytics (2020). Sales in December 2020. Available at: https://www.BDSA.com.

 

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As of Q1 2021, GH Group’s 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 GH Group taking over the properties and were transitioned to cannabis use by GH Group. 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 GH Group, including the addition of new growing systems, fertigation, photoperiod lights, automated light deprivation curtains, and upgraded climate control technology. GH Group followed up the Casitas project with its Padaro facility acquisition, which tripled GH Group’s cultivation footprint while increasing canopy planting efficiency by over 350% through the use of an innovative rolling tray system. GH Group 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, GH Group 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 GH Group expects 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. GH Group’s 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, the GH Group 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 GH Group’s 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.

 

GH Group’s cultivation expertise reflects the culmination of years of operating experience and specialized input from cannabis, agriculture, technology, business, manufacturing and scientific experts, allowing GH Group to grow high-quality cannabis at a low cost. GH Group’s cultivation management team has a combined 100+ years of greenhouse experience. GH Group 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, GH Group’s 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. GH Group’s ability to grow productively at scale has resulted in lower unit production costs. During 2020, GH Group scaled up its 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.

 

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Cultivation Licenses

 

Padaro Licenses

 

The applicable licenses for cultivation/processing issued by the CDFA are held by K&G Flowers, LLC and G&K Produce, LLC (each of which is a wholly owned subsidiary of GH Group), respectively, as described in the table below.

 

Expiration/Renewal
License Holder Address Permit/License No. Date (MM/DD/YY) License Type
G&K Produce, LLC 3480 Via Real CCL18-0001702 11/22/21 Adult-Use-Nursery
  Carpinteria, CA      
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001703 11/22/21 Adult-Use-Processor
  Carpinteria, CA      
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001652 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001633 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001624 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001622 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001599 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001589 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001582 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001700 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001696 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001695 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001683 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001678 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001664 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
G&K Produce, LLC 3480 Via Real CCL18-0001655 01/02/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      

 

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K&G Flowers, LLC 3480 Via Real CCL18-0001673 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001670 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001668 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001667 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001665 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001649 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001647 11/22/21 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001660 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001657 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001654 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001635 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001630 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001629 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      
K&G Flowers, LLC 3480 Via Real CCL18-0001628 02/20/22 Adult-Use-Small Mixed-Light Tier 1
  Carpinteria, CA    
  93013      

 

See “Material Contracts”.

 

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 BCC is held by Mission Health Associates, Inc., as described in the table below.

 

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Expiration/Renewal
License Holder Address Permit/License No. Date (MM/DD/YY) License Type
Mission Health 5601 Casitas Pass CCL18-0001009 06/07/21 Medicinal-Nursery
Associates, Inc. Road Carpinteria,    
  CA 93013      
Mission Health 5601 Casitas Pass C13-0000080-LIC (BCC) 07/08/21 Medicinal - Distributor/Transport Only
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0003034 03/25/22 Medicinal-Processor
Associates, Inc. Road Carpinteria,    
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000498 03/15/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000503 03/15/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000512 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000510 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000509 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000506 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000505 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000502 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      
Mission Health 5601 Casitas Pass CCL18-0000500 03/11/22 Medicinal-Small Mixed-Light Tier 1
Associates, Inc. Road Carpinteria,  
  CA 93013      

 

See “Material Contracts”.

 

The Pottery Licenses

 

The applicable license for cultivation/processing issued by the CDFA is held by The Pottery, as described in the table below. The applicable licenses for distribution/transportation issued by BCC are held by The Pottery Inc., as described in the table below. The Pottery, Inc. is co-owned by an unrelated third party, TLMD Holdings, LLC.

 

  Expiration/Renewal
License Holder Address Permit/License No. Date (MM/DD/YY) License Type
The Pottery Inc. 5042 Venice Blvd. CCL18-0000935 04/01/21 Adult-Use-Specialty Indoor
  Los Angeles, CA    
  90019      
The Pottery Inc. 5042 Venice Blvd. C11-0000726-LIC (BCC) 07/08/21 Adult-Use & Medicinal – Distributor License
  Los Angeles, CA  
  90019      

 

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See “Material Contracts”.

 

Manufacturing and Distribution

 

GH Group’s 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 the GH Group’s 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, GH Group 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 GH Group), as described in the table below. The applicable license for distribution issued by BCC is held by CA Manufacturing Solutions LLC, as described in the table below.

 

Expiration/Renewal
License Holder Address Permit/License No. Date (MM/DD/YY) License Type
CA Manufacturing 1637 W. Central CDPH-10002412 04/12/21 Annual Manufacturing
Solutions LLC Ave. Lompoc, CA     License – Adult and
  93436     Medicinal Cannabis
        Products
        Type 7: Volatile
        Solvent Extraction
CA Manufacturing 1637 W. Central C11-0000031-LIC (BCC) 04/30/21 Adult-Use &
Solutions LLC Ave. Lompoc, CA   Medicinal – Distributor
  93436     License

 

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See “Material Contracts”.

 

Wholesale Sales

 

In addition to sending cultivated biomass to the CMS Asset for manufacture, GH Group also sells its biomass on various wholesale markets.

 

WHOLESALE - BULK BIOMASS   Q1     Q2     Q3     Q4     TOTAL  
Number of Bulk Customers     14       21       18       19       36  
Total Revenue   $ 2.4     $ 6.5     $ 6.6     $ 8.4     $ 23.9  
Average Revenue per Customer   $ 0.1     $ 0.3     $ 0.3     $ 0.4     $ 0.7  
Top 5 customers (% of sales)     68.8 %     80.6 %     83.2 %     78.3 %     69.1 %
Top 10 customers (% of sales)     92.1 %     93.0 %     96.7 %     94.9 %     83.5 %

 

Dollar figures in above table are expressed in millions and each quarter refers to the applicable quarter of the 2020 financial year.

 

Further, GH Group has a wholesale business selling GH Group-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. 7

 

WHOLESALE – OWNED BRANDS
Consumer Packaged Goods
    Q1 2020     Q2 2020     Q3 2020     Q4 2020     Total  
Cumulative Points of Distribution             64       151       239       273       273  
Revenue by Brand     100.0 %   $ 1.3     $ 2.2     $ 3.5     $ 6.2     $ 13.2  
Glass House Farms     71.4 %     0.4       1.4       2.5       5.2       9.5  
Other     28.6 %     0.1       0.2       0.5       0.4       1.2  
Revenue by Category     100.0 %   $ 1.3     $ 2.2     $ 3.5     $ 6.2     $ 13.2  
Flower     71.4 %     0.5       1.4       2.8       5.0       9.7  
Concentrates     19.3 %     0.7       0.2       0.4       0.5       1.8  
Pre-rolls     9.3 %     -       0.2       0.2       0.5       0.9  
Vape     19.3 %     -       0.4       0.1       0.2       0.7  
Other     9.3 %     0.1       -       -       -       0.1  

 

Dollar figures in above table are expressed in millions.

 

 

7 BDS Analytics (2020). Sales in December 2020. Available at: https://www.BDSA.com.

 

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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.

 

GH Group relies on a single large distributor to provide the bulk of its wholesale sales, which provided approximately 99% of its wholesale revenue in 2020 and has provided approximately 84% of its year to date wholesale sales. GH Group is currently negotiating an exclusive contract for distribution for an initial one (1)-year term with its major distributor. Although GH Group is not dependent on this relationship, a change in the status of the distributor or the relationship is likely to cause a material impact until GH Group can develop relationships with alternative distributors to carry its goods.

 

Each of the following licensed facilities are responsible for more than 10% of the gross revenue of GH Group: Casitas, Padaro, Farmacy SB, and Bud and Bloom.

 

Brand, Product and Marketing

 

The creation of dominant, extensible CPG products and brands is GH Group’s strategic mission. While many cannabis businesses prioritized brand building and customer acquisition before securing a reliable product flow, GH Group 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.

 

As production quantity has increased and the GH Group’s products have become more widely distributed, GH Group has 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 Region8.

 

GH Group does 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.

 

GH Group has 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, GH Group’s 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, GH Group’s 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.

 

 

8 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/.

 

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Retail

 

GH Group has operational dispensaries in Santa Barbara, Santa Ana, Los Angeles and Berkeley, California. GH Group uses clean, minimalistic retail space with a focus on local sourcing and sustainably grown cannabis. GH Group staff has substantial knowledge on the health and wellness benefits of cannabis, as well as GH Group’s focus on educating customers on responsible adult-use, including understanding appropriate dosing.

 

GH Group offers 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. GH Group’s motto is “Local Farms, Local People, Local Values”. This ethos is woven into purchasing decisions and illustrates GH Group’s prioritization of locally cultivated and manufactured products.

 

GH Group intends 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 GH Group 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.

 

Retail Locations

 

GH Group currently offers online payment processing, as well as in store pickup and home delivery services for adult-use and medicinal-use customers at all locations. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution” for a discussion of GH Group’s online sale and delivery regulatory compliance protocols.

 

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 GH Group’s contribution to and partnership with the local community. GH Group has 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 2020.9

 

Farmacy SB

 

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.

 

 

9 Santa 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/.

 

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Farmacy SB Licenses

 

The applicable license for retail issued by BCC is held by Farmacy SB, Inc. (a wholly owned subsidiary of GH Group), as described in the table below.

 

License Holder Address Permit/License No. Expiration/Renewal
Date (MM/DD/YY)
License Type
Farmacy SB, Inc. 128 W. Mission Street Santa Barbara, CA 93101 C10-0000293- LIC (BCC) 06/25/21 Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

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.10

 

Farmacy Berkeley Licenses

 

The applicable license for retail issued by BCC is held by Farmacy Berkeley (a wholly owned subsidiary of GH Group), as described in the table below.

 

License Holder Address Permit/License No. Expiration/Renewal
Date (MM/DD/YY)
License Type
Farmacy Berkeley 3243 Sacramento Street Berkeley, CA 94702 C10-0000506- LIC (BCC) 07/24/21 Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

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.

 

 

10 East Bay Express (2021). Best of The East Bay 2021 – Reader’s Picks: Best Cannabis Delivery. Available at: https://eastbayexpress.com/readers-picks-cannabis/.

 

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The Pottery License

 

The applicable license for retail issued by BCC is held by The Pottery Inc. (a wholly owned subsidiary of GH Group), as described in the table below.

 

License Holder Address Permit/License No. Expiration/Renewal
Date (MM/DD/YY)
License Type
The Pottery Inc. 5042 Venice Blvd, Los Angeles, CA 90019 C11-0000389- LIC (BCC) 07/08/21 Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

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 2017.11

 

Bud and Bloom Licenses

 

The applicable license for retail issued by BCC is held by Bud and Bloom, as described in the table below.

 

License Holder Address Permit/License No. Expiration/Renewal
Date (MM/DD/YY)
License Type
Bud and Bloom 1327 St. Gertrude Place E. Santa Ana, CA 92705 C10-0000044- LIC (BCC) 05/09/21 Adult-Use & Medicinal – Retailer License

 

See “Material Contracts”.

 

Information Technology & Inventory Management

 

GH Group has an information technology infrastructure that prioritizes security, compliance, business process support, customer-facing technology, operational systems, data insights, and business intelligence. GH Group uses Treez, a third-party software platform, to serve as its inventory management system (“IMS”) and data warehouse. GH Group’s 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. GH Group’s IMS also serves as a data warehouse, allowing for daily inventory management.

 

GH Group also uses its IMS for weekly cycle counts across all retail and storage locations. GH Group’s IMS allows for comprehensive reporting on all stages of inventory within GH Group. All personally identifiable information is required to be stored and maintained by GH Group in compliance with the California Consumer Privacy Act.

 

In addition to its IMS, GH Group participates in California’s track and trace system (METRC).

 

GH Group’s websites are its primary customer-facing technology for online customer transactions in its growing direct-to-consumer business. GH Group works with Stronghold to enable bank-to-bank transfers for secure, contactless electronic payments from direct-to-consumer customers.

 

 

11 Leafly (2017). Top 10 Most Beautiful Dispensaries in America. Available at: https://www.leafly.com/news/lifestyle/beautiful-marijuana- dispensary-designs-and-layouts.

 

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GH Group intends to continue to implement and use leading tools and technologies that allow it to support and promote growth in its business.

 

Banking & Processing

 

GH Group and all of its affiliated entities have accounts with the largest bank headquartered in the greater Los Angeles area. GH Group selected its bank because it is also a subsidiary of one of the largest banks in the United States, which is expected to be helpful as GH Group scales its operations.

 

GH Group currently accepts cash and debit cards for sales in the retail locations and cash for sales to direct-to-consumer customers. GH Group also has a relationship with Stronghold to allow direct-to-consumer customers to prepay using a debit card. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution”.

 

Competitive Conditions

 

As GH Group is vertically integrated, it competes on multiple fronts, from manufacturing to retail to delivery, and experiences competition in each of these areas. From a retail perspective, GH Group competes 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, GH Group competes with other manufactures of brands for shelf space in non-GH Group owned dispensaries throughout California. Similar to certain competitors in the retail space, GH Group competes with manufacturers ranging in size from small local operators to significant operators with a larger presence. Indirectly, GH Group competes with the illicit market, including many illegal dispensaries.

 

Environmental Protection Requirements

 

Although a number of environmental restrictions apply to GH Group, 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 GH Group’s financial position or operations as currently conducted.

 

SOCAL GREENHOUSE ACQUISITION

 

GH Group’s wholly-owned subsidiary, GH Camarillo LLC (“Purchaser”), has entered into a series of agreements, subject to satisfactory completion of due diligence and other conditions, to effect the purchase of SoCal Greenhouse located in southern California consisting of approximately 160 acres (including 125 acres of glass greenhouses and associated support structures). The SoCal Greenhouse property currently consists of six separate greenhouses, six packhouses or warehouses, a water filtration building, a building housing multiple energy co-generation generators and a main office, along with associated water tanks, solar arrays and ancillary buildings.

 

The 125-acres of existing greenhouses use high- tech climate control systems and, while they are currently used to grow immature and mature vine crops including, without limitation, tomatoes, peppers, and cucumbers, are an ideal height for cultivation of premium commercial cannabis. While capital expenditures will be required to make certain capital expenditure improvements to the greenhouses for such purposes, such improvements will not require any structures to be replaced.

 

The six (6) greenhouses were constructed between 1996 and 2009 as one of California’s first large-scale vegetable greenhouses. SoCal Greenhouse currently is in use to grow vine crops and it is anticipated, subject to the receipt of applicable state and local regulatory approvals, that the greenhouses will be re-purposed in three (3) phases to grow commercial cannabis. As part of the purchase of the Property, the CEFF Parties, as SoCal Greenhouse’s seller, will cause each of the existing master lease and ground lease (collectively, the “Existing Leases”) to be terminated pursuant to a form approved by Purchaser, and Purchaser will enter into a license agreement with the vacating tenant to allow it up to 14 weeks to complete harvest operations for any then existing vine crops during which time Purchaser expects to begin its phased capital expenditure improvements to the property. Due to the size of the existing greenhouses, capital expenditure improvements will be accomplished in each of the aforementioned phases.

 

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As part of the planned, phased conversion of the greenhouses, Purchaser is expected to enter into an arm’s length term lease of no less than three (3) years (the “Short-Term Lease”) with an experienced large-scale commercial agricultural operator who has previously operated SoCal Greenhouse (the “Short-Term Tenant”) to operate the greenhouses for cultivating vegetables until the capital expenditure improvements are completed. The terms of the Short-Term Lease provide, among other things, that (i) the Short-Term Tenant is responsible for all costs of maintenance, taxes, insurance and utilities in operating SoCal Greenhouse, which is expected to defray the overall cost of operations of SoCal Greenhouse, and (ii) the Short-Term Tenant shall be entitled to all revenues in respect of the sale of vegetables cultivated at SoCal Greenhouse during the Short-Term Lease. Further, the amount of rentable square footage of greenhouse space occupied by the Short-Term Tenant will be reduced proportionately as each phase of conversion is completed by Purchaser.

 

The acquisition of SoCal Greenhouse by Purchaser is not considered the acquisition of a “business”, and, accordingly, no financial statements in respect of SoCal Greenhouse have been provided in this prospectus.

 

SoCal Greenhouse Acquisition Agreements

 

Pursuant to an Option Agreement (California Option Assets) dated December 28, 2018 by and among CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC (“CEFF Parent” and. together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc. (the “Option Holder” or “GIPI”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and GIPI (“First Amendment”), (ii) the Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and among the CEFF Parties and GIPI (“Second Amendment”), (iii) the Third Amendment to Option Agreement (California Option Assets), made effective as of March 21, 2021 by and among the CEFF Parties and GIPI (“Third Amendment”), and (iv) the Fourth Amendment to Option Agreement (California Option Assets), effective as of March 24, 2021 by and among the CEFF Parties and GIPI (“Fourth Amendment”) (the California Option Agreement, as amended by the First Amendment, Second Amendment, Third Amendment and Fourth Amendment, collectively, the “California Option Agreement”), GIPI owns an option to purchase the California Option Assets (the “Option” and collectively with all rights, option and interests held by GIPI in, to and under the California Option Agreement including, without limitation, the relevant land located in southern California, together with the fixtures, greenhouses and other structures and improvements located thereon and appurtenances relating thereto and all other California Option Assets (as defined in the California Option Agreement), the “Option Rights”).

 

On February 13, 2021, GH Group delivered a purchase offer to the Option Holder (the “SoCal Greenhouse Acquisition Agreement”), to purchase GIPI’s Option Rights under the California Option Agreement, including, without limitation, all rights relating to the Option Rights. The Option Holder delivered an Exercise Notice, dated February 20, 2021, electing to exercise its Option Rights under the California Option Agreement, which was delivered to the CEFF Parties and designated Purchaser as designee of GIPI (the “Exercise Notice”). The Exercise Notice was intended as, and constituted, a non-binding intention by each party to enter into a separate binding agreement.

 

Subsequently, as contemplated by the SoCal Greenhouse Facility Acquisition Agreement, (i) GIPI, as the seller, and Purchaser, as the buyer, are in the process of negotiating and finalizing an Agreement to Assign an Option to Acquire Real Estate, effective as of March 29, 2021 (the “Definitive Option PSA”), an accompanying Earn-Out Agreement by and between BRND and GIPI of even date therewith (the “Earn-Out Agreement”, together with Definitive Option PSA, the California Option Agreement and the SoCal Greenhouse Acquisition Agreement, the “SoCal Greenhouse Agreements”) to document the definitive terms and conditions that will govern the sale by GIPI to Purchaser of the Option Rights, and (ii) GIPI shall conditionally assign all of its rights, title and interests in and to all Option Rights to Purchaser pursuant to the Conditional Assignment of Option Agreement made effective as of March 29, 2021, by and between GIPI, as assignor, and Purchaser, as assignee.

 

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Pursuant to the California Option Agreement, the CEFF Parties and Purchaser, as GIPI’s assignee, entered into an Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions dated March 29, 2021 and related instruments for the transactions contemplated by the California Option Agreement (all such agreements and instruments are, collectively, the “Definitive Property PSA”). The proposed closing date under the Definitive Property PSA is no later than August 20, 2021.

 

There are a number of conditions that must be met before each of the Definitive Option PSA and Definitive Property PSA will close, including, but not limited to, the following:

 

satisfaction of all required entitlement conditions thirty (30) days prior to the closing date, including obtaining all regulatory approvals necessary to convert SoCal Greenhouse from its current agricultural use to commercial cannabis use;

GIPI will have caused, and will cause, a mutually acceptable designee to enter into a consulting agreement with such title as is mutually agreed by Purchaser and GIPI, and such consultant will report directly to the President, Chief Executive Officer or such other designees of GH Group’s board of directors;

no governmental moratorium will have been enacted and is continuing with respect to the cultivation, processing, packaging, on-site testing, storage and distribution of cannabis and that would apply to all or any “material” portion of SoCal Greenhouse;

the relevant title company will be irrevocably committed to issue one or more policies of title insurance for SoCal Greenhouse in favour of GH Group;

the Existing Leases for SoCal Greenhouse will have been terminated pursuant to a form of termination agreement satisfactory to Purchaser and BRND;

the entry into the Short-Term Lease for the portions of the property not then being used for cannabis use;

the CEFF Parties, as the seller, and Purchaser, as the buyer, will be in a position to close the purchase and sale of the property in accordance with the terms of the Definitive PSA immediately after the closing of the transactions contemplated by the California Option Agreement;

all parties will have been in a position to close the sale to the Purchaser of the Option Rights in accordance with the Definitive Option PSA immediately prior to the closing date (or on any such earlier date as may be exercisable by Purchaser under the Definitive Option PSA);

as of the date of closing, no material breach by the CEFF Parties of any covenant, representation or warranty of the CEFF Parties set forth in the California Option Agreement or the Definitive PSA will have occurred and remains uncured;

all funds and instruments required under the Definitive PSA to be delivered on or prior to the date of closing will have been delivered in accordance with applicable provisions of the Definitive PSA; and

as of the date of closing, no material breach by Purchaser of any covenant, representation or warranty of Purchaser set forth in the Definitive PSA will have occurred and remains uncured.

 

Pursuant to the SoCal Greenhouse Facility Acquisition Agreement, one addition closing condition is that BRND will have completed its acquisition of GH Group pursuant to the Transaction.

 

Pursuant to the Definitive Property PSA, the total purchase price payable to the CEFF Parties for the fee simple interest of SoCal Greenhouse (i.e., the real property and existing improvements) is $118,890,000, cash, payable on the closing date of the transactions contemplated therein.

 

Pursuant to the Definitive Option PSA and the Earn- Out Agreement, the total purchase price payable to GIPI for the Option Rights is up to $175,000,000, payable solely in Equity Shares pursuant to the terms of the Definitive Option PSA. Additionally, BRND has contractually agreed to commit up to $40,000,000 for capital expenditure improvements required to further develop or repurpose SoCal Greenhouse for commercial cannabis use following the closing of the transactions contemplated by the Definitive Option PSA. The terms for the issuance of the Equity Shares for the Option Rights by BRND are as follows: (i) 10,000,000 fully-vested Equity Shares on the closing date at a price equal to $10.00 per share (the “Closing Shares”), and (ii) up to $75,000,000 of additional Equity Shares (the “Earn- Out Shares”) following the closing date pursuant to the terms of the Earn-Out Agreement. More particularly, the Earn-Out Shares will be determined in accordance with the vesting formula set forth in the Earn-Out Agreement over a period of twelve (12) consecutive months commencing August 1, 2023 and ending July 31, 2024. The price of the Earn-Out Shares will be based on the volume weighted average price of such Earn-Out Shares for twenty (20) consecutive trading days immediately prior to October 31, 2024. GIPI will be subject to a 12-month lock-up agreement with respect to its receipt of both the Closing Shares and Earn-Out Shares.

 

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Assuming all of the conditions in the SoCal Greenhouse Agreements are fully satisfied, the SoCal Greenhouse transactions are expected to close in or about Q3 2021.

 

The description of the SoCal Greenhouse Acquisition Agreements, both below and elsewhere in this prospectus, is a summary only, not exhaustive and qualified in its entirety by reference to the terms of the California Option Agreement, which will be available on BRND’s profile on SEDAR at www.sedar.com.

 

ELEMENT 7

 

GH Group has executed an agreement with Element 7 whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to merge with certain subsidiary entities of Element 7 which are in the process of applying for up to 17 state and local retail cannabis licenses in California (each an “Element 7 Merger”).

 

Element 7 Merger Agreement

 

GH Group has executed a Merger and Exchange Agreement dated as of February 23, 2021 with Element 7 (“Element 7 Merger Agreement”), whereby GH Group has the right, subject to satisfactory completion of due diligence, to merge with up to 17 subsidiary entities of Element 7 which are in the process of applying for state and local retail cannabis licenses in California, by way of a separate merger for each entity. The Element 7 Merger Agreement is conditional on, and assuming all conditions thereto are satisfied is expected to be completed at the same time as, the closing of the Transaction.

 

For each 1% of the membership interests of a wholly owned licensed entity owned by Element 7 or partially owned licensed entity owned by Element 7 at the closing of an Element 7 Merger, GH Group will issue $15,000 in Company Stock at a price per share of: (i) Company Stock at a GH Group valuation of $325,000,000; plus (ii) any amount of equity financing completed prior to the closing of any Element 7 Merger and excluding all in-the-money options (or in the event that the Transaction is completed, $10.00 per Equity Share). The stock will be issued at $10.00 per share for up to $24,000,000 consideration.

 

There are a number of conditions that must be met by Element 7 before GH Group will be required to close on a merger with an Element 7 licensed entity pursuant to the Element 7 Merger Agreement, including:

 

that such Element 7 licensed entity possesses the required local authorization to conduct retail cannabis operations;

such Element 7 licensed entity has no liabilities except commercially reasonable leases in good standing disclosed on the disclosure schedule to the Element 7 Merger Agreement;

if partially owned, such Element 7 licensed entity does not have membership interests exceeding 49% of the membership interests that are not transferrable to Glass House Retail, LLC (a subsidiary of GH Group) under applicable laws and regulations;

if partially owned, such Element 7 licensed entity does not have membership interests that are restricted from transfer pursuant to any agreements entered into by Element 7 or such partially owned Element 7 licensed entity; and

such Element 7 licensed entity is able to complete an unqualified U.S. PCAOB GAAS-compliant audit for the prior three (3) years by a certified public accountant (to the extent required to complete the Transaction).

 

The Element 7 Merger Agreement contains customary representations and warranties, pre- closing and post-closing covenants, indemnification (subject to certain limitations) and closing conditions, including:

 

For the benefit of both parties:

 

adoption of the Element 7 Merger Agreement by the board of directors of GH Group and the managers and members of Element 7; and

no governmental authority enacting, issuing, promulgating, enforcing or entering any order making the transactions contemplated in the Element 7 Merger Agreement illegal or prohibiting such transactions.

 

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For the benefit of GH Group:

 

the representations and warranties of Element 7 will be true and correct in all respects as of the date of closing;

Element 7 will have duly performed and complied in all material respects with all agreements, covenants and conditions;

the delivery of customary closing deliverables by Element 7, which includes fully executed documents required to effect the subsidiary mergers contemplated within the Element 7 Merger Agreement;

the closing of the transactions contemplated in the Definitive GH Group Agreement on or before July 30, 2021;

no termination or default under the Element 7 Consulting Agreement (described below); and

delivery of market rate leases related to the Element 7 properties in the Element 7 Merger Agreement.

 

For the benefit of Element 7:

 

the representations and warranties of GH Group will be true and correct in all respects as of the date of closing;

GH Group will have duly performed and complied in all material respects with all agreements, covenants and conditions required by the Element 7 Merger Agreement and any ancillary document thereto;

GH Group will have delivered each of the closing deliverables;

the closing of the transactions contemplated in the Definitive GH Group Agreement on or before July 30, 2021;

directly after the close of the Element 7 Merger Agreement there be $25,000,000 in free cash available, and that such amount be dedicated to the development of cannabis retail facilities such that they obtain all permits and authorizations necessary to conduct sales under California law;

that the SPAC Closing Cash (as defined in the Definitive GH Group Agreement) at the close of the Element 7 Merger will be at least $185,000,000 less: (i) any amount raised through incurring debt or equity sales by GH Group prior to such close; (ii) any amount spent with respect to the purchase of cultivation assets as the close of the Transaction; and

no termination or default under the Element 7 Consulting Agreement.

 

GH Group is required to provide financing for four (4) of the licensed entities to be merged under the Element 7 Merger Agreement, commencing upon the execution of the Element 7 Merger Agreement to reasonably maintain and build such licensed retail entities, at a total cost per entity assumed to be $850,000 with respect to each such licensed entity, provided such financing obligation shall not exceed $1,000,000 with respect to each such licensed entity.

 

BRND is not a party to the Element 7 Merger Agreement.

 

See the Element 7 Audited Annual Financial Statements and the Element 7 Annual MD&A attached hereto as Appendix J and Appendix K, respectively.

 

The description of the Element 7 Merger Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Element 7 Merger Agreement, which will be made available on BRND’s profile on SEDAR at www.sedar.com.

 

Element 7 Consulting Agreement

 

Pursuant to a License Development Consulting Agreement dated February 23, 2021 by and between Element 7 and GH Group (the “Element 7 Consulting Agreement”), GH Group has agreed to appoint Element 7 as a consultant to assist with the obtaining of additional permits, licenses and operations in localities within the State of California in addition to those contemplated under the Element 7 Merger Agreement. The Element 7 Consulting Agreement is conditional on the closing of the Transaction.

 

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In consideration of the provision of the services by Element 7 and the rights granted to GH Group under the Element 7 Consulting Agreement, GH Group will be obliged to pay:

 

cash fees in the amount of $155,000 per month, the total not to exceed $5,580,000 (which monthly payments have been made to date);

 

a one (1)-time payment $375,000 payable within three (3) business days of the execution of the Element 7 Consulting Agreement (which has been paid); and

 

for each local permit in a specific jurisdiction for which a local authorization for cannabis activities is going to be filed, a cash fee of $30,000 (the total amount not to exceed, without written waiver by GH Group, $1,800,000).

 

All cash fees due will be payable within 10 days of the close of each month. Unpaid invoices will incur an eight percent (8%) interest charge per year, which will accrue daily after a five (5) day grace period.

 

GH Group will also pay to Element 7 $15,000 for each 1% of membership interests acquired from Element 7 of either: (i) a limited liability company formed for purposes of applying for the local authorization for cannabis activities; or (ii) an entity for which a option or other purchase arrangement has been entered into that meets the Conditions for Transfer (as defined in the Element 7 Consulting Agreement), or with respect to any specific condition the requirement has been waived, and for which a transfer of ownership is completed, such amount to be payable in newly created and issuable shares of GH Group, or its successor in interest, or the Resulting Issuer after the close of the Transaction, at a deemed value of $10.00 per share. All such shares will be subject to resale restrictions imposed by securities laws or stock exchange rules, and in any event a minimum six (6) months resale restriction. Element 7 will pay and be responsible for any taxes imposed on, or with respect to, Element 7’s income, revenues, gross receipts, personnel, or real or personal property or other assets. No fee is payable and no credit will apply in respect of the Element 7 Merger Agreement, any license or entity to which it relates, or any work related to the Element 7 Merger Agreement or any work or obligation related thereto.

 

There is no guarantee that Element 7 will be granted any local licenses. Even if Element 7 is granted a local license, a license from the State of California must be obtained before the licensed entity can begin selling cannabis.

 

BRND is not a party to the Element 7 Consulting Agreement.

 

The description of the Element 7 Consulting Agreement, both below and elsewhere in this prospectus, is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Element 7 Consulting Agreement, which will be made available on BRND’s profile on SEDAR at www.sedar.com.

 

MERCER PARK BRAND ACQUISITION CORP.

 

BRND is a SPAC incorporated under the laws of the Province of British Columbia. BRND was organized for the purpose of effecting an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination involving BRND that will qualify as its “qualifying transaction”.

 

As part of the Transaction, it is contemplated that BRND will complete the acquisition of GH Group subject to various closing conditions in respect of the acquisition of GH Group pursuant to the Transaction. However, BRND has no control over whether or not the conditions will be met and there can be no assurance that all conditions will be satisfied or waived or that such acquisition will be consummated. There is no assurance that the acquisition of GH Group will be completed or, if completed, will be on terms that are exactly the same as disclosed in this prospectus.

 

The Resulting Issuer, upon completion of the Transaction, will be a vertically- integrated cannabis company in the United States focused on recreational and wellness applications, with operations in the State of California.

 

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GH Group was selected in part based on its anticipated 2021 financial results and strength of the resulting platform for future growth, with a focus on positive Adjusted EBITDA 12 and vertical integration in recreationally legal States with large addressable consumer populations. See “Outlook”.

 

The post-closing head office of the Resulting Issuer is expected to be located at 3645 Long Beach Blvd., Long Beach, California.

 

OUTLOOK

 

GH Group’s outlook for the business is based on a number of factors, including the experience of its management team and advisors in growing cannabis businesses, management’s local market expertise and management’s positive views on the prospects for the cannabis market in the state of the California and the U.S. cannabis market as a whole.

 

GH Group believes it has the opportunity to grow its business to achieve the following targets:

 

estimated total annual revenue of $124.1 million in 2021, $326.4 million in 2022, and $600.9 million in 2023;

o the revenue growth implied by these targets is 163% from 2021 to 2022 and 84% from 2022 to 2023;

o the increased cultivation capacity expected to be derived primarily from the acquisition of SoCal Greenhouse is an outsized contributor to that revenue growth; excluding its impact the GH Group business and the Element 7 Merger are anticipated to yield combined revenue growth of 72% from 2021 to 2022 and 40% from 2022 to 2023;

estimated gross profit of $61.6 million in 2021, $162.6 million in 2022, and $310.6 million in 2023; and

estimated Adjusted EBITDA 13 of $24.5 million in 2021, $103.8 million in 2022, and $240.0 million in 2023.

 

In developing the targets above, GH Group has made the following assumptions and relied on the following factors and considerations:

 

these targets are based on the expertise of management and their historical results;

these targets assume an increase in cultivation capacity via the Greenhouse Option Acquisition, allowing for volume growth at GH Group’s brands, sold into both GH Group’s operated dispensaries and the third-party wholesale channel:

o from the acquisition through 2022 additional greenhouse capacity is expected to be brought online with ~9,500 sq. ft. coming online each week in 2021, accelerating to 13,000 in 2022 and to over 20,000 square feet per week in 2023;

o the new facility is expected to become more productive over time, from initially yielding 32 grams per sq. ft. per harvest to reaching 41 grams per sq. ft. per harvest in 2022 and 42 grams per sq. ft. per harvest in 2023, reaching 60%-80% higher yields per harvest over GH Group’s existing facilities during the same period, due to the technology and infrastructure of the new facility including climate control, supplemental lighting, and power capacity; and

o in order to retrofit and ramp the facility, GH Group expects to initially commit $40 million in capital expenditures, with the additional costs expected to be funded from either cash flow or cash on hand;

§ through 2023 the full buildout is expected to cost $75-80 million, with $20-25 million, $35-40 million, and $20-25 million expected to be spent in 2021, 2022, and 2023 respectively;

 

 

12 See “Non-U.S. GAAP Measures.
13 See “Non-U.S. GAAP Measures.

 

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these targets assume expansion of the retail distribution footprint from four (4) dispensaries at the end of 2020 to 21 dispensaries by the end 2022 via licenses from the Element 7 Merger. GH Group has historically seen significantly higher sales of its internally produced brands in its own dispensaries, which allows for broader brand distribution and increased brand awareness for GH Group’s products:

o from the closing of the proposed Element 7 Merger, 12 dispensaries are expected to open through Q4 2021 with 17 total additional dispensaries by Q1 2022;

o the additional dispensaries are expected to generate approximately $2.7 million in revenue per dispensary, on an annualized basis, in Q4 2021 growing to approximately $3.9 million per store, on an annualized basis, in 2023. This assumes average ticket sizes 5-10% below GH Group’s existing dispensaries for 2021 and 2022, with average ticket sizes increasing to reach 0-5% below GH Group’s existing dispensaries in 2023; and

o the 17 new dispensaries are expected to cost approximately $9.7 million in capital expenditures, with $7-9 million expected to be spent in 2021 and the remainder anticipated to be spent in Q1 2022;

these targets assume growth of the GH Group base business as follows:

o revenue for GH Group is expected to grow from $109.6 million in 2021, to $156.3 million in 2022, and to $227.7 million in 2023;

o the CPG segment is expected to grow from $47.0 million in 2021, to $107.3 million in 2022, and to $181.3 million in 2023, driven by expanded distribution on existing portfolio, new product and form factor development, and velocity gains through omni-channel marketing;

o the retail segment is expected to grow from $30.4 million in 2021, to $34.0 million in 2022, and to $37.8 million in 2023, from increased sales in the existing four dispensaries;

o as GH Group grows its CPG segment and scales its cultivation, the cost is expected to decrease from $118 per pound in 2021 to $84 per pound in 2023. This decline in per unit costs is partially offset by increased costs in the CPG segment from packaging and other direct costs for branded products. Taken together, these shifts cause gross margins to decline slightly from 52% in 2021 to ~50% in 2023; and

o modest SG&A growth over 2021 levels is expected, allowing EBITDA margins for the GH Group business to expand over time, going from 26% in 2021 to 34% in 2023; and

o GH Group’s anticipated effective income tax rate applicable to the operations is expected to range from 32-38%. GH Group’s statutory rate is expected to be 28%, comprised of a 21% federal statutory rate and a 7% California state statutory rate, with effective rates exceeding the statutory rate due to the limitations from Section 280E of the U.S. Internal Revenue Code.

 

GH Group has also assumed that business and economic conditions will continue substantially in the ordinary course, including, without limitation, with respect to general industry conditions, competition, regulations (including those in respect of the cannabis industry), taxes, continued growing acceptance of cannabis, that there will be no material safety issues or material recalls required, and that there will be no unplanned material changes in GH Group’s facilities, equipment or customer or employee relations.

 

These targets, and the related assumptions, involve known and unknown risks and uncertainties that may cause actual results to differ materially. While GH Group believes there is a reasonable basis for these targets, such targets may not be met.

 

These targets represent forward-looking information. Actual results may vary and differ materially from the targets. See “Caution Regarding Forward-Looking Statements”.

 

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USE OF ESCROWED FUNDS

 

Upon completion of the Transaction, the proceeds received by BRND for the non-redeemed BRND Class A Restricted Voting Shares distributed in its initial public offering (the “Escrowed Funds”), which funds are currently held in BRND’s escrow account, will be released to the Resulting Issuer. It is expected that the Resulting Issuer will allocate:

 

approximately $105-$115 million of the Escrowed Funds to capital expenditures,

o approximately $20-25 million of which is expected to be allocated to the buildout of GH Group’s existing infrastructure,

o approximately $75-80 million of which is expected to be allocated to the buildout of SoCal Greenhouse (assuming completion of the acquisition of SoCal Greenhouse, which cannot be assured), and

o approximately $10 million of which is expected to be allocated to additional dispensaries to be opened in connection with the Element 7 Merger (assuming the acquisition of licenses in connection with the Element 7 Merger, which cannot be assured;

 

approximately $120 million to the purchase price for SoCal Greenhouse;

 

approximately $20-25 million of the Escrowed Funds to underwriter’s fees and expenses in connection with BRND’s initial public offering (as more particularly described in the BRND’s final prospectus dated May 7, 2019 which is available on BRND’s profile on SEDAR at www.sedar.com); and

 

in respect of the balance of the Escrowed Funds (estimated to be approximately $235-250 million assuming zero redemptions and approximately $130-145 million assuming a 25% level of redemptions, when including the $85 million in respect of the Private Placement):

o approximately 20% to continued development of the Resulting Issuer’s brands;

o approximately 10% to operating capital and general corporate purposes; and

o approximately 70% to future M&A and capital projects. The focus of future M&A activity is expected to be centered on maintaining a leading number of dispensaries in the State of California. The number of dispensaries purchased could be 20 or more, doubling from the 21 dispensaries currently anticipated to be controlled by GH Group. Although there can be no guarantee as to pricing, doubling the GH Group dispensary count could require in the range of $100 million (roughly $5 million per operational dispensary). Beyond dispensaries, GH Group also intends to seek other acquisitions that expand its distribution network, such as operators that allow for a greater direct-to-consumer distribution. Finally, GH Group intends to seek to expand its brand portfolio by acquisition, which would require cash investment in the form of both purchase price and additional investment in the form of brand support for such purchased brands. Notwithstanding its future capital allocation plans in respect of M&A, GH Group has no letters of intent or binding agreements in respect of such acquisitions outstanding at this time.

 

See “Outlook”.

 

While it is currently anticipated that the Resulting Issuer will use the non-redeemed Escrowed Funds as outlined above, the actual use of such funds may vary depending upon numerous factors, including the Resulting Issuer’s operating costs and capital expenditure requirements, its strategy relative to the market and other conditions in effect at the time, as well as the other factors described under “Risk Factors” in this prospectus. Accordingly, the Resulting Issuer will retain the discretion to allocate such funds, and reserves the right to change the allocation of such funds from time to time. The Resulting Issuer will operate in a dynamic and rapidly evolving market, and it is expected that financial flexibility to react to market demand and conditions will be a competitive advantage for the Resulting Issuer. Pending deployment, the Escrowed Funds are expected to be held in cash and/or cash equivalents or similar secure investments.

 

NON-U.S. GAAP MEASURES

 

GH Group reports certain non-U.S. GAAP measures that are used to evaluate the performance of such businesses and the performance of their respective segments, as well as to manage its capital structure. As non-U.S. GAAP measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined and reconciled with their most directly comparable U.S. GAAP measure.

 

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Adjusted EBITDA

 

Adjusted EBITDA” represents income (loss) from operations, as reported, before interest, tax, and adjusted to exclude extraordinary items, non-recurring items, other non-cash items, including stock based compensation expense, depreciation and further adjusted to remove acquisition related costs.

 

The following is a reconciliation of how BRND calculates Adjusted EBITDA and reconciles it to U.S. GAAP figures, based on figures derived from the Resulting Issuer Pro Forma Financial Statements attached hereto as Appendix C.

 

    Twelve Months Ended December 31, 2020  
       
                                  Pro-Forma        
    BRND     GH Group     iCann     Element 7     Combined     Adjustments     Total  
Net Income (Loss) Before Non-Controlling Interest   $ 947,346     $ (16,659,479 )   $ (1,726,818 )   $ (274,397 )   $ (17,713,348 )   $ (6,000,000 )   $ (23,713,348 )
Depreciation and amortization     -       2,576,263       108,672       -       2,684,935       -       2,684,935  
Interest Expense     -       2,179,137       327,104       -       2,506,241       -       2,506,241  
Interest Income     (1,742,747 )     (115,572 )     -       -       (1,858,319 )     -       (1,858,319 )
Income Tax Expense     -       6,418,533       207,868       -       6,626,401       -       6,626,401  
EBITDA (non-GAAP)   $ (795,401 )   $ (5,601,117 )   $ (1,083,174 )   $ (274,397 )   $ (7,754,089 )   $ (6,000,000 )   $ (13,754,089 )
Adjusting Items:                                                        
Share of (income) loss on equity investments     -       2,126,112       -       -       2,126,112       -       2,126,112  
Loss on change in fair value of derivative liablities     -       251,663       -       -       251,663       -       251,663  
Non-cash operating lease costs     -       865,438               -       865,438       -       865,438  
Share-based compensation expense     -       2,547,792               -       2,547,792       -       2,547,792  
Acquisition costs     -       479,501               274,397       753,898       6,000,000       6,753,898  
SPAC related costs     752,259       -               -       752,259       -       752,259  
Foreign exchange loss (gain)     43,142       -               -       43,142       -       43,142  
Other expense (income)     -       (203,345 )     32,566       -       (170,779 )     -       (170,779 )
Other non-operating expenses1     -       1,051,377               -       1,051,377       -       1,051,377  
Adjusted EBITDA (non-GAAP)   $ -     $ 1,517,421     $ (1,050,608 )   $ -     $ 466,813     $ 6,000,000     $ 466,813  
                                                         

 

Notes:

 

(1) Other adjustments made to exclude the impact of one time inventory write-offs including outdated packaging and discontinued product lines.

 

This prospectus makes reference to certain non-U.S. GAAP measures and cannabis industry metrics. These measures are not recognized measures under U.S. GAAP and do not have a standardized meaning prescribed by U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these are provided as additional information to complement those U.S. GAAP measures by providing further understanding of GH Group’s results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation, nor as a substitute for analysis of GH Group’s financial information reported under U.S. GAAP. Non-U.S. GAAP measures used to analyze the performance of GH Group include “Adjusted EBITDA”.

 

BRND believes that these non-U.S. GAAP financial measures provide meaningful supplemental information regarding GH Group’s performance and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. These financial measures are intended to provide investors with supplemental measures of GH Group’s operating performances and thus highlight trends in GH Group’s core businesses that may not otherwise be apparent when solely relying on the U.S. GAAP measures.

 

SELECTED CONSOLIDATED FINANCIAL INFORMATION

 

Pro Forma Consolidated Capitalization

 

Completion of the Transaction and the Private Placement requires, among other things, shareholder approval at a meeting of the BRND Shareholders, which meeting has not yet taken place. In addition, as the Transaction constitutes BRND’s qualifying transaction, holders of BRND Class A Restricted Voting Shares can elect to redeem all or a portion of their BRND Class A Restricted Voting Shares, whether they vote for or against, or do not vote on the qualifying transaction, provided that they deposit (and do not validly withdraw) their shares for redemption prior to the Redemption Deadline. A description of the redemption rights will be included in the management information circular to be mailed to BRND Shareholders in connection with the BRND shareholders meeting. A redeeming BRND Shareholder is entitled (conditional on closing) to receive an amount per Class A Restricted Voting Share, payable in cash, equal to the pro-rata portion (per BRND Class A Restricted Voting Share) of: (A) the escrowed funds available in the BRND’s escrow account at the time of the BRND Meeting, including interest and other amounts earned thereon; less (B) an amount equal to the total of (i) applicable taxes payable by BRND 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 BRND. For greater certainty, such amount will not be reduced by the amount of any tax of BRND under Part VI.1 of the Tax Act or the deferred underwriting commissions per BRND Class A Restricted Voting Share held in escrow. This redemption amount is anticipated to be $ 10.11 per BRND Class A Restricted Voting Share, assuming a June 4, 2021 redemption date. Upon payment in cash of such redemption amount (which shall occur no later than 30 calendar days following Closing), the holders of the BRND Class A Restricted Voting Shares so redeemed will have no further rights in respect of the BRND Class A Restricted Voting Shares. Holders of BRND Class B Shares and BRND Warrants do not have redemption rights with respect to their BRND Class B Shares or BRND Warrants. Notwithstanding the foregoing redemption right, no registered holder of BRND Class A Restricted Voting Shares, together with any affiliate of such holder or other person with whom such holder or affiliate is acting jointly or in concert, will be permitted to redeem more than an aggregate of 15 % of the number of BRND Class A Restricted Voting Shares issued and outstanding.

 

89

 

 

The following table sets forth the consolidated capitalization of the Resulting Issuer as of December 31, 2020 adjusted to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing, 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 the equity and debt capital of GH Group.

 

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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix H, Appendix J and Appendix L, respectively.

 

    As of December 31, 2020, as adjusted after giving     As of December 31, 2020, as adjusted after giving  
    effect to (i) the Transaction and the acquisition of     effect to the Transaction and the acquisition of  
    Farmacy Berkeley, (ii) the proposed acquisition of     Farmacy Berkeley, (ii) the proposed acquisition of  
    SoCal Greenhouse, (iii) the proposed Element 7     SoCal Greenhouse, (iii) the proposed Element 7  
    Merger, (iv) the Private Placement, and (v) the GH     Merger, (iv) the Private Placement, and (v) the GH  
    Group Financing and assuming no redemptions of     Group Financing and assuming 25% redemptions of  
    BRND Class A Restricted Voting Shares     BRND Class A Restricted Voting Shares  
Cash and cash equivalents     381,177,330       177,408,802  
Debt     989,554       989,554  
Shareholders’ equity(1)     713,882,057       512,632,057  
Total Capitalization     714,871,611       513,621,611  
Debt, net of cash     (380,187,776 )     (176,419,248 )

 

Notes:

 

(1) Excludes the Equity Shares issuable upon the exercise of the BRND Warrants, which are exercisable commencing 65 days after the completion of the Transaction. See “Corporate Structure – Warrant Agreement”.

 

Summary Pro Forma Consolidated Financial Information

 

The following unaudited pro forma consolidated statement of financial position of BRND as at December 31, 2020 has been prepared by BRND to give effect to (i) the Transaction (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2020. The following unaudited pro forma consolidated statement of operations of BRND for the year ended December 31, 2020 has been prepared by BRND to give effect to (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing as if they had occurred on December 31, 2019.

 

90

 

 

This summary pro forma financial information 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, the Element 7 Audited Annual Financial Statements and the Resulting Issuer Pro Forma Financial Statements attached to this prospectus as Appendix A, Appendix C, Appendix H, Appendix J, and Appendix L, respectively.

 

The pro forma financial information has been prepared for illustrative purposes only and may not be indicative of the operating results or financial condition that would have been achieved if (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing had been completed on the date or for the periods noted above, nor does it purport to project the results of operations or financial position for any future period or as of any future date. In addition to the pro forma adjustments that comprise this pro forma financial information, various other factors will have an effect on the financial condition and results of operations of BRND following the completion of (i) the Transaction, (ii) the proposed acquisition of SoCal Greenhouse, (iii) the proposed Element 7 Merger, (iv) the Private Placement, and (v) the GH Group Financing, including an adjustment as it relates to the closing of the Transaction which assumes no redemption of BRND Class A Restricted Voting Shares (the actual redemption level is uncertain, but see Note 5 of the Resulting Issuer Pro Forma Financials for the illustrative effect of 0% and 25% redemption levels). See “Notes to Pro Forma Condensed Consolidated Combined Financial Information” included in Appendix L for a discussion of pro forma adjustments. See also “Caution Regarding Forward-Looking Statements”.

 

91

 

 

Mercer Park Brand Acquisition Corp. 

Unaudited Pro Forma Consolidated Statement of Financial Position 

As at December 31, 2020

 

  Mercer Park BRAND     GH Group             Subtotal       Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     iCann     Element 7     December 31, 2020         Adjustments     December 31, 2020  
US$   $     $     December 31, 2020     December 31, 2020     $     Notes   $     $  
ASSETS                                                            
Current                                                        
Cash     2,095,023       4,535,251       158,928               6,789,202     5a     407,537,056       365,936,258  
                                            5d     (118,890,000 )        
                                            5f     (16,100,000 )        
                                            5i     85,000,000          
                                            5l     (400,000 )        
                                            5k     2,000,000          
Deposit                             61,893       61,893     5k     10,000,000       10,061,893  
Accounts receivable, trade, no allowance         -               5,141,021                                                5,141,021                                     5,141,021    
Income tax recoverable     1,209,852       -                       1,209,852                   1,209,852  
Inventory     -       6,866,002       343,289               7,209,291                   7,209,291  
Prepaid Expenses and other assets     -       1,018,212       61,528               1,079,740                   1,079,740  
Notes Receivables             904,534                       904,534                   904,534  
    3,304,875       18,465,020       563,745       61,893       22,395,533           369,147,056       391,542,589  
Operating Lease Right-of-Use Assets, Net                           2,532,629                               538,065               3,070,694                                     3,070,694    
Marketable securities held in a escrow account           407,537,056               -                                               407,537,056         5a         (407,537,056         -    
Intangible assets     -       5,279,000               153,477       5,432,477     5d     171,920,360       214,103,880  
                                            5e     (153,477 )        
                                            5e     24,000,000          
                                            5l     12,904,520          
Property, plant and equipment     -       27,192,027       692,645               27,884,672     5d     92,420,992       120,305,664  
Goodwill     -       4,815,999                       4,815,999                   4,815,999  
Deferred tax assets     598,435       -                       598,435     5c(iii)     (598,435 )     -  
Investments             10,701,868                       10,701,868     5l     (2,045,309 )     8,656,559  
Other long term assets     -       554,266                       554,266                   554,266  
Total assets     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  
                                                             
Liabilities                                                            
Current                                                            
Accounts payable and accrued liabilities     396,779       6,570,715       875,599               7,843,093     5g     6,000,000       13,843,093  
Income tax payable     -       4,740,003       209,466               4,949,469                   4,949,469  
Debts/notes payable - current portion     -       601,188                       601,188                   601,188  
Derivative Liabilities             7,365,000                       7,365,000                   7,365,000  
Operating Lease Liabilities - current portion             327,329               155,906       483,235                   483,235  
Due to related parties     349,034       -               531,121       880,155     5e     (531,121 )     349,034  
      745,813       19,604,235       1,085,065       687,027       22,122,140           5,468,879       27,591,019  
                                                             
Deferred underwriters' commission     16,100,000       -                       16,100,000     5f     (16,100,000 )     -  
Class A restricted voting shares                                           5b             -  
subject to redemption     402,500,000       -                       402,500,000         (402,500,000        
Debts payable - Non-current portion     -       19,072,858                       19,072,858     5j     (18,684,492 )     388,366  
Operating Lease Liabilities - Non-current portion             2,318,852               451,259       2,770,111                   2,770,111  
Deferred Tax Liabilities             1,420,583                       1,420,583                   1,420,583  
Other Non-Current Liabilities     -       849,358                       849,358                   849,358  
Total liabilities     419,345,813       43,265,886       1,085,065       1,138,286       464,835,050           (431,815,613 )     33,019,437  
                                                             
Additional paid-in-capital     (11,684,284 )     -                       (11,684,284 )   5b     402,500,000       667,345,361  
                                            5c(ii)     (390,815,716 )        
                                            5d     100,000,000          
                                            5d     45,451,352          
                                            5e     24,000,000          
                                            5e     531,121          
                                            5e     (153,477 )        
                                            5c(i)     393,996,118          
                                            5c(ii)     26,061,981          
                                            5i     85,000,000          
                                            5j     (18,001,529 )        
                                            5e     584          
                                            5l     (171,325 )        
                                            5l     10,630,536          
Preferred Stock                                           5k     12,000,000       48,686,021  
                                            5j     18,684,492          
                                            5j     18,001,529          
Retained earnings     3,778,837       -                       3,778,837     5i     (3,778,837 )     -  
                                            5g     (6,000,000 )     (6,000,000 )
Members' equity     -       26,274,923       171,325       (384,267 )     26,061,981     5c(ii)     (26,061,981 )     -  
Non-Controlling Interest                             (584 )     (584 )   5e     (584 )     (1,168 )
Total Shareholders' Equity     (7,905,447 )     26,274,923       171,325       (384,851 )     18,155,950     -     691,874,264       710,030,214  
Total liabilities and members' equity     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  

 

92

 

Mercer Park Brand Acquisition Corp. 

Unaudited Pro Forma Consolidated Statement of Operations 

As at December 31, 2020

 

    Mercer Park BRAND     GH Group     iCann     Element 7                 Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     December 31, 2020     December 31, 2020     Subtotal           Adjustments     December 31, 2020  
US$   $     $           $     $     Notes     $     $  
Revenues, net of discounts     -       48,259,601       3,607,307               51,866,908                   51,866,908  
Cost of goods sold     -       29,519,143       2,621,272               32,140,415                   32,140,415  
      -       18,740,458       986,035       -       19,726,493             -     19,726,493  
Gross profit (loss)     -       18,740,458       986,035       -       19,726,493             -     19,726,493  
                                                             
                                                             
Expenses                                           5g       6,000,000     6,000,000  
Transaction costs     -       -                       -                      
General and administrative     752,259       18,637,477       1,798,289       274,397       21,462,422                   21,462,422  
Sales and marketing     -       1,489,664       166,784               1,656,448                   1,656,448  
Professional Fees     -       2,040,004       71,570               2,111,574                   2,111,574  
Depreciation and Amortization     -       2,576,263       108,672               2,684,935                   2,684,935  
Foreign exchange loss (gain)     43,142       -                       43,142                   43,142  
Total Expenses     795,401       24,743,408       2,145,315       274,397       27,958,521             6,000,000     33,958,521  
                                                             
Net income (loss) from operations     (795,401 )     (6,002,950 )     (1,159,280 )     (274,397 )     (8,232,028 )           (6,000,000 )   (14,232,028 )
                                                             
Other (income) expense                                                         2,126,112  
Share of (income) loss on equity investments     -       2,126,112                       2,126,112                      
Interest expense     -       2,179,137       327,104               2,506,241                   2,506,241  
Interest income     (1,742,747 )     (115,572 )                     (1,858,319 )                 (1,858,319 )
Loss on Change in Fair Value of Derivative Liablities             251,663                       251,663                   251,663  
Other expense (income)     -       (203,345 )     32,566               (170,779 )                 (170,779 )
Total other (income) expense     (1,742,747 )     4,237,995       359,670       -       2,854,918             -     2,854,918  
                                                             
Income tax (recovery) expense     -       6,418,533       207,868               6,626,401                   6,626,401  
                                                             
Net Income (loss) and comprehensive income (loss)     947,346       (16,659,479 )     (1,726,818 )     (274,397 )     (17,713,348 )           (6,000,000 )   (23,713,348 )
                                                             
Net Income (Loss) Attributable to Non-Controlling Interest                             (584 )     (584 )   5e       584     -  
                                                             
Net Loss Attributable to Members Interest     947,346       (16,659,479 )     (1,726,818 )     273,813       (17,713,932 )           (5,999,416 )   (23,713,348 )

 

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DIVIDEND POLICY

 

The declaration of dividends on Equity Shares will be at the sole discretion of the Resulting Issuer Board. No dividend policy has yet been adopted by the Resulting Issuer Board. It is not intended that the Resulting Issuer will pay dividends on the Equity Shares in the immediate future following the Transaction as it intends to retain earnings to finance the growth and development of its businesses and to otherwise reinvest in its businesses. Therefore, it is not anticipated that the Resulting Issuer will pay cash dividends on the Equity Shares in the near future. In addition, the Exchange Rights Agreement will restrict the Resulting Issuer from declaring or paying dividends on the Equity Shares unless economically equivalent dividends are declared and paid on the Exchangeable Shares, subject to applicable law. See “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Voting and Dividend Rights”.

 

The Resulting Issuer’s dividend policy will be reviewed from time to time by the Resulting Issuer Board in the context of the Resulting Issuer’s earnings, financial condition and other relevant factors. The payment of dividends in the future will depend on the earnings, cash flow and financial condition of the Resulting Issuer as well as the need to finance the Resulting Issuer’s business activities and any restrictions that may be contained in any credit or financing agreements and such other factors as the Resulting Issuer Board considers appropriate. Until the time that the Resulting Issuer does pay dividends, which it may never do, Resulting Issuer Shareholders will not be able to receive a return on their Equity Shares unless they sell them. See “Risk Factors – The Resulting Issuer may not pay dividends”.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Please see the MD&A of BRND attached hereto as Appendix B.

 

Please see the MD&A of GH Group attached hereto as Appendix D.

 

The MD&A of BRND and of GH Group contain important information about each respective entity’s business and its performance for the relevant periods. The discussion and analysis of BRND and GH Group’s respective financial conditions and results of operations covers periods prior to the completion of the Transaction. The MD&A of BRND and of GH Group should be read in conjunction with the BRND Audited Annual Financial Statements and the GH Group Audited Financial Statements attached to this prospectus as Appendix A and Appendix C, respectively.

 

All dollar amounts are in U.S. dollars, unless otherwise stated. Amounts for subtotal, totals and percentage variances included in tables in each respective MD&A may not sum or calculate using the numbers as they appear in the tables due to rounding. The MD&A of BRND and GH Group is current as of December 31, 2020. The MD&A of BRND was approved by BRND’s board of directors. These discussions contain forward-looking statements based upon current expectations that involve numerous risks and uncertainties, including those described under the headings “Caution Regarding Forward-Looking Statements”, “Risk Factors” and elsewhere in this prospectus. The actual results of the Resulting Issuer may differ materially from those contained in any forward-looking statements.

 

DESCRIPTION OF SECURITIES

 

The following is a summary of the rights, privileges, restrictions and conditions attaching to the Equity Shares and Multiple Voting Shares after giving effect to the Transaction. Following completion of the Transaction, the Resulting Issuer will be authorized to issue an unlimited number each of Subordinate Voting Shares, Restricted Voting Shares, Limited Voting Shares and Multiple Voting Shares. In addition, the Resulting Issuer will have as part of its authorized share capital an unlimited number of preferred shares (excluding the Multiple Voting Shares, “Preferred Shares”) issuable in series with such terms as are determined by the Resulting Issuer Board from time to time. It is not intended that such Preferred Shares will be used for anti-takeover purposes.

 

The number of Equity Shares expected to be issued and outstanding upon completion of the Transaction will be approximately 62,848,751 (assuming no BRND Shareholders elect to redeem BRND Class A Restricted Voting Shares). Assuming a redemption level of BRND Class A Restricted Voting Shares of 25%, it is expected that there will be approximately 52,786,251 Equity Shares issued and outstanding upon completion of the Transaction. Approximately 4,756,849 Multiple Voting Shares will also be issued and outstanding upon completion of the transaction. No Preferred Shares are expected to be issued and outstanding upon completion of the Transaction. See “Selected Consolidated Financial Information – Pro Forma Consolidated Capitalization”.

 

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Equity Shares and Multiple Voting Shares

 

In connection with the Transaction, BRND intends to amend its constating documents to, among other things, (i) create and set the terms of the Restricted Voting Shares and Limited Voting Shares, including applying coattail terms to such shares similar to those applicable to the Subordinate Voting Shares as more particularly described below, (ii) amend the terms of the BRND Class A Restricted Voting Shares to provide that, upon completion of the Transaction, the BRND Class A Restricted Voting Shares shall be converted into Subordinate Voting Shares, Restricted Voting Shares or Limited Voting Shares, as applicable (rather than solely into Subordinate Voting Shares), (iii) amend the terms of the Subordinate Voting Shares issuable on conversion of the BRND Class A Restricted Voting Shares, including by amending the requirements in respect of who may hold Subordinate Voting Shares (together with (i) and (ii) above, the “ FPI Capital Structure Amendments”), (iv) provide that, upon completion of the Transaction, the BRND Class B Shares shall be directly or indirectly converted on a one-for-one basis into Equity Shares, and (v) amend the terms of the 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 (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed or liquidated at the relevant time by the applicable holder). BRND intends to issue Multiple Voting Shares to the GH Group Founders in connection with the closing of the Transaction.

 

It is expected that the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares will, upon completion of the Transaction, collectively trade under the symbol “GLAS.A.U” on the NEO Exchange. It is a condition of closing of the Transaction that the Equity Shares and Warrants be listed and posted for trading on the NEO Exchange. The NEO Exchange has conditionally approved the listing of the Equity Shares and the BRND Warrants under the symbols “GLAS.A.U”, and “GLAS.WT.U”, respectively.

 

We are seeking to implement the FPI Capital Structure Amendments in order to seek to maintain the Resulting Issuer’s FPI status under U.S. securities laws and thereby avoid a commensurate material increase in the Resulting Issuer’s ongoing costs. This is to be accomplished by implementing a mandatory conversion mechanism in the Resulting Issuer’s share capital to decrease the number of shares eligible to be voted for directors of the Resulting Issuer if the Resulting Issuer’s FPI Threshold (as defined below) is exceeded. Each of the classes of Equity Shares will be, as further described below, economically identical and mandatorily inter-convertible (continuously and without formality) based on (i) the holder’s status as a United States resident or a non-United States resident, and (ii) the status of the Resulting Issuer’s FPI Threshold. This proposed multi-class structure will likely require additional BRND Shareholder votes at the BRND Meeting, including majority of minority approval by a majority of votes cast by the holders of BRND Class A Restricted Voting Shares, excluding any votes attached to BRND Class A Restricted Voting Shares held directly or indirectly by persons who also hold BRND Class B Shares.

 

Upon implementation of the FPI Capital Structure Amendments in connection with the Transaction, each of the Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares may be considered “restricted securities” or “restricted shares”, as applicable under applicable Canadian securities legislation, respectively, as (i) there will be another class of Resulting Issuer Shares (namely, the Multiple Voting Shares) that will carry a disproportionate vote per share relative to each class of Equity Shares, and (ii) the share terms of the Limited Voting Shares will contain provisions that nullify certain of the voting rights attributable to the Limited Voting Shares (i.e., the Limited Voting Shares will not have votes in respect of the election of directors of the Resulting Issuer).

 

Under the Articles, the quorum for the transaction of business at a meeting of shareholders of the Resulting Issuer will be two shareholders who are present in person or represented by proxy and who represent at least 25% of the applicable class or series of shares (and, for greater certainty, where more than one class or series of shares are voting together as if they were a single class of shares, at least 25% of the total issued and outstanding shares of such classes or series).

 

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Equity Shares

 

Exercise of Voting Rights

 

The holders of each class of Equity Shares will be entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Resulting Issuer, except that they will not be able to vote (but will be entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the Business Corporations Act (British Columbia) (“BCBCA”), and except that holders of Limited Voting Shares will not be entitled to vote for the election of directors. The Subordinate Voting Shares and Restricted Voting Shares will carry one vote per share on all matters. The Limited Voting Shares will carry one vote per share on all matters except the election of directors, as the holders of Limited Voting Shares will not have any entitlement to vote in respect of the election for directors of the Company.

 

In connection with any Change of Control Transaction (as defined below) requiring approval of the holders of all classes of Equity Shares under the BCBCA, holders of the Equity Shares shall be treated equally and identically, on a per share basis, unless different treatment of the shares of each such class is approved by a majority of the votes cast by the holders of outstanding Subordinate Voting Shares, Restricted Voting Shares and/or Limited Voting Shares, as applicable, in respect of a resolution approving such Change of Control Transaction, voting separately as a class at a meeting of the holders of that class called and held for such purpose.

 

For purposes herein, a “Change of Control Transaction” means an amalgamation, arrangement, recapitalization, business combination or similar transaction of the Resulting Issuer, other than an amalgamation, arrangement, recapitalization, business combination or similar transaction that would result in (i) the voting securities of the Resulting Issuer outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the continuing entity or its direct or indirect parent) more than 50% of the total voting power of the voting securities of the Resulting Issuer, the continuing entity or its direct or indirect parent, and more than 50% of the total number of outstanding shares of the Resulting Issuer, the continuing entity or its direct or indirect parent, in each case as outstanding immediately after such transaction, and (ii) the shareholders of the Resulting Issuer immediately prior to the transaction owning voting securities of the Resulting Issuer, the continuing entity or its direct or indirect parent immediately following the transaction in substantially the same proportions (vis-a-vis each other) as such shareholders owned the voting securities of the Resulting Issuer immediately prior to the transaction (provided that in neither event shall the exercise of any exchangeable shares of a subsidiary of the Resulting Issuer that are exchangeable into shares of the Resulting Issuer be taken into account in such determination).

 

Notwithstanding the foregoing, the holders of an outstanding class of Equity Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would: (i) adversely affect the rights of the holders of the applicable class of Equity Shares; (ii) affect the holders of any class of Equity Shares differently, on a per share basis from any other class of Equity Shares; or (iii) except as already set forth in the Articles, create any class or series of shares ranking equal to or senior to the applicable outstanding class of Equity Shares; and in each case such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of the applicable outstanding class of Equity Shares.

 

Dividends

 

Holders of Equity Shares will be entitled to receive, as and when declared by the Resulting Issuer Board, dividends in cash or property of the Resulting Issuer. No dividend will be declared or paid on any class of Resulting Issuer Shares unless the Resulting Issuer simultaneously declares or pays, as applicable, equivalent dividends (on a per share basis) on all classes of Equity Shares then issued and outstanding. In the event of the payment of a dividend in the form of shares, holders of Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares shall receive Subordinate Voting Shares, Restricted Voting Shares and Limited Voting Shares, respectively, unless otherwise determined by the Resulting Issuer Board, provided an equal number of shares is declared as a dividend or distribution on a per-share basis, without preference or distinction, in each case.

 

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Liquidation, Dissolution or Winding-Up

 

In the case of liquidation, dissolution or winding- up of the Resulting Issuer, whether voluntary or involuntary, or in the event of any other distribution of assets of the Resulting Issuer for the purposes of a dissolution or winding-up of the Resulting Issuer, the holders of Equity Shares will be entitled, subject to the prior rights of the holders of any shares of the Resulting Issuer ranking in priority to the Equity Shares (including any liquidation preference on any issued and outstanding Multiple Voting Shares and/or Preferred Shares), to receive the Resulting Issuer’s remaining property. Each class of Equity Shares is entitled to share equally, on a share for share basis, with all other classes of Equity Shares in all distributions of such assets. No Preferred Shares are currently issued and outstanding, nor are any Preferred Shares expected to be issued and outstanding upon completion of the Transaction.

 

Rights to Subscribe; Pre-Emptive Rights

 

The holders of Equity Shares will not be entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Resulting Issuer now or in the future.

 

Conversion

 

Under the Articles, where Subordinate Voting Shares are held of record, directly or indirectly, jointly by (i) one or more United States residents, and (ii) one or more non-United States residents, such Subordinate Voting Shares shall be deemed to be held of record by a United States resident. At the request of the Resulting Issuer, beneficial shareholders and actual or proposed transferees will be required to respond to enquiries regarding their status as United States residents or non-United States residents, and will be required to provide declarations or other documents with respect thereto, as may be necessary or desirable, in the discretion of the Resulting Issuer, failing which they would, in the Resulting Issuer’s discretion, be deemed to be United States residents.

 

If, at any given time, the Subordinate Voting Shares are held of record by United States residents, they will be automatically converted, without further act or formality, on a one-for-one basis into Restricted Voting Shares. If, at any given time, the Restricted Voting Shares or the Limited Voting Shares are held of record by non-United States residents, they will be automatically converted, without further act or formality, on a one-for-one basis into Subordinate Voting Shares.

 

Notwithstanding the foregoing, if, at any given time, the total number of Restricted Voting Shares represents a number equal to or in excess of the formulaic threshold set forth below (the “FPI Threshold”), then the minimum number of Restricted Voting Shares required to stay within the FPI Threshold will be automatically converted, without further act or formality, on a pro rata basis across all registered holders of Restricted Voting Shares (rounded up to the next nearest whole number of shares), on a one-for-one basis, into Limited Voting Shares:

 

(0.50 x Aggregate Number of Multiple Voting Shares, Subordinate Voting Shares and Restricted Voting
Shares) – (Aggregate Number of Multiple Voting Shares held of record by United States residents)

 

If, at any given time, the total number of Restricted Voting Shares represents a number below the FPI Threshold, then a number of Limited Voting Shares will be automatically converted, without further act or formality, on a pro rata basis across all registered holders of Limited Voting Shares (rounded down to the next nearest whole number of shares), on a one-for-one basis, into Restricted Voting Shares, to the maximum extent possible such that the Restricted Voting Shares then represent a number of Shares that is one share less than the FPI Threshold.

 

The Company has applied for exemptive relief from the Canadian securities regulatory authorities such that, inter alia, each class of Equity Shares may be aggregated for the purposes of certain securities law reporting thresholds, including in respect of certain take-over bid and issuer bid rules and the early warning requirements under NI 62-104. See “Securities Laws Exemptions”.

 

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If an offer is made to purchase any class of Resulting Issuer Shares and such offer is one which is required, pursuant to Ontario securities legislation or the rules of a stock exchange on which such Resulting Issuer Shares that are subject to the offer are then listed, to be made to all or substantially all the holders of such Resulting Issuer Shares in a given province of Canada to which these requirements apply (assuming that the offeree was a resident in Ontario), each Subordinate Voting Share, Restricted Voting Share and/or Limited Voting Share shall become convertible, at the option of the holder, on a one- for-one basis, into such class of Resulting Issuer Shares that are subject to the offer, at any time while such offer is in effect until the date prescribed by applicable securities legislation for the offeror to take up and pay for such shares as are to be acquired pursuant to such offer. The conversion right may only be exercised in respect of Subordinate Voting Shares, Restricted Voting Shares and/or Limited Voting Shares, as applicable, for the purpose of depositing the resulting Resulting Issuer Shares pursuant to the offer, and for no other reason, including with respect to voting rights attached thereto, which are deemed to remain subject to the provisions concerning voting rights for Subordinate Voting Shares, Restricted Voting Shares and/or Limited Voting Shares, as applicable, notwithstanding their conversion. The transfer agent will be required to deposit the resulting Resulting Issuer Shares pursuant to such offer on behalf of such holder.

 

Should the applicable Resulting Issuer Shares issued upon such conversion and tendered in response to such offer be withdrawn by shareholders of the Resulting Issuer or not taken up by the offeror, or should the offer be abandoned or withdrawn, then each Resulting Issuer Share resulting from such conversion shall be automatically reconverted, without any further act on the part of the Resulting Issuer or on the part of the holder, back into one Subordinate Voting Share, Restricted Voting Share or Limited Voting Share, as applicable.

 

Constraints on Share Ownership

 

Subject to the Specified Exceptions (as defined below), (i) the Subordinate Voting Shares will only be able to be held of record, directly or indirectly, by non-United States residents, and (ii) the Restricted Voting Shares and Limited Voting Shares will only be able to be held of record, directly or indirectly, by United States residents.

 

Pursuant to the “Specified Exceptions”, (i) the automatic conversion features of the Equity Shares will not apply in the context of Equity Shares held, beneficially owned or controlled by one or more underwriters solely for the purposes of a distribution to the public, and (ii) the United States resident/non-United States resident status of an entity holding, beneficially owning or controlling Equity Shares solely in the capacity of an intermediary in connection with either the payment of funds and/or the delivery of securities and which entity provides centralized facilities for the deposit, clearing or settlement of trades in securities (including CDS Clearing and Depositary Services Inc., or any successor or assign) without general discretionary authority over the voting or disposition of such Equity Shares will be disregarded for purposes of the automatic conversion features of the Equity Shares.

 

Renamed as Common Shares

 

At the effective time that there are no Multiple Voting Shares issued and outstanding, the Subordinate Voting Shares may in the discretion of the Board from that point on be named and referred to as “Common Shares”.

 

Multiple Voting Shares

 

Exercise of Voting Rights

 

The holders of Multiple Voting Shares will be entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Resulting Issuer, except that they will not be able to vote (but will be entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the BCBCA. The Multiple Voting Shares will carry 50 votes per share, voting together with the other classes of Equity Shares as if they were a single class except where otherwise required by law or stock exchange requirements.

 

The holders of Multiple Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would adversely affect the rights of the holders of the Multiple Voting Shares, and such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of the Multiple Voting Shares.

 

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Dividends

 

Holders of Multiple Voting Shares shall not be entitled to receive any dividends.

 

Liquidation, Dissolution or Winding-Up

 

In the case of liquidation, dissolution or winding- up of the Resulting Issuer, whether voluntary or involuntary, or in the event of any other distribution of assets of the Resulting Issuer for the purposes of a dissolution or winding-up of the Resulting Issuer, the holders of Multiple Voting Shares shall be entitled, subject to the prior rights of the holders of any shares of the Resulting Issuer ranking in priority to the Multiple Voting Shares (including any liquidation preference on any issued and outstanding Preferred Shares ranking in priority to the Multiple Voting Shares), to a liquidation preference of $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being liquidated at the relevant time by the applicable holder).

 

Rights to Subscribe; Pre-Emptive Rights

 

The holders of Multiple Voting Shares will not be entitled to a right of first refusal to subscribe for, purchase or receive any part of any issue of shares, or bonds, debentures or other securities of the Resulting Issuer.

 

Retraction and Redemption

 

The Multiple Voting Shares will be retractable by the holders thereof at any time for $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being retracted at the relevant time by the applicable holder). In addition, the Multiple Voting Shares will be automatically redeemed by the Corporation for $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being redeemed at the relevant time by the applicable holder) on the earliest of (i) the third (3rd) anniversary of the Transaction, and (ii) the date on which such Multiple Voting Shares are held or controlled by a person who is not a Permitted Holder (as defined in the Articles to be in effect a controlled affiliate). The Multiple Voting Shares will not be transferable except to Permitted Holders.

 

Compliance Provisions

 

The Resulting Issuer’s notice of articles and Articles will contain, in respect of the Equity Shares (and BRND’s notice of articles and Articles currently contain in respect of the Subordinate Voting Shares), certain provisions to facilitate compliance with applicable regulatory and/or licensing regulations (the “Compliance Provisions”). The Compliance Provisions include a combination of certain remedies such as an automatic suspension of voting and/or dividend rights, as applicable, a discretionary right to force a share transfer to a third party and/or a discretionary redemption right in our favour, in each case to seek to ensure that the Resulting Issuer and its subsidiaries are able to comply with applicable regulatory and licensing regulations. The purpose of the Compliance Provisions is to provide the Resulting Issuer with a means of protecting itself from having a shareholder, or, as determined by the Resulting Issuer Board, a group of shareholders acting jointly or in concert, with an ownership interest of, whether of record or beneficially (or having the power to exercise control or direction over) (“Owning or Controlling”), five percent (5%) or more of the issued and outstanding shares of the Resulting Issuer, or such other number as is determined by the Resulting Issuer Board from time to time, and: (i) who a governmental authority granting licenses to, or otherwise governing the operations of, the Resulting Issuer or its subsidiaries has determined to be unsuitable to own Equity Shares; (ii) whose ownership of Equity Share may reasonably result in the loss, suspension or revocation (or similar action) with respect to any licenses or permits relating to the Resulting Issuer’s or its subsidiaries’ conduct of business (being the conduct of any activities relating to the cultivation, manufacturing, distributing and dispensing of cannabis and cannabis-derived products in the United States, which include the owning and operating of cannabis licenses) or in the Resulting Issuer being unable to obtain any new licenses or permits in the normal course, all as determined by the Resulting Issuer Board; or (iii) who have not been determined by the applicable regulatory authority to be an acceptable person or otherwise have not received the requisite consent of such regulatory authority to own the Equity Shares, as applicable, in each case within a reasonable time period acceptable to the Resulting Issuer Board or prior to acquiring any Equity Shares (in each case, an “Unsuitable Person”). The ownership restrictions in the Resulting Issuer’s notice of articles and Articles will also be (and the notice of articles and articles of BRND currently are) subject to an exemption for applicable depositaries and clearing houses as well as underwriters (as defined in the Securities Act (Ontario)) in the course of a distribution of securities

 

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Notwithstanding the foregoing, the Compliance Provisions will provide that any shareholder (or group of shareholders acting jointly or in concert) proposing to Own or Control five percent (5%) or more of the issued and outstanding shares of the Resulting Issuer (or such other number as is determined by the Resulting Issuer Board from time to time) will be required to provide not less than 30 days’ advance written notice to the Corporation by mail sent to the Corporation’s registered office to the attention of the Corporate Secretary and to obtain all necessary regulatory approvals. Upon any such shareholder(s) Owning or Controlling five percent (5%) or more of the issued and outstanding shares of the Resulting Issuer (or such other number as is determined by the Resulting Issuer Board from time to time), and having not received the requisite approval of any applicable regulatory authority to own the Equity Shares, the Compliance Provisions will provide: (i) that such shareholder(s) may, in the discretion of the Resulting Issuer Board, be prohibited from exercising any voting rights and/or receiving any dividends from the Resulting Issuer, unless and until all requisite regulatory approvals are obtained; and (ii) the Resulting Issuer with a right, but not the obligation, at its option, upon notice to the Unsuitable Person, to: (A) redeem any or all Equity Shares directly or indirectly held by an Unsuitable Person; and/or (B) forcibly transfer any or all Equity Shares directly or indirectly held directly or indirectly by an Unsuitable Person to a third party. Such rights are required in order for the Resulting Issuer to comply with regulations in various jurisdictions where the Resulting Issuer or its subsidiaries are expected to conduct business.

 

Upon receipt by the holder of a notice to redeem or to transfer any or all of its Equity Shares, the holder will be entitled to receive, as consideration therefor, (i) if the Equity Shares are then listed for trading on a stock exchange, no less than 95% of the lesser of (A) the closing price of the Equity Shares on the NEO Exchange (or the then principal exchange on which the Resulting Issuer’s securities are listed for trading) on the trading day immediately prior to the closing of the redemption or transfer (or the average of the last bid and last asking prices if there was no trading on the specified date), and (B) the five-day volume weighted average price of the Equity Shares on the NEO Exchange (or the then principal exchange on which the Resulting Issuer’s securities are quoted for trading) for the five trading days immediately prior to the closing of the redemption or transfer (or the average of the last bid and last asking prices if there was no trading on the specified dates), or (ii) if the Equity Shares are not then listed for trading on a stock exchange, a price per share to be determined by the Resulting Issuer Board, acting reasonably.

 

The foregoing restriction will not apply to the ownership, acquisition or disposition of Equity Shares as a result of:

 

(i) transfer of Equity Shares occurring by operation of law including, inter alia, the transfer of Equity Shares to a trustee in bankruptcy, (ii) an acquisition or proposed acquisition by one or more underwriters who hold Equity Shares for the purposes of distribution to the public or for the benefit of a third party provided that such third party is in compliance with the foregoing restriction, or (iii) conversion, exchange or exercise of securities issued by the Resulting Issuer or a subsidiary into or for Equity Shares in accordance with their respective terms. If the Resulting Issuer Board reasonably believes that any such holder of the Equity Shares may have failed to comply with the foregoing restrictions, the Resulting Issuer may apply to the Supreme Court of British Columbia, or any other court of competent jurisdiction, for an order directing that such shareholder disclose the number of Equity Shares directly or indirectly held.

 

Notwithstanding the adoption of the Compliance Provisions, the Resulting Issuer may not be able to exercise such rights in full or at all, including its redemption rights. Under the BCBCA, a corporation may not make any payment to redeem shares if there are reasonable grounds for believing that the Resulting Issuer is unable to pay its liabilities as they become due in the ordinary course of its business or if making the payment of the redemption price or providing the consideration would cause the Resulting Issuer to be unable to pay its liabilities as they become due in the ordinary course of its business. Furthermore, the Resulting Issuer may become subject to contractual restrictions on its ability to redeem its Equity Shares by, for example, entering into a secured credit facility subject to such restrictions. In the event that restrictions prohibit the Resulting Issuer from exercising its redemption rights in part or in full, the Resulting Issuer will not be able to exercise its redemption rights absent a waiver of such restrictions, which the Resulting Issuer may not be able to obtain on acceptable terms or at all.

 

Ownership of Restricted Voting Shares and Limited Voting Shares

 

For reasons of tax efficiency, any holder of Multiple Voting Shares that holds at least two (2) Restricted Voting Shares and/or Limited Voting Shares shall be deemed to hold (i) at least one (1) Restricted Voting Share, and (ii) at least one (1) Limited Voting Share.

 

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Advance Notice Requirements for Director Nominations

 

The Articles will contain an advance notice provision pertaining to the Resulting Issuer Shareholders (who meet the necessary qualifications outlined in the Articles) seeking to nominate candidates for election as directors (a “Nominating Shareholder”) at any annual meeting of the Resulting Issuer Shareholders, or for any special meeting of Resulting Issuer Shareholders if one of the purposes for which the special meeting was called was the election of directors (the “ Advance Notice Provisions”). The following description is a summary only and is qualified in its entirety by the full text of the applicable provisions of Articles which will be made available on the Resulting Issuer’s SEDAR profile at www.sedar.com.

 

In addition to any other applicable requirements, for a nomination to be made by a Nominating Shareholder, the Nominating Shareholder must have given timely notice thereof in proper written form to the Corporate Secretary of the Resulting Issuer. To be timely, a Nominating Shareholder’s notice to the Corporate Secretary must be made: (i) in the case of an annual meeting of shareholders (including an annual and special meeting), not less than 30 days’ prior to the date of the annual meeting of Resulting Issuer Shareholders; provided, however, that in the event that the annual meeting of shareholders is to be held on a date that is less than 50 days after the date (the “Notice Date”) on which the first public announcement of the date of the annual meeting was made, notice by the Nominating Shareholder may be made not later than the close of business on the 15th day following the Notice Date; and (ii) in the case of a special meeting of shareholders (which is not also an annual meeting) called for the purpose of electing directors (whether or not called for other purposes as well), not later than the close of business on the 15th day following the day on which the first public announcement of the date of the special meeting of shareholders was made. The Articles will also prescribe the proper written form for a Nominating Shareholder’s notice.

 

The chairperson of the meeting shall have the power and duty to determine whether a nomination was made in accordance with the notice procedures set forth in the Articles and, if any proposed nomination is not in compliance with such provisions, the discretion to declare that such defective nomination will be disregarded.

 

Notwithstanding the foregoing, the directors of the Resulting Issuer Board may, in their sole discretion, waive any requirement in the Advance Notice Provisions.

 

EQUITY INCENTIVE PLAN DESCRIPTION

 

Summary of Equity Incentive Plan

 

The Equity Incentive Plan will be implemented in respect of the Resulting Issuer, the principal terms of which are described below.

 

Purpose

 

The purpose of the Equity Incentive Plan will be to enable the Resulting Issuer and its affiliated companies to: (i) attract and retain employees, officers, consultants, advisors and non-employee directors capable of assuring the future success of the Resulting Issuer, (ii) offer such persons incentives to put forth maximum efforts, (iii) compensate such persons through various stock-based arrangements and provide them with opportunities for stock ownership, thereby aligning the interests of such persons and the Resulting Issuer Shareholders.

 

The Equity Incentive Plan permits the grant of (i) nonqualified stock options (“NQSOs”) and incentive stock options (“ISOs”) (collectively, “Options”), (ii) restricted stock units (“RSUs”), (iii) performance compensation awards, and (iv) unrestricted stock bonuses or purchases, which are referred to herein collectively as “Awards”, all as more fully described below.

 

The Resulting Issuer Board shall have the power to manage the Equity Incentive Plan and may delegate such power at its discretion to any committee of the Resulting Issuer Board, including the Compensation, Nominating and Corporate Governance Committee (“C&CG Committee”).

 

The Resulting Issuer will not issue equity compensation awards under the Equity Incentive Plan until the Transaction has been completed. The Equity Incentive Plan will be filed on SEDAR at www.sedar.com prior to the completion of the Transaction.

 

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Eligibility

 

Any non-employee director of the Resulting Issuer or any employee, officer, director, consultant, independent contractor or advisor providing services to the Resulting Issuer or any Affiliate, or any such person to whom an offer of employment or engagement with the Resulting Issuer or any Affiliate is extended, are eligible to participate in the Equity Incentive Plan if selected by the Resulting Issuer Board (the “Participants”). The basis of participation of an individual under the Equity Incentive Plan, and the type and amount of any Award that an individual will be entitled to receive under the Equity Incentive Plan, will be determined by the Resulting Issuer Board based on its judgment as to the best interests of the Resulting Issuer and its shareholders, and therefore cannot be determined in advance.

 

The maximum number of Equity Shares that may be issued under the Equity Incentive Plan shall be fixed by the Resulting Issuer Board to be 10% of the Equity Shares outstanding, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made pursuant to the Equity Incentive Plan and any grants of restricted Exchangeable Shares made under any equity plan of MPB AcquisitionCo, as described below), from time to time, subject to adjustment in the Equity Incentive Plan. 8% of such Equity Shares, subject to adjustment in accordance with the Equity Incentive Plan, shall be available for time-based vested Awards. In addition to the foregoing, 2% of such Equity Shares, subject to adjustment in the Equity Incentive Plan, shall be available for performance-based Awards (with the performance target being set as the market capitalization of the Equity Shares outstanding, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made pursuant to the Equity Incentive Plan and any grants of restricted Exchangeable Shares made under any equity plan of MPB AcquisitionCo), having reached or exceeded $1.0 billion for 20 out of 30 consecutive trading days in order for vesting of such Awards to occur). Notwithstanding the foregoing, a maximum of 16,406,629 Equity Shares may be issued as ISOs, subject to adjustment in the Equity Incentive Plan.

 

To the extent that section 2.25 of NI 45-106 applies to an Award or issuances of Equity Shares pursuant to the Equity Incentive Plan, the maximum number of Equity Shares that may be issued under the Equity Incentive Plan to any one Related Person, or the number of securities that may be issuable on exercise of the Options granted to any one Related Person, as compensation within any one-year period, excluding performance-based Awards (with the performance target being set as the market capitalization of the Equity Shares outstanding), shall not exceed 5.0% of the outstanding Equity Shares, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made under the Equity Incentive Plan and any equity plan of MPB AcquisitionCo), at the time of grant, subject to adjustment in the Equity Incentive Plan. The maximum number of Equity Shares that may be issued under the Equity Incentive Plan to the Resulting Issuer’s non-executive directors, as a whole, or the number of securities that may be issuable on exercise of the Awards granted to the Resulting Issuer’s non-executive directors, as a whole, as compensation within any one-year period, shall not exceed 1.0% of the outstanding Equity Shares, on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants and excluding grants made under the Equity Incentive Plan and any equity plan of MPB AcquisitionCo), at the time of grant, subject to adjustment in the Equity Incentive Plan. The Resulting Issuer Board will not grant Options to any one non-executive director in which the aggregate fair market value (determined as of the time the Options are granted) of such Options during any calendar year (under the Equity Incentive Plan and all other plans of the Resulting Issuer and its Affiliates) shall exceed $100,000, or will not grant Awards in which the aggregate fair market value (determined as of the time the Awards are granted) of the Equity Shares in respect to which the Awards are exercisable by such non-executive director during any calendar year (under the Equity Incentive Plan and all other plans of BRND and its Affiliates) shall exceed C$150,000.

 

Any shares subject to an Award under the Equity Incentive Plan that are not purchased or are forfeited, cancelled, expire unexercised, are settled in cash, or are used or withheld to satisfy tax withholding obligations of a Participant shall again be available for Awards under the Equity Incentive Plan.

 

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In the event of any dividend (other than a regular cash dividend) or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, forward stock split, reverse stock split, reorganization, plan of arrangement, merger, amalgamation, consolidation, split-up, spin-off, combination, repurchase or exchange of Equity Shares or other securities of the Resulting Issuer, issuance of warrants or other rights to acquire Equity Shares or other securities of the Resulting Issuer, or other similar corporate transaction or event which affects the Equity Shares or unusual or nonrecurring events affecting the Resulting Issuer or the financial statements of the Resulting Issuer, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange or inter-dealer quotation system, accounting principles or law, the Resulting Issuer Board may, subject to any required regulatory or NEO Exchange approvals, make such adjustment which it deems appropriate in its discretion in order to prevent dilution or enlargement of the rights of Participants under the Equity Incentive Plan, to (i) the number and kind of Equity Shares (or other securities or other property) that may thereafter be issued in connection with Awards, (ii) the number and kind of Equity Shares (or other securities or other property) subject to outstanding Awards, (iii) the purchase price or exercise price relating to any Award or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, and/or (iv) any share limit set forth in the Equity Incentive Plan.

 

MPB AcquisitionCo may establish an equity plan through which awards of restricted Exchangeable Shares may be granted to service providers to MPB AcquisitionCo and their Affiliates. To the extent any awards of restricted Exchangeable Shares are granted by MPB AcquisitionCo, the number of restricted Exchangeable Shares granted by MPB AcquisitionCo will reduce the number of Equity Shares that may be awarded under the Equity Incentive Plan on a one- for-one basis. If any restricted Exchangeable Shares awarded under a MPB AcquisitionCo equity plan are forfeited, cancelled, or are used or withheld to satisfy tax withholding obligations of an award recipient, any such Exchangeable Shares that are forfeited, cancelled, used or withheld will not be treated as reducing the number of Equity Shares that are available for Awards under the Equity Incentive Plan.

 

Awards

 

Options

 

The Resulting Issuer Board is authorized to grant Options to purchase Equity Shares that are either ISOs (meaning they are intended to satisfy the requirements of Section 422 of the Code), or NQSOs (meaning they are not intended to satisfy the requirements of Section 422 of the Code). Options granted under the Equity Incentive Plan will be subject to the terms and conditions established by the Resulting Issuer Board. Options granted under the Equity Incentive Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the Resulting Issuer Board and specified in the applicable award agreement. The maximum term of an Option granted under the Equity Incentive Plan will be ten years from the date of grant (or five years in the case of an ISO granted to a 10% shareholder). Payment in respect of the exercise of an Option may be made in cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise) or by such other method as the Resulting Issuer Board may determine to be appropriate.

 

RSUs

 

RSUs are granted in reference to a specified number of Equity Shares and entitle the holder to receive, on achievement of specific performance goals established by the Resulting Issuer Board or after a period of continued service with the Resulting Issuer or its affiliates or any combination of the above as set forth in the applicable award agreement, one Equity Share for each such Equity Share covered by the RSU; provided, that the Resulting Issuer Board may elect to pay cash, or part cash and part Equity Shares in lieu of delivering only Equity Shares. The Resulting Issuer Board may, in its discretion, accelerate the vesting of RSUs. Unless otherwise provided in the applicable award agreement or as may be determined by the Resulting Issuer Board upon a Participant’s termination of employment or service with the Resulting Issuer, the unvested portion of the RSUs will be forfeited and re-acquired by the Resulting Issuer for cancellation at no cost.

 

Unrestricted Stock Bonuses or Purchases

 

The Resulting Issuer Board is authorized to grant unrestricted Subordinate Voting Shares as consideration for services rendered to the Resulting Issuer or an Affiliate in the prior calendar year, or may offer a Participant the opportunity to purchase unrestricted Equity Shares for cash consideration equal to the fair market value of the unrestricted Equity Shares.

 

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Dividend Equivalents

 

The Resulting Issuer Board is authorized to grant dividend equivalents, under which the holder shall be entitled to receive payments (in cash, Subordinate Voting Shares, other securities or other property, as determined by the Resulting Issuer Board) equivalent to the amount of cash dividends paid by BRND to holders of Subordinate Voting Shares with respect to a number of Subordinate Voting Shares determined by the Resulting Issuer Board. Subject to the terms of the Equity Incentive Plan and any applicable award agreement, such dividend equivalents may have such terms and conditions as the Resulting Issuer Board shall determine. Notwithstanding the foregoing, (i) the Resulting Issuer Board may not grant dividend equivalents to Participants in connection with grants of Options or other Awards, the value of which is based solely on an increase in the value of the Subordinate Voting Shares after the date of grant of such Award, and (ii) dividend and dividend equivalent amounts may be accrued but shall not be paid unless and until the date on which all conditions or restrictions relating to such Award have been satisfied, waived or lapsed.

 

Restricted Exchangeable Shares

 

If, during the term of the Equity Incentive Plan, MPB AcquisitionCo establishes a compensatory plan or arrangement through which they may grant awards of restricted Exchangeable Shares to Participants, any restricted Exchangeable Shares awarded under such plan(s) will reduce the number of Equity Shares that may be awarded under the Equity Incentive Plan on a one-for-one basis. If any restricted Exchangeable Shares awarded under the plans of MPB AcquisitionCo are forfeited, cancelled, or are used or withheld to satisfy tax withholding obligations of an award recipient thereunder, any such restricted Exchangeable Shares that are forfeited, cancelled, used or withheld will thereafter not be treated as reducing the number of Equity Shares that are available for Awards under the Equity Incentive Plan.

 

General

 

The maximum term of the Awards to be granted under the Equity Incentive Plan will be 10 years. The Equity Incentive Plan will be presented to the BRND Shareholders at the BRND Meeting for their approval.

 

The Resulting Issuer Board may impose restrictions on the vesting, exercise or payment of an Award as it determines appropriate. Generally, no Awards (other than fully vested and unrestricted Equity Shares issued pursuant to any Award) granted under the Equity Incentive Plan shall be transferable except by will or by the laws of descent and distribution. No Participant shall have any rights as a shareholder with respect to Equity Shares covered by Options or RSUs, unless and until such Awards are settled in Equity Shares.

 

No Option shall be exercisable, no Equity Shares shall be issued, no certificates, registration statements or electronic positions for Equity Shares shall be delivered and no payment shall be made under the Equity Incentive Plan except in compliance with all applicable laws and NEO Exchange and any other regulatory requirements.

 

The Resulting Issuer Board may amend, alter, suspend, discontinue or terminate the Equity Incentive Plan and the Resulting Issuer Board may amend any outstanding Award at any time; provided that (i) such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Resulting Issuer Shareholders if such approval is necessary to comply with any tax, regulatory or NEO Exchange requirement applicable to the Equity Incentive Plan (including, without limitation, as necessary to comply with the NEO Exchange Policies or any rules or requirements of any applicable securities exchange), and (ii) subject to the next following paragraph, no such amendment or termination may adversely alter or impair the Awards then outstanding without the Award holder’s permission. The Resulting Issuer Board may, without prior approval of the Resulting Issuer Shareholders, correct any defect, supply any omission or reconcile any inconsistency in the Equity Incentive Plan or in any Award or award agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of the Equity Incentive Plan. The Equity Incentive Plan also provides for the issuance of Equity Shares in lieu of bonuses.

 

In the event of any reorganization, merger, amalgamation, consolidation, split- up, spin-off, combination, plan of arrangement, take- over bid or tender offer, repurchase or exchange of Equity Shares or other securities of the Resulting Issuer or any other similar corporate transaction or event involving the change of control of the Resulting Issuer (or if the Resulting Issuer shall enter into a written agreement to undergo such a transaction or event), the Resulting Issuer Board may, in its sole discretion, take such measures or make such adjustments in regards to any securities granted pursuant to the Equity Incentive Plan, as it deems appropriate, as further described in the Equity Incentive Plan. Notwithstanding the foregoing, upon a corporate transaction or event involving the change of control of the Resulting Issuer, all securities granted pursuant to the Equity Incentive Plan shall immediately vest.

 

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Unless the Awards and the Equity Shares issuable upon exercise or redemption thereof have been registered under the U.S. Securities Act, and any applicable state securities laws, any Awards or Equity Shares granted to residents of the United States will be “restricted securities” within the meaning of Rule 144 under the U.S. Securities Act and will be subject to transfer restrictions under U.S. securities laws.

 

Tax Withholding

 

The Resulting Issuer may take such action as it deems appropriate to ensure that all applicable federal, State, provincial, local and/or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant.

 

OPTIONS TO PURCHASE SECURITIES

 

Options

 

The aggregate number of Options and RSUs that are expected to be outstanding upon completion of the Transaction, as well as their corresponding vesting terms and exercise prices, as applicable, currently remain to be determined. For a description of the Options and RSUs, see “Equity Incentive Plan Description – Summary of Equity Incentive Plan”.

 

BRND Warrants and Series A Warrants

 

29,989,500 BRND Warrants are outstanding as of the date of this prospectus, which were issued as part of the 2019 initial public offering of BRND. Each BRND Warrant shall represent share purchase warrants to acquire BRND Class A Restricted Voting Shares following 65 days after the Effective Date (which, at such time, will represent the right to acquire Equity Shares), at an exercise price of $11.50 per share.

 

The 29,989,500 BRND Warrants are governed by the terms of the Warrant Agreement. See “Corporate Structure – Warrant Agreement” for a description of the terms.

 

Once the BRND Warrants become exercisable, pursuant to the terms of the Warrant Agreement, BRND may accelerate the expiry date of the outstanding BRND Warrants (excluding the BRND Founders’ Warrants but only to the extent still held by Mercer at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by Mercer of material undisclosed information which could limit their flexibility) by providing 30 days’ notice if, and only if, the closing share price of the BRND Class A Shares (which will be designated as Equity Shares) equals or exceeds $18.00 per share (as adjusted for stock splits or combinations, stock dividends, Extraordinary Dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30-trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice is provided. In the event that the foregoing conditions are satisfied upon or following completion of the Transaction, it is expected that BRND will accelerate the expiry date of the BRND Warrants by providing such notice.

 

See “Corporate Structure – GH Group Financing” in respect of the Series A Warrants.

 

GH Group Equity Incentive Plan

 

GH Group established an equity incentive plan in 2019 (the “GH EIP”) for the benefit of its employees, officers, directors and eligible consultants (each, a “GH Participant”). The GH EIP provides for options, restricted stock and other forms of awards. It is administered by the GH Group board of directors.

 

Options have a maximum term of 10 years from the date of grant and the option exercise price could not be less than the fair market value at the date of grant.

 

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Awards are subject to vesting restrictions, either time-based or conditioned on the consummation of an equity financing or initial public offering.

 

In the event of a GH Participant’s termination of service, his or her options expire as follows:

 

(i) In the event of death, options are set to expire on the earlier of (a) their original expiry date, and (b) 12 months after the death, unless extended by the board.

 

(ii) In the event of termination for cause, options are set to expire immediately.

 

(iii) In the event of termination other than as a result of death or for cause, options are set to expire on the earlier of: (a) their original expiry date; and (b) 90 days from the termination date (or, if the termination was due to disability, 12 months from the termination date).

 

Option grants could permit cashless exercises and payment of the exercise price by way of a promissory note.

 

Awards are non-transferable except in the event of death or pursuant to a domestic relations-related court order and are subject to customary anti-dilution provisions for stock splits, stock consolidations, stock dividends and other changes. On a change of control, fully-vested awards could, in the board’s discretion, be either paid out or terminated, unless assumed by the buyer.

 

As of the date of this prospectus, 60,711,886 stock options (the “GH Options”) are issued and outstanding under the GH EIP, 26,940,583 of which are incentive stock options and 33,771,303 of which are non-qualified stock options. As of the date of this prospectus, 10,821,414 of such incentive stock options are vested, 16,119,169 of such incentive stock options are unvested, 17,744,724 of such non-qualified stock options are vested and 16,026,579 of such non-qualified stock options are unvested. For clarity, the GH Options continue to vest (if applicable) on their respective vesting schedules through the effective time of the Merger.

 

Pursuant to the terms of the Definitive GH Group Agreement, at the effective time of the Merger:

 

(i) each outstanding GH Option that is an incentive stock option will be assumed by the Resulting Issuer and become an option to purchase a number of Equity Shares calculated pursuant to a formula set forth in the Definitive GH Group Agreement, with an exercise price between $2.07 and $3.10. Assuming for illustrative purposes only that the effective time of the Merger were to occur on the date of this prospectus, such number of Equity Shares would be 2,864,539;

 

(ii) each outstanding GH Option that is vested and is not an incentive stock option will be cancelled, extinguished and converted into the right to receive a number of Exchangeable Shares calculated pursuant to a formula set forth in the Definitive GH Group Agreement. Assuming for illustrative purposes only that the effective time of the Merger were to occur on the date of this prospectus, such number of Exchangeable Shares would be 1,474,711; and

 

(iii) each outstanding GH Option that is unvested and is not an incentive stock option will be cancelled, extinguished and converted into a restricted unit representing a number of Exchangeable Shares calculated pursuant to a formula set forth in the Definitive GH Group Agreement, with an exercise price between $2.07 and $3.10. Assuming for illustrative purposes only that the effective time of the Merger were to occur on the date of this prospectus, such number of Exchangeable Shares would be 1,305,275.

 

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SECURITIES SUBJECT TO CONTRACTUAL RESTRICTIONS ON TRANSFER

 

The following sets out, based on the number of issued and outstanding Equity Shares expected to be outstanding upon completion of the Transaction, the anticipated number of securities of the Resulting Issuer that will be subject to a contractual restriction on transfer upon the completion of the Transaction. The Multiple Voting Shares will be non-transferable except to controlled affiliates. To the knowledge of BRND and GH Group, no other securities of the Resulting Issuer will be held in escrow or will be subject to contractual restrictions on transfer upon closing of the Transaction.

 

Designation of Class   Number of Securities Subject to
Contractual Restriction
    Percentage of Class(2)  
Subordinate, Restricted or Limited Voting Shares     10,178,751       16.2 %
Exchangeable Shares(1)     29,224,437       100 %
Multiple Voting Shares     4,756,849       100 %

 

Notes:

 

(1) See “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders”.

(2) Assumes no redemptions of the BRND Class A Restricted Voting Shares.

 

Mercer Park Brand Acquisition Corp. Founders’ Shares

 

On the closing of BRND’s initial public offering, the BRND Founders entered into the Exchange Agreement and Undertaking pursuant to which each BRND Founder agreed to certain transfer restrictions in respect of their: (i) aggregate 10,089,750 BRND Founders’ Shares (which were acquired for nominal consideration); (ii) 9,810,000 BRND Warrants (which were acquired for $1.00 per BRND Warrant); and (iii) 109,000 BRND Class B Units (which were acquired for $10.00 per BRND Class B Unit). Pursuant to the Exchange Agreement and Undertaking, the BRND Founders agreed not to transfer any of their Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the BRND Class B Units), Founders’ Shares or Founders’ Warrants, or any securities of BRND received in exchange therefor, prior to the closing of BRND’s qualifying transaction without the prior consent of the NEO Exchange. Such transfer restrictions only apply to BRND Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the Class B Units), Founders’ Shares and Founders’ Warrants and do not apply to any BRND Class A Restricted Voting Shares of the BRND Founders (if any).

 

Pursuant to the Investor Rights Agreement, none of the Sponsor Shares (i.e., the Equity Shares to be issued to Mercer, Charles Miles and Sean Goodrich on Closing in exchange for their BRND Founders’ Shares) subject to forfeiture thereunder shall be transferable until the expiry of the applicable forfeiture periods.

 

Exchangeable Shares

 

See “Corporate Structure – Exchangeable Shares and Exchange Rights Agreements – Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders”.

 

PRIOR SALES

 

There have been no issuances of shares, including any securities convertible or exchangeable into shares, during the 12-month period before the date of this prospectus, except for the proposed Private Placement.

 

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The BRND Class A Restricted Voting Shares are listed on the NEO Exchange and trade under the symbol “BRND.A.U”. The following table sets forth, for the periods indicated, the reported high and low prices and the aggregate volume of trading of the Class A Restricted Voting Shares on the NEO Exchange:

 

Period   High ($)     Low ($)     Volume  
May 2020     9.80       9.60       632,950  
June 2020     9.95       9.66       2,069,640  
July 2020     9.93       9.71       210,274  
August 2020     9.95       9.83       487,983  
September 2020     9.95       9.80       5,539,402  
October 2020     9.95       9.82       676,469  
November 2020     10.02       9.84       496,774  
December 2020     10.08       9.91       995,473  
January 2021     10.80       10.08       2,349,382  
February 2021     10.75       10.06       3,058,107  
March 2021     10.50       9.84       3,889,469  
April 2021     10.40       9.97       3,929,859  
May 1 - 5, 2021     10.20       10.08       553,850  

 

The BRND Warrants are listed on the NEO Exchange and trade under the symbol “BRND.WT”. The following table sets forth, for the periods indicated, the reported high and low prices and the aggregate volume of trading of the BRND Warrants on the NEO Exchange:

 

Period   High ($)     Low ($)     Volume  
May 2020     0.70       0.30       649,925  
June 2020     0.70       0.50       50,140  
July 2020     1.08       0.65       199,350  
August 2020     0.70       0.55       125,388  
September 2020     0.9       0.51       302,802  
October 2020     0.95       0.6       305,836  
November 2020     1.25       0.69       497,870  
December 2020     1.20       0.90       1,784,867  
January 2021     1.76       0.76       1,424,089  
February 2021     2.30       1.63       727,270  
March 2021     2.00       1.46       451,643  
April 2021     2.44       1.11       9,755,534  
May 1 - 5, 2021     2.35       2.20       227,064  

 

PRINCIPAL SHAREHOLDERS

 

The following table discloses, based on the number of issued and outstanding Equity Shares and Multiple Voting Shares expected to be outstanding upon completion of the Transaction, the names of the persons or companies who, upon completion of the Transaction and assuming that no BRND Shareholders elect to redeem their BRND Class A Restricted Voting Shares, will, to BRND and GH Group’s knowledge, beneficially own or control, directly or indirectly, more than 10% of the combined voting rights attached to the Equity Shares and Multiple Voting Shares.

 

                      Total Voting      
                Equity Shares     Power      
          Total Voting     assuming     assuming      
    Equity Shares     Power upon     Exchangeable     Exchangeable      
    upon Closing of     Completion of     Shares are     Shares are     Type of
Name   the Transaction     the Transaction     Exchanged     Exchanged(4)     Ownership
Kyle Kazan(1)   -       29.16 %     2,197,654       25.86 %    Registered and
                                   beneficial

Jamie Rosenwald(2)

  -       21.35 %     1,247,973       18.82 %    Registered and
                                   beneficial
Graham Farrar(3)   -       22.60 %     1,456,749       19.97 %    Registered and
                                   beneficial

 

Notes:

 

(1) Will also hold 1,704,586 Multiple Voting Shares (approximately 38.6% of such class of shares) for up to three years from closing of the Transaction, which will be entitled to 50 votes per share and be of nominal value.

(2) Will also hold 1,247,973 Multiple Voting Shares (approximately 31.4% of such class of shares) for up to three years from closing of the Transaction, which will be entitled to 50 votes per share and be of nominal value.

(3) Will also hold 1,321,087 Multiple Voting Shares (approximately 30.0% of such class of shares) for up to three years from closing of the Transaction, which will be entitled to 50 votes per share and be of nominal value.

(4) Prior to the issuance of any Earn-Out Shares in connection with the acquisition of SoCal Greenhouse. Assumes the issuance of 2,400,000 Equity Shares in connection with the Element 7 Mergers. See “SoCal Greenhouse” and “Element 7”.

  

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DIRECTORS AND EXECUTIVE OFFICERS

 

The names, municipality of residence and positions with the Resulting Issuer of the persons who are expected to serve as directors and executive officers of the Resulting Issuer after giving effect to the Transaction are set out below. Each of the proposed members of the Resulting Issuer Board will be formally appointed to the Resulting Issuer Board at or following the closing of the Transaction.

 

Directors    
     
Name and Province/State and Country of Present Principal Occupation
Residence    
Kyle Kazan   Chief Executive Officer, GH Group
Palos Verdes Peninsula, CA, USA  
   
Graham Farrar President, GH Group
Santa Barbara, CA, USA  
   
Jamie Mendola Head of Strategy and M&A, Mercer Park L.P.
San Francisco, CA, USA  
   
Jocelyn Rosenwald(1) Director of Acquisitions and Asset Management, Beach Front
Costa Mesa, CA, USA Property Management
   
Lameck Humble Lukangka(1) Principal, Life Line Financial Group
Los Angeles, CA, USA  
   
George Raveling Self-Employed Consultant, Coaching for Success
Los Angeles, CA, USA  
     
Bob Hoban   Principal Attorney of Hoban Law Group and Global Proven
Denver, CO, USA Strategies
   
Hector De La Torre(1) Director, California Air Resources Board
Los Angeles, CA, USA  
     
     
Notes:    
(1) Proposed member of the Audit Committee (as defined below).

 

As the proposed directors of the Resulting Issuer set forth above are not current directors of BRND and will not become directors until the completion of the Transaction, they will not be subject to liability as directors for any misrepresentation in this prospectus.

 

The directors of the Resulting Issuer will thereafter be elected by Resulting Issuer Shareholders at each annual meeting of shareholders, and will hold office until the next annual meeting of the Resulting Issuer, unless: (i) his or her office is earlier vacated in accordance with the articles of the Resulting Issuer; or (ii) he or she becomes disqualified to act as a director.

 

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Executive Officers

 

Name and Residence Proposed Position with the Present Principal Occupation
  Resulting Issuer  
Kyle Kazan Executive Chairman, Chief Chief Executive Officer, GH Group
Palos Verdes Peninsula, CA, USA Executive Officer and Director  
Graham Farrar President and Director President, GH Group
Santa Barbara, CA, USA    
Derek Higgins Chief Financial Officer Chief Financial Officer, GH Group
Long Beach, CA, USA    
Jamin Horn Corporate Secretary General Counsel and Corporate
Long Beach, CA, USA   Secretary, GH Group
Daryl Kato Chief Operating Officer Chief Operating Officer, GH Group
Rancho Palos Verdes, CA, USA     
Joe Andreae Vice President, Business Vice President, Business
Huntington Beach, CA, USA Development Development, GH Group

 

Biographies

 

The following are brief profiles of the proposed directors and executive officers of the Resulting Issuer, including a description of each individual’s principal occupation within the past five years.

 

Kyle Kazan, Executive Chairman, Chief Executive Officer and Director

 

A seasoned investor and expert manager of private equity funds with over two (2) decades of domestic and international experience, Kyle has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. In 1991 he began investing in real estate, eventually launching a total of 23 private equity funds with a current estimated value of owned and managed properties that stands above $2.75 billion. Kyle also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the vertically integrated GH Group. Since his early service as a special education teacher and law enforcement officer, Kyle has been a vocal advocate for police reform and ending the War on Drugs and its injustices, speaking on behalf of Law Enforcement Against Prohibition (LEAP) and appearing in many media outlets ranging from CNN to Fox. He is a frequent guest professor at NYU Stern School of Business, USC Marshall Business School, and UCLA Anderson School of Management, and Kyle is a graduate of the University of Southern California, where he played varsity basketball for Hall of Fame Coach George Raveling.

 

Graham Farrar, President and Director

 

Graham is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Farrar served as a board member for Heal the Ocean, was a founder and partner of ebook publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry. Farrar currently sits on the Board of Directors of The Santa Barbara Bowl Foundation.

 

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Derrek Higgins, Chief Financial Officer

 

Derrek Higgins serves as Chief Financial Officer for GH Group. Derrek has day to day responsibility managing the financial actions and planning of GH Group, overseeing cash flow, leading capital raises, analyzing mergers and acquisitions, and implementing growth strategies. He has more than 20 years of public and private company financial expertise in preparing venture-backed startups for public listings, representing shareholders and implementing comprehensive profitability and working capital plans. Derrek has held various key roles throughout his career, including most recently as the Chief Financial Officer and board member of FLRish Inc., the parent company of Harborside Inc, where helped lead the completion of Harborside’s reverse takeover of FLRish, Inc., recapitalized the business and implemented public reporting frameworks, accounting policies and operational transformation initiatives across Harborside, its subsidiaries and controlled entities. Prior to FLRish/Harborside, Higgins served as a consultant for The Brenner Group LLC, where he provided Chief Financial Officer advisory services to venture-backed startups and mid-size companies, developed and executed strategic plans, raised capital and managed shareholder representation. Derrek also served as a strategic consultant at Alvarez & Marsal, a global professional services firm known for its work in turnaround management and performance improvement of large, high-profile businesses both in the U.S. and internationally, providing critical assistance to companies in crisis situations and helping to stabilize financial and operational performance by developing and implementing comprehensive profitability and working capital plans. Higgins holds a B.S. degree in Accounting from Arizona State University, an MBA from the USC Marshall School of Business, and a CPA (inactive) in the state of California.

 

Jamin Horn, General Counsel and Corporate Secretary

 

Jamin has over a decade of legal experience in counseling high-growth private and public companies, principally in the medical and digital technology sectors, and over six years of experience advising California and multi-state cannabis operators and associated technology service providers. Prior to becoming an attorney, he worked on investor-side early-stage financing and intellectual property commercialization planning and analysis. Jamin joined FLRish, Inc., the parent company of Harborside, in 2017 as Associate Counsel, where he was responsible for corporate and commercial transactions through the company’s growth and public listing before departing at the end of 2020 as VP of Corporate Affairs. He is a member of the California bar, the Association of Corporation Counsel, and the International Cannabis Bar Association, and he holds a JD from UC Davis School of Law and a BS in Molecular, Cellular and Developmental Biology from UC Santa Cruz.

 

Daryl Kato, Chief Operating Officer

 

Daryl is a seasoned leader with over 20 years of experience in operations, finance, accounting, and technology across multiple industry sectors and consumer packaged goods categories. Most recently, he served as the Chief Financial Officer and Board Director at Nissin Foods USA. Prior to that, he co-founded and sold a digital out-of-home advertising company and completed several business transformation projects while with Nestlé USA, Global Nestle Professional, Farmer Brothers (NASDAQ: FARM), and Mitsubishi UFJ Financial Group (NYSE: MUFG). Kato began his career in Deloitte’s audit practice where he earned his CPA license. He holds a BA in Business Economics & minor in Accounting from the University of California at Los Angeles and an MBA from USC Marshall School of Business.

 

Joe Andreae, Vice President, Business Development

 

Joe is a true veteran of legal cannabis markets, having spent over a decade as a serial cannabis entrepreneur. With multiple endeavors spanning 3 states, he has acquired a range of expertise that encompasses nearly every aspect of the cannabis business, beginning in the cultivation supply sector with lighting and hydroponic equipment for the medical market. From there, he dove ever-deeper into the industry, as a pioneer of the extraction sector in Colorado, co-owner of a medical cannabis dispensary in California, founder/owner of Madrone Oregon, which held 11 state cultivation licenses, and President of the ceramic accessories brand, Hive. Most recently, he served as the CEO of a premium California concentrates brand for three years, before bringing his extensive industry knowledge and leadership to GH Group.

 

Jocelyn Rosenwald, Director14

 

Jocelyn began her career as a Teach for America Corps member in New York City. She began her career in real estate investment in 2013 with Beach Front Properties LLC and managed a $500M portfolio of opportunistic real estate investments. In November of 2016, Rosenwald began supervising the operations of 4 funds in the regulated cannabis industry which would eventually be consolidated to form GH Group. Today, Rosenwald sits on the board of GH Group as a director. She holds a BA from the University of Pennsylvania, an MA in Education from Hunter College, and an MBA from UCLA Anderson School of Business. She is a Co-founder and current Board Director of GH Group.

 

 

14 Considered independent for the purposes of NI 58-101.

 

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Jamie Mendola, Director

 

Jamie Mendola is the Head of Strategy and M&A for Mercer Park L.P., which is a family office focused on the cannabis sector that controls the Sponsor. Mercer Park provides management services to Ayr Wellness, a U.S. multi-state operator with key assets in 7 states and the parent of the Sponsor of Mercer Park Brand Acquisition Corp. Jamie has nearly 20 years of experience as a public and private equity investor and has been an active investor in the cannabis industry for several years. Prior to joining Mercer Park, Jamie was the CEO and Portfolio Manager of Pacific Grove Capital, a San Francisco-based hedge fund focused primarily on investments in consumer, technology and cannabis. He also managed the Pacific Grove Opportunity Fund, which focused on special purpose acquisition companies (SPACs), and was one of the top performing hedge funds during its tenure. Pacific Grove was named the best new hedge fund by Hedge Funds Review in 2015 and Jamie received accolades from Institutional Investor as a Hedge Fund Rising Star and was named as one of Tomorrow’s Titans by The Hedge Fund Journal. Prior to founding Pacific Grove in 2014, Jamie was a Partner at Scout Capital, which had assets under management of approximately $7 billion. He was a senior member of the firm’s Investment and Risk Committees and helped to build Scout’s west coast office. Previously, Jamie worked as a Principal of Watershed Asset Management, a private equity analyst at JLL Partners and an investment banking analyst at J.P. Morgan Chase. Jamie graduated with a B.S. in Management, summa cum laude, from Binghamton University in 1999, where he was also a 4-year letter- winner in Baseball, and earned his M.B.A. from Stanford’s Graduate School of Business in 2005. He resides in San Francisco with his wife and four sons.

 

Lameck Humble Lukanga, Director15

 

Lameck Humble Lukanga was born in a small village in Uganda, where he spent the first decade of his life enduring genocide, famine and extreme poverty. At the age of 11, he and his family were granted a political asylum, allowing them to come to the United States to seek refuge, which he calls “the biggest blessing of my life.” Since, Humble has gone on to become a venerable young leader in finance. Humble owns Life Line Financial Group, a wealth management firm servicing world-class performers and leaders in business, sports and entertainment. In addition to Life Line Financial, Humble serves on the board of trustees for the University of New Mexico and the board of directors for various companies. He holds both a Bachelors and Masters in Business Administration from the Anderson School of Management at the University of New Mexico, received a Personal Finance Planning degree from UCLA and holds the CFP credential. Humble is passionate about social entrepreneurship, financial literacy, freedom and the orphans of Uganda. He is a philanthropist, teacher and self-proclaimed “ambassador of hope”.

 

George Raveling, Director16

 

One of basketball’s most impactful Hall of Fame coaches, George has defined his career, from basketball to business, by his relentless dedication to leadership and mentoring. In 1964, he joined the coaching staff at his alma mater, Villanova, before becoming the first African American basketball coach in the Pacific-8 Conference (now the Pac-12), the head coach at Washington State, the University of Iowa and USC, and an assistant coach of the medal-winning U.S. Olympic teams of 1984 and 1988. While coaching, he published two books and afterwards became a broadcaster for Fox Sports and CBS. Nike subsequently named George Director of International Basketball, kicking off his life as an executive; he would go on to key positions on the boards of the NCAA, NABC, USA Basketball, and Nike, Inc. He was the recipient of the Naismith Memorial Hall of Fame’s John W. Bunn Lifetime Achievement Award and the co-founder, with former NFL GM Michael Lombardi, of leadership program The Daily Coach. As a result of his dedication to civil rights and service as additional security during 1963’s famed March on Washington, George is the current guardian of the original draft of Martin Luther King’s “I Have a Dream” speech.

 

 

15 Considered independent for the purposes of NI 58-101.

16 Considered independent for the purposes of NI 58-101.

 

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Bob Hoban, Director 17

 

Bob Hoban sits at the center of a large commercial cannabis industry network, a cannabis industry ecosystem that he has cultivated since 2008 as an attorney, an entrepreneur, and an executive. Bob has earned a reputation as a cannabis industry dealmaker representing start-ups, entrepreneurs, governments, and companies in all stages of development. He is a visionary industry leader, who has founded, created, bought, and sold over fifteen of his own cannabis companies. He has served as a C-Suite executive in multiple companies and as a director on a number of boards. He is Co-Founder of Gateway Proven Strategies, a leading global cannabis industry consulting firm. He constructed the Hoban Law Group to become a leading full-service commercial cannabis industry law firm. And Bob served as a cannabis policy instructor at the University of Denver, where he lectured regarding cannabis regulation and policy. He has crafted cannabis policy solutions for over thirty different countries around the world and has consistently been recognized as one of the most influential people in the global cannabis industry by a variety of organizations and publications over the course of the past twelve years. Bob received his Ph.D. in Public Affairs from the University of Colorado, his J.D. from the University of Wyoming and his B.A. from Rutgers University.

 

Hector De La Torre, Director18

 

Hector’s career has been defined by his public service and outstanding record of leadership. From 2004-10, Hector represented the 50th District in southeast Los Angeles County to the California State Assembly, where he focused on health care, the environment, and good governance. Previously, he was a member of the South Gate City Council for 8 years, including serving 2 years as Mayor. In 2011, Hector became the Assembly-Appointed Member of the California Air Resources Board, a position he still holds, where he focuses on goods movement, environmental justice, and green technologies. He served as the executive director of the Transamerica Center for Health Studies, a national nonprofit focused on helping people better understand health coverage, and today is chair of the board at L.A. Care, the largest public health plan in America, as well as a trustee of Occidental College, where he received his B.A. He did his graduate studies at the Elliott School of International Affairs at the George Washington University. Hector has been an early and vocal advocate for cannabis policy reform and remains dedicated to serving the industry.

 

Cease Trade Orders, Bankruptcies, Penalties or Sanctions

 

To the knowledge of BRND and GH Group, no proposed nominee for election as a director or proposed executive officer of the Resulting Issuer has been, at the date of the prospectus or within the last 10 years: (a) a director, chief executive officer or chief financial officer of any company that, while that person was acting in that capacity, (i) was the subject of a cease trade or similar order or an order that denied BRND access to any exemption under securities legislation, for a period of more than 30 consecutive days, or (ii) was the subject of an event that resulted, after that person ceased to be a director or chief executive officer or chief financial officer, in BRND being the subject of such an order; or (b) a director or executive of a company that, while that person was acting in that capacity or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or was subject to or instituted any proceedings, transaction or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

 

No proposed director or executive officer of the Resulting Issuer has been subject to (a) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in making an investment decision.

 

To the knowledge of BRND, no proposed director or executive officer of the Resulting Issuer has, within the 10 years before the date of the prospectus, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, transaction or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.

 

 

17 Considered independent for the purposes of NI 58-101.

18 Considered independent for the purposes of NI 58-101.

 

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Majority Voting Policy

 

Consistent with NEO Exchange Requirements, the Resulting Issuer will adopt a majority voting policy prior to the first uncontested meeting of shareholders at which directors are to be elected where such meeting is subsequent to the Resulting Issuer ceasing to be “majority controlled” (as such term is defined in the NEO Exchange Listing Manual). The Resulting Issuer will be “majority controlled” by the GH Group Founders upon closing of the Transaction.

 

Forum Selection Provisions

 

The Resulting Issuer’s articles will include a provision providing for a forum for adjudication of certain disputes whereby, unless the Resulting Issuer approves or consents in writing to the selection of an alternative forum, the Superior Court of Justice of the Province of British Columbia, Canada and appellate courts therefrom shall be the sole and exclusive forum for: (i) any derivative action or proceeding brought on behalf of the Resulting Issuer ; (ii) any action asserting a claim for breach of a fiduciary duty owed by any director or officer of the Resulting Issuer to the Resulting Issuer ; (iii) any action asserting a claim arising pursuant to any provision of the BCBCA or the articles of the Resulting Issuer (as either may be amended from time to time); or (iv) any action asserting a claim otherwise related to the relationships among the Resulting Issuer , its affiliates and their respective shareholders, directors and/or officers, but does not include claims related to the business carried on by the Resulting Issuer or such affiliates. Any person or entity owning, purchasing or otherwise acquiring any interest, including without limitation any registered or beneficial ownership thereof, in the securities of the Resulting Issuer shall be deemed to have notice of and consented to the provisions of the articles.

 

Conflicts of Interest

 

Certain of the proposed directors and executive officers of the Resulting Issuer 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 Resulting Issuer from time to time. The BCBCA requires, among other things, that the directors and executive officers of the Resulting Issuer act honestly and in good faith with a view to the best interest of the Resulting Issuer , to disclose any personal interest which they may have in any material contract or transaction which is proposed to be entered into with the Resulting Issuer 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.

 

Directors’ and Officers’ Liability Insurance

 

It is intended that the Resulting Issuer will seek to carry a directors’ and officers’ liability insurance policy which will be designed to protect the Resulting Issuer and its directors and officers against any legal action which may arise as a result of wrongful acts on the part of directors and/or officers of the Resulting Issuer . Any such policy will be written with a maximum limit and be subject to a corporate deductible on all claims.

 

DIRECTORS’ AND EXECUTIVE OFFICERS’ COMPENSATION

 

The Resulting Issuer will operate in a competitive and rapidly evolving market. To succeed in this environment and to achieve its business and financial objectives, the Resulting Issuer needs to attract, retain and motivate a highly talented team of executives. It is expected that the Resulting Issuer’s team will possess and demonstrate strong leadership and management capabilities, as well as foster the Resulting Issuer’s company culture, which is at the foundation of its success and remains a pivotal part of its everyday operations.

 

The Resulting Issuer’s executive compensation program will be designed to achieve the following objectives:

 

provide market-competitive compensation opportunities in order to attract and retain talented, high-performing and experienced executive officers, whose knowledge, skills and performance are critical to the Resulting Issuer’s success;

 

motivate these executive officers to achieve the Resulting Issuer’s business objectives;

 

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align the interests of the Resulting Issuer’s executive officers with those of its shareholders by tying a meaningful portion of compensation directly to the long-term value and growth of the Resulting Issuer’s business; and

 

provide incentives that encourage appropriate levels of risk-taking by the executive team.

 

It is expected that the “named executive officers” of the Resulting Issuer will include Kyle Kazan as the Chief Executive Officer, Graham Farrer as President, Derek Higgins as Chief Financial Officer, Jamin Horn as Corporate Secretary, Daryl Kato as Chief Marketing Officer and Joe Andreae as Vice President, Business Development. An issuer’s “named executive officers” are comprised of its Chief Executive Officer and Chief Financial Officer (or individuals who serve in similar capacities), and its next three most highly compensated executive officers, other than the Chief Executive Officer and Chief Financial Officer, whose total compensation is, individually, more than C$150,000.

 

It is anticipated that the Resulting Issuer Board will adopt a written charter for the C&CG Committee that establishes, among other things, the C&CG Committee’s purpose and its responsibilities with respect to executive compensation (see “Corporate Governance – C&CG Committee”). The charter of the C&CG Committee will provide that such committee shall, among other things, assist the Resulting Issuer Board in its oversight of executive compensation, management development and succession, director compensation and executive compensation disclosure.

 

Although formal executive compensation arrangements for the executive officers of the Resulting Issuer have not yet been determined, it is anticipated that the Resulting Issuer will adopt a compensation structure for executive officers that is consistent with its peers and designed to provide strong incentive for business growth.

 

The Resulting Issuer will continue to evaluate its philosophy and compensation programs as circumstances require and plan to review compensation on an annual basis. As part of this review process, it is expected that the Resulting Issuer will be guided by the philosophy and objectives outlined above, as well as other factors which may become relevant, such as the cost to find a replacement for a key employee.

 

The Resulting Issuer’s annual retainer fee or attendance fee for directors has not been established. However, the Resulting Issuer may establish directors’ fees for non- executive directors in the future, in consultation with a compensation consultant or advisor, and will reimburse directors for all reasonable expenses incurred in order to attend meetings.

 

All current directors and officers of BRND , as well as all those to be appointed at closing, will be indemnified on customary terms by both BRND and GH Group.

 

Benchmarking

 

The executive team is expected to establish an appropriate comparator group for purposes of setting the future compensation of the named executive officers (“NEOs”).

 

Elements of Compensation

 

The compensation of the NEOs is expected to be comprised of the following major elements: (a) base salary; (b) an annual, discretionary cash bonus; and (c) long-term equity incentives, consisting of stock options, restricted stock awards, performance compensation awards and/or other applicable awards granted under the Equity Incentive Plan and any other equity plan that may be approved by the Resulting Issuer Board from time to time. These principal elements of compensation are described below.

 

Base Salary

 

Base salaries are intended to provide an appropriate level of fixed compensation that will assist in employee retention and recruitment. Base salaries will be determined on an individual basis, taking into consideration the past, current and potential contribution to the Resulting Issuer’s success, the NEO’s experience and expertise, the position and responsibilities of the NEO, and competitive industry pay practices for other high growth, premium brand companies of similar size and revenue growth potential.

 

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Annual Cash Bonus

 

Annual bonuses may be awarded based on qualitative and quantitative performance standards, and will reward performance of the NEO individually. The determination of a NEO’s performance may vary from year to year depending on economic conditions and conditions in the cannabis industry, and may be based on measures such as stock price performance, the meeting of financial targets against budget (such as adjusted funds from operations), the meeting of acquisition objectives and balance sheet performance.

 

Equity Incentive Plan

 

In connection with the Transaction, BRND Shareholders will be asked to approve the Equity Incentive Plan at the BRND Meeting. BRND may grant Options and other securities upon completion of the Transaction. The Resulting Issuer Board may also decide to grant new Options and other securities pursuant to the Equity Incentive Plan in the future. For further details in respect of the Equity Incentive Plan, please see “Equity Incentive Plan Description – Summary of Equity Incentive Plan”.

 

Pension Plan Benefits

 

The Resulting Issuer does not intend to implement any deferred compensation plan, pension plan or other forms of funded or unfunded retirement compensation for its employees that provides for payments or benefits at, following or in connection with retirement.

 

Compensation, Employment Agreements, Termination and Change of Control Benefits

 

Employment agreements between the Resulting Issuer and its NEOs are expected to be executed in connection with or following closing of the Transaction. It is expected that such employment agreements will contain customary change of control provisions. The specific terms of the employment contracts to be entered into between the Resulting Issuer and its NEOs will be subject to review and approval by the Resulting Issuer Board and, other than as described below, have not yet been finalized as of the date of this prospectus. Upon completion of the Transaction, it is expected that the Resulting Issuer Board will review and adjust the executive compensation for its NEOs to the extent necessary to ensure that the compensation is in line with the Resulting Issuer’s compensation philosophy and objectives and aligned with market practices of similar issues. Accordingly, the information provided below is subject to change following completion of the Transaction.

 

In respect of the year ended December 31, 2021, the NEOs are expected to have base salaries in the ranges of $220,000 to $450,000, respectively. It is expected that none of the NEOs will be entitled to perquisites or other personal benefits which, in the aggregate, will be worth over $50,000 or over 10% of their base salary.

 

Following completion of the Transaction, the Resulting Issuer will continue to evaluate its philosophy and compensation programs as circumstances require and plans to review compensation on an annual basis. As part of this review process, the Resulting Issuer expects to be guided by the philosophy and objectives outlined above, as well as other factors which may become relevant, such as the cost to the Resulting Issuer if it were required to find a replacement for a key employee.

 

Director Compensation

 

It is anticipated that the Resulting Issuer will pay compensation to its directors, which may be comprised of cash (including annual fees for attending meetings of the Resulting Issuer Board and additional compensation for acting as chairs of committees of the Resulting Issuer Board), stock options and other applicable awards granted in accordance with the terms of the Equity Incentive Plan and the NEO Exchange Policies, or a combination of both. It is anticipated that the Resulting Issuer will grant Options pursuant to its Equity Incentive Plan to each of its independent directors upon the consummation of the Transaction and thereafter annually. It is anticipated that the directors will be reimbursed for any out-of-pocket travel expenses incurred in order to attend meetings of the Resulting Issuer Board, committees of the Resulting Issuer Board or meetings of the shareholders of the Resulting Issuer . It is also anticipated that the Resulting Issuer will obtain customary insurance for the benefit of its directors and enter into indemnification agreements with its directors pursuant to which the Resulting Issuer will agree to indemnify its directors to the extent permitted by applicable law.

 

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INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

 

As of the date of this prospectus, no current, former, or proposed director, executive officer or employee of BRND or GH Group, nor any of their respective associates, is or has been at any time during the most recently completed financial year, indebted to BRND of GH Group, or is expected to be indebted to BRND or GH Group following the completion of the Transaction, other than routine indebtedness (as defined under NI 51-102).

 

AUDIT COMMITTEE

 

The following disclosure is based on the present expectations of the Resulting Issuer with respect to the formal establishment of the Audit Committee (the “Audit Committee”) of the Resulting Issuer Board (without changes to the proposed composition) and the ratification and adoption of its proposed mandate (without any material modifications) will occur following completion of the Transaction. However, such disclosure remains subject to revision prior or subsequent to the Effective Date. See “Notice to Readers” in this prospectus. The proposed mandate of the Audit Committee is set out in Appendix E to this prospectus.

 

Composition of the Resulting Issuer Audit Committee

 

On the Effective Date, the Audit Committee is expected to consist of Lameck Humble Lukanga, Jocelyn Rosenwald and Hector De La Torre. It is expected that Lameck Humble Lukanga will be the chair of the Audit Committee. Each member of the Audit Committee will be independent (as defined in National Instrument 52-110 – Audit Committees (“NI 52-110”)) and none is expected to receive, directly or indirectly, any compensation from the Resulting Issuer other than for service as a member of the Resulting Issuer Board and its committees. All proposed members of the Audit Committee are considered to be financially literate (as defined under NI 52-110).

 

For the relevant education and experience of the members of the Audit Committee, please refer to the biographies of Lameck Humble Lukanga, Jocelyn Rosenwald and Hector De La Torre in “Directors and Executive Officers — Biographies” in this prospectus.

 

Pre-Approval Policies and Procedures

 

The Audit Committee will adopt requirements regarding pre-approval of non-audit services as part of its Audit Committee Mandate. The Audit Committee Mandate will require that the Audit Committee must approve in advance any retainer of the auditors to perform any non-audit service to the Resulting Issuer (together with all non-audit service fees) that it deems advisable in accordance with applicable requirements and the Resulting Issuer Board approved policies and procedures. The Audit Committee intends to consider the impact of such service and fees on the independence of the auditor. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee; however, the decisions of any member of the Audit Committee to whom this authority has been delegated must be presented to the full Audit Committee at its next scheduled Audit Committee meeting.

 

External Audit Service Fees

 

All audit and non-audit services to be provided by the Resulting Issuer’s external auditor will be required to be pre-approved by the Audit Committee. It is expected that on an annual basis, the Resulting Issuer’s Audit Committee will pre-approve a budget for certain specific non-audit services such as assistance with tax returns.

 

CORPORATE GOVERNANCE

 

Unless otherwise indicated, the following disclosure is based on the present expectations of the Resulting Issuer in respect of its corporate governance practices and the formal establishment of committees of the Resulting Issuer Board described below (without changes to the proposed composition) and the ratification and adoption of their respective proposed mandates (without any material modifications) will occur following completion of the Transaction. However, such disclosure remains subject to revision prior or subsequent to the Effective Date. See “Notice to Readers” in this prospectus.

 

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Statement of Corporate Governance Practices

 

The Resulting Issuer’s corporate governance disclosure obligations are set out in the Canadian Securities Administrators’ NI 58-101, NP 58-201 and NI 52-110. These instruments set out a series of guidelines and requirements for effective corporate governance (collectively, the “Guidelines”). The Guidelines address matters such as the constitution and independence of corporate boards, the functions to be performed by boards and their committees and the effectiveness and education of board members. NI 58-101 requires the disclosure by each listed corporation of its approach to corporate governance with reference to the Guidelines.

 

Set out below is a description of the anticipated approach of the Resulting Issuer to corporate governance in relation to the Guidelines.

 

Board of Directors

 

On the Effective Date, it is expected that the Resulting Issuer Board will be comprised of eight (8) directors: Kyle Kazan, Graham Farrar, Jamie Mendola, Jocelyn Rosenwald, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De La Torre. The names, municipality of residence and positions with the Resulting Issuer of the persons who are expected to serve as directors and executive officers of the Resulting Issuer after giving effect to the Transaction are set out below. Each of the proposed members of the Resulting Issuer Board will be formally appointed to the Resulting Issuer Board following closing of the Transaction.

 

Directors  
   
Name and Province/State and Country of Residence Present Principal Occupation

Kyle Kazan

Palos Verdes Peninsula, CA, USA

Chief Executive Officer, GH Group

Graham Farrar

Santa Barbara, CA, USA

President, GH Group

Jamie Mendola

San Francisco, CA, USA

Head of Strategy and M&A, Mercer Park L.P.

Jocelyn Rosenwald(1)

Costa Mesa, CA, USA

Director of Acquisitions and Asset Management, Beach Front Property Management

Lameck Humble Lukangka(1)

 Los Angeles, CA, USA

Principal, Life Line Financial Group

George Raveling

Los Angeles, CA, USA

Self-Employed Consultant, Coaching for Success

Bob Hoban

Denver, CO, USA

Principal Attorney of Hoban Law Group and Global Proven Strategies

Hector De La Torre(1)

Los Angeles, CA, USA

Director, California Air Resources Board

 

Notes:  
   
(1) Proposed member of the Audit Committee.

 

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Jonathan Sandelman, Charles Miles, Lawrence Hackett and Andrew Smith are the current directors of BRND and will be subject to liability as directors for and misrepresentation in this prospectus. The following proposed directors are not current directors of BRND and will not become directors of the Resulting Issuer until the completion of the Transaction and therefore they will not be subject to liability as directors for any misrepresentation in this prospectus: Kyle Kazan, Graham Farrar, Jocelyn Rosenwald, Jamie Mendola, Lameck Humble Lukanga, George Raveling, Bob Hoban and Hector De La Torre.

 

Each director of the Resulting Issuer will thereafter be required to be elected by Resulting Issuer Shareholders at each annual meeting of shareholders, and will hold office until the next annual meeting of the Resulting Issuer, unless: (i) his or her office is earlier vacated in accordance with the Articles of the Resulting Issuer; or (ii) he or she becomes disqualified to act as a director.

 

The primary function of the Resulting Issuer Board will be to supervise the management of the business and affairs of the Resulting Issuer, including the responsibility for the strategic planning process, risk management, succession planning, approving and communicating a communications policy and disclosure policy, setting internal controls, corporate governance, senior management compensation and oversight, director compensation and assessment and approving material transactions and contracts. The Resulting Issuer Board will also be responsible for reviewing the succession plans for the Resulting Issuer, including appointing, training and monitoring senior management to ensure that the Resulting Issuer Board and management have appropriate skill and experience. The Resulting Issuer Board will establish an Audit Committee and C&CG Committee. See “ Audit Committee” and “Corporate Governance – C&CG Committee” for a description of each of the proposed committees of the Resulting Issuer Board, including the proposed membership thereof, as applicable.

 

Following the Effective Date and consistent with NEO Exchange Requirements, the Resulting Issuer Board will adopt a majority voting policy prior to the first uncontested meeting of shareholders at which directors are to be elected where such meeting is subsequent to the Resulting Issuer ceasing to be “majority controlled” (as such term is defined in the NEO Exchange Listing Manual). The Resulting Issuer will be “majority controlled” by the GH Group Founders upon closing of the Transaction.. See “Directors and Executive Officers — Majority Voting Policy” in this prospectus.

 

The Resulting Issuer Board will delegate to the applicable committee those duties and responsibilities set out in each committee’s proposed mandate. The primary mandate of the Audit Committee will be to provide assistance to the Resulting Issuer Board in fulfilling its responsibility to Resulting Issuer Shareholders, potential shareholders and the investment community, to oversee the work and review the qualifications and independence of the external auditors of the Resulting Issuer, to review the financial statements of the Resulting Issuer and public disclosure documents containing financial information and to assist BRND with the legal compliance and ethics programs as established by management and by the Resulting Issuer Board and as required by law.

 

The primary mandate of the C&CG Committee with respect to compensation will be to approve corporate goals and objectives relevant to the compensation of the Resulting Issuer’s CEO and to make recommendations with respect to the Resulting Issuer’s CEO compensation based on its evaluation, to recommend compensation Transactions for the directors, committee members and chairs, and the Resulting Issuer Chairman, to administer and interpret the incentive compensation and equity compensation plans, and to approve the appointment, compensation and terms of employment for the Resulting Issuer’s CFO and senior management of Resulting Issuer. The primary mandate of the C&CG Committee with respect to corporate governance will be to assess the effectiveness of the Resulting Issuer Board, of committees of the Resulting Issuer Board and of the directors of the Resulting Issuer Board, to recommend to the Resulting Issuer Board candidates for election as directors and candidates for appointment to Board committees and to advise the Resulting Issuer Board on enhancing Resulting Issuer’s corporate governance through a continuing assessment of Resulting Issuer’s approach to corporate governance.

 

Independence of the Resulting Issuer Board

 

NI 58-101 defines an “independent director” as a director who has no direct or indirect material relationship with Resulting Issuer. A “material relationship” is in turn defined as a relationship which could, in the view of the Resulting Issuer Board, be reasonably expected to interfere with such member’s independent judgment. In determining whether a particular director is an “independent director” or a “non-independent director”, the Resulting Issuer Board will consider the factual circumstances of each director in the context of the Guidelines.

 

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It is expected that the Resulting Issuer Board will be comprised of eight (8) members upon completion of the Transaction. Kyzle Kazan, Graham Farrar and Jamie Mendola are not considered independent for the purposes of NI 58- 101 because of,: (i) in respect of Kyle Kazan and Graham Farrar, their anticipated roles as executive officers of the Resulting Issuer upon completion of the Transaction, and (ii) in respect of Jamie Mendola, his position as Head of Strategy and M&A of Mercer Park, L.P., which is the parent of Mercer.

 

Executive Chairman

 

Kyle Kazan will serve as the Executive Chairman of the Resulting Issuer. The Executive Chairman’s role will be to coordinate the management, development and effective functioning of the Resulting Issuer Board and provide leadership. The Executive Chairman and each committee can also engage outside consultants without consulting management. This is designed to ensure they receive independent advice as they feel necessary.

 

Meeting In-camera

 

The Resulting Issuer Board and committees are expected to hold regularly scheduled meetings at each quarterly board meeting without management and non-independent directors, including Mr. Kazan, the anticipated chairperson of the Resulting Issuer Board. These discussions are intended to generally form part of the committee chairs’ reports to the Resulting Issuer Board. The BRND’s Chairman intends to encourage open and candid discussions among the independent directors by providing them with an opportunity to express their views on key topics before decisions are taken.

 

Succession Planning

 

The C&CG Committee (with the advice of the BRND’s Chairman) is expected to provide primary oversight of succession planning for senior management, the performance assessment of the Resulting Issuer’s CEO, and the Resulting Issuer’s CEO’s assessments of the other senior officers. The C&CG Committee is expected to conduct in-depth reviews of succession options relating to senior management positions and, when appropriate, is expected to approve the rotation of senior executives into new roles to broaden their responsibilities and experiences and deepen the pool of internal candidates for senior management positions. The C&CG Committee is expected to develop an emergency succession plan and contingency plan for the Resulting Issuer’s CEO for a scenario in which the CEO suddenly and unexpectedly was unable to perform his duties for an extended period.

 

The independent directors are expected to participate in the assessment of the performance of the Resulting Issuer’s CEO every year. The Resulting Issuer Board is expected to approve all appointments of executive officers.

 

Director Term Limits/Mandatory Retirement

 

The Resulting Issuer Board will consider the matters of term limits and mandatory retirement. At this time, BRND does not expect that these types of policies would be appropriate for the Resulting Issuer Board. BRND believes that a rigorous self-evaluation process combined with input, where appropriate, from an external third party governance firm would be a more effective and transparent manner to ensure that the Resulting Issuer’s directors add value and remain strong contributors.

 

Diversity

 

Board of Directors

 

BRND recognizes the benefits that diversity brings to BRND. The Resulting Issuer Board will aim to be comprised of directors who have a range of perspectives, insights and views in relation to the issues affecting the Resulting Issuer. This belief in diversity is expected to be reflected in a written Diversity Policy that is expected to be adopted by the Resulting Issuer Board. The Diversity Policy is expected to state that the Resulting Issuer Board should include individuals from diverse backgrounds, having regard to, among other things, gender, status, age, business experience, professional expertise, education, nationality, race, culture, language, personal skills and geographic background. Accordingly, consideration of whether the diverse attributes highlighted in the policy are sufficiently represented on the Resulting Issuer Board will be an important component of the selection process for new Resulting Issuer Board members.

 

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Management

 

BRND believes that a diversity of backgrounds, opinions and perspectives and a culture of inclusion helps to create a healthy and dynamic workplace, which improves overall business performance. BRND recognizes the value of ensuring that the Resulting Issuer has leaders who are women. The Resulting Issuer will work to develop its employees internally and provide them with opportunities to advance their careers. The Resulting Issuer will build a strategy and execution plan to work towards increasing the representation of women in leadership roles at all levels of the organization. One of the objectives of this initiative will be to ensure that there are highly-qualified women within the Resulting Issuer available to fill vacancies in executive officer and other leadership positions. In appointing individuals to its leadership team, both at the corporate level and business vertical level, the Resulting Issuer will weigh a number of factors, including the skills and experience required for the position and the personal attributes of the candidates.

 

Female Representation

 

Two (2) of the proposed directors of the Resulting Issuer are female, and BRND recognizes the value of the contribution of members with diverse attributes on the Resulting Issuer Board and will be committed to ensuring that there is representation of women on the Resulting Issuer Board in the future. However, the Resulting Issuer does not intend to establish a target regarding the number of women on the Resulting Issuer Board. BRND believes a target would not be the most effective way of ensuring the Resulting Issuer Board is comprised of individuals with diverse attributes and backgrounds. The Resulting Issuer will, however, evaluate the appropriateness of adopting targets in the future.

 

Three (3) of the 10 proposed executive officers of the Resulting Issuer are female. The Resulting Issuer does not intend to establish a target regarding the number of women in executive officer or senior leadership positions. BRND believes that the most effective way to achieve its goal of increasing the representation of women in leadership roles at all levels of the organization is to identify high-potential women within the Resulting Issuer and work with them to ensure they develop the skills, acquire the experience and have the opportunities necessary to become effective leaders. The Resulting Issuer will, however, evaluate the appropriateness of adopting targets in the future.

 

Orientation and Continuing Education

 

As set out in the proposed Resulting Issuer Board Mandate, the Resulting Issuer will have a policy of making a full initial orientation and continuing education process available to Board members. All new directors are expected to be provided with an initial orientation regarding the nature and operation of the Resulting Issuer’s business and the affairs of the Resulting Issuer and as to the role of the Resulting Issuer Board and its committees, as well as the legal obligations of a director of the Resulting Issuer. Existing directors will also be periodically updated on these matters.

 

In order to orient new directors as to the nature and operation of the Resulting Issuer’s business, they will be given the opportunity to meet with key members of the management team to discuss the Resulting Issuer’s business and activities. In addition, new directors will receive copies of Board materials, corporate policies and procedures, and other information regarding the business and operations of the Resulting Issuer.

 

Resulting Issuer Board members will be expected to keep themselves current with industry trends and developments and will be encouraged to communicate with management and, where applicable, auditors, advisors and other consultants of the Resulting Issuer. Board members will have access to the Resulting Issuer’s in-house and external legal counsel in the event of any questions or matters relating to Resulting Issuer Board members’ corporate and director responsibilities and to keep themselves current with changes in legislation. Resulting Issuer Board members have full access to the Resulting Issuer’s records.

 

It is expected that the Resulting Issuer will provide on-going continuous education programs through key business area presentations, business updates and operations site visits as appropriate.

 

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Social Responsibility

 

The Resulting Issuer’s Board’s role is expected to include considering and reviewing with management the Resulting Issuer’s fundamental policies and internal controls pertaining to environment, health and safety, and sustainability, and review procedures designed to minimize environmental, occupational health and safety and other risks while undertaking due consideration of opportunities and performance enhancement thereto. The Resulting Issuer’s Board’s role is also expected to include seeking to verify that management proactively identifies and monitors the impact of proposed legislation and other emerging issues in environmental and sustainability areas, that the Resulting Issuer's business is conducted in a socially responsible and ethical manner and that management engages, respects and supports the communities in which the Resulting Issuer works.

 

Nomination of Directors

 

The C&CG Committee’s role will be to recommend to the Resulting Issuer Board candidates for election as directors and candidates for appointment to Resulting Issuer Board committees as set out in the C&CG Committee Mandate. BRND’s Chairman is also expected to consult with the C&CG Committee regarding candidates for nomination or appointment to the Resulting Issuer Board.

 

Board and Committee Assessment

 

The C&CG Committee’s role is expected to be to assess the effectiveness of the Resulting Issuer Board as a whole, the committees of the Resulting Issuer Board and the contribution of individual directors.

 

Audit Committee

 

The Audit Committee is expected to be comprised of three (3) directors of the Resulting Issuer: (i) Lameck Humble Lukanga; (ii) Jocelyn Rosenwald; and (iii) Hector De La Torre, all of whom will be independent for purposes of NI 52-110. The role and operation of the Audit Committee are set out in the Resulting Issuer’s proposed Audit Committee Mandate, the text of which is included as Appendix E to this prospectus. See “Audit Committee”.

 

The members of the Audit Committee will be appointed annually by the Resulting Issuer Board, and each member of the Audit Committee will serve at the pleasure of the Resulting Issuer Board until the member resigns, is removed, or ceases to be a member of the Resulting Issuer Board.

 

Compensation, Nomination & Corporate Governance Committee

 

The Resulting Issuer will establish a majority or fully independent C&CG Committee following completion of the Transaction. It is expected that the C&CG Committee will conduct its business on the basis of majority approval, which encourages an objective process for determining compensation.

 

The members of the C&CG Committee are anticipated to be appointed annually by the Resulting Issuer Board, and it is expected that each member of the C&CG Committee will serve at the pleasure of the Resulting Issuer Board until the member resigns, is removed, or ceases to be a member of the Resulting Issuer Board.

 

To fulfil its role in developing the Resulting Issuer’s approach to compensation issues, it is anticipated that the C&CG Committee shall:

 

(i) review and approve corporate goals and objectives relevant to the compensation of the Resulting Issuer’s CEO;

 

(ii) evaluate the performance of the Resulting Issuer’s CEO in light of those corporate goals and objectives, and make recommendations to the Resulting Issuer Board with respect to the compensation level of the Resulting Issuer’s CEO based on its evaluation;

 

(iii) review the recommendations to the C&CG Committee of the Resulting Issuer’s CEO respecting the appointment, compensation and other terms of employment of the Resulting Issuer’s CFO, all senior management reporting directly to the Resulting Issuer’s CEO and all other officers appointed by the Resulting Issuer Board and, if advisable, approve and recommend for board approval, with or without modifications, any such appointment, compensation and other terms of employment;

 

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(iv) administer and interpret the Resulting Issuer’s share compensation agreements and its policies respecting the grant of options or other share-based compensation or the sale of shares thereunder, and review and recommend for approval of the Resulting Issuer Board the grant of options thereunder and the terms thereof;

 

(v) review the Resulting Issuer’s pension and retirement Transactions in light of the overall compensation policies and objectives of the Resulting Issuer;

 

(vi) review employment agreements between the Resulting Issuer and the Resulting Issuer’s CEO, and between the Resulting Issuer and executive officers, and amendments to the terms of such agreements shall be subject to review and recommendation by the C&CG Committee and approval by the Resulting Issuer Board;

 

(vii) review management’s policies and practices respecting the Resulting Issuer’s compliance with applicable legal prohibitions, disclosure requirements or other requirements on making or arranging for personal loans to senior officers or directors or amending or extending any such existing personal loans or Transactions;

 

(viii) recommend to the Resulting Issuer Board for its approval the terms upon which directors shall be compensated, including the Chairman (if applicable) and those acting as committee chairs and committee members;

 

(ix) review on a periodic basis the terms of and experience with the Resulting Issuer’s executive compensation programs for the purpose of determining if they are properly coordinated and achieving the purpose for which they were designed and administered;

 

(x) review executive compensation disclosure before the Resulting Issuer publicly discloses this information;

 

(xi) submit a report to the Resulting Issuer Board on human resources matters at least annually; and

 

(xii) prepare an annual report for inclusion in the Resulting Issuer’s management information circular to Resulting Issuer Shareholders respecting the process undertaken by the committee in its review of compensation issues and prepare a recommendation in respect of the compensation of the Resulting Issuer’s CEO.

 

It is expected that the C&CG Committee’s role with respect to corporate governance is expected to include, among other things:

 

(i) developing and updating a long-term plan for the composition of the Resulting Issuer Board that takes into consideration the current strengths, competencies, skills and experience of the Resulting Issuer Board members, retirement dates and the strategic direction of the Resulting Issuer, and reporting to the Resulting Issuer Board thereon at least annually;

 

(ii) undertaking on an annual basis an examination of the size of the Resulting Issuer Board, with a view to determining the impact of the number of directors, the effectiveness of the Resulting Issuer Board, and recommending to the Resulting Issuer Board, if necessary, a reduction or increase in the size of the Resulting Issuer Board;

 

(iii) endeavouring, in consultation with the Resulting Issuer’s Chairman (or Lead Director, if applicable), to seek to ensure that an appropriate system is in place to evaluate the effectiveness of the Resulting Issuer Board as a whole, each of the committees of the Resulting Issuer Board and each individual director of the Resulting Issuer Board with a view to ensuring that they are fulfilling their respective responsibilities and duties;

 

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(iv) in consultation with the Resulting Issuer’s Chairman (or Lead Director, if applicable), and the Resulting Issuer’s CEO, annually or as required, recruiting and identifying individuals qualified to become new board members and recommending to the Resulting Issuer Board new director nominees for the next annual meeting of Resulting Issuer Shareholders;

 

(v) in consultation with the Resulting Issuer’s Chairman (or Lead Director, if applicable), annually or as required, identifying and recommending to the Resulting Issuer Board, the individual directors to serve on the various committees, taking into consideration (A) the competencies and skills that the Resulting Issuer Board considers to be necessary for the Resulting Issuer Board, as a whole, to possess, (B) the diversity of the Resulting Issuer Board composition, including whether targets have been adopted for women, visible minorities, indigenous people and people with disabilities on the Resulting Issuer Board or in executive officer positions, (C) the competencies and skills that the Resulting Issuer Board considers each existing director to possess, and (D) the competencies and skills each new nominee will bring to the boardroom;

 

(vi) conducting a periodic review of the Resulting Issuer’s corporate governance policies and making policy recommendations aimed at enhancing board and committee effectiveness;

 

(vii) reviewing overall governance principles, monitoring disclosure and best practices of comparable and leading companies, and bringing forward to the Resulting Issuer Board a list of corporate governance issues for review, discussion or action by the Resulting Issuer Board or its committees;

 

(viii) reviewing the disclosure in the Resulting Issuer’s public disclosure documents relating to corporate governance practices and preparing recommendations to the Resulting Issuer Board regarding any other reports required or recommended on corporate governance;

 

(ix) proposing agenda items and content for submission to the Resulting Issuer Board related to corporate governance issues and providing periodic updates on recent developments in corporate governance to the Resulting Issuer Board;

 

(x) conducting a periodic review of the relationship between management and the Resulting Issuer Board, particularly in connection with a view to ensuring effective communication and the provision of information to directors in a timely manner;

 

(xi) reviewing annually the Resulting Issuer Board Mandate and the mandates for each committee of the Resulting Issuer Board, together with the position descriptions, if any, of each of the Resulting Issuer’s Chairman, CEO, director and committee chairs, and where necessary, recommending changes to the Resulting Issuer Board;

 

(xii) reviewing and recommending the appropriate structure, size, composition, mandate and members for the committees, and recommending for board approval the appointment of each to board committees;

 

(xiii) recommending procedures to seek to ensure that the Resulting Issuer Board and each of its committees function independently of management;

 

(xiv) monitoring conflicts of interest (real or perceived) of both the Resulting Issuer Board and management in accordance with the Code, and other policies on conflicts of interest and ethics; and

 

(xv) recommending procedures to permit the Resulting Issuer Board to meet on a regular basis without management or non-independent directors.

 

The C&CG Committee is expected to make recommendations for candidates to the Resulting Issuer Board and candidates for appointment to various committees of the Resulting Issuer Board, and in making such recommendations is expected to consider the competencies and skills that the Resulting Issuer Board considers to be necessary for the Resulting Issuer Board as a whole to possess, the competencies and skills that the Resulting Issuer Board considers each existing director to possess, and the competencies and skills each new nominee will bring to the Resulting Issuer’s boardroom. It is expected that the responsibility for approving new nominees to Resulting Issuer Board will fall to the full Resulting Issuer Board. It is also expected that the C&CG Committee will be able to make, where appropriate, recommendations for the removal of a director from the Resulting Issuer Board or from a committee of the Resulting Issuer Board if he or she is no longer qualified to serve as a director under applicable requirements or for any other reason it considers appropriate.

 

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Code of Conduct

 

The Resulting Issuer Board is expected to consider whether to adopt a written code of conduct in due course following the closing of the Transaction that applies to all of its directors, officers and employees. The objective of the code of conduct, if adopted, would be to provide guidelines for maintaining the Resulting Issuer’s integrity, reputation, honesty, objectivity and impartiality. If adopted, the code of conduct is expected to address, among other things, conflicts of interest, protection of assets, confidentiality, fair dealing with shareholders, competitors and employees, insider trading, compliance with laws and reporting any illegal or unethical behaviour. As part of the code of conduct, if adopted, any person subject to the code of conduct would be required to avoid or fully disclose interests or relationships that are harmful or detrimental to the Resulting Issuer’s best interests or that may give rise to real, potential or the appearance of conflicts of interest. The Resulting Issuer Board would have ultimate responsibility for the stewardship of the code of conduct.

 

Key Governance Documents

 

Following completion of the Transaction, it is expected that many policies and practices will support the corporate framework of the Resulting Issuer. The following documents will constitute key components of the Resulting Issuer’s corporate governance system and are expected to be made available by the Resulting Issuer subsequent to completion of the Transaction:

 

Audit Committee Mandate;

C&CG Committee Mandate;

Disclosure and Insider Trading Policy (which Insider Trading Policy shall apply to the Resulting Issuer’s directors, executives and other employees); and

Code of Conduct (if adopted).

 

REGULATORY APPROVALS

 

It is a condition precedent in favour of each of BRND and the sellers under each Definitive GH Group Agreement to the completion of the Transaction that (i) the NEO Exchange shall have approved the Transaction as qualifying as BRND’s “qualifying transaction” within the meaning of the NEO Exchange Listing Manual, (ii) clearance is received from the applicable Canadian securities regulators, including the OSC, in respect of this prospectus, and (iii) clearance is received from the applicable United States antitrust regulators under the HSR Act in respect of the Definitive GH Group Agreement.

 

Notice to and/or the approval or consent by the following U.S. State and local authorities may also be required in connection with completion of the Transaction:

 

California Bureau of Cannabis Control;

California Department of Food and Agriculture;

California Department of Public Health;

City of American Canyon;

City of Port Hueneme;

City of Willits;

City of Mendota;

City of Dunsmuir;

City of Lemon Grove;

City of Eureka;

 

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City of Walnut Creek;

City of Willows;

City of Napa;

City of Lompoc;

City of Chula Vista;

City and County of San Francisco;

City of Salinas;

City of Moreno Valley;

City of San Luis Obispo; and

City of Hesperia.

 

RISK FACTORS

 

The following are certain factors relating to the business of BRND and/or the Resulting Issuer, as applicable. These risks and uncertainties are not the only ones we face. The following information is a summary only of certain risk factors and is qualified in its entirety by reference to, and must be read in conjunction with, the detailed information appearing elsewhere in this prospectus. Additional risks and uncertainties not presently known to BRND or currently deemed immaterial by BRND may also impair the operations of BRND and/or the Resulting Issuer, as applicable. If any such risks actually occur, shareholders of BRND could lose all or part of their investment and the business, financial condition, liquidity, results of operations and prospects of BRND and/or the Resulting Issuer, as applicable, could be materially adversely affected and the ability of the Resulting Issuer to implement its growth plans could be adversely affected.

 

The acquisition of any of the securities of BRND is speculative, involving a high degree of risk and should be undertaken only by persons whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the securities of BRND should not constitute a major portion of an individual’s investment portfolio and should only be made by persons who can afford a total loss of their investment. BRND’s shareholders should evaluate carefully the following risk factors associated with BRND’s securities, along with the risk factors described elsewhere in this prospectus.

 

Risks Related to Legality of Cannabis

 

While legal under applicable U.S. State law, the Resulting Issuer’s business activities are illegal under U.S. federal law.

 

Investors are cautioned that in the United States, cannabis is largely regulated at the State level. To BRND’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. Additional States have pending legislation regarding the same. Although each State in which the Resulting Issuer will operate authorizes, as applicable, medical and/or adult-use cannabis production and distribution by licensed or registered entities, and numerous other States have legalized cannabis in some form, 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 under any and all circumstances under the Substances Act. The concepts of “medical cannabis”, “retail cannabis” and “adult-use cannabis” do not exist under U.S. federal law. Marijuana is a Schedule I drug under the Substances Act. Under 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 BRND and GH Group believe their respective businesses are, and that the business of the Resulting Issuer 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 Resulting Issuer of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Resulting Issuer. Any such proceedings brought against the Resulting Issuer may result in a material adverse effect on the Resulting Issuer.

 

Since the possession and use of cannabis and any related drug paraphernalia is illegal under U.S. federal law, the Resulting Issuer may be deemed to be aiding and abetting illegal activities. GH Group 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 Resulting Issuer, 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 allege that the Resulting Issuer has “aided and abetted” violations of federal law by providing financing and services to the Corporation. Under these circumstances, the federal prosecutor could seek to seize the assets of the Resulting Issuer, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing. In these circumstances, the Resulting Issuer’s operations would cease, 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 Resulting Issuer.

 

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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 BRND, or, following completion of the Transaction, the Resulting Issuer, if it became known to CBP, could have an impact on a 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 Resulting Issuer will derive 100% of its revenues from the cannabis industry in the State of California which industry is illegal under U.S. federal law. Even where the Corporation’s cannabis-related activities are compliant with applicable State and local law, 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, this 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 2021 appropriations deadline of September 30, 2021.

 

In July 2020, the House of Representatives passed the “Blumenauer-McClintock-Norton-Lee amendment,” to the Commerce, Justice, Science (CJS) Appropriations bill. That amendment proposed continuing the Rohrabacher-Blumenauer Amendment’s protections for state medical cannabis programs, and extend those protections to include recreational programs in states where recreational cannabis is legal. The amendment was not included in the final spending bill, so at this time the protections afforded by the Rohrabacher-Blumenauer Amendment apply only to medical cannabis programs.

 

Should the Rohrabacher-Blumenauer Amendment language not be included in the Fiscal Year 2022 appropriations package, 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. Such potential proceedings could involve significant restrictions being imposed upon the Resulting Issuer or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Resulting Issuer, even if such proceedings were concluded successfully in favour of the Resulting Issuer.

 

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 Resulting Issuer, 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 Resulting Issuer 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.

 

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The approach to the enforcement of 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 tendered his resignation as Attorney General at the request of President Donald 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 marijuana, but would not go after marijuana companies in states that legalized it 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.

 

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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, BRND’s Target Business, results of operations, financial condition and prospects and BRND would be materially adversely affected.

 

Such potential proceedings could involve significant restrictions being imposed upon the Resulting Issuer or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Resulting Issuer, as well as the Resulting Issuer’s reputation, even if such proceedings were concluded successfully in favour of the Resulting Issuer. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Resulting Issuer or the seizure of corporate assets; however as of the date hereof, BRND believes that proceedings of this nature are remote.

 

There is no certainty as to how the U.S. DOJ, Federal Bureau of Investigation and other government agencies will handle cannabis matters in the future. BRND regularly monitors the activities of the current administration in this regard.

 

The Resulting Issuer 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 burdensome 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 Resulting Issuer may have limited or no access to banking or other financial services in the United States. The inability, or limitation of the Resulting Issuer’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 Resulting Issuer 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 companies and businesses similar to the Corporation. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep 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 Resulting Issuer when needed or on terms which are acceptable to the Resulting Issuer. The Resulting Issuer’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 Resulting Issuer from achieving 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 regulated markets in the cannabis industry are exactly the same, doing business across State lines may not be possible or commercially practicable. As a result, the Resulting Issuer may be limited to identifying opportunities in individual States, which may have the effect of slowing the growth prospects of the Resulting Issuer.

 

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Risk of legal, regulatory or other political change.

 

The success of the business strategy of the Resulting Issuer depends on the legality of the cannabis industry. The political environment surrounding the cannabis industry in general can be volatile and the regulatory framework remains in flux. To BRND’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 Resulting Issuer’s business, results of operations, financial condition or prospects.

 

Delays in enactment of new State or federal regulations could restrict the ability of the Resulting Issuer to reach strategic growth targets. The growth strategy of the Resulting Issuer is contingent upon certain federal and State 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 Resulting Issuer could be negatively impacted, and thus, the effect on the return of investor capital, could be detrimental.

 

The Resulting Issuer 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 State law, or if existing applicable State laws are repealed or curtailed, the Resulting Issuer’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 marijuana in a manner that will make it extremely difficult or impossible to transact business in that jurisdiction, which may adversely affect the Resulting Issuer’s continued operations. Federal actions against individuals or entities engaged in the cannabis industry or a repeal of applicable marijuana legislation could adversely affect the Resulting Issuer and its business, results of operations, financial condition and prospects.

 

The Resulting Issuer is also aware that multiple States are considering 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 taxation. Should such special taxes or fees be adopted, this could have a material adverse effect upon the Resulting Issuer’s business, results of operations, financial condition or prospects.

 

Overall, the medical and adult-use cannabis industry is subject to significant regulatory change at both the State and federal level. The inability of the Resulting Issuer 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 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 Resulting Issuer’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 Resulting Issuer to succeed. BRND is treating, and upon completion of the Transaction the Resulting Issuer will treat, the cannabis industry as a deregulating industry with significant unsatisfied demand for the Resulting Issuer’s proposed products and will adjust its future operations, product mix and market strategy as the industry develops and matures.

 

The Resulting Issuer’s operations in the U.S. cannabis market may become the subject of heightened scrutiny.

 

For the reasons set forth above, the Resulting Issuer’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 Resulting Issuer 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 Resulting Issuer’s ability to operate or invest in the U.S. or any other jurisdiction, in addition to those described herein.

 

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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 CSE, 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 as 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. BRND views the Staff Notice favourably, 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 Resulting Issuer’s ability to pursue further investment and opportunities in the Resulting Issuer.

 

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 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 Resulting Issuer could expand. Any inability to fully implement the Resulting Issuer’s expansion strategy may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Regulatory scrutiny of the Resulting Issuer’s industry may negatively impact its ability to raise additional capital.

 

The Resulting Issuer’s business activities will rely on newly established and/or developing laws and regulations in the various States in which the Resulting Issuer will operate. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Resulting Issuer’s profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, Securities and Exchange Commission, the U.S. DOJ, the Financial Industry Regulatory Advisory 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 Resulting Issuer’s industry may adversely affect the business and operations of the Resulting Issuer, 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 Resulting Issuer or to find a suitable acquirer, which could reduce, delay or eliminate any return on investment in the Resulting Issuer.

 

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The Resulting Issuer’s investments in the U.S. will be 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 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 Resulting Issuer. See “Risk Factors – The Resulting Issuer 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 Resulting Issuer’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 Resulting Issuer 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 Resulting Issuer to declare or pay dividends on the Equity Shares in the foreseeable future, in the event that a determination was made that the Resulting Issuer’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Resulting Issuer 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 affect the Resulting Issuer’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 Resulting Issuer’s products such as medical cannabis. 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 Resulting Issuer 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 may result in delay of the manufacturing or distribution of the Resulting Issuer’s 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 Resulting Issuer’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.

 

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The availability of favourable 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.

 

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 Resulting Issuer to locate and obtain the rights to operate at various preferred locations. Property owners may violate their mortgages by leasing to the Resulting Issuer, 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 Resulting Issuer), 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

 

Unpredictability caused by the Resulting Issuer’s capital structure.

 

Although other Canadian-based companies have dual class or multiple voting share structures, given the concentration of voting control that will be held indirectly by GH Group Founders by virtue of their Multiple Voting Shares, BRND 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 Resulting Issuer or other adverse consequences.

 

The Resulting Issuer’s multi-class structure will have the effect of concentrating voting control and the ability to influence corporate matters with the GH Group Founders.

 

The Multiple Voting Shares will have 50 votes per share, whereas the Equity Shares are expected to have one (1) vote per share (other than in respect of the election of directors of the Resulting Issuer, for which the Limited Voting Shares will not have any entitlement to vote). Following the Transaction until the expiry of the three (3)-year sunset period, the GH Group Founders will hold approximately 66% of the voting power of the outstanding voting shares of the Resulting Issuer (and approximately 63% on a diluted basis (including the applicable Equity Shares issuable on exchange of the Exchangeable Shares and on exercise of the BRND Warrants)). Accordingly, each GH Group Founder would therefore have significant influence over the management and affairs of the Resulting Issuer 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 will control a majority of the combined voting power of the Resulting Issuer’s voting shares even though the Multiple Voting Shares will represent a substantially reduced percentage of the total outstanding shares of the Resulting Issuer. The concentrated voting control of the holders of Multiple Voting Shares will limit 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 Resulting Issuer’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 will have the ability to influence or control many matters affecting the Resulting Issuer 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. See “Description of the Securities – Equity Shares and Multiple Voting Shares”.

 

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The issuance of Preferred Shares 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 Resulting Issuer 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 Resulting Issuer 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

 

It is anticipated that the Resulting Issuer will be an FPI as defined in Rule 405 under the U.S. Securities Act and Rule 3b-4 under the U.S. Exchange Act. While it is anticipated that we will enact the FPI Capital Structure Amendments in order to avoid such a circumstance, if, as of the last business day of the Resulting Issuer’s second fiscal quarter for any year, more than 50% of the Resulting Issuer’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 Resulting Issuer will no longer meet the definition of an FPI, which may have adverse consequences on the Resulting Issuer’s ability to raise capital in private placements or Canadian prospectus offerings. In addition, the loss of the Resulting Issuer’s FPI status may result in increased reporting requirements and increased audit, legal and administration costs. These increased costs may significantly affect the Resulting Issuer’s business, financial condition and results of operations.

 

General Regulatory and Legal Risks

 

The Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer or GH Group were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Resulting Issuer’s U.S. operations, which could have a material adverse effect on the Resulting Issuer.

 

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BRND Shareholders will only have limited and indirect recourse against the vendors of GH Group.

 

BRND Shareholders will not have a direct statutory right or any other rights against the vendors of GH Group. The sole remedy of the investors against such vendors will be through BRND bringing an action for a breach of the representations and warranties contained in the Definitive GH Group Agreement. While BRND is indemnified for breaches of representations and warranties contained in the Definitive GH Group Agreement recourse for such breaches may be limited due to qualifications related to knowledge of the vendors of GH Group, contractual and time limits on recourse under applicable laws and the ability of the vendors of GH Group to satisfy third-party claims. The inability to recover fully any significant liabilities incurred with respect to breaches of representations and warranties under the Definitive GH Group Agreement may have a material adverse effect on the Resulting Issuer. In addition, GH Group vendors have made representations to BRND as to the disclosure in this prospectus constituting full, true and plain disclosure of all material facts related to GH Group only, and that this prospectus does not contain a misrepresentation with respect to information in respect of GH Group only. Accordingly, the vendors of GH Group will only have limited and indirect liability to BRND Shareholders if the disclosure in this prospectus relating to GH Group does not meet such standard or contains a misrepresentation.

 

The Resulting Issuer 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 Resulting Issuer will be able to legally enforce contracts it enters into if necessary. The Resulting Issuer cannot be assured that it will have a remedy for breach of contract, which would have a material adverse effect on the Resulting Issuer.

 

BRND/the Resulting Issuer may be subject to the risk of changes in Canadian laws or regulations, or a failure to comply with any such laws and regulations.

 

BRND is, and upon completion of the Transaction the Resulting Issuer will be, subject to laws and regulations enacted by the federal and provincial governments of Canada. In particular, upon completion of the Transaction the Resulting Issuer will be 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 Resulting Issuer’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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer is subject to general regulatory and licensing risks.

 

GH Group is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of marijuana, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the Resulting Issuer’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 Resulting Issuer may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

GH Group 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 regulatory agencies, public hearings and costly undertakings on the part of GH Group. The duration and success of GH Group’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. GH Group 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 GH Group. To the extent necessary, permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, GH Group 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Many of the licenses held by GH Group 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. Compliance personnel of GH Group check renewal dates for licenses to seek to ensure that licenses are renewed as and when required. Following closing of the Transaction, it is intended that the Resulting Issuer will implement an additional centralized review of such renewal process.

 

While BRND believes that GH Group’s compliance controls have been developed to mitigate the risk of any violations of any licenses they hold arising, there is no assurance that GH Group’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 GH Group could impede the ongoing or planned operations of GH Group and have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer or GH Group 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 Resulting Issuer’s or GH Group’s reputation, require the Resulting Issuer or GH Group to take, or refrain from taking, actions that could harm its operations or require the Resulting Issuer or GH Group 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

California regulatory regime and transfer and grant of licenses.

 

Cannabis business activities are heavily regulated in California. The Resulting Issuer’s operations will be 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 BCC, CDPH and CDFA and local regulatory bodies broad administrative discretion over the activities of the Resulting Issuer in California, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Resulting Issuer’s products and services. Government approvals, including state licenses and local permits, are currently required in connection with the operations of the Resulting Issuer. To the extent such approvals are required and not obtained, the Resulting Issuer may be curtailed or prohibited from cultivating, manufacturing, distributing and selling medical or adult use cannabis in California. Achievement of the Resulting Issuer’s business objectives is contingent, in part, upon compliance with regulatory requirements enacted by the BCC, CDPH and CDFA and local governmental authorities and obtaining all regulatory approvals from the BCC, CDPH and CDFA and local governmental authorities, where necessary, for the cultivation, manufacturing, distribution and sale of its cannabis products.

 

The Resulting Issuer may not be able to obtain or maintain the necessary licenses, permits, certificates, authorizations or accreditations to operate its respective business, including in respect of the acquisition of SoCal Greenhouse and the Element 7 Merger (none of which have yet been obtained), or may only be able to do so at great cost. In addition, the Resulting Issuer may not be able to comply fully with the wide variety of laws and regulations applicable to the Cannabis industry. The Resulting Issuer 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 Resulting Issuer’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 (including in respect of the acquisition of SoCal Greenhouse and the Element 7 Merger), changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Resulting Issuer’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 Resulting Issuer.

 

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Regulatory action and approvals from the Food and Drug Administration.

 

GH Group’s cannabis-based products are supplied to patients diagnosed with certain medical conditions. However, GH Group’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 GH Group 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 GH Group’s production or distribution of its products. Any such event could have a material adverse effect on the Resulting Issuer’s business, prospects, financial condition, and operating results.

 

Risks related to the Qualifying Transaction.

 

As part of the Transaction, it is contemplated that BRND will complete the acquisition of GH Group subject to various closing conditions in respect of each of the acquisitions pursuant to the Transaction. However, BRND has no control over whether or not the conditions will be met and there can be no assurance that all conditions will be satisfied or waived or that the acquisition or any part thereof will ultimately be consummated. There is no assurance that the acquisition of GH Group will be completed or, if completed, will be on terms that are exactly the same as disclosed in this prospectus.

 

If the acquisition of GH Group does not take place as contemplated, BRND expects to use the funds intended for such transactions to fund future acquisitions and for general corporate purposes. If less than all of such acquisitions are completed, BRND may not realize the benefits described in this prospectus and could suffer adverse consequences, including loss of investor confidence. The price of the BRND Class A Restricted Voting Shares may decline to the extent that the relevant current market price reflects a market assumption that the acquisition will be consummated and certain costs related to the acquisition pursuant to the Transaction such as legal, accounting and consulting fees, must be paid even if the Transaction is not completed. BRND may be unable to identify other investments offering financial returns comparable to those pursuant to the acquisition of GH Group.

 

Seller’s liability for misrepresentation or breach of Definitive GH Group Agreement.

 

While certain of the Sellers have reviewed the disclosure related to GH Group, SoCal Greenhouse and Element 7 (the “Target Disclosure”) in this prospectus, the Sellers have no liability to the holders of the BRND Class A Restricted Voting Shares if the Target Disclosure contains a misrepresentation. While the Sellers have provided a warranty in the Definitive GH Group Agreement that the disclosure in this prospectus regarding GH Group shall be full, true and plain disclosure and shall not contain a misrepresentation, such warranty is for the benefit of BRND only. The Sellers’ indemnification obligations to BRND are capped at the Seller Indemnity Cap in respect of a breach by the Sellers of the Definitive GH Group Agreement (including in respect of the warranty disclosed in the immediately preceding sentence).

 

There can be no assurance that the Private Placement will be completed on the expected terms, or at all.

 

Closing of the Private Placement is subject to customary conditions, including the receipt of all required regulatory approvals for the Transaction and the closing of the Transaction. There can be no assurance that the Private Placement will be completed on the expected terms, or at all. If the Private Placement does not close, or does not close on substantially the same terms as are currently agreed to, the Resulting Issuer will have substantially less funds available to fund their growth strategy and ongoing operations. As a result, the Resulting Issuer’s business, results of operations or financial condition could be materially adversely affected, and the trading price of the Equity Shares and the BRND Warrants may be adversely impacted.

 

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Business Risks Related to the Cannabis Industry

 

Scientific research related to the benefits of marijuana 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 early stages. To BRND’s knowledge, there have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids. Any statements made in this prospectus concerning the potential medical benefits of cannabinoids are based on published articles and reports. As a result, any statements made in this prospectus are subject to the experimental parameters, qualifications, assumptions and limitations in the studies that have been completed.

 

Although BRND 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 BRND Shareholders 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 prospectus 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Competition in the cannabis industry is intense and increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition and results of operations of the Resulting Issuer.

 

The Resulting Issuer will face intense competition in the cannabis industry, some of which can be expected to come from companies with longer operating histories and more financial resources, manufacturing and marketing experience than the Resulting Issuer. In addition, there is potential that the cannabis industry will undergo consolidation, creating larger companies with financial resources, manufacturing and marketing capabilities, and products that will be greater than those of the Resulting Issuer. As a result of this competition, the Resulting Issuer may be unable to maintain its operations or develop them as currently proposed 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer will face competition from the illegal cannabis market.

 

The Resulting Issuer will face competition from illegal dispensaries and the illegal market that are unlicensed and unregulated. Such black market entities may sell cannabis and cannabis products with higher concentrations of active ingredients, use flavours or other additives which the Resulting Issuer may not be permitted to use, or engage in advertising and promotion activities from which the Resulting Issuer 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 Resulting Issuer. The perpetuation of the illegal market for cannabis may have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects, as well as the public perception of cannabis use.

 

The Resulting Issuer may be unable to attract and retain customers.

 

The Resulting Issuer’s future success depends on its ability to attract and retain customers. There are many factors which could impact the Resulting Issuer’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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Negative publicity or consumer perception may affect the success of the Resulting Issuer’s business.

 

The success of the cannabis industry may be significantly influenced by the public’s perception of marijuana. Both the medical and adult-use of marijuana are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion and public opinion relating to marijuana will be favourable. The cannabis industry is an early-stage business that is constantly evolving with no guarantee of viability. The market for medical and adult-use marijuana is uncertain, and any adverse or negative publicity, scientific research, limiting regulations, medical opinion and public opinion (whether or not accurate or with merit) relating to the consumption of marijuana, whether in Canada, the U.S. or elsewhere, may have a material adverse effect on the Resulting Issuer’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 favourable to the marijuana 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 favourable 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 marijuana and on the business, results of operations, financial condition, cash flows or prospects of the Resulting Issuer.

 

Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana 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 Resulting Issuer could expand. Any inability to fully implement the Resulting Issuer’s expansion strategy may have a material adverse effect on the Resulting Issuer’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 (such as 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 or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of the Resulting Issuer’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 prospectus 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 Resulting Issuer’s products with the potential to lead to a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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 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 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 Resulting Issuer’s products, product liability claims and increased regulation stemming from unfavourable scientific studies on cannabis vaporizer products could have a material adverse effect on the Resulting Issuer’s business, results of operations, financial condition or prospectus.

 

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The current controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer products and expose the Resulting Issuer 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 flavours or use of such vaporizers. This trend may continue, accelerate and 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 Resulting Issuer’s vaping products. There can be no assurance that the Resulting Issuer will be able to meet any additional compliance requirements or regulatory restrictions, or remain competitive in face of unexpected changes in market conditions.

 

Litigation pertaining to vaporizer products is accelerating and that litigation could potentially expand to include the Resulting Issuer’s products, which would materially and adversely affect the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The cannabis industry is difficult to forecast.

 

The Resulting Issuer 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 Resulting Issuer.

 

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 limited and unreliable. Federal and State laws prevent widespread participation and hinder market research. Therefore, market research and projections by BRND 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 BRND’s management team as of the date of this prospectus.

 

The Resulting Issuer may be subject to the risk of constraints on marketing products.

 

The development of the Resulting Issuer’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 companies’ abilities to compete for market share in a manner similar to other industries. If the Resulting Issuer 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 Resulting Issuer’s sales and results of operations or prospects could be adversely affected.

 

Risks Related to the Resulting Issuer’s Business and GH Group’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 cannot be reasonably estimated at this time, the Corporation has sought to assess the potential impact of the pandemic on its operating results. The Corporation has attempted to assess the impact of the pandemic by identifying risks in the following principle 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 GH Group 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 GH Group to shut down operations its operations in California. GH Group’s ability to generate revenue would be materially impacted by any shut down of its operations.

 

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Customer Impact. GH Group has implemented several initiatives prioritizing its medical patients and customers most susceptible to COVID- 19 during the pendency of the COVID-19 outbreak. While GH Group 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”), GH Group made essential changes to promote a healthy and safe operating environment for all of its patients, customers and employees, including:

 

frequently sanitizing high-touch surfaces;

 

deep cleaning and sanitizing workstations;

 

sanitizing or washing hands after each transaction;

 

ensuring hand sanitizer is easily accessible;

 

suspending all use of paper menus, demo products, and demo samples;

 

positioning staff at every other register when possible;

 

taking the temperature of store employees before they begin their shift;

 

requiring all dispensary staff to wear face masks;

 

installed plexi-shields in areas where patients/customers come face to face with staff (check-in and at registers where glass doesn’t already exist); and

 

placed markers on the floor to dictate 6 feet + of space between patients/customers.

 

Supply Chain Disruption. GH Group 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 mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating. At this time, GH Group 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 GH Group’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

 

Staffing Disruption. GH Group 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. GH Group has cancelled nonessential travel by employees, implemented remote 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, GH Group and the Resulting Issuer, upon completion of the Transaction, 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.

 

GH Group 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 may have a material impact on GH Group’s ability to generate revenue, and that of the Resulting Issuer upon completion of the Transaction.

 

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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 GH Group is not currently in financial distress, if its financial situation (or that of the Resulting Issuer upon completion of the Transaction) materially deteriorates as a result of the impact of the pandemic, the Resulting Issuer could eventually be unable to meet its obligations to third parties, which in turn could lead to insolvency and bankruptcy of the Resulting Issuer.

 

The Resulting Issuer may not successfully execute its business strategy.

 

An important part of the Resulting Issuer’s business strategy will involve expanding operations in additional U.S. markets, including in markets where it will not initially operate following completion of the Transaction. The Resulting Issuer may be unable to pursue this strategy in the future at the desired pace or at all. The Resulting Issuer may be unable to, among other things, identify suitable businesses to acquire or invest in, complete acquisitions on satisfactory terms, 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. BRND can give no assurance that it or the Resulting Issuer 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 Resulting Issuer’s business, financial condition or results of operations.

 

If the Resulting Issuer 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 Resulting Issuer’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 will not initially operate flowing completion of the Transaction. Consequently, in order to manage growth effectively, the Resulting Issuer 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 Resulting Issuer’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 Resulting Issuer’s management will have broad discretion in the use of BRND’s escrowed funds and the net proceeds from the Private Placement, and may not use them effectively.

 

The Resulting Issuer’s management will have broad discretion in the application of BRND’s escrowed funds and the net proceeds from the Private Placement and could spend the proceeds in ways that do not improve its results of operations or enhance the value of the Equity Shares. The failure by the Resulting Issuer’s management to apply these funds effectively could result in financial losses that could have a material adverse effect on the Resulting Issuer’s business, results of operations and financial condition.

 

The Resulting Issuer and GH Group have a limited operating history.

 

As a high-growth enterprise, BRND (and GH Group) does not, and the Resulting Issuer will not, have a history of profitability. As such, the Resulting Issuer will have no immediate prospect of generating profit from its intended operations. The Resulting Issuer will therefore be subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Resulting Issuer 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 Resulting Issuer will be reliant on its management team.

 

The success of the Resulting Issuer 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 services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Resulting Issuer’s business, operating results, financial condition or prospects.

 

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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. Resulting Issuer employees traveling from Canada to the U.S. for the benefit of the Resulting Issuer 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 Resulting Issuer employees, then this may reduce our ability to manage effectively our business in the U.S.

 

Certain of the BRND’s officers and directors may now be, and all of them in respect of the Resulting Issuer may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by the Resulting Issuer and, accordingly, may have conflicts of interest in allocating their time and determining to which entity a particular business opportunity should be presented.

 

The Resulting Issuer’s officers and directors also may become aware of business opportunities which may be appropriate for presentation to the Resulting Issuer and the other entities to which they owe duties. In the course of their other business activities, the Resulting Issuer’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 favour, as the Resulting Issuer’s officers and directors are not required to present investment and business opportunities to the Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer’s officers, directors, security holders and their respective affiliates and associates may have interests that conflict with the Resulting Issuer’s interests.

 

The Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The SoCal Greenhouse acquisition and/or Element 7 Merger may not be completed or, if completed, may not be successful.

 

The closing of the proposed acquisition of SoCal Greenhouse and the Element 7 Merger are subject in each case to due diligence and certain other customary closing conditions and may not be completed on the terms negotiated or at all. Certain of these conditions, such as State and local regulatory approvals, are outside of our control. There is no assurance that such approvals or consents will be obtained. Continued delay in obtaining such approvals or consents, the failure to do so or the imposition of unfavourable terms or conditions could have a material adverse effect on the business, financial condition and results of operations of the Resulting Issuer. It is intended that the Resulting Issuer will consummate the acquisition of SoCal Greenhouse and the Element 7 Merger as soon as practicable once such conditions are met. However, we have no control over whether or not certain of the conditions will be met and there is no assurance that such conditions to the closing of the acquisition of SoCal Greenhouse and the Element 7 Merger will be satisfied.

 

Even if the acquisition of SoCal Greenhouse and/or the Element 7 Merger do close, our ability to realize the anticipated benefits of SoCal Greenhouse and/or Element 7 subsidiary assets will depend, to a large extent, on our ability to integrate SoCal Greenhouse and/or the Element 7 subsidiary assets into the business of the Resulting Issuer (including re-purposing the greenhouse farm complex to grow cannabis and operationalizing the licenses obtained in the Element 7 Merger). There can be no assurance that we will successfully integrate or operationalize SoCal Greenhouse and/or the Element 7 subsidiary assets, and the Resulting Issuer could face impediments in its ability to implement its integration strategy. The integration process and operationalizing the acquired assets may also require attention from management and divert its focus and resources from other strategic opportunities and from current operational matters. If we are unable to successfully operate SoCal Greenhouse and/or the Element 7 subsidiary assets, our results of operations could suffer. Any failure to successfully integrate SoCal Greenhouse and/or the Element 7 subsidiary assets into the business of the Resulting Issuer on a timely basis and successfully operate the such assets could result in unanticipated expenses and liabilities.

 

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In addition, while we conducted substantial due diligence in connection with both the acquisition of SoCal Greenhouse and the Element 7 Merger, there are risks inherent in any acquisition.

 

Specifically, there could be unknown or undisclosed risks or liabilities in connection with these assets for which we are not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect the business, financial condition, results of operation or prospects of the Resulting Issuer.

 

Failure to establish and maintain effective internal control over financial reporting may result in the Resulting Issuer 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 Resulting Issuer will be 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. Because the Resulting Issuer will be implementing new financial control and management systems, 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 Resulting Issuer’s ability to raise capital in the future.

 

If management of the Resulting Issuer is unable to certify the effectiveness of its internal controls or if material weaknesses or significant deficiencies in its internal controls are identified, the Resulting Issuer could be subject to regulatory scrutiny and a loss of public confidence, which could harm its business. In addition, if the Resulting Issuer 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 Resulting Issuer’s ability to raise capital.

 

It is not expected that the Resulting Issuer’s disclosure controls and procedures and internal control over financial reporting will prevent all error 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 Resulting Issuer 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 Resulting Issuer 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 marijuana, through the development and distribution of synthetic products which emulate the effects and treatment of organic marijuana. 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 Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects

 

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The Resulting Issuer may be subject to the risks associated with fraudulent or illegal activity by its employees, contractors and consultants.

 

The Resulting Issuer will be 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 Resulting Issuer 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 Resulting Issuer to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Resulting Issuer to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Resulting Issuer 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 Resulting Issuer, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Resulting Issuer’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 Resulting Issuer’s operations, any of which could have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

BRND may be subject to the risk associated with the contractual right of action.

 

The contractual right of action to be provided to the original purchasers of each of the BRND Class A Restricted Voting Shares and BRND Warrants pursuant to the Transaction could expose BRND to one or more actions for rescission or damages, and costs, following the Transaction if this prospectus contains or is alleged to have contained a misrepresentation. In addition, as BRND will indemnify the other parties granting such rights, it could suffer additional expenses. BRND may seek to mitigate its exposure through insurance. These contractual rights may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects. See “Contractual Right of Action”.

 

Certain events or developments in the cannabis industry more generally may impact the Resulting Issuer’s reputation.

 

Damage to the Resulting Issuer’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 Resulting Issuer. 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 regards to the Resulting Issuer 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 it 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 Resulting Issuer’s overall ability to advance its business strategy and realize on its growth prospects, thereby having a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Third parties with whom the Resulting Issuer may do business may perceive themselves as being exposed to reputational risk as a result of their relationship with the Resulting Issuer.

 

The parties with which the Resulting Issuer may do business may perceive that they are exposed to reputational risk as a result of the Resulting Issuer’s cannabis-related business activities. Failure to establish or maintain business relationships due to reputational risk arising in connection with the nature of the Resulting Issuer’s business may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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The Resulting Issuer may be subject to advertising and promotional risk in the event it cannot effectively implement a successful branding strategy.

 

The Resulting Issuer’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 Resulting Issuer’s business in the future, or will generate awareness for any of the Resulting Issuer’s products. In addition, no assurance can be given that the Resulting Issuer 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 stage 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 Resulting Issuer’s ability to conduct sales and marketing activities and to create brand recognition, and could potentially result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

GH Group is subject to product liability regimes and strict product recall requirements.

 

GH Group distributes products designed to be ingested by humans. Accordingly, the Resulting Issuer will face 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 Resulting Issuer 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 Resulting Issuer could result in increased costs, could adversely affect our reputation with the Resulting Issuer’s clients and consumers generally, and may result in a material adverse effect on the Resulting Issuer’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 Resulting Issuer could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Resulting Issuer 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 Resulting Issuer. 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 Resulting Issuer may not be able to successfully develop new products or find a market for their sale.

 

The cannabis industry is in its early stages of development and the Resulting Issuer, and its competitors, may seek to introduce new products in the future. In attempting to keep pace with any new market developments, the Resulting Issuer may need to expend significant amounts of capital in order to successfully develop and generate revenues from new products introduced by the Resulting Issuer. The Resulting Issuer may also be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. The Resulting Issuer 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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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The Resulting Issuer will be reliant on third-party suppliers, manufacturers and contractors.

 

It is intended that the Resulting Issuer will maintain 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 Resulting Issuer’s third-party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Resulting Issuer’s operations. Loss of these suppliers, manufacturers and contractors may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer will be reliant on key inputs.

 

The marijuana 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 Resulting Issuer. 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 Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer.

 

The Resulting Issuer will be reliant on equipment and skilled labour.

 

The ability of the Resulting Issuer to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labour, equipment, parts and components. No assurances can be given that the Resulting Issuer will be successful in maintaining its required supply of skilled labour, equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Resulting Issuer’s capital expenditure plans may be significantly greater than anticipated by the Resulting Issuer’s management, and may be greater than funds available to the Resulting Issuer, in which circumstance the Resulting Issuer may curtail, or extend the timeframes for completing, its capital expenditure plans. This may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

Service providers could suspend or withdraw service.

 

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 marijuana or otherwise, third-party service providers to the Resulting Issuer could suspend or withdraw their services, which may have a material adverse effect on the Resulting Issuer’s business, revenues, operating results, financial condition or prospects.

 

The Resulting Issuer may be subject to the risk of litigation.

 

The Resulting Issuer 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 Resulting Issuer becomes involved be determined against the Resulting Issuer, such a decision could adversely affect the Resulting Issuer’s ability to continue operating and the market price for the Equity Shares. Even if the Resulting Issuer is involved in litigation and wins, litigation can redirect significant company resources.

 

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The Resulting Issuer may be subject to risks related to the protection and enforcement of intellectual property rights and may become subject to allegations that the Resulting Issuer 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 Resulting Issuer’s future success. The Resulting Issuer may rely on trade secrets, technical know-how and proprietary information that are not protected by patents to maintain its competitive position. The Resulting Issuer will try to protect such intellectual property by entering into confidentiality agreements with parties that have access to it, such as the Resulting Issuer’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 Resulting Issuer could be materially adversely affected.

 

Unauthorized parties may attempt to replicate or otherwise obtain and use the Resulting Issuer’s products, trade secrets, technical know-how and proprietary information. Policing the unauthorized use the Resulting Issuer’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 Resulting Issuer may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Resulting Issuer’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 Resulting Issuer, 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 Resulting Issuer’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 Resulting Issuer’s business, financial condition, results of operations or prospects.

 

In addition, other parties may claim that the Resulting Issuer’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 Resulting Issuer may need to obtain licenses from third parties who allege that the Resulting Issuer has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Resulting Issuer or at all. In addition, the Resulting Issuer may not be able to obtain or utilize on terms that are favourable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.

 

The Resulting Issuer may be subject to risks related to information technology systems, including cyber-attacks.

 

The Resulting Issuer’s operations may 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 Resulting Issuer’s operations may also depend 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 Resulting Issuer’s reputation and results of operations. The Resulting Issuer’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 Resulting Issuer may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

 

The Resulting Issuer may be subject to risks related to security breaches.

 

Given the nature of GH Group’s product and its lack of legal availability outside of channels approved by the Government 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 GH Group’s facilities could expose the Resulting Issuer 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 Resulting Issuer’s products.

 

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In addition, GH Group collects and stores personal information about its patients 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 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 Resulting Issuer’s business, financial condition and results of operations or prospects.

 

The Resulting Issuer 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 marijuana 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 Resulting Issuer 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 Resulting Issuer’s business.

 

The Resulting Issuer’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labour disputes 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 Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer is not generally available on acceptable terms. The Resulting Issuer might also become subject to liability for pollution or other hazards which may not be insured against or which the Resulting Issuer may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Resulting Issuer to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.

 

The Resulting Issuer may be subject to transportation risks.

 

The Resulting Issuer’s business will involve, both directly and indirectly, the production, sale and distribution of cannabis products. Due to the perishable nature of such products, the Resulting Issuer will depend 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 Resulting Issuer. Rising costs associated with the third-party transportation services which will be used by the Resulting Issuer to ship its proposed products may also adversely impact the business of the Resulting Issuer.

 

The Resulting Issuer’s share price may be vulnerable to rising energy costs.

 

The Resulting Issuer’s business may involve, directly or indirectly, the production of cannabis products which will consume considerable energy, making the Resulting Issuer vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business of the Resulting Issuer and its ability to operate profitably.

 

The Resulting Issuer may be subject to risks inherent in an agricultural business.

 

The Resulting Issuer’s business may involve, directly or indirectly, 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 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 Resulting Issuer’s business, financial condition, results of operations or prospects of the Resulting Issuer.

 

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Management of growth may prove to be difficult.

 

The Resulting Issuer may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Resulting Issuer 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 Resulting Issuer to deal with this growth may result in a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

The Resulting Issuer may be subject to the risks of leverage.

 

It is anticipated that the Resulting Issuer will utilize leverage in connection with the Resulting Issuer’s investments in the form of secured or unsecured indebtedness. Although the Resulting Issuer 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 Resulting Issuer defaults on secured indebtedness, the lender may foreclose and the Resulting Issuer could lose its entire investment in the security of such loan. If the Resulting Issuer defaults on unsecured indebtedness, the terms of the loan may require the Resulting Issuer to repay the principal amount of the loan and any interest accrued thereon in addition to heavy penalties that may be imposed. Because the Resulting Issuer may engage in financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, the Resulting Issuer 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 Resulting Issuer’s investments, the Resulting Issuer may borrow funds 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 Resulting Issuer. If investments fail to cover the cost of such borrowings, the value of the investments held by the Resulting Issuer would decrease faster than if there had been no such borrowings. Additionally, if the investments fail to perform to expectation, the interests of investors in the Resulting Issuer could be subordinated to such leverage, which will compound any such adverse consequences.

 

The Resulting Issuer 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 Resulting Issuer’s ongoing business; (ii) distraction of management; (iii) the Resulting Issuer 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 Resulting Issuer’s operations; and (vi) loss or reduction of control over certain of the Resulting Issuer’s assets. Additionally, the Resulting Issuer may issue additional Equity Shares in connection with such transactions, which would dilute a Resulting Issuer Shareholder’s holdings in the Resulting Issuer or indirect holdings in the Resulting Issuer.

 

The presence of one or more material liabilities of an acquired company that are unknown to the Resulting Issuer at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Resulting Issuer. A strategic transaction may result in a significant change in the nature of the Resulting Issuer’s business, operations and strategy. In addition, the Resulting Issuer may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Resulting Issuer’s operations.

 

Risks related to the difficulty of attracting and retaining personnel.

 

The Resulting Issuer’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 Resulting Issuer’s business. If the Resulting Issuer 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.

 

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Co-investment risk in terms of control over the Resulting Issuer’s investments.

 

The Resulting Issuer 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 Resulting Issuer. Although it is our intent to retain control and other superior rights over the Resulting Issuer’s investments, under certain circumstances it may be possible that the Resulting Issuer 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 Resulting Issuer does maintain a control position with respect to its investments, the Resulting Issuer’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 Resulting Issuer, or may be in a position to take (or block) action in a manner contrary to the Resulting Issuer’s objectives. The Resulting Issuer 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 Resulting Issuer, and such different terms may be disadvantageous to the Resulting Issuer.

 

Liabilities arising from the Resulting Issuer’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 Resulting Issuer sells services or products via web- based links targeting only jurisdictions in which such sales or services are compliant with State law, the Resulting Issuer may face legal action in other jurisdictions which are not the intended object of any of the Resulting Issuer’s marketing efforts for engaging in any web-based activity that results in sales into such jurisdictions deemed illegal under applicable laws.

 

The Resulting Issuer will be subject to the costs of being a public company.

 

As a public issuer, BRND is, and the Resulting Issuer upon completion of the Transaction will be, subject to the reporting requirements and rules and regulations under the applicable Canadian securities laws and rules of any stock exchange on which the Resulting Issuer’s securities may be listed from time to time. Additional or new regulatory requirements may be adopted in the future. The requirements of existing and potential future rules and regulations will increase the Resulting Issuer’s legal, accounting and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on its personnel, systems and resources, which could adversely affect its business and financial condition.

 

In particular, the Resulting Issuer will be subject to reporting and other obligations under applicable Canadian securities laws, including NI 52-109, which requires annual management assessment of the effectiveness of the Resulting Issuer’s internal controls over financial reporting. Effective internal controls, including financial reporting and disclosure controls and procedures, are necessary for the Resulting Issuer to provide reliable financial reports, to effectively reduce the risk of fraud and to operate successfully as a public company. These reporting and other obligations place significant demands on the Resulting Issuer as well as on the Resulting Issuer’s management, administrative, operational and accounting resources.

 

Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Resulting Issuer’s results of operations or cause it to fail to meet its reporting obligations. If the Resulting Issuer or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in the Resulting Issuer’s consolidated financial statements and materially adversely affect the trading price of the applicable Equity Shares.

 

Certain remedies may be limited to the Resulting Issuer.

 

Pursuant to its governing documents, the Resulting Issuer and the shareholders of the Resulting Issuer may be prevented from recovering damages for alleged errors or omissions made by the members of the Resulting Issuer Board and its officers. The Resulting Issuer’s governing documents may also provide that the Resulting Issuer will, to the fullest extent permitted by law, indemnify members of the Resulting Issuer Board and its officers for certain liabilities incurred by them by virtue of their acts on behalf of the Resulting Issuer.

 

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The Resulting Issuer may have difficulty enforcing judgments and effecting service of process on directors and officers.

 

The directors and officers of the BRND 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 BRND 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 BRND 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 GH Group is not indicative of the future operating results of the Resulting Issuer. There can be no assurance that the historical operating results achieved by GH Group or its affiliates will be achieved by the Resulting Issuer, and the Resulting Issuer’s performance may be materially different.

 

Financial projections may prove materially inaccurate or incorrect.

 

Any GH Group or the Resulting Issuer financial estimates, projections and other forward-looking information or statements included in this prospectus were prepared by BRND 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 prospectus. BRND Shareholders should inquire of BRND 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, BRND Shareholders should not rely on any projections to indicate the actual results the Resulting Issuer might achieve.

 

The Resulting Issuer may not pay dividends.

 

It is not intended that the Resulting Issuer will pay any dividends on the Equity Shares in the foreseeable future. Dividends paid by the Resulting Issuer would be subject to tax and, potentially, withholdings.

 

Market and Economy Risks

 

The Resulting Issuer may be vulnerable to currency exchange fluctuations.

 

Due to BRND’s present operations in the United States, and its intention to continue future operations outside Canada, the Resulting Issuer is expected to be 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 Resulting Issuer’s revenue will be earned in US dollars, but a portion of its operating expenses are incurred in Canadian dollars. Fluctuations in the exchange rate between the US dollar and the Canadian dollar may have a material adverse effect on the Resulting Issuer’s business, financial position or results of operations or prospects.

 

The Resulting Issuer 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 Resulting Issuer, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in the business prospects for the Resulting Issuer, general economic conditions, legislative changes, and other events and factors outside of the Resulting Issuer’s control. In addition, stock markets have from time to time 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.

 

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There may be restrictions on the market for the Equity Shares.

 

Notwithstanding that it is a condition of closing that the Equity Shares are listed on the NEO Exchange (and excluding the Multiple Voting Shares which will not be listed securities), 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 Resulting Issuer’s licenses in that State being revoked.

 

There may be a limited market for the Equity Shares.

 

Notwithstanding that it is a condition of closing that the Equity Shares are listed on the NEO Exchange (and excluding the Multiple Voting Shares which will not be listed securities), there can be no assurance that an active and liquid market for such Equity Shares will develop or be maintained and a Resulting Issuer Shareholder may find it difficult to resell any securities of the Resulting Issuer.

 

The Resulting Issuer may be subject to the risks posed by sales by existing BRND Shareholders.

 

Sales of a substantial number of Equity Shares (and excluding the Multiple Voting Shares which will not be listed securities) in the public market could occur at any time by existing holders of such Equity Shares. These sales, or the market perception that the holders of a large number of Equity Shares intend to sell Equity Shares, could reduce the market price of the Equity Shares. If this occurs and continues, it could impair the Resulting Issuer’s ability to raise additional capital through the sale of securities.

 

Subsequent offerings will result in dilution to holders of the Equity Shares.

 

The Resulting Issuer 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 Resulting Issuer 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 Resulting Issuer would result in dilution to holders of Equity Shares. Exercises of issued and outstanding BRND Warrants may also result in dilution to the holders of Equity Shares.

 

Global financial conditions and the future economic shocks may impair the Resulting Issuer’s financial condition.

 

Following the onset of the credit crisis in 2007-2008, global financial conditions were characterized by extreme volatility and several major financial institutions either went into bankruptcy or were rescued by governmental authorities. While global financial conditions subsequently stabilized, there remains considerable risk in the system given the extraordinary measures adopted by government authorities to achieve that stability. Global financial conditions could suddenly and rapidly destabilize in response to future economic shocks, as government authorities may have limited resources to respond to future crises.

 

Future economic shocks may be precipitated by a number of causes, including a rise in the price of oil, geopolitical instability and natural disasters. Any sudden or rapid destabilization of global economic conditions could impact the Resulting Issuer’s ability to obtain equity or debt financing in the future on terms favourable to the Resulting Issuer. Additionally, any such occurrence could cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. Further, in such an event, the Resulting Issuer’s operations and financial condition could be adversely impacted.

 

Furthermore, general market, political and economic conditions, including, for example, inflation, interest and currency exchange rates, structural changes in the cannabis industry, supply and demand for commodities, political developments, legislative or regulatory changes, social or labour unrest and stock market trends will affect the Resulting Issuer’s operating environment and its operating costs, profit margins and share price. Any negative events in the global economy could have a material adverse effect on the Resulting Issuer’s business, financial condition, results of operations or prospects.

 

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Environmental Risks

 

The Resulting Issuer may be subject to significant environmental regulations and risks.

 

The Resulting Issuer’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 Resulting Issuer’s operations.

 

Government approvals and permits are currently, and may in the future, be required in connection with the Resulting Issuer’s operations. To the extent such approvals are required and not obtained, the Resulting Issuer may be curtailed or prohibited from its proposed production of medical marijuana 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 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 Resulting Issuer 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 Resulting Issuer and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

 

The Resulting Issuer may be subject to unknown environmental risks.

 

There can be no assurance that the Resulting Issuer will not encounter hazardous conditions at the facilities where it operates its businesses, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Resulting Issuer may be suspended. The presence of other hazardous conditions may require significant expenditure of the Resulting Issuer’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Resulting Issuer.

 

Tax Risks

 

U.S. and Canadian tax residence of the Resulting Issuer.

 

It is anticipated that the Resulting Issuer will be treated as a U.S. corporation for U.S. federal income tax purposes under section 7874 of the Code as a result of the Transaction (although no definitive determination of this matter has been reached, and no tax ruling has been sought or obtained in this regard). As a result, it is anticipated that the Resulting Issuer will be considered a U.S. tax resident for U.S. federal income tax purposes and therefore subject to U.S. federal income tax on its worldwide income. For Canadian tax purposes, however, BRND is and the Resulting Issuer will continue to be treated as a Canadian resident company (as defined in the Tax Act) for Canadian federal income tax purposes. Consequently, it is anticipated that the Resulting Issuer would be subject to income tax both in Canada and the U.S., which could have a material adverse effect on its financial condition and results of operations.

 

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The deduction of certain expenses of the Resulting Issuer 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 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. It is expected that the Resulting Issuer will be subject to section 280E of the Code and consequently, section 280E of the Code may adversely affect the Resulting Issuer’s profitability and, in fact, may cause the Resulting Issuer 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 the law, it is anticipated that the Resulting Issuer will be subject to section 280E of the Code.

 

Dividends paid by the Resulting Issuer may be subject to withholding tax.

 

It is unlikely that the Resulting Issuer will pay any dividends on the Equity Shares in the foreseeable future. However, dividends received by holders who are residents of Canada for purpose 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 Resulting Issuer 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 Resulting Issuer, 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 Resulting Issuer, subject to examination of the relevant treaty.

 

The Resulting Issuer 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. It is anticipated that the Transaction will result in an ownership change for purposes of section 382 of the Code. However, BRND currently does not have, and does not expect at the time of the Transaction to 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 Resulting Issuer as a U.S. Real Property Holding Company.

 

As a result of the Transaction, discussed above, it is anticipated that the Resulting Issuer will be 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. Holders (as defined below) may be subject to U.S. federal income tax upon a disposition of their Equity Shares depending on whether the Resulting Issuer is classified as a United States real property holding corporation (a “USRPHC”) under the Code. It is not expected that the Resulting Issuer will be a USRPHC, but we do not intend to seek formal confirmation of its status as a non-USRPHC from the IRS. If the Resulting Issuer were to be considered a USRPHC, Non-U.S. Holders may be subject to U.S. federal income tax on any gain associated with the disposition of their Equity Shares.

 

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The discussion of certain U.S. federal income tax and certain Canadian federal income tax risks under “Risk Factors – Tax Risks” is subject in its entirety to the summaries set forth in “Certain Canadian Federal Income Tax Considerations” and “Certain United States Federal Income Tax Considerations”.

 

EACH SHAREHOLDER SHOULD SEEK TAX ADVICE, BASED ON SUCH SHAREHOLDER’S PARTICULAR CIRCUMSTANCES, FROM AN INDEPENDENT TAX ADVISOR.

 

CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

 

The following is, as of the date hereof, a general summary of certain Canadian federal income tax considerations under the Tax Act are generally applicable to a beneficial owner of Equity Shares and BRND Warrants (collectively, the “Securities”) following the Transaction who at all relevant times, for purposes of the Tax Act, deals at arm’s length with, and is not affiliated with, the Resulting Issuer and who will acquire and hold such Securities as capital property (a “Holder”), all within the meaning of the Tax Act. A Security will generally be considered to be capital property to a Holder unless the Holder holds (or will hold) such Security in the course of carrying on a business of trading or dealing in securities or has acquired (or will acquire) them in a transaction or transactions considered to be an adventure or concern in the nature of trade.

 

This summary is not applicable to a Holder: (a) that is a “financial institution” for purposes of the “mark-to-market rules” in the Tax Act; (b) an interest in which is a “tax shelter investment” as defined in the Tax Act; (c) that is a “specified financial institution” as defined in the Tax Act; (d) that has made a “functional currency” election under the Tax Act to determine its “Canadian tax results”, as defined in the Tax Act, in a currency other than Canadian currency; (e) that enters into, or has entered into, a “derivative forward agreement” as such term is defined in the Tax Act, with respect to a Security; (f) that is a BRND Founder; or (g) that is an Unsuitable Person. Any such Holder to which this summary does not apply should consult its own tax advisor. In addition, this summary does not address the deductibility of interest by a Holder who has borrowed money or otherwise incurred debt in connection with the acquisition or holding of Securities.

 

This summary does not address the possible application of the “foreign affiliate dumping” rules in section 212.3 of the Tax Act to a Holder that (i) is a corporation resident in Canada and (ii) is or becomes (or does not deal at arm’s length for purposes of the Tax Act with a corporation resident in Canada that is or becomes), as part of a transaction or event or series of transactions or events that includes the acquisition of an Equity Share, controlled by a non-resident corporation, non-resident individual, non-resident trust, or group of any of the foregoing who do not deal at arm’s length with each other for purposes of such rules. Such Holders should consult their own tax advisors with respect to the possible application of these rules.

 

This summary is of a general nature only, is based upon the current provisions of the Tax Act, specific proposals to amend the Tax Act (the “ Tax Proposals”) which have been announced by or on behalf the Minister of Finance (Canada) prior to the date hereof, and counsel’s understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency. This summary assumes that the Tax Proposals will be enacted in the form proposed and does not take into account or anticipate any other changes in law, whether by way of judicial, legislative or governmental decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ from the Canadian federal income tax considerations discussed herein. No assurances can be given that the Tax Proposals will be enacted as proposed or at all, or that legislative, judicial or administrative changes will not modify or change the statements expressed herein.

 

This summary is not exhaustive of all possible Canadian federal income tax considerations applicable to an investment in Securities and is not intended to be, nor should it be construed to be, legal or income tax advice to any particular Holder. Holders are urged to consult their own income tax advisors with respect to the tax consequences applicable to the acquisition, holding and disposition of Securities based on their own particular circumstances.

 

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Residents of Canada

 

This portion of the summary is applicable to a Holder who, for the purposes of the Tax Act and at all relevant times, is or is deemed to be resident in Canada (a “Resident Holder”). A Resident Holder whose Equity Shares might not otherwise qualify as capital property may, in certain circumstances, make the irrevocable election pursuant to subsection 39(4) of the Tax Act to deem their Equity Shares, and every other “Canadian security”, as defined in the Tax Act, owned by such Resident Holder in the taxation year of the election and in all subsequent taxation years, to be capital property. Such election will not apply in respect of BRND Warrants. Resident Holders should consult their own tax advisors with respect to whether an election under subsection 39(4) of the Tax Act is available and advisable having regard to their own particular circumstances.

 

Exercise or Expiry of BRND Warrants

 

No gain or loss will be realized by a Resident Holder of a BRND Warrant upon the exercise of such BRND Warrant. When a BRND Warrant is exercised, the Resident Holder’s cost of the Equity Share acquired thereby will be equal to the adjusted cost base of the BRND Warrant to such Resident Holder, plus the amount paid on the exercise of the BRND Warrant. For the purpose of computing the adjusted cost base to a Resident Holder of each Equity Share acquired on the exercise of a BRND Warrant, the cost of such Equity Share must be averaged with the adjusted cost base to such Resident Holder of all other Equity Shares of that class (if any) held by the Resident Holder as capital property immediately prior to the exercise of such BRND Warrant.

 

Generally, the expiry of an unexercised BRND Warrant will give rise to a capital loss equal to the adjusted cost base to the Resident Holder of such expired BRND Warrant. See “Disposition of Securities” below.

 

Disposition of Securities

 

A Resident Holder who disposes of or is deemed to have disposed of a Security (other than a disposition arising on the exercise of a BRND Warrant by a Resident Holder) will generally realize a capital gain (or incur a capital loss) in the year of disposition equal to the amount by which the proceeds of disposition in respect of the Security exceed (or are exceeded by) the aggregate of the adjusted cost base of such Security and any reasonable expenses associated with the disposition. The tax treatment of capital gains and capital losses is discussed in greater detail below under the subheading “Taxation of Capital Gains and Capital Losses”.

 

Taxation of Capital Gains and Capital Losses

 

Generally, one-half of any capital gain (a “taxable capital gain”) realized by a Resident Holder must be included in computing the Resident Holder’s income for the taxation year in which the disposition occurs. Subject to and in accordance with the provisions of the Tax Act, one-half of any capital loss incurred by a Resident Holder (an “allowable capital loss”) may be used to offset taxable capital gains realized by the Resident Holder in the taxation year of disposition. Allowable capital losses in excess of taxable capital gains for the taxation year of disposition may be applied to reduce net taxable gains realized by the Resident Holder in the three preceding taxation years or in any subsequent year in the circumstances and to the extent provided in the Tax Act.

 

The amount of any capital loss realized on the disposition of an Equity Share by a Resident Holder that is a corporation may, in certain circumstances, be reduced by the amount of dividends which have been previously received or deemed to have been received by the Resident Holder on such share. Similar rules may apply where a corporation is, directly or through a trust or partnership, a member of a partnership or a beneficiary of a trust that owns Equity Shares.

 

A Resident Holder that is, throughout the relevant taxation year, a “Canadian-controlled private corporation” (as defined in the Tax Act) may be subject to pay a refundable tax on its “aggregate investment income”, which is defined in the Tax Act to include capital gains on the disposition or deemed disposition of Securities.

 

Capital gains realized by an individual and certain trusts may result in the individual or trust paying minimum tax under the Tax Act.

 

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A Resident Holder may, in certain specific circumstances, be subject to United States tax on a gain realized on the disposition of a Security (see “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Dispositions of Equity Shares or BRND Warrants”). United States tax, if any, levied on any gain realized on a disposition of a Security may be eligible for a foreign tax credit under the Tax Act to the extent and under the circumstances described in the Tax Act. Generally, a foreign tax credit in respect of a tax paid to a particular foreign country is limited to the Canadian tax otherwise payable in respect of income sourced in that country. Gains realized on the disposition of a Security by a Resident Holder may not be treated as income sourced in the United States for these purposes. Resident Holders should consult their own tax advisors with respect to the availability of a foreign tax credit, having regard to their own particular circumstances.

 

Dividends on Equity Shares

 

Dividends (including deemed dividends) received on Equity Shares by a Resident Holder who is an individual (and certain trusts) will be included in the Resident Holder’s income and be subject to the gross-up and dividend tax credit rules applicable to taxable dividends received by an individual from taxable Canadian corporations, including the enhanced gross-up and dividend tax credit for “eligible dividends” properly designated as such by the Resulting Issuer.

 

Dividends (including deemed dividends) received on Equity Shares by a Resident Holder that is a corporation will be included in the Resident Holder’s income and will generally be deductible in computing such Resident Holder’s taxable income. In certain circumstances, subsection 55(2) of the Tax Act will treat a taxable dividend received by a Resident Holder that is a corporation as proceeds of disposition of the Equity Share or a capital gain. Resident Holders that are corporations should consult their own tax advisors having regard to their own circumstances.

 

A Resident Holder that is a “private corporation” (as defined in the Tax Act) or any other corporation resident in Canada and controlled, whether by reason of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or a related group of individuals (other than trusts), may be liable to pay a refundable tax under Part IV of the Tax Act on dividends received on the Equity Shares to the extent that such dividends are deductible in computing the Resident Holder’s taxable income. Dividends received by a Resident Holder that is an individual or a trust, other than certain specified trusts, may give rise to minimum tax under the Tax Act.

 

A Resident Holder may be subject to United States withholding tax on dividends received on the Equity Shares (see “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Distributions on Equity Shares”). Any United States withholding tax paid by or on behalf of a Resident Holder in respect of dividends received on the Equity Shares by a Resident Holder may be eligible for foreign tax credit or deduction treatment where applicable under the Tax Act. Generally, a foreign tax credit in respect of a tax paid to a particular foreign country is limited to the Canadian tax otherwise payable in respect of income sourced in that country. Dividends received on the Equity Shares by a Resident Holder may not be treated as income sourced in the United States for these purposes. Resident Holders should consult their own tax advisors with respect to the availability of any foreign tax credits or deductions under the Tax Act in respect of any United States withholding tax applicable to dividends on the Equity Shares.

 

Conversion of Equity Shares

 

The conversion of shares of a class of Equity Shares into shares of a different class of Equity Shares will be deemed not to constitute a disposition of property for purposes of the Tax Act and, accordingly, will not give rise to a capital gain or capital loss. The cost to a Resident Holder of the Equity Shares received on such conversion will be deemed to be equal to the Resident Holder’s adjusted cost base of the converted shares immediately before the conversion. For the purpose of computing the adjusted cost base to a Holder of each Equity Share of a particular class acquired on such conversion, the cost of such Equity Share must be averaged with the adjusted cost base to such Holder of all other shares of that class (if any) held by the Holder as capital property immediately prior to the conversion.

 

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Eligibility for Investment

 

The Equity Shares and the BRND Warrants will, on the date hereof, be qualified investments for a trust governed by a registered retirement savings plan (“RRSP”), a registered retirement income fund (“RRIF”), a deferred profit sharing plan, a registered education savings plan (“RESP”), a registered disability savings plan (“RDSP”) or a tax-free savings account (“TFSA”), provided that:

 

(i) in the case of the Equity Shares, the Equity Shares are listed on a designated stock exchange for the purposes of the Tax Act (which currently includes the NEO Exchange); and

 

(ii) in the case of the BRND Warrants: (a) the BRND Warrants are listed on a designated stock exchange for purposes of the Tax Act (which currently includes the NEO Exchange); or (b) the shares to be issued on the exercise of the BRND Warrants are qualified investments as described in (i) above, provided that the Resulting Issuer is not, and deals at arm’s length with each person who is, an annuitant, a beneficiary, an employer or a subscriber under or a holder of such registered plan.

 

Notwithstanding the foregoing, the holder of a TFSA or an RDSP, the annuitant under an RRSP or RRIF, or the subscriber of an RESP, will be subject to a penalty tax in respect of the Equity Shares or BRND Warrants held in the TFSA, RRSP, RRIF, RDSP or RESP if such Securities are prohibited investments for the TFSA, RRSP, RRIF, RDSP or RESP. A Security will generally be a “prohibited investment” for a TFSA, RRSP, RRIF, RDSP or RRIF if the holder of the TFSA or RDSP, the annuitant under the RRSP or RRIF, or the subscriber of the RESP does not deal at arm’s length with the Resulting Issuer for the purposes of the Tax Act, or the holder, annuitant or subscriber has a “significant interest” (as defined in subsection 207.01(4) the Tax Act) in the Resulting Issuer. Holders of a TFSA or RDSP, annuitants under an RRSP or RRIF, and subscribers of RESPs should consult their own tax advisors as to whether Securities will be a prohibited investment in their particular circumstances.

 

Non-Residents of Canada

 

This portion of the summary is generally applicable to a Holder who, for purposes of the Tax Act and at all relevant times, is neither resident nor deemed to be resident in Canada and does not use or hold, and will not be deemed to use or hold, Securities in a business carried on in Canada (a “Non-Resident Holder”). Special considerations, which are not discussed in the summary, may apply to a Non-Resident Holder that is an insurer that carries on an insurance business in Canada and elsewhere. Such Holders should consult their own advisers.

 

Exercise or Expiry of BRND Warrants

 

The tax consequences of the exercise and expiry of a BRND Warrant held by a Non-Resident Holder are the same as those described above under “Residents of Canada – Exercise or Expiry of BRND Warrants”.

 

Dividends on Equity Shares

 

Dividends paid or credited, or deemed to be paid or credited, on the Equity Shares to a Non-Resident Holder will be subject to non-resident withholding tax under the Tax Act at the rate of 25%, although such rate may be reduced under the terms of an applicable income tax convention between Canada and the country in which the Non-Resident Holder is resident. For example, the rate of withholding tax applicable to a dividend paid on the Equity Shares to a Non-Resident Holder who is a resident of the U.S. for purposes of the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), who beneficially owns the dividend and who qualifies for the benefits of the Canada- U.S. Tax Convention will generally be reduced to 15% or, if the Non-Resident Holder is a corporation that owns at least 10% of the voting stock of the Resulting Issuer, to 5%. Not all persons who are residents of the U.S. for purposes of the Canada-U.S. Tax Convention will qualify for the benefits of the Canada-U.S. Tax Convention. A Non-Resident Holder who is a resident of the U.S. is advised to consult its tax advisor in this regard.

 

A Non-Resident Holder may be subject to United States withholding tax on dividends received on the Equity Shares (see “Certain United States Federal Income Tax Considerations – Tax Consequences to Non-U.S. Holders – Distributions on Equity Shares”).

 

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Disposition of Securities

 

A Non-Resident Holder generally will not be subject to tax under the Tax Act in respect of a capital gain realized on the disposition or deemed disposition of a Security, nor will capital losses arising therefrom be recognized under the Tax Act, unless the Security constitutes “taxable Canadian property” to the Non-Resident Holder for purposes of the Tax Act, and the gain is not exempt from tax pursuant to the terms of an applicable income tax convention between Canada and the country in which the Non-Resident Holder is resident.

 

Generally, provided the Equity Shares are listed on a “designated stock exchange” for the purposes of the Tax Act (which currently includes the NEO Exchange) at the time of disposition, the Equity Shares and the BRND Warrants, as the case may be, generally will not constitute taxable Canadian property of a Non-Resident Holder unless, at any time during the 60-month period immediately preceding the disposition, the following two conditions are met concurrently: (i) the Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at arm’s length, partnerships in which the Non-Resident Holder or persons with whom the Non-Resident Holder did not deal at arm’s length held a membership interest, directly or indirectly through one or more partnerships, or the Non-Resident Holder together with all such persons, owned 25% or more of the issued Equity Shares or any other class or series of shares of the Resulting Issuer; and (ii) more than 50% of the fair market value of the Equity Shares was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, “Canadian resource property” (as defined in the Tax Act), “timber resource property” (as defined in the Tax Act), or any option in respect of, or interest in, or for civil law a right in such properties, whether or not the property exists. Notwithstanding the foregoing, a Security may otherwise be deemed to be taxable Canadian property to a Non-Resident Holder for purposes of the Tax Act.

 

Even if a Security is taxable Canadian property to a Non-Resident Holder, any capital gain realized upon the disposition of such Security may not be subject to tax under the Tax Act if such capital gain is exempt from Canadian tax pursuant to the provisions of an applicable income tax convention. If a Non-Resident Holder to whom Securities are taxable Canadian property is not exempt from tax under the Tax Act by virtue of an income tax convention, the consequences described under “Residents of Canada – Taxation of Capital Gains and Capital Losses” will generally apply.

 

Conversion of Equity Shares

 

The tax consequences of the conversion of shares of a class of Equity Shares into shares of a different class of Equity Shares are the same as those described above under “Residents of CanadaConversion of Equity Shares”.

 

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion sets forth a summary of the principal U.S. federal income tax consequences of (i) the Transaction to U.S. Holders (as defined below) of BRND Class A Restricted Voting Shares and BRND Warrants prior to the Transaction, (ii) the Transaction to the tax classification of the Resulting Issuer, (iii) the redemption of BRND Class A Restricted Voting Shares in connection with the Transaction to U.S. Holders or Non-U.S. Holders that elect to have all or a portion of their BRND Class A Restricted Voting Shares redeemed, and (iv) the ownership and disposition of the Equity Shares issued pursuant to the Transaction to U.S. Holders and Non-U.S. Holders, but does not purport to be a complete analysis of all potential tax matters for consideration in connection with the Transaction. This summary does not address the U.S. federal income tax consequences of any transactions that take place prior to the Transaction, including the sale of any BRND Class A Restricted Voting Shares or BRND Warrants prior to the Transaction.

 

This discussion is based on the provisions of the Code as well as final, temporary and proposed treasury regulations promulgated thereunder (the “Treasury Regulations”) and current administrative rulings and judicial decisions, all as in effect as of the date hereof. Legislative, judicial, or administrative modifications, revocations, or interpretations that occur in the future, which may or may not be retroactive, may result in U.S. federal income tax consequences significantly different from those discussed herein.

 

BRND has not obtained, and will not obtain, a ruling from the IRS or opinion of legal counsel with respect to any U.S. federal tax consequences of the Transaction described herein. This discussion is not binding on the IRS and the IRS may disagree with the discussion and conclusions herein, and its determination may be upheld by a court.

 

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This summary assumes that any shares of the Resulting Issuer are held as capital assets within the meaning of section 1221 of the Code (generally, property held for investment), in the hands of a shareholder at all relevant times and are treated as equity of the Resulting Issuer for U.S. federal income tax purposes. This discussion does not address all aspects of U.S. federal income taxation that may be relevant to particular holders in light of their personal investment or tax circumstances or to persons that are subject to special tax rules. For example, this summary of U.S. tax consequences does not address the tax treatment of special classes of holders who are subject to special rules, including without limitation: (a) financial institutions or financial services entities; (b) insurance companies; (c) taxpayers who have elected mark-to-market accounting for U.S. tax purposes; (d) tax-exempt entities; (e) governments or agencies or instrumentalities thereof; (f) regulated investment companies or real estate investment trusts; (g) brokers, dealers, or traders in securities or currencies; (h) United States expatriates or former long-term residents of the United States; (i) persons subject to the alternative minimum tax; (j) partnerships or other pass-through entities; (k) persons that hold BRND Class A Restricted Voting Shares or BRND Warrants as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; (l) controlled foreign corporations; (m) corporations that accumulate earnings to avoid U.S. federal income tax; (n) passive foreign investment companies; (o) holders who acquired their BRND Class A Restricted Voting Shares or BRND Warrants pursuant to employee stock options, participation in an employee stock purchase plan or otherwise as compensation; (p) except as discussed below in connection with the Conversion (as defined below), holders that own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the Resulting Issuer after the Transaction; and (q) persons whose functional currency is not the U.S. dollar. In addition, this summary does not address any U.S. federal estate, gift, or other non-income tax, or any state, local, or non-U.S. tax considerations of the ownership and disposition of Shares, BRND Class A Restricted Voting Shares or BRND Warrants or the impact of the alternative minimum tax or the Medicare contribution tax on net investment income.

 

If a partnership (including, for this purpose, any other entity either organized within or without the United States that is treated as a partnership for U.S. federal income tax purposes) holds BRND Class A Restricted Voting Shares, BRND Class B Shares or BRND Warrants, the U.S. federal income tax treatment of a partner as a beneficial owner of such shares generally will depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner in a partnership holding BRND Class A Restricted Voting Shares, BRND Class B Shares or BRND Warrants, such U.S. Holder should consult its own tax advisors regarding the tax consequences of the Transaction.

 

As used in this summary, the term U.S. Holder means a beneficial owner of the BRND Class A Restricted Voting Shares or BRND Warrants (or after the Transaction, of the Equity Shares or BRND Warrants) that is for U.S. federal income tax purposes: (a) an individual treated as a citizen or resident of the United States; (b) a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized) in or under the laws of the United States, any state thereof or the District of Columbia; (c) an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or (d) a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust or (ii) it has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.

 

A beneficial owner of the BRND Class A Restricted Voting Shares or BRND Warrants (or after the Transaction, of the Equity Shares or BRND Warrants) who is not a U.S. Holder and is not a partnership for U.S. federal income tax purposes is referred to as a Non-U.S. Holder.

 

THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. U.S. HOLDERS AND NON-U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE U.S. FEDERAL INCOME, ESTATE, AND GIFT TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE, LOCAL, AND NON-U.S. TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SHARES OF THE RESULTING ISSUER, BRND CLASS A RESTRICTED VOTING SHARES OR BRND WARRANTS.

 

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Tax Treatment of the Transaction to the Resulting Issuer and Classification of the Resulting Issuer as a U.S. Domestic Corporation

 

As a result of the Transaction, pursuant to section 7874(b) of the Code and the Treasury Regulations promulgated thereunder, notwithstanding that BRND is currently organized under the provisions of the BCBCA in connection with the Transaction, solely for U.S. federal income tax purposes, it is anticipated that the Resulting Issuer will be treated as converting to a U.S. domestic corporation at the end of the day immediately preceding the Effective Date under a tax-deferred reorganization under section 368(a) of the Code (the “Conversion”). We should not recognize any gain or loss as a result of the Conversion.

 

It is anticipated that we will experience a number of significant and complicated U.S. federal income tax consequences as a result of being treated as a U.S. domestic corporation for U.S. federal income tax purposes, and this summary does not attempt to describe all such U.S. federal income tax consequences. Section 7874 of the Code and the Treasury Regulations promulgated thereunder do not address all the possible tax consequences that arise from the Resulting Issuer being treated as a U.S. domestic corporation for U.S. federal income tax purposes. Accordingly, there may be additional or unforeseen U.S. federal income tax consequences to BRND that are not discussed in this summary.

 

Generally, the Resulting Issuer will be subject to U.S. federal income tax on its worldwide taxable income (regardless of whether such income is “U.S. source” or “foreign source”) and will be required to file a U.S. federal income tax return annually with the IRS. It is anticipated that the Resulting Issuer will also be subject to tax in Canada. It is unclear how the foreign tax credit rules under the Code will operate in certain circumstances, given the treatment of the Resulting Issuer as a U.S. domestic corporation for U.S. federal income tax purposes and the taxation of the Resulting Issuer in Canada. Accordingly, it is possible that the Resulting Issuer will be subject to double taxation with respect to all or part of its taxable income. It is anticipated that such U.S. and Canadian tax treatment will continue indefinitely and that the Equity Shares will be treated indefinitely as shares in a U.S. domestic corporation for U.S. federal income tax purposes, notwithstanding future transfers. The remainder of this summary assumes that the Resulting Issuer will be treated as a U.S. domestic corporation for U.S. federal income tax purposes.

 

Tax Consequences of the Transaction to U.S. Holders of BRND Class A Restricted Voting Shares

 

Conversion of BRND into a U.S. Domestic Corporation

 

Tax Considerations upon the Conversion

 

Subject to the discussion in “Effects of Section 367(b) of the Code Upon the Conversion” below, the following U.S. federal income tax consequences will result from the Conversion:

 

(i) U.S. Holders will be deemed to exchange their BRND Class A Restricted Voting Shares of a non-U.S. corporation for BRND Class A Restricted Voting Shares in a U.S. domestic corporation;

 

(ii) U.S. Holders should recognize no gain or loss as a result of the Conversion;

 

(iii) the aggregate tax basis of the BRND Class A Restricted Voting Shares after the Conversion will be the same as such U.S. Holder’s aggregate tax basis in the BRND Class A Restricted Voting Shares immediately prior to the Conversion; and

 

(iv) the holding period of the BRND Class A Restricted Voting Shares will include the holding period of the BRND Class A Restricted Voting Shares prior to the Conversion.

 

Effects of Section 367(b) of the Code Upon the Conversion

 

Notwithstanding qualification of the Conversion as a tax-deferred reorganization under section 368(a) of the Code, U.S. Holders may nevertheless, in certain circumstances, recognize taxable income in connection with the Conversion under section 367(b) of the Code. U.S. Holders who own, directly or indirectly under certain stock attribution rules, 10% or more of the value or combined voting power of the Resulting Issuer (each, a “10% U.S. Shareholder”) will be required to recognize as dividend income a proportionate share of the Resulting Issuer’s “all earnings and profits amount” (“All E&P Amount”), if any, as determined under applicable Treasury Regulations.

 

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A U.S. Holder that is not a 10% U.S. Shareholder immediately prior to the Transaction is not required to include any part of the All E&P Amount in income unless such U.S. Holder makes an election to do so (a “Deemed Dividend Election”). Absent a Deemed Dividend Election, such U.S. Holder must recognize gain, but will not recognize any loss, upon the deemed exchange of such U.S. Holder’s BRND Class A Restricted Voting Shares of a non-U.S. corporation for BRND Class A Restricted Voting Shares in a U.S. domestic corporation if such BRND Class A Restricted Voting Shares have a fair market value of $50,000 or more on the date the Transaction is completed. The gain recognized will be added to the transferred basis in BRND Class A Restricted Voting Shares that such U.S. Holder will be deemed to receive in the Conversion.

 

By making a Deemed Dividend Election, a U.S. Holder that is not a 10% U.S. Shareholder will, in lieu of recognizing a gain upon the exchange of BRND Class A Restricted Voting Shares for BRND Class A Restricted Voting Shares in a U.S. domestic corporation under the Transaction as described above, recognize as dividend income a proportionate share of BRND’s All E&P Amount, if any. A Deemed Dividend Election can be made only if BRND provides such U.S. Holder with information as to the All E&P Amount in respect of such U.S. Holder and the U.S. Holder elects and files certain notices with such U.S. Holder’s U.S. federal income tax return for the tax year in which the Transaction occurs.

 

BRND anticipates that it will have a nominal All E&P Amount per share from inception through to the Effective Date. BRND will continue to refine the computation of its All E&P Amount, as well as estimate its All E&P Amount through the date of closing of the Transaction, which closing date All E&P Amount will need to be finally determined after the Effective Date.

 

The rules under section 367 of the Code with respect to the Transaction and the deemed stock exchange are complex, and each U.S. Holder is strongly urged to consult its own tax advisors regarding these rules, including, if applicable, to make the foregoing election to avoid recognize gain on such deemed exchange of stock.

 

Passive Foreign Investment Company Considerations in Connection with the Conversion

 

In addition to the possibility of taxation under section 367(b) of Code as described above, the Conversion may be a taxable event to U.S. Holders if the Resulting Issuer is, or ever was, a passive foreign investment company (“PFIC”) as defined under section 1297 of Code.

 

A non-U.S. corporation is classified as a PFIC if, for a taxable year, (i) 75% or more of its gross income is passive income (as defined for U.S. federal income tax purposes) or (ii) 50% or more (by value) of its assets either produce or are held for the production of passive income, based on the quarterly average of the fair market value of such assets. For purposes of the PFIC provisions, “gross income” generally means sales revenues less cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” generally includes dividends, interest, royalties, rents, and gains from commodities or securities transactions. In determining whether or not it is classified as a PFIC, a non-U.S. corporation is required to take into account its pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest by value.

 

BRND believes that it was a PFIC during its initial tax year ended December 31, 2019, and based on its income, assets and activities during its current tax year, BRND expects that it should be a PFIC for its current tax year. PFIC classification is factual in nature, and generally cannot be determined until after the close of the tax year in question. Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. No opinion of legal counsel or ruling from the IRS concerning the PFIC status of BRND has been obtained and none will be requested. Consequently, there can be no assurances regarding the PFIC status of BRND during its current tax year or any prior or future tax year.

 

Under proposed Treasury Regulations, if BRND was classified as a PFIC for any tax year during which a U.S. Holder held BRND Class A Restricted Voting Shares, special rules, set forth in the proposed Treasury Regulations, may increase such U.S. Holder’s U.S. federal income tax liability with respect to the Conversion. Such proposed Treasury Regulations generally would require gain recognition by Non-Electing Shareholders (as defined below) as a result of the Conversion. Under such rules:

 

(i) the Conversion may be treated as a taxable exchange to such U.S. Holder even if such transaction otherwise qualifies as a tax-deferred reorganization under section 368(a) of the Code, as discussed above;

 

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(ii) any gain on the deemed exchange of the BRND Class A Restricted Voting Shares for BRND Class A Restricted Voting Shares in a U.S. corporation pursuant to the Conversion will be allocated ratably over such U.S. Holder’s holding period;

 

(iii) the amount allocated to the current tax year and any tax year prior to the first tax year in which BRND was classified as a PFIC will be taxed as ordinary income in the current tax year;

 

(iv) the amount allocated to each of the other tax years will be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year; and

 

(v) an interest charge for a deemed deferral benefit will be imposed with respect to the resulting tax attributable to each of the other tax years, which interest charge is not deductible by non-corporate U.S. Holders.

 

A U.S. Holder that has made a “mark-to-market” election under section 1296 of the Code (a “Mark-to-Market Election”) or a timely and effective election to treat BRND as a “qualified electing fund” (a “QEF”) under section 1295 of the Code (a “QEF Election”) may generally mitigate or avoid the PFIC consequences described above with respect to the Conversion. A U.S. Holder who makes a timely and effective QEF Election generally must report on a current basis its share of BRND’s net capital gain and ordinary earnings for any tax year in which BRND is a PFIC, whether or not BRND distributes any amounts to its shareholders. A U.S. Holder who makes the Mark-to-Market Election generally must include as ordinary income each year the excess of the fair market value of relevant shares over the U.S. Holder’s tax basis therein.

 

With respect to any tax year ending on or prior to the Effective Date, BRND will use commercially reasonable efforts to satisfy the record keeping requirements that apply to a QEF and supply U.S. Holders with information, including PFIC annual information statements, that such U.S. Holders require to report under the QEF rules. BRND may choose to provide the PFIC annual information statement on its website. Each U.S. Holder should consult its own tax advisors regarding the availability of, and procedure for making, a QEF Election. A shareholder who does not make a timely QEF Election or a Mark-to-Market Election is referred to for purposes of this summary as a “Non-Electing Shareholder”.

 

The PFIC provisions are complex. U.S. Holders should consult their own tax advisors regarding the application of the PFIC regime, including whether the proposed Treasury Regulations under section 1291(f) of the Code would apply to the Conversion, the impact of making a Mark-to-Market Election or a QEF Election and/or other elections under the PFIC provisions, and the availability of, and procedures for making, such elections under the Code and Treasury Regulations.

 

Conversion of BRND Class A Restricted Voting Shares to Equity Shares

 

The conversion of BRND Class A Restricted Voting Shares into Equity Shares should qualify as a tax-deferred “recapitalization” within the meaning of section 368(a)(1)(E) of the Code (a “Recapitalization”) and/or a tax-deferred exchange under section 1036(a) of the Code. If the conversion qualifies as a Recapitalization or tax-deferred exchange, then the following U.S. federal income tax consequences will result for U.S. Holders:

 

(vi) a U.S. Holder of BRND Class A Restricted Voting Shares who exchanges BRND Class A Restricted Voting Shares for Equity Shares will not recognize a gain or loss as a result of such conversion;

 

(vii) the aggregate tax basis of a U.S. Holder in the Equity Shares acquired in the conversion will be equal to such U.S. Holder’s aggregate tax basis in the BRND Class A Restricted Voting Shares surrendered in exchange therefor; and

 

(viii) the holding period of a U.S. Holder for the Equity Shares acquired in the conversion will include such U.S. Holder’s holding period for the BRND Class A Restricted Voting Shares surrendered in exchange therefor.

 

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Redemption of BRND Class A Restricted Voting Shares

 

We intend to treat a redemption of Class A Restricted Voting Shares in connection with the Transaction as a redemption occurring after the Conversion. The U.S. federal income tax treatment of U.S. Holders who elect to deposit their BRND Class A Restricted Voting Shares for redemption and whose BRND Class A Restricted Voting Shares are redeemed by BRND pursuant to the Transaction will depend on whether the redemption qualifies as a sale of the BRND Class A Restricted Voting Shares under section 302 of the Code. If the redemption qualifies as a sale of the BRND Class A Restricted Voting Shares under that section, the U.S. Holder will be treated as described under “ Dispositions of Equity Shares” below with respect to such U.S. Holder’s BRND Class A Restricted Voting Shares. If the redemption does not qualify as a sale of BRND Class A Restricted Voting Shares, the U.S. Holder will be treated as receiving a corporate distribution with the tax consequences described under “Distributions on Equity Shares” below with respect to their BRND Class A Restricted Voting Shares. Whether the redemption qualifies for sale treatment will depend largely on the percentage of the shares of BRND’s outstanding stock treated as held by the U.S. Holder (including any stock constructively owned by the U.S. Holder, for example, as a result of owning BRND Warrants) both before and after the redemption. The redemption of BRND Class A Restricted Voting Shares generally will be treated as a sale (rather than as a corporate distribution) if the redemption (i) is “substantially disproportionate” with respect to such U.S. Holder, (ii) results in a “complete termination” of such U.S. Holder’s interest in BRND or (iii) is “not essentially equivalent to a dividend” with respect to such U.S. Holder. These tests are explained more fully below.

 

In determining whether any of the foregoing tests are satisfied, a U.S. Holder takes into account not only stock actually owned by such U.S. Holder, but also shares that are constructively owned by such U.S. Holder. A U.S. Holder may constructively own, in addition to stock owned directly, stock owned by certain related individuals and entities in which the U.S. Holder has an interest or that have an interest in such U.S. Holder, as well as any stock the U.S. Holder has a right to acquire by exercise of an option, which would generally include Equity Shares which could be acquired pursuant to the exercise of the BRND Warrants. In order to meet the substantially disproportionate test, the percentage of BRND’s outstanding voting stock actually and constructively owned by the U.S. Holder immediately following the redemption of BRND Class A Restricted Voting Shares must, among other requirements, be less than 80% of the percentage of BRND’s outstanding voting stock actually and constructively owned by such U.S. Holder immediately before the redemption. There will be a complete termination of a U.S. Holder’s interest if either (i) all of the shares of BRND’s stock actually and constructively owned by the U.S. Holder are redeemed, or (ii) all of the shares of BRND’s stock actually owned by the U.S. Holder are redeemed and the U.S. Holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of stock owned by certain family members and the U.S. Holder does not constructively own any other stock of BRND. The redemption of the BRND Class A Restricted Voting Shares will not be essentially equivalent to a dividend if a U.S. Holder’s redemption results in a “meaningful reduction” of the U.S. Holder’s proportionate interest in BRND. Whether the redemption will result in a meaningful reduction of a U.S. Holder’s proportionate interest in BRND will depend on the particular facts and circumstances. However, the IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority stockholder in a publicly-held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.” A U.S. Holder should consult with its own tax advisors as to the tax consequences of a redemption of such U.S. Holder’s BRND Class A Restricted Voting Shares.

 

If none of the foregoing tests are satisfied, then the redemption will be treated as a corporate distribution and the tax effects will be as described under “Distributions on Equity Shares” below with respect to such U.S. Holder’s BRND Class A Restricted Voting Shares. After the application of those rules, any remaining tax basis of the U.S. Holder in the redeemed BRND Class A Restricted Voting Shares will be added to the U.S. Holder’s adjusted tax basis in its remaining BRND Class A Restricted Voting Shares, or, if it has none, to the U.S. Holder’s adjusted tax basis in its BRND Warrants, or possibly in other stock of BRND constructively owned by it.

 

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Tax Considerations of Holding and Disposing of Equity Shares after the Transaction

 

Distributions on Equity Shares

 

As discussed above in the section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of Equity Shares in the foreseeable future. If the Resulting Issuer decides to make any such distributions, however, the gross amount of any distribution paid by the Resulting Issuer on the Equity Shares generally should be included in the gross income of a U.S. Holder as a dividend to the extent the distribution is paid out of the Resulting Issuer’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent that the amount of any distribution exceeds the Resulting Issuer’s current and accumulated earnings and profits, the distribution should be treated, first, as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in its Equity Shares, and then, to the extent that the distribution exceeds the U.S. Holder’s adjusted tax basis in such shares, as a capital gain, which will be a long-term capital gain if the U.S. Holder has held such stock at the time of the distribution for more than one year. Distributions on Equity Shares constituting dividend income paid to U.S. Holders that are U.S. corporations may qualify for the dividends received deduction, subject to various limitations. Distributions on Equity Shares constituting dividend income paid to U.S. Holders that are individuals may qualify for the reduced rates applicable to qualified dividend income.

 

Foreign Tax Credit Limitations

 

Because it is anticipated that the Resulting Issuer will be subject to tax both as a U.S. domestic corporation and as a Canadian corporation, a U.S. Holder may pay, through withholding, Canadian tax, as well as U.S. federal income tax, with respect to dividends paid on its Equity Shares. For U.S. federal income tax purposes, a U.S. Holder may elect for any taxable year to receive either a credit or a deduction for all foreign income taxes paid by the holder during the year. Complex limitations apply to the foreign tax credit, including a general limitation that the credit cannot exceed the proportionate share of a taxpayer’s U.S. federal income tax that the taxpayer’s foreign source taxable income bears to the taxpayer’s worldwide taxable income. In applying this limitation, items of income and deduction must be classified, under complex rules, as either foreign source or U.S.-source. The status of the Resulting Issuer as a U.S. domestic corporation for U.S. federal income tax purposes will cause dividends paid by BRND to be treated as U.S. source rather than foreign source for this purpose. As a result, a foreign tax credit may be unavailable for any Canadian tax paid on dividends received from BRND. Similarly, to the extent a sale or disposition of the Equity Shares by a U.S. Holder results in Canadian tax payable by the U.S. Holder (for example, because the Equity Shares constitute taxable Canadian property within the meaning of the Tax Act), a U.S. foreign tax credit may be unavailable to the U.S. Holder for such Canadian tax. In each case, however, the U.S. Holder should be able to take a deduction for the U.S. Holder’s Canadian tax paid, provided that the U.S. Holder has not elected to credit other foreign taxes during the same taxable year. The foreign tax credit rules are complex, and each U.S. Holder should consult its own tax advisor regarding these rules.

 

Foreign Currency

 

If the Resulting Issuer makes a distribution in Canadian dollars or a currency other than U.S. dollars, the amount of the distribution that a U.S. Holder must include in income under the foregoing rules will be the U.S. dollar value of the non-U.S. dollar distribution, determined at the spot rate on the date the distribution is includible in the U.S. holder’s gross income, regardless of whether the distribution is converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the U.S. Holder includes the distribution in income to the date the holder converts the distribution into U.S. dollars will be treated as ordinary income or loss when recognized and will not be eligible for taxation at the preferential rates applicable to long-term capital gains. Different rules apply to U.S. Holders of Subordinate Voting Shares who use the accrual method of tax accounting. Each U.S. Holder should consult its own tax advisors.

 

Distributions by BRND to a U.S. Holder on Subordinate Voting Shares may be subject to withholding of Canadian tax. See “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada – Dividends on Equity Shares”.

 

Tax on Net Investment Income

 

Certain U.S. Holders that are individuals, estates, or trusts whose income exceeds certain thresholds will be required to pay an additional 3.8% tax on their “net investment income,” which includes, among other things, dividends and net gain from the sale or other disposition of property (other than property held in a trade or business, other than a passive trade or business or a trade or business consisting of trading financial instruments or commodities).

 

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Sale or Dispositions of Equity Shares

 

A U.S. Holder will generally recognize gain or loss, if any, on the sale, exchange, or other disposition of Subordinate Voting Shares equal to the difference between the U.S. Holder’s adjusted tax basis in Equity Shares and the U.S. dollar value of the amount realized on such sale or disposition. Such capital gain or loss will be long-term capital gain or loss if a U.S. Holder’s holding period in the Equity Shares disposed of is more than one year at the time of the sale or other disposition. Long-term capital gains recognized by certain non-corporate U.S. Holders (including individuals) will generally be subject to a maximum U.S. federal income tax rate of 20%. Deductions for capital losses are subject to limitations.

 

Back-Up Withholding and Information Reporting

 

Payments of dividends on or proceeds arising from the sale or other taxable disposition of Equity Shares generally will be subject to information reporting and back-up withholding, at the current federal rate of 24%, if a U.S. Holder (i) fails to furnish such holder’s correct U.S. taxpayer identification number (generally on IRS Form W-9), (ii) furnishes an incorrect U.S. taxpayer identification number, (iii) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to back-up withholding, or (iv) fails to certify under penalties of perjury that the U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified the U.S. Holder that it is subject to back-up withholding.

 

Back-up withholding is not an additional tax. Any amounts withheld under the back-up withholding rules may be refunded or credited against the U.S. Holder’s U.S. federal income tax liability, assuming the required information is timely provided to the IRS. Moreover, certain penalties may be imposed by the IRS on a U.S. Holder who is required to furnish information but does not do so in the proper manner.

 

U.S. Holders should consult with their own tax advisors regarding the effect, if any, of the foregoing summary on their ownership and disposition of Equity Shares.

 

Tax Consequences of the Transaction to U.S. Holders of BRND Warrants

 

Investment Unit

 

The BRND Warrants and Class A Restricted Voting Share originally purchased with each BRND Warrant (and the Subordinate Voting Share into which such Class A Restricted Voting Share converts) should be treated for U.S. federal income tax purposes as an investment unit consisting of one Equity Share and one-half BRND Warrant to acquire one-half Equity Share. For U.S. federal income tax purposes, the purchase price paid for each investment unit will be allocated between the Equity Shares and BRND Warrants based on their respective relative fair market values. This allocation will be based upon our determination of the relative values of the BRND Warrants and of the Equity Shares.

 

U.S. Holders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of an investment in a unit, and the allocation of the purchase price paid for a unit.

 

Exercise or Lapse of BRND Warrants

 

A U.S. Holder generally will not recognize gain or loss on exercise of the BRND Warrant and will have a tax basis in the Equity Shares received upon exercise equal to the U.S. Holder’s tax basis in the BRND Warrants, plus the exercise price of the BRND Warrants. The holding period for the Equity Shares purchased pursuant to the exercise of BRND Warrant will begin on the date following the date of exercise of the BRND Warrant (or possibly the date of exercise) and will not include the period during which the U.S. Holder held the applicable BRND Warrant.

 

If a BRND Warrant is allowed to lapse unexercised, a U.S. Holder will recognize a capital loss in an amount equal to its tax basis in the applicable BRND Warrant. Such loss will be long-term capital loss if the BRND Warrant has been held for more than one year as of the date the applicable BRND Warrant lapsed. The deductibility of capital losses is subject to certain limitations.

 

Sale or Disposition of BRND Warrants

 

A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of a BRND Warrant in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in the BRND Warrant sold or otherwise disposed of. Any such gain or loss generally will be a capital gain or loss, which will be long-term capital gain or loss if the BRND Warrant is held for more than one year. Deductions for capital losses are subject to various limitations under the Code.

 

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Tax Consequences to Non-U.S. Holders

 

Distributions on Equity Shares

 

The gross amount of any distribution by the Resulting Issuer to a Non-U.S. Holder on Equity Shares will be treated as a dividend to the extent such distribution is paid out of the Resulting Issuer’s current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent that the amount of any distribution exceeds the Resulting Issuer’s current and accumulated earnings and profits for a taxable year, the distribution will be treated as a tax-free return of capital to the extent of the Non-U.S. Holder’s tax basis in its Equity Shares. Then, to the extent that such distribution exceeds the Non-U.S. Holder’s tax basis in its Equity Shares, it will be treated as gain from the sale or exchange of the Non-U.S. Holder’s Equity Shares (see “Dispositions of Equity Shares” below). Any such distribution that constitutes a dividend is treated as U.S.-source gross income and is subject to withholding under section 1441 of the Code (unless it is treated as “effectively connected” income as described below and appropriate documentation is provided). The withholding rate on dividends under section 1441 of the Code is generally 30%, but may be reduced pursuant to a tax treaty between the U.S. and the jurisdiction of the Non-U.S. Holders. Non-U.S. Holders will be required to provide documentation to claim a treaty exemption or reduced rate of withholding with respect to the distribution. Non-U.S. Holders should also review the discussion of the FATCA rules below. Distributions by the Resulting Issuer to a Non-U.S. Holder on Equity Shares may also be subject to withholding of Canadian tax. See “Certain Canadian Federal Income Tax Considerations – Non-Residents of Canada – Dividends on Equity Shares”. Non-U.S. Holders should consult their own tax advisors regarding the extent to which they may be entitled to claim a credit or deduction in their jurisdiction of residence for any taxes withheld on distributions by the Resulting Issuer on the Subordinate Voting Shares.

 

Dispositions of Equity Shares or BRND Warrants

 

A Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain recognized upon the disposition of Equity Shares or BRND Warrants unless:

 

(i) such Non-U.S. Holder is a non-resident alien individual who is present in the United States for a period or periods aggregating 183 days or more during the taxable year of disposition and certain other conditions are met;

 

(ii) such gain is effectively connected with such Non-U.S. Holder’s conduct of a U.S. trade or business (and, where a tax treaty applies, is attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder); or

 

(iii) Equity Shares or BRND Warrants constitute a U.S. real property interest by reason of the Resulting Issuer’s status as a “United States real property holding corporation” within the meaning of section 897 of the Code.

 

A Non-U.S. Holder described in the first bullet above is required to pay tax at a flat 30% rate (or such lower rate specified by an applicable income tax treaty) on the gain derived from the sale, which may be offset by U.S.-source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses. A Non-U.S. Holder described in the second bullet above, or if the third bullet applies, is required to pay tax on the net gain derived from the sale under regular graduated U.S. federal income tax rates, and corporate Non-U.S. Holders described in the second bullet above may also be subject to branch profits tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty). With respect to the third bullet point above, BRND believes it currently is not, and does not anticipate becoming, a USRPHC. Because the determination of whether BRND is a USRPHC depends, however, on the fair market value of BRND’s USRPIs relative to the fair market value of BRND’s non-U.S. real property interests and other business assets, there can be no assurance BRND currently is not a USRPHC or will not become one in the future. Even if BRND is or were to become a USRPHC, gain arising from the sale or other taxable disposition by a Non-U.S. Holder of Equity Shares will not be subject to U.S. federal income tax if the Equity Shares are “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market and such Non-U.S. Holder owned, actually and constructively, 5% or less of the Equity Shares throughout the shorter of the five (5)-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

 

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Non-U.S. Holders should consult any applicable income tax treaties that may provide for different results. Non-U.S. Holders should also review the discussion of the FATCA rules, below.

 

Back-Up Withholding and Information Reporting

 

Generally, BRND must report annually to the IRS and to Non-U.S. Holders the amount of dividends paid and the amount of tax, if any, withheld with respect to those payments. These information reporting requirements apply even if withholding is not required. Pursuant to tax treaties or other agreements, the IRS may make such information available to tax authorities in the Non-U.S. Holder’s country of residence. The payment of proceeds from the sale of Subordinate Voting Shares by a broker to a Non-U.S. Holder is generally not subject to information reporting if:

 

(i) the Non-U.S. Holder certifies its non-U.S. status under penalties of perjury by providing a properly executed IRS Form W-8BEN, or otherwise establishes an exemption; or

 

(ii) the sale of Equity Shares is effected outside the United States by a foreign office of a broker, unless the broker is: (1) a U.S. person; (2) a foreign person that derives 50% or more of its gross income for certain periods from activities that are effectively connected with the conduct of a trade or business in the United States; (3) a “controlled foreign corporation” for U.S. federal income tax purposes; or (4) a foreign partnership more than 50% of the capital or profits interest of which is owned by one or more U.S. persons or which engages in a U.S. trade or business.

 

A back-up withholding may apply to amounts paid to a Non-U.S. Holder if the Non-U.S. Holder fails to properly establish its foreign status on the applicable IRS Form W-8 or if certain other conditions are met. Back- up withholding is not an additional tax. Any amounts withheld under the back-up withholding rules may be refunded or credited against the Non-U.S. Holder’s U.S. federal income tax liability, assuming the required information is timely provided to the IRS.

 

Foreign Account Tax Compliance Act

 

Withholding taxes may be imposed under sections 1471 to 1474 of the Code (such sections commonly referred to as the Foreign Account Tax Compliance Act, or “FATCA”), on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on Equity Shares paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (a) the foreign financial institution undertakes certain diligence and reporting obligations, (b) the non-financial foreign entity either certifies it does not have any “substantial United States owners,” as defined in the Code, or furnishes identifying information regarding each substantial United States owner, or (c) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in (a) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States-owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules. Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on the Equity Shares. Under currently proposed Treasury Regulations, “withholdable payments” do not include any gross proceeds from the disposition of property of a type that can produce U.S.-source dividends or interest. Non-U.S. Holders should consult their tax advisors regarding of withholding under FATCA to their investment in Equity Shares.

 

PROMOTER

 

Mercer, BRND’s sponsor (who is also a BRND Founder), is considered a promoter of BRND within the meaning of applicable securities legislation.

 

As of the date of this prospectus, Mercer owns, of record and beneficially, (i) 10,178,751 BRND Class B Shares (comprised of 10,089,750 BRND Founders’ Shares, the 109,000 BRND Class B Shares forming part of the 109,000 (former) BRND Class B Units, and 1 Class B Share representing the Incorporation Share), representing approximately 20% of BRND’s currently issued and outstanding shares, and (ii) 9,864,500 BRND Warrants (comprised of 9,810,000 BRND Founders’ Warrants and the 54,5000 BRND Warrants forming part of the (former) 109,000 BRND Class B Units), representing approximately 32.89% of the issued and outstanding BRND Warrants.

 

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As of the Effective Date, and assuming that no BRND Shareholders elect to redeem their BRND Class A Restricted Voting Shares and before any exchange of Exchangeable Shares for Equity Shares, Mercer is expected to own 10,178,751 Equity Shares, representing (i) a total voting power of approximately 3.4% over the Resulting Issuer, and (ii) approximately 20% of the issued and outstanding Equity Shares.

 

LEGAL PROCEEDINGS AND REGULATORY ACTIONS

 

BRND is not party to any legal proceedings, nor, to the knowledge of BRND, are any such proceedings contemplated by or against BRND.

 

INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

 

Except as described in this prospectus, none of the proposed directors or executive officers of BRND, or any person or company that is expected to beneficially own, or control or direct more than 10% of any class or series of shares of BRND, or any associate or Affiliate of any of the foregoing persons, has or has had any material interest in any past transaction within the three years before the date of the prospectus, or any proposed transaction, that has materially affected or would materially affect BRND or any of its expected subsidiaries.

 

As at December 31, 2020, the amount due to Mercer by BRND was $205,000 for out-of-pocket expenses paid by Mercer on behalf of BRND and the terms of the administrative services agreement which was entered into by Mercer and BRND as part of the 2019 initial public offering of BRND. The amounts due are unsecured, non-interest bearing and are payable no earlier than the date of the consummation of the Transaction, with no recourse against the funds held in BRND’s escrow account.

 

Since the BRND Founders (including our sponsor, Mercer) will lose their investment in BRND if a qualifying transaction is not completed, they may have different interests than holders of Class A Restricted Voting Shares in evaluating whether a proposed qualifying transaction, such as the Qualifying Transaction, is appropriate. The BRND Founders will not be entitled to redeem their BRND Founders’ Shares in connection with a qualifying transaction or be entitled to access to BRND’s escrow account in respect thereof upon BRND’s winding-up. The personal and financial interests of the BRND Founders may influence the identifying and selecting of the qualifying transaction, the voting on the qualifying transaction and the operation of the business following the qualifying transaction.

 

AUDITORS

 

The auditor of BRND is MNP LLP, having an address at 111 Richmond Street West, Suite 300, Toronto, Ontario, Canada M5H 2G4. Such firm is independent of BRND within the meaning of the Rules of Professional Conduct of the Chartered Professional Accountants of Ontario and within the meaning of PCAOB Rule 3520, Auditor Independence.

 

The auditor of GH Group is Macias Gini & O’Connell, LLP, having an address at 700 South Flower Street, Suite 800, Los Angeles, CA 90017. Such firm is independent of GH Group and BRND within the meaning of the CPA Code of Professional Conduct and within the meaning of PCAOB Rule 3520, Auditor Independence.

 

Upon completion of the Transaction it is proposed that Macias Gini & O’Connell, LLP will be the auditor of the Resulting Issuer.

 

REGISTRAR AND TRANSFER AGENT

 

The transfer agent and registrar of the Equity Shares and the Multiple Voting Shares will be Odyssey Trust Company at its principal offices in Calgary, Alberta.

 

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MATERIAL CONTRACTS

 

The following are expected to be the material contracts of the Resulting Issuer following closing of the Transaction, other than contracts entered into in the ordinary course of business:

 

the Warrant Agreement;
the Investor Rights Agreement;
the Registration Rights Agreement;
the Lockup Agreement;
the Exchange Rights Agreement; and
the SoCal Greenhouse Agreements.

 

At this time, the following leases of GH Group, which represent GH Group’s two (2) most significant leases, are considered to be material contracts entered into for the purposes of this prospectus:

 

the lease dated as of June 4, 2017 by and between 3243 Sacramento LLC, as lessor, and Farmacy Berkeley, as lessee; and
the lease dated as of October 1, 2018 between Neo Street Partners LLC and Lompoc TIC, LLC, as lessor, and CA Manufacturing Solutions LLC, as lessee.

 

No lease represents more than 10% of the consolidated revenues of GH Group.

 

To the extent that cannabis-related licenses could also be considered to be material contracts, see “The Business of GH Group – Cultivation Licenses”, “The Business of GH Group – Manufacturing and Distribution Licenses”, “The Business of GH Group – The Pottery License” and “The Business of GH Group – Bud and Bloom License”.

 

Copies of the above material contracts will be available following completion of the Transaction on the Resulting Issuer’s SEDAR profile at www.sedar.com. Set out below are the particulars of certain material contracts not described elsewhere in this prospectus.

 

CONTRACTUAL RIGHT OF ACTION

 

Original purchasers of BRND Class A Restricted Voting Shares and BRND Warrants from the underwriters in BRND’s initial public offering who continue to hold those securities up to the Redemption Deadline will have a contractual right of action for rescission or damages against BRND (as well as a contractual right of action for damages alone against: (a) the directors of BRND as of the Redemption Deadline (the “BRND directors”), and (b) every person or company who signs this prospectus, which, for greater certainty, includes Mercer as a promoter of BRND (collectively, the “signatories”)).

 

In the event that BRND’s qualifying transaction is completed and if this prospectus or any amendment hereto contains a misrepresentation (as defined in the Securities Act (Ontario)), provided that such claims for rescission or damages are commenced by the purchaser not later than: (a) in the case of an action for rescission, 180 days after the Redemption Deadline, or (b) in the case of an action for damages, the earlier of: (i) 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or (ii) three (3) years after the Redemption Deadline, a purchaser who purchased BRND Class A Restricted Voting Shares and BRND Warrants from BRND in its initial public offering shall, in respect of such BRND Class A Restricted Voting Shares, as re-designated pursuant to the Transaction as the applicable Equity Shares, and such BRND Warrants be entitled to, in addition to any other remedy available at the time to such holder, (i) as against BRND, in the case of rescission, the amount paid for such BRND Class A Restricted Voting Shares and/or such BRND Warrants, as applicable, upon surrender of such securities, and (ii) as against BRND, the BRND directors and the signatories, in the case of a damages election, their proven damages.

 

These parties have attorned to the jurisdiction of the courts of Ontario in respect of such rights of action.

 

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In addition, the following additional provisions apply to actions against the BRND directors or the signatories (including the promoter):

 

(i) each has a due diligence defence and the other defences and rights contemplated in section 130 of the Securities Act (Ontario) and at law; and

 

(ii) each is entitled to be indemnified by BRND to the maximum extent permitted by law.

 

This contractual right of action for rescission or damages will, subject to the foregoing, be consistent with the statutory right of rescission or damages described under section 130 of the Securities Act (Ontario). In no case shall the amount recoverable exceed the original purchase price of the BRND Class A Restricted Voting Units. In addition, for non-residents of Canada, the contractual right shall be subject to the same interpretational or constitutional defences, if any, as would apply to a claim against a resident Canadian issuer under section 130 of the Securities Act (Ontario), and, as a result, the argument that non-residents are not entitled to take advantage of the contractual right shall not be precluded.

 

The directors of BRND as at the date of the final prospectus (or any amendment), namely Jonathan Sandelman, Charles Miles, Lawrence Hackett and Andrew Smith, will, subject to the terms thereof, be potentially liable for misrepresentations in this final prospectus (as it may be amended) under Part XXIII.1 of the Securities Act (Ontario) and the “Contractual Right of Action” as described above. New directors of BRND appointed after such date will not be subject to such liability as such.

 

SECURITIES LAWS EXEMPTIONS

 

BRND has applied to the applicable Canadian securities regulatory authorities for relief from the requirement in sections 3.2 and 3.3 of NI 52-107 that the financial statements included in this prospectus be prepared in accordance with International Financial Reporting Standards and audited as required in accordance with Canadian generally accepted auditing standards, respectively (the “Accounting Standards Relief”). The Accounting Standards Relief will allow this prospectus to include financial statements prepared in accordance with U.S. GAAP and audited as required in accordance with the standards of the U.S. PCAOB GAAS.

 

BRND’s application for the Accounting Standards Relief is based on the fact that: (i) prior to the filing of its final prospectus, BRND will have filed a Form 40- F registration statement with the Securities and Exchange Commission (“SEC”) in the United States and became an SEC issuer (as such term is defined in NI 52-107); and (ii) the use of U.S. GAAP and U.S. PCAOB GAAS is permitted by NI 52-107 for reporting issuers that are SEC issuers. An order signed by the securities regulatory authority in Ontario will constitute evidence that the Accounting Standards Relief has been granted.

 

The Corporation has applied for exemptive relief from the Canadian securities regulatory authorities such that, inter alia, upon closing of the Transaction, each class of Equity Shares may be aggregated for the purposes of certain securities law reporting thresholds, including in respect of certain take-over bid and issuer bid rules and the early warning requirements under National Instrument 62-104 – Take-Over Bid and Issuer Bids.

 

FINANCIAL STATEMENTS

 

Please see attached the following financial statements:

 

audited financial statements of BRND as of and for the year ended December 31, 2020 and December 31, 2019, in each case with the notes thereto and the auditors’ report thereon, attached to this prospectus as Appendix A (the “BRND Audited Annual Financial Statements”);

 

audited consolidated financial statements of GH Group as of and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, in each case with the notes thereto and the auditors’ report thereon, attached to this prospectus as Appendix C (the “GH Group Audited Annual Financial Statements”);

 

audited combined financial statements as of and for the eight (8)-month period ended August 31, 2019 and the year ended December 31, 2018, in each case with the notes thereto and the auditor’s report thereon, attached to this prospectus as Appendix F (the “Bud and Bloom Audited Financial Statements”);

 

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audited financial statements of Farmacy Berkeley as of and for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, in each case with the notes thereto and the auditor’s report thereon, attached to this prospectus as Appendix H (the “Farmacy Berkeley Audited Annual Financial Statements”);

 

audited consolidated financial statements of the applicable subsidiaries of Element 7 as of and for the years ended December 31, 2020 and December 31, 2019, in each case with the notes thereto and the auditor’s report thereon, attached to this prospectus as Appendix J (the “Element 7 Audited Annual Financial Statements”); and

 

unaudited pro forma financial statements of BRND, after giving effect to the Transaction, as of and for the year ended December 31, 2020, together with the notes thereto, and attached to this prospectus as Appendix K (the “Resulting Issuer Pro Forma Financial Statements”).

 

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APPENDIX A – BRND AUDITED ANNUAL FINANCIAL STATEMENTS

(YEARS ENDED DECEMBER 31, 2020 AND 2019)

 

(See attached)

 

  A-1  

 

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

FINANCIAL STATEMENTS

 

YEAR ENDED DECEMBER 31, 2020

 

AND

 

APRIL 16, 2019 (DATE OF INCORPORATION)

 

TO DECEMBER 31, 2019

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders of Mercer Park Brand Acquisition Corp.

 

Opinion

 

We have audited the accompanying balance sheets of Mercer Park Brand Acquisition Corp. (“the Corporation”) as of December 31, 2020 and 2019 and the related statements of operations and comprehensive income, shareholders’ deficiency, and cash flows for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019, and the related notes (collectively referred to as the financial statements).

 

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Material Uncertainty Related to Going Concern

 

The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 1 to the financial statements, the Corporation is dependent on the continued support of its Sponsor and/or the completion of the Qualifying Transaction within the permitted timeline, that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Change in Accounting Framework

 

The Corporation has elected to change its accounting framework from International Financial Reporting Standards as issued by the International Accounting Standards Board to accounting principles generally accepted in the United States of America for the year ended December 31, 2020 and the period from April 16, 2019 (date of incorporation) to December 31, 2019.

 

Basis for Opinion

 

These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on the Corporation’s financial statements based on our audits. We are a public accounting firm registered with the Public Corporation Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

Chartered Professional Accountants

Licensed Public Accountants

 

We have served as the Corporation’s auditor since 2019.

 

Toronto, Canada

March 29, 2021

 

 

 

 

Mercer Park Brand Acquisition Corp.

Balance Sheets

(Expressed in United Stated Dollars)

 

As at December 31,   2020     2019  
ASSETS                
                 
Current                
Cash   $ 2,095,023     $ 4,127,262  
Income tax recoverable     1,209,852       -  
Prepaid expenses     -       140,869  
      3,304,875       4,268,131  
                 
Marketable securities held in a escrow account (note 5)     407,537,056       405,796,047  
Deferred tax asset (note 14)     598,435       713,425  
Total assets   $ 411,440,366     $ 410,777,603  
                 
LIABILITIES AND SHAREHOLDERS' DEFICIENCY                
                 
Current   $ 396,779     $ 144,757  
Accounts payable and accrued liabilities                
Income tax payable (note 14)     -       713,425  
Due to related parties (note 12)     349,034       172,214  
      745,813       1,030,396  
Deferred underwriters' commission (note 9)     16,100,000       16,100,000  
Total liabilities     16,845,813       17,130,396  
                 
Commitments and contingencies                
Class A Restricted Voting Shares subject to redemption, 40,250,000 shares (at a redemption value of $10.00 per share) (note 6)     402,500,000       402,500,000  
                 
Shareholders' deficiency     -       -  
Class B shares, unlimited authorized, 10,198,751 issued (note 8(a))                
Additional paid-in-capital     (11,684,284 )     (11,684,284 )
Retained earnings     3,778,837       2,831,491  
Total shareholders' deficiency     (7,905,447 )     (8,852,793 )
Total liabilities and shareholders' deficiency   $ 411,440,366     $ 410,777,603  

 

The accompanying notes are an integral part of these financial statements.

 

Description of organization and business operations and going concern (note 1)

Subsequent event (note 15)

 

Approved on behalf of the Board:

 

"Jonathan Sandelman", Director  
   
"Charles Miles", Director  

 

  - 3 -  

 

 

Mercer Park Brand Acquisition Corp.

Statements of Operations and Comprehensive Income

(Expressed in United States Dollars)

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Income                
Interest income   $ 1,742,747     $ 3,296,977  
                 
Expenses                
General and administrative (note 11)     702,259       381,137  
Travel     50,000       85,000  
Foreign exchange loss (gain)     43,142       (651 )
      795,401       465,486  
Net income before income taxes     947,346       2,831,491  
                 
Income taxes (note 14)                
Current tax (recovery) expense     (114,990 )     713,425  
Deferred tax expense (recovery)     114,990       (713,425 )
      -       -  
Net income and comprehensive income for the year/period   $ 947,346     $ 2,831,491  
                 
Basic and diluted net income per Class B share   $ 0.09     $ 0.31  
Weighted average number of Class B Shares outstanding (basic and diluted)     10,198,751       9,253,693  

 

The accompanying notes are an integral part of these financial statements.

 

  - 4 -  

 

 

Mercer Park Brand Acquisition Corp.

Statements of Cash Flows

(Expressed in United States Dollars)

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Operating activities                
Net income for the year/period Items not affecting cash:   $ 947,346     $ 2,831,491  
Deferred tax     114,990       (713,425 )
Changes in non-cash working capital items:                
Prepaid expenses     140,869       (140,869 )
Accounts payable and accrued liabilities     252,022       144,757  
Due to related parties     176,820       172,214  
Income tax payable/(recoverable)     (1,923,277 )     713,425  
Net cash (used in) provided by operating activities     (291,230 )     3,007,593  
                 
Investing activity                
Investment in marketable securities held in a escrow account, net     (1,741,009 )     (405,796,047 )
Net cash used in investing activity     (1,741,009 )     (405,796,047 )
                 
Financing activities                
Proceeds from issuance of Class B Shares to Founders (note 8(a))     -       25,010  
Proceeds from issuance of Class B Units (note 8(a))     -       1,090,000  
Proceeds from issuance of Warrants to Founders (note 7)     -       9,810,000  
Proceeds from issuance of Class A Restricted Voting Units (note 6)     -       402,500,000  
Transaction costs (note 9)     -       (6,509,294 )
Net cash provided by financing activities     -       406,915,716  
                 
Net change in cash during the year/period     (2,032,239 )     4,127,262  
Balance, beginning of year/period     4,127,262       -  
Balance, end of year/period   $ 2,095,023     $ 4,127,262  
                 
Supplementary information                
Income taxes paid   $ 1,808,297     $ -  
Interest received in cash     1,742,747       2,506,813  

 

The accompanying notes are an integral part of these financial statements.

 

  - 5 -  

 

 

Mercer Park Brand Acquisition Corp.

Statement of Changes in Shareholders' Deficiency

(Expressed in United States Dollars)

  

                      Total  
    Class B shares     Additional Paid-in capital           Shareholder's  
    Number     Amount     Number     Amount     Retained Earnings     Deficiency  
From commencement of operations on April 16, 2019     -     $ -       -     $ -     $ -     $ -  
Issuance of Class B Shares in connection with organization of the Corporation (note 8(a))     1       -       -       10       -       10  
Issuance of Class B Shares to Founders (note 1 and note 8(a))     10,089,750       -       -       25,000       -       25,000  
Issuance of Warrants to Founders     -       -       9,810,000       9,810,000       -       9,810,000  
Issuance of Class B Units to Sponsor (note 1 and note 8(a)) (share portion)     109,000       -       -       1,056,210       -       1,056,210  
Issuance of Class B Units to Sponsor (note 1 and note 8(a)) (Warrant portion)     -       -       54,500       33,790       -       33,790  
Issuance of Class A Restricted Voting Units pursuant to the Offering (note 6) (share portion)     -       -       40,250,000       390,022,500       -       390,022,500  
Issuance of Class A Restricted Voting Units pursuant to the Offering (note 6) (Warrant portion)     -       -       20,125,000       12,477,500       -       12,477,500  
Class A Restricted Voting Shares subject to possible redemption; 40,250,000 Shares at a redemption value of $10 per share     -       -       (40,250,000 )     (402,500,000 )     -       (402,500,000 )
Transaction costs (note 9)             -       -       (22,609,294 )     -       (22,609,294 )
Net income and comprehensive income for the period     -               -       -       2,831,491       2,831,491  
Balance, December 31, 2019     10,198,751       -       29,989,500       (11,684,284 )     2,831,491       (8,852,793 )
Net income and comprehensive income for the year     -               -       -       947,346       947,346  
Balance, December 31, 2020     10,198,751     $ -       29,989,500     $ (11,684,284)     $ 3,778,837     $ (7,905,447 )

 

The accompanying notes are an integral part of these financial statements.

 

  - 6 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

1.            Description of organization and business operations and going concern

 

Mercer Park Brand Acquisition Corp. (the “Corporation”) 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.

 

The Corporation's ability to continue as a going concern is dependent on the continued support of its Sponsor, Mercer Park CB II, L.P. and/or upon the completion of the Qualifying Transaction within the permitted timeline which is prior to May 13, 2021. There can be no assurance that we will be successful in completing our Qualifying Transaction. Under the NEO rules, the Corporation is able to borrow funds from the Sponsor (see Note 10). In the event our Qualifying Transaction does not occur the escrowed cash will be returned to the Class A restricted voting shareholders and the Sponsor will have no recourse against the escrowed cash.

 

These uncertainties cast significant doubt upon the Corporation's ability to continue as a going concern and the ultimate appropriateness of using accounting principles applicable to a going concern. These financial statements do not include any adjustments to the amounts and classification of assets and liabilities that might be necessary should the Corporation be unable to continue as a going concern. If the Corporation is not able to continue as a going concern, the Corporation may be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in these financial statements. These differences could be material.

 

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 (“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 IPO. As a result of the exercise of the over-allotment option, 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”), own an aggregate of 10,089,750 Class B Shares, including 109,000 Class B Units and 9,810,000 Founders’ Warrants.

 

  - 7 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

1.            Description of organization and business operations (continued)

 

Concurrent with the completion of the Offering, the Founders purchased an aggregate of 10,089,750 Class B Shares ("Founders' 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 and purchased 109,000 Class B Units.

 

Upon closing of the Qualifying Transaction, the Class B Shares will, 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 or 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.

 

  - 8 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

1.            Description of organization and business operations (continued)

 

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. 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.

 

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 outbreak 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.

 

2.            Summary of significant accounting policies

 

The significant accounting policies adopted by the Corporation in the preparation of its financial statements are set out below.

 

Basis of presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules of the Securities and Exchange Commission (“SEC”).

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period.

 

Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.

 

Cash and cash equivalents

 

The Corporation considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents. The Corporation did not have any cash equivalents as of December 31, 2020 and 2019.

 

  - 9 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

2.            Summary of significant accounting policies (continued)

 

Cash held in escrow

 

At December 31, 2020, the Corporation had $nil (December 31, 2019 - $140,869) in an escrow account maintained by the Corporation’s former legal counsel (the “Escrowed Amount”). The Escrowed Amount was being held in a non-interest bearing account and was under the Corporation’s full control.

 

Marketable securities held in Escrow Account

 

At December 31, 2020 and 2019, the assets held in the Escrow Account were substantially held in U.S. Treasury Bills.

 

Common stock subject to possible redemption

 

The Corporation accounts for its Class A Restricted Voting Shares subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Shares subject to mandatory redemption are classified as a liability instrument and is measured at fair value. Conditionally redeemable shares (including shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Corporation’s control) is classified as temporary equity. At all other times, shares are classified as shareholders’ equity. The Corporation’s Class A Restricted Voting Shares features certain redemption rights that are considered to be outside of the Corporation’s control and subject to occurrence of uncertain future events. Accordingly, Class A Restricted Voting Shares subject to possible redemption is presented at redemption value as temporary equity, outside of the shareholders’ deficiency section of the Corporation’s consolidated balance sheets.

 

Income Taxes

 

The Corporation complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The Corporation recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. As of December 31, 2020 and 2019, there were no unrecognized tax benefits and no amounts accrued for interest and penalties. The Corporation is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

 

Net Income (Loss) Per Share

 

The Corporation complies with accounting and disclosure requirements of ASC Topic 260, “Earnings Per Share.” Net income per share is computed by dividing net income by the weighted average number of Class B Shares outstanding during the period. At December 31, 2020 and 2019, the Corporation did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into Class B Shares and then share in the income of the Corporation. As a result, diluted income per share is the same as basic income per share for the periods presented.

 

  - 10 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

2.            Summary of significant accounting policies (continued)

 

Concentration of credit risk

 

Financial instruments that potentially subject the Corporation to concentration of credit risk consist of cash accounts in a financial institution, which, at times may exceed the Canada Deposit Insurance Corporation coverage of $100,000. At December 31, 2020 and 2019, the Corporation had not experienced losses on these accounts and management believes the Corporation is not exposed to significant risks on such accounts.

 

Fair value of financial instruments

 

The fair value of the Corporation’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the accompanying balance sheets, primarily due to their short-term nature.

 

Recently issued accounting standards

 

Management does not believe that any recently issued, but not yet effective, accounting pronouncements, if currently adopted, would have a material effect on the Corporation’s financial statements.

 

3.            Critical accounting judgments, estimates and assumptions

 

The preparation of these financial statements requires the Corporation to make judgments in applying its accounting policies and estimates and assumptions about the future. These judgments, estimates and assumptions affect the Corporation’s reported amounts of assets, liabilities, and items in net income or loss, and the related disclosure of contingent assets and liabilities, if any. The Corporation evaluates its estimates on an ongoing basis. Such estimates are based on various 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 amounts 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. The following discusses the most significant accounting judgments, estimates and assumptions that the Corporation has made in the preparation of its December 31, 2020 and 2019 financial statements.

 

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.

 

  - 11 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

3.            Critical accounting judgments, estimates and assumptions (continued)

 

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 in order 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.

 

4.            The Offering

 

Pursuant to the Offering, the Corporation sold 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 of the Corporation and one-half of a Warrant. See note 1.

 

5.             Marketable securities held in Escrow Account 

 

As at December 31,   2020     2019  
Restricted cash   $ 981     $ 35,460  
Investments in United States Treasury Bills     407,509,774       404,970,423  
Accrued interest     26,301       790,164  
Marketable securities held in Escrow Account   $ 407,537,056     $ 405,796,047  

 

6.             Class A Restricted Voting Shares Subject to Redemption  

 

Authorized

 

The Corporation is authorized to issue an unlimited number of Class A Restricted Voting Shares. Following closing of the Qualifying Transaction, the Corporation will not issue any further Class A Restricted Voting Shares. The holders of Class A Restricted Voting Shares have no preemptive rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Prior to the consummation of a Qualifying Transaction, holders of Class A Restricted Voting Shares are not entitled to vote at, or receive notice of or meeting materials in respect of meetings, held only to consider the election and/or removal of directors and auditors. The holders of Class A Restricted Voting Shares are, however, entitled to vote on and receive notice of meeting materials on all other matters requiring shareholder approval, including approval of an extension of the Permitted Timeline, if applicable, and of a proposed Qualifying Transaction.

 

  - 12 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

6.            Class A Restricted Voting Shares Subject to Redemption (continued)

 

Redemption rights

 

The holders of Class A Restricted Voting Shares are entitled to redeem their shares, subject to certain conditions, and are entitled to receive the escrow proceeds, net of applicable taxes and other permitted deductions, from the Escrow Account: (i) in the event that the Corporation does not complete a Qualifying Transaction within the Permitted Timeline; (ii) in the event of a Qualifying Transaction; and (iii) in the event of an extension to the Permitted Timeline. Upon such redemption, the rights of holders of Class A Restricted Voting Shares as shareholders will be completely extinguished.

 

Value of Class A Restricted Voting Shares Subject to Redemption

 

The redemption rights embedded in the terms of the Corporation’s Class A Restricted Voting Shares are considered by the Corporation to be outside of the Corporation’s control and subject to uncertain future events. Accordingly, the Corporation has classified its "Class A Restricted Voting Shares subject to redemption" as commitments and contingencies at redemption value.

 

Fair value of Class A restricted voting shares subject to redemption -- issued and outstanding

 

    Number     Amount  
From commencement of operations on April 19, 2019     -     $ -  
Issuance of Class A Restricted Voting Shares pursuant to the Offering     35,000,000       350,000,000  
Issuance of Class A Restricted Voting Shares pursuant to the over-allotment option     5,250,000       52,500,000  
Balance, December 31, 2019 and 2020     40,250,000       402,500,000  

 

7.             Warrants  

 

As at December 31, 2020 and 2019, the Corporation had 29,989,500 Warrants issued and outstanding, comprised of 20,125,000 Warrants forming part of the Class A Restricted Voting Units, 9,810,000 Founders’ Warrants, and 54,500 Warrants forming part of the Class B Units.

 

All Warrants will become exercisable only commencing 65 days after the completion of our Qualifying Transaction. Each 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) at a price of $11.50 per share. The Warrant Agreement provides that the exercise price and number of Subordinate Voting Shares issuable on exercise of the Warrants may be adjusted in certain circumstances, including in the event of a stock dividend, Extraordinary Dividend or a recapitalization, reorganization, merger or consolidation. The Warrants will not, however, be adjusted for issuances of Subordinate Voting Shares at a price below their exercise price. Once the Warrants become exercisable, the Corporation may accelerate the expiry date of the outstanding Warrants (excluding the Founders’ Warrants but only to the extent still held by our Sponsor at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by our Sponsor of material undisclosed information which could limit their flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Subordinate Voting Shares equals or exceeds $18.00 per Subordinate Voting Share (as adjusted for stock splits or combinations, stock dividends, extraordinary dividends, reorganizations and recapitalizations and the like) for any 20 trading days within a 30 trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice if provided.

 

The Warrants will not be entitled to the proceeds from the Escrow Account. The Warrant holders do not have the rights or privileges of holders of shares and any voting rights until they exercise their Warrants and receive corresponding Subordinate Voting Shares of the Corporation. After the issuance of corresponding Subordinate Voting Shares upon exercise of the Warrants, each holder is expected to be entitled to one vote for each Subordinate Voting Share held of record on all matters to be voted on by such shareholders.

 

  - 13 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

7.            Warrants (continued)

 

Restrictions on Transfer of Founders’ Warrants

 

The Founders have agreed not to transfer any of their Founders’ Warrants until after the closing of the Qualifying Transaction without the prior consent of the Exchange, except for transfers required due to the structuring of the Qualifying Transaction or to permitted transferees, with the Exchange’s consent, in which case such restriction will apply to the securities received in connection with the Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Founders’ Warrants, including Subordinate Voting Shares issuable on exercise of the Founders’ Warrants, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

8.            Shareholders' deficiency

 

a) Class B Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of Class B Shares without nominal or par value. Following closing of the Qualifying Transaction, the Corporation will not issue any further Class B Shares. The holders of Founders’ Shares have no pre-emptive rights or other subscription rights and there are no sinking fund provisions applicable to these shares.

 

Voting rights

 

Holders of Class B Shares are entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, with the exception of (i) meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia), and (ii) meetings to approve an extension of the Permitted Timeline within which the Corporation is required to complete its Qualifying Transaction, which will only be voted upon by holders of Class A Restricted Voting Shares.

 

Redemption rights

 

Holders of Class B Shares do not have any redemption rights, or rights to distributions from the Escrow Account if the Corporation fails to complete a Qualifying Transaction within the Permitted Timeline.

 

Restrictions on transfer, assignment or sale of Founders' Shares

 

The holders of the Class B Shares have agreed not to transfer, assign or sell any of their Class B Shares, unless transferred, assigned or sold to permitted transferees with the Exchange’s consent, prior to completion of the Corporation’s Qualifying Transaction. Following completion of the Corporation’s Qualifying Transaction, the Multiple-Voting Shares into which the Class B Shares are converted, may be subject to certain sale or transfer restrictions in accordance with applicable securities laws.

 

  - 14 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

8.            Shareholders' deficiency (continued)

 

b) Subordinate Voting Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of subordinate voting shares ("Subordinate Voting Shares”) without nominal or par value. No Subordinate Voting Shares may be issued prior to the closing of a Qualifying Transaction, except in connection with such closing.

 

Voting rights

 

Holders of Subordinate Voting Shares will be entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Subordinate Voting Shares are entitled to vote, each Subordinate Voting Share will be entitled to one vote per Subordinate Voting Share.

 

Dividend rights

 

See Note 8 – Multiple Voting Shares – Dividend rights.

 

Redemption rights

 

Holders of Subordinate Voting Shares will not have any redemption rights.

 

c) Multiple Voting Shares

 

Authorized

 

The Corporation is authorized to issue an unlimited number of multiple voting shares (“Multiple Voting Shares”) without nominal or par value. No Multiple Voting Shares may be issued prior to the closing of a Qualifying Transaction, except in connection with such closing.

 

Voting rights

 

Holders of Multiple Voting Shares will be entitled to receive notice of any meeting of shareholders of the Corporation, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Multiple Voting Shares are entitled to vote, each Multiple Voting Share will be entitled to 2,500 votes per Multiple Voting Share.

 

Dividend rights

 

Holders of Subordinate Voting Shares will be entitled to receive dividends out of the assets available for the payment or distribution of dividends at such times and in such amount and form as the board of directors of the Corporation may from time to time determine on the following basis, and otherwise without preference or distinction among or between the Subordinate Voting Shares and Multiple Voting Shares: each Multiple Voting Share will be entitled to 100 times the amount paid or distributed per Subordinate Voting Share (including by way of share dividends, which holders of Multiple Voting Shares will receive in Multiple Voting Shares, unless otherwise determined by the board of directors of the Corporation) and each fraction of a Multiple Voting Share will be entitled to the applicable fraction thereof.

 

  - 15 -  

 

 

Mercer Park Brand Acquisition Corp. 

Notes to Financial Statements 

Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

8.            Shareholders' deficiency (continued)

 

c) Multiple Voting Shares (continued)

 

Redemption rights

 

Holders of Multiple Voting Shares will not have any redemption rights.

 

9.            Transaction costs

 

Transaction costs consist principally of legal, accounting and underwriting costs incurred through to date of the balance sheet. Transaction costs incurred amounted to $22,609,294 (including $22,137,500 in underwriters’ commission of which $16,100,000 is deferred and payable only upon completion of a Qualifying Transaction) were charged to shareholder’s equity upon completion of the Offering.

 

Underwriter's commission

 

In consideration for its services in connection with the Offering, the Corporation has agreed to pay the underwriter a commission equal to 5.5% of the gross proceeds of the Class A Restricted Voting Units issued under the Offering. The Corporation paid $ $6,037,500, representing $0.15 per Class A Restricted Voting Unit, to the underwriter upon closing of the Offering. Upon completion of a Qualifying Transaction, the remaining $16,100,000 (representing $0.40 per Class A Restricted Voting Unit) will be payable, 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).

 

10.            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 at December 31, 2020:

 

Balance, December 31, 2020        
         
Shareholders' deficiency   $ (7,905,447 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Total   $ 394,594,553  
         
Balance, December 31, 2019        
         
Shareholders' deficiency   $ (8,852,793 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Total   $ 393,647,207  

 

The Corporation’s primary objective in managing capital is to ensure capital preservation in order to benefit from acquisition opportunities as they arise.

 

  - 16 -  

 

 

Mercer Park Brand Acquisition Corp.
Notes to Financial Statements
Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

10.            Capital management (continued)

 

(b) Liquidity

 

As at December 31, 2020, the Corporation had $2,095,023 (December 31, 2019 - $ 4,127,262) 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 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.

 

11.            General and administrative expenses

 

Year Ended December 31, 2020        
Professional fees   $ 472,525  
Public company filing and listing costs     229,706  
General office expenses     28  
    $ 702,259  

 

From April 16, 2019 (Date of Incorporation) to December 31, 2019        
Public company filing and listing costs   $ 205,453  
General office expenses     175,684  
    $ 381,137  

 

- 17 -

 

 

Mercer Park Brand Acquisition Corp.
Notes to Financial Statements
Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

12.            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 December 31, 2020, the Corporation accrued $205,000 (December 31, 2019 - $85,000) 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 year ended December 31, 2020, the Corporation paid professional fees of $26,256 (April 19, 2019 (date of incorporation) to December 31, 2019 - $12,926) 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 December 31, 2020, Marrelli Support was owed $9,034 (December 31, 2019 - $2,214) and was included in accounts payable and accrued liabilities on the Corporation's balance sheet.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $106 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to DSA Filing Services Limited (“DSA Filing”), an organization which Carmelo Marrelli, the Chief Financial Officer of the Corporation, controls. These services were incurred in the normal course of operation of filing matters to adhere to the Corporation’s continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, DSA Filing was owed $nil by the Corporation (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $1,116 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to Marrelli Press Release Services Limited (“Marrelli Services Limited”), an organization of which Carmelo Marrelli, the Chief Financial of the Corporation, controls. These services were incurred in the Corporation’s normal course of operations in adherence with its continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, Marrelli Services Limited was owed $nil (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

From April 16, 2019 (Date of Incorporation) to December 31, 2019 and for the year ended December 31, 2020, Ayr Strategies Inc. ("Ayr"), a company with common management, incurred travel costs on behalf of the Corporation. As at December 31, 2020, the Corporation owed Ayr $135,000 (December 31, 2019 - $85,000) and which included in due to related parties on the Corporation's balance sheets. This is based on a cash-call-basis from Ayr.

 

- 18 -

 

 

Mercer Park Brand Acquisition Corp.
Notes to Financial Statements
Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

13.            Fair value measurements

 

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 Company’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 at December 31, 2020 and 2019, and indicates the fair value hierarchy of the valuation inputs the Corporation utilized to determine such fair value:

 

    Carrying value                    
    as at     Fair value as at December 31, 2020  
    December 31, 2020     Level 1     Level 2     Level 3  
    ($)     ($)     ($)     ($)  
Assets                                
Marketable securities held in a escrow account     407,537,056       407,537,056       -       -  

 

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.

 

- 19 -

 

 

Mercer Park Brand Acquisition Corp.
Notes to Financial Statements
Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

13.            Fair value measurements (continued)

 

Market risk (continued)

 

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 to currency risk as the Corporation transacts minimally in any currency other than the United States dollar.

 

14.            Income taxes

 

The reconciliation of the combined Canadian federal and provincial statutory income tax rate of 27% (2019 - 27%) to the effective tax rate is as follows:

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Loss before tax at statutory rate   $ 947,346     $ 2,831,491  
Effect on taxes of:                
Expected income tax (recovery) expense     255,790       764,503  
Share issue costs booked through equity     -       (6,512,075 )
Change in tax benefits not recognized     (255,790 )     5,747,572  
Income tax (recovery) expense   $ -     $ -  

 

The Corporation's income tax (recovery) is allocated as follows:

 

          From April 16,  
          2019  
          (Date of  
          Incorporation)  
    Year Ended     to  
    December 31     December 31,  
    2020     2019  
Current tax (recovery) expense   $ (114,990 )   $ 713,425  
Deferred tax expense (recovery)     114,990       (713,425 )
    $ -     $ -  

 

- 20 -

 

 

Mercer Park Brand Acquisition Corp.
Notes to Financial Statements
Year Ended December 31, 2020 and From April 16, 2019 (Date of Incorporation) To December 31, 2019
(Expressed in United States Dollars)

 

14.            Income taxes (continued)

 

Deferred tax

 

Deferred income tax assets are only given recognition in the Corporation’s financial statements if management has determined that it is more likely than not that such deferred income tax assets may be recovered. In recognition of this uncertainty, management has provided a full valuation allowance on these deferred tax assets as set out below:

 

December 31,   2020     2019  
Deferred underwriters' commission   $ 4,347,000     $ 4,347,000  
Share issue costs     1,193,090       1,555,687  
      5,540,090       5,902,687  
Valuation allowance     (4,941,655 )     (5,189,262 )
    $ 598,435     $ 713,425  

 

The Corporation may be subject to potential examination by Canadian tax authorities in the area of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and provincial tax laws. The Corporation is currently not subject to any tax examinations.

 

15.            Subsequent event

 

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. The letter of intent is non-binding and proceeding with the transaction is subject to a number of conditions, including, among others, satisfactory due diligence and the negotiation and execution of a definitive agreement. The Corporation intends to disclose additional details regarding the transaction following the entry into a definitive agreement, if applicable. There can be no assurance that a definitive agreement will be completed.

 

- 21 -

 

 

APPENDIX B – MANAGEMENT’S DISCUSSION & ANALYSIS OF BRND

 

(See attached)

 

B-1

 

 

 

MERCER PARK BRAND ACQUISITION CORP. 

 

(A SPECIAL PURPOSE ACQUISITION CORPORATION)

 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

YEAR ENDED DECEMBER 31, 2020 AND THE PERIOD

 

FROM APRIL 16, 2019 (DATE OF INCORPORATION)

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

 

Introduction

 

The following management’s discussion and analysis (“MD&A”) of the financial condition and results of the operations of Mercer Park Brand Acquisition Corp. (“Brand”, the “Corporation”, “we”, “our” or “us”) constitutes management’s review of the factors that affected the Corporation’s financial and operating performance for the year ended December 31, 2020. This MD&A was written to comply with the requirements of National Instrument 51- 102 – Continuous Disclosure Obligations. This discussion should be read in conjunction with the audited financial statements for the year ended December 31, 2020 and from the April 16, 2019 (Incorporation Date) to December 31, 2019, and the related notes thereto. Results are reported in United States dollars, unless otherwise noted. In the opinion of management, all adjustments (which consist only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results presented for the year ended December 31, 2020, are not necessarily indicative of the results that may be expected for any future period. The financial statements and the financial information contained in this MD&A were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Further information about the Corporation and its operations can be obtained on www.sedar.com.

 

The Corporation intends to focus its search for target businesses that operate branded product businesses in cannabis and/or cannabis-adjacent industries; however, the Corporation is not limited to a particular industry or geographic region for purposes of completing its Qualifying Transaction (as defined below). Please refer to the Corporation’s latest annual information form for risk factors and regulatory information (the “AIF”) regarding the cannabis industry.

 

Cautionary Note Regarding Forward-Looking Information

 

This MD&A contains certain forward-looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Corporation’s future performance. All statements other than statements of historical fact are forward-looking statements. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of, such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. The following table outlines certain significant forward-looking statements contained in this MD&A and provides the material assumptions used to develop such forward-looking statements and material risk factors that could cause actual results to differ materially from the forward-looking statements.

 

Forward-looking statements Assumptions Risk factors
The Corporation expects to complete a Qualifying Transaction (as defined below). The Corporation expects to identify an asset or business/businesses to acquire and close a Qualifying Transaction, on terms favourable to the Corporation. The Corporation’s inability to find a target to complete a Qualifying Transaction within the Permitted Timeline (as defined below). If we are unable to consummate our Qualifying Transaction within the Permitted Timeline, we will be required to redeem 100% of the outstanding Class A Restricted Voting Shares (as defined below), as described herein.
The Corporation’s ability to meet its working capital needs at the current level for the twelve-month period ending December 31, 2021. The operating activities of the Corporation for the twelve-month period ending December 31, 2021, and the costs associated therewith, will be consistent with the Corporation’s current expectations; debt and equity markets, exchange and interest rates and other applicable economic conditions favourable to the Corporation. Changes in debt and equity markets; timing and availability of external financing on acceptable terms; increases in costs; regulatory compliance and changes in regulatory compliance and other local legislation and  regulation; interest rate and exchange rate fluctuations; changes in economic conditions; impact of COVID-19 and timing of a Qualifying Transaction.

 

Page | 2

 

  

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021 

 

 

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).

 

Page | 3

 

  

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

 

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.

 

Page | 4

 

  

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021 

  

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.

 

Page | 5

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

Current liabilities as of December 31, 2020 total $745,813 (December 31, 2019 - $1,030,396). Shareholders’ deficiency as of December 30, 2020 is comprised of Class B Shares, unlimited, 10,198,751 issued of $nil (December 31, 2019 - $nil), additional paid-in-capital of ($11,684,284) (December 31, 2019 - ($11,684,284)) and retained earnings of $3,778,837 (December 31, 2019 - $2,831,491) for a net amount of ($7,905,447) (December 31, 2019 – ($8,852,793)) in shareholders’ deficit.

 

Commitments and contingencies as of December 31, 2020 total $402,500,000 (December 31, 2019 - $402,500,000). It is comprised of Class A Restricted Voting Shares subject to redemption, 40,250,000 shares (at a redemption value of $10.00 per share).

 

Working capital, which consists of current assets less current liabilities, is $2,559,062 (December 31, 2019 - $3,237,735) as of December 31, 2020. Management believes the Corporation’s working capital is sufficient for the Corporation to meet its ongoing obligations and meet its objective of completing a Qualifying Transaction.

 

The weighted average number of Class B Shares outstanding for the year ended December 31, 2020 was 10,198,751 (December 31, 2019 – 9,253,693).

 

Liquidity and Capital Resources

 

Marketable securities held in an escrow account   December 31, 2020  
United States Treasury Bills   $ 407,509,774  
Accrued interest   $ 26,301  
Restricted cash   $ 981  
Total marketable securities held in an escrow account   $ 407,537,056  
         
Per Class A Restricted Voting Shares subject to redemption   $ 10.00  
         
Cash held outside the escrow account   $ 2,095,023  

 

We intend to use substantially all the funds held in the Escrow Account, including interest (which interest shall be net of taxes payable and certain expenses) to consummate a Qualifying Transaction. To the extent that, after redemptions, our share capital or debt is used, in whole or in part, as consideration to consummate a Qualifying Transaction, the remaining proceeds held in the Escrow Account may be used as working capital to finance the operations of the target business or businesses, make other acquisitions and/or pursue a growth strategy.

 

As of December 31, 2020, we had cash held outside of our Escrow Account of $2,095,023, which is available to fund our working capital requirements, including any further transaction costs that may be incurred. We expect to generate negative cash flow from operating activities in the future until our Qualifying Transaction is completed and we commence income generation. We intend to employ a proactive acquisition targeting strategy that identifies potential acquisition targets that align with the Corporation’s investment objectives. Consistent with this strategy, we have identified the following general criteria and guidelines that we believe are important in evaluating prospective acquisition targets:

 

Opportunity to consolidate a highly fragmented marketplace where even the largest brands represent less than 10% market share.

 

Page | 6

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

Ability to build an institutional-quality cannabis corporation focused on brands and branded products.
   
Companies with strong marketing and brand development expertise. Companies that will benefit from a defined branding strategy.
   
Companies with additional, strategic capabilities-such as distribution, manufacturing, or product development-that support brand value.
   
Orphaned or underinvested brands within existing companies.
   
Companies exhibiting growth and profitability performance that could be enhanced through improved access to capital and financial expertise.
     
Opportunity to provide rescue financing for undercapitalized operators. Companies that will benefit from being a public company.

 

Management seeks to ensure that our operational and administrative costs are minimal prior to the completion of a Qualifying Transaction, with a view to preserving the Corporation’s working capital.

 

We do not believe that we will need to raise additional funds to meet expenditures required for operating our business until the consummation of our Qualifying Transaction. We believe that we will have sufficient available funds outside of the Escrow Account to operate the business. However, we cannot be assured that this will be the case. To the extent that the Corporation may require additional funding for general ongoing expenses or in connection with sourcing a proposed Qualifying Transaction, we may seek funding by way of unsecured 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.

 

Page | 7

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

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.

 

Page | 8

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

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:

 

                Basic and Diluted  
                Loss  
    Income     Net (Loss) Income     per Class B Share  
    ($)     ($)   ($) (8)  
December 31, 2020     -     $ (144,116 ) (7)     (0.01 )
September 30, 2020     -     $ (161,569 ) (6)     (0.02 )
June 30, 2020     -     $ (83,442 ) (5)     (0.01 )
March 31, 2020     -     $ 1,336,473 (4)     0.13  
December 31, 2019     -     $ 1,412,880 (3)     0.16  
September 30, 2019     -     $ 1,611,697 (2)     0.16  
Incorporation date to June 30, 2019     -     $ (193,086 ) (1)     (0.03 )

 

Page | 9

 

 

Mercer Park Brand Acquisition Corp.

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020

Discussion dated: March 29, 2021

 

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) 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 of December 31, 2020, the Corporation accrued $205,000 (December 31, 2019 - $85,000) in respect of these services.

 

Page | 10

 

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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 year ended December 31, 2020, the Corporation paid professional fees of $26,256 (April 19, 2019 (date of incorporation) to December 31, 2019 - $12,926) 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 of December 31, 2020, Marrelli Support was owed $9,034 (December 31, 2019 - $2,214) and was included in accounts payable and accrued liabilities on the Corporation's balance sheet.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $106 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to DSA Filing Services Limited (“DSA Filing”), an organization which Carmelo Marrelli, the Chief Financial Officer of the Corporation, controls. These services were incurred in the normal course of operation of filing matters to adhere to the Corporation’s continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, DSA Filing was owed $nil by the Corporation (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

During the year ended December 31, 2020, the Corporation paid professional fees and disbursements of $1,116 (April 19, 2019 (date of incorporation) to December 31, 2019 - $nil) to Marrelli Press Release Services Limited (“Marrelli Services Limited”), an organization which Carmelo Marrelli, the Chief Financial of the Corporation, controls. These services were incurred in the Corporation’s normal course of operations in adherence with its continuous disclosure obligations and these amounts are included in public company filing and listing costs. As of December 31, 2020, Marrelli Services Limited was owed $nil (December 31, 2019 - $nil) and these amounts were included in accounts payable and accrued liabilities.

 

From April 16, 2019 (Date of Incorporation) to December 31, 2019 and for the year ended December 31, 2020, Ayr Strategies Inc. ("Ayr"), a company with common management, incurred travel costs on behalf of the Corporation. As of December 31, 2020, the Corporation owed Ayr $135,000 (December 31, 2019 - $85,000) and which included in due to related parties on the Corporation's balance sheets. This is based on a cash-call-basis from Ayr.

 

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.

 

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.

 

Page | 11

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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 December 31, 2020.

 

Page | 12

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 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 December 31, 2020 and 2019, and indicates the fair value hierarchy of the valuation inputs the Corporation utilized to determine such fair value:

 

    Carrying value as of                    
    December 31, 2020     Level 1 (*)     Level 2 (*)     Level 3 (*)  
    ($)     ($)     ($)     ($)  
Assets                                
Marketable securities held in an escrow account     407,537,056       407,537,056       nil       nil  

 

 

(*) Fair values as of December 31, 2020

 

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.

 

Page | 13

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

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 December 31, 2020:

 

    $  
Shareholders’ deficiency     (7,905,447 )
Class A Restricted Voting Shares subject to redemption     402,500,000  
Balance, December 31, 2020     394,594,553  

 

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 December 31, 2020, the Corporation had $2,095,023 (December 31, 2019 - $4,127,262) in cash and cash equivalents. The Corporation expects to incur significant costs in pursuit of its acquisition plans.

 

Page | 14

 

 

Mercer Park Brand Acquisition Corp. 

(A Special Purpose Acquisition Corporation)

Management’s Discussion and Analysis

Year Ended December 31, 2020 

Discussion dated: March 29, 2021

 

 

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 40,250,000 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, 109,000 Class B Units and 29,989,500 Warrants 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.

 

Contingency

 

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 Event

 

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. The letter of intent is non-binding and proceeding with the transaction is subject to several conditions, including, among others, satisfactory due diligence and the negotiation and execution of a definitive agreement. The Corporation intends to disclose additional details regarding the transaction following the entry into a definitive agreement, if applicable. There can be no assurance that a definitive agreement will be completed.

 

Page | 15

 

 

 

APPENDIX C – GH GROUP ANNUAL FINANCIAL STATEMENTS

(YEAR ENDED DECEMBER 31, 2020; YEAR ENDED DECEMBER 31, 2019; YEAR ENDED

DECEMBER 31, 2018)

 

(See attached)

 

  C-1  

 

 

 

 

GH GROUP, INC.

 

CONSOLIDATED

AND

COMBINED FINANCIAL STATEMENTS

 

AS OF

DECEMBER 31, 2020 AND 2019
AND FOR THE YEARS ENDED
DECEMBER 31, 2020, 2019 AND 2018

 

 

 

GH GROUP, INC.

Index to Consolidated and Combined Financial Statements

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm 1
   
Consolidated and Combined Balance Sheets 2
   
Consolidated and Combined Statements of Operations 3
   
Consolidated and Combined Statements of Changes in Shareholders’ / Members’ Equity 4
   
Consolidated and Combined Statements of Cash Flows 5 - 6
   
Notes to Consolidated and Combined Financial Statements 7 - 35

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders / Members

GH Group, Inc.

 

Opinion on the Consolidated and Combined Financial Statements

 

We have audited the accompanying consolidated balance sheet of GH Group, Inc. (the “Company”) as of December 31, 2020, combined balance sheets as of December 31, 2019 and 2018, and the related consolidated and combined statements of operations, changes in shareholders’/members’ equity, and cash flows for the years then ended, and the related notes to the consolidated and combined financial statements (collectively referred to as the “consolidated and combined financial statements”). In our opinion, the consolidated and combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the consolidated and combined results of its operations and its cash flows for the years ended December 31, 2020, 2019 and 2018, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated and combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated and combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated and combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

We have served as the Company's auditor since 2020.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP      
2029 Century Park East, Suite 1500    
Los Angeles, CA 90067   www.mgocpa.com  

- 1 -

 

 

GH GROUP, INC.

Consolidated and Combined Balance Sheets

As of December 31, 2020 and 2019

 

 

    2020     2019  
ASSETS                
Current Assets:                
Cash and Cash Equivalents   $ 4,535,251     $ 2,631,886  
Accounts Receivable, Net     5,141,021       1,253,891  
Prepaid Expenses and Other Current Assets     1,018,212       377,238  
Inventory     6,866,002       1,396,770  
Notes Receivable     904,534       3,606,398  
                 
Total Current Assets     18,465,020       9,266,183  
                 
Operating Lease Right-of-Use Assets, Net     2,532,629       1,785,083  
Investments     10,701,868       10,950,877  
Property, Plant and Equipment, Net     27,192,027       25,268,313  
Intangible Assets, Net     5,279,000       1,577,333  
Goodwill     4,815,999       2,720,081  
Other Assets     554,266       351,423  
                 
TOTAL ASSETS   $ 69,540,809     $ 51,919,293  
                 
LIABILITIES AND SHAREHOLDERS’ / MEMBERS' EQUITY                
                 
LIABILITIES:                
Current Liabilities:                
Accounts Payable and Accrued Liabilities   $ 6,570,715     $ 5,344,552  
Income Taxes Payable     4,740,003       864,377  
Derivative Liabilities     7,365,000       -  
Current Portion of Operating Lease Liabilities     327,329       245,646  
Current Portion of Notes Payable     601,187       1,759,839  
Current Portion of Notes Payable - Related parties     -       2,241,262  
                 
Total Current Liabilities     19,604,234       10,455,677  
                 
Operating Lease Liabilities, Net of Current Portion     2,318,852       1,576,187  
Other Non-Current Liabilities     849,358       543,243  
Deferred Tax Liabilities     1,420,583       89,999  
Notes Payable, Net of Current Portion     15,368,892       651,942  
Notes Payable, Net of Current Portion - Related Parties     3,703,966       -  
                 
TOTAL LIABILITIES     43,265,885       13,317,047  
                 
SHAREHOLDERS' / MEMBERS’ EQUITY:                
Preferred Shares ($0.00001 Par value, 50,000,000 shares authorized and no shares issued and outstanding as of December 31, 2020)     -       -  
Class A Common Shares ($0.00001 Par value, 500,000,000 shares authorized and 205,900,164 issued and outstanding as of December 31, 2020)     2,059       -  
Class B Common Shares ($0.00001 Par value, 33,000,000 shares authorized and 32,295,270 issued and outstanding as of December 31, 2020)     323       -  
Additional Paid-In Capital     42,932,020       -  
Accumulated Deficit     (16,659,478 )     -  
Members' Equity     -       35,047,515  
                 
Total Equity Attributable to Shareholders / Members of GH Group     26,274,924       35,047,515  
Non-Controlling Interest     -       3,554,731  
                 
TOTAL SHAREHOLDERS’ / MEMBERS' EQUITY     26,274,924       38,602,246  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ / MEMBERS EQUITY   $ 69,540,809     $ 51,919,293  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

  - 2 -  

 

 

GH GROUP, INC.

Consolidated and Combined Statements of Operations

For The Years Ended December 31, 2020, 2019 and 2018

 

 

    2020     2019     2018  
Revenues, Net   $ 48,259,601     $ 16,941,426     $ 8,967,286  
Cost of Goods Sold     29,519,143       8,461,551       3,749,373  
                         
Gross Profit     18,740,458       8,479,875       5,217,913  
                         
Expenses:                        
General and Administrative     18,637,477       9,354,591       3,094,857  
Sales and Marketing     1,489,664       912,842       143,216  
Professional Fees     2,040,004       5,196,993       1,913,865  
Depreciation and Amortization     2,576,263       1,455,780       767,567  
                         
Total Expenses     24,743,408       16,920,206       5,919,505  
                         
Loss from Operations     (6,002,950 )     (8,440,331 )     (701,592 )
                         
Other Expense (Income):                        
Interest Expense     2,179,137       636,762       597,427  
Interest Income     (115,572 )     (443,523 )     (308,591 )
Loss on Investments     2,126,112       1,147,968       166,059  
Loss (Income) on Change in Fair Value of Derivative Liabilities     251,663       -       -  
Other Expense (Income), Net     (203,345 )     (19,419 )     (202,397 )
                         
Total Other Expense     4,237,995       1,321,788       252,498  
                         
Loss from Operations Before Provision for Income Taxes     (10,240,945 )     (9,762,119 )     (954,090 )
Provision for Income Taxes     6,418,533       972,520       357,352  
                         
Net Loss     (16,659,478 )     (10,734,639 )     (1,311,442 )
Net Income (Loss) Attributable to Non-Controlling Interest     -       (511,465 )     211,396  
                         
Net Loss Attributable to Shareholders / Members of GH Group   $ (16,659,478 )   $ (10,223,174 )   $ (1,522,838 )

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

  - 3 -  

 

 

GH GROUP, INC. 

Consolidated and Combined Statements of Changes in Shareholders’/ Members’ Equity
For the Years Ended December 31, 2020 and 2019
 

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

 

      $ Amount   Units     $ Amount   Units     $ Amount     Units     $ Amount               TOTAL EQUITY          
                                                      ATTRIBUTABLE TO       TOTAL  
                    Class A      Class A     Class B     Class B     Additional         SHAREHOLDER    Non -    SHAREHOLDERS'  
      Members'   Preferred     Preferred    Common     Common      Common     Common     Paid-In     Accumulated   S' / MEMBERS'   Controlling   / MEMBERS'   
      Equity    Shares      Shares    Shares      Shares      Shares      Shares      Capital      Deficit    OF GH Group    Interest    EQUITY   
BALANCE AS OF JANUARY 1, 2018   $ 16,793,571   -   $ -           -   $ -   $ -   $ -   $ 16,793,571   $ 1,450,000   $ 18,243,571  
Net (Loss) Income     (1,522,838 ) -     -           -     -     -     -   (1,522,838 211,396   (1,311,442 )
Contributions     16,331,834   -     -           -     -     -     -   16,331,834   100,000   16,431,834  
Distributions     (1,958,000 ) -     -           -     -     -     -   (1,958,000 -   (1,958,000 )
Share based compensation     -         -   -     -     -     -     -     -   -   792,000   792,000  
BALANCE AS OF DECEMBER 31, 2018     29,644,568   -     -           -     -     -     -   29,644,568   2,553,396   32,197,964  
Net Loss     (10,223,174 ) -     -           -     -     -     -   (10,223,174 (511,465 (10,734,639 )
Contributions     7,797,336   -     -           -     -     -     -   7,797,336   272,800   8,070,136  
Distributions     (812,500 ) -     -           -     -     -     -   (812,500 -   (812,500 )
Share based compensation     641,285   -     -           -     -     -     -   641,285   1,240,000   1,881,285  
Equity issued in conversion of convertible debt     8,000,000         -   -     -     -     -     -     -   8,000,000   -   8,000,000  
BALANCE AS OF DECEMBER 31, 2019     35,047,515   -     -           -     -     -     -   35,047,515   3,554,731   38,602,246  
Net Loss     -   -     -           -     -     -     (16,659,478 ) (16,659,478 -   (16,659,478 )
Contributions     11,835   -     -           -     -     -     -   11,835   -   11,835  
Issuance of Warrants in Relief of Liabilities     -   -     -           -     -     426,887     -   426,887   -   426,887  
Share based compensation     -   -     -           -     -     2,547,792     -   2,547,792   -   2,547,792  
Formation and Rollup     (35,059,350 ) -     -   197,650,255     1,977     32,295,270     323     38,611,781     -   3,554,731   (3,554,731 -  
Issuance for Business Acquisition     -   -     -   10,318,807     103     -     -     3,095,539     -   3,095,642   -   3,095,642  
Cancellation of shares for issuance of Convertible Debt     -   -     -   (2,068,898 )   (21 )   -     -     (1,749,979 )   -   (1,750,000 -   (1,750,000)  
BALANCE AS OF DECEMBER 31, 2020   $ -       $ -   205,900,164     2,059     32,295,270   $ 323   $ 42,932,020   $ (16,659,478 ) $ 26,274,924   $ -   $ 26,274,924  

 

 The accompanying notes are an integral part of these consolidated and combined financial statements.

 

  - 4 -  

 

 

GH GROUP, INC. 

Consolidated and Combined Statements of Cash Flows
For The Years Ended December 31, 2020, 2019 and 2018
 

 

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net Loss   $ (16,659,478 )   $ (10,734,639 )   $ (1,311,442 )
Adjustments to Reconcile Net Loss                        
to Net Cash Used in Operating Activities:                        
Deferred Tax (Recovery) Expense     1,330,584       214,552       (19,532 )
Interest Capitalized To Notes Payable     1,091,341       43,992       148,875  
Interest Income Capitalized to principle balance     (114,113 )     (451,746 )     (295,442 )
Depreciation and Amortization     2,576,263       1,455,780       767,567  
Net Loss on Equity Method Investments     2,126,112       1,147,968       166,059  
Gain on Extinguishment of Liabilities     (184,057 )     -       -  
Non-Cash Operating Lease Costs     919,519       426,552       -  
Accretion of Debt Discount and Loan Origination Fees     1,061,463       -       -  
Loss (Income) on Change in Fair Value of Derivative Liabilities     251,663       -       -  
Share-Based Compensation     2,547,792       1,881,285       792,000  
Changes in Operating Assets and Liabilities:                        
Accounts Receivable     (3,540,684 )     (605,094 )     (529,457 )
Prepaid Expenses and Other Current Assets     (542,533 )     186,812       (36,725 )
Inventory     (3,764,209 )     (78,592 )     (792,621 )
Other Assets     (24,701 )     (14,495 )     109,925  
Accounts Payable and Accrued Liabilities     1,888,335       3,203,741       (234,304 )
Cash Payments - Operating Lease Liabilities     (842,717 )     (389,802 )     -  
Income Taxes Payable     3,875,626       (256,263 )     317,885  
Other Non-Current Liabilities     306,115       535,241       8,002  
NET CASH USED IN OPERATING ACTIVITIES     (7,697,679 )     (3,434,706 )     (909,209 )
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Purchases of Property and Equipment     (3,850,589 )     (5,724,738 )     (12,738,220 )
Proceeds From Payments on Note Receivable     -       154,746       1,127,238  
Issuance of Note Receivable     (1,140,010 )     (3,512,362 )     (50,000 )
Purchase of Investments     (2,987,061 )     (5,054,945 )     (3,184,061 )
Distributions Received from Equity Method Investments     340,138       261,229       -  
Cash Paid for Business Acquisition     (81,522 )     (1,912,000 )     -  
NET CASH USED IN INVESTING ACTIVITIES     (7,719,045 )     (15,788,070 )     (14,845,042 )
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from the Issuance of Note Payable, Third Parties and Related Parties     18,449,748       1,680,815       9,925,000  
Payments on Note Payable, Third Parties and Related Parties     (1,141,494 )     (858,343 )     (525,314 )
Contributions - Controlling and Non-Controlling Interest     11,835       8,070,136       16,431,834  
Distributions - Controlling and Non-Controlling Interest     -       (812,500 )     (1,958,000 )
NET CASH PROVIDED BY FINANCING ACTIVITIES     17,320,089       8,080,108       23,873,520  
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     1,903,366       (11,142,668 )     8,119,269  
Cash and Cash Equivalents, Beginning of Period     2,631,886       13,774,554       5,655,285  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 4,535,251     $ 2,631,886     $ 13,774,554  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

  - 5 -  

 

 

GH GROUP, INC. 

Consolidated and Combined Statements of Cash Flows
For The Years Ended December 31, 2020, 2019 and 2018
 

 

 

    2020     2019     2018  
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                        
Cash Paid for Interest   $ 316,859     $ 148,875     $ -  
Cash Paid for Taxes   $ 906,209     $ 252,543     $ 58,999  
Non-Cash Investing and Financing Activities:                        
Net Assets acquired from an Acquisition   $ 7,902,973     $ 1,912,000     $ -  
Equity issued in conversion of convertible debt   $ -     $ 8,000,000     $ -  
Conversion of Advances to Convertible Debt   $ 477,007     $ -     $ -  
Issuance of warrants for relief of liabilities   $ 426,887     $ -     $ -  
Acquisition of Non-Controlling Interest   $ 3,554,731     $ -     $ -  
Cancellation of shares for issuance of Convertible Debt   $ 1,750,000     $ -     $ -  
Recognition of Right-of-Use Assets for Operating Leases   $ 1,182,942     $ 1,939,332     $ -  
Conversion of Note Receivable to Equity of Investee   $ 2,045,309     $ -     $ -  
Acquisition of Non-Controlling Interest Upon Roll - Up   $ 3,554,731     $ -     $ -  
Derivative Liability incurred upon issuance of Convertible Debt   $ 3,095,642     $ -     $ -  

 

The accompanying notes are an integral part of these consolidated and combined financial statements.

 

  - 6 -  

 

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

1.            NATURE OF OPERATIONS

 

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.

 

On January 31, 2020, pursuant to a Formation and Contribution Agreement (the “Agreement”), a roll-up transaction (“Roll-up”) was consummated whereby the assets and liabilities of a combined group of companies were transferred into GH Group, Inc whereby GH Group, Inc. now owns and controls the majority interest of all the entities previously combined.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

These developments could have a material adverse impact on the Company’s revenues, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation

 

The accompanying consolidated and combined financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of the Company’s subsidiaries in which the Company has a controlling financial interest.

 

All intercompany transactions and balances have been eliminated in consolidation and combination. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated and combined financial position of the Company as of December 31, 2020 and 2019, the consolidated and combined results of operations and cash flows for the years ended December 31, 2020, 2019 and 2018 have been included. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company consolidates any variable interest entity (“VIE”), of which the Company is the primary beneficiary.

 

Basis of Consolidation and Combination

 

These consolidated financial statements as of and for the year ended December 31, 2020 and combined financial statements as of and for the years ended December 31, 2019 and 2018 include the accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control as defined in ASC 810. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company has ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity. In assessing control, potential voting rights that are currently exercisable are considered.

 

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GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  

 

The following are the Company’s principal wholly-owned or controlled subsidiaries and or affiliates that are included in these consolidated and combined financial statements as of December 31, 2020 and 2019 and for the years ending December 31, 2020, 2019 and 2018:

 

Corporate Entities  

 

            Ownership  
Entity   Location   Purpose   2020     2019     2018  
LOB Investment Co. LLC   Long Beach, CA   Holding company     100 %     80 %     80 %
SoCal Hemp Co, LLC   San Bernardino Co., CA   Holding company     100 %     100 %     N/A  
Field Investment Co. LLC   Long Beach, CA   Holding company     100 %     80 %     N/A  
Field Taste Matters, Inc.   Long Beach, CA   Holding company     100 %     N/A       N/A  
Glass House Retail, LLC   Long Beach, CA   Holding company     100 %     N/A       N/A  
Glass House Cultivation, LLC   Santa Barbara, CA   Holding company     100 %     N/A       N/A  
Glass House Manufacturing, LLC   Lompoc, CA   Holding company     100 %     N/A       N/A  

 

Management and Operating Entities

 

            Ownership  
Subsidiaries   Location   Purpose   2020     2019     2018  
Lompoc Management Co. LLC   Lompoc, CA   Manufacturing management     100 %     93 %     N/A  
CA Manufacturing Solutions LLC   Lompoc, CA   Cannabis manufacturing     100 %     72 %     73 %
MGF Management LLC   Long Beach, CA   Cultivation management     100 %     99.50 %     100 %
G&K Produce LLC   Carpinteria, CA   Cannabis cultivation     100 %     100 %     100 %
K&G Flowers LLC   Carpinteria, CA   Cannabis cultivation     100 %     100 %     100 %
Saint Gertrude Management Company LLC   Santa Ana, CA   Provides retail management     100 %     85 %     N/A  
G&H Supply Company, LLC   Carpinteria, CA   Provides cultivation management     100 %     100 %     100 %
Farmacy SB, Inc.   Santa Barbara, CA   Cannabis retail     100 %     99 %     100 %
Bud and Bloom   Santa Ana, CA   Cannabis retail     100 %     85 %     N/A  
Mission Health Associates, Inc.   Carpinteria, CA   Cannabis cultivation     100 %     100 %     100 %
Zero One Seven Management, LLC   Long Beach, CA   Manufacturing management     100 %     N/A       N/A  
ATES Enterprises, LLC   Long Beach, CA   Cannabis manufacturing     100 %     N/A       N/A  
Farmacy Isla Vista, LLC   Santa Barbara, CA   Cannabis retail     100 %     N/A       N/A  
Lompoc Manufacturing GHG, LLC   Lompoc, CA   Processing management     100 %     N/A       N/A  

 

Real Estate Entities

 

            Ownership  
Subsidiaries   Location   Purpose   2020     2019     2018  
Magu Farm LLC   Carpinteria, CA   Holds 100% interest in real property     100 %     99.50 %     100 %
East Saint Gertrude 1327 LLC   Santa Ana, CA   Holds 100% interest in real property     100 %     100 %     90 %
Glass House Farm LLC   Carpinteria, CA   Holds 100% interest in real property     100 %     69 %     71 %
2000 De La Vina LLC   Santa Barbara, CA   Real Estate     100 %     100 %     100 %

 

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GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Non-Controlling Interest

 

Non-controlling interest represents equity interests owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s ownership interest that do not result in a loss of control are accounted for as equity transactions.

 

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. 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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Accounts Receivable

 

The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the consolidated and combined balance sheets, net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. The reserve for doubtful accounts was $200,000 and $95,016 as of December 31, 2020 and 2019, respectively.

 

Inventory

 

Inventory is comprised of raw materials, finished goods and work-in-process such as pre-harvested cannabis plants and by-products to be extracted. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and supplies, are capitalized into inventory until the time of harvest. All direct and indirect costs related to inventory are capitalized when incurred, and subsequently classified to cost of goods sold in the consolidated and combined statements of operations. Raw materials and work-in-process is stated at the lower of cost or net realizable value, determined using the weighted average cost. Finished goods inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and establishes reserves when warranted. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of December 31, 2020 and 2019, the Company determined that no reserve was necessary.

 

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GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Investments

 

Investments in unconsolidated and combined affiliates are accounted as follows:

 

Equity Method and Joint Venture Investments

 

The Company accounts for investments in which it can exert significant influence but does not control as equity method investments in accordance with ASC 323, “Investments—Equity Method and Joint Ventures”. In accordance with ASC 825, the fair value option (“FVO”) to measure eligible items at fair value on an instrument-by-instrument basis can be applied. Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for under the equity method. These investments are recorded at the amount of the Company’s investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.

 

Investments in Equity without Readily Determinable Fair Value

 

Investments without readily determinable fair values (which are classified as Level 3 investments in the fair value hierarchy) use a determinable available measurement alternative in accordance with ASC 321, “Investments—Equity Securities”. The measurement alternative requires the investments to be held at cost and adjusted for impairment and observable price changes, if any.

 

Property, Plant and Equipment

 

Property, plant and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Land Not Depreciated
Buildings 39 Years
Furniture and Fixtures 5 Years
Leasehold Improvements Shorter of Lease Term or Economic Life
Equipment and Software 3 – 5 Years
Construction in Progress Not Depreciated

 

The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the consolidated and combined statements of operations in the period the asset is derecognized.

 

Intangible Assets

 

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. The estimated useful lives, residual values and amortization methods are reviewed at each reporting period, and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization. Amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Dispensary Licenses Indefinite
Intellectual Property 5 Years

 

- 10 -

 

 

GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

In accordance with ASC 350, “Intangibles—Goodwill and Other”, costs of internally developing, maintaining or restoring intangible assets are expensed as incurred. Inversely, costs are capitalized when certain criteria are met through the point at which the intangible asset is substantially complete and ready for its intended use.

 

Goodwill

 

Goodwill is measured as the excess of consideration transferred and the net of the acquisition date fair value of assets acquired, and liabilities assumed in a business acquisition. In accordance with ASC 350, “Intangibles—Goodwill and Other”, goodwill and other intangible assets with indefinite lives are no longer subject to amortization. The Company reviews the goodwill and other intangible assets allocated to each of the Company’s reporting units for impairment on an annual basis as of year-end or whenever events or changes in circumstances indicate carrying amount it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The carrying amount of each reporting unit is determined based upon the assignment of the Company’s assets and liabilities, including existing goodwill, to the identified reporting units. Where an acquisition benefits only one reporting unit, the Company allocates, as of the acquisition date, all goodwill for that acquisition to the reporting unit that will benefit. In order to determine if goodwill is impaired, the Company measures the impairment of goodwill by comparing a reporting unit’s carrying amount to the estimated fair value of the reporting unit. If the carrying amount of a reporting unit is in excess of its fair value, the Company recognizes an impairment charge equal to the amount in excess. A goodwill impairment loss associated with a discontinued operation is included within the results of discontinued operations.

 

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

 

The Company 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, 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.

 

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GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

Prior to the Roll-Up, most of the combined entities flowing into the Company’s investment funds were either single member LLCs or taxed as flow-through entities. Income taxes for such entities are not payable by or provided for by the Company. Members are taxed individually on their share of the entity’s earnings. California imposes an LLC fee based on revenue, which is included with state taxes as a provision for income taxes. Certain entities with cannabis licenses were either corporations or LLCs electing to be taxed as corporations.

 

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”.

 

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GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 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 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. Critical estimates and assumptions used in the model are discussed in “Note 12 - Derivative Liabilities”.

 

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 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 Consolidated and combined Statements of Operations immediately as a gain on acquisition. See “Note 8 – Business Acquisitions” for further details on business combinations.

 

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.

 

- 13 -

 

 

GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

 

Revenue Recognition

 

Revenue is recognized by the Company in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:

 

Identify a customer along with a corresponding contract;

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

Allocate the transaction price to the performance obligation(s) in the contract;

Recognize revenue when or as the Company satisfies the performance obligation(s).

 

Revenues consist of wholesale and retail sales of cannabis, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. Sales discounts were not material during the years ended December 31, 2020, 2019 and 2018.

 

Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer. Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its consolidated and combined financial statements.

 

Dispensary Revenue

 

The Company recognizes revenue from the sale of cannabis for a fixed price upon delivery of goods to customers at the point of sale since at this time performance obligations are satisfied. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues.

 

Cultivation and Wholesale

 

The Company recognizes revenue from the sale of cannabis for a fixed price upon the shipment of cannabis goods as the Company has transferred to the buyer the significant risks and rewards of ownership of the goods and the Company does not retain either continuing material involvement to the degree usually associated with ownership nor effective control over the goods sold and the amount of revenue can be measured reliably and collectible and the costs incurred in respect of the transaction is reliably measured. Excise taxes due upon sale are recorded as an expense in the accompanying consolidated and combined statement of operations.

 

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 Class 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 Class 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 consolidated and combined statements of operations.

 

- 14 -

 

 

GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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

 

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.

 

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments. There have been no transfers between fair value levels during the years ended December 31, 2020, 2019 and 2018.

 

Financial instruments are measured at amortized cost or at fair value. Financial instruments measured at amortized cost consist of accounts receivable, due from and due to related party, other liabilities, and accounts payable and accrued liabilities wherein the carrying value approximates fair value due to its short-term nature. Other financial instruments measured at amortized cost include notes payable and senior secured convertible credit facility wherein the carrying value at the effective interest rate approximates fair value as the interest rate for notes payable and the interest rate used to discount the host debt contract for senior secured convertible credit facility approximate a market rate for similar instruments offered to the Company.

 

Cash and cash equivalents and restricted cash are measured at Level 1 inputs. Acquisition related liabilities resulting from business combinations are measured at fair value using Level 1 or Level 3 inputs. Investments that are measured at fair value use Level 3 inputs. Refer to “Note 6 – Investments” for assumptions used to value investments.

 

The individual fair values attributed to the different components of a financing transaction, notably derivative financial instruments, convertible debentures and loans, are determined using valuation techniques. The Company uses judgment to select the methods used to make certain assumptions and derive estimates. Significant judgment is also used when attributing fair values to each component of a transaction upon initial recognition, measuring fair values for certain instruments on a recurring basis and disclosing the fair values of financial instruments subsequently carried at amortized cost. These valuation estimates could be significantly different because of the use of judgment and the inherent uncertainty in estimating the fair value of instruments that are not quoted or observable in an active market.

 

- 15 -

 

 

GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its consolidated and combined financial position and consolidated and combined results of operations.

 

- 16 -

 

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

3.            CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash at its physical locations, which are not currently insured and cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of December 31, 2020, 2019 and for the years ended December 31, 2020, 2019 and 2018, the Company has not experienced any losses with regards to its cash balances.

 

The Company provides credit in the normal course of business to customers located throughout California. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were two customers for each of the years ended December 31, 2020, 2019 and 2018 that comprised 37%, 29% and 39%, respectively of the Company’s revenues. As of December 31, 2020, 2019 and 2018, these same customers had balances due the Company of $4,053,718, $744,821 add $367,567, respectively.

 

4. INVENTORY            

 

As of December 31, 2020 and 2019, inventory consists of the following:

 

    2020     2019  
Raw Materials   $ 4,109,434     $ 599,813  
Work-in-Process     1,793,094       220,089  
Finished Goods     963,474       576,868  
                 
Total Inventory   $ 6,866,002     $ 1,396,770  

 

5. NOTES RECEIVABLE                      

 

As of December 31, 2020 and 2019, notes receivable consists of the following:

 

    2020     2019  
Note receivable with an investee maturing in April 2020, bearing interest at 8.00 percent per annum.   $ -     $ 1,657,040  
Note receivable with an investee maturing in July 2020, bearing interest at 2.00 percent per annum. Subsequent to December 31, 2020, the remaining balance was exchanged for equity of the investee.     -       1,108,825  
                 
Note receivable with an investee maturing in May 2020, bearing interest at 8.00 percent per annum. The investee is currently in negotiations with the Company to extend the maturity date.     904,534       840,533  
                 
Total Notes Receivable     904,534       3,606,398  
Less Current Portion of Notes Receivable     (904,534 )     (3,606,398 )
Notes Receivable, Net of Current Portion   $ -     $ -  

 

- 17 -

 

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

6.            INVESTMENTS

 

The Company has various investments in entities in which it holds a significant but non-controlling influence through voting equity or through company representation on the entities board of directors. Accordingly, the Company was deemed to have significant influence resulting in equity method accounting.

 

As of December 31, 2020 and 2019, investments consist of the following:

 

          NRO                                      
    LOB Group,     Management,     SoCal Hemp                 5042 Venice,     Lompoc TIC,        
    Inc.     LLC     JV, LLC     ICANN, LLC     F/ELD     LLC     LLC     TOTAL  
Fair Value as of January 1, 2019   $ 2,008,173     $ 2,759,266     $ -     $ -     $ -     $ 2,269,035     $ 268,656     $ 7,305,130  
Additions     999,934       -       678,576       -       3,304,113       -       72,322       5,054,945  
Distribution     -       -       -       -       -       (261,230 )             (261,230 )
(Loss) Income on Equity Method Investments     (142,211 )     (303,300 )     (491,869 )     -       (488,983 )     238,058       40,337       (1,147,968 )
                                                                 
Fair Value as of December 31, 2019     2,865,896       2,455,966       186,707       -       2,815,130       2,245,863       381,315       10,950,877  
Additions     -       -       2,987,062       2,045,309       -       -       -       5,032,371  
Distributions                                             (263,656 )     (76,482 )     (340,138 )
Disposition Due to Acquisition     -       -       -       -       (2,815,130 )     -       -       (2,815,130 )
(Loss) Income on Equity Method Investments     (56,484 )     (119,253 )     (2,114,991 )     -       -       240,488       (75,872 )     (2,126,112 )
                                                                 
Fair Value as of December 31, 2020   $ 2,809,412     $ 2,336,713     $ 1,058,778     $ 2,045,309     $ -     $ 2,222,695      $ 228,961     $ 10,701,868  

 

During the years ended December 31, 2020, 2019 and 2018, the Company recorded net losses from equity method investments of $2,126,112, $1,147,968 and $166,059, respectively. These investments are recorded at the amount of the Company’s investment and as adjusted for the Company’s share of the investee’s income or loss, and dividends paid.

 

7.            PROPERTY, PLANT AND EQUIPMENT

 

As of December 31, 2020 and 2019, property and equipment consist of the following:

 

    2020     2019  
Land   $ 8,966,874     $ 8,966,874  
Buildings     11,211,573       11,211,573  
Furniture and Fixtures     44,519       33,610  
Leasehold Improvements     7,475,295       4,818,786  
Equipment and Software     4,502,869       3,045,937  
Construction in Progress     315,306       -  
Total Property, Plant and Equipment     32,516,436       28,076,780  
Less Accumulated Depreciation     (5,324,409 )     (2,808,467 )
Property, Plant and Equipment, Net   $ 27,192,027     $ 25,268,313  

 

Depreciation for the years ended December 31, 2020, 2019 and 2018 of $2,387,930, $1,443,113 and $767,567, respectively.

 

- 18 -

 

 

GH GROUP, INC.

Notes to Consolidated and Combined Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

8.            BUSINESS ACQUISITIONS

 

The purchase price allocations for the acquisitions, as set forth in the table below, reflect various preliminary fair value estimates and analyses that are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company’s consolidated and combined financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could be affected. All the acquisitions noted below were accounted for in accordance with ASC 805, “Business Combinations”.

 

The below are the preliminary (2020) and final (2019) allocations of business acquisitions completed during the years ended December 31, 2020 and 2019 is as follows:

 

Total Consideration   2020     2019  
Cash   $ 81,523     $ 1,912,000  
Equity Investment Converted     2,815,130          
Prior Note Receivable Converted     1,910,678       -  
Fair Value of Equity Issued     3,095,642       -  
Total Consideration   $ 7,902,973     $ 1,912,000  
                 
Net Assets Acquired (Liabilities Assumed)                
Current Assets   $ 2,149,910     $ 724,987  
Property, Plant and Equipment     461,055       590,000  
Non-Current Assets     178,142       36,000  
Deferred Tax Assets, Net     -       103,791  
Current Liabilities Assumed     (814,834 )     (1,131,906 )
Long-Term Liabilities Assumed     (57,218 )     (2,720,953 )
Intangible Assets:                
Intellectual Property     750,000       190,000  
Dispensary License     3,140,000       1,400,000  
Total Identifiable Net Assets Acquired (Net Liabilities Assumed)     5,807,055       (808,081 )
Goodwill (1)     2,095,918       2,720,081  
Total Net Assets Acquired   $ 7,902,973     $ 1,912,000  
Pro Forma Revenues (2)   $ 60,361     $ 3,809,773  
Pro Forma Net Loss (2)   $ (393,743 )   $ (355,127 )

 

On February 11, 2020, the Company completed the acquisition of a licensed concentrate and extractions business for aggregate an consideration of $7,902,973 which is comprised of prior investment with a value of $2,815,130, convertible note receivable, and accrued interest in the amount of $1,910,678, cash at closing in the amount of $81,523, and the issuance of 10,318,807 Class A Common Shares valued at $3,095,642.

 

Subsequent to August 31, 2019, the Company completed the acquisition of a licensed cannabis retail business for an aggregate consideration of $1,912,000 which is comprised of all cash at closing.

 

 

(1) Goodwill arising from acquisitions represent expected synergies, future income and growth, and other intangibles that do not qualify for separate recognition. Generally, goodwill related to dispensaries acquired within a state adds to the footprint of the GH Group dispensaries within the state, giving the Company’s customers more access to the Company’s branded stores. Goodwill related to cultivation and wholesale acquisitions provide for lower costs and synergies of the Company’s growing and wholesale distribution methods which allow for overall lower costs.

 

(2) If the acquisition had been completed on January 1, 2020 or 2019 for the 2020 and 2019 acquisitions, respectively, the Company estimates it would have recorded increases in revenues and net loss shown in the pro forma amounts noted above.

 

- 19 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

9.              INTANGIBLE ASSETS

 

 

As of December 31, 2020 and 2019, intangible assets consist of the following:

 

    2020     2019  
Definite Lived Intangibles            
Intellectual Property   $ 940,000     $ 190,000  
Total Intangible Assets     940,000       190,000  
Less Accumulated Amortization     (201,000 )     (12,667 )
Definite Lived Intangible Assets, Net     739,000       177,333  
Indefinite Lived Intangibles                
Cannabis Licenses     4,540,000       1,400,000  
Indefinite Lived Intangibles     4,540,000       1,400,000  
Total Intangibles Assets, Net   $ 5,279,000     $ 1,577,333  

 

For the years ended December 31, 2020, 2019 and 2018, the Company recorded amortization expense of $188,333, $12,667 and $0, respectively.

 

The following is the future minimum amortization expense to be recognized for the years ended December 31:

 

December 31:      
2021   $ 188,000  
2022     188,000  
2023     188,000  
2024     175,000  
Total Future Amortization Expense   $ 739,000  

 

10.            GOODWILL

 

 

As of December 31, 2020 and 2019, goodwill was $4,815,999 and $2,720,081, respectively. See “Note 8 – Business Acquisitions” for further information.

 

Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company adopted ASU 2017-04 which eliminates Step 2 from the quantitative assessment of the goodwill impairment test wherein the goodwill impairment loss was measured by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. As amended, the goodwill impairment test consists of one step comparing the fair value of a reporting unit with its carrying amount. The amount by which the carrying amount exceeds the reporting unit’s fair value is recognized as a goodwill impairment loss.

 

The Company conducts its annual goodwill impairment assessment as of the last day of the year. For the purpose of the goodwill impairment test, the Company performed a qualitative assessment wherein management analyzed a wide range of indicators including macroeconomic condition, industry and market considerations, cost factors and overall reporting unit performance and other relevant reporting unit specific events. In accordance with this analysis, management determined there was no impairment of its goodwill for the years ended December 31, 2020 and 2019.

 

- 20 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

11.           ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

 

As of December 31, 2020 and 2019, accounts payable and accrued liabilities consist of the following:

 

    2020     2019  
Accounts Payable   $ 2,583,910     $ 2,384,500  
Accrued Liabilities     1,082,980       391,604  
Accrued Payroll and Related Liabilities     1,724,921       509,986  
Related Party Payable     -       1,773,879  
Sales Tax and Cannabis Taxes     1,178,904       284,583  
Total Accounts Payable and Accrued Liabilities   $ 6,570,715     $ 5,344,552  

 

The Company offers a customer loyalty rewards program that allows members to earn discounts on future purchases. Unused discounts earned by loyalty rewards program members are included in accrued liabilities and recorded as a sales discount at the time a qualifying purchase is made. The value of points accrued as of December 31, 2020 and 2019 was approximately $1,007,000 and $178,000, respectively. Currently, unused points do not expire in most cases.

 

12.           DERIVATIVE LIABILITIES

 

 

During the year ended December 31, 2020, the Company issued convertible debt to third parties and related parties, See Note 14 and Note 15, respectively. Upon the analysis of the conversion feature of the convertible debt under ASC 815, the Company determined that the conversion features are to be accounted as derivative liabilities. The Company valued the conversion feature using the Binomial Lattice Model using the following level 3 inputs:

 

    2020  
Weighted-Average Risk Free Annual Rate     0.82 %
Weighted-Average Average Probability at Maturity     0.31 %
Weighted-Average Average Probability Before Maturity     59.00 %
Weighted-Average Average Probability at Change of Control     33.00 %
Weighted-Average Expected Annual Dividend Yield     9.0 %
Weighted-Average Expected Stock Price Volatility     70.9 %
Weighted-Average Expected Life in Years     2.28  

 

A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities for the year ended December 31, 2020 is as follows:

 

    2020     2019  
Balance at beginning of year   $ -     $ -  
Derivative Liability incurred upon issuance of Convertible Debt     7,113,337       -  
Change in Fair Value     251,663       -  
Balance at end of year   $ 7,365,000     $ -  

 

Derivative liabilities are included in current liabilities as the holders of the convertible notes can convert at any time.

 

- 21 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

13.           LEASES

 

  

As a result of the adoption of ASC 842 the Company has changed its accounting policy for leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and accrued obligations under operating lease (current and non-current) liabilities in the consolidated and combined balance sheets.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.

 

ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms at its properties that have either been extended or are likely to be extended. The terms used to calculate the ROU assets for these properties include the renewal options that the Company is reasonably certain to exercise.

 

The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes and the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the consolidated and combined balance sheets and are expensed in the consolidated and combined statements of operations on the straight-line basis over the lease term.

 

The below are the details of the lease cost and other disclosures regarding the Company’s leases as of December 31, 2020 and 2019:

 

    2020     2019     2018  
Operating Lease Cost   $ 919,519     $ 426,552     $ -  
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:                        
Operating Cash Flows from Operating Leases   $ 842,717     $ 389,802     $ -  
Non-Cash Additions to Right-of-Use Assets and Lease Liabilities:                        
Recognition of Right-of-Use Assets for Operating Leases   $ 1,182,942     $ 1,939,332     $ -  
Weighted-Average Remaining Lease Term (Years) - Operating Leases     5       7       N/A  
Weighted-Average Discount Rate - Operating Leases     17.00 %     17.00 %     N/A  

 

- 22 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

13.           LEASES (Continued)

 

 

The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Operating Lease Liabilities and Right of Use Assets

 

The Company leases certain business facilities from related parties and third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $2,700 to $44,000 and expire through September 2028. Certain lease monthly payments may escalate up to 5.0% each year. In such cases, the variability in lease payments are included within the current and noncurrent operating lease liabilities.

 

Future minimum operating lease payments under non-cancelable operating leases is as follows:

 

December 31:     Third Parties     Related Parties     Total  
2021     $ 341,709     $ 389,645     $ 731,354  
2022       351,967       393,127       745,094  
2023       362,526       396,783       759,309  
2024       373,396       393,597       766,993  
2025       31,192       320,004       351,196  
Thereafter       -       880,011       880,011  
Total Future Minimum Lease Payments       1,460,790       2,773,167       4,233,957  
Total Amount Representing Interest       (409,511 )     (1,178,265 )     (1,587,776 )
Total Amount Representing Present Value       1,051,279       1,594,902       2,646,181  
Current Portion of Operating Lease Liabilities       (178,940 )     (148,389 )     (327,329 )
Operating Lease Liabilities, Net of Current Portion     $ 872,339     $ 1,446,513     $ 2,318,852  

 

The following are changes in right-of-use assets during the years ended December 31, 2020 and 2019.

 

Balance as of January 1, 2019   $ -  
Recognition of Right-of-Use Assets for Operating Leases     1,939,332  
Non-Cash Operating Lease Costs     (154,249 )
Balance as of December 31, 2019     1,785,083  
Recognition of Right-of-Use Assets for Operating Leases     1,182,942  
Non-Cash Operating Lease Costs     (435,395 )
Balance as of December 31, 2020   $ 2,532,629  

 

- 23 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

14. NOTES PAYABLE

 

As of December 31, 2020 and 2019, notes payable consist of the following:  

 

    2020     2019  
Note payable maturing in July 2020, bearing interest at 12.00 percent per annum.   $ -   (i) $ 1,028,605  
Note payable maturing in June 2021, bearing interest at 7.25 percent per annum.     -       7,860  
Note payable maturing in June 2021, bearing interest at 7.00 percent per annum.     343,435   (ii)   995,375  
Note payable maturing in December 2020, bearing interest at 8.00 percent per annum.     212,821   (iii)   379,941  
Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum.     20,790,514   (iv)   -  
Other - Vehicle Loans     44,931       -  
Total Notes Payable     21,391,701       2,411,781  
Less Unamortized Debt Issuance Costs and Loan Origination Fees     (5,421,622 )     -  
Net Amount   $ 15,970,079     $ 2,411,781  
Less Current Portion of Notes Payable     (601,187 )     (1,759,839 )
Notes Payable, Net of Current Portion   $ 15,368,892     $ 651,942  

 

(i) During the Year ended December 31, 2019, the Company issued debt to an unrelated third party for working capital needs in the amount of $988,157. The debt matures in July 2020 and bears interest at 12.00 percent per year. The balance as of December 31, 2019 was $1,028,605, which includes accrued interest. During the year ended December 31, 2020, as part of the convertible debt offering, the holders of the note payable agreed to settle its debt by converting the balance ($1,041,924 at the time of agreement) into convertible debt.

 

(ii) During the Year ended December 31, 2017, the Company issued debt to an unrelated third party for working capital needs in the amount of $2,000,000. The debt matures in June 2021 and bears interest at 7.00 percent per year. The balance as of December 31, 2020 and 2019 was $343,435 and $995,375, respectively.

 

(iii) During the Year ended December 31, 2019, the Company issued debt to an unrelated third party for working capital needs in the amount of $377,658. The debt matured in December 2020 and bears interest at 7.00 percent per year. The balance as of December 31, 2020 and 2019 was $212,821 and $379,941, respectively. Subsequent to year end, the balance was paid in full.

 

(iv) 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 December 31, 2020 and 2019, the balance due under these Senior Convertible Notes was $20,790,514 and $0, respectively.

 

Scheduled maturities of notes payable are as follows:

 

    Principal  
December 31:   Payments  
2021   $ 601,187  
2025     20,790,514  
Total Future Minimum Principal Payments   $ 21,391,701  

 

  - 24 -  

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

15. NOTES PAYABLE – RELATED PARTIES

 

As of December 31, 2020 and 2019, notes payable from related parties consist of the following:

 

    2020     2019  
Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum.   $ 2,049,037   (i) $ -  
Convertible note payable maturing in March 2023, bearing interest at 6.00 percent per annum.     2,189,264   (ii)   1,925,000  
Note payable maturing in October 2020, bearing interest at 1.68 percent per annum.     -   (iii)   316,262  
Total Notes Payable - Related Parties     4,238,301       2,241,262  
Less Unamortized Debt Issuance Costs and Loan Origination Fees     (534,335 )     -  
Net Amount   $ 3,703,966     $ 2,241,262  
Less Current Portion of Notes Payable - Related Parties     -       (2,241,262 )
Notes Payable, Net of Current Portion - Related Parties   $ 3,703,966     $ -  

 

(i) 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 December 31, 2020 and 2019, the balance due under these Senior Convertible Notes from related parties was $2,049,037 and $0, respectively.

 

(ii) 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. KBIC balance which was not converted remained. Effective as of March 1, 2020, KBIC assigned the 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 a result of the modification, the Company 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.

 

(iii) 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, Glass House 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.

 

  - 25 -  

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

15. NOTES PAYABLE- RELATED PARTIES (Continued)

 

Scheduled maturities of notes payable are as follows:

 

    Principal  
December 31:   Payments  
2023   $ 2,189,264  
2025     2,049,037  
Total Future Minimum Principal Payments   $ 4,238,301  

 

16. SHAREHOLDERS’ AND MEMBERS EQUITY

 

Authorized

 

As of December 31, 2020, the authorized share capital of the Company is comprised of the following:

 

Class A Common Shares

 

The authorized total number of Class A Common Shares is 500,000,000. Holders of Class A Common Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company and are entitled to one vote in respect of each Class A Common Share held. Class A Shares have no dividend preference senior or subordinated to other class of shares. Upon a liquidation event, Class A Common shareholders are entitled to their pro-rata portion of total equity instruments then outstanding.

 

On January 31, 2020, pursuant to the “Agreement, a Roll-up was consummated whereby the assets and liabilities of a combined group of companies were transferred into GH Group, Inc whereby GH Group, Inc. now owns and controls the interest of all the entities previously combined. As a result of the Roll-Up, the Company issued to the investors of the combined entities 197,650,255 Class A Common Shares.

 

On February 11, 2020, the Company issued 10,318,807 Class A Common Shares valued at $3,095,642 related to an acquisition, see Note 8.

 

In February 2020, the Company repurchased 2,068,898 Class A Common Shares from an investor and issued as part of the Convertible Debt raise in February 2020, $1,750,000 convertible notes. The Shares repurchased were simultaneously cancelled.

 

Class B Common Shares

 

The authorized total number of Class B Common Shares is 33,000,000. Holders of Class B Common Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company and are entitled to fifty votes in respect of each Class B Common Share held. Class B Shares have no dividend preference senior or subordinated to other class of shares. Class B Common Shares are convertible at either the option of the holder or automatically upon certain events as defined in the articles of incorporation to shares of Class b Common Shares on a one-to-one basis. Upon a liquidation event, Class B Common shareholders are entitled to their pro-rata portion of total equity instruments then outstanding.

 

In January 2020 as part of the roll up and re-organization, the Company issued 32,295,270 class B Common Shares to related parties, see Note 20.

 

  - 26 -  

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

16. SHAREHOLDERS’ AND MEMBERS EQUITY

 

Preferred Shares

 

The authorized total number of Preferred Shares is 50,000,000. Holders of Preferred Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company and are not entitled to votes. Preferred Shares have no dividend preference senior or subordinated to other class of shares and are not convertible into other classes of shares. Upon a liquidation event, Preferred shareholders are entitled to their pro-rata portion of total equity instruments then outstanding.

 

Non-Controlling Interest

 

Non-controlling interest represents equity interests owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s ownership interest that do not result in a loss of control are accounted for as equity transactions.

 

During the years ended December 31, 2020, 2019 and 2018, the Company recorded a (loss) / income attributable to non-controlling interest of $0, ($511,465) and $211,396, respectively. The Company received contributions from non-controlling members in the amount of $272,800 and $100,000 and issued equity interest to non-controlling members valued at $1,240,000 and $792,000 for services performed during the year ended December 31, 2019 and 2018, respectively. The equity issuances to non-controlling interest members were fair valued using the estimated fair value of the equity of the Company as determined by a valuation specialist using level 3 inputs from the Company consisting of, but not limited to future profitability of the Company and industry data. During the year ended December 31, 2020, as part of the roll-up transaction, the Company acquired all the membership interest from the combined entities and the non-controlling members, resulting in the non-controlling interest balance of $3,554,731 being reclassed to controlling interest during the year ended December 31, 2020.

 

17. SHARE-BASED COMPENSATION

 

The Company has an equity incentive plan (the “Incentive Plan”) under which the Company may issue various types of equity instruments or instruments that track to equity, more particularly the Company’s Class A Common stock to any employee, officer, consultants or director. The types of equity instruments issuable under the Incentive Plan encompass, among other things, stock options, stock appreciation rights, restricted stock and or other awards. (together, “Awards”). Share based compensation expenses are recorded as a component of general and administrative to the extent that the Company has not appointed a Compensation Committee, all rights and obligations under the Incentive Plan shall be those of the full Board of Directors. The maximum number of Awards that may be issued under the Incentive Plan shall be 63,753,020. If an Award expires, becomes unexercisable, or is cancelled, forfeited or otherwise terminated without having been exercised or settled in full, as the case may be, the shares allocable to the unexercised portion of the Award shall again become available for future grant or sale under this Incentive Plan (unless this Plan has terminated). Shares that have been issued under this plan shall not be returned to this Incentive Plan. However, the following shares shall again become available for future grant under this Incentive Plan: (i) any shares that are reacquired by the Company pursuant to any forfeiture provision, right of repurchase or redemption; and (ii) any shares that are retained by the Company upon the exercise of or purchase of shares under an Award in order to satisfy the exercise price or purchase price for the Award or to satisfy any withholding taxes due with respect to such exercise or purchase. Vesting of Awards will be determined by the Compensation Committee or Board of Directors in absence of one. The exercise price for Awards (if applicable) will generally not be less than the fair market value of the Award at the time of grant and will generally expire after 5 years.

 

  - 27 -  

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

17. SHARE-BASED COMPENSATION (Continued)

 

Stock Options

 

A reconciliation of the beginning and ending balance of stock options outstanding is as follows:

 

          Weighted-  
    Number of     Average  
    Stock Options     Exercise Price  
Balance as of January 1, 2019     -     $ -  
Granted     50,575,080     $ 0.22  
Balance as of December 31, 2019     50,575,080     $ 0.22  
Granted     4,696,786     $ 0.30  
Forfeited     (6,868,242 )   $ 0.22  
Balance as of December 31, 2020     48,403,624     $ 0.23  

 

The following table summarizes the stock options that remain outstanding as of December 31, 2020:

 

Security Issuable   Exercise
Price
    Expiration Date   Stock Options
Outstanding
    Stock Options
Exercisable
 
Class A Common Shares   $ 0.22     September 2029     43,706,838       20,880,755  
Class A Common Shares   $ 0.30     April 2030     4,696,786       -  
                  48,403,624       20,880,755  

 

For the years ended December 31, 2020 and 2019, the fair value of stock options granted with a fixed exercise price was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:

 

    2020     2019  
Weighted-Average Risk-Free Annual Interest Rate     0.31 %     1.53 %
Weighted-Average Expected Annual Dividend Yield     0.0 %     0.0 %
Weighted-Average Expected Stock Price Volatility     85.3 %     85.3 %
Weighted-Average Expected Life in Years     4.00       4.00  
Weighted-Average Estimated Forfeiture Rate     0.0 %     0.0 %

 

Stock price volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies. The expected life represents the period of time that stock options granted are expected to be outstanding. The risk-free rate was based on United States Treasury zero coupon bond with a remaining term equal to the expected life of the options.

 

During the years ended December 31, 2020 and 2019, the weighted-average fair value of stock options granted was $0.18 and $0.013, respectively, per option. As of December 31, 2020 and 2019, stock options outstanding have a weighted-average remaining contractual life of 8.8 years and 9.8 years, respectively.

 

For the years ended December 31, 2020 and 2019, the Company recognized $2,547,792 and $641,285, respectively in share-based compensation expense related to these stock options. The remaining share-based compensation recognized for the years ended December 31, 2019 and 2018 are related to equity issued to consultants in the amount of $1240,000 and $792,000, respectively.

 

As of December 31, 2020 and 2019, there were approximately $3,553,000 and $6,192,000 in unrecognized share-based compensation cost.

 

- 28 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

17. SHARE-BASED COMPENSATION (Continued)

 

Warrants

 

A reconciliation of the beginning and ending balance of warrants outstanding is as follows:

 

          Weighted-  
    Number of     Average  
    Warrants     Exercise Price  
Balance as of January 1, 2019     -     $ -  
Granted     -     $ -  
Balance as of December 31, 2019     -     $ -  
Granted     1,968,300     $ 0.16  
Balance as of December 31, 2020     1,968,300     $ 0.16  

 

The following table summarizes the warrants that remain outstanding as of December 31, 2020:

 

Security Issuable   Exercise
Price
    Expiration Date   Warrants
Outstanding
    Warrants
Exercisable
 
Class A Common Shares   $ 0.16     July 2023     1,968,300       1,968,300  
                  1,968,300       1,968,300  

 

For the year ended December 31, 2020, the fair value of warrants granted with a fixed exercise price was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:

 

Weighted-Average Risk-Free Annual Interest Rate     0.31 %
Weighted-Average Expected Annual Dividend Yield     0.0 %
Weighted-Average Expected Stock Price Volatility     85.3 %
Weighted-Average Expected Life in Years     3  
Weighted-Average Estimated Forfeiture Rate     0.0 %

 

Stock price volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies. The expected life represents the period of time that stock options granted are expected to be outstanding. The risk-free rate was based on United States Treasury zero coupon bond with a remaining term equal to the expected life of the options.

 

During the year ended December 31, 2020, the weighted-average fair value of warrants granted was $0.22, per warrant. As of December 31, 2020, warrants outstanding have a weighted-average remaining contractual life of 2.6 years. There were no warrants issued our outstanding for the year ended December 31, 2019.

 

The Company evaluated its agreements related to the warrants issued during the year ended December 31, 2019 and determined that the warrants were not derivatives or contained features that qualify as embedded derivatives.

 

- 29 -

 

 

GH GROUP, INC. 

Notes to Consolidated and Combined Financial Statements 

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

18. PROVISION FOR INCOME TAXES AND DEFERRED TAXES

 

Provision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Current:                        
Federal   $ 3,543,578     $ 582,081     $ 247,338  
State     1,544,371       175,887       129,546  
Total Current     5,087,949       757,968       376,884  
Deferred:                        
Federal     1,229,887       221,870       (19,761 )
State     100,697       (7,318 )     229  
Total Deferred     1,330,584       214,552       (19,532 )
Total Provision for Income Taxes   $ 6,418,533     $ 972,520     $ 357,352  

 

As of December 31, 2020 and 2019, the components of deferred tax assets and liabilities were as follows:

 

    2020     2019  
Deferred Tax Assets:                
State taxes   $ 6,130     $ 26,806  
Allowance for doubtful accounts     13,992       -  
Deferred rent     25,995       75,475  
Non-qualified stock options     572,999       -  
Operating losses     5,937,406       469,764  
Total Deferred Tax Assets     6,556,522       572,045  
Valuation Allowance     (6,510,405 )     (423,034 )
Net Deferred Tax Assets   $ 46,117     $ 149,011  

 

    2020     2019  
Deferred Tax Liabilities:                
Property, Plant & Equipment   $ (1,273,724 )   $ (239,010 )
Basis in subsidiary entity     (192,976 )     -  
Total Deferred Tax Liabilities     (1,466,700 )     (239,010 )
Net Deferred Tax Liabilities   $ (1,420,583 )   $ (89,999 )

 

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the year ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Income tax expense at federal rate   $ (505,820 )   $ (1,415,675 )   $ 595,544  
State taxes and fees     1,464,420       136,464       112,227  
IRS Section 280E disallowance     914,042       781,245       30,936  
Uncertain tax position     306,115       98,575       -  
Change in valuation allowance     4,279,589       422,866       15,898  
Interest on convertible debt     160,588       -       -  
Other permanent differences     (200,401 )     (20,475 )     1,844  
Income not taxed at entity level     -       969,520       (399,097 )
Reported Income Tax Expense   $ 6,418,533     $ 972,520     $ 357,352  

 

- 30 -

 

 

GH GROUP, INC. 
Notes to Consolidated and Combined Financial Statements 
For The Years Ended December 31, 2020, 2019 and 2018
 

 

18. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for years ended December 31, 2020, 2019 and 2018 is as follows:

 

    2020     2019  
Balance at Beginning of Period   $ 543,243     $ -  
IRS Section 280E Positions     306,115       543,243  
Balance at End of Period   $ 849,358     $ 543,243  

 

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits at December 31, 2020 and 2019, potential benefits of $849,358 and $543,243, respectively, that if recognized would impact the effective tax rate on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

 

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of December 31, 2020, the federal tax returns since 2017 and state tax returns since 2016 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

 

19. COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of December 31, 2020 and 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

- 31 -

 

 

GH GROUP, INC. 
Notes to Consolidated and Combined Financial Statements 
For The Years Ended December 31, 2020, 2019 and 2018
 

 

19. COMMITMENTS AND CONTINGENCIES (Continued)

 

Royalty

 

Effective as of May 9, 2019, Sweet & Salty, Inc., a California corporation (“Lender”) and GH Brands LLC, a California limited liability company (“GH Brands”) entered into the License and Services Agreement, pursuant to which Lender granted to GH Brands an exclusive, transferable, sublicensable, right and license to use, exploit and incorporate the name, nicknames, initials, signature, voice, image, likeness, and photographic or graphic representations of likeness, statements and biography of the artist Annabella Avery Thorne pka Bella Thorne for all purposes relating to or in connection with the development, quality control, cultivation, extraction, manufacture, production, branding, testing, advertising, marketing, promotion, commercialization, packaging, distribution, exploitation and/or sale of the products of GH Brands and its affiliates. The term of License and Service Agreement is 3 years, with the right to renew upon 60-days prior notice for additional 2-year term. Royalty fees for Bella boxes are 10% for the 1st year and 12% for 2-5 years. Royalty fees for flower products and accessories are 6% for the 1st year, 7% for the 2nd year and 8% for 3-5 years. Minimum guarantee fees are recoupable against royalties for an initial term of $1,000,000 ($50,000 initial payment, $200,000 for the 1st year, $375,000 for the 2nd year and $375,000 for the 3rd year). For a renewal term, the minimum guarantee fee is $1,500,000 ($750,000 for the 4th year, $750,000 for the 5th year). During the year ended December 31, 2020, 2019 and 2018, the Company recognized expenses related to these royalties in the amount of $137,500, $166,667 and $0, respectively. As of December 31, 2020 and 2019, the Company has no amounts due under this royalty agreement.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the consolidated and combined financial statements relating to claims and litigations. As of December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

20. RELATED PARTY TRANSACTIONS

 

Incubation Services

 

Effective January 1, 2019, Glass House 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 Glass House (and incur certain fees and expenses on behalf of Glass House as part of and as performance for such services) (collectively, the “Incubation”) in consideration of Glass House’s agreement to issue to Magu Capital, upon a date certain following the closing of the Roll-Up as reasonably determined by the board of directors of Glass House, 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, Glass House issued to Magu Capital a Warrant to Purchase Exercise Shares (the “Magu Capital Warrant”), in full satisfaction of Glass House’s 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. The Company 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 Common Shares for Management Services

 

In January 2020, the Company 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 Class B common shares of Glass House (“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.

 

- 32 -

 

 

GH GROUP, INC. 
Notes to Consolidated and Combined Financial Statements 
For The Years Ended December 31, 2020, 2019 and 2018
 

 

20. RELATED PARTY TRANSACTIONS (Continued)

 

Asset Management Fees – Related Party

 

The Company has 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, the Company incurred expenses of approximately $0, $822,000 and $590,000, respectively.

 

21. SEGMENTED INFORMATION

 

The Company currently operates in one segment, the production and sale of cannabis products, which is how the Company’s Chief Operating Decision Maker manages the business and makes operating decisions. All the Company’s operations are in the United States of America in the State of California. Intercompany sales and transactions are eliminated in consolidation.

 

22. REVENUES, NET

 

Revenues are disaggregated as follows for the years ending December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Retail   $ 14,503,125     $ 4,176,773     $ -  
Wholesale     33,756,476       12,478,363       8,395,326  
Other     -       286,290       571,960  
Revenues, Net   $ 48,259,601     $ 16,941,426     $ 8,967,286  

 

23. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these consolidated and combined financial statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the consolidated and combined financial statements or disclosure in the notes to the consolidated and combined financial statements.

 

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 a 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 7,554,679 Class A Common shares to holders of iCANN equity interests; and (iv) the Company issued an additional 500,000 Class A Common shares to brokers and consultants.

 

Engagement of Canaccord Genuity

 

Effective as of February 10, 2021 GH Group Inc. (“GH Group”) and Canaccord Genuity Corp. (“Canaccord Genuity”) entered into an Engagement Agreement pursuant to which GH Group agreed to appoint Canaccord Genuity as financial advisor to GH Group in connection with a merger by and between GH Group, Inc. and Mercer Park Brand Acquisitions Corp. (the “SPAC”). The fees: $2,000,000, of which $1,000,000 to be paid in cash and $1,000,000, in freely tradeable shares of the SPAC, where each share of the SPAC is valued at $10.00 per share, payable if merger is completed during the term of the engagement, or within a period of 12 months after the termination of this engagement, plus expenses limited to the amount of $25,000. The term of the engagement: from December 30, 2020 until the earlier of the date the merger is completed and date upon which the engagement is terminated by either party hereto by written notice of termination delivered to the other party.

 

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GH GROUP, INC. 
Notes to Consolidated and Combined Financial Statements 
For The Years Ended December 31, 2020, 2019 and 2018
 

 

23. SUBSEQUENT EVENTS (Continued)

 

Acquisition Agreement – Mercer Park Brand Acquisition Co.

 

On December 29th 2020 the Company and Mercer Park Brand Acquisition Corporation, 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.

 

Proposed Transaction

 

Effective February 23, 2021 GH Group, Inc. entered into a Merger and Exchange Agreement with Element 7 CA, LLC (“E7”) whereby GH Group, Inc. would obtain all of the equity interest held by E7 in seventeen in-process license applications, some of which are partially owned. GH Group, Inc. is obligated to purchase all such interests of each license that meets the conditions for sale and E7 is obligated to sell such equity interests. The consideration of $1,500,000 for 100% of the E7’s equity interests in each license holding entity payable in shares of post-close Mercer Park Brand Acquisition Corp. at $10 per share. Conditions to close include the closing of the Mercer Park merger, the availability of $25,000,000 for development of retail licenses, and the delivery by E7 of certain leases.

 

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 million.

 

Camarillo Farm Transaction

 

CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC (“CEFF Parent”, and together with CEFF Camarillo Propco, the “CEFF Parties”) are the owners of the California Option Assets (as defined in the California Option Agreement (as defined below)), including, without limitation, that certain approximately 160-acre real property and agricultural facility located thereon, located at 645 Laguna Road, City of Camarillo, County of Ventura California (APN: 230-0-071-345) (the “Real Property”).

 

Pursuant to that certain Option Agreement (California Option Assets), dated December 28, 2018, by and among the CEFF Parties and GIPI (as defined below) Glass Investments Projects, Inc., a Delaware corporation (“GIPI”) (the “Original California Option Agreement”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and GIPI (“First Amendment”) and (ii) the Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and among the CEFF Parties and GIPI (“Second Amendment”) (as amended by the First Amendment and Second Amendment, collectively, the “California Option Agreement”), GIPI holds an option to purchase the California Option Assets (the “Option” and collectively with all rights, option and interests held by GIPI in, to and under the California Option Agreement including, without limitation, the Real Property and other California Option Assets, the “Option Rights”).

 

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GH GROUP, INC. 
Notes to Consolidated and Combined Financial Statements 
For The Years Ended December 31, 2020, 2019 and 2018
 

 

23. SUBSEQUENT EVENTS (Continued)

 

Effective as of February 13, 2021, Glass House, Mercer Park Brand Acquisition Corp., a British Columbia corporation (“Mercer Park”, together with Glass House, “GH/MPBAC”) and GIPI entered into that certain letter agreement (the “Camarillo Acquisition Agreement”), pursuant to which, among other things, (i) GIPI agreed to sell the Option Rights to GH/MPBAC or their designee, and (ii) in acknowledgment of the Camarillo Acquisition Agreement being an interim agreement, GH/MPBAC and GIPI agreed to negotiate and document, for the transactions contemplated by the Camarillo Acquisition Agreement, the terms and conditions of the Definitive Agreements (as defined in the Camarillo Acquisition Agreement), including, without limitation, an Agreement to Assign an Option to Acquire Real Estate to be entered into by and among, GIPI, GH Camarillo LLC, a Delaware limited liability company and wholly-owned subsidiary of Glass House (“GH Camarillo”), as the designee of Glass House pursuant to the Camarillo Acquisition Agreement, and Mercer Park (the “Definitive Option PSA”). As of the date hereof, the Definitive Option PSA has not been finalized.

 

Effective as of February 20, 2021, GIPI exercised the Option via a letter which was delivered to the CEFF Parties pursuant to Section 2.3 of the California Option Agreement (the “Exercise Notice”). The Exercise Notice has been signed by the CEFF Parties to acknowledge, among other things, that GIPI has validly exercised the Option in accordance with the California Option Agreement.

 

Prior to the expiration of the Contingency Period (as defined in the Second Amendment), the CEFF Parties, as seller, and GH Camarillo, as buyer, will have agreed to negotiate in good faith and attempt to finalize a definitive purchase and sale agreement for the Real Property (the “Definitive Property PSA”) and other related agreements and instruments for the transactions contemplated by the California Option Agreement.

 

Effective as of February 20, 2021, and in connection with the Camarillo Acquisition Agreement, GIPI, GH Camarillo and Peninsula Escrow, Inc., a California corporation (“Escrow Holder”), have entered into that certain Escrow Agreement (Camarillo Acquisition Agreement) (the “Camarillo Acquisition Escrow Agreement”), pursuant to which, among other things, the Escrow Holder has agreed to hold, administer, and disburse a $2,000,000 cash deposit (the “COA Deposit”) in one or more segregated, interest-bearing money market accounts in accordance with the terms of the Camarillo Acquisition Agreement, and the express instructions provided by GH Camarillo.

 

Effective as of February 20, 2021, and in connection with the California Option Agreement, GH Camarillo, the CEFF Parties and Escrow Holder, have entered into that certain Escrow Agreement (California Option Agreement), pursuant to which, among other things, the Escrow Holder has agreed to hold, administer, and disburse the COA Deposit, and assuming GH Camarillo has not terminated the Camarillo Acquisition Agreement, the Camarillo Acquisition Escrow Agreement, the Definitive Option PSA or the Definitive Property PSA, on or before the expiration of the Contingency Period, an additional $8,000,000 cash deposit (the “Additional Deposit”) in one or more segregated, interest-bearing money market accounts in accordance with the terms of the California Option Agreement, and the express instructions provided by GH Camarillo.

 

Effective as of February 22, 2021, BFP made a $2,000,000 unsecured bridge loan to Glass House at market terms for the express and only purpose of funding the COA Deposit, pursuant to an Unsecured Promissory Note issued to BFP (the “BFP Bridge Note”). Further, assuming GH Camarillo has not terminated the Camarillo Acquisition Agreement, the Camarillo Acquisition Escrow Agreement, the Definitive Option PSA or the Definitive Property PSA, Glass House intends to complete on or before March 22, 2021, an approximately $12,000,000 Qualified Financing (as defined in the Senior Convertible Notes), pursuant to which it will repay the BFP Bridge Note, fund the Additional Deposit, and fund certain other required expenditures of Glass House.

 

Effective as of March 3, 2021 Glass House assigned all of its membership interests in Field Investment Co., LLC a subsidiary and its subsidiaries Field Taste Matters, Inc., ATES Enterprises, LLC, and Zer One Seven Management, LLC for de minimis consideration to an unrelated party.

 

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APPENDIX D – MANAGEMENT’S DISCUSSION AND ANALYSIS OF GH GROUP, INC.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended December 31, 2020, December 31, 2019 and December 31, 2018

 

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.

 

See “Description of Business” for an overview of the GH Group and “Regulatory Overview” for details regarding the California regulatory framework.

 

Recent Developments

 

Acquisition of Farmacy Berkeley

 

On January 1, 2021 the Company completed an acquisition of 100% of the equity interests of iCANN, LLC d/b/a 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 $2,00,000 and accrued interest of $45,321 into equity interests of iCANN; (ii) the Company paid $400,000 in cash to four holders of iCANN equity interests: (iii) the Company issued 7,554,679 Series A Common shares to holders of iCANN equity interests; and (iv) the Company issued an additional 500,000 Series A Common shares to brokers and consultants.

 

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 southern California (the “Greenhouse Option Acquisition”). GH Group is currently conducting due diligence on the Greenhouse Option Acquisition.

 

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 million. The Greenhouse is uniquely suited to meet the license requirements for cannabis cultivation in southern California. The Filer and GH Group are 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). They believe, 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 million (before including any earn-out consideration), and then exercise it at a cost of approximately $120 million, payable in cash. The $100 million would be payable in common or subordinate voting shares of the Filer (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.

 

D-1

 

 

(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

 

The Element Acquisition

 

GH Group is seeking to acquire a series of related limited liability companies that are currently in the application stage for 17 cannabis retail dispensary licenses for locations in California (the “Element Acquisitions”). GH Group is currently conducting due diligence on the Element Acquisitions.

 

The Element Acquisitions involve the proposed acquisitions of 100% of the shares owned by Element 7 Inc. (“Element 7”) of a company or series of related companies that are currently in the application stage for licenses for 17 cannabis retail dispensaries in California. None of the licenses have been obtained. The Filer and GH Group are interested in this opportunity and are in the process of negotiating a non-binding memorandum of understanding with Element 7. The proposed transaction is as follows:

 

(a) GH Group would acquire, directly or indirectly, the shares of the limited liability company or series of related companies currently applying for the licenses from Element 7 for a value of approximately $1,500,000 for each license, up to a maximum amount of $25,500,000 for all 17 license applications.

 

(b) The proposed up to $25,500,000 purchase price to be paid by the Filer or GH Group for the Element Acquisitions is proposed to be paid in newly-issued common or subordinate voting shares of the Filer (or shares of a subsidiary exchangeable therefor) at a value of $10.00 per share.

 

(c) The purchase of each entity currently applying for a license would be subject to the satisfaction of certain conditions, which may be waived in GH Group’s discretion. In the event such conditions are not satisfied in respect of any such purchase, GH Group would not be obligated to purchase such entity, and the price would be reduced accordingly.

 

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 and Santa Ana, 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 year ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Revenue, Net   $ 48,259,601     $ 16,941,426     $ 8,967,286  
Cost of Goods Sold     29,519,143       8,461,551       3,749,373  
Gross Profit     18,740,458       8,479,875       5,217,913  
Expenses:                        
General and Administrative     18,637,477       9,354,591       3,094,857  
Sales and Marketing     1,489,664       912,842       143,216  
Professional Fees     2,040,004       5,196,993       1,913,865  
Depreciation and Amortization     2,576,263       1,455,780       767,567  
Total Expenses     24,743,408       16,920,206       5,919,505  
Loss from Operations     (6,002,950 )     (8,440,331 )     (701,592 )
Other Expense (Income):                        
Interest Expense     2,179,137       636,762       597,427  
Interest Income     (115,572 )     (443,523 )     (308,591 )
Loss on Investments     2,126,112       1,147,968       166,059  
Loss (Income) on Change in Fair Value of Derivative Liabilities     251,663       -       -  
Other Expense (Income), Net     (203,345 )     (19,419 )     (202,397 )
Total Other Expense     4,237,995       1,321,788       252,498  
Loss from Operations Before Provision for Income Taxes     (10,240,945 )     (9,762,119 )     (954,090 )
Provision for Income Taxes     6,418,533       972,520       357,352  
Net Loss     (16,659,478 )     (10,734,639 )     (1,311,442 )
Net Income (Loss) Attributable to Non-Controlling Interest     -       (511,465 )     211,396  
Net Loss Attributable to Shareholders / Members of GH Group   $ (16,659,478 )   $ (10,223,174 )   $ (1,522,838 )

 

Revenue

 

2020

 

Revenue for the year ended December 31, 2020 was $48.3 million, which represents an increase of $31.3 million or 185% from $16.9 million for the year ended December 31, 2019. Revenue growth in 2020 was primarily driven by an increase in cannabis production from the Company’s 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. The Company’s 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 the Company’s first greenhouse cultivation facility, which operated at full capacity throughout 2019, and at partial capacity in 2018 while the Company ramped up operations. The Company 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 the Company’s 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 the Company’s expanding cannabis cultivation operation which grew over 300% from the prior year. The Company’s 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 the Company’s grow operations being fully operational throughout 2019 and only partially operational in 2018. The Company 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. The Company’s cost of goods sold is a direct result of the Company’s 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. The Company’s 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 the Company’s retail operations, which began Q3 2019.

 

2018

 

For the year ended December 31, 2018, The Company 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, the Company 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 the Company’s 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 a 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 from our notes receivables.

 

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. 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 year end December 31:

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
NET CASH USED IN OPERATING ACTIVITIES   $ (7,697,679 )   $ (3,434,706 )   $ (909,209 )
CASH FLOWS FROM INVESTING ACTIVITIES:                        
NET CASH USED IN INVESTING ACTIVITIES     (7,719,045 )     (15,788,070 )     (14,845,042 )
CASH FLOWS FROM FINANCING ACTIVITIES:                        
NET CASH PROVIDED BY FINANCING ACTIVITIES     17,320,089       8,080,108       23,873,520  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     1,903,366       (11,142,668 )     8,119,269  
Cash and Cash Equivalents, Beginning of Period     2,631,886       13,774,554       5,655,285  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 4,535,251     $ 2,631,886     $ 13,774,554  

 

Cash Flow Provided by Operating Activities

 

2020

 

Cash used in operating activities totaled $ 7.7 million in 2020. This was primarily driven by the net loss incurred of $16.7 million during the year, increases in accounts receivable ($3.5 million) and buildup of inventory ($3.8 million) resulting from increased operations. The use of cash in operations was offset by the increase in trade payables and accrued liabilities ($1.9 million), increase in income taxes payable ($3.9 million), Increases in deferred tax liabilities, net ($1.3 million) and non-cash expense from interest capitalized to notes payable ($ 1.1 million), share-based compensation ($2.5 million), accretion of debt discounts on loans ($1.1 million), loss on equity method investments ($2.1 million) and depreciation and amortization ($2.6 million).

 

2019

 

Cash used in operating activities totaled $3.4 million in 2019. This was primarily driven by the net loss incurred of $10.8 million during the year as a result from increased operations. The use of cash in operations was offset by the increase in trade payables and accrued liabilities ($3.2 million) and non-cash expense from share-based compensation ($1.9 million), unrealized loss on equity method investments ($1.1 million) and depreciation and amortization ($1.5 million).

 

 

 

 

2018

 

Cash used in operating activities totaled $0.9 million in 2018. This was primarily driven by the net loss incurred of $1.4 million during the year, increases in accounts receivable ($0.5 million) and buildup of inventory ($0.8 million) resulting from increased operations. The use of cash in operations was offset by non-cash expense from share-based compensation ($0.8 million) and depreciation and amortization ($0.8 million).

 

Cash Flow Provided by (Used in) Investing Activities

 

2020

 

Cash used in investing activities totaled $ 7.7 million in 2020. This was primarily driven by the purchase of property and equipment ($3.9 million) purchase of investments ($2.9 million) and issuance of notes receivables ($1.1 million).

 

2019

 

Cash used in investing activities totaled $15.8 million in 2019. This was primarily driven by the purchase of property and equipment ($5.7 million), purchase of investments ($5.1 million), issuance of notes receivables ($3.5 million) and cash paid for an acquisition ($1.9 million).

 

2018

 

Cash used in investing activities totaled $14.8 million in 2018. This was primarily driven by the purchase of property and equipment ($12.7 million) and the purchase of investments ($3.2 million). Cash outflows from investing activities were offset by repayments on notes receivables during the year ($1.1 million).

 

Cash Flow Provided by (Used in) Financing Activities

 

2020

 

Cash provided by financing activities totaled $17.3 million in 2020. This was primarily driven by cash proceeds from the issuance of notes and convertible notes payable during the year ($18.4 million) which was offset by payments on notes payable ($1.1 million).

 

2019

 

Cash provided by financing activities totaled $8.1 million in 2019. This was primarily driven by cash proceeds from the issuance of notes payable during the year ($1.7 million), cash contributions from investors ($8.1 million) offset by payments of notes payable during the year ($0.9 million).

 

2018

 

Cash provided by financing activities totaled $23.9 million in 2018. This was primarily driven by cash proceeds from the issuance of notes and convertible notes payable during the year ($9.9 million), cash contributions from investors ($16.4 million) offset by payments of distributions to shareholders during the year ($2.0 million).

 

As previously noted, 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 December 31, 2020:

 

    2021     2022     2023 - 2024     After 2024     Total  
Notes Payable from Third Parties and Related Parties   $ 601,187     $ -     $ 2,189,264     $ 22,839,551     $ 25,630,002  
Leases obligations     731,354       745,094       1,526,302       1,231,207       4,233,957  
Total Contractual Obligations   $ 1,332,541     $ 745,094     $ 3,715,566     $ 24,070,758     $ 29,863,959  

 

Transactions with Related Parties

 

Reposition Debt Transactions

 

Reposition Investments, LLC, a Texas limited liability company (“Reposition”) and an affiliate of a shareholder of the Company, agreed to make a $1,000,000 unsecured bridge loan to the Company at an interest rate of 8% per annum to fund the Company until the initial close of Senior Notes Offering, pursuant to that certain Promissory Note, dated as of January 24, 2020, issued by the Company in favour of Reposition. In February 2020, the Company 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 Repositions 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 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. KBIC balance which was not converted remained. Effective as of March 1, 2020, KBIC assigned the 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 GH Group’s subsidiaries but expressly subordinated to the holders of the Senior Convertible Notes. As a result of the modification, the Company 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 favour 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, GH Group 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 expenses of the Company. Effective as of June 30, 2020: (a) Magu Capital assigned to the Company, the Company assumed and Magu Capital was released from, all of Magu Capital’s rights, duties and obligations under the BFP Loans; and (b) the Company 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, GH Group 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 GH Group (and incur certain fees and expenses on behalf of GH Group as part of and as performance for such services) (collectively, the “Incubation”) in consideration of GH Group’s agreement to issue to Magu Capital, upon a date certain following the closing of the Roll-Up as reasonably determined by the board of directors of GH Group, 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, GH Group issued to Magu Capital a Warrant to Purchase Exercise Shares (the “Magu Capital Warrant”), in full satisfaction of GH Group’s 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. The Company 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, The Company 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 Class B common stock of GH Group (“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

 

The Company has 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, the Company incurred expenses of approximately $0, 822,000 and $590,000, respectively.

 

 

 

 

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. 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

 

The Company 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, 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 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 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. Critical estimates and assumptions used in the model are discussed in “Note 12 - Derivative Liabilities”.

 

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 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 Consolidated and combined Statements of Operations immediately as a gain on acquisition. See “Note 8 – Business Acquisitions” for further details on business combinations.

 

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 consolidated and combined 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” 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 is currently evaluating the adoption date and impact, if any, adoption will have on its 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its consolidated and combined financial position and consolidated and combined results of operations.

 

 

 

 

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 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 the Company 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. 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 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

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company’s main risk is associated with fluctuations in Canadian dollars. The Company holds 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, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has 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. 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.

 

 

 

 

APPENDIX E – CHARTER OF THE AUDIT COMMITTEE OF GLASS HOUSE BRANDS INC.

 

PURPOSE

 

The audit committee (the “Audit Committee”) is a committee of the board of directors (the “Board”) of Glass House Brands Inc. (the “Company”). The primary function of the Audit Committee is to assist the directors of the Company in fulfilling their applicable roles by:

 

a) recommending to the Board the appointment and compensation of the Company’s external auditor;

 

b) overseeing the work of the external auditor, including the resolution of disagreements between the external auditor and management;

 

c) pre-approving all non-audit services (or delegating such pre-approval if and to the extent permitted by law) to be provided to the Company by the Company’s external auditor;

 

d) satisfying themselves that adequate procedures are in place for the review of the Company’s public disclosure of financial information, other than those described in (g) below, extracted or derived from its financial statements, including periodically assessing the adequacy of such procedures;

 

e) establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters;

 

f) reviewing and approving any proposed hiring of current or former partners or employees of the current auditor of the Company; and

 

g) reviewing and approving the annual and interim financial statements, related Management Discussion and Analysis (“MD&A”) and other financial information provided by the Company to any governmental body or the public.

 

The Audit Committee should primarily fulfill these roles by carrying out the activities enumerated in this Charter. However, it is not the duty of the Audit Committee to prepare financial statements, to plan or conduct internal or external audits, to determine that the financial statements are complete and accurate and are in accordance with United States generally accepted accounting principles, to conduct investigations, or to assure compliance with laws and regulations or the Company’s internal policies, procedures and controls, as these are the responsibility of management, and in certain cases, the external auditor.

 

LIMITATIONS ON AUDIT COMMITTEE'S DUTIES

 

In contributing to the Audit Committee’s discharge of its duties under this Charter, each member of the Audit Committee shall be obliged only to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Nothing in this Charter is intended to be, or may be construed as, imposing on any members of the Audit Committee a standard of care or diligence that is in any way more onerous or extensive than the standard to which the directors are subject.

 

Members of the Audit Committee are entitled to rely, absent actual knowledge to the contrary, on (i) the integrity of the persons and organizations from whom they receive information, (ii) the accuracy and completeness of the information provided, (iii) representations made by management as to the non-audit services provided to the Company by the external auditor, (iv) financial statements of the Company represented to them by a member of management or in a written report of the external auditors to present fairly the financial position of the Company in accordance with generally accepted accounting principles, and (v) any report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.

 

E-1

 

 

COMPOSITION AND MEETINGS

 

The Audit Committee should be comprised of not less than three directors as determined by the Board, all of whom shall be independent within the meaning of National Instrument 52-110 – Audit Committees (“NI 52-110”) of the Canadian Securities Administrators (or exempt therefrom), and free of any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Audit Committee. All members of the Audit Committee should have (or should gain within a reasonable period of time after appointment) a working familiarity with basic finance and accounting practices. Each member must be “financially literate” within the meaning of NI 52- 110 or must become financially literate within a reasonable period of time following his or her appointment. The Audit Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or an outside consultant.

 

The members of the Audit Committee shall be elected by the Board on an annual basis or until their successors shall be duly appointed. Unless a Chair of the Audit Committee (the “Chair”) is elected by the full Board, the members of the Audit Committee may designate a Chair by majority vote of the full Audit Committee membership.

 

In addition, the Audit Committee members should meet all of the requirements for members of audit committees as defined from time to time under applicable legislation and the rules of any stock exchange on which the Company’s securities are listed or traded.

 

The Audit Committee should meet at least four times annually, or more frequently as circumstances require. The Audit Committee should meet within forty-five (45) days following the end of the first three financial quarters to review and discuss the unaudited financial results for the preceding quarter and the related MD&A, and should meet within 90 days following the end of the fiscal year end to review and discuss the audited financial results for the preceding quarter and year and the related MD&A.

 

The Audit Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. For purposes of performing their duties, members of the Audit Committee shall have full access to all corporate information and any other information deemed appropriate by them, and shall be permitted to discuss such information and any other matters relating to the financial position of the Company with senior employees, officers and the external auditor of the Company, and others as they consider appropriate.

 

For greater certainty, management is indirectly accountable to the Audit Committee and is responsible for the timeliness and integrity of the financial reporting and information presented to the Board.

 

In order to foster open communication, the Audit Committee or its Chair should meet at least annually with management and the external auditor in separate sessions to discuss any matters that the Audit Committee or each of these groups believes should be discussed privately. In addition, the Audit Committee or its Chair should meet with management quarterly in connection with the Company’s interim financial statements.

 

A quorum for the transaction of business at any meeting of the Audit Committee shall be a majority of the number of members of the Audit Committee or such greater number as the Audit Committee shall by resolution determine.

 

Meetings of the Audit Committee shall be held from time to time and at such place as any member of the Audit Committee shall determine upon 48 hours’ notice to each of its members. The notice period may be waived by all members of the Audit Committee. Each of the Chair of the Board, the external auditor, the Chief Executive

 

Officer, the Chief Financial Officer or the Secretary shall be entitled to request that any member of the Audit Committee call a meeting.

 

This Charter is subject in all respects to the Company’s articles from time to time.

 

ROLE

 

As part of its function in assisting the Board in fulfilling its oversight role (and without limiting the generality of the Audit Committee’s role), the Audit Committee should:

 

(1) Determine any desired agenda items;

 

(2) Review and recommend to the Board changes to this Charter, as considered appropriate from time to time;

 

(3) Review the public disclosure regarding the Audit Committee required by NI 52-110;

 

 

 

 

(4) Review and seek to ensure that disclosure controls and procedures and internal control over financial reporting frameworks are operational and functional;

 

(5) Summarize in the Company’s annual information form the Audit Committee’s composition and activities, as required; and

 

(6) Submit the minutes of all meetings of the Audit Committee to the Board upon request.

 

Documents / Reports Review

 

(7) Review and recommend to the Board for approval the Company’s annual and interim financial statements, including any certification, report, opinion, undertaking or review rendered by the external auditor and the related MD&A, as well as such other financial information of the Company provided to the public or any governmental body as the Audit Committee or the Board require.

 

(8) Review other financial information provided to any governmental body or the public as they see fit.

 

(9) Review, recommend and approve any of the Company’s press releases that contain financial information.

 

(10) Seek to satisfy itself and ensure that adequate procedures are in place for the review of the Company’s public disclosure of financial information extracted or derived from the Company’s financial statements and related MD&A and periodically assess the adequacy of those procedures.

 

External Auditor

 

(11) Recommend to the Board the selection of the external auditor, considering independence and effectiveness, and review and recommend the fees and other compensation to be paid to the external auditor. The Audit Committee shall have the ultimate authority to approve all audit engagement terms and fees, including the auditors’ audit plan.

 

(12) Review and seek to ensure that all financial information provided to the public or any governmental body, as required, provides for the fair presentation of the Company’s financial condition, financial performance and cash flow.

 

(13) Instruct the external auditor that its ultimate client is not management and that it is required to report directly to the Audit Committee, and not management.

 

(14) Monitor the relationship between management and the external auditor including reviewing any management letters or other reports of the external auditor and discussing any material differences of opinion between management and the external auditor.

 

(15) Review and discuss, on an annual basis, with the external auditor all significant relationships it has with the Company to determine the external auditor’s independence.

 

(16) Pre-approve all non-audit services (or delegate such pre-approval, as the Audit Committee may determine and as permitted by applicable Canadian securities laws) to be provided by the external auditor.

 

(17) Review the performance of the external auditor and any proposed discharge of the external auditor when circumstances warrant.

 

(18) Periodically consult with the external auditor out of the presence of management about significant risks or exposures, internal controls and other steps that management has taken to control such risks, and the fullness and accuracy of the financial statements, including the adequacy of internal controls to expose any payments, transactions or procedures that might be deemed illegal or otherwise improper.

 

(19) Communicate directly with the external auditor and arrange for the external auditor to be available to the Audit Committee and the full Board as needed.

 

 

 

 

(20) Review and approve any proposed hiring by the Company of current or former partners or employees of the current (and any former) external auditor of the Company.

 

Audit Process

 

(21) Review the scope, plan and results of the external auditor’s audit and reviews, including the auditor’s engagement letter, the post-audit management letter, if any, and the form of the audit report. The Audit Committee may authorize the external auditor to perform supplemental reviews, audits or other work as deemed desirable.

 

(22) Following completion of the annual audit and quarterly reviews, review separately with each of management and the external auditor any significant changes to planned procedures, any difficulties encountered during the course of the audit and, if applicable, reviews, including any restrictions on the scope of work or access to required information and the cooperation that the external auditor received during the course of the audit and, if applicable, reviews.

 

(23) Review any significant disagreements among management and the external auditor in connection with the preparation of the financial statements.

 

(24) Where there are significant unsettled issues between management and the external auditor that do not affect the audited financial statements, the Audit Committee shall seek to ensure that there is an agreed course of action leading to the resolution of such matters.

 

Financial Reporting Processes

 

(25) Review the integrity of the financial reporting processes, both internal and external, in consultation with the external auditor as they see fit.

 

(26) Consider the external auditor’s judgments about the quality, transparency and appropriateness, not just the acceptability, of the Company’s accounting principles and financial disclosure practices, as applied in its financial reporting, including the degree of aggressiveness or conservatism of its accounting principles and underlying estimates, and whether those principles are common practices or are minority practices.

 

(27) Review all material balance sheet issues, material contingent obligations (including those associated with material acquisitions or dispositions) and material related party transactions.

 

(28) Review with management and the external auditor the Company’s accounting policies and any changes that are proposed to be made thereto, including all critical accounting policies and practices used, any alternative treatments of financial information that have been discussed with management, the ramification of their use and the external auditor’s preferred treatment and any other material communications with management with respect thereto.

 

(29) Review the disclosure and impact of contingencies and the reasonableness of the provisions, reserves and estimates that may have a material impact on financial reporting.

 

(30) If considered appropriate, establish separate systems of reporting to the Audit Committee by each of management and the external auditor.

 

(31) Periodically consider the need for an internal audit function, if not present.

 

Risk Management

 

(32) Review program of risk assessment and steps taken to address significant risks or exposures of all types, including insurance coverage and tax compliance.

 

 

 

 

General

 

(33) The Audit Committee may at its discretion retain independent counsel, accountants and other professionals to assist it in the conduct of its activities and to set and pay (as an expense of the Company) the compensation for any such advisors.

 

(34) Respond to requests by the Board with respect to the functions and activities that the Board requests the Audit Committee to perform.

 

(35) Periodically review this Charter and, if the Audit Committee deems appropriate, recommend to the Board changes to this Charter.

 

(36) Review the public disclosure regarding the Audit Committee required from time to time by applicable Canadian securities laws, including:

 

· The Charter of the Audit Committee;

 

· the composition of the Audit Committee;

 

· the relevant education and experience of each member of the Audit Committee;

 

· the external auditor services and fees; and

 

· such other matters as the Company is required to disclose concerning the Audit Committee.

 

(37) Perform any other activities as the Audit Committee deems necessary or appropriate including seeking to ensure all regulatory documents are compiled to meet Committee reporting obligations under NI 52-110.

 

AUDIT COMMITTEE COMPLAINT PROCEDURES

 

The Audit Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

 

The Audit Committee is a committee of the Board and is not and shall not be deemed to be an agent of the Company’s securityholders for any purpose whatsoever. The Board may, from time to time, permit departures from the terms hereof, either prospectively or retrospectively, and no provision contained herein is intended to give rise to civil liability to the Company securityholders or other liability whatsoever.

 

 

 

 

APPENDIX F –BUD AND BLOOM AUDITED FINANCIAL STATEMENTS

(FOR THE PERIOD ENDED AUGUST 31, 2019 AND THE YEAR ENDED DECEMBER 31, 2018)

 

(See attached)

 

F-1

 

 

BUD AND BLOOM

 

COMBINED FINANCIAL STATEMENTS

 

AS OF

AUGUST 31, 2019 AND DECEMBER 31, 2018

AND FOR THE PERIOD ENDED

AUGUST 31, 2019 AND YEAR ENDED DECEMBER 31, 2018

 

 

 

 

BUD AND BLOOM

Index to Combined Financial Statements

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm 1
   
Combined Balance Sheets 2
   
Combined Statements of Operations 3
   
Combined Statements of Changes in Members’ Deficit 4
   
Combined Statements of Cash Flows 5
   
Notes to Combined Financial Statements 6 - 14

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members

Bud and Bloom

 

Opinion on the Combined Financial Statements

 

We have audited the accompanying combined balance sheets of Bud and Bloom (the “Company”) as of August 31, 2019 and December 31, 2018, and the related combined statements of operations, changes in members’ equity, and cash flows for the period ended August 31, 2019 and for the year ended December 31, 2018, and the related notes to the combined financial statements (collectively referred to as the “combined financial statements”). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and December 31, 2018, and the combined results of its operations and its cash flows for the period ended August 31, 2019 and for the year ended December 31, 2018, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company's auditor since 2020.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP  
2029 Century Park East, Suite 1500    
Los Angeles, CA 90067   www.mgocpa.com

 

- 1 -

 

 

BUD AND BLOOM 
Combined Balance Sheets
As of August 31, 2019 and December 31, 2018
 

 

    2019     2018  
ASSETS                
Current Assets:                
Cash and Cash Equivalents   $ 390,290     $ 234,630  
Prepaid Expenses and Other Current Assets     46,287       21,157  
Inventory     289,797       141,963  
                 
Total Current Assets     726,374       397,750  
Deferred Tax Assets     103,611       138,635  
Property and Equipment, Net     589,857       638,599  
Other Assets     36,000       20,000  
TOTAL ASSETS   $ 1,455,842     $ 1,194,984  
LIABILITIES AND MEMBERS' DEFICIT                
LIABILITIES:                
Current Liabilities:                
Accounts Payable and Accrued Liabilities   $ 358,240     $ 385,496  
Income Taxes Payable     776,428       434,547  
Current Portion of Notes Payable to Related Parties     2,720,457       -  
Total Current Liabilities     3,855,125       820,043  
Deferred Rent     220,018       210,602  
Notes Payable to Related Parties, Net of Current Portion     -       2,678,642  
TOTAL LIABILITIES     4,075,143       3,709,287  
MEMBERS’ DEFICIT:                
Members' Deficit     (2,619,301 )     (2,514,303 )
Total Members' Deficit     (2,619,301 )     (2,514,303 )
TOTAL LIABILITIES AND MEMBERS' DEFICIT   $ 1,455,842     $ 1,194,984  

 

The accompanying notes are an integral part of these combined financial statements.

 

- 2 -

 

 

BUD AND BLOOM 
Combined Statements of Operations
For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018
 

 

    2019     2018  
Revenues, Net   $ 3,809,773     $ 4,249,638  
Cost of Goods Sold     2,232,857       2,890,836  
Gross Profit     1,576,916       1,358,802  
Expenses:                
General and Administrative     920,442       1,350,857  
Sales and Marketing     129,010       173,918  
Professional Fees     70,592       127,500  
Depreciation and Amortization     62,374       90,238  
Total Expenses     1,182,418       1,742,513  
Income (Loss) from Operations     394,498       (383,711 )
Other Expense (Income):                
Interest Expense     354,162       256,343  
Other Income, Net     (34,742 )     (5,092 )
Total Other Expense     319,420       251,252  
Income (Loss) from Operations Before Provision for Income Taxes     75,078       (634,962 )
Provision for Income Taxes     430,205       250,493  
Net Loss   $ (355,127 )   $ (885,455 )

 

The accompanying notes are an integral part of these combined financial statements.

 

- 3 -

 

 

BUD AND BLOOM 
Combined Statements of Changes in Members’ Equity
For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018
 

 

BALANCE AS OF JANUARY 1, 2018   $ (1,624,632 )
Net Loss     (885,455 )
Distributions     (4,216 )
BALANCE AS OF DECEMBER 31, 2018     (2,514,303 )
Net Loss     (355,127 )
Non-Cash Contributions     250,129  
BALANCE AS OF AUGUST 31, 2019   $ (2,619,301 )

 

The accompanying notes are an integral part of these combined financial statements.

 

- 4 -

 

 

BUD AND BLOOM 
Combined Statements of Cash Flows
For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018
 

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Loss   $ (355,127 )   $ (885,455 )
Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities:                
Deferred Tax (Recovery) Expense     35,024       (66,856 )
Accrued Interest Capitalized to Notes Payable     153,090       185,376  
Amortization of Debt Discount     201,072       70,967  
Depreciation and Amortization     62,374       90,238  
Changes in Operating Assets and Liabilities:                
Prepaid Expenses and Other Current Assets     (25,129 )     (21,157 )
Inventory     (147,833 )     67,459  
Other Assets     (16,000 )     2,700  
Accounts Payable and Accrued Liabilities     (27,256 )     356,986  
Income Taxes Payable     341,880       246,529  
Deferred Rent     9,416       64,124  
NET CASH PROVIDED BY OPERATING ACTIVITIES     231,512       110,911  
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of Property and Equipment     (13,632 )     (15,600 )
NET CASH USED IN INVESTING ACTIVITIES     (13,632 )     (15,600 )
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from the Issuance of Notes Payable to Related Parties     -       50,000  
Payments on Notes Payable to Related Parties     (62,219 )     (28,401 )
Distributions     -       (4,216 )
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES     (62,219 )     17,383  
NET INCREASE IN CASH AND CASH EQUIVALENTS     155,661       112,694  
Cash and Cash Equivalents, Beginning of Period     234,630       121,936  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 390,291     $ 234,630  
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                
Cash Paid for Interest   $ 354,162     $ 256,343  
Cash Paid for Taxes   $ 330,570     $ 214,738  
NON - CASH TRANSACTIONS                
Increase in Notes Payable to Related Parties for relief of Accrued Liabilities   $ -     $ 43,500  
Non-Cash Contribution for the Relief of Owner Notes Payable   $ 250,129     $ -  

 

The accompanying notes are an integral part of these combined financial statements.

 

- 5 -

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

1.            NATURE OF OPERATIONS

 

Bud and Bloom (“the Company”) consists of the combined financial statements of Saint Gertrude Management Company, LLC (“SGMC”) and Bud and Bloom (“BNB”). The Company is a cannabis company that operates a dispensary in the city of Santa Ana, California.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

These developments could have a material adverse impact on the Company’s combined revenues, combined results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s combined results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation

 

The accompanying combined financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of the Company’s subsidiaries in which the Company has a controlling financial interest.

 

All intercompany transactions and balances have been eliminated in combination. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the combined financial position of the Company as of August 31, 2019 and December 31, 2018 and the combined results of operations and cash flows for the period ended August 31, 2019 and the year ended December 31, 2018 have been included. In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, “Consolidation” (“ASC 810”), the Company consolidates any variable interest entity (“VIE”), of which the Company is the primary beneficiary.

 

Basis of Combination

 

These combined financial statements as of August 31, 2019 and December 31, 2018 and for period ended August 31, 2019 and the year ended December 31, 2018 include the accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control or common ownership as defined in ASC 810. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company has ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity. In assessing control, potential voting rights that are currently exercisable are taken into account.

 

Use of Estimates

 

The preparation of the 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 combined 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, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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.

 

- 6

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Inventory

 

Inventory is comprised entirely of finished goods and is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of August 31, 2019 and December 31, 2018, the Company determined that no reserve was necessary.

 

Property and Equipment

 

Property and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Furniture and Fixtures 5 Years
Leasehold Improvements Shorter of Lease Term or Economic Life
Equipment and Software 3 – 5 Years

 

The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the combined statements of operations in the period the asset is derecognized.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property and equipment 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.

 

- 7

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income taxes

 

BNB accounts for income taxes under the liability approach. Under the liability approach, deferred income taxes are computed by applying enacted laws and currently enacted tax rates to the "temporary" differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

SGMC is treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by or provided for SGMC. Members are taxed individually on their share of SGMC’s earnings. Since the members are liable for individual federal and state income taxes on the SGMC's taxable income, the SGMC may disburse funds necessary to satisfy the members' estimated personal income tax liabilities. California imposes an LLC fee based on revenue, which is included in the provision for income tax.

 

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 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.

 

- 8

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition

 

Revenue is recognized by the Company in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:

 

Identify a customer along with a corresponding contract;

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

Allocate the transaction price to the performance obligation(s) in the contract;

Recognize revenue when or as the Company satisfies the performance obligation(s).

 

Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues. Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its combined financial statements.

 

Cost of Sales

 

Cost of sales includes the costs directly attributable to product sales.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. There were approximately $129,000 and $174,000 in advertising costs during the period ended August 31, 2019 and the year ended December 31, 2018, respectively.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheets and combined results of operations.

 

Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long-term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to members’ equity (deficit) upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.

 

- 9

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

3.            CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash at its physical location, which is not currently insured and cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of August 31, 2019 and December 31, 2018 and for the period ended August 31, 2019 and the year ended December 31, 2018, the Company has not experienced any losses with regards to its cash balances.

 

The Company provides credit in the normal course of business to customers located throughout California. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were no customers that comprised more than 10% of the Company’s revenue for the period ended August 31, 2019 and the year ended December 31, 2018.

 

4.            PROPERTY AND EQUIPMENT

 

As of August 31, 2019 and December 31, 2018, property and equipment consist of the following:

 

    2019     2018  
Furniture and Fixtures   $ 7,401     $ 7,401  
Leasehold Improvements     738,178       738,178  
Equipment and Software     91,122       77,491  
Total Property and Equipment     836,701       823,070  
Less Accumulated Depreciation     (246,844 )     (184,471 )
Property and Equipment, Net   $ 589,857     $ 638,599  

 

Depreciation for the period ended August 31, 2019 and the year ended December 31, 2018 was $62,374 and $90,238, respectively.

 

5.            ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

As of August 31, 2019 and December 31, 2018, accounts payable and accrued liabilities consist of the following:

 

    2019     2018  
Accounts Payable   $ 243,943     $ 298,874  
Accrued Liabilities     3,783       -  
Accrued Payroll and Related Liabilities     12,151       15,180  
Sales Tax and Cannabis Taxes     98,363       71,442  
Total Accounts Payable and Accrued Liabilities   $ 358,240     $ 385,496  

 

- 10

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

6.            NOTES PAYABLE TO RELATED PARTIES

 

As of August 31, 2019 and December 31, 2018, notes payable consist of the following:

 

    2019     2018  
Loans to Owners and Officers   $ -     $ 256,967  
Loan to related Parties     2,720,457       2,421,675  
Total Notes Payable     2,720,457       2,678,642  
Less Current Portion of Notes Payable     (2,720,457 )     -  
Notes Payable, Net of Current Portion   $ -     $ 2,678,642  

 

The above noted notes payable are all due to related parties of the Company consisting of owners, officers and entities related to the Company’s members or board members of the Company.

 

The loans to related parties with an outstanding balance of $2,720,457 and $2,421,675 as of August 31, 2019 and December 31, 2018, respectively, were originally issued in October 2016 and matures in October 2021. The holders have the option to convert all but not less than all the outstanding principal and unpaid accrued interest into 50 percent of issued and authorized units of the Company.

 

On August 31, 2019, the owners of the Company forgave their notes payable due by the Company in the amount of $250,129. The note payable forgiven by the owners of the Company was recorded as a non-cash contribution to the Company.

 

Subsequent to August 31, 2019 as part of the acquisition by GH Group, Inc., $2,720,457 of related party convertible debt was converted to equity of the Company subsequent to the sale of the Company. See Note 10.

 

7.            MEMBERS’ DEFICIT

 

The Company is a limited liability company whereby allocations of profits, losses and distributions, if any, for each fiscal period or year are allocated pro rata in proportion to the member’s capital interest account.

 

8.            PROVISION FOR INCOME TAXES AND DEFERRED TAXES

 

Provision for income taxes consists of the following for the period ended August 31, 2019 and the year ended December 31, 2018:

 
    2019     2018  
Current:                
Federal   $ 391,959     $ 314,669  
State     3,222       2,680  
Total Current     395,181       317,349  
Deferred:                
Federal     (8,414 )     (38,339 )
State     43,438       (28,517 )
Total Deferred     35,024       (66,856 )
Total Provision for Income Taxes   $ 430,205     $ 250,493  

 

- 11

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

8.            PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

As of August 31, 2019 and December 31, 2018, the components of deferred tax assets and liabilities were as follows:

 

    2019     2018  
Deferred Tax Assets:                
State taxes   $ 320     $ 168  
Accrued Liabilities     -       4,551  
Deferred rent     65,654       58,933  
Operating losses     39,478       84,870  
                 
Total Deferred Tax Assets   $ 105,452     $ 148,522  

 

      2019       2018  
Deferred Tax Liabilities:                
Property and Equipment   $ (1,841 )   $ (1,194 )
Other     -       (8,693 )
                 
Total Deferred Tax Liabilities     (1,841 )     (9,887 )
                 
Net Deferred Tax Assets   $ 103,611     $ 138,635  

 

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the period ended August 31, 2019 and the year ended December 31, 2018:

 

    2019     2018  
Income tax expense at federal rate   $ 21,812     $ (159,404 )
State taxes and fees     3,222       2,512  
IRS Section 280E disallowance     138,196       189,953  
Uncertain tax positions     146,312       142,560  
Other permanent differences     34,718       (25,450 )
Income not taxed at entity level     85,945       100,322  
                 
Reported Income Tax Expense   $ 430,205     $ 250,493  

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

- 12

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

8.            PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for period ended August 31, 2019 and year ended December 31, 2018 is as follows:

 

    2019     2018  
Balance at Beginning of Period   $ 298,356     $ 155,796  
IRS Section 280E Positions     146,312       142,560  
Balance at End of Period   $ 444,668     $ 298,356  

 

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits at August 31, 2019 and December 31, 2018, potential benefits of $444,668 and $298,356, respectively, that if recognized would impact the effective tax rate on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

 

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of the August 31, 2019, the federal tax returns since 2017 and state tax returns since 2016 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

 

9.            COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases property from a related party under a operating lease agreement that specifies minimum rentals. The lease expires in October 2027 and contains certain renewal provisions. The Company records rent expense on a straight-line basis. As of August 31, 2019 and December 31, 2018, deferred rent was $220,018 and $210,602, respectively. The Company’s rent expense was approximately $249,000 and $374,000 for the period ended August 31, 2019 and the year ended December 31, 2018, respectively, and is recorded in general and administrative expenses in the accompanying combined statements of operations.

 

Future minimum lease payments under non-cancelable operating leases with the related party having an initial or remaining term of more than one year are as follows:

 

December 31:        
  Four Months Remaining 2019     $ 121,800  
  2020       372,654  
  2021       383,834  
  2022       395,350  
  2023       407,206  
  Thereafter       1,220,396  
  Total Future Minimum Lease Payments     $ 2,901,240  

 

- 13

 

 

BUD AND BLOOM

Notes to Combined Financial Statements

For The Period Ended August 31, 2019 and For The Year Ended December 31, 2018

 

 

9.            COMMITMENTS AND CONTINGENCIES (Continued)

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of August 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of August 31, 2019, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the combined financial statements relating to claims and litigations. As of August 31, 2019, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

10.            SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these combined financial statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the combined financial statements or disclosure in the notes to the combined financial statements.

 

Acquisition by GH Group, Inc.

 

Subsequent to August 31, 2019, GH Group, Inc. completed the acquisition of the Company for an aggregate consideration of $1,912,000 which is comprised of all cash at closing.

 

- 14

 

 

APPENDIX G –MANAGEMENT’S DISCUSSION AND ANALYSIS OF BUD AND BLOOM

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Period Ended August 31, 2019 and the Year Ended December 31, 2018

 

Overview

 

Bud and Bloom (“the Company”) consists of the combined financial statements of Saint Gertrude Management Company, LLC (“SGMC”) and Bud and Bloom (“BNB”). The Company is a cannabis company that operates a dispensary in the city of Santa Ana, California.

 

See “Description of Business” for an overview of the Company and “Regulatory Overview” for details regarding the California regulatory framework.

 

Recent Developments

 

Acquisition by GH Group, Inc.

 

On August 31, 2019, GH Group, Inc (“GH Group”). completed the acquisition of the Company for aggregate consideration of $1,912,000 which is comprised of all cash at closing.

 

Major Business Lines and Geographies

 

The Company views its financial results under one business line – the procurement and sale of cannabis retail products in the city of Santa Ana, California.

 

Geographic Areas

 

All of the Company’s revenue is derived from the city of Santa Ana, 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, and with the acquisition of the Company by GH Group, GH Group along with its other retail dispensaries look to expand its retail presence and brand name that allow GH Group to outperform competitors and build superior brand awareness and loyalty.

 

G-1 

 

 

Results of Operations

 

The following are the results of our operations for the period end August 31, 2019 and the year ended December 31, 2018:

  

    2019     2018  
Revenues, Net   $ 3,809,773     $ 4,249,638  
Cost of Goods Sold     2,232,857       2,890,836  
Gross Profit     1,576,916       1,358,802  
Expenses:                
General and Administrative     920,442       1,350,857  
Sales and Marketing     129,010       173,918  
Professional Fees     70,592       127,500  
Depreciation and Amortization     62,374       90,238  
Total Expenses     1,182,418       1,742,513  
Income (Loss) from Operations     394,498       (383,711 )
Other Expense (Income):                
Interest Expense     354,162       256,343  
Other Income, Net     (34,742 )     (5,092 )
Total Other Expense     319,420       251,252  
Income (Loss) from Operations Before Provision for Income Taxes     75,078       (634,962 )
Provision for Income Taxes     430,205       250,493  
                 
Net Loss   $ (355,127 )   $ (885,455 )

 

Revenue

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, revenue was $3.8 million ($5.7 million annualized, which represents an increase of $1.5 million or 34% annualized from $4.2 million for the year ended December 31, 2018. Revenue growth in 2019 was primarily driven by an increase in awareness of the Company’s operations. The Company began operations in Q1 of 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, revenue was $4.2 million. Revenues during 2018 consists of all retail products sold at its Santa Ana, California location which began sales in Q1 2018.

 

Cost of Goods Sold

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, cost of goods sold was $2.2 million, which represents an increase of $3.3 million or 16% annualized from the prior year amount of $2.9 million. Cost of goods sold growth in 2019 was primarily driven by an increase in awareness of the Company’s operations. The Company began operations in Q1 of 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, cost of goods sold was $2.9 million. The Company’s cost of goods sold is a direct result of the Company’s retail operations during 2018.

 

General and Administrative

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, general and administrative expenses was $0.9 million, which represents a negligible increase (less than 2% increase on an annualized basis) from $1.4 million in 2018.

 

 

 

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, general and administrative expenses was $1.4 million. General and administrative expenses include salary expenses, employee benefits, selling costs and incidental expenses related to its retail operations.

 

Sales & Marketing

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, sales and marketing expenses was $0.1 million, which represents an increase of $0.2 million or 11% annualized from the prior year amount of $0.2 million. Marketing expenses increased year over year to support the Company’s retail operations, which began Q1 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, The Company incurred $0.2 million of sales and marketing expenses for general advertising and promotions in various media outlets.

 

Professional Fees

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, professional fees were $0.1 million, which represents a negligible increase on an annualized basis from $0.1 million in 2018.

 

For the year ended December 31, 2018

 

For the year ended December 31, 2018, professional fees were $ 0.1 million. Professional fees in 2018 represent fees paid to part time operational and accounting consultants and for legal and advisory fees.

 

Other Expense

 

For the period ended August 31, 2019

 

For the period ended August 31, 2019, net other expenses were $0.3 million, which represents a increase of $0.2 million or 91% annualized from the prior year amount of $0.3 million. The increase from 2018 was primarily a result of the increase in our interest expense due to increased debt borrowings in 2019.

 

For the year ended December 31, 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 ($0.3 million).

 

Liquidity and Capital Resources

 

Overview

 

Historically, the Company’s primary source of liquidity has been capital contributions by investors and debt issuances. The Company 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 fund the Company from its capital resources in order to meet liquidity needs.

  

 

 

 

Financial Condition

 

Cash Flows

 

The following table summarizes the Company’s combined statement of cash flows from operations for the year end period ended August 31, 2019 and the year ended December 31, 2018:

 

    2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                
                 
NET CASH PROVIDED BY OPERATING ACTIVITIES   $ 231,512     $ 110,911  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
                 
NET CASH USED IN INVESTING ACTIVITIES     (13,632 )     (15,600 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
                 
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES     (62,219 )     17,383  
                 
NET INCREASE IN CASH AND CASH EQUIVALENTS     155,660       112,694  
Cash and Cash Equivalents, Beginning of Period     234,630       121,936  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 390,291     $ 234,630  

 

Cash Flow Provided by Operating Activities

 

For the period ended August 31, 2019

 

Cash provided by operating activities totaled $0.2 million for the period ended August 31, 2019. This was primarily driven by the net loss incurred of $0.4 million during the period ended August 31, 2019. The use of cash in operations was offset by the increase in income taxes payable ($0.3 million) and non-cash expense of amortization of debt discount ($0.2 million).

 

For the year ended December 31, 2018

 

Cash provided by operating activities totaled $0.1 million in 2018. This was primarily driven by the net loss incurred of $0.9 million during the year, offset by increases in accounts payable and accrued liabilities ($0.3) million, increases in income taxes payable ($0.2 million), reduction of inventory ($0.1 million) and non-cash expense from depreciation ($0.1 million) and non-cash interest expense capitalized to notes payable ($0.2 million)

 

Cash Flow Used in Investing Activities

 

For the period ended August 31, 2019

 

Cash used in investing activities totaled $0.01 million for the period ended August 31, 2019 all related to the purchase of property equipment.

 

For the year ended December 31, 2018

 

Cash used in investing activities totaled $0.02 million for 2018 all related to the purchase of property and equipment.

 

Cash Flow (Used In) Provided by Financing Activities

 

For the period ended August 31, 2019

 

Cash used in financing activities totaled $0.1 million for the period ended August 31, 2019. This was primarily driven by cash payments on notes payable to related parties ($0.1 million).

 

 

 

 

For the year ended December 31, 2018

 

Cash provided by financing activities totaled $0.02 million for 2018. This was primarily driven by cash proceeds from the issuance of notes payable during the period ($0.05 million), offset by payments on notes payable ($0.03 million).

 

As previously noted, the Company’s primary source of liquidity has been capital contributions and debt capital made available from investors. The Company 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 fund the Company from its capital resources in order to meet liquidity needs. The Company does not have any committed sources of financing, nor significant outstanding capital expenditure commitments.

 

Contractual Obligations

 

The Company 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 August 31, 2019:

 

    2020     2021     2022 - 2023     After 2023     Total  
Notes Payable   $ 2,720,457     $ -     $ -     $ -     $ 2,720,457  
Leases     121,800       372,654       779,184       1,627,602       2,901,240  
Total Contractual Obligations   $ 2,842,257     $ 372,654     $ 779,184     $ 1,627,602     $ 5,621,697  

 

Transactions with Related Parties

 

Related Party Debt

 

The loans to related parties with an outstanding balance of $2,720,457 and $2,421,675 as of August 31, 2019 and December 31, 2018, respectively, were originally issued in October 2016 and matures in October 2021. The holders have the option to convert all but not less than all the outstanding principal and unpaid accrued interest into 50 percent of issued and authorized units of the Company.

 

On August 31, 2019, the owners of the Company forgave their notes payable due by the Company in the amount of $250,129. The note payable forgiven by the owners of the Company was recorded as a non-cash contribution to the Company.

 

Subsequent to August 31, 2019 as part of the acquisition by GH Group, Inc., $2,720,457 of related party convertible debt was converted to equity of the Company subsequent to the sale of the Company.

 

Related Party Operating Leases

 

The Company leases property from a related party under an operating lease agreement that specifies minimum rentals. The lease expires in October 2027 and contains certain renewal provisions. The Company records rent expense on a straight-line basis. As of August 31, 2019 and December 31, 2018, deferred rent was $220,018 and $210,602, respectively. The Company’s rent expense was approximately $249,000 and $374,000 for the period ended August 31, 2019 and the year ended December 31, 2018, respectively and recorded in general and administrative expenses in the accompanying statements of operations.

 

 

 

 

Critical Accounting Estimates

 

Use of Estimates

 

The preparation of the 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 combined 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, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property 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.

 

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.

 

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. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position and combined results of operations.

 

 

 

 

Financial Instruments and Other Instruments

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, trade payables, accrued 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 the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at June 29, 2019 is the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and 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 June 29, 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

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company’s main risk is associated with fluctuations in Canadian dollars. The Company holds 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 June 29, 2019 and June 30, 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has 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. 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.

 

 

 

 

APPENDIX H – FARMACY BERKELEY AUDITED ANNUAL FINANCIAL STATEMENTS (FOR THE YEARS ENDED DECEMBER 31, 2020, DECEMBER 31, 2019 AND DECEMBER 31, 2018)

 

(See attached)

 

H-1

 

 

iCANN, LLC

 

FINANCIAL STATEMENTS

 

DECEMBER 31, 2020, 2019 and 2018

 

 

 

 

ICANN, LLC

Index to Financial Statements

 

  Page(s)
   
Report of Independent Registered Public Accounting Firm 1
   
Balance Sheets 2
   
Statements of Operations 3
   
Statements of Changes in Members’ Equity (Deficit) 4
   
Statements of Cash Flows 5
   
Notes to Financial Statements 6 - 14

 

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members

iCANN, LLC

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of iCANN, LLC (the “Company”) as of December 31, 2020, 2019 and 2018, and the related statements of operations, changes in members’ equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

We have served as the Company's auditor since 2021.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP    
2029 Century Park East, Suite 1500  
Los Angeles, CA 90067   www.mgocpa.com

- 1 -

 

 

iCANN, LLC

Balance Sheets

As of December 31, 2020, 2019 and 2018

 

 

 

    2020     2019     2018  
ASSETS                        
Current Assets:                        
Cash and Cash Equivalents   $ 158,928     $ 37,290     $ 28,007  
Prepaid Expenses     61,528       -       -  
Inventory     343,289       -       -  
Total Current Assets     563,745       37,290       28,007  
Property and Equipment, Net     692,645       684,079       137,352  
TOTAL ASSETS   $ 1,256,390     $ 721,369     $ 165,359  
                         
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)                        
                         
LIABILITIES:                        
Current Liabilities:                        
Accounts Payable and Accrued Liabilities   $ 875,599     $ 47,930     $ 4,902  
Income Taxes Payable     209,466       2,400       1,600  
Current Portion of Related Party Notes Payable     -       125,500       95,500  
Current Portion of Convertible Debt     -       1,084,967       -  
Total Current Liabilities     1,085,065       1,260,797       102,002  
TOTAL LIABILITIES     1,085,065       1,260,797       102,002  
MEMBERS’ EQUITY (DEFICIT):     171,325       (539,428 )     63,357  
TOTAL LIABILITIES AND MEMBERS' EQUITY (DEFICIT)   $ 1,256,390     $ 721,369     $ 165,359  

 

The accompanying notes are an integral part of these financial statements.

 

- 2 -

 

 

iCANN, LLC

Statements of Operations

For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

    2020     2019     2018  
Revenues, Net   $ 3,607,307     $ -     $ -  
Cost of Goods Sold     2,621,272       -       -  
                         
Gross Profit     986,035       -       -  
                         
Expenses:                        
General and Administrative     1,798,289       60,142       44,771  
Sales and Marketing     166,784       9,736       2,728  
Professional Fees     71,570       293,208       220,735  
Depreciation and Amortization     108,672       -       -  
                         
Total Expenses     2,145,315       363,086       268,234  
                         
Loss from Operations     (1,159,280 )     (363,086 )     (268,234 )
                         
Other Expense (Income):                        
Interest Expense     327,104       12,169       -  
Interest Income     -       (68 )     (127 )
Other Expense, Net     32,566       -       -  
                         
Total Other Expense (Income), Net     359,670       12,101       (127 )
                         
Loss from Operations Before Provision for Income Taxes     (1,518,950 )     (375,187 )     (268,107 )
Provision for Income Taxes     207,868       800       800  
                         
Net Loss   $ (1,726,818 )   $ (375,987 )   $ (268,907 )

 

The accompanying notes are an integral part of these financial statements.

 

- 3 -

 

 

iCANN, LLC

Statements of Changes in Members’ Equity (Deficit)
For The Years Ended December 31, 2020, 2019 and 2018

 

 

 

BALANCE AS OF JANUARY 1, 2018   $ (120,086 )
Net Loss     (268,907 )
Contributions     452,350  
BALANCE AS OF DECEMBER 31, 2018     63,357  
Net Loss     (375,987 )
Equity Component of Convertible Debt     27,202  
Distributions     (254,000 )
BALANCE AS OF DECEMBER 31, 2019     (539,428 )
Net Loss     (1,726,818 )
Equity Component of Convertible Debt Amendments     234,462  
Conversion of Convertible Debt     2,045,309  
Conversion of Related Party Notes Payable     157,800  
BALANCE AS OF DECEMBER 31, 2020   $ 171,325  

 

The accompanying notes are an integral part of these financial statements.

 

- 4 -

 

 

iCANN, LLC

Statements of Cash Flows

For The Years Ended December 31, 2020, 2019 and 2018

 

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
Net Loss   $ (1,726,818 )   $ (375,987 )   $ (268,907 )
Adjustments to Reconcile Net Loss to Net Cash Used In Operating Activities:                        
Accrued Interest Capitalized to Convertible Debt     36,484       8,825       -  
Accrued Interest Capitalized to Related Party Notes     32,300       -       -  
Amortization of Debt Discount     258,320       3,344       -  
Depreciation and Amortization     108,672       -       -  
Changes in Operating Assets and Liabilities:                        
Prepaid Expenses     (61,528 )     -       -  
Inventory     (343,289 )     -       -  
Accounts Payable and Accrued Liabilities     827,669       43,028       (30,421 )
Income Taxes Payable     207,066       800       800  
NET CASH USED IN OPERATING ACTIVITIES     (661,124 )     (319,990 )     (298,528 )
CASH FLOWS FROM INVESTING ACTIVITIES:                        
Purchases of Property and Equipment     (117,238 )     (546,727 )     (137,352 )
NET CASH USED IN INVESTING ACTIVITIES     (117,238 )     (546,727 )     (137,352 )
CASH FLOWS FROM FINANCING ACTIVITIES:                        
Proceeds from the Issuance of Convertible Debt     900,000       1,100,000       -  
Proceeds from the Issuance of Related Party Notes Payable     -       30,000       -  
Contributions     -       -       452,350  
Distributions     -       (254,000 )     -  
NET CASH PROVIDED BY FINANCING ACTIVITIES     900,000       876,000       452,350  
NET INCREASE IN CASH AND CASH EQUIVALENTS     121,638       9,283       16,470  
Cash and Cash Equivalents, Beginning of Period     37,290       28,007       11,537  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 158,928     $ 37,290     $ 28,007  
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                        
Cash Paid for Taxes   $ 806     $ -     $ -  
NON - CASH TRANSACTIONS                        
Conversion of Convertible Debt to Equity   $ 2,045,309     $ -     $ -  
Conversion of Related Party Notes Payable to Equity   $ 157,800     $ -     $ -  
Equity Component of Convertible Debt   $ -     $ 27,202     $ -  
Equity Component of Convertible Debt Amendments   $ 234,462     $ -     $ -  

 

The accompanying notes are an integral part of these financial statements.

 

  - 5 -  

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

1.            NATURE OF OPERATIONS

 

iCANN, LLC (“the Company”) is a cannabis company that operates a dispensary in the city of Berkley, California.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

These developments could have a material adverse impact on the Company’s revenues, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation

 

The accompanying financial statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company.

 

Use of Estimates

 

The preparation of the 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 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 estimated useful lives, depreciation and amortization of property and equipment, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Inventory

 

Inventory is comprised entirely of finished goods and is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews inventory for obsolete, redundant and slow-moving goods and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of December 31, 2020, 2019 and 2018, the Company determined that no reserve was necessary.

 

  - 6 -  

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Property and Equipment

 

Property and equipment is stated at cost, net of accumulated depreciation, amortization and impairment losses, if any. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Furniture and Fixtures 5 Years
Leasehold Improvements Shorter of Lease Term or Economic Life
Equipment and Software 3 – 5 Years

 

The assets’ residual values, useful lives and methods of depreciation and amortization are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the statements of operations in the period the asset is derecognized.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property and equipment 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.

 

Income taxes

 

The Company is treated as a corporation for federal and state income tax purposes. Consequently the Company accounts for income taxes under the liability approach. Under the liability approach, deferred income taxes are computed by applying enacted laws and currently enacted tax rates to the "temporary" differences between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.

 

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 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 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.

 

  - 7 -  

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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.

 

Revenue Recognition

 

Revenue is recognized by the Company in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASU 2014-09, the Company applies the following five (5) steps:

 

Identify a customer along with a corresponding contract;

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

Allocate the transaction price to the performance obligation(s) in the contract;

Recognize revenue when or as the Company satisfies the performance obligation(s).

 

Revenue is recognized upon the satisfaction of the performance obligation. The Company satisfies its performance obligation and transfers control upon delivery and acceptance by the customer. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues. Based on the Company’s assessment, the adoption of this new standard had no impact on the amounts recognized in its financial statements.

 

Cost of Goods Sold

 

Cost of goods sold includes the costs directly attributable to product sales.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. There were approximately $166,784, $9,736 and $2,728 in advertising costs during the years ended December 31, 2020, 2019 and 2018, respectively.

 

  - 8 -  

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Financial Instruments

 

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.

 

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments. There have been no transfers between fair value levels during the years ended December 31, 2020, 2019 and 2018.

 

Financial instruments are measured at amortized cost or at fair value. Financial instruments measured at amortized cost consist of accounts payable, accrued liabilities and income taxes payable wherein the carrying value approximates fair value due to its short-term nature. Other financial instruments measured at amortized cost include notes payable and convertible debt wherein the carrying value at the effective interest rate approximates fair value as the interest rate for notes payable and the interest rate used to discount the host debt contract for convertible debt approximate a market rate for similar instruments offered to the Company.

 

Recently Issued Accounting Standards

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of this ASU during the year ended December 31, 2020 had no material impact on these financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its balance sheets and results of operations.

 

  - 9 -  

 

 

iCANN, LLC

Notes to Financial Statements

For The Years Ended December 31, 2020, 2019 and 2018

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long-term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to members’ equity (deficit) upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.

 

3.            CONCENTRATIONS OF BUSINESS AND CREDIT RISK

 

The Company maintains cash at its physical location, which is not currently insured and cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of and for the years ended December 31, 2020, 2019 and 2018, the Company has not experienced any losses with regards to its cash balances.

 

4.            PROPERTY AND EQUIPMENT

 

As of December 31, 2020, 2019 and 2018, property and equipment consist of the following:

 

    2020     2019     2018  
Furniture and Fixtures   $ 192,294     $ -     $ -  
Leasehold Improvements     516,878       -       -  
Equipment and Software     92,145       -       -  
Construction in Progress     -       684,079       137,352  
Total Property and Equipment     801,317       684,079       137,352  
Less Accumulated Depreciation and Amortization     (108,672 )     -       -  
Property and Equipment, Net   $ 692,645     $ 684,079     $ 137,352  

 

Depreciation and amortization for the years ended December 31, 2020, 2019 and 2018 was $108,672, $0 and $0, respectively.

 

  - 10 -  

 

 

iCANN, LLC
Notes to Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

As of December 31, 2020, 2019 and 2018, accounts payable and accrued liabilities consist of the following:

 

    2020     2019     2018  
Accounts Payable   $ 396,933     $ 37,391     $ 4,902  
Accrued Liabilities     291,739       10,539       -  
Accrued Payroll and Related Liabilities     53,363       -       -  
Sales Tax and Cannabis Taxes     133,564       -       -  
Total Accounts Payable and Accrued Liabilities   $ 875,599     $ 47,930     $ 4,902  

 

During the year ended December 31, 2020, the Company began a customer loyalty rewards program that allows members to earn discounts on future purchases. Unused discounts earned by loyalty rewards program members are included in accrued liabilities and recorded as a sales discount at the time a qualifying purchase is made. The value of points accrued as of December 31, 2020 was $291,000. Currently, unused points do not expire in most cases.

 

6. RELATED PARTY NOTES PAYABLE

 

As of December 31, 2020, 2019 and 2018, related party notes payable consist of the following:

 
    2020     2019     2018  
Related Party Notes Payable   $ -     $ 125,500     $ 95,500  
Less Current Portion of Related Party Notes Payable     -       (125,500 )     (95,500 )
Related Party Notes Payable, Net of Current Portion   $ -     $ -     $ -  

 

The related party notes payable are due on demand and bear no interest. During the year ended December 31, 2020, to induce the holders to convert their amounts due to equity of the Company, the Company agreed to increase the amounts due in the form of additional interest in the amount of $32,300. The total balance converted to equity during the year ended December 31, 2020 was $157,800.

 

7. CONVERTIBLE DEBT

 

As of December 31, 2020, 2019 and 2018, convertible debt consist of the following:

 

    2020     2019     2018  
Convertible Debt   $ -     $ 1,108,825     $ -  
Less Debt Discount     -       (23,858 )     -  
Total Convertible Debt     -       1,084,967       -  
Less Current Portion of Convertible Debt     -       (1,084,967 )     -  
Convertible Debt, Net of Current Portion   $ -     $ -     $ -  

 

In July 2019, the Company entered into a letter of intent and a convertible facility term loan agreement with GH Group, Inc. The convertible facility term loan agreement allows up to a $2,000,000 term loan at a 2 percent interest rate and matures 3 years from the date of the first advance under the convertible facility term loan agreement. No prepayments are allowed. The convertible facility term loan agreement is convertible into 10 percent of the Company’s equity on a fully diluted basis and is only convertible upon the Company the final closing as defined in the letter of intent. During the years ended December 31, 2020 and 2019, the Company received $900,000 and $1,100,000 under the convertible facility term loan agreement, respectively. In December 2020, all outstanding principal and interest of $2,045,309 due under the convertible facility term loan agreement, were converted into equity of the Company.

 

- 11 -

 

 

iCANN, LLC
Notes to Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

8. MEMBERS’ EQUITY (DEFICIT)

 

The Company is a limited liability company whereby allocations of profits, losses and distributions, if any, for each fiscal period or year are allocated pro rata in proportion to the member’s capital interest account. Certain members as defined in the operating agreement have a preference on distributions over other members when certain financial metrics are met for an initial period of 8 years. This initial period is automatically extended one additional 8-year term, if during each of the last three years of the initial term the Company’s revenue is $10,000,000.

 

9. PROVISION FOR INCOME TAXES AND DEFERRED TAXES

 

Provision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Current:                        
Federal   $ 207,068     $ -     $ -  
State     800       800       800  
Total Current     207,868       800       800  
Total Provision for Income Taxes   $ 207,868     $ 800     $ 800  

 

As of December 31, 2020, 2019 and 2018, the components of deferred tax assets were as follows:

 

    2020     2019     2018  
Deferred Tax Assets:                        
Operating losses   $ 174,412     $ 40,137     $ 7,162  
Valuation Allowance     (174,412 )     (40,137 )     (7,162 )
Total Deferred Tax Assets   $ -     $ -     $ -  

 

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Income tax expense at federal rate   $ (318,980 )   $ (78,334 )   $ (60,450 )
State taxes and fees     800       800       800  
IRS Section 280E disallowance     347,335       78,334       60,450  
State Tax Carryforwards     (134,275 )     (32,975 )     (7,162 )
Increase in Valuation Allowance     134,275       32,975       7,162  
Uncertain tax positions     178,713       -       -  
Reported Income Tax Expense   $ 207,868     $ 800     $ 800  

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

- 12 -

 

 

iCANN, LLC
Notes to Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

9. PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for years ended December 31, 2020, 2019 and 2018 is as follows:

 

    2020     2019     2018  
Balance at Beginning of Period   $ -     $ -     $ -  
IRS Section 280E Positions     178,713       -       -  
Balance at End of Period   $ 178,713     $ -     $ -  

 

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits at December 31, 2020, 2019 and 2018, potential benefits of $178,713, $0 and $0, respectively, that if recognized would impact the effective tax rate on income from continuing operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

 

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

 

As of the December 31, 2020, the federal tax returns since 2018 and state tax returns since 2017 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

 

10. COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company leases property from a related party under an operating lease agreement that specifies minimum rentals. The lease expires in January 2031 and contains certain renewal provisions. The Company’s rent expense was $220,000, $4,955 and $12,576 for the years ended December 31, 2020, 2019 and 2018, respectively, and is recorded in general and administrative expenses in the accompanying statements of operations.

 

Future minimum lease payments under non-cancelable operating leases with the related party having an initial or remaining term of more than one year are as follows:

 
December 31:      
2021   $ 240,000  
2022     240,000  
2023     240,000  
2024     240,000  
2025     240,000  
Thereafter     1,220,000  
Total Future Minimum Lease Payments   $ 2,420,000  

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of December 31, 2020, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

- 13 -

 

 

iCANN, LLC
Notes to Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
 

 

10. COMMITMENTS AND CONTINGENCIES (Continued)

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the financial statements relating to claims and litigations. As of December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

12. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these financial statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the financial statements or disclosure in the notes to the financial statements.

 

Acquisition by GH Group, Inc.

 

Subsequent to December 31, 2020, GH Group, Inc. (“GH Group”) completed the acquisition of 100% of the Company’s equity interests. Pursuant to the terms of the agreement, GH Group elected to convert its earlier issued convertible notes with a principal amount of $2,000,000 and accrued interest of $45,309 into equity interests of the Company, paid $400,000 in cash to four holders of the Company’s equity interests, issued 7,554,679 Class A Common shares to the holders of the Company’s equity interests; and issued an additional 500,000 Class A Common shares to the Company’s brokers and consultants.

 

- 14 -

 

 

APPENDIX I – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FARMACY BERKELEY

 

(See attached)

 

  I-1  

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended December 31, 2020, 2019 and 2018 – iCann

 

Overview

 

iCann, LLC (“the Company”) is a cannabis company that operates a dispensary in the city of Berkley, California.

 

See “Description of Business” for an overview of the Company and “Regulatory Overview” for details regarding the California regulatory framework.

 

Recent Developments

 

Acquisition by GH Group, Inc.

 

On January 1, 2021, GH Group, Inc. (“GH Group”) completed the acquisition of 100% of the Company’s equity interests. Pursuant to the terms of the agreement, GH Group elected to convert its earlier issued convertible notes with a principal amount of $2,000,000 and accrued interest of $45,309 into equity interests of the Company, paid $400,000 in cash to four holders of the Company’s equity interests, issued 7,554,679 Class A Common shares to the holders of the Company’s equity interests; and issued an additional 500,000 Class A Common shares to the Company’s brokers and consultants.

 

Major Business Lines and Geographies

 

The Company views its financial results under one business line – the procurement and sale of cannabis retail products in the city of Berkley, California.

 

Geographic Areas

 

All of the Company’s revenue is derived from the city of Berkley, 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, and with the acquisition of the Company by GH Group, GH Group along with its other retail dispensaries look to expand its retail presence and brand name 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 years ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
Revenues, Net   $ 3,607,307     $ -     $ -  
Cost of Goods Sold     2,621,272       -       -  
Gross Profit     986,035       -       -  
Expenses:                        
General and Administrative     1,798,289       60,142       44,771  
Sales and Marketing     166,784       9,736       2,728  
Professional Fees     71,570       293,208       220,735  
Depreciation and Amortization     108,672       -       -  
Total Expenses     2,145,315       363,086       268,234  
Loss from Operations     (1,159,280 )     (363,086 )     (268,234 )
Other Expense (Income):                        
Interest Expense     327,104       12,169       -  
Interest Income     -       (68 )     (127 )
Other Expense, Net     32,566       -       -  
Total Other Expense (Income), Net     359,670       12,101       (127 )
Loss from Operations Before Provision for Income Taxes     (1,518,950 )     (375,187 )     (268,107 )
Provision for Income Taxes     207,868       800       800  
Net Loss   $ (1,726,818 )   $ (375,987 )   $ (268,907 )

 

 

 

 

Revenue

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, revenue was $3.6 million, an increase from $0 million for the year ended December 31, 2019. The Company began retail sales in February 2020.

 

Cost of Goods Sold

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, cost of goods sold was $2.6 million, an increase from $0 million for the year ended December 31, 2019. The Company began retail sales in February 2020.

 

General and Administrative

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, general and administrative expenses was $1.8 million, an increase of $1.7 million or 2,890% from the prior year amount of $0.1 million. The increase in general and administrative expenses is due to the Company having started sales and ramping up operations in February 2020. In the prior year, the Company was not fully operational and had minor operations.

 

For the year ended December 31, 2019 and 2018

 

For the year ended December 31, 2019, general and administrative expenses was $0.1 million, a negligible increase from 2018. In 2019 and in 2018, the Company was not fully operational and had minor operations.

 

Sales & Marketing

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, sales and marketing expenses was $0.2 million, which represents an increase of $0.2 million or 1,613% from the prior year amount of $0.0 million. Marketing expenses increased year over year to support the Company’s retail operations, which began February 2020.

 

For the year ended December 31, 2019 and 2018

 

For the year ended December 31, 2019 and 2018, sales and marketing expenses was negligible as the Company had not begun operations until February 2020.

 

Professional Fees

 

For the year ended December 31, 2020

 

For the year ended December 31, 2020, professional fees were $0.1 million, which represents a decrease of $0.2 million or 76% from $0.3 million in 2019. The decline in professional fees in 2019 was a result of the Company expending much of its up front costs in 2019 and 2018 to start the Company and obtain the cannabis license.

 

For the year ended December 31, 2019 and 2018

 

For the year ended December 31, 2019 professional fees were $0.3 million, which represents an increase of $0.1 million or 33% from $0.2 million in 2018. Professional fees for 2019 and 2018 represents fees paid to consultants, outside accountants and legal fees related to starting up the Company and the process of obtaining the cannabis license.

 

 

 

 

Liquidity and Capital Resources

 

Overview

 

Historically, the Company’s primary source of liquidity has been capital contributions by investors and debt issuances. The Company 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 fund the Company from its capital resources in order to meet liquidity needs.

 

Financial Condition

 

Cash Flows

 

The following table summarizes the Company’s combined statement of cash flows from operations for the year end year ended December 31, 2020, 2019 and 2018:

 

    2020     2019     2018  
CASH FLOWS FROM OPERATING ACTIVITIES:                        
NET CASH USED IN OPERATING ACTIVITIES   $ (661,124 )   $ (319,990 )   $ (298,528 )
CASH FLOWS FROM INVESTING ACTIVITIES:                        
NET CASH USED IN INVESTING ACTIVITIES     (117,238 )     (546,727 )     (137,352 )
CASH FLOWS FROM FINANCING ACTIVITIES:                        
NET CASH PROVIDED BY FINANCING ACTIVITIES     900,000       876,000       452,350  
NET INCREASE IN CASH AND CASH EQUIVALENTS     121,638       9,283       16,470  
Cash and Cash Equivalents, Beginning of Period     37,290       28,007       11,537  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 158,928       37,290     $ 28,007  

 

Cash Flow Used In Operating Activities

 

For the year ended December 31, 2020

 

Cash used in operating activities totaled $0.7 million for the year ended December 31, 2020. This was primarily driven by the net loss incurred of $1.7 million during the year ended December 31, 2020. The use of cash in operations was offset by the increase in accounts payable and accrued liabilities ($0.8 million).

 

For the year ended December 31, 2019

 

Cash used in operating activities totaled $0.3 million for the year ended December 31, 2019. This was primarily driven by the net loss incurred of $0.4 million during the year ended December 31, 2019. Cash flows from other operating activities during the year ended December 31, 2019 was negligible.

 

For the year ended December 31, 2018

 

Cash used in operating activities totaled $0.3 million for the year ended December 31, 2018. This was primarily driven by the net loss incurred of $0.3 million during the year ended December 31, 2018. Cash flows from other operating activities during the year ended December 31, 2018 was negligible.

 

Cash Flow Used in Investing Activities

 

For the year ended December 31, 2020

 

Cash used in investing activities totaled $0.1 million for the year ended December 31, 2020 all related to the purchase of property equipment.

 

 

 

 

For the year ended December 31, 2019

 

Cash used in investing activities totaled $0.5 million for the year ended December 31, 2019 all related to the purchase of property equipment.

 

For the year ended December 31, 2018

 

Cash used in investing activities totaled $0.1 million for the year ended December 31, 2018 all related to the purchase of property equipment.

 

Cash Flow Provided by Financing Activities

 

For the year ended December 31, 2020

 

Cash provided by financing activities totaled $0.9 million for the year ended December 31, 2020. This was primarily driven by the issuance of convertible debt during the year ($0.9 million).

 

For the year ended December 31, 2019

 

Cash provided by financing activities totaled $0.9 million for the year ended December 31, 2019. This was primarily driven by the issuance of convertible debt during the year ($1.13 million), offset by a payment of a distribution to a member ($0.3 million).

 

For the year ended December 31, 2018

 

Cash provided by financing activities totaled $0.5 million for the year ended December 31, 2018. This was primarily driven by a contribution ($0.5 million) from a member during the year.

 

As previously noted, the Company’s primary source of liquidity has been capital contributions and debt capital made available from investors and members. The Company 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 fund the Company from its capital resources in order to meet liquidity needs. The Company does not have any committed sources of financing, nor significant outstanding capital expenditure commitments.

 

Contractual Obligations

 

The Company has contractual obligations to make future payments, on related party lease agreements.

 

The following table summarizes such obligations as of December 31, 2020:

 

    2021     2022     2023 - 2024     After 2024     Total  
Leases   $ 240,000     $ 240,000     $ 480,000     $ 1,460,000     $ 2,420,000  
Total Contractual Obligations   $ 240,000     $ 240,000     $ 480,000     $ 1,460,000     $ 2,420,000  

 

Transactions with Related Parties

 

The Company leases property from a related party under a operating lease agreement that specifies minimum rentals. The lease expires in January 2031 and contains certain renewal provisions. The Company’s rent expense was $220,000, $4,955 and $12,576 for the years ended December 31, 2020, 2019 and 2018, respectively, and is recorded in general and administrative expenses in the accompanying combined statements of operations.

 

The Company had various loans with related parties throughout 2020, 2019 and 2018. The outstanding balances of $0, $125,500, and $95,500 as of December 31, 2020, 2019 and 2018, respectively, were due on demand and bear no interest. During the year ended December 31, 2020, to induce the holders to convert their amounts due to equity of the Company, the Company agreed to increase the amounts due in the form of additional interest in the amount of $32,300. The total balance converted to equity during the year ended December 31, 2020 was $157,800.

 

 

 

 

Critical Accounting Estimates

 

Use of Estimates

 

The preparation of the 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 combined 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 and amortization of property and equipment, inventory valuation, long-lived asset impairment, fair value of financial instruments, compound financial instruments, 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 and Amortization of Property and Equipment

 

Depreciation and amortization 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.

 

Impairment of Long-Lived Assets

 

For purposes of the impairment test, long-lived assets such as property 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.

 

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.

 

Changes in Accounting Policies Including Adoption

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The adoption of this ASU during the year ended December 31, 2020 had no material impact on these financial statements.

 

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. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined financial position and combined results of operations.

 

Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, Leases, as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. The Company will be required to record a right-of-use asset and lease liability equal to the present value of the remaining minimum lease payments and will continue to recognize expense on a straight-line basis upon adoption of this standard. The Company expects to record a decrease in long-term prepaid rent, reduction in its deferred rents, and an increase in lease liabilities and right of use assets upon adoption. The Company does not expect any impact to members’ equity (deficit) upon transition. ASU 2016-02 is effective for reporting periods beginning after December 15, 2020 for non-public entities.

 

 

 

 

Financial Instruments and Other Instruments

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, trade payables, accrued 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 the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at December 31, 2020, 2019 and 2018 is the carrying values of cash and cash equivalents, restricted cash, accounts receivable, and 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 December 31, 2020, 2019 and 2018, 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

 

The operating results and financial position of the Company are reported in U.S. dollars. Some of the Company’s financial transactions are denominated in currencies other than the U.S. dollar. The results of the Company’s operations are subject to currency transaction and translation risks. The Company’s main risk is associated with fluctuations in Canadian dollars. The Company holds 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, 2019 and 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. The Company has 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. 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.

 

 

 

 

APPENDIX J – ELEMENT 7 AUDITED ANNUAL FINANCIAL STATEMENTS
(FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER 31, 2019)

 

(See attached)

 

J-1

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

 

COMBINED FINANCIAL STATEMENTS

 

DECEMBER 31, 2020 AND 2019

 

 

 

E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Index to Combined Financial Statements

 

 

    Page(s)
     
Report of Independent Registered Public Accounting Firm     1
       
Combined Balance Sheets     2
       
Combined Statements of Operations     3
       
Combined Statements of Changes in Members’ Deficit     4
       
Combined Statements of Cash Flows     5
       
Notes to Combined Financial Statements     6 - 13

 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Members

E7 Carve-Out In-Process License Portfolio

 

Opinion on the Combined Financial Statements

 

We have audited the accompanying combined balance sheets of E7 Carve-Out In-Process License Portfolio (the “Company”) as of December 31, 2020 and 2019, and the related combined statements of operations, changes in members’ deficit, and cash flows for the years then ended, and the related notes to the combined financial statements (collectively referred to as the “combined financial statements”). In our opinion, the combined financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the combined results of its operations and its cash flows for the years ended December 31, 2020 and 2019, in conformity with the accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the combined financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the combined financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company's auditor since 2021.

 

Los Angeles, California

 

May 4, 2021

 

Macias Gini & O’Connell LLP
2029 Century Park East, Suite 1500 www.mgocpa.com
Los Angeles, CA 90067  

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Balance Sheets

As of December 31, 2020 and 2019

 

 

    2020     2019  
ASSETS                
Current Assets:                
Deposits     61,893       40,393  
Intangible assets, net     153,477       109,900  
Total Current Assets     215,370       150,293  
Operating Lease Right-of-Use Assets, Net     538,066       696,772  

TOTAL ASSETS     753,436       847,065  
LIABILITIES AND MEMBERS' DEFICIT                
LIABILITIES:                
Current Liabilities:                
Current portion of operating lease liabilities     155,908       107,906  
Due to Element 7 CA, LLC     531,121       244,447  
Total Current Liabilities     687,029       352,353  
Operating lease liabilities, net of current portion     451,258       607,166  
TOTAL LIABILITIES     1,138,287       959,519  
MEMBERS' DEFICIT     (384,851 )     (112,454 )
TOTAL LIABILITIES AND MEMBERS' DEFICIT     753,436       847,065  

 

The accompanying notes are an integral part of these combined financial statements

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Statements of Operations

For The Years Ended December 31, 2020 and 2019

 

 

    2020      2019  
Revenues, Net     -       -  
Cost of Goods Sold     -       -  
Gross Profit     -       -  
General and Administrative Expenses     38,225       82,223  
Amortization of Operating Lease Right-of-Use Assets     236,172       44,231  
Total Operating Expenses     274,397       126,454  
Net Loss     (274,397 )     (126,454 )

 

The accompanying notes are an integral part of these combined financial statements

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Statements of Changes in Members’ Deficit

For The Years Ended December 31, 2020 and 2019

 

 

                Total  
    Members'     Accumulated     Members'  
    Capital     Deficit     Deficit  
BALANCE AS OF JANUARY 1, 2019   $ -     $ -     $ -  
Members' Contribution     14,000       -       14,000  
Net Loss     -       (126,454 )     (126,454 )
BALANCE AS OF DECEMBER 31, 2019     14,000       (126,454 )     (112,454 )
Members' Contribution     2,000       -       2,000  
Net Loss     -       (274,397 )     (274,397 )
BALANCE AS OF DECEMBER 31, 2020   $ 16,000     $ (400,851 )   $ (384,851 )

 

The accompanying notes are an integral part of these combined financial statements

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Combined Statements of Cash Flows

For The Years Ended December 31, 2020 and 2019

 

 

  2020     2019  
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net Loss     (274,397 )     (126,454 )
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:                
Amortization of Operating Lease Right-of-Use Assets     236,172       44,231  
Changes in Operating Assets and Liabilities:                
Deposits     (21,500 )     (40,393 )
Operating Lease Right-of-Use Assets, Net     (185,372 )     (25,931 )
NET CASH USED IN OPERATING ACTIVITIES     (245,097 )     (148,547 )
CASH FLOWS FROM INVESTING ACTIVITIES:                
Purchases of Intangibles Assets     (43,577 )     (109,900 )
NET CASH USED IN INVESTING ACTIVITIES     (43,577 )     (109,900 )
CASH FLOWS FROM FINANCING ACTIVITIES:                
Contributions from Members     2,000       14,000  
Proceeds from Related Party Loans     286,674       244,447  
NET CASH PROVIDED BY FINANCING ACTIVITIES     288,674       258,447  
CHANGE IN CASH AND CASH EQUIVALENTS     -       -  
Cash and Cash Equivalents, Beginning of Period     -       -  
CASH AND CASH EQUIVALENTS, END OF PERIOD     -       -  

 

SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION

Recognition of Right-of-Use Assets and Operating Leases     -       727,043  

 

The accompanying notes are an integral part of these combined financial statements

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Notes to Combined Financial Statements

For The Years Ended December 31, 2020 and 2019

 

 

1.            NATURE OF OPERATIONS

 

E7 Carve-Out In-Process License Portfolio (“E7 Carve-Out” or the “Company”), is a collection of 16 in-process applications for cannabis dispensary licenses in the state of California, each held in a dedicated limited liability company that are currently held by sixteen entities that are majority owned by Element 7 CA, LLC and a seventeenth entity that may be created prior to the close of the transaction to apply for a retail cannabis license in Moreno Valley located in Riverside County, California. The E7 Carve-Out is the result of identified opportunities for license development for the retail cannabis industry in the state of California.

 

Going Concern

 

These combined financial statements have been prepared on a going concern basis in accordance with Accounting Standards Update No. 2014-15 (ASU 2014-15), “Presentation of Financial Statements—Going Concern” (Subtopic 205-40). This going concern basis of presentation assumes that the Company will continue in operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

 

The Company will be acquired by GH Group, Inc. as further described in footnote 7. This will further help the Company in financing its operations. As of December 31, 2020, the company is still in its pre-operation stage and has incurred an accumulated deficit of $384,851.

 

These combined financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these combined financial statements, then adjustments would be necessary in the carry value of the assets and liabilities, the reported revenue and expenses and the classifications used in the statement of financial position. Such differences in amounts could be material.

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Preparation and Statement of Compliance

 

The combined financial statements as of December 31, 2020 and 2019 (the “financial statements”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Basis of Measurement

 

These combined financial statements have been prepared on the going concern basis, under the historical cost convention, except for certain financial instruments that are measured at fair value as described herein.

 

Basis of Combination

 

The combined financial statements for the years ended December 31, 2020 and 2019 include the accounts of the Company and its affiliates which are under common control of the management.

 

Control exists when the Company has power over an affiliate, when the Company is exposed, or has rights, to variable returns from the affiliate, and when the Company has the ability to affect those returns through its power over the affiliate. The financial statements of entities controlled by the Company by virtue of agreements are fully consolidated from the date that control commences and deconsolidated from the date control ceases.

 

The financial statements of the affiliates are prepared for the same reporting period as the Company, using consistent accounting policies.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Notes to Combined Financial Statements

For The Years Ended December 31, 2020 and 2019

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Use of Estimates

 

The preparation of the 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 combined financial statements and the reported amounts of total net revenue and expenses during the reporting period. 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.

 

Intangible Assets

 

Intangible assets are recorded at cost, less accumulated amortization and impairment losses. Amortization is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets, which include costs to obtain dispensary licenses including: license and permit fees. The useful life of licenses (when obtained) is determined to be 15 years, with amortization of licenses only commencing at the start of their useful life. Such assets are tested annually for impairment, or more frequently, if events or changes in circumstances indicate that they might be impaired. The estimated useful lives, residual values, and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. The retail cannabis licenses for all 16 entities are all in the application stage at December 31, 2020 and 2019.

 

Basis of Combination

 

These combined financial statements as of and for the years ended December 31, 2020 and 2019 include sixteen (16) entities controlled by Robert DiVito (Founder and CEO of Element 7 CA, LLC) or Joshua Black (Co-Founder), collectively (“Founders) and thereby establishes a common controlling financial interest in the respective entities. As noted under ASC 810-10-55-1B, combined financial statements might be used to present the financial statements of entities under common management. Element 7 CA, LLC is a California limited liability company engaged in the pursuit of cannabis retail dispensary licenses in various jurisdictions in the state of California that holds the ownership interests described in the below table.

 

The following are the Company’s principal wholly-owned or controlled subsidiaries and or affiliates that are included in these combined financial statements as of December 31, 2020 and 2019 and for the years then ended:

 

            Ownership  
Entities   Location   Purpose   2020     2019  
Element 7 American Canyon LLC   Napa, CA   Cannabis retail     100 %     100 %
PH Investments Group, LLC   Ventura, CA   Cannabis retail     100 %     100 %
Element 7 Willits LLC   Medocino, CA   Cannabis retail     100 %     N/A  
Element 7 Mendota LLC   Fresno, CA   Cannabis retail     100 %     100 %
E7 Dunsmuir LLC   Siskiyou, CA   Cannabis retail     90 %     90 %
Element 7 Lemon Grove, LLC   San Diego, CA   Cannabis retail     70 %     100 %
E7 Eureka LLC   Humboldt, CA   Cannabis retail     100 %     100 %
Element 7 Walnut Creek, LLC   Contra Costa, CA   Cannabis retail     100 %     100 %
Element 7 Willows, LLC   Glenn, CA   Cannabis retail     100 %     100 %
E7 Napa City, LLC   Napa, CA   Cannabis retail     100 %     100 %
E7 Lompoc LLC   Santa Barbara, CA   Cannabis retail     100 %     100 %
Element 7 Chula Vista, LLC   San Diego, CA   Cannabis retail     100 %     100 %
Element 7 SF2 LLC   San Francisco, CA   Cannabis retail     80 %     N/A  
E7 Salinas, LLC   Monterey, CA   Cannabis retail     92 %     92 %
Element 7 San Luis Obispo, LLC   San Luis Obispo, CA   Cannabis retail     94 %     100 %
Element 7 Hesperia LLC   San Bernardino, CA   Cannabis retail     100 %     100 %

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Notes to Combined Financial Statements

For The Years Ended December 31, 2020 and 2019

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Leased Assets

 

The Company 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, 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. Based on the implementation of this new standard, the Company recognized right-of-use assets and lease liabilities in its combined financial statements.

 

Income Taxes

 

The E7 Carve-Out are treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by or provided for E7 Carve-Out. Members are taxed individually on their share of E7 Carve-Out’ earnings. Since the members are liable for individual federal and state income taxes on the E7 Carve-Out’ taxable income, the E7 Carve-Out may disburse funds necessary to satisfy the members' estimated personal income tax liabilities. California imposes an LLC fee based on revenue, which is included in the provision for income tax. However, as none of the in-process license applications comprising the E7 Carve-Out have been granted final licenses, there are no operations and no revenues associated with the E7 Carve-Out, and thus no related California LLC fee.

 

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 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.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Notes to Combined Financial Statements

For The Years Ended December 31, 2020 and 2019

 

 

2.            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Recently Issued Accounting Standards

 

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. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheet 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheet 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its combined balance sheet and combined results of operations.

 

3.            INTANGIBLE ASSETS

 

As of December 31, 2020, and 2019, intangible assets consist of the following:

 

    2020     2019  
License and Permit Fees   $ 153,477     $ 109,900  
Less Accumulated Amortization     -       -  
Intangible Assets, net   $ 153,477     $ 109,900  

 

The licenses are in the application stage as such, the amortization has not commenced and no indication of events or changes in circumstances that would require impairment as of December 31, 2020 and 2019

 

4.            LEASES

 

Operating Lease Liabilities

 

As a result of the adoption of ASC 842 the Company has changed its accounting policy for leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and accrued obligations under operating lease (current and non-current) liabilities in the combined balance sheets.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Notes to Combined Financial Statements

For The Years Ended December 31, 2020 and 2019

 

 

4.            LEASES (Continued)

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.

 

ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Certain operating leases contain renewal options that provide for rent increases based on prevailing market conditions.

 

The Company leases commercial real estate assets which it plans to use for corporate purposes and the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the combined balance sheets and are expensed in the combined statements of operations on the straight-line basis over the lease term.

 

The below are the details of the lease cost and other disclosures regarding the Company’s leases as of December 31, 2020 and 2019:

 

    2020     2019  
Operating lease cost   $ 236,172     $ 44,231  
Cash flow for amounts included in the measurement of lease liabilities:                
Operating cash flows for operating leases   $ 185,372     $ 25,931  
Non-cash additions to right-of-use assets and lease liabilities:                
Recognition of right-of-use assets and operating leases   $ -     $ 727,043  
Amount representing operating leases   $ 607,166     $ 715,072  
Weight average remaining lease term (years) - operating leases     3       4  
Weighted average discount rate - operating leases     16.50 %     16.50 %

 

The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

 

Operating Lease Liabilities and Right-of-Use Assets

 

The Company leases certain business facilities from third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $2,331 to $16,000 and expire through October 2024.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO

Notes to Combined Financial Statements

For The Years Ended December 31, 2020 and 2019

 

 

4.             LEASES (Continued)

 

Future minimum operating lease payments under non-cancelable operating leases is as follows:  

 

December 31:        
2021     $ 233,372  
2022       232,441  
2023       224,000  
2024       195,000  
Total future minimum lease payments       884,813  
Total amount representing interest       (277,647 )
Total amount representing present value       607,166  
Current portion of operating lease liabilities       (155,908 )
Operating lease liabilities, net of current portion     $ 451,258  

 

The following are changes in right-of-use assets during the years ended December 31, 2020 and 2019:      

 

Balance as of January 1, 2019   $ -  
Recognition of right-of-use assets for operating leases     727,043  
Non-cash operating lease costs     (30,271 )
Balance as of December 31, 2019     696,772  
Recognition of right-of-use assets for operating leases     -  
Non-cash operating lease costs     (158,706 )
Balance as of December 31, 2020   $ 538,066  

 

5.            COMMITMENTS AND CONTINGENCIES

 

Contingencies      

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations as of December 31, 2020 and 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the combined financial statements relating to claims and litigations. As of December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

 

6. RELATED PARTY TRANSACTIONS

 

Incubation Services

 

Each of the 16 limited liability companies that comprise the E7 Carve-Out have entered into a Services and Incubation Agreement (the “Services and Incubation Agreement”) with Element 7 CA, LLC, pursuant to which Element 7 CA, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out (collectively, the “Incubation”). No payments have been charged by Element 7 CA, LLC at December 31, 2020 and 2019 relating to this.

 

Related Party Loans

 

Element 7 CA, LLC has paid certain fees and expenses on behalf of the E7 Carve-Out entities pursuant to the Services and Incubation Agreements, resulting in the Element 7 CA, LLC being a lender to the E7 Carve-Out via unsecured debt with no payment terms. The total amount outstanding under this arrangement was $531,120 and $244,447 as of December 31, 2020 and 2019, respectively.

 

7. SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through May 4, 2021, which is the date these combined financial statements were issued and has concluded that the following subsequent events have occurred that would require recognition in the combined financial statements or disclosure in the notes to the combined financial statements.

 

Proposed Transaction

 

Element 7 CA, LLC has executed an agreement with GH Group, Inc. whereby GH Group has the right, subject to satisfactory completion of due diligence and other conditions, to acquire the E7 Carve-Out entities. Each of the E7 Carve-Out entities will be prior to the close of the proposed transaction or 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 the E7 Carve-Out entities, by way of merger, in exchange for shares of a publicly traded entity with which GH Group has entered into a letter of intent to be acquired, with shares issued at $10.00 per share. This could result in the issuance of up to 2,400,000 shares in the amount of up to $24 million.

 

COVID-19

 

In March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus, COVID-19. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. The COVID-19 pandemic has also led to disruption and volatility in the global capital markets, which could increase the cost of and accessibility to capital. Given that the COVID-19 pandemic has caused a significant economic slowdown, it appears increasingly likely that it could cause a global recession, which could be of an unknown duration, which would have a significant impact on our ongoing operations and cash flows. In addition, there has been a recent spike in the number of reported COVID-19 cases in many states where a substantial portion of the Company’s business and operations is located. The Company is unable to currently quantify the economic effect, if any, of this increase on the Company’s results of operations.

 

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E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO 

Notes to Combined Financial Statements 

For The Years Ended December 31, 2020 and 2019

 

 

 

7. SUBSEQUENT EVENTS (Continued)

 

These developments could have a material adverse impact on the Company’s revenues, results of operations and cash flows. This situation is rapidly changing and additional impacts to the business may arise that the Company is not aware of currently. The ultimate magnitude and duration of COVID-19, including the extent of its overall impact on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time.

 

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APPENDIX K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF ELEMENT 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Years Ended December 31, 2020 and December 31, 2019

 

Overview

 

E7 Carve-Out In-Process License Portfolio (“E7 Carve-Out” or the “Company”) is a collection of 16 in-process applications for cannabis dispensary licenses in the state of California, each held in a dedicated limited liability company that are currently held by sixteen entities that are majority owned by Element 7 CA, LLC and a seventeenth entity that may be created prior to the close of the transaction to apply for a retail cannabis license in Moreno Valley located in Riverside County, California. The E7 Carve-Out is the result of identified opportunities for license development for the retail cannabis industry in the state of California.

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues or operations associated with the E7 Carve-Out.

 

Major Business Lines and Geographies

 

The Company presents its financial results under one business line representing the deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California.

 

Applications for Cannabis Dispensary Licenses

 

The following are 16 the limited liability companies that comprise the E7 Carve-Out, as well as the percent of owned by the respective limited liability company at December 31, 2020 and December 31, 2019.

 

            Ownership  
Entities   Location   Purpose   2020     2019  
Element 7 American Canyon LLC   Napa, CA   Cannabis retail     100 %     100 %
PH Investments Group, LLC   Ventura, CA   Cannabis retail     100 %     100 %
Element 7 Willits LLC   Medocino, CA   Cannabis retail     100 %     N/A  
Element 7 Mendota LLC   Fresno, CA   Cannabis retail     100 %     100 %
E7 Dunsmuir LLC   Siskiyou, CA   Cannabis retail     90 %     90 %
Element 7 Lemon Grove, LLC   San Diego, CA   Cannabis retail     70 %     100 %
E7 Eureka LLC   Humboldt, CA   Cannabis retail     100 %     100 %
Element 7 Walnut Creek, LLC   Contra Costa, CA   Cannabis retail     100 %     100 %
Element 7 Willows, LLC   Glenn, CA   Cannabis retail     100 %     100 %
E7 Napa City, LLC   Napa, CA   Cannabis retail     100 %     100 %
E7 Lompoc LLC   Santa Barbara, CA   Cannabis retail     100 %     100 %
Element 7 Chula Vista, LLC   San Diego, CA   Cannabis retail     100 %     100 %
Element 7 SF2 LLC   San Francisco, CA   Cannabis retail     80 %     N/A  
E7 Salinas, LLC   Monterey, CA   Cannabis retail     92 %     92 %
Element 7 San Luis Obispo, LLC   San Luis Obispo, CA   Cannabis retail     94 %     94 %
Element 7 Hesperia LLC   San Bernardino, CA   Cannabis retail     100 %     100 %

 

K - 1

 

Geographic Areas

 

All E7 Carve-Out activities are in the State of California

 

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.

 

Results of Operations

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues or operations associated with the E7 Carve-Out. Expenditures have been capitalized to the E7 Carve-Out balance sheet, represented as a deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California.

 

Revenue

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues associated with the E7 Carve-Out.

 

Cost of Goods Sold

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there is no cost of goods sold associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there is no cost of goods sold associated with the E7 Carve-Out.

 

General and Administrative

 

2020

 

During the year, E7 Carve- Out incurred expenses of $274,397 in relation to the costs of acquiring retail dispensary licenses, these expenses are inclusive of $236,172 relating to the amortization of Right-of-use operating leases.

 

2019

 

During the year, E7 Carve- Out incurred expenses of $126,454 in relation to the costs of acquiring retail dispensary licenses, these expenses are inclusive of $44,231 relating to the amortization of Right-of-use operating leases.

 

Sales & Marketing

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no sales and marketing expenses associated with the E7 Carve-Out.

 

K - 2

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no sales and marketing expenses associated with the E7 Carve-Out.

 

Professional Fees

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no professional fees associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no professional fees associated with the E7 Carve-Out.

 

Other Expense

 

2020

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no other expenses associated with the E7 Carve-Out.

 

2019

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no other expenses associated with the E7 Carve-Out.

 

Liquidity and Capital Resources

 

Overview

 

The primary source of liquidity for the E7 Carve-Out has been a series of Services and Incubation Agreements (the “Services and Incubation Agreements”) between each of the 16 limited liability companies that comprise the E7 Carve-Out and Element 7, LLC, whereby Element 7, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out (and incur certain fees and expenses on behalf of these E7 Carve-Out entities as part of and as performance for such services) (collectively, the “Incubation”).

 

Total working capital as of December 31, 2020 and 2019 was ($472K) and ($202K), respectively. The decrease in working capital is related to payments made by a related party on behalf of E7 Carve-Out as E7 Carve-Out is attempting to acquire licenses.

 

Contractual Obligations

 

The E7 Carve-Out has contractual obligations to make future payments, specifically lease agreements from third parties. The Company leases certain business facilities from third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $2,331 to $16,000 and expire through October 2024.

 

K - 3

 

Future minimum operating lease payments under non-cancelable operating leases is as follows:

 

December 31:      
2021   $ 233,372  
2022     232,441  
2023     224,000  
2024     195,000  
Total future minimum lease payments     884,813  
Total amount representing interest     (277,648 )
Total amount representing present value     607,165  
Current portion of operating lease liabilities     (155,906 )
Operating lease liabilities, net of current portion   $ 451,259  

 

Financial Condition

 

Cash Flows

 

No final licenses have been granted pursuant to any of these 16 license applications. As such, there are no revenues or operations associated with the E7 Carve-Out. Expenditures have been capitalized to the E7 Carve-Out balance sheet, represented as a deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California.

 

Pursuant to a series of Services and Incubation Agreements (the “Services and Incubation Agreements”) between each of the 16 limited liability companies that comprise the E7 Carve- Out and Element 7, LLC, whereby Element 7, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out, Element 7, LLC incurred certain fees and expenses on behalf of these E7 Carve-Out entities.

 

Operating Activities

 

Cash flow used in operating activities total ($245,097) and ($148,547) for 2020 and 2019 respectively. This relates to a related party advance for deposits and Operating Right-of-Use Assets.

 

Investing Activities

 

Cash flow for investing activities total ($43,577) and ($109,900) for 2020 and 2019 respectively. This relates to a related party advance for the purchase of intangibles, including permits and licenses.

 

Financing Activities

 

Cash flow provided by financing activities totaled $288,674 and $258,447 for 2020 and 2019 respectively. This relates to a related party advance to fund the costs associated with acquiring licenses, in accordance with the Services and Incubation Agreements.

 

Transactions with Related Parties

 

Incubation Services

 

Each of the 16 limited liability companies that comprise the E7 Carve-Out have entered into a Services and Incubation Agreement (the “Services and Incubation Agreement”) with Element 7, LLC, pursuant to which Element 7, LLC agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out (and incur certain fees and expenses on behalf of these E7 Carve-Out entities as part of and as performance for such services) (collectively, the “Incubation”).

 

K - 4

 

Related Party Loans

 

Element 7 CA, LLC has paid certain fees and expenses on behalf of the E7 Carve-Out entities pursuant to the Services and Incubation Agreements, resulting in the Element 7 CA, LLC being a lender to the E7 Carve-Out via unsecured debt with no payment terms. The total amount outstanding under this arrangement was $531,121 and $244,447 as of December 31, 2020 and 2019, respectively.

 

Critical Accounting Estimates

 

Use of Estimates

 

The preparation of the 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. 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, stock-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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

 

Income Taxes

 

The Merger Entities are treated as a partnership for federal and state income tax purposes. Consequently, income taxes are not payable by or provided for Merger Entities. Members are taxed individually on their share of Merger Entities’ earnings. Since the members are liable for individual federal and state income taxes on the Merger Entities’ taxable income, the Merger Entities may disburse funds necessary to satisfy the members' estimated personal income tax liabilities. California imposes an LLC fee based on revenue, which is included in the provision for income tax.

 

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.

 

K - 5

 

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.

 

Recently Issued Accounting Standards

 

In December 2019, the FASB issued ASU 2019- 12, “Simplifying the Accounting for Income Taxes” which eliminates certain exceptions related to the approach for intraperiod 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 is currently evaluating the adoption date and impact, if any, adoption will have on its 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 the Company beginning January 1, 2021. The Company is currently evaluating the adoption date and impact, if any, adoption will have on its 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 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 is currently evaluating the adoption date and impact, if any, adoption will have on its consolidated and combined financial position and consolidated and combined results of operations.

 

K - 6

 

Financial Instruments and Other Instruments

 

Fair Value of Financial Instruments

 

The E7 Carve-Out’s financial instruments consist of a deferred asset and a current liability. 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. As at December 31, 2020, the E7 Carve-Out has no exposure to a customer or third party to a financial instrument failing to meet its contractual obligations.

 

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 via its Services and Incubation Agreements, under which Element 7, LLC has agreed to perform certain advisory and business “incubation” services for each of the 16 limited liability companies that comprise the E7 Carve-Out and incur certain fees and expenses on behalf of these E7 Carve-Out entities as part of and as performance for such services.

 

As of December 31, 2020, no final licenses have been granted pursuant to any of the 16 E7 Carve-Out license applications. As such, there are no cash flows from operating activities associated with the E7 Carve-Out.

 

Currency Risk

 

The operating results and financial position of the Company are reported in U.S. dollars. All expenditures associated with licenses applications, and all assets and liabilities as of December 31, 2020 are U.S. dollar denominated.

 

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. As of December 31, 2020, the Company’s sole financial liability is an unsecured debt with no payment terms and therefore is not subject to interest rate risk.

 

K - 7

 

Price Risk

 

Price risk is the risk of variability in fair value due to movements in equity or market prices. As of December 31, 2020, the Company’s sole asset is a deferred asset created through the process of applying for cannabis retail dispensary licenses in the State of California. This asset is not subject to price risk.

 

Recent Developments

 

Effective February 23, 2021 GH Group, Inc. entered into a Merger and Exchange Agreement with Element 7 CA, LLC whereby GH Group, Inc. would obtain all of the equity interest held by E7 in seventeen licenses, some of which are partially owned. GH Group, Inc. is obligated to purchase all such interests of each license that meets the conditions for sale and E7 is obligated to sell such equity interests. The consideration if $1,500,000 for 100% of the equity interests in each license holding entity payable in shares of post-close Mercer Park Brand Acquisition Corp. at $10 per share. Conditions to close include the closing of the Mercer Park merger, the availability of $25,000,000 for development of retail licenses, and the delivery by E7 of certain leases.

 

K - 8

 

APPENDIX L – BRND UNAUDITED PRO FORMA FINANCIAL STATEMENTS

 

 

(See attached)

 

L-1

 

 

MERCER PARK BRAND ACQUISITION CORP.

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2020

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

Mercer Park Brand Acquisition Corp.  
   
Pro Forma Consolidated Financial Statements  
   
Pro Forma Consolidated Financial Position 1
Pro Forma Consolidated Statement of Operations 2
   
Notes to the Pro Forma Consolidated Financial Statements 3-12

 

 

 

Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Financial Position

 

As at December 31, 2020

 

    Mercer Park BRAND     GH Group                 Subtotal         Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020     iCann     Element 7     December 31, 2020         Adjustments     December 31, 2020  
 US$   $     $     December 31, 2020     December 31, 2020     $      Notes   $     $  
ASSETS                                                            
Current                                                            
Cash     2,095,023       4,535,251       158,928               6,789,202     5a     407,537,056       365,936,258  
                                            5d     (118,890,000 )        
                                            5f     (16,100,000 )        
                                            5i     85,000,000          
                                            5l     (400,000 )        
                                            5k     2,000,000          
Deposit                             61,893       61,893     5k     10,000,000       10,061,893  
Accounts receivable, trade, no                                                            
allowance     -       5,141,021                       5,141,021                   5,141,021  
Income tax recoverable     1,209,852       -                       1,209,852                   1,209,852  
Inventory     -       6,866,002       343,289               7,209,291                   7,209,291  
Prepaid Expenses and other assets     -       1,018,212       61,528               1,079,740                   1,079,740  
Notes Receivables             904,534                       904,534                   904,534  
Operating Lease Right-of-Use Assets,     3,304,875       18,465,020       563,745       61,893       22,395,533           369,147,056       391,542,589  
                                                             
Net             2,532,629               538,065       3,070,694                   3,070,694  
Marketable securities held in a escrow                                                            
account     407,537,056       -                       407,537,056     5a     (407,537,056 )     -  
Intangible assets     -       5,279,000               153,477       5,432,477     5d     171,920,360       214,103,880  
                                            5e     (153,477 )        
                                            5e     24,000,000          
                                            5l     12,904,520          
Property, plant and equipment     -       27,192,027       692,645               27,884,672     5d     92,420,992       120,305,664  
Goodwill     -       4,815,999                       4,815,999                   4,815,999  
Deferred tax assets     598,435       -                       598,435     5c(iii)     (598,435 )     -  
Investments             10,701,868                       10,701,868     5l     (2,045,309 )     8,656,559  
Other long term assets     -       554,266                       554,266                   554,266  
Total assets     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  
Liabilities                                                            
Current                                                            
Accounts payable and accrued liabilities     396,779       6,570,715       875,599               7,843,093     5g     6,000,000       13,843,093  
Income tax payable     -       4,740,003       209,466               4,949,469                   4,949,469  
Debts/notes payable - current portion     -       601,188                       601,188                   601,188  
Derivative Liabilities             7,365,000                       7,365,000                   7,365,000  
Operating Lease Liabilities - current portion             327,329               155,906       483,235                   483,235  
Due to related parties     349,034       -               531,121       880,155     5e     (531,121 )     349,034  
      745,813       19,604,235       1,085,065       687,027       22,122,140           5,468,879       27,591,019  
Deferred underwriters' commission     16,100,000       -                       16,100,000     5f     (16,100,000 )     -  
Class A restricted voting shares                                                            
subject to redemption     402,500,000       -                       402,500,000     5b     (402,500,000 )     -  
Debts payable - Non-current portion     -       19,072,858                       19,072,858     5j     (18,684,492 )     388,366  
Operating Lease Liabilities - Non-current portion             2,318,852               451,259       2,770,111                   2,770,111  
Deferred Tax Liabilities             1,420,583                       1,420,583                   1,420,583  
Other Non-Current Liabilities     -       849,358                       849,358                   849,358  
Total liabilities     419,345,813       43,265,886       1,085,065       1,138,286       464,835,050           (431,815,613 )     33,019,437  
Additional paid-in-capital     (11,684,284 )     -                       (11,684,284 )   5b     402,500,000       667,345,361  
                                            5c(ii)     (390,815,716 )        
                                            5d     100,000,000          
                                            5d     45,451,352          
                                            5e     24,000,000          
                                            5e     531,121          
                                            5e     (153,477 )        
                                            5c(i)     393,996,118          
                                            5c(ii)     26,061,981          
                                            5i     85,000,000          
                                            5j     (18,001,529 )        
                                            5e     584          
                                            5l     (171,325 )        
                                            5l     10,630,536          
Preferred Stock                                           5k     12,000,000       48,686,021  
                                            5j     18,684,492          
                                            5j     18,001,529          
Retained earnings     3,778,837       -                       3,778,837     5i     (3,778,837 )     -  
                                            5g     (6,000,000 )     (6,000,000 )
Members' equity     -       26,274,923       171,325       (384,267 )     26,061,981     5c(ii)     (26,061,981 )     -  
Non-Controlling Interest                             (584 )     (584 )   5e     (584 )     (1,168 )
Total Shareholders' Equity     (7,905,447 )     26,274,923       171,325       (384,851 )     18,155,950     -     691,874,264       710,030,214  
                                                             
Total liabilities and members' equity     411,440,366       69,540,809       1,256,390       753,435       482,991,000           260,058,651       743,049,651  

 

1 

 

 

Mercer Park Brand Acquisition Corp.

 

Unaudited Pro Forma Consolidated Statement of Operations

 

As at December 31, 2020

 

    Mercer Park BRAND     GH Group         Element 7               Pro-Forma     Consolidated  
    December 31, 2020     December 31, 2020       iCann     December 31, 2020     Subtotal         Adjustments     December 31, 2020  
US$   $     $     December 31, 2020     $     $     Notes   $     $  
Revenues, net of discounts     -       48,259,601       3,607,307               51,866,908                   51,866,908  
Cost of goods sold     -       29,519,143       2,621,272               32,140,415                   32,140,415  
      -       18,740,458       986,035       -       19,726,493           -       19,726,493  
Gross profit (loss)     -       18,740,458       986,035       -       19,726,493           -       19,726,493  
Expenses                                                            
Transaction costs     -       -                       -     5g     6,000,000       6,000,000  
General and administrative     752,259       18,637,477       1,798,289       274,397       21,462,422                   21,462,422  
Sales and marketing     -       1,489,664       166,784               1,656,448                   1,656,448  
Professional Fees     -       2,040,004       71,570               2,111,574                   2,111,574  
Depreciation and Amortization     -       2,576,263       108,672               2,684,935                   2,684,935  
Foreign exchange loss (gain)     43,142       -                       43,142                   43,142  
Total Expenses     795,401       24,743,408       2,145,315       274,397       27,958,521           6,000,000       33,958,521  
                                                             
Net income (loss) from operations     (795,401 )     (6,002,950 )     (1,159,280 )     (274,397 )     (8,232,028 )         (6,000,000 )     (14,232,028 )
                                                             
Other (income) expense                                                            
Share of (income) loss on equity investments     -       2,126,112                       2,126,112                   2,126,112  
Interest expense     -       2,179,137       327,104               2,506,241                   2,506,241  
Interest income     (1,742,747 )     (115,572 )                     (1,858,319 )                 (1,858,319 )
Loss on Change in Fair Value of Derivative Liablities             251,663                       251,663                   251,663  
Other expense (income)     -       (203,345 )     32,566               (170,779 )                 (170,779 )
Total other (income) expense     (1,742,747 )     4,237,995       359,670       -       2,854,918           -       2,854,918  
Income tax (recovery) expense     -       6,418,533       207,868               6,626,401                   6,626,401  
                                                             
Net Income (loss) and comprehensive income (loss)     947,346       (16,659,479 )     (1,726,818 )     (274,397 )     (17,713,348 )         (6,000,000 )     (23,713,348 )
                                                             
Net Income (Loss) Attributable to Non-Controlling Interest                             (584 )     (584 )   5e     584       -  
                                                             
Net Loss Attributable to Members Interest     947,346       (16,659,479 )     (1,726,818 )     273,813       (17,713,932 )         (5,999,416 )     (23,713,348 )

 

2 

 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

1) Description of Transactions

 

The unaudited pro forma combined financial statements (the “Pro Forma Financial Statements”) of Mercer Park Brand Acquisition Corp. (“BRND” or the “Corporation”) reflect various adjustments to give effect to the following proposed acquisitions:

 

Acquisition of GH Group, Inc.

 

On April 8, 2021, BRND announced that it had entered into a definitive purchase agreement (the “Definitive Agreement”) with GH Group, Inc. (“GH Group” or the “Target Business”) pursuant to which, among other things, BRND shall indirectly acquire all of the equity of GH Group (collectively, the “Transaction”). The Transaction constitutes BRND’s qualifying transaction. GH Group is a vertically integrated producer and seller of adult-use and medicinal cannabis and related products in California.

 

The Target Business will be acquired in a stock transaction paid via a combination of newly issued subordinate voting shares and multiple voting shares (“MVS”) in BRND (the “Purchase Consideration”), the proportions of which are to be mutually agreed between the parties, with shares issued at $10.00 per share. The Purchase Consideration to be paid at closing is the value of shares equal to (i) the purchase price of $325 million, minus (ii) the amount of indebtedness of GH Group and its direct and indirect subsidiaries as of the data immediately preceding the Transaction, plus (iii) the amount of cash of GH Group and its direct and indirect subsidiaries on the date immediately preceding the Transaction, and further adjusted by (iv) the amount of working capital on the date immediately preceding the Transaction relative to the working capital target of $15 million. The total consideration to be received by GH Group and its shareholders will also include an earn-out component based on share price trading thresholds, together with the Purchase Consideration, the “Aggregate Consideration”. The Aggregate Consideration is subject to post-closing adjustments based on working capital targets, closing cash and the amount of closing indebtedness.

 

In addition to other closing conditions, BRND will be obligated to have a minimum of $185 million in cash at the closing of the Transaction: (i) before any cash consideration, as applicable, is payable for any additional acquisitions; (ii) after any payments due and payable for BRND’s expenses related to the closing of the Transaction, including all costs, fees, expenses and payments contingent on the closing of the Transaction; and (iii) after reduction for the aggregate amount of payments required to be made in connection with the BRND stockholder redemptions; (iv) plus the aggregate PIPE proceeds and other replacement cash proceeds; and (v)after taking into account any debt or payables on BRND’s balance sheet as of the closing of the Transaction (collectively, the “Closing Cash”).

 

3 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

Completed Acquisition by GH Group, Inc.

 

On January 1, 2021 GH Group 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 (“the iCANN Acquisition”). Since the acquisition was a subsequent event as of December 31, 2020, the iCANN financial statements did not meet the criteria for consolidation with GH Group and is therefore presented on a standalone basis for purposes of the pro forma financial statements. Previously iCANN was held by GH Group under the investment method of accounting as a result of significant but non-controlling influence over iCANN. Pursuant to the terms of the merger agreement between GH Group and iCANN the following occurred: (i) GH Group 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) GH Group paid $400,000 in cash to four holders of iCANN equity interests: (iii) GH Group issued 7,554,679 Class A Common shares to holders of iCANN equity interests; and (iv) GH Group issued an additional 500,000 Class A Common shares to brokers and consultants.

 

Proposed Acquisitions by GH Group, Inc.

 

The Greenhouse

 

GH Group has executed an agreement with Glass Investment Project, Inc. whereby GH Group has acquired the option, subject to satisfactory completion of due diligence and other conditions, to acquire real property and a greenhouse (the “Greenhouse”) located in Southern California from CEFF Camarillo Property, LLC. The Greenhouse is currently used to grow tomatoes and cucumbers, but it is anticipated, subject to the receipt of applicable regulatory approvals, that it will be re-purposed to grow cannabis. The purchase price payable to CEFF Camarillo Property, LLC for the real property and Greenhouse will be $118.9 million. In addition, the consideration commits $40 million for capital expenditures required to further develop or repurpose the Greenhouse following closing of the acquisition. Upon closing the transaction, 10 million BRND shares will be issued for total consideration of $ 100 million to Glass Investment Projects, Inc., the previous owner of the option to purchase the real property and the Greenhouse. In addition, another $75 million payable in the form of BRND shares, can be earned by Glass Investment Projects, Inc. over a period of 12 consecutive months commencing July 1, 2023 and ending June 30, 2024, which vest based on an EBITDA and Capex derived target calculation. The Greenhouse requires two earnest money deposits in the amount of $2 million and $8 million, respectively.

 

4 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

Element 7

 

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 BRND, 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 million.

 

In addition, GH Group has agreed to appoint Element 7, LLC as a consultant to assist with the obtaining of additional licenses in California.

 

US GAAP ASC 805 defines a business as an integrated set of activities and assets that is capable of being conducted and managed to provide a return to investors (or other owners, members or participants) by way of dividends, lower costs or other economic benefits. The Greenhouse and Element 7 acquisitions (the “GH Group Proposed Acquisitions”) did not meet the definition of a business according to ASC 805, and were recorded as an asset acquisition. The acquirer allocates the cost of acquisition to the assets acquired and liabilities assumed based on their relative fair values at the date of acquisition, and no goodwill or bargain purchase gain is recognized.

 

On April 8, 2021, BRND also announced a private placement of $85 million of shares of a subsidiary (the “Private Placement Shares”) at a price of US $10 per share (the “Private Placement”). The closing of the Private Placement will occur contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares will be exchanged for Equity Shares. The funds from the Private Placement will be used to fund the Resulting Issuer’s growth strategy, for working capital and for general corporate purposes. The Private Placement is subject to customary conditions, including the closing of the Transaction.

 

2) Basis of Presentation

 

The unaudited pro forma consolidated statement of financial position as at December 31, 2020 has been prepared by BRND to give effect to the GH Group Proposed Acquisitions and the iCANN Acquisition, as if they had occurred on December 31, 2020. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2020 have been prepared by BRND to give effect to the acquisitions, as if they had occurred on December 31, 2019.

 

The Pro Forma Financial Statements were prepared using the acquisition method of accounting in accordance with US GAAP ASC 805, Business Combinations, with GH Group being the legal acquiree and accounting acquirer. As such, GH Group is treated as the continuing reporting entity. The acquirer in a business combination is the combining entity that obtains control of the other combining business or businesses. The Pro Forma Financial Statements do not purport to project the future operating results of the combined company.

 

5 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

All financial data in the Pro Forma Financial Statements are presented in United States Dollars, which is the presentation currency of both BRND and GH Group.

 

The Pro Forma Financial Statements are derived from the following:

 

The audited financial statements of BRND as at and for the year ended December 31, 2020 and the related notes;

 

The audited financial statements of iCANN as at and for the year ended December 31, 2020 and the related notes;

 

The audited financial statements of GH Group as at and for the year ended December 31, 2020 and the related notes; and

 

The audited financial statements of Element 7 as at and for the year ended December 31, 2020 and the related notes.

 

Under ASC 805, acquisition-related transaction costs (i.e., advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges are not included as a component of consideration transferred but are accounted for as expenses in the period in which the costs are incurred. Since GH Group is treated as the continuing reporting entity for accounting purposes, the accounting for the acquisition is not dependent upon valuations. However, the accounting for the acquisitions by GH Group is dependent upon the allocation of the acquisition cost based on the relative fair values of the assets acquired and liabilities assumed at the date of acquisition. Accordingly, the respective fair values for the acquisitions are provisional and are subject to change.

 

Management will finalize the purchase accounting during the measurement period defined by ASC 805, which is no later than one year from the date of the respective acquisition dates. Accordingly, certain pro forma adjustments are preliminary and have been prepared solely for the purpose of these Pro Forma Financial Statements. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact on BRND’s future financial performance. In addition, the Pro Forma Statements of Operations do not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve, the costs to integrate the operations of BRND and the GH Group Proposed Acquisitions, or any costs necessary to achieve these cost savings, operating synergies and revenue enhancements.

 

3) Accounting Policies

 

The accounting policies used in the preparation of these unaudited Pro Forma Consolidated Financial Statements are consistent with those described in the audited financial statements of GH Group for the year ended December 31, 2020. BRND has conducted a review of the accounting policies of iCANN and the GH Group Proposed Acquisitions and has not identified any differences in accounting policies that were applied historically by these entities. Additional accounting policies related to the Target Business will be included in the BRND consolidated financial statements after acquisition on going forward basis. For purposes of these Unaudited Pro Forma Consolidated Financial Statements, certain reclassifications have been made to the historical financial statements (as described in notes 5) to conform to the classifications adopted by BRND.

 

6 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

4) Accounting for Acquisitions

 

Completed Acquisitions by GH Group, Inc.

 

While the iCANN financial statements are presented on a standalone basis as of December 31, 2020, this acquisition has closed as of January 1, 2021 and is not contingent on the Transaction.

 

The following is a summary of the purchase price and allocation for the iCANN Acquisition:

 

          i.  
          ICANN  
          $  
Cash     a)     $ 400,000  
Convertible Note (including interest)     b)     $ 2,045,309  
Share Capital (based on $325M valuation)     c)     $ 10,630,536  
Total Consideration           $ 13,075,845  
                 
Cash           $ 158,928  
Inventory           $ 343,289  
Other assets and liabilities           $ (1,023,537 )
Property, Plant and Equipment           $ 692,645  
Intangible Assets - License in Process           $ 12,904,520  
Net Assets Acquired           $ 13,075,845  

 

i. The iCANN Acquisition

 

Pursuant to the terms of the Definitive Agreement, GH Group satisfied the purchase consideration through the following:

 

a) GH Group paid $400,000 in the form of cash consideration;

 

b) GH Group 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;

 

c) GH Group issued 7,554,679 Class A Common shares to holders of iCANN equity interests; and GH Group issued an additional 500,000 Class A Common shares to brokers and consultants. The shares represented 3.3% of the total outstanding shares of GH Group at the time of acquisition, which were valued at the deemed valuation from the Transaction, for purposes of this estimated purchase price calculation.

 

7 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

Proposed Acquisitions by GH Group, Inc.

 

The Greenhouse and Element 7 acquisitions did not meet the definition of a business according to ASC 805, and were recorded as an asset acquisition. US GAAP ASC 805 defines a business as an integrated set of activities and assets that is capable of being conducted and managed to provide a return to investors (or other owners, members or participants) by way of dividends, lower costs or other economic benefits. The acquirer allocates the cost of acquisition to the assets acquired and liabilities assumed based on their relative fair values at the date of acquisition, and no goodwill or bargain purchase gain is recognized.

 

Each of the GH Group Proposed Acquisitions is subject to specific terms relating to satisfaction of the purchase price by BRND and incorporates payments in cash and shares. In addition, the purchase prices may be adjusted for consideration of acquisition date working capital. No working capital adjustments have been reflected in the Pro Forma Financial Statements. ASC 805 requires that contingent consideration be estimated and recorded at the acquisition date with subsequent changes to estimates reflected in earnings. For purposes of the Unaudited Pro Forma Consolidated Financial Statements, all estimates of contingent consideration are preliminary and subject to change.

 

The following is a summary of the purchase price and allocation for each of the Proposed Acquisitions by GH Group, Inc:

 

    ii.     iii.     iv.        
    BRND     The Greenhouse     Element 7     Total  
    $     $     $     $  
Cash           $ 118,890,000             $ 118,890,000  
Share Capital   $ 393,996,118     $ 100,000,000     $ 24,000,000     $ 517,996,118  
Earn Out           $ 45,451,352             $ 45,451,352  
Total Consideration   $ 393,996,118     $ 264,341,352     $ 24,000,000     $ 682,337,470  
                                 
Cash (net of Underwriters' Commission)   $ 409,632,079                     $ 409,632,079  
Deferred Underwriters' Commission   $ (16,100,000 )                   $ (16,100,000 )
Other assets and liabilities   $ 464,039                     $ 464,039  
Property, Plant and Equipment           $ 92,420,992             $ 92,420,992  
Intangible Assets - License in Process           $ 171,920,360     $ 24,000,000     $ 195,920,360  
Net Assets Acquired   $ 393,996,118     $ 264,341,352     $ 24,000,000     $ 682,337,470  

 

8 

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

ii.            GH Group Acquisition

 

Pursuant to the terms of the Definitive Agreement, BRND will satisfy the purchase consideration in the form of shares for GH Group through the following:

 

GH Group purchase price is to be paid in the form of newly issued subordinate voting shares (or exchangeable shares exchangeable thereinto on a 1 for 1 basis) and multiple voting shares of BRND;

 

A portion of the GH Group purchase price is derived from an earn-out provision for additional shares based on stock price trading thresholds of the BRND

 

As GH Group has been determined to be the accounting acquiror, these pro forma financial statements reflect the issuance of equity instruments by GH Group to acquire the net assets of BRND.

 

iii.          The Greenhouse Acquisition

 

Pursuant to the terms of the Definitive Agreement, BRND will satisfy the purchase price of $264.3 million for The Greenhouse through the following:

 

$118.9 million is to be paid in the form of cash consideration

 

$100 million is to be paid in the form of shares of BRND pursuant to the exercise of the option

 

A portion of The Greenhouse purchase price is derived from an earn-out provision that may entitle the sellers to earn additional stock consideration, if certain milestones are achieved as it relates to EBITDA and Capex. For the purposes of this pro forma financial statement, the value of the earn out consideration has been estimated at $45.5 million.

 

The property, plant, and equipment of The Greenhouse to be acquired has been valued based on a preliminary fair value estimate. The excess of the purchase price over the value of the property, plant, and equipment has been assigned to the intangible assets representing in process cannabis licenses.

 

iv.            Element 7 Acquisition

 

Pursuant to the terms of the Definitive Agreement, BRND will satisfy the purchase price of $24 million for Element 7 by issuance of up to 2.4 million of subordinate voting shares

 

9

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

5) Pro Forma adjustments to the Pro Forma Consolidated Financial Statements in connection with the Acquisitions of the Target Business

 

The following summarizes the pro forma adjustments in connection with the acquisitions of the Target Business to give effect to the acquisitions as if they had occurred on December 31, 2019:

 

a) The release of $407.5 million of marketable securities held in escrow in the form of US Treasury Bills transferred to cash;

 

b) 40,250,000 Class A Restricted Voting Shares valued at $402,500,000 (plus interest) are transferred to equity. The number of Class A Restricted Voting Shares that will be redeemed will occur at the time of completion of the transactions and cannot be known until shortly before the time that the transactions are affected. It is assumed for illustrative purposes in this pro forma statement that no Class A Restricted Voting Shares will be redeemed.

 

From a sensitivity perspective:

 

If this adjustment had been presented assuming a redemption of 25% of Class A Restricted Voting Shares, then $305.63 million of restricted cash and flexible guaranteed investment certificates will be converted into cash resources and $101.87 will be used to settle the redemption of 25% of the Class A Restricted Voting Shares.

 

c) deemed acquisition of BRND by GH Group:

 

(i) the net assets of BRND are acquired in exchange for the deemed purchase price of $393 million described in 4(ii);

 

(ii) the historical equity of BRND is eliminated and historical equity of GH Group is transferred from Members’ equity to APIC

 

(iii) the deferred tax assets are eliminated;

 

d) Greenhouse acquisition as described in 4(iii);

 

e) Element 7 acquisition as described in note 4(iv); the carrying values of the intangible assets, minority interest and due to related parties are eliminated;

 

f) Payment of the $16.1 million underwriters’ commission on the Class A voting restricted shares;

 

10

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

g) To incorporate estimated transaction cost of $6 million in connection with the acquisition of the Target Business.

 

h) The tax rate is expected to be approximately 21% as a result of acquisitions. However, no impact of tax other than what is reflected historically on the financial statements of the Issuer and the entities being acquired, has been shown in the Pro Forma statements;

 

i) The Private Placement of $85 million of shares;

 

j) Represent an estimated conversion on the convertible debt instruments, with only $388,366 of non-convertible debt remaining after the acquisition of the Target Business. The $18,684,492 of convertible debt valued at $36,686,021 results in another equity reclassification to preferred stock of $18,001,529;

 

k) GH Group, Inc. is expected to close on a Preferred Stock financing for up to $12 million to pay for the $10 million Greenhouse deposit required as part of the acquisition.

 

l) The iCANN Acquisition as described in 4(i)

 

6)   Pro Forma Earnings per Share (“Pro Forma EPS”)

 

The Pro Forma EPS have been adjusted to reflect the pro forma unaudited consolidated statement of operations for the year ended December 31, 2020. In addition, the number of shares used in calculating the unaudited pro forma consolidated basis and diluted earnings per share has been adjusted to reflect the estimated total number of subordinate voting shares of BRND (or exchangeable shares exchangeable thereinto on a 1 for 1 basis) that would be outstanding as of the closing of the acquisition of the Target Business.

 

As a result of the acquisition of the Target Business, the pro forma shares of GH Group are estimated based on expected purchase adjustments summarized below:

 

GH Group Purchase Adjustment   Total  
$325 Million Purchase Price     325,000,000  
Plus: Estimated Cash as of 12.31.20     4,535,251  
Minus: Cash paid for ICANN net of cash received)     (241,072 )
Minus: Remaining Debt     (989,554 )
Minus: Estimated Settlement of Convertible Debt     (36,686,021 )
Plus: Estimated Settlement of Options     28,591,367  
Total Value     320,209,971  
Total Share Value at $10 per Share     32,020,997  

 

11

 

 

Mercer Park Brand Acquisition Corp. 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at December 31, 2020 (expressed in US$)

 

The following is a breakdown of the pro forma shares that will be issued and outstanding immediately following the proposed transaction with the EPS calculation as of December 31, 2020:

 

                      Year Ended  
Shares Outstanding - Assuming No Redemptions                       December 31, 2020  
Net Loss                           $ (23,713,348 )

 

      Class A       Class B       Common       Total  
GH Group Shares (net of estimated purchase adjustments)                     32,020,997       32,020,997  
BRND Shares     40,250,000       10,198,751               50,448,751  
Class B Shares convert on 100-1 basis into MVS     101,988       (10,198,751 )             (10,096,763 )
Acquisition of The Greenhouse                     10,000,000       10,000,000  
Acquisition of Element 7                     2,400,000       2,400,000  
The Private Placement                     8,500,000       8,500,000  
Total Shares Outstanding     40,351,988       -       52,920,997       93,272,985  
                                 
Loss per share - basic and diluted                           $ (0.25 )

 

12

 

 

CERTIFICATE OF MERCER PARK BRAND ACQUISITION CORP AND PROMOTER

 

May 6, 2021

 

This prospectus constitutes full, true and plain disclosure of all material facts relating to the securities previously issued by the issuer as required by securities legislation of each of the provinces and territories of Canada, other than Quebec.

 

By: (SIGNED) LOUIS F. KARGER BY: (SIGNED) CARMELO MARRELLI
  LOUIS F. KARGER   CARMELO MARRELLI
  CHIEF EXECUTIVE OFFICER   CHIEF FINANCIAL OFFICER

 

  ON BEHALF OF THE BOARD OF DIRECTORS
   
By: (SIGNED) JONATHAN SANDELMAN By: (SIGNED) CHARLES MILES
  JONATHAN SANDELMAN   CHARLES MILES
  DIRECTOR   DIRECTOR

 

  Mercer Park Brand, L.P., by its general partner, Mercer 
  Park CB GP II, LLC, AS PROMOTER
   
  By: (SIGNED) JONATHAN SANDELMAN
  JONATHAN SANDELMAN
  MEMBER

 

CT-1

 

Exhibit 99.71

 

APPENDIX B TO NATIONAL INSTRUMENT 41-101

GENERAL PROSPECTUS REQUIREMENTS

 

ISSUER FORM OF SUBMISSION TO

JURISDICTION AND APPOINTMENT OF

AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the “Issuer”): Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.)
     

 

2. Jurisdiction of incorporation, or equivalent, of Issuer: British Columbia
     

 

3. Address of principal place of business of Issuer: 590 Madison Avenue, 26th Floor, New York, New York, 10022
     

 

4. Description of securities (the “Securities”): Not applicable. Non-offering prospectus.
     

 

5. Date of the prospectus (the “Prospectus”) under which the Securities are offered: May 6, 2021
     

 

6. Name of agent for service of process (the “Agent”): 152928 Canada Inc.
     

 

7. Address for service of process of Agent in Canada (the address may be anywhere in Canada): 5300 Commerce Court West, 199 Bay Street, Toronto, Ontario M5L 1B9
     

 

8. The Issuer designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus or the obligations of the Issuer as a reporting issuer, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring such Proceeding.

 

9. The Issuer irrevocably and unconditionally submits to the non-exclusive jurisdiction of

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus or the obligations of the issuer as a reporting issuer.

 

 

 

 

- 2 -

 

10. Until six years after it has ceased to be a reporting issuer in any Canadian province or territory, the Issuer shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

11. Until six years after it has ceased to be a reporting issuer in any Canadian province or territory, the Issuer shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before any change in the name or above address of the Agent.

 

12. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of Ontario.

 

[SIGNATURE PAGE FOLLOWS.]

 

 

 

 

- 3 -

 

Dated: May 6, 2021

 

   MERCER PARK BRAND ACQUISITION CORP.
   
  (signed) “Louis F. Karger”
  Signature of Issuer
   
  Louis F. Karger
  Chief Executive Officer
  Print name and title of signing officer of Issuer

 

 

 

 

AGENT

 

The undersigned accepts the appointment as agent for service of process of Mercer Park Brand Acquisition Corp. under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021

 

  152928 Canada Inc.
   
  (signed) “Amanda Linett”
  Signature of Agent
   
  Amanda Linett, Vice President
  Print name of person signing and, if Agent is not an individual, the title of the person

 

 

 

 

APPENDIX C TO NATIONAL INSTRUMENT 41-101

GENERAL PROSPECTUS REQUIREMENTS

 

NON-ISSUER FORM OF SUBMISSION TO

JURISDICTION AND APPOINTMENT OF

AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the “Issuer”):

 

Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.)

 

2. Jurisdiction of incorporation, or equivalent, of Issuer:

 

British Columbia

     

 

3. Address of principal place of business of Issuer:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA

     

 

4. Description of securities (the “Securities”):

 

Not applicable as the prospectus is a non-offering prospectus.

     

 

5. Date of the prospectus (the “Prospectus”) under which the Securities are offered:

 

May 6, 2021

     

 

6. Name of person filing this form (the “Filing Person”):

 

Macias Gini & O’Connell, LLP

     

 

7. Filing Person’s relationship to Issuer:

 

U.S. Auditor

     

 

8. Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person:

 

700 South Flower Street, Suite 800, Los Angeles, CA 90017

     

 

9. Address of principal place of business of Filing Person:

 

700 South Flower Street, Suite 800, Los Angeles, CA 90017

     

 

10. Name of agent for service of process (the “Agent”):

 

152928 Canada Inc.

     

 

11. Address for service of process of Agent in Canada:

 

5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9

     

 

 

 

 

12. The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring the Proceeding.

 

13. The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of:

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the Securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.

 

14. Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

15. Until six years after completion of the distribution of the Securities under the Prospectus, the Filing Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change in the name or address of the Agent.

 

16. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of British Columbia.

 

[signature pages follow]

 

 

 

 

Dated and signed: May 6, 2021    
     
  By: (signed) “Macias Gini & O’Connell, LLP”
    Name: Macias Gini & O’Connell, LLP
    Title: Auditor

 

 

 

 

AGENT

 

The undersigned accept the appointment as agent for service of process of Macias Gini & O’Connell, LLP under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021

 

  152928 Canada Inc.
   
  By: (signed) “Amanda Linett”
    Name: Amanda Linett
    Title: Vice President

 

 

 

 

 

 

Exhibit 99.72

 

APPENDIX C TO NATIONAL INSTRUMENT 41-101

GENERAL PROSPECTUS REQUIREMENTS

 

NON-ISSUER FORM OF SUBMISSION TO

JURISDICTION AND APPOINTMENT OF

AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the “Issuer”):

 

Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.)

 

2. Jurisdiction of incorporation, or equivalent, of Issuer:

 

British Columbia

 

 

3. Address of principal place of business of Issuer:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA

 

 

4. Description of securities (the “Securities”):

 

Not applicable as the prospectus is a non-offering prospectus.

 

 

5. Date of the prospectus (the “Prospectus”) under which the Securities are offered:

 

May 6, 2021

 

 

6. Name of person filing this form (the “Filing Person”):

 

Charles Miles

 

 

7. Filing Person’s relationship to Issuer:

 

Director

 

 

8. Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person:

 

Brooklyn, New York, USA

 

 

9. Address of principal place of business of Filing Person:

 

Brooklyn, New York, USA

 

 

10. Name of agent for service of process (the “Agent”):

 

152928 Canada Inc.

 

 

11. Address for service of process of Agent in Canada:

 

5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9

 

 

 

 

 

12. The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring the Proceeding.

 

13. The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of:

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the Securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.

 

14. Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

15. Until six years after completion of the distribution of the Securities under the Prospectus, the Filing Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change in the name or address of the Agent.

 

16. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of British Columbia.

 

[signature pages follow]

 

 

 

 

Dated and signed: May 6, 2021    
     
     
  By: (signed) “Charles Miles”
    Name: Charles Miles
    Title: Director

 

 

 

 

AGENT

 

The undersigned accept the appointment as agent for service of process of Charles Miles under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021    
     
     
  152928 Canada Inc.
     
     
  By: (signed) “Amanda Linett”
    Name: Amanda Linett
    Title: Vice President

 

 

 

 

Exhibit 99.73

 

APPENDIX C TO NATIONAL INSTRUMENT 41-101 

GENERAL PROSPECTUS REQUIREMENTS

 

NON-ISSUER FORM OF SUBMISSION TO 

JURISDICTION AND APPOINTMENT OF 

AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the “Issuer”):

 

Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.)

 

2. Jurisdiction of incorporation, or equivalent, of Issuer:

 

British Columbia 

 

 

3. Address of principal place of business of Issuer:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA 

 

 

4. Description of securities (the “Securities”):

 

Not applicable as the prospectus is a non-offering prospectus. 

 

 

5. Date of the prospectus (the “Prospectus”) under which the Securities are offered:

 

May 6, 2021 

 

 

6. Name of person filing this form (the “Filing Person”):

 

Jonathan Sandelman 

 

 

7. Filing Person’s relationship to Issuer:

 

Director 

 

 

8. Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person:

 

New York, New York, USA 

 

 

9. Address of principal place of business of Filing Person:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA 

 

 

10. Name of agent for service of process (the “Agent”):

 

152928 Canada Inc. 

 

 

11. Address for service of process of Agent in Canada:

 

5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9 

 

 

 

 

 

12. The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring the Proceeding.

 

13. The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of:

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the Securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.

 

14. Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

15. Until six years after completion of the distribution of the Securities under the Prospectus, the Filing Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change in the name or address of the Agent.

 

16. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of British Columbia.

 

[signature pages follow]

 

 

 

 

Dated and signed: May 6, 2021

 

  By: (signed) “Jonathan Sandelman”
    Name: Jonathan Sandelman
    Title: Director

 

 

 

 

AGENT

 

The undersigned accept the appointment as agent for service of process of Jonathan Sandelman under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021

 

  152928 Canada Inc.
     
     
  By: (signed) “Amanda Linett”
    Name: Amanda Linett
    Title: Vice President

 

 

 

 

Exhibit 99.74

 

APPENDIX C TO NATIONAL INSTRUMENT 41-101

GENERAL PROSPECTUS REQUIREMENTS

 

NON-ISSUER FORM OF SUBMISSION TO

JURISDICTION AND APPOINTMENT OF

AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the “Issuer”):

 

Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.)

 

2. Jurisdiction of incorporation, or equivalent, of Issuer:

 

British Columbia

 

 

3. Address of principal place of business of Issuer:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA

 

 

4. Description of securities (the “Securities”):

 

Not applicable as the prospectus is a non-offering prospectus.

 

 

5. Date of the prospectus (the “Prospectus”) under which the Securities are offered:

 

May 6, 2021

 

 

6. Name of person filing this form (the “Filing Person”):

 

Louis F. Karger

 

 

7. Filing Person’s relationship to Issuer:

 

Chief Executive Officer

 

 

8. Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person:

 

Massachusetts, USA

 

 

9. Address of principal place of business of Filing Person:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA

 

 

10. Name of agent for service of process (the “Agent”):

 

152928 Canada Inc.

 

 

11. Address for service of process of Agent in Canada:

 

5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9

 

 

 

 

12. The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring the Proceeding.

 

13. The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of:

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the Securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.

 

14. Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

15. Until six years after completion of the distribution of the Securities under the Prospectus, the Filing Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change in the name or address of the Agent.

 

16. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of British Columbia.

 

[signature pages follow]

 

 

 

Dated and signed: May 6, 2021

 

  By: (signed) “Louis F. Karger”
    Name: Louis F. Karger
    Title: Director

 

 

 

AGENT

 

The undersigned accept the appointment as agent for service of process of Louis F. Karger under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021

 

  152928 Canada Inc.
     
  By: (signed) “Amanda Linett”
    Name: Amanda Linett
    Title: Vice President

 

 

 

Exhibit 99.75

 

APPENDIX C TO NATIONAL INSTRUMENT 41-101 
GENERAL PROSPECTUS REQUIREMENTS

 

NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF
AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the “Issuer”):

 

Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.) 

 

2. Jurisdiction of incorporation, or equivalent, of Issuer:

 

British Columbia 

 

 

3. Address of principal place of business of Issuer:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA 

 

 

4. Description of securities (the “Securities”):

 

Not applicable as the prospectus is a non-offering prospectus. 

 

 

5. Date of the prospectus (the “Prospectus”) under which the Securities are offered:

 

May 6, 2021 

 

 

6. Name of person filing this form (the “Filing Person”):

 

Lawrence Hackett 

 

 

7. Filing Person’s relationship to Issuer:

 

Director 

 

 

8. Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person:

 

New York, New York 

 

 

9. Address of principal place of business of Filing Person:

 

63 Downing St., New York, NY 10014, USA 

 

 

10. Name of agent for service of process (the “Agent”):

 

152928 Canada Inc. 

 

 

11. Address for service of process of Agent in Canada:

 

5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9 

 

 

 

 

 

12. The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring the Proceeding.

 

13. The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of:

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the Securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.

 

14. Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

15. Until six years after completion of the distribution of the Securities under the Prospectus, the Filing Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change in the name or address of the Agent.

 

16. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of British Columbia.

 

[signature pages follow]

 

 

 

 

Dated and signed: May 6, 2021

 

  By: (signed) “Lawrence Hackett”
    Name: Lawrence Hackett
    Title: Director

 

 

 

 

AGENT

 

The undersigned accept the appointment as agent for service of process of Lawrence Hackett under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021

 

  152928 Canada Inc.
     
  By: (signed) “Amanda Linett”
    Name: Amanda Linett
    Title: Vice President

 

 

 

Exhibit 99.76

 

APPENDIX C TO NATIONAL INSTRUMENT 41-101

GENERAL PROSPECTUS REQUIREMENTS

 

NON-ISSUER FORM OF SUBMISSION TO

JURISDICTION AND APPOINTMENT OF

AGENT FOR SERVICE OF PROCESS

 

1. Name of issuer (the Issuer):

 

Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.)

 

2. Jurisdiction of incorporation, or equivalent, of Issuer:

 

British Columbia

 

3. Address of principal place of business of Issuer:

 

590 Madison Avenue, 26th Floor, New York, New York, 10022, USA

 

4. Description of securities (the Securities):

 

Not applicable as the prospectus is a non-offering prospectus.

 

5. Date of the prospectus (the Prospectus) under which the Securities are offered:

 

May 6, 2021

 

6. Name of person filing this form (the Filing Person):

 

Macias Gini & O’Connell, LLP

 

7. Filing Persons relationship to Issuer:

 

U.S. Auditor

 

8. Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person:

 

700 South Flower Street, Suite 800, Los Angeles, CA 90017

 

9. Address of principal place of business of Filing Person:

 

700 South Flower Street, Suite 800, Los Angeles, CA 90017

 

10. Name of agent for service of process (the Agent):

 

152928 Canada Inc.

 

11. Address for service of process of Agent in Canada:

 

5300 Commerce Court West, 199 Bay Street, Toronto, ON, Canada M5L 1B9

 

 

12. The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal, quasi-criminal, penal or other proceeding (the Proceeding) arising out of, relating to or concerning the distribution of the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding any alleged lack of jurisdiction to bring the Proceeding.

 

13. The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of:

 

(a) the judicial, quasi-judicial and administrative tribunals of each of the provinces and territories of Canada in which the Securities are distributed under the Prospectus; and

 

(b) any administrative proceeding in any such province or territory, in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.

 

14. Until six years after completion of the distribution of the Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of process.

 

15. Until six years after completion of the distribution of the Securities under the Prospectus, the Filing Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change in the name or address of the Agent.

 

16. This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with the laws of British Columbia.

 

[signature pages follow]

 

 

Dated and signed: May 6, 2021

 

  By: (signed) “Macias Gini & O’Connell, LLP”
    Name: Macias Gini & O’Connell, LLP
    Title: Auditor

 

 

AGENT

 

The undersigned accept the appointment as agent for service of process of Macias Gini & O’Connell, LLP under the terms and conditions of the appointment of agent for service of process stated above.

 

Dated: May 6, 2021

 

  152928 Canada Inc.
   
     
  By: (signed) “Amanda Linett”
    Name: Amanda Linett
    Title: Vice President

 

 

 

Exhibit 99.77

 

Final

 

RETAIL LEASE

 

This Lease (“Lease”), dated as of June 9, 2017 (“Effective Date”), is made by and between 3243 Sacramento LLC, a California limited liability company (“Landlord”), and iCANN, LLC, a California limited liability company (“Tenant”). Landlord and Tenant are also sometimes referred to herein collectively as the “Parties,” or individually as a “Party.”

 

Article I.      Demise.

 

Section 1.01      Demise. In consideration of the payment of the Rent reserved, the mutual covenants, and each and every act to be performed by Landlord and Tenant under this Lease, Landlord hereby lets and demises to Tenant and Tenant hereby leases from Landlord for the Term (as defined below) and upon the terms and conditions set forth in this Lease the premises located at 3243 Sacramento Street, Berkeley, County of Alameda, California 94720 (the “Premises”).

 

Section 1.02      Quiet Enjoyment. In lieu of any implied covenant of quiet possession or quiet enjoyment, upon payment by Tenant of all Rent and other charges and performance of all the covenants, conditions and provisions on Tenant’s part to be observed and performed under this Lease, Tenant shall have quiet enjoyment of the Premises for the Term as against all persons or entities claiming by, through or under Landlord, subject to all terms of this Lease and the Permitted Exceptions.

 

Article II.      Term & Rent.

 

Section 2.01      Term. The “Term” of this Lease shall be the ten (10)-year period that commences on the Commencement Date (as defined below) and expires on the Expiration Date (as defined below). Provided that Tenant is not in default under any term of this Lease, unless Tenant provides written notice no less than sixty (60) days before the expiration of the Term of Tenant’s intent not to renew this Lease, upon conclusion of the Term this Lease shall automatically be extended for an additional one (1)-year term (“Renewal Term”).

 

Section 2.02      Commencement Date. The “Commencement Date” shall be the date on which Landlord notifies Tenant that the Premises are in Deliverable Condition. “Deliverable Condition” means that: (a) the Premises are in a broom-clean condition, free and clear of all prior leases, tenants and/or occupants and free and clear of all fixtures and other property, including exterior signs, of all prior tenants and/or occupants; and (b) Landlord has substantially completed Landlord’s Work as described and budgeted in Exhibit A. Rent shall be first due and payable thirty (30) days after the Commencement Date (the “Rent Commencement Date”).

 

Section 2.03      Expiration Date. The “Expiration Date” shall be the tenth (10th) anniversary of the Rent Commencement Date. Landlord and Tenant shall each use commercially reasonable efforts to execute a memorandum, in form and substance reasonably acceptable to both Parties, confirming the Commencement Date, Rent Commencement Date and the Expiration Date once the same are known.

 

Section 2.04      Rent. “Rent” shall mean, collectively, all Fixed Rent and all other amounts that Tenant is required to pay to Landlord under this Lease (“Additional Rent”). “Fixed Rent” shall mean rent to be paid to Landlord commencing on the Rent Commencement Date, for the Term and the Renewal Term (if any). Fixed Rent will equal $240,000 per year, payable in twelve (12) monthly installments of $20,000. At Landlord’s sole option, Rent may be increased in proportion to changes in the “Consumer Price Index for All Urban Consumers” for the “West Region” (“CPI-U”) (as reported by the United States Bureau of Labor Statistics, using 1982-1984 as the base period) relative to the CPI-U reported for April 2017.

 

Section 2.05      Tax Payments.

 

(a) Commencing on the Commencement Date, and thereafter during each year of the Term and Renewal Term, if any, Tenant shall pay to Landlord as Additional Rent Tenant’s Share of the Real Estate Taxes assessed against the Premises. As used herein, the term “Real Estate Taxes” shall mean all taxes and assessments, whether general or special, ordinary or extraordinary, foreseen or unforeseen, of any kind or nature whatsoever (including without limitation, municipal, school, county and open space taxes and business improvement and special improvement district assessments) levied, assessed or imposed at any time by any Authority (as defined below) upon or against the Premises and/or any part thereof, and any rights or interests appurtenant thereto (hereinafter collectively referred to as the “Taxable Property”). Should any alteration or improvement performed by or for Tenant cause an increase in Real Estate Taxes, Tenant shall pay to Landlord the full cost of all such increases in addition to any amounts paid by Tenant pursuant to Section 2.05(b). If, due to a future change in the method of taxation or in a taxing Authority, a franchise, license, income, transit, profit or other tax, fee or governmental imposition, however designated, shall be levied, assessed or imposed against Landlord, the Premises or the rent or profit therefrom in lieu of, in addition to or as a substitute for all or any part of the Real Estate Taxes, then such tax, fee or imposition shall be included within the definition of Real Estate Taxes. Real Estate Taxes shall be determined without reference to any abatement or exemption from or credit against Real Estate Taxes applicable to all or part of the Premises. As used herein, the term “Authority” shall mean any political subdivision, city, city council, planning board, municipal entity, municipal authority, federal government, state government, county government, governmental agency, public corporation, district or other political or public entity or public authority.

 

1

 

 

Final

 

(b) Tenant shall make payments with respect to Real Estate Taxes monthly in advance at the same time as the payment of the Fixed Rent. The monthly Real Estate Taxes payment shall be in an amount reasonably estimated by Landlord. When the actual amount of the Real Estate Taxes for the Premises for each year of the Term or Renewal Term is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable Real Estate Taxes for that year. Tenant shall pay any additional monies due within thirty (30) days after landlord notifies Tenant of a deficiency.

 

Section 2.06      Utilities.

 

(a) Tenant shall directly contract for the provision of, and shall pay (before delinquency) for, all water, gas, heat, light, power, telephone, telecommunications, and other utilities and services supplied to the Premises, together with any taxes thereon and hook-up or connection fees associated therewith. Without limiting the foregoing, all telecommunications services (voice, video and data) desired by Tenant shall be obtained at Tenant’s sole cost and risk from providers authorized by Landlord and the appropriate governmental authorities to provide such services to the Premises. If any utility services are not separately metered to Tenant, Tenant shall pay to Landlord as Additional Rent a reasonable proportion, to be determined by Landlord, of all charges jointly metered.

 

Section 2.07         Late Payment Fee. All Rent and other payments due hereunder, upon becoming due under this Lease and remaining unpaid when due, shall bear interest until paid at the rate of 1.5% per annum. Tenant acknowledges that late payment by Tenant to Landlord of Rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which would be extremely difficult to ascertain. The parties agree that the interest on late payments represents a fair and reasonable estimate of the costs that Landlord will incur by reason of late payments of Rent by Tenant. Acceptance of any interest shall not constitute a waiver of Tenant’s default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord.

 

Article III.      Condition of the Premises.

 

Section 3.01      No Representations. Tenant acknowledges that: (a) neither Landlord nor Landlord’s agents or employees have made any representations or warranties as to the suitability or fitness of the Premises for the conduct of Tenant’s business or for any other purpose; (b) except as expressly provided herein, neither Landlord nor its agents or employees have agreed to undertake any alterations or construct any improvements to the Premises; (c) Tenant has been advised to satisfy itself regarding the condition of the Premises, including without limitation the heating, ventilation and air conditioning (HVAC) systems, electrical and fire sprinkler systems and any structural or environmental matters and the present and future suitability of the Premises for Tenant’s intended use; (d) Tenant has been advised to satisfy itself regarding the Premises’ compliance with applicable requirements, including all municipal, county, state laws, ordinances, rules and regulations, orders, permits and zoning, the requirements of any applicable fire insurance underwriter or rating bureau and any covenants, restrictions or other matters of record relating to the Tenant, the Premises or the use thereof but excluding federal law that conflicts with California law (collectively, “Laws”). Tenant further acknowledges, by taking possession of the Premises, that as of the Commencement Date: (x) Tenant has been given access to the Premises and has made such investigation as it deems necessary with reference to the matters set forth in this Section, is satisfied with reference thereto, and assumes all responsibility therefor as the same relate to Tenant’s occupancy of the Premises and/or the terms of this Lease; and (y) neither Landlord nor any of its agents or employees has made any oral or written representations or warranties regarding said matters or the condition of the Premises other than as expressly set forth in this Lease.

 

Section 3.02      Americans with Disabilities Act. Notwithstanding Section 3.01, Landlord shall be solely responsible for all costs, expenses, surveys, construction costs, fines, fees and other amounts required for compliance with the Americans with Disabilities Act, including any construction required after the improvements described in Exhibit A.

 

2

 

 

Final

 

Article IV.      Use.

 

Section 4.01      Permitted Use. Tenant shall operate within the Premises a cannabis dispensary retail store that is open to purchasers of cannabis as may be permitted under the Laws, and for any purpose reasonably related to the foregoing (“Permitted Use”).

 

Section 4.02      Tenant Operation. Tenant covenants and agrees to operate its business on the Premises diligently and continuously throughout the Term. Tenant shall keep the Premises well lighted and in a safe, neat and clean condition throughout the Term. Tenant agrees to take such actions as may be necessary or as Landlord may reasonably require to prevent or remedy any nuisance to or impact on the Premises related to the Permitted Use. Tenant shall not permit or suffer the Premises, or the walls or floors thereof, to be endangered by overloading. Tenant shall abide by and observe those rules and regulations established by Landlord for the Premises from time to time that are determined by Landlord, in its reasonable discretion, to be necessary for the safety, security, care and appearance of the Premises or the preservation of good order therein, or for the operation and maintenance of the Premises or equipment therein (collectively, the “Rules and Regulations”).

 

Article V.      Repairs and Maintenance.

 

Section 5.01      Landlord’s Obligations. Landlord shall complete the improvements described in Exhibit A according to the schedule set forth therein, except that obtaining necessary permits, or other circumstances beyond the Parties’ control, may require modifications to the schedule. Landlord shall notify Tenant of such delays, and shall in any event complete the improvements no later than one hundred eighty (180) days after beginning work on the improvements. Subject to the remainder of this Article V and all provisions in this Lease relating to damage, destruction or condemnation of the Premises, as improved according to Exhibit A, Landlord shall maintain, repair and keep in good condition, the foundation, the roof, any roof coverings, and exterior walls (excluding the interior and exterior finish surfaces of exterior walls, windows, window frames and doors) of any building on the Premises, including after the improvements described in Exhibit A. If Landlord shall be called on to make any such repairs occasioned by the negligent act or omission of Tenant, its employees, agents, servants, customers and other invitees, the entire cost of such repair shall be borne by Tenant. Except as provided above and in Exhibit A, it is intended by the Parties hereto that Landlord have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of Tenant. Landlord shall use reasonable efforts to cause any repairs for which it is responsible to be made promptly.

 

Section 5.02      Tenant’s Obligations. Subject to provisions in this Lease relating to damage, destruction or condemnation of the Premises, Tenant shall, at Tenant’s sole expense, keep the Premises in good order, condition and repair (whether or not the need for such repair occurs as a result of Tenant’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, interior walls, the interior and exterior finish surface of exterior walls, ceilings, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Tenant, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Tenant’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Tenant shall, during the Term of this Lease, keep the exterior appearance of the Premises in the same condition as the Rent Commencement Date consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity. Tenant is responsible for removal of snow and ice from the sidewalks adjacent to the Premises.

 

Article VI.      Security.

 

Section 6.01      Security Deposit. At the time of Tenant’s execution of this Lease, Tenant shall deliver the sum of Thirty Thousand Dollars ($30,000.00) (the “Security Deposit”) to Landlord as security for the full, faithful and timely performance of each and every provision of this Lease to be performed by Tenant.

 

3

 

 

Final

 

(a) If Tenant defaults with respect to any provision of this Lease, including but not limited to the provisions relating to the payment of Rent, Landlord may, in Landlord’s discretion, use, apply or retain all or any part of the Security Deposit for the payment of any Rent, or any other sum in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant’s default, or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant’s default, including, without limitation, prospective damages and damages recoverable pursuant to California Civil Code Section 1951.2. If any portion of the Security Deposit is so used, applied, or retained, (x) Landlord shall within ten (10) days provide Tenant a written accounting of the allocation of funds, and (b) Tenant shall within ten (10) days after written demand deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount.

 

(b) If Tenant has fully and faithfully performed and observed all of Tenant’s obligations under this Lease, any remaining balance of the Security Deposit (over any amount retained for application by Landlord as provided herein) shall be paid to Tenant no later than ninety (90) days after the last to occur of: (i) the Expiration Date; (ii) full vacation and surrender of the Premises by Tenant to Landlord in accordance with this Lease; or (iii) the date, as reasonably determined by Landlord, that all Additional Rent pursuant to this Lease has been computed by Landlord and paid by Tenant. In no event shall any payment of Security Deposit balance be construed as an admission by Landlord that Tenant has performed all of its obligations under this Lease.

 

(c) Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. The Security Deposit shall not be deemed a limitation on Landlord’s damages or a payment of liquidated damages or a payment of the Rent due for the last month of the Term.

 

(d) Landlord may deliver or otherwise credit the Security Deposit to the purchaser of the Premises if the Premises are sold, and after such time, Landlord will have no further liability to Tenant with respect to the Security Deposit.

 

Article VII.      Laws.

 

Section 7.01      Tenant’s Compliance. Tenant shall, at Tenant’s expense, comply with all Laws. In the event any Authority changes Laws in a way that makes Tenant’s compliance impractical, infeasible or impossible for a period of not fewer than thirty (30) consecutive days (“Change in Law”), there shall be a deemed Condemnation under Section 10.01 and Tenant’s non-compliance with Laws shall not be considered a Default under Section 10.06.

 

Section 7.02      Tenant’s Permits. Tenant shall, at its own cost and expense, secure and maintain throughout the Term, all necessary licenses and permits from such authorities as shall be necessary for, or incidental to, the conduct of its business in the Premises and shall comply with all Laws relating to the operation of its business. Landlord does not covenant, warrant or make any representation that any particular license or permit that may be required in connection with the operation of Tenant’s business will be granted, or if granted, will be continued in effect or renewed.

 

Section 7.03      Accessibility. Without limiting the generality of Section 7.01 and Section 7.02:

 

(a) To Landlord’s actual knowledge, the Premises have not undergone inspection by a Certified Access Specialist (CASp). The foregoing lack of verification shall not in any manner affect Landlord’s and Tenant’s respective responsibilities for compliance with construction-related accessibility standards as provided under this Lease.

 

(b) Landlord agrees to use reasonable efforts to notify Tenant if Landlord makes any alterations to the Premises that might impact accessibility to the Premises under any federal or state disability access laws, and Tenant agrees to use reasonable efforts to notify Landlord if Tenant makes any alterations to the Premises that might impact accessibility to the Premises under any federal or state disability access laws. Landlord acknowledges that Landlord will be responsible for any accommodations or alterations to the Premises required by Law during the Term to accommodate disabled employees and customers of Tenant, including, without limitation, the requirements under the disabilities or access Laws.

 

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Article VIII.      Insurance.

 

Section 8.01      Tenant’s Insurance. Tenant shall, at Tenant’s expense, maintain at all times during the Term and at all times when Tenant is in possession of the Premises the following:

 

(a) commercial general liability insurance (or successor form of insurance designated by Landlord) in respect of the Premises, on an occurrence basis, with a combined single limit (annually and per occurrence and location) of at least one million Dollars ($1,000,000) naming as additional insureds Landlord and any other person designated by Landlord. Tenant’s liability insurance policy shall include contractual liability, fire and legal liability coverage;

 

(b) property insurance in an amount equal to one hundred (100%) percent of full replacement value, with a deductible not exceeding one million Dollars ($1,000,000.00), covering Tenant’s property and the property of third parties located in the Premises, against fire and other risks, including business interruption insurance covering the entire term of the lease; and,

 

(c) workers’ compensation and employer’s liability insurance providing statutory benefits for Tenant’s employees at the Premises.

 

Section 8.02      Certificates. Tenant shall deliver to Landlord and each additional insured certificates in form reasonably acceptable to Landlord evidencing the insurance required by this Lease to be maintained by Tenant before the Commencement Date, as soon as reasonably available, and on request, a copy of each insurance policy. All required insurance shall be primary and non-contributory (as shown on endorsement), issued by companies satisfactory to Landlord and contain a provision whereby it cannot be canceled unless Landlord and any additional insureds are given at least thirty (30) days’ prior written notice of the cancellation. Tenant may carry any required insurance under a blanket policy if that policy complies with the requirements of this Lease and provides that Tenant’s insurance for the Premises is on a “per location basis.”

 

Section 8.03      Release. Provided its right of full recovery under its insurance policy is not adversely affected, Landlord and Tenant each hereby releases the other (and the other’s agents and employees) with respect to any claim (including a claim for negligence) it may have against the other for damage or loss covered by its property insurance (including business interruption and loss of rent). Landlord and Tenant shall, to the extent obtainable, each procure a clause in, or endorsement on, any property insurance carried by it, under which the insurance company waives its right of subrogation against the other party to this Lease and its agents and employees or consents to a waiver of the right of recovery against the other party to this Lease and its agents and employees. If an additional premium is required for the waiver or consent, the other party shall be advised of that amount and may, but is not obligated to, pay the same. If that party elects not to pay the additional premium, the waiver or consent shall not be required in favor of that party.

 

Article IX.      Casualty.

 

Section 9.01      If the Premises are damaged by fire or other casualty, Landlord shall give Tenant a certification made by a competent architect, in good standing, as to the number of days from the occurrence of such casualty within which the Premises, with the exercise of reasonable diligence, can be made fit for occupancy (the “Repair Period”), and the election, if any, which Landlord has made according to this Article IX. Such notice will be given before thirty (30) days after such casualty, and the date of such notice shall be referred to herein as the “Notice Date.” If there is damage to the Premises as described in this Article IX, and if the Lease is not terminated as provided in this Article IX, then this Lease shall remain in full force and effect, and the parties waive any provisions of any law to the contrary.

 

Section 9.02      Minor Casualty. If the Premises are damaged by fire or other insured casualty to the extent that the Repair Period does not exceed thirty (30) days, Landlord will diligently pursue the repair of damage to the Premises. In that event, this Lease shall continue in full force and effect, except that Fixed Rent shall be abated on a pro rata basis based on the portion of the Premises that Tenant cannot use during the Repair Period.

 

Section 9.03      Major Casualty; End of Term. If (a) the Premises are damaged by fire or other insured casualty to the extent that the Repair Period exceeds ninety (90) days, or (b) the Premises are damaged to any extent by any casualty and, on the Notice Date, the remainder of the Term is less than six (6) months (and Tenant fails to exercise, within ten (10) days following the Notice Date, any remaining option to extend the Term), then Landlord may, at Landlord’s option, diligently pursue the repair of damage to the Premises. If Landlord elects to repair such damage during the Repair Period, Fixed Rent will be abated on a pro rata basis during the Repair Period, based on the portion of the Premises the use of which Tenant is deprived during the Repair Period. If Landlord elects not to repair such damage during the Repair Period, this Lease shall terminate effective on the date of termination set forth in the notice, and Fixed Rent shall be abated on a pro rata basis based on the portion of the Premises the use of which Tenant is deprived during the period from the date of the casualty to the date of termination of the Lease.

 

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Section 9.04      Limitation. Notwithstanding any other provision of this Lease, if the proceeds of Landlord’’s insurance are insufficient to pay for the repair of any damage to the Premises, then Landlord will have the option to repair such damage or cancel this Lease as of the date of such casualty by written notice to Tenant, and Landlord shall not be liable to Tenant for any damage or losses to the Tenant that are occasioned by the damage to or destruction of the Premises or by the repair or restoration of the Premises. If a fire or other casualty is the result of the willful misconduct or negligence or failure to act of Tenant, its agents, contractors, employees or invitees, there will be no abatement of Fixed Rent as otherwise provided for in this Article IX.

 

Section 9.05      Tenant’s Repair. If Landlord is obligated or elects to repair any damage to the Premises, Tenant shall promptly replace or fully repair all inventory, goods, exterior signs, trade fixtures, equipment, display cases and other personal property on the Premises. Tenant shall continue the operation of its business in the Premises during the Repair Period to the extent reasonably practical from the standpoint of good business.

 

Section 9.06      Waiver. The provisions of this Lease, including this Article IX, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises. Any Laws or common law with respect to any rights or obligations concerning damage or destruction, including, without limitation, Sections 1932(2), 1933(4), 1941 and 1942 of the California Civil Code, now or hereafter in effect shall have no application to this Lease or any damage to or destruction of all or any part of the Premises, and are hereby waived.

 

Article X.      Condemnation; Subletting; Default

 

Section 10.01      Termination. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power, or if the action of any governmental entity or Authority takes an action (or omits to take an action) that makes the Tenant’s business impractical or economically infeasible (collectively “Condemnation”): (x) at the option of Tenant this Lease shall terminate as of thirty (30) days after the Authority’s action (or inaction) becomes unappealable; or (y) Landlord may terminate this Lease as to the portion of the Premises not taken if Landlord determines, in its discretion, that the taking renders operation of the Premises uneconomical. If more than ten percent (10%) of any portion of the Premises occupied by a building, or more than ten percent (10%) of the land area portion of the Premises not occupied by a building, is taken by Condemnation, Tenant may, at Tenant’s option to be exercised in writing within ten (10) days after the condemning Authority shall have taken possession, terminate this Lease as of the date the condemning Authority takes such possession.

 

Section 10.02      Rent Abatement. If neither Landlord nor Tenant terminates this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Fixed Rent shall be reduced in proportion to the reduction in area of the Premises caused by such Condemnation.

 

Section 10.03      Awards. Condemnation awards and/or payments shall be the property of Landlord, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in any taking, together with any and all rights of Tenant now or hereafter arising in or to such award or any part thereof; provided, however, that so long as no diminution of Landlord’s award results therefrom, Tenant shall have the right to separately pursue against the condemning Authority, and shall not be required to assign any part thereof to Landlord, a separate award for Tenant’s relocation expenses, the taking of personal property and trade fixtures belonging to Tenant, the value of improvements to the Premises made and paid for by Tenant, or the interruption of or damage to Tenant’s business at the Premises.

 

Section 10.04      Waiver. Tenant hereby waives any and all rights it might otherwise have pursuant to Section 1265.130 of the California Code of Civil Procedure or any other Law or common law with respect to termination rights upon Condemnation of all or any part of the Premises.

 

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Section 10.05      Assignment and Subleasing. Tenant shall not assign, mortgage or otherwise transfer or encumber (collectively, “Assign”) all or any part of Tenant’s interest in this Lease or in the Premises or sublease all or any part of the Premises or otherwise permit all or any part of the Premises to be occupied by any other person, without Landlord’s prior written consent, which consent shall not be unreasonably withheld or delayed, except that, with notice only, Tenant may Assign the Premises to any affiliate of Tenant or to Kush Boy Enterprises, LLC (“Permitted Assignee”). If Tenant claims that Landlord has unreasonably withheld or delayed its consent under this Section 10.05 or otherwise has breached or acted unreasonably under this Section 10.05, Tenant’s sole remedy shall be declaratory judgment and an injunction for the relief sought without any monetary damages, and Tenant hereby waives all other remedies, including, without limitation, any right provided under Section 1995.310 of the California Civil Code or any other Laws to terminate this Lease.

 

Section 10.06      Defaults. Each of the following (a “Default”) is a material default by Tenant under this Lease:

 

(a) Tenant fails to pay when due any Rent and the failure continues for ninety (90) days following Landlord’s notice (which notice shall also be considered any demand required by any Laws).

 

(b) Tenant fails to obtain or maintain its Material License, through its fault or negligence and the failure cannot be cured in a sixty (60) day period.

 

Section 10.07      Landlord’s Remedies. Upon the occurrence of any Default, Landlord shall cumulatively have: (a) all rights and remedies available to a landlord at law or in equity upon the default of a tenant; and (b) the right, at Landlord’s election, then or at any time thereafter, to exercise any one or more of the following remedies to the fullest extent allowed by applicable Law:

 

(a) Landlord may, without releasing Tenant from any obligations under this Lease, make any payment or take any action as Landlord may deem necessary or desirable to cure any such Default in such manner and to such extent as Landlord may deem necessary or desirable, and Landlord may do so without demand on, or written notice to, Tenant and without giving Tenant an opportunity to cure such Default.

 

(b) Landlord may reenter and take possession of the Premises or any part thereof, without demand or Notice, and repossess the same and expel Tenant and any party claiming by, under or through Tenant, and remove the effects of both, by unlawful detainer or other summary proceedings, or as otherwise permitted by Law. Landlord shall have the right to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises, to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to this Lease. No notice or other act by Landlord shall be construed as an election by Landlord to terminate this Lease unless a written notice of such intention is given to Tenant. No notice from Landlord hereunder or under an unlawful detainer statute or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states.

 

Section 10.08      [Reserved]

 

Section 10.09      Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee’s breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations). Acts of maintenance or preservation, efforts to relet the Premises or the appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease shall not constitute a termination of Tenant’s right to possession of the Premises.

 

Section 10.10      If Landlord commences summary proceedings in the nature of a forcible entry and detainer or unlawful detainer for non-payment Rent or for Tenant’s failure to perform its other obligations hereunder, Tenant covenants that it shall not file a counterclaim against Landlord in the summary proceedings, nor shall Tenant consolidate claims against Landlord in said proceedings; however, Tenant does not waive its right hereunder to bring any later action against Landlord for damages. If Tenant should contest such summary proceedings, it shall post a bond in favor of Landlord for the amount of Rent due and for future damages upon termination of this Lease.

 

Section 10.11      No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

 

Section 10.12      Upon any Default, Landlord may proceed directly against Tenant or any other party guaranteeing or responsible for the performance or Tenant’s obligations under this Lease, including any assignee or subtenant, without first exhausting Landlord’s remedies against any other person or entity responsible therefor to Landlord, or any security held by Landlord.

 

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Section 10.13      Access. Landlord and Landlord’s employees, agents, contractors and other authorized representatives shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon not less than twenty four (24) hours prior notice for the purpose of showing the same to prospective purchasers, lenders or tenants, or making such alterations, repairs, improvements or additions to the Premises as Landlord may deem necessary, or performing any obligation of Landlord under this Lease. All such activities shall be without abatement of Rent. Landlord shall not place a “For Sale” or “For Lease” sign on the Premises, if Tenant is conducting business on the Premises and not in Default under the Lease. For purposes of this Section 10.13, Tenant shall be deemed to be conducting business on the Premises during times of remodeling or other periods of less than five (5) days during which the Premises is not open for business to the public. Landlord may at any time place on the Premises any ordinary “For Sale” signs and Landlord may during the last three (3) months of the Term hereof place on the Premises (but not in any show windows) any ordinary “For Lease” signs.

 

Section 10.14      Brokers. Tenant and Landlord each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder in connection with this Lease that is entitled to any commission or finder’s fee in connection herewith. Tenant and Landlord do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto. This Section shall survive the expiration or sooner termination of this Lease.

 

Article XI.      Subordination.

 

Section 11.01      This Lease, and the rights of Tenant under this Lease, are subject and subordinate in all respects to all present and future mortgages or deeds of trust on the Premises including all increases, renewals, modifications, extensions, supplements, consolidations and replacements thereof (“Mortgages”), and all advances under any Mortgage. This Section 11.01 is self-operative and no further instrument of subordination is required. Tenant shall, within ten (10) days following receipt of Landlord’s request, sign, acknowledge and deliver any instrument that Landlord or any mortgagee or beneficiary under a Mortgage (“Mortgagee”) may request to evidence such subordination.

 

Section 11.02      If any Mortgagee or any successor or assignee thereof or any purchaser at a foreclosure sale or by deed in lieu of foreclosure succeeds to the rights of Landlord under this Lease, then upon their request, Tenant shall transfer to such Mortgagee, successor, assignee or purchaser as Tenant’s landlord under this Lease. Tenant shall, within ten (10) days following request by such Mortgagee, successor or assignee, sign, acknowledge and deliver any instrument that such Mortgagee, successor, assignee, or purchaser requests to evidence the attornment. If any Mortgagee requires any modifications of this Lease, then, provided such modifications do not materially adversely affect Tenant, Tenant shall, within ten (10) days following Tenant’s receipt of a request, sign, acknowledge and deliver to Landlord a lease amendment prepared by Landlord that shall make the required modifications.

 

Section 11.03      Permitted Exceptions. This Lease and all of Tenant’s rights hereunder are subject to all the matters, restrictions and encumbrances of record (whether now existing or hereafter arising), including, without limitation, all restrictions in this Lease (collectively, the “Permitted Exceptions”). Landlord reserves to itself the right, from time to time, to grant, without the consent or joinder of Tenant, such easements, rights and dedications as Landlord deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use or occupancy of the Premises by Tenant. When granted or recorded, such easements, rights, dedications, maps and restrictions will be additional Permitted Exceptions. Tenant agrees to sign any documents reasonably requested by Landlord to effectuate any such easements, rights, dedications, maps or restrictions. Tenant shall have no right to seek damages or to cancel or terminate this Lease, and the rights and obligations of Landlord and Tenant hereunder otherwise shall not be affected, because of any rights, changes or other matters allowed or set forth in the Permitted Exceptions.

 

Section 11.04      Estoppel Certificates. Tenant shall, at any time and from time to time, within ten (10) days following its receipt of a request from Landlord, sign, acknowledge and deliver to Landlord or any other person designated by Landlord a certification: (a) that this Lease is in full force and effect and has not been modified (or, if modified, setting forth all modifications); (b) stating the date to which the Rent has been paid; (c) stating whether or not, to its actual knowledge, Landlord is in default of its obligations under this Lease and if so, describing the default, including any event that has occurred which, with the serving of notice or the passage of time, or both, would give rise to a default; and (d) stating to its actual knowledge, any other factual matters reasonably requested. Any certification delivered under this Section may be relied on by the third party for whom the certification is requested but shall not, as between Landlord and Tenant, affect their respective rights.

 

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Article XII.      End of Term.

 

Section 12.01      Condition. Upon the expiration or sooner termination of this Lease, Tenant shall restore the Premises to their original condition as of the Commencement Date of this Lease, reasonable wear and tear excepted. Reasonable wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Tenant performing all of its obligations under this Lease. All damage caused by Tenant shall be repaired and the Premises restored such that on or before the last day of the Lease, the Premises shall be delivered up broom swept free of Tenant’s product, furniture and equipment in good and rentable condition with all restoration work completed, and any excess materials and construction equipment used in the restoration process removed from the Premises. Tenant’s obligation hereunder shall survive the expiration or sooner termination of the Lease.

 

Section 12.02      Holdover. If the Premises are not vacated and surrendered in accordance with this Lease (whether by Tenant or any other occupant), on the date required by this Lease, Tenant shall indemnify and hold harmless Landlord against all losses, costs, liabilities, claims, damages and expenses incurred by Landlord in connection therewith, including reasonable attorneys’ fees and disbursements whether in an action by or against Tenant or a third party, and including claims and liabilities of Landlord made by any succeeding tenant(s) or other third party. No holding over by Tenant after the Term shall operate to extend the Term; provided, however, that at Landlord’s written option, such holding over shall be construed as a tenancy at sufferance, or from month to month, and otherwise on the same terms and conditions in this Lease. In no event shall this Section 12.02 be construed as permitting Tenant (or any other occupant) to remain in possession of the Premises after the Expiration Date without Landlord’s written consent in its sole discretion.

 

Section 12.03      Notices. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier such as FedEx, DHL, UPS, or Airborne) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile or electronic mail transmission, and shall be deemed sufficiently given if served in a manner specified in this Section.

 

Notices to Landlord shall be sent to: Notices to Tenant shall be sent to:
   
3243 Sacramento LLC iCANN, LLC
1828 4th Street 3243 Sacramento Street
Berkeley, CA 94710 Berkeley, CA 94702
Attn: Brian McMahon Attn: Sue Taylor               Text
   
  and
   
  Kush Boy Enterprises, LLC
  1828 4th Street
  Berkeley CA 94701
  Attn: Brian McMahon

 

Either Party may by written notice to the other specify a different address for notice, except that upon Tenant’s taking possession of the Premises, the Premises shall constitute Tenant’s address for notice. A copy of all notices to Landlord shall be concurrently transmitted to such party or parties at such addresses as Landlord may from time to time hereafter designate in writing. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. Notices sent by regular mail shall be deemed given three (3) days after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or a nationally recognized overnight courier (including FedEx, DHL, UPS and Airborne) that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or such courier. Notices transmitted by facsimile transmission, electronic mail or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a non-business day, it shall be deemed received on the next business day.

 

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Section 12.04 Waiver. No waiver by Landlord of the violation of any term, covenant or condition hereof by Tenant, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent violation by Tenant of the same or of any other term, covenant or condition hereof. Landlord’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Landlord’s consent to, or approval of, any subsequent or similar act by Tenant, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Landlord shall not be a waiver of any such violation or any Default by Tenant. Any payment by Tenant may be accepted by Landlord on account of moneys or damages due Landlord, notwithstanding any qualifying statements or conditions made by Tenant in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Landlord at or before the time of deposit of such payment. No payment by Tenant, nor receipt by Landlord, of a lesser amount than the Rent herein stipulated shall be deemed to be other than on an account of the earliest stipulated Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord shall accept such check for payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any other remedy available to Landlord.

 

Section 12.05      Force Majeure. Whenever a period of time is provided in this Lease for either party to do or perform any act or thing, except for the payment of monies by Tenant, the computation of such period of time shall exclude any delays due to strikes, riots, acts of God, shortages of labor or any cause or causes, whether or not similar to those enumerated, beyond the parties’ reasonable control or the reasonable control of their agents, servants, employees and any contractor engaged by them to perform work in connection with this Lease.

 

Section 12.06      Tenant Indemnity. To the fullest extent permitted by applicable law, Tenant shall indemnify, protect, defend and hold harmless the Premises, Landlord and its members, managers, employees, agents, contractors, partners and lenders (collectively, including Landlord, the “Landlord Parties”) from and against any and all claims, actions, demands, suits, proceedings, orders, losses (including loss of rents), damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities (collectively, “Claims”) arising out of, involving, or in connection with: (a) the use and/or occupancy of the Premises by Tenant; (b) the conduct of Tenant’s business on the Premises; (c) any act, omission, fault or neglect on or about the Premises of Tenant, its agents, employees, contractors, subtenants, licensees, visitors, or invitees; or (d) any violation of any terms hereof by Tenant. If any action or proceeding is brought against Landlord by reason of any of the foregoing matters, Tenant shall upon notice defend the same at Tenant’s expense by counsel reasonably satisfactory to Landlord and Landlord shall reasonably cooperate with Tenant in such defense. Landlord need not have first paid any such claim in order to be defended or indemnified. This Section shall survive the expiration or sooner termination of this Lease.

 

Section 12.07      Arbitration. Any unresolved controversy or claim arising out of or relating to this Lease, except as otherwise provided in this Lease, shall be submitted to arbitration by one arbitrator mutually agreed upon by the Parties to the controversy or claim, and if no agreement can be reached within thirty (30) days after names of potential arbitrators have been proposed by the American Arbitration Association (the “AAA”), then by one arbitrator having reasonable experience in commercial real estate transactions of the type provided for in this Lease and who is chosen by the AAA. The arbitration shall take place in Oakland, California, in accordance with the AAA rules then in effect, and judgment upon any award rendered in such arbitration will be binding and may be entered in any court having jurisdiction thereof. There shall be limited discovery prior to the arbitration hearing as follows: (a) exchange of witness lists and copies of documentary evidence and documents relating to or arising out of the issues to be arbitrated, (b) depositions of all party witnesses, and (c) such other depositions as may be allowed by the arbitrators upon a showing of good cause. Depositions shall be conducted in accordance with the California Code of Civil Procedure, the arbitrator shall be required to provide in writing to the parties the basis for the award or order of such arbitrator, and a court reporter shall record all hearings, with such record constituting the official transcript of such proceedings.

 

Article XIII.      Miscellaneous

 

(a) This Lease may not be changed or terminated, in whole or in part, except in a writing signed by the Parties.

 

(b) Notwithstanding any provision of this Lease, or any Laws, to the contrary, or the execution of this Lease by Tenant, this Lease shall not bind or benefit Landlord or Tenant unless and until this Lease is signed and delivered by both Landlord and Tenant.

 

(c) No act or omission of Landlord or Tenant, or their respective employees, agents or contractors, including the delivery or acceptance of keys, shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such surrender shall be valid unless it is in a writing signed by Landlord.

 

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Final

 

(d) The captions in this Lease are for reference only and do not define the scope of this Lease or the intent of any term. All Section references in this Lease shall, unless the context otherwise specifically requires, be deemed references to the Sections of this Lease.

 

(e) If any provision of this Lease, or the application thereof to any person or circumstance, is invalid or unenforceable, then in each such event the remainder of this Lease or the application of such provision to any other person or any other circumstance (other than those as to which it is invalid or unenforceable) shall not be affected, and each provision hereof shall remain valid and enforceable to the fullest extent permitted by all applicable Laws.

 

(f) There shall be no presumption against Landlord because Landlord drafted this Lease or for any other reason.

 

(g) Wherever appropriate in this Lease, personal pronouns shall be considered to include the other gender and the singular to include the plural.

 

(h) Each party agrees to keep the terms of this Lease confidential and shall not disclose same to any other person not a party hereto without the prior written consent of the other, provided that either party may disclose the terms hereof to such accountants, attorneys, managing employees and others in privity with any such party to the extent reasonably necessary for either party’s business purposes.

 

(i) This Lease shall be governed by, and construed in accordance with, the laws of the State of California.

 

(j) The parties agree to record a memorandum of lease as soon as reasonably practical after the Effective Date.

 

Section 13.02      Waiver of Jury Trial. EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE NOTES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALLENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

 

[Signature Page Follows]

 

11

 

 

Final

 

In witness whereof, Landlord and Tenant have executed this Lease as of the Effective Date.

 

  3243 Sacramento LLC,  
     
  a California Limited Liability Company  
     
  By: /s/ Brian McMahon  
     
  Name: Brian McMahon  
     
  Its: Manager  
     
  iCANN, LLC,  
     
  a California Limited Liability Company  
     
  By /s/ Frances Sue Taylor  
     
  Name: Frances Sue Taylor (May 24, 2017)  
     
  Its: Manager  

 

Exhibit List

Exhibit A              Description of Landlord Work

 

Signature Page to Retail Lease

3243 Sacramento Street

Berkeley

 

 

 

Exhibit 99.78

 

 

STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET

(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)

 

1. Basic Provisions (“Basic Provisions”).

 

1.1            Parties. This Lease (“Lease”), dated for reference purposes only 10/1/18, is made by and between Neo Street Partners LLC and Lompoc TIC, LLC (“Lessor”) and CA Manufacturing Solutions LLC (“Lessee”), (collectively the “Parties,” or individually a “Party”).

 

1.2            Premises: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known as (street address, city, state, zip): 1637 and 1635 West Central Avenue Lompoc, CA 93436 (“Premises”). The Premises are located in the County of Santa Barbara, and are generally described as (describe briefly the nature of the property and, if applicable, the “Project,” if the property is located within a Project):                      . (See also Paragraph 2)

 

1.3            Term: Five (5) years and 0 months (“Original Term”) commencing 10/1/18 (“Commencement Date”) and ending 9/30/23 (“Expiration Date”). (See also Paragraph 3)

 

1.4            Early Possession: If the Premises are available Lessee may have non-exclusive possession of the Premises commencing                    (“Early Possession Date”). (See also Paragraphs 3.2 and 3.3)

 

1.5            Base Rent: $23,418.02 per month (“Base Rent”), payable on the 30th day of each month commencing 9–30–18. (See also Paragraph 4)

 

x If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. See Paragraph 53.

 

1.6            Base Rent and Other Monies Paid Upon Execution:

 

(a) Base Rent: $23,333.00 for the period 10/1/2023 - 10/31/2023.

 

(b) Security Deposit: $23,333.00 (“Security Deposit”). (See also Paragraph 5)

 

(c) Association Fees: TBD for the period                   .

 

(d) Other: $4,715.00 for CAM- October 2018.

 

(e) Total Due Upon Execution of this Lease: $56,580.00.

 

1.7            Agreed Use:                  . (See also Paragraph 6)

 

1.8            Insuring Party. Lessor is the “Insuring Party” unless otherwise stated herein. (See also Paragraph 8)

 

1.9            Real Estate Brokers. (See also Paragraph 15 and 25)

 

a) Representation: The following real estate brokers (the Brokers”) and brokerage relationships exist in this transaction (check applicable boxes):

 

¨ _______ represents Lesser exclusively (“Lesser’s Broker”);

 

¨ _______ represents Lessee exclusively (“Lessee’s Broker”); or

 

¨ _______ represents both Lesser and Lessee (“Dual Agency”).

 

(b) Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay tothe Brokers the brokerage fee agreed to in a separate written agreement (or if there is no such agreement, the sum of                  or                  % of the total Base Rent) for the brokerage services rendered by the Brokers.

 

1.10          Guarantor. The obligations of the Lessee under this Lease are to be guaranteed by N/A (“Guarantor”). (See also Paragraph 37)

 

1.11          Attachments. Attached hereto are the following, all of which constitute a part of this Lease:

 

x an Addendum consisting of Paragraphs 51 through 59 and Exhibit A thereto ;

 

¨ a plot plan depicting the Premises;

 

¨ a current set of the Rules and Regulations;

 

¨ a Work Letter;

 

¨ other (specify):_________.

 

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2. Premises.

 

2.1            Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. While the approximate square footage of the Premises may have been used in the marketing of the Premises for purposes of comparison, the Base Rent stated herein is NOT tied to square footage and is not subject to adjustment should the actual size be determined to be different. NOTE: Lessee is advised to verify the actual size prior to executing this Lease.

 

2.2            Condition. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Data or the Early Possession Date, whichever first occurs (“Start Date”), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems (“HVAC”), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date, that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the “Building”) shall be free of material defects, and that the Premises do not contain hazardous levels of any mold or fungi defined as toxic under applicable state or federal law. If a non-compliance with said warranty exists as of the Start Date, or if one of such systems or elements should malfunction or fail within the appropriate warranty period, Lessor shall, as Lessor’s sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, rectify same at Lessor’s expense. The warranty periods shall be as follows: (i) 6 months as to the HVAC systems, and (ii) 30 days as to the remaining systems and other elements of the Building. If Lessee does not give Lessor the required notice within the appropriate warranty period, correction of any such non-compliance, malfunction or failure shall be the obligation of Lessee at Lessee’s sole cost and expense. Lessor also warrants, that unless otherwise specified in writing, Lessor is unaware of (i) any recorded Notices of Default affecting the Premise; (ii) any delinquent amounts due under any loan secured by the Premises; and (iii) any bankruptcy proceeding affecting the Premises, in current “as-is” condition (see addendum paragraph 51).

 

2.3            Compliance. Lessor warrants that to the best of its knowledge the improvements on the Premises comply with the building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances (“Applicable Requirements”) that were in effect at the time that each improvement, or portion thereof, was constructed. Said warranty does not apply to the use to which Lessee will put the Premises, modifications which may be required by the Americans with Disabilities Act or any similar laws as a result of Lessee’s use (see Paragraph 49), or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE; Lessee is responsible for determining whether or not the Applicable Requirements, and especially the zoning, are appropriate for Lessee’s intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor’s expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within 6 months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee’s sole cost and expense. If the Applicable Requirements are hereafter changed so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Unit, Premises and/or Building (“Capital Expenditure”), Lessor and Lessee shall allocate the cost of such work as follows:

 

(a)            Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however, that if such Capital Expenditure is required during the last 2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within 10 days after receipt of Lessee’s termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to 6 months’ Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least 90 days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.

 

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(b)            If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor shall pay for such Capital Expenditure and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease or any extension thereof, on the date that on which the Base Rent is due, an amount equal to 1/144th of the portion of such costs reasonably attributable to the Premises. Lessee shall pay Interest on the balance but may prepay its obligation at any time. If, however, such Capital Expenditure is required during the last 2 years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon 90 days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within 10 days after receipt of Lessor’s termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor’s share of such costs have been fully paid. If Lessee is unable to finance Lessor’s share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon 30 days written notice to Lessor.

 

(c)            Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non .voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall either: (i) immediately cease such changed use or intensity of use and/or take such other steps as may be necessary to eliminate the requirement for such Capital Expenditure, or (ii) complete such Capital Expenditure at its own expense. Lessee shall not, however, have any right to terminate this Lease.

 

2.4            Acknowledgements. Lessee acknowledges that: (a) it has been given an opportunity to inspect and measure the Premises, (b) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the size and condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and the Americans with Disabilities Act), and their suitability for Lessee’s intended use, (c) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, (d) it is not relying on any representation as to the size of the Premises made by Brokers or Lessor, (e) the square footage of the Premises was not material to Lessee’s decision to lease the Premises and pay the Rent stated herein, and (f) neither Lessor, Lessor’s agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Lessee’s ability to honor the Lease or suitability to occupy the Premises, and (ii) it is Lessor’s sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.

 

2.5            Lessee as Prior Owner/Occupant. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.

 

3. Term.

 

3.1            Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.

 

3.2            Early Possession. Any provision herein granting Lessee Early Possession of the Premises is subject to and conditioned upon the Premises being available for such possession prior to the Commencement Date. Any grant of Early Possession only conveys a non-exclusive right to occupy the Premises. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such Early Possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such Early Possession shall not affect the Expiration Date.

 

3.3            Delay in Possession. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession by such date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or change the Expiration Date. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises and any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by the acts or omissions of Lessee. If possession is not delivered within 60 days after the Commencement Date, as the same may be extended under the terms of any Work Letter executed by Parties, Lessee may, at its option, by notice in writing within 10 days after the end of such 60 day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said 10 day period, Lessee’s right to cancel shall terminate. If possession of the Premises is not delivered within 120 days after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.

 

3.4            Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

 

4. Rent.

 

4.1            Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent (“Rent”).

 

4.2            Payment. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. All monetary amounts shall be rounded to the nearest whole dollar. In the event that any invoice prepared by Lessor is inaccurate such inaccuracy shall not constitute a waiver and Lessee shall be obligated to pay the amount set forth in this Lease. Rent for any period during the term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Rent, regardless of Lessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment given by Lessee to Lessor is dishonored for any reason, Lessee agrees to pay to Lessor the sum of $25 in addition to any Late Charge and Lessor, at its option, may require all future Rent be paid by cashier’s check. Payments will be applied first to accrued late charges and attorney’s fees, second to accrued interest, then to Base Rent, Insurance and Real Property Taxes, and any remaining amount to any other outstanding charges or costs.

 

4.3            Association Fees. In addition to the Base Rent, Lessee shall pay to Lessor each month an amount equal to any owner’s association or condominium fees levied or assessed against the Premises. Said monies shall be paid at the same time and in the same manner as the Base Rent.

 

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5.    Security Deposit. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee’s faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount already due Lessor, for Rents which will be due in the future, and/ or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within 10 days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor’s reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor’s reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within 90 days after the expiration or termination of this Lease, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. Lessor shall upon written request provide Lessee with an accounting showing how that portion of the Security Deposit that was not returned was applied. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease. THE SECURITY DEPOSIT SHALL NOT BE USED BY LESSEE IN LIEU OF PAYMENT OF THE LAST MONTH’S RENT.

 

6. Use.

 

6.1            Use. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of or causes damage to neighboring premises or properties. Other than guide, signal and seeing eye dogs, Lessee shall not keep or allow in the Premises any pets, animals, birds, fish, or reptiles. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the premises or the mechanical or electrical systems therein, and/or is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within 7 days after such request give written notification of same, which notice shall include an explanation of Lessor’s objections to the change in the Agreed Use (See Addendum Section 52)

 

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6.2            Hazardous Substances.

 

(a)            Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, ordinary office supplies (copier toner, liquid paper, glue, etc.) and common household cleaning materials, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

 

(b)            Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

 

(c)            Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s expense, comply with all Applicable Requirements and take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, fort the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.

 

(d)            Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties not caused or contributed to by Lessee). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.

 

(e)            Lessor Indemnification. Except as otherwise provided in paragraph 8.7, Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which result from Hazardous Substances which existed on the Premises prior to Lessee’s occupancy or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor’s obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.

 

(f)            Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to Lessee’s occupancy, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities.

 

(g)            Lessor Termination Option. If a Hazardous Substance Condition (see Paragraph 9.1(e)) occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor’s rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’s option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds 12 times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within 30 days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor’s desire to terminate this Lease as of the date 60 days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within 10 days thereafter, give written notice to Lessor of Lessee’s commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to 12 times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor’s notice of termination.

 

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6.3            Lessee’s Compliance with Applicable Requirements. Except as otherwise provided in this Lease, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the Premises, without regard to whether said Applicable Requirements are now in effect or become effective after the Start Date. Lessee shall, within 10 days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Likewise, Lessee shall immediately give written notice to Lessor of: (i) any water damage to the Premises and any suspected seepage, pooling, dampness or other condition conducive to the production of mold; or (ii) any mustiness or other odors that might indicate the presence of mold in the Premises. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of a written request therefor. In addition, Lessee shall provide Lessor with copies of its business license, certificate of occupancy and/or any similar document within 10 days of the receipt of a written request therefor.

 

6.4            Inspection; Compliance. Lessor and Lessor’s “Lender” (as defined in Paragraph 30) and consultants authorized by Lessor shall have the right to enter into Premises at anytime, in the case of an emergency, and otherwise at reasonable times after reasonable notice, for the purpose of inspecting and/or testing the condition of the Premises and/or for verifying compliance by Lessee with this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a Hazardous Substance Condition (see paragraph 9.1) is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspection, so long as such inspection is reasonably related to the violation or contamination. In addition, Lessee shall provide copies of all relevant material safety data sheets (MSDS) to Lessor within 10 days of the receipt of a written request therefor. Lessee acknowledges that any failure on its part to allow such inspections or testing will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to allow such inspections and/or testing in a timely fashion the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for the remainder to the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to allow such inspection and/or testing. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such failure nor prevent the exercise of any of the other rights and remedies granted hereunder.

 

7. Maintenance; Repairs; Utility Installations; Trade Fixtures and Alterations.

 

7.1            Lessee’s Obligations.

 

(a)            In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance with Applicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense, keep the Premises, Utility Installations (intended for Lessee’s exclusive use, no matter where located), and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee’s use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, HVAC equipment, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, roof drainage systems, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition (including, e.g. graffiti’ removal) consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.

 

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(b)            Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, and (vi) clarifiers. However, Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and Lessee shall reimburse Lessor, upon demand, for the cost thereof.

 

(c)            Failure to Perform. If Lessee fails to perform Lessee’s obligations under this Paragraph 7.1, Lessor may enter upon the Premises after 10 days’ prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf, and put the Premises in good order, condition and repair, and Lessee shall promptly pay to Lessor a sum equal to 115% of the cost thereof.

 

(d)            Replacement. Subject to Lessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee’s failure to exercise and perform good maintenance practices, if an item described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such item, then such item shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is 144 (ie. 1/144th of the cost per month). Lessee shall pay Interest on the unamortized balance but may prepay its obligation at any time.

 

7.2            Lessor’s Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises.

 

7.3            Utility Installations; Trade Fixtures; Alterations.

 

(a)            Definitions. The term “Utility Installations” refers to all floor and window coverings, air and/or vacuum lines, power panels, electrical distribution, security and fire protection systems, communication cabling, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).

 

(b)            Consent. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent. Lessee may, however, make non-structural Alterations or Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, will not affect the electrical, plumbing, HVAC, and/or life safety systems, do not trigger the requirement for additional modifications and/or improvements to the Premises resulting from Applicable Requirements, such as compliance with Title 24, and the cumulative cost thereof during this Lease as extended does not exceed a sum equal to 3 month’s Base Rent in the aggregate or a sum equal to one month’s Base Rent in any one year. Notwithstanding the foregoing, Lessee shall not make or permit any roof penetrations and/or install anything on the roof without the prior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lessee to utilize a contractor chosen and/or approved by Lessor. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount in excess of one month’s Base Rent, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to 150% of the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting an additional Security Deposit with Lessor.

 

(c)            Liens; Bonds. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than 10 days notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to 150% of the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor’s attorneys’ fees and costs.

 

7.4            Ownership; Removal; Surrender; and Restoration.

 

(a)            Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

 

(b)            Removal. By delivery to Lessee of written notice from Lessor not earlier than 90 and not later than 30 days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.

 

(c)            Surrender; Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Notwithstanding the foregoing, if the Lessee occupies the Premises for 12 months or less, then Lessee shall surrender the Premises in the same condition as delivered to Lessee on the Start Date with NO allowance for ordinary wear and tear. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee. Lessee shall also remove from the Premises any and all Hazardous Substances brought onto the Premises by or for Lessee, or any third party (except Hazardous Substances which were deposited via underground migration from areas outside of the Premises) to the level specified in Applicable Requirements. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. Any personal property of Lessee not removed on or before the Expiration Date or any earlier termination date shall be deemed to have been abandoned by Lessee and may be disposed of or retained by Lessor as Lessor may desire. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.

 

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8. Insurance; Indemnity.

 

8.1            Payment For Insurance. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within 10 days following receipt of an invoice.

 

8.2            Liability Insurance.

 

(a)            Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability policy of insurance protecting Lessee and Lessor as an additional insured against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an annual aggregate of not less than $2,000,000. Lessee shall add Lessor as an additional insured by means of an endorsement at least as broad as the Insurance Service Organization’s “Additional Insured-Managers or Lessors of Premises” Endorsement. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Lessee’s indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. Lessee shall provide an endorsement on its liability policy(ies) which provides that its insurance shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.

 

(b)            Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.

 

8.3            Property Insurance - Building, Improvements and Rental Value.

 

(a)            Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any ground-lessor, and to any Lender insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full insurable replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lender, but in no event more than the commercially reasonable and available insurable value thereof. Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee’s personal property shall be insured by Lessee not by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $5,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.

 

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(b)            Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one year with an extended period of indemnity for an additional 180 days (“Rental Value insurance”). Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next 12 month period. Lessee shall be liable for any deductible amount in the event of such loss.

 

(c)            Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

 

8.4            Lessee’s Property; Business Interruption Insurance; Worker’s Compensation Insurance.

 

(a)            Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations.

 

(b)            Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.

 

(c)            Worker’s Compensation Insurance. Lessee shall obtain and maintain Worker’s Compensation Insurance in such amount as may be required by Applicable Requirements. Such policy shall include a ‘Waiver of Subrogation’ endorsement. Lessee shall provide Lessor with a copy of such endorsement along with the certificate of insurance or copy of the policy required by paragraph 8.5.

 

(d)            No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee’s property, business operations or obligations under this Lease.

 

8.5            Insurance Policies. Insurance required herein shall be by companies maintaining during the policy term a “General Policyholders Rating” of at least A-, VII, as set forth in the most current issue of “Best’s Insurance Guide”, or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates with copies of the required endorsements evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to modification except after 30 days prior written notice to Lessor. Lessee shall, at least 10 days prior to the expiration of such policies, furnish Lessor with evidence of renewals or “insurance binders” evidencing renewal thereof, or Lessor may increase his liability insurance coverage and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.

 

8.6            Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.

 

8.7            Indemnity. Except for Lessor’s gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, a Breach of the Lease by Lessee and/or the use and/or occupancy of the Premises and/or Project by Lessee and/or by Lessee’s employees, contractors or invitees. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.

 

8.8            Exemption of Lessor and its Agents from Liability. Notwithstanding the negligence or breach of this Lease by Lessor or its agents, neither Lessor nor its agents shall be liable under any circumstances for: (i) injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, indoor air quality, the presence of mold or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, (ii) any damages arising from any act or neglect of any other tenant of Lessor or from the failure of Lessor or its agents to enforce the provisions of any other lease in the Project, or (iii) injury to Lessee’s business or for any loss of income or profit therefrom. Instead, it is intended that Lessee’s sole recourse in the event of such damages or injury be to file a claim on the insurance policy(ies) that Lessee is required to maintain pursuant to the provisions of paragraph 8.

 

8.9            Failure to Provide Insurance. Lessee acknowledges that any failure on its part to obtain or maintain the insurance required herein will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, for any month or portion thereof that Lessee does not maintain the required insurance and/or does not provide Lessor with the required binders or certificates evidencing the existence of the required insurance, the Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater. The parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to maintain the required insurance. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to maintain such insurance, prevent the exercise of any of the other rights and remedies granted hereunder, nor relieve Lessee of its obligation to maintain the insurance specified in this Lease.

 

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9. Damage or Destruction.

 

9.1            Definitions.

 

(a)            “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

(b)            “Premises Total Destruction” shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in 6 months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within 30 days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

 

(c)            “Insured Loss” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.

 

(d)            “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

 

(e)            “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance, in, on, or under the Premises which requires restoration.

 

9.2            Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect; provided, however, that Lessee shall, at Lessor’s election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee’s responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within 10 days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said 10 day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless elect by written notice to Lessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect, or (ii) have this Lease terminate 30 days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.

 

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9.3            Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within 10 days after receipt of the termination notice to give written notice to Lessor of Lessee’s commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within 30 days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.

 

9.4            Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, except as provided in Paragraph 8.6.

 

9.5            Damage Near End of Term. If at any time during the last 6 months of this Lease there is damage for which the cost to repair exceeds one month’s Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective 60 days following the date of occurrence of such damage by giving a written termination notice to Lessee within 30 days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is 10 days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

 

9.6            Abatement of Rent; Lessee’s Remedies.

 

(a)            Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

 

(b)            Remedies. If Lessor is obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within 90 days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than 60 days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within 30 days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within such 30 days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

 

9.7            Termination; Advance Payments. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee’s Security Deposit as has not been, or is not then required to be, used by Lessor.

 

10. Real Property Taxes.

 

10.1          Definition. As used herein, the term “Real Property Taxes” shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises or the Project, Lessor’s right to other income therefrom, and/or Lessor’s business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the Building address. Real Property Taxes shall also include any tax, fee, levy, assessment or charge, or any increase therein: (i) imposed by reason of events occurring during the term of this Lease, including but not limited to, a change in the ownership of the Premises, and (ii) levied or assessed on machinery or equipment provided by Lessor to Lessee pursuant to this Lease.

 

10.2          Payment of Taxes. In addition to Base Rent, Lessee shall pay to Lessor an amount equal to the Real Property Tax installment due at least 20 days prior to the applicable delinquency date. If any such installment shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee’s share of such installment shall be prorated. In the event Lessee incurs a late charge on any Rent payment, Lessor may estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee monthly in advance with the payment of the Base Rent. Such monthly payments shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sum as is necessary. Advance payments may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of its obligations under this Lease, then any such advance payments may be treated by Lessor as an additional Security Deposit.

 

10.3          Joint Assessment. If the Premises are not separately assessed, Lessee’s liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor’s work sheets or such other information as may be reasonably available.

 

10.4          Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause its Lessee Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10 days after receipt of a written statement setting forth the taxes applicable to Lessee’s property.

 

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11.  Utilities and Services. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered or billed to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered or billed. There shall be no abatement of rent and Lessor shall not be liable in any respect whatsoever for the inadequacy, stoppage, interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair or other cause beyond Lessor’s reasonable control or in cooperation with governmental request or directions.

 

12. Assignment and Subletting.

 

12.1          Lessor’s Consent Required.

 

(a)            Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent.

 

(b)            Unless Lessee is a corporation and its stock is publicly traded on a national stock exchange, a change in the control of Lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of 25% or more of the voting control of Lessee shall constitute a change in control for this purpose.

 

(c)            The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee’s assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than 25% of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this Lease to which Lessor may withhold its consent. “Net Worth of Lessee” shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.

 

(d)            An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice per Paragraph 13.1(d), or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30 days written notice, increase the monthly Base Rent to 110% of the Base Rent then in effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to 110% of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to 110% of the scheduled adjusted rent.

 

(e)            Lessee’s remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.

 

(f)            Lessor may reasonably withhold consent to a proposed assignment or subletting if Lessee is in Default at the time consent is requested.

 

(g)            Notwithstanding the foregoing, allowing a de minimis portion of the Premises, ie.20 square feet or less, to be used by a third party vendor in connection with the installation of a vending machine or payphone shall not constitute a subletting.

 

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12.2          Terms and Conditions Applicable to Assignment and Subletting.

 

(a)            Regardless of Lessor’s consent, no assignment or subletting shall: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

 

(b)            Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

 

(c)            Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

 

(d)            In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

 

(e)            Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $500 as consideration for Lessor’s considering and processing said request. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested. (See also Paragraph 36)

 

(f)            Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment, entering into such sublease, or entering into possession of the Premises or any portion thereof, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

 

(g)            Lessor’s consent to any assignment or subletting shall not transfer to the assignee or sublessee any Option granted to the original Lessee by this Lease unless such transfer is specifically consented to by Lessor in writing. (See Paragraph 39.2)

 

12.3          Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

 

(a)            Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. In the event that the amount collected by Lessor exceeds Lessee’s then outstanding obligations any such excess shall be refunded to Lessee. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

 

(b)            In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

 

(c)            Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

 

(d)            No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

 

(e)            Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.

 

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13. Default; Breach; Remedies.

 

13.1          Default; Breach. A Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or Rules and Regulations under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

 

(a)            The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.

 

(b)            The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of 3 business days following written notice to Lessee. THE ACCEPTANCE BY LESSOR OF A PARTIAL PAYMENT OF RENT OR SECURITY DEPOSIT SHALL NOT CONSTITUTE A WAIVER OF ANY OF LESSOR’S RIGHTS, INCLUDING LESSOR’S RIGHT TO RECOVER POSSESSION OF THE PREMISES.

 

(c)            The failure of Lessee to allow Lessor and/or its agents access to the Premises or the commission of waste, act or acts constituting public or private nuisance, and/or an illegal activity on the Premises by Lessee, where such actions continue for a period of 3 business days following written notice to Lessee. In the event that Lessee commits waste, a nuisance or an illegal activity a second time then, the Lessor may elect to treat such conduct as a non-curable Breach rather than a Default.

 

(d)            The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) an Estoppel Certificate or financial statements, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42, (viii) material safety data sheets (MSDS), or (ix) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of 10 days following written notice to Lessee.

 

(e)            A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b), (c) or (d), above, where such Default continues for a period of 30 days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said 30 day period and thereafter diligently prosecutes such cure to completion.

 

(f)            The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within 60 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within 30 days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within 30 days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

 

(g)            The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.

 

(h)            If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within 60 days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

 

13.2          Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within 10 days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. Lessee shall pay to Lessor an amount equal to 115% of the costs and expenses incurred by Lessor in such performance upon receipt of an invoice therefor. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

 

(a)            Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover any damages to which Lessor is otherwise entitled. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

 

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(b)            Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

 

(c)            Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

 

13.3          Inducement Recapture. Any agreement for free or abated rent or other charges, the cost of tenant improvements for Lessee paid for or performed by Lessor, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

 

13.4          Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within 5 days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall immediately pay to Lessor a one-time late charge equal to 10% of each such overdue amount or $100, whichever is greater. The Parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for 3 consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance.

 

13.5          Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due shall bear interest from the 31st day after it was due. The interest (“Interest”) charged shall be computed at the rate of 10% per annum but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.

 

13.6          Breach by Lessor.

 

(a)            Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than 30 days after receipt by Lessor, and any Lender whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than 30 days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such 30 day period and thereafter diligently pursued to completion.

 

(b)            Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within 30 days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee’s expense and offset from Rent the actual and reasonable cost to perform such cure, provided, however, that such offset shall not exceed an amount equal to the greater of one month’s Base Rent or the Security Deposit, reserving Lessee’s right to seek reimbursement from Lessor for any such expense in excess of such offset. Lessee shall document the cost of said cure and supply said documentation to Lessor.

 

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14.   Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than 10% of the Building, or more than 25% of that portion of the Premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within 10 days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within 10 days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation paid by the condemnor for Lessee’s relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.

 

15. Brokerage Fees,

 

15.1          Additional Commission. In addition to the payments owed pursuant to Paragraph 1.9 above, Lessor agrees that; (a) if Lessee exercises any Option, (b) if Lessee or anyone affiliated with Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, Lessor shall pay Brokers a fee in accordance with the fee schedule of the Brokers in effect at the time the Lease was executed.

 

15.2          Assumption of Obligations. Any buyer or transferee of Lessor’s interest in this Lease shall be deemed to have assumed Lessor’s obligation hereunder. Brokers shall be third party beneficiaries of the provisions of Paragraphs 1.9,15, 22 and 31. If Lessor fails to pay to Brokers any amounts due as and for brokerage fees pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee’s Broker when due, Lessee’s Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within 10 days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee’s Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor’s Broker for the limited purpose of collecting any brokerage fee owed.

 

15.3          Representations and Indemnities of Broker Relationships. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Iease, and that no one other than said named brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

 

16. Estoppel Certificates.

 

(a)            Each Party (as “Responding Party”) shall within 10 days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current “Estoppel Certificate” form published BY AIR CRE, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.

 

(b)            If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such 10 day period, the Requesting Party may execute an Estoppel Certificate stating that: (i)the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate. In addition, Lessee acknowledges that any failure on its part to provide such an Estoppel Certificate will expose Lessor to risks and potentially cause Lessor to incur costs not contemplated by this Lease, the extent of which will be extremely difficult to ascertain. Accordingly, should the Lessee fail to execute and/or deliver a requested Estoppel Certificate in a timely fashion the monthly Base Rent shall be automatically increased, without any requirement for notice to Lessee, by an amount equal to 10% of the then existing Base Rent or $100, whichever is greater for remainder of the Lease. The Parties agree that such increase in Base Rent represents fair and reasonable compensation for the additional risk/costs that Lessor will incur by reason of Lessee’s failure to provide the Estoppel Certificate. Such increase in Base Rent shall in no event constitute a waiver of Lessee’s Default or Breach with respect to the failure to provide the Estoppel Certificate nor prevent the exercise of any of the other rights and remedies granted hereunder.

 

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(c)            If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall within 10 days after written notice from Lessor deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past 3 years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

 

17.  Definition of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

 

18.  Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

 

19.  Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

 

20.  Limitation on Liability. The obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, or its partners, members, directors, officers or shareholders, and Lessee shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against Lessor’s partners, members, directors, officers or shareholders, or any of their personal assets for such satisfaction.

 

21.  Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

 

22.  No Prior or Other Agreements; Broker Disclaimer. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the use, nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.

 

23.  Notices.

 

23.1          Notice Requirements. All notices required or permitted by this Lease or applicable law shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, or by email, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

 

23.2         Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given 72 hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given 24 hours after delivery of the same to the Postal Service or courier. Notices delivered by hand, or transmitted by facsimile transmission or by email shall be deemed delivered upon actual receipt. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

 

24. Waivers.

 

(a)            No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent.

 

(b)            The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

 

(c)            THE PARTIES AGREE THAT THE TERMS OF THIS LEASE SHALL GOVERN WITH REGARD TO ALL MATTERS RELATED THERETO AND HEREBY WAIVE THE PROVISIONS OF ANY PRESENT OR FUTURE STATUTE TO THE EXTENT THAT SUCH STATUTE IS INCONSISTENT WITH THIS LEASE.

 

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25. Disclosures Regarding The Nature of a Real Estate Agency Relationship.

 

(a)            When entering into a discussion with a real estate agent regarding a real estate transaction, a Lessor or Lessee should from the outset understand what type of agency relationship or representation it has with the agent or agents in the transaction. Lessor and Lessee acknowledge being advised by the Brokers in this transaction, as follows:

 

(i)            Lessor’s Agent. A Lessor’s agent under a listing agreement with the Lessor acts as the agent for the Lessor only. A Lessor’s agent or subagent has the following affirmative obligations: To the Lessor: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessor. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith. (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

(ii)            Lessee’s Agent. An agent can agree to act as agent for the Lessee only. In these situations, the agent is not the Lessor’s agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Lessor. An agent acting only for a Lessee has the following affirmative obligations. To the Lessee: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Lessee. To the Lessee and the Lessor: (a) Diligent exercise of reasonable skills and care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith, (c) A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above.

 

(iii)            Agent Representing Both Lessor and Lessee. A real estate agent, either acting directly or through one or more associate licenses, can legally be the agent of both the Lessor and the Lessee in a transaction, but only with the knowledge and consent of both the Lessor and the Lessee. In a dual agency situation, the agent has the following affirmative obligations to both the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either Lessor or the Lessee, (b) Other duties to the Lessor and the Lessee as stated above in subparagraphs (i) or (ii). In representing both Lessor and Lessee, the agent may not without the express permission of the respective Party, disclose to the other Party that the Lessor will accept rent in an amount less than that indicated in the listing or that the Lessee is willing to pay a higher rent than that offered. The above duties of the agent in a real estate transaction do not relieve a Lessor or Lessee from the responsibility to protect their own interests. Lessor and Lessee should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.

 

(b)            Brokers have no responsibility with respect to any default or breach hereof by either Party. The Parties agree that no lawsuit or other legal proceeding involving any breach of duty, error or omission relating to this Lease may be brought against Broker more than one year after the Start Date and that the liability (including court costs and attorneys’ fees), of any Broker with respect to any such lawsuit and/or legal proceeding shall not exceed the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker’s liability shall not be applicable to any gross negligence or willful misconduct of such Broker.

 

(c)            Lessor and Lessee agree to identify to Brokers as “Confidential” any communication or information given Brokers that is considered by such Party to be confidential.

 

26.  No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to 150% of the Base Rent applicable immediately preceding the expiration or termination. Holdover Base Rent shall be calculated on monthly basis. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

 

27.  Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

 

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28.  Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the Parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the Parties, but rather according to its fair meaning as a whole, as if both Parties had prepared it.

 

29.  Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.

 

30.  Subordination; Attornment; Non-Disturbance.

 

30.1          Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, “Security Device”), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as “Lender”) shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

 

30.2          Attornment. In the event that Lessor transfers title to the Premises, or the Premises are acquired by another upon the foreclosure or termination of a Security Device to which this Lease is subordinated (i) Lessee shall, subject to the non-disturbance provisions of Paragraph 30.3, attorn to such new owner, and upon request, enter into a new lease, containing all of the terms and provisions of this Lease, with such new owner for the remainder of the term hereof, or, at the election of the new owner, this Lease will automatically become a new lease between Lessee and such new owner, and (ii) Lessor shall thereafter be relieved of any further obligations hereunder and such new owner shall assume all of Lessor’s obligations, except that such new owner shall not: (a) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (b) be subject to any offsets or defenses which Lessee might have against any prior lessor, (c) be bound by prepayment of more than one month’s rent, or (d) be liable for the return of any security deposit paid to any prior lessor which was not paid or credited to such new owner.

 

30.3          Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a “Non-Disturbance Agreement”) from the Lender which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within 60 days after the execution of this Lease, Lessor shall, if requested by Lessee, use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said 60 days, then Lessee may, at Lessee’s option, directly contact Lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.

 

30.4          Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

 

31.  Attorneys’ Fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, “Prevailing Party” shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation).

 

32.  Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times after reasonable prior notice for the purpose of showing the same to prospective purchasers, lenders, or tenants, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary or desirable and the erecting, using and maintaining of utilities, services, pipes and conduits through the Premises and/or other premises as long as there is no material adverse effect on Lessee’s use of the Premises. All such activities shall be without abatement of rent or liability to Lessee.

 

33.  Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

 

34.  Signs. Lessor may place on the Premises ordinary “For Sale” signs at anytime and ordinary “For Lease” signs during the last 6 months of the term hereof. Except for ordinary “for sublease” signs, Lessee shall not place any sign upon the Premises without Lessor’s prior written consent. All signs must comply with all Applicable Requirements.

 

35.  Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within 10 days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

 

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36.  Consents. All requests for consent shall be in writing. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within 10 business days following such request.

 

37.  Guarantor.

 

37.1          Execution. The Guarantors, if any, shall each execute a guaranty in the form most recently published BY AIR CRE, and each such Guarantor shall have the same obligations as Lessee under this Lease.

 

37.2          Default. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor’s behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) an Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.

 

38.  Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

 

39.  Options. If Lessee is granted any Option, as defined below, then the following provisions shall apply.

 

39.1          Definition. “Option” shall mean: (a) the right to extend or reduce the term of or renew this Lease or to extend or reduce the term of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase, the right of first offer to purchase or the right of first refusal to purchase the Premises or other property of Lessor.

 

39.2          Options Personal To Original Lessee. Any Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention oft hereafter assigning or subletting.

 

39.3          Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.

 

39.4          Effect of Default on Options.

 

(a)            Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given 3 or more notices of separate Default, whether or not the Defaults are cured, during the 12 month period immediately preceding the exercise of the Option.

 

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(b)            The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise an Option because of the provisions of Paragraph 39.4(a).

 

(c)            An Option shall terminate and be of no further force or effect, notwithstanding Lessee’s due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term or completion of the purchase, (i) Lessee fails to pay Rent for a period of 30 days after such Rent becomes due (without any necessity of Lessor to give notice thereof), or (ii) if Lessee commits a Breach of this Lease.

 

40.  Multiple Buildings. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by and conform to all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessee also agrees to pay its fair share of common expenses incurred in connection with such rules and regulations.

 

41.  Security Measures. Lessee hereby acknowledges that the Rent payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

 

42.  Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.

 

43.  Performance Under Protest. If at anytime a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay. A Party who does not initiate suit for the recovery of sums paid “under protest” within 6 months shall be deemed to have waived its right to protest such payment.

 

44.  Authority; Multiple Parties; Execution.

 

(a)            If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each Party shall, within 30 days after request, deliver to the other Party satisfactory evidence of such authority.

 

(b)            If this Lease is executed by more than one person or entity as “Lessee”, each such person or entity shall be jointly and severally liable hereunder. It is agreed that any one of the named Lessees shall be empowered to execute any amendment to this Lease, or other document ancillary thereto and bind all of the named Lessees, and Lessor may rely on the same as if all of the named Lessees had executed such document.

 

(c)            This Lease may be executed by the Parties in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument.

 

45.  Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

 

46.  Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

 

47.  Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

 

48.  Waiver of Jury Trial. THE PARTIES HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING THE PROPERTY OR ARISING OUT OF THIS AGREEMENT.

 

49.  Arbitration of Disputes. An Addendum requiring the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease ¨ is ¨ is not attached to this Lease.

 

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50.  Accessibility; Americans with Disabilities Act.

 

(a)            The Premises:

 

x have not undergone an inspection by a Certified Access Specialist (CASp). Note: A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises.

 

¨ have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises met all applicable construction-related accessibility standards pursuant to California Civil Code §55.51 et seq. Lessee acknowledges that it received a copy of the inspection report at least 48 hours prior to executing this Lease and agrees to keep such report confidential.

 

¨ have undergone an inspection by a Certified Access Specialist (CASp) and it was determined that the Premises did not meet all applicable construction-related accessibility standards pursuant to California Civil Code §55.51 et seq. Lessee acknowledges that it received a copy of the inspection report at least 48 hours prior to executing this Lease and agrees to keep such report confidential except as necessary to complete repairs and corrections of violations of construction related accessibility standards.

 

In the event that the Premises have been issued an inspection report by a CASp the Lessor shall provide a copy of the disability access inspection certificate to Lessee within 7 days of the execution of this Lease.

 

(b)            Since compliance with the Americans with Disabilities Act (ADA) and other state and local accessibility statutes are dependent upon Lessee’s specific use of the Premises, Lessor makes no warranty or representation as to whether or not the Premises comply with ADA or any similar legislation. In the event that Lessee’s use of the Premises requires modifications or additions to the Premises in order to be in compliance with ADA or other accessibility statutes, Lessee agrees to make any such necessary modifications and/or additions at Lessee’s expense.

 

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

 

ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY AIR CRE OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:

 

1.            SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

 

2.            RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.

 

WARNING: IF THE PREMISES ARE LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.

 

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The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures.

 

Executed at:     Executed at:    

 

On:     On:    
       
By LESSOR:   By LESSEE:  
Neo Street Partners LLC and Lompoc TIC, LLC CA Manufacturing Solutions LLC
   
By: SEE ATTACHED SIGNATURE PAGES By: SEE ATTACHED SIGNATURE PAGES
   
    Name Printed:    
Name Printed:     Title:      
Title:     Phone:      
Phone:     Fax:      
Fax:     Email:      
Email:        
           
By:     By:    
Name Printed:     Name Printed:    
Title:     Title:      
Phone:     Phone:      
Fax:     Fax:      
Email:     Email:      
             
Address:     Address:      
Federal ID No.:     Federal ID No.:    
         
BROKER   BROKER  
       
Attn:     Attn:    
Title:     Title:    
Address:     Address:    
Phone:     Phone:    
Fax:     Fax:    
Email:     Email:      
Federal ID No.:     Federal ID No.:    
Broker/Agent BRE License #:     Broker/Agent BRE License #:    
                                           

 

AIR CRE. 500 North Brand Blvd, Suite 900, Glendale, CA9 1203, Tel 213-687-8777, Email contracts@aircre.com
NOTICE: No part of these works may be reproduced in any form without permission in writing.

 

________     ________
________   Page 23 of 23   ________
INITIALS   INITIALS

 

 

SIGNATURE PAGE TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE TENANT LEASE-NET

 

LOMPOC TIC LLC,   CA MANUFACTURING SOLUTIONS LLC,
a California limited liability company   a California limited liability company
     
    By:  MG Padaro Fund LLC,
By: /s/ Kyle D. Kazan,   a California limited liability company,
  Kyle D. Kazan,   Managing Member
  Authorized Signatory      
    By: /s/ Kyle D. Kazan
      Kyle D. Kazan
      Authorized Signatory
     
Address for Notices:   Address for Notices:
3711 Long Beach Boulevard, Suite 814   3711 Long Beach Boulevard, Suite 814
Long Beach, California 90807   Long Beach, California 90807
     
NEO STREET PARTNERS, LLC,    
a California limited liability company    
       
By: /s/ Kyle D. Kazan    
  Kyle D. Kazan    
  Its: Authorized Signatory    
     
Address for Notices:    
3711 Long Beach Boulevard, Suite 814    
Long Beach, California 90807    
         

 

 

ADDENDUM TO LEASE

 

The following Addendum to Lease will amend and supplement the provisions of that certain Standard Industrial/Commercial Single Tenant Lease-Net (the “Lease Form”) by and between NEO STREET PARTNERS, LLC, a California limited liability company and LOMPOC TIC LLC, a California limited liability company, tenants in common (collectively, “Lessor”) and CA MANUFACTURING SOLUTIONS LLC, a California limited liability company (“Lessee”), dated October 1, 2018 (the “Lease Date”) and covering certain premises located at 1637 and 1635 West Central Avenue, Lompoc, California 93436. Capitalized terms have the meaning ascribed in the Lease Form unless otherwise defined herein.

 

FOR GOOD AND VALUABLE CONSIDERATION, Lessor and Lessee agree that the Lease shall be amended and supplemented with additional provisions as follows:

 

51.          Condition of Premises. The following is added after Section 2.2 of the Lease form.

 

As used herein “Applicable Requirements” means building codes and ordinances, covenants conditions and restrictions of record and all other applicable laws (subject to Section 58 hereof). Lessor makes no representation or warranty as to the size or condition of the Premises and any building systems located on the Premises, the suitability of the Premises and the electrical water and other facilities serving the Premises for the business of Lessee, the ability of Lessee to obtain any approvals required for the operation of its business on the Premises, compliance of the Premises with Applicable Requirements, or any other matter related to the Premises, all of which shall have been investigated by Lessee prior to executing this Lease.

 

52.          Agreed Use. Section 6.1 of the Lease Form is hereby deleted in its entirety and is replaced with the following:

 

Section 6.1. Use. Lessee may use the Premises for the purposes of operating a cannabis manufacturing and/or processing facility and any ancillary storage or other use reasonably ancillary to such use (but not including human habitation), and for no other purposes, provided Lessee has obtained, or will, prior to commencing any such use obtain all approvals required under Applicable Requirements, as they may be amended from time to time including any approvals required by the local governmental authorities, including, without limitation, conditional use permits or other municipal approvals, including, without limitation, any Conditional Use Permit applicable to the Premises. It is acknowledged by Lessor and Lessee that the permitted use hereunder includes the storage, and processing of Cannabis (as defined in Section 58). Lessee shall not knowingly use or occupy or permit any of the Premises to be used or occupied, nor knowingly do or permit anything to be done in or on any of the Premises, in a manner which would (i) make void or voidable or cause any insurer to cancel any insurance required by this Lease, or make it difficult or impossible to obtain any such insurance at commercially reasonable rates, to the extent that such insurance is available at commercially reasonable rates considering the Permitted Use of the Premises, (iii) constitute a public or private nuisance or waste, or (iv) violate any Applicable Requirements (as defined below) subject, however, to Section 58 hereof.

 

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53.          Base Rent and Operating Rent. The Base Rent shall be determined and adjusted in accordance with the following:

 

(a)            Section 1.5 of the Lease form is hereby deleted and replaced with the following:

 

Section 1.5. Base Rent. Base Rent shall initially be $23,333.00 per month (as adjusted pursuant to the terms hereof, “Base Rent”). Base Rent shall be paid monthly on the first day of each month during the Term during each year. One month of Base Rent shall be payable concurrently with the execution of this Lease, to be credited against the Rent for the first month hereof. Lessee shall pay Basic Rent and all other sums payable to Lessor under this Lease to Lessor by wire transfer, in immediately available funds to an account to be designated by Lessor from time to time or at such other address or to such other person as Lessor from time to time may designate. Any rental payment made in respect of a period which is less than one month shall be prorated by multiplying the then applicable monthly Basic Rent by a fraction the numerator of which is the number of days in such month with respect to which rent is being paid and the denominator of which is the total number of days in such month. Lessee shall perform all of its obligations under this Lease at its sole cost and expense, and shall pay all Basic Rent, and other sums payable hereunder when due and payable, without notice or demand.

 

(b)           Base Rent hereunder shall be adjusted during the term hereof in accordance with the following:

 

Chart of Base Rent  
  Monthly Rent/Rentable      
Period   Square Foot     Monthly Basic Rent  
October 1, 2018- September 30, 2019   $ 1.07     $ 23,333.00  
                 
October 1, 2019- September 30, 2020   $ 1.22     $ 26,667.00  
                 
October 1, 2020- September 30, 2021   $ 1.22     $ 26,667.00  
                 
October 1, 2021- September 30, 2022   $ 1.22     $ 26,667.00  
                 
October 1, 2022- September 30, 2023   $ 1.22     $ 26,667.00  

 

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(c)            In addition to payment of Base Rent, Lessee will pay “Operating Rent” as follows: In Lease Years 3, 4 and 5, a sum equal to one and two percent (2.0%) of Gross Revenue earned in each such Lease Year (the “Revenue Percentage”). Operating Rent shall be calculated and paid on a quarterly basis and shall be payable in arrears each January 1, April 1, July 1 and October 1 of each Lease Year (each a “Payment Date”), with the first payment to be made January 1, 2022 covering the period from October 1, 2021 to December 31, 2021.

 

(i)            Definition of Gross Revenue. “Gross Revenue” means the revenue received by Lessee from Lessee’s operations at the Premises (or the operations of any sublessee occupying the entire Premises for all or substantially all of the remaining term), including, without limitation goods or services sold in or from the Premises by Lessee, whether for cash or for credit, excluding, however, the following: (A) the sales price of all goods returned and accepted for full credit or the amount of the cash refund or allowance made thereon; (B) the sums and credits received in settlement of claims for loss or damage to goods stored at the Premises; (C) sales taxes, cannabis related taxes excise taxes, gross receipt taxes, and other taxes now or hereafter imposed upon the sale or value of goods or services, whether added separately to the selling price of the merchandise or services and collected from customers or included in the retail selling price; (D) Lessee’s accounts receivable, not to exceed two percent (2%) of Gross Revenue, which have been determined to be uncollectible for federal income tax purposes during the Lease Year, provided, however, that if such accounts are actually collected in a later Lease Year, the amount shall be included in the Gross Revenue for such later Lease Year; or (E) rents, subrents or other consideration received in connection with an assignment, sublease, license, concession or other transfer of any portion of the Premises. For avoidance of doubt, Gross Revenue shall in no event include the value of goods or services sold by any sublessee of the Premises, who is not affiliated with Lessee unless the sublease is of the entire Premises, and in the case of affiliates, such Gross Revenue will not be included unless such sublease is entered into in bad faith to avoid or reduce payment of Operating Rent hereunder.

 

(ii)            Gross Revenue Statement. On each Payment Date during the Term of the Lease for which a payment of Operating Rent is required to be made, Lessee shall submit to Lessor a statement indicating the amount of its Gross Revenue for the calendar quarter (a “Quarterly Statement”). If any Operating Rent is due for such period, Lessee shall accompany such Quarterly Statement with a payment of the Operating Rent due. In addition, within thirty (30) days after the end of each calendar year, Lessee shall submit to Lessor an income statement of Lessee, prepared in accordance with generally accepted accounting principles consistently applied, which shall be accompanied by a statement of annual Gross Revenue (collectively, the “Annual Statement”). Each Annual Statement and Quarterly Statement shall be certified as correct by the Chief Financial Officer or a Vice President of Lessee.

 

(iii)            Maintenance of Records. Lessee shall maintain adequate records for a period of at least three (3) years after the close of each Lease Year for the purpose of allowing Lessor to verify the reported Gross Revenue. Lessor or its agents may, upon at least five (5) business days’ advance written notice, audit such records at Lessee’s main office during normal business hours. If such inspection or audit or Annual Statement discloses an underpayment of Operating Rent, Lessee shall pay to Lessor within thirty (30) days after receipt of written notice thereof (together with a copy of the audit report, if such underpayment arises from the results of an audit) the amount of the underpayment. In the event the required adjustment arises from an understatement of Gross Revenue in excess of three percent (3%), and additional Operating Rent is due, Lessee shall reimburse Lessor for Lessor’s reasonable expenses incurred in conducting such inspection or audit.

 

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(iv)          Operating Covenant. Lessee will at all times during the term of this Lease operate the Premises as a fully stocked and equipped cannabis processing/manufacturing facility, subject only to temporary closure not to exceed thirty (30) days, as required for repairs and any casualty affecting the Premises, and will use reasonable efforts to maximize the amount of Operating Rent payable to Lessor hereunder

 

(v)          Option Period Rent Reduction Notice. At any time, Lessor may provide a notice that Lessor has elected to reduce the Revenue Percentage and Base Rent hereunder, and upon the giving of such notice, the Rent will be reduced as specified therein as of the date specified in such notice (an “Option Period Rent Reduction Notice”). Such Option Period Rent Reduction Notice shall specify one of two contingencies: either (i) that for the purposes of calculating Operating Rent payable hereunder, the Revenue Percentage will be reduced as of the Effective Date specified in such Option Period Rent Reduction Notice to one percent (1%), or (ii) that Base Rent hereunder will be reduced to $6,400.00 per month and that for the purposes of calculating Operating Rent payable hereunder, the Revenue Percentage will be reduced as of the Effective Date specified in such Option Period Rent Reduction Notice to one half of one percent (0.5%). If the Revenue Percentage is revised pursuant the foregoing, calculations will be based on actual income during any relevant quarter attributable to periods before and after the effective date.

 

54.          Compliance with Applicable Requirements. Notwithstanding Sections 2.2 and 6.3 of the Lease form, in the event that Lessee is require to make improvements to the Premises required to comply with Applicable Requirements that are not part of the Tenant Improvements, (“Compliance Improvements”) Lessee will be solely responsible to pay the cost of any Compliance Improvements up to $300,000.00 in the aggregate, provided if the aggregate cost of Compliance Improvements exceeds $300,000.00, the cost of such Compliance Improvements will be shared 50% by Lessor and 50% by Lessee.

 

55.          Association Charges. Lessee will pay, within ten (10) business days after billing by Lessor, all amounts assessed against Owner by the West Central Avenue Association, or any other Owner, under that certain Declaration of Covenants, Conditions and Restrictions recorded October 13, 2004 as Instrument No. 2004-109112, of the Official of Santa Barbara County (the “Declaration”), or assessed under any successor or supplementary Declaration.

 

56.          Tenant Improvements. Provided no Event of Default exists under this Lease, nor any other event that with the giving of notice or the passage of time would constitute an Event of Default, Lessor shall available to Lessee a tenant improvement allowance to be used for the improvement of the Premises in the amount not to exceed of Three Hundred Fifty Thousand Dollars ($350,000.00), on the terms provided in Exhibit A attached hereto and incorporated herein by this reference.

 

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57.          Option to Extend the Term. Lessor grants to Lessee one (1) option (the “Extension Option”) to extend the term for a period of five (5) years. As used herein, “Extended Term” means the Term, as extended by the Extension Option. All the provisions of the Lease shall apply during the Extended Term except for the amount of the Basic Rent or any amount of tenant improvements installed in connection with Lessee’s initial occupancy. Without limiting the foregoing, Operating Rent shall continue to be payable in the amounts reserved in the Lease during the Extended Term. The Basic Rent for the first year of the Extended Term will be the Basic Rent applicable to the last year of the Term prior to the commencement of the Extended Term, multiplied by the CPI Factor. Basic Rent will be adjusted effective on October 1 of each Lease Year during the Extended Term by multiplying the Base Rent in effect at the for the prior Lease Year by the CPI Factor. The “CPI Factor” will be the quotient of the Ending Index over the Starting Index. The “Ending Index” will be the CPI in effect on the date of any adjustment and the “Starting Index” will be the CPI in effect in October of the year prior to the date of the Adjustment, but the CPI Factor shall not be less than one (1). The “CPI” is the Consumer Price Index (All Items) Los Angeles-Long Beach-Anaheim, CA, 1984=100, published by the Bureau of Labor Statistics, or any successor thereto reasonably selected by Lessor. The Extension Option is further subject to the following terms and conditions:

 

(a)           Lessee must deliver its irrevocable written notice of Lessee’s exercise of the Extension Option (“Exercise Notice”) to Lessor no less than six (6) months prior to the expiration of the Term. Time is of the essence with respect to the time period during which Lessee must deliver to Lessor its written notice of exercise and, therefore, if Lessee fails to give Lessor its irrevocable written notice of its exercise of the Extension Option within the time period provided above, then the Extension Option shall expire and be of no further force or effect.

 

(b)           If Lessee is in default beyond any applicable grace or cure period under this Lease at the date of delivery of the Exercise Notice to Lessor, then the Exercise Notice shall be of no effect and this Lease shall expire at the end of the Term. If Lessee is in default under this Lease on the last day of the Term then Lessor may in its sole discretion elect to have Lessee’s exercise of the Extension Option be of no effect, in which case the Lease shall expire at the end of the Term.

 

(c)           If Lessee delivers the Extension Option the Lease shall be extended on all the terms and conditions provided in the Lease and herein, including, without limitation, the annual increases for the Extended Term provided above.

 

(d)           Lessee and Lessor shall enter into an amendment to the Lease to document the rent and during the Extended Term and the extension of the term pursuant thereto.

 

(e)           The Extension Option is personal to Lessee and may not assigned in connection with any assignment under this Lease and will not inure in favor of any subtenant.

 

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58.          Licensed Broker Disclosure. Kyle Kazan and Jocelyn Rosenwald are brokers licensed in the state of California and are acting as principals in this transaction.

 

59.          Cannabis Specific Provisions.

 

(a)           Lessor’s Representations and Warranties. Lessor represents and warrants that:

 

(i)            No portion of the Premises is located on any lands owned directly or indirectly by the United States of America nor is any portion of the Premises subject to any federal land grants from the United States of America.

 

(ii)           No school is located within 600 feet of the Premises.

 

The foregoing representations and warranties are material inducements to Lessee to enter into this Lease and if any are false in any material respect, Lessee may terminate the Lease by written notice to Lessor.

 

(b)           Additional Covenants of Lessor. If, at any time, Lessor becomes aware, or has reasonable cause to believe, that any legal or regulatory action by any Federal Governmental Authority or any State Governmental Authority under or with respect to Cannabis Laws has occurred or will occur with respect to Lessee or the Premises, or if Lessor identifies or otherwise becomes aware of any noncompliance or alleged non-compliance with any Cannabis Law at the Premises, any threatened or pending legal action by any Federal Governmental Authority or any State Governmental Authority under any Cannabis Law related to the Premises, Lessor shall notify Lessee immediately in writing of such circumstance and shall include a full description of all relevant information. Lessor shall, upon receipt, promptly deliver to Lessee a copy of any report, audit, summary or investigation, of any kind or character, whether prepared by or on behalf of Lessor or by any other party, related to matter or the compliance status of the Premises or Lessee with respect to any Cannabis Law.

 

(c)           Effect of Noncompliance with Law. Lessor and Lessee agree that neither party shall be considered to be in breach of the Lease to the extent that performance of their respective obligations or agreed uses (excluding Lessee payment obligations) is prevented by an unforeseen change to the Cannabis Laws. If such change to the Cannabis Laws occurs, Lessee shall have the greater of one hundred twenty (120) days or any period of time proscribed in the Cannabis Laws to comply with said change. Upon a determination that compliance with said change is impossible or impractical, and ninety (90) days’ notice to Lessor by Lessee thereof, the parties agree that the Lease shall terminate with no further recourse by either party.

 

(d)           Early Termination. Lessor shall have the right at its sole election upon thirty (30) days’ prior written notice to Lessee to terminate this Lease if any of the following arise (each an “Early Termination Event”):

 

(i)            The seizure by any Governmental Authority seeking forfeiture of the Premises, whether or not the court proceeding has actually commenced.

 

(ii)           The entry of a final, non-appealable judgment that deems or determines that Lessee’s use constitutes a public or private nuisance.

 

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(iii)            Lessee’s permanent inability to comply with all required permits, business licenses and governmental approvals.

 

(iv)           A change in the laws or enforcement policies of the city in which the Premises is located, which prohibits or bans the Permitted Use.

 

(v)            Any change in any law or enforcement policy or a change in practices by any law enforcement agency, whether it be State of California or Federal, relating to Cannabis Laws which has the effect of prohibiting or banning the Permitted Use.

 

(e)            Additional Covenants. Lessee (in addition to all other covenants, warranties and agreement set forth in the Lease) further and specifically warrants, covenants and represents that:

 

(i)            Lessee shall, at its sole cost and expense, obtain all necessary permits and licenses to operate its business at the Premises and shall comply with all applicable laws, including, without limitation, all local law and ordinances (including local zoning ordinances), state law and ordinances and federal laws and regulations relating to the operation of its business (to the extent such federal laws and ordinances are not inconsistent with state and local laws allowing Lessee to use the Premises for the Permitted Use) and shall renew said permits and licenses as required. The foregoing duty to comply encompasses all applicable laws that may become effective before and during the Term, as same may be extended, regardless of the cost of such compliance. Notwithstanding the foregoing, Lessor acknowledges that the activities on the Premises do not comply with the Controlled Substances Act (21 U.S.C. § 801 et. seq.) (“CSA”), and failure to comply with such law shall not be a default under this Lease, so long as no Federal action is brought seeking to enforce the provisions of the CSA. Lessee warrants that as of the date hereof, it knows of no current or pending enforcement actions under the CSA against the Lessee or the Premises.

 

(ii)            In the event that Lessor becomes aware of any facts or circumstances which reasonably lead it to believe Lessee is in violation of any of Lessee’s covenants, warranties and representations, Lessor shall be entitled, after notice and any cure period in accordance with this Lease to declare an Event of Default and pursue all its remedies at law and equity.

 

(f)            Indemnification of Lessor by Lessee. Notwithstanding any other indemnification provisions in this Lease which remain in full force and effect, Lessee shall indemnify, protect, defend and hold Lessor and its, affiliates, shareholders, directors, officers, agents, employees, successors, and assigns harmless and shall pay all sums required with respect to any, damages, demands, claims, liabilities, costs and expenses, including but not limited to reasonable attorney fees (collectively “Expenses”), incurred by reason of, arising out of, or in connection with any of the following:

 

(i)            The granting of said approvals, licenses and permits to Lessee that this Lease and related provisions are subject to. Furthermore, no representation by Lessor or its agents have been made as to the suitability of the Premises for the Permitted Use by Lessee that are not set forth in this Lease and Lessee has been and is currently relying upon its own independent research, investigations and information.

 

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(ii)            Lessee’s business use and any related liability of said use of the Premises, including, but not limited to any safety or security issues, or any violation of the requirements of any governmental agencies.

 

(iii)           Any governmental agency taking or commencing any notice or action to take the Premises or Property under any forfeiture law or statute.

 

(iv)           The occurrence of an Early Termination Event(s).

 

(g)            Definitions. For the purposes of this Article IX only, the following terms shall have the meanings herein specified, such definitions to be applicable equally to the singular and the plural forms of such terms and to all genders:

 

(i)             “Cannabis” means all parts of the plant Cannabis sativa linnaeus, Cannabis indica, or Cannabis ruderalis, whether growing or not; the seeds thereof; the resin, whether crude or purified, extracted from any part of the plant; and every compound, manufacture, salt, derivative, mixture, or preparation of the plant, its seeds or resin. “Cannabis” also means the separated resin, whether crude or purified, obtained from cannabis. “Cannabis” also means marijuana as defined by Section 11018 of the Health and Safety Code as enacted by Chapter 1407 of the Statutes of 1972. “Cannabis” also include all products derived from, either directly or indirectly, the plant Cannabis sativa Linnaeus, Cannabis indica, or Cannabis ruderalis, including but not limited to cigarettes and vaporizing or “vaping” products containing Cannabis and goods containing Cannabis produced for human consumption and which are commonly referred to as edibles.

 

(ii)            “Cannabis Law” means any Applicable Law relating to Cannabis, whether medical or adult use (a/k/a recreational), including without limitation, all laws and regulations to the planting, growing, cultivation of Cannabis, the operation of any business relating to the sale and/or distribution of Cannabis related products as all licensing and permitting laws and regulations relating thereto, as may be in effect at the time of Lease execution.

 

(iii)           “Federal Governmental Authority” means the government of the United States or any other nation, or of any political subdivision thereof, or any agency, authority, instrumentality, regulatory body, court, central bank or other entity within the federal government of the United States exercising executive, legislative judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

 

(iv)           “State Governmental Authority” means the government of the State of California or of any political subdivision thereof or any other state in the United States of America, whether state or local, and any agency, authority, instrumentality, regulatory body, court, exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including but not limited to, the California Bureau of Medical Cannabis Regulation (a/k/a the California Bureau of Marijuana Control) and/or any successor agency, the California Department of Consumer Affairs, the California Department of Food and Agriculture and the California Department of Public Health.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the date first above written.

 

LOMPOC TIC LLC,   CA MANUFACTURING SOLUTIONS LLC,
a California limited liability company   a California limited liability company
     
      By: MG Padaro Fund LLC,
By: /s/ Kyle D. Kazan,   a California limited liability company,
  Kyle D. Kazan,   Managing Member
Authorized Signatory    
    By: /s/ Kyle D.Kazan
      Kyle D.Kazan
      Authorized Signatory
NEO STREET PARTNERS, LLC,    
a California limited liability company    
     
By: /s/ Kyle D. Kazan    
  Kyle D. Kazan    
  Its: Authorized Signatory    
         

Lease Agreement Signature Page

 

 

 

 

EXHIBIT A

 

WORK AGREEMENT

 

The following Work Agreement is executed pursuant to that certain Standard Industrial/Commercial Single Lease- Net (the “Lease Form”) by and between NEO STREET PARTNERS, LLC, a California limited liability company and LOMPOC TIC LLC, a California limited liability company (collectively, “Lessor”) and CA MANUFACTURING SOLUTIONS LLC, a California limited liability company (“Lessee”), dated October 1, 2018 (the “Lease Date”) and covering certain premises located at 1637 and 1635 West Central Avenue, Lompoc, California 93436, and will govern the construction of certain improvements by Lessee to the Premises. Capitalized terms have the meaning ascribed in the Lease Form unless otherwise defined herein.

 

1.             TENANT IMPROVEMENT ALLOWANCE.

 

(a)           Lessee shall be entitled to a tenant improvement allowance (the “Tenant Improvement Allowance”) in an amount up to Three Hundred Fifty Thousand Dollars ($350,000.00), which Tenant Improvement Allowance shall be used for the costs relating to the construction of Lessee’s improvements which are permanently affixed to the Premises (the “Tenant Improvements”). A preliminary description of the improvements intended to be constructed at the Premises is attached hereto as Schedule I. In no event shall Lessor be obligated to make disbursements pursuant to this Exhibit in a total amount which exceeds the Tenant Improvement Allowance.

 

(b)           Disbursement of the Tenant Improvement Allowance.

 

(i)             Tenant Improvement Allowance Items. The Tenant Improvement Allowance shall be disbursed by Lessor only for the following items and costs (collectively the “Tenant Improvement Allowance Items”): plan check, permit and license fees relating to construction of the Tenant Improvements, and the cost of design and construction of the Tenant Improvements.

 

A-1 

 

 

(ii)            Disbursement of Tenant Improvement Allowance. During the construction of the Tenant Improvements, Lessor shall make monthly disbursements of the Tenant Improvement Allowance for Tenant Improvement Allowance Items for the benefit of Lessee and shall authorize the release of monies for the benefit of Lessee as follows.

 

(1)            Monthly Disbursements. On or before the occurrence of a uniform date designated by Lessor (the “Submittal Date”) for each calendar month during the construction of the Tenant Improvements, Lessee shall deliver to Lessor: (A) a request for payment of the “Contractor” (as hereinafter defined) approved by Lessee, in substantially the form of AIA Document G702, showing the schedule, by trade, of percentage of completion of the Tenant Improvements in the Premises, detailing the portion of the work completed and the portion not completed, and demonstrating that the relationship between the cost of the work completed and the costs of the work to be completed complies with the terms of the “Construction Budget” (as hereinafter defined); (B) invoices from all of “Tenant’s Agents” (as hereinafter defined) for labor rendered and materials delivered to the Premises evidencing costs for Tenant Improvement Allowance Items at least in the amount requested (together with amounts previously disbursed by Lessor from the Tenant Improvement Allowance); (C) executed mechanic’s lien releases from all of Tenant’s Agents which shall comply with the appropriate provisions, as reasonably determined by Lessor, of California Civil Code Section 8132, together with executed unconditional mechanic’s lien releases from all of Tenant’s Agents with respect to prior requests for payment theretofore paid by Lessor (to the extent not previously delivered to Lessor by Lessee) which shall comply with the appropriate provisions, as reasonably determined by Lessor, of California Civil Code Section 8134; and (D) all other information reasonably requested by Lessor, including any certification requested by Lessor’s construction lender. Lessee’s request for payment shall be deemed Lessee’s acceptance and approval of the work furnished and/or the materials supplied as set forth in Lessee’s payment request. On or before the date occurring twenty (20) days after the Submittal date, and assuming Lessor receives all of the information described in items (A) through (D) above, Lessor shall deliver a check to Lessee in payment of the lesser of: (1) so requested by Lessee, as set forth in clause (A) above, and (2) the balance of any remaining available portion of the Tenant Improvement Allowance, provided that Lessor does not dispute any request for payment based on non-compliance of any work with the “Approved Working Drawings” (as hereinafter defined), or due to any substandard work, or for any other reason. Lessor’s payment of such amounts shall not be deemed Lessor’s approval or acceptance of the work furnished or materials supplied as set forth in Lessee’s payment request.

 

(2)            Completion. Upon completion of construction of the Premises, provided that Lessee shall deliver to Lessor (A) properly executed mechanics lien releases in compliance with both California Civil Code Section 8138, and invoices from all of “Tenant’s Agents” (as hereinafter defined) for labor rendered and materials delivered to the Premises evidencing costs for Tenant Improvement Allowance Items at least in the amount requested (together with amounts previously disbursed by Lessor from the Tenant Improvement Allowance), (B) copies of signed-off permits evidencing governmental approval of the completion of the Tenant Improvements, (C) a copy of a recorded Notice of Completion, recorded in the office of the Recorder of the County where the Premises is located in accordance with Section 8182 of the Civil Code of the State of California or any successor statute, provided that if Lessee fails to record a Notice of Completion, Lessor may execute and file the same on behalf of Lessee as Lessee’s agent for such purpose, at Lessee’s sole cost and expense, (D) as built drawings for the Premises with the completed Tenant Improvements and a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises, and (E) a certification of the Contractor for the benefit of Lessor certifying that the construction of the Tenant Improvements has been substantially completed.

 

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(3)            Other Terms. Lessor shall only be obligated to make disbursements from the Tenant Improvement Allowance to the extent costs are incurred by Lessee for Tenant Improvement Allowance Items. Lessee shall not be entitled to the use of (as a credit against Rent or otherwise) any portion of the Tenant Improvement Allowance which is not used in payment of Tenant Improvement Allowance Items.

 

(4)            Time of Performance. Lessee shall have until nine (9) months following the date of the Lease to request disbursement of the Allowance (the “Deadline Date”). If Lessee has not requested disbursement of the Allowance on or before the Deadline Date, Lessor shall have no further obligation to disburse the Allowance.

 

2.             CONSTRUCTION DRAWINGS.

 

(a)            Selection of Architect/Construction Drawings. Lessee shall retain an architect/space planner (the “Architect”) approved by Lessor, which approval shall not be unreasonably withheld, to prepare the Construction Drawings. Lessee shall retain engineering consultants (the “Engineers”) approved by Lessor, which approval shall not be unreasonably withheld, to prepare all plans and engineering working drawings relating to building systems in connection with the Tenant Improvements. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the “Construction Drawings”. Lessor’s review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Lessor’s review of the same, or obligate Lessor to review the same, for quality, design, compliance with Applicable Law or other like matters.

 

(b)            Working Drawings. Lessee shall promptly cause the Architect and the Engineers to complete the architectural and engineering drawings for the Premises, and Architect shall compile a fully coordinated set of architectural, structural, mechanical, electrical and plumbing working drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the “Final Working Drawings”) and shall submit the same to Lessor’s approval. Lessee shall supply Lessor with four (4) copies signed by Lessee of such Final Working Drawings. Lessor shall advise Lessee within twenty (20) days after Lessor’s receipt of the Final Working Drawings for the Premises if the same is unsatisfactory or incomplete in any respect. If Lessee is so advised, Lessee shall immediately revise the Final Working Drawings in accordance with such review and any disapproval of Lessor in connection therewith.

 

(c)            Approved Working Drawings. The Final Working Drawings shall be approved by Lessor (the “Approved Working Drawings”) prior to the commencement of construction of the Premises by Lessee. After approval by Lessor of the Final Working Drawings, Lessee may submit the same to the City where the Premises is located for all applicable building permits. Lessee hereby agrees that neither Lessor nor Lessor’s consultant shall be responsible for obtaining any building permit or certificate of occupancy for the Premises and that obtaining the same shall be Lessee’s responsibility; provided, however, that Lessor shall cooperate with Lessee in executing permit applications and performing other ministerial acts reasonably necessary to enable Lessee to obtain any such permit or certificate of occupancy. No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Lessor, which consent shall not be unreasonably withheld.

 

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3.            CONSTRUCTION OF THE TENANT IMPROVEMENTS.

 

(a)            Lessee’s Selection of Contractors.

 

(i)            The Contractor. Lessee shall retain a licensed general contractor (the “Contractor”), as contractor for the construction of the Tenant Improvements, by a process of competitive bidding among not less than three (3) qualified, licensed general contractors reasonably approved by Lessor and reasonably experienced in the performance of work comparable to the work of the Tenant Improvements in buildings comparable to the Building, or otherwise reasonably approved by Lessor.

 

(ii)            Tenant’s Agents. All subcontractors, laborers, material, men, and suppliers used by Lessee (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as “Tenant’s Agents”) must be approved in writing by Lessor, which approval shall not be unreasonably withheld or delayed; provided that, in any event, Lessee must contract with Lessor’s base building subcontractors for any mechanical, electrical, plumbing, structural, life safety, HVAC or other integrated utility system work in the Premises. At Lessor’s option, Tenant’s Agents shall all be union labor in compliance with the applicable master labor agreements.

 

(b)            Construction of Tenant Improvements by Tenant’s Agents.

 

(i)            Construction Contract. Prior to Lessee’s execution of the construction contract and general conditions with Contractor (the “Contract”), Lessee shall submit the Contract to Lessor for its approval, which approval shall not be unreasonably withheld or delayed. Such contract shall be for a guaranteed maximum cost not to exceed the costs shown in the budget attached hereto as Schedule II and incorporated herein by this reference (the “Construction Budget”). Prior to the commencement of construction of the Tenant Improvements, Lessee shall supply Lessor with cash in an amount (the “Over Allowance Amount”) equal to the difference between the amount of the Construction Budget and the amount of the Tenant Improvement Allowance (less any portion thereof disbursed by Lessor, or in the process of being disbursed by Lessor, on or before the commencement of construction of the Tenant Improvements). The Over Allowance Amount shall be disbursed by Lessor prior to the disbursement of any of the then remaining portion of the Tenant Improvement Allowance, and such disbursement shall be pursuant to the same procedure as the Tenant Improvement Allowance. In the event that, after the Construction Budget has been delivered by Lessor to Lessee, the costs relating to the design and construction of the Tenant Improvements shall change, any additional costs necessary to such design and construction in excess of the Construction Budget, shall be paid by Lessee to Lessor immediately as an addition to the Over Allowance Amount, or at Lessor’s option, Lessee shall make payments for such additional costs out of its own funds, but Lessee shall continue to provide Lessor with the documents described in clauses (A) (D) of Section 2(b)(ii)( 1) above, for Lessor’s approval, prior to Lessee paying such costs.

 

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(ii)            Tenant’s Agents.

 

(1)            Lessor’s General Conditions for Tenant’s Agents and Tenant Improvement Work. Lessee’s and Tenant’s Agent’s construction of the Tenant Improvements shall construct the Tenant Improvements in strict accordance with the Approved Working Drawings.

 

(2)            Indemnity. Lessee’s indemnity of Lessor as set forth in the Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Lessee or Tenant’s Agents, or anyone directly or indirectly employed by any of them, or in connection with Lessee’s non-payment of any amount arising out of the Tenant Improvements and/or Lessee’s disapproval of all or any portion of any request for payment. Such indemnity by Lessee, as set forth in the Lease, shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to Lessor’s performance of any ministerial acts reasonably necessary (i) to permit Lessee to complete the Tenant Improvements, and (ii) to enable Lessee to obtain any building permit or certificate of occupancy for the Premises.

 

(3)            Requirements of Tenant’s Agents. Each of Tenant’s Agents shall guarantee to Lessee and for the benefit of Lessor that the portion of the Tenant Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. Each of Tenant’s Agents shall be responsible for the replacement or repair, without additional charge, of all work done or furnished in accordance with its contract that shall become defective within one (1) year after the later to occur of (i) completion of the work performed by such contractor or subcontractors and (ii) the Commencement Date. The correction of such work shall include, without additional charge, all additional expenses and damages incurred in connection with such removal or replacement of all or any part of the Tenant Improvements, and/or the Building and/or common areas that may be damaged or disturbed thereby. All such warranties or guarantees as to materials or workmanship of or with respect to the Tenant Improvements shall be contained in the Contract or subcontract and shall be written such that such guarantees or warranties shall inure to the benefit of both Lessor and Lessee, as their respective interests may appear, and can be directly enforced by either. Lessee covenants to give to Lessor any assignment or other assurances which may be necessary to effect such right of direct enforcement.

 

(4)            Insurance Requirements.

 

(A)            General Coverages. All of Tenant’s Agents shall carry worker’s compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Lessee as set forth in the Lease, and the policies therefor shall insure Lessor and Lessee, as their interests may appear, as well as the Contractor and subcontractors.

 

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(B)            Special Coverages. Lessee shall carry “Builder’s All Risk” insurance in an amount approved by Lessor covering the construction of the Tenant Improvements and such other insurance as Lessor may reasonably require, it being understood and agreed that the Tenant Improvements shall be insured by Lessor pursuant to the Lease immediately upon completion thereof. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Lessor.

 

(C)            General Terms. Certificates for all insurance carried pursuant to this Section 4(b)(ii)(4) shall be delivered to Lessor before the commencement of construction of the Tenant Improvements and before the Contractor’s equipment is moved onto the site. All such policies of insurance must contain a provision that the company writing said policy will give Lessor at least thirty (30) days prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of such insurance.

 

(iii)           Governmental Compliance. The Tenant Improvements shall comply in all respects with the following: (1) all applicable Laws and other state, federal, city or quasi-governmental laws, code, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or other person; (2) applicable standards of the American Insurance Association and the National Electrical Code; and (3) building material manufacturer’s specifications.

 

(iv)           Inspection by Lessor. Lessor shall have the right to inspect the Tenant Improvements at all times, provided however, that Lessor’s failure to inspect the Tenant Improvements shall in no event constitute a waiver of any of Lessor’s rights hereunder nor shall Lessor’s inspection of the Tenant Improvements constitute Lessor’s approval of the same. Should Lessor disapprove any portion of the Tenant Improvements, Lessor shall notify Lessee in writing of such disapproval and shall specify the items disapproved. Any defects or deviations in, and/or disapproved by Lessor of, the Tenant Improvements shall be rectified by Lessee at no expense to Lessor, provided however, that in the event Lessor determines that a defect or deviation exists or disapproves of any matter in connection with any portion of the Tenant Improvements and such defect, deviation or matter might adversely affect the mechanical, electrical, plumbing, heating, ventilating and air conditioning or life-safety systems of the Building, the structure or exterior appearance of the Building Lessor may, take such action as Lessor deems necessary, at Lessee’s expense and without incurring any liability on Lessor’s part, to correct any such defect, deviation and/or matter, including, without limitation, causing the cessation of performance of the construction of the Tenant Improvements until such time as the defect, deviation and/or matter is corrected to Lessor’s satisfaction.

 

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(c)            Updated Approved Working Drawings. At the conclusion of construction, (A) Lessee shall cause the Architect and Contractor to update the Approved Working Drawings as necessary to reflect all changes made to the Approved Working Drawings during the course of construction, and (B); certify to the best of their knowledge that the “record-set” of as-built drawings are true and correct, which certification shall survive the expiration or termination of this Lease.

 

(d)            Coordination by Tenant’s Agents with Lessor. Upon Lessee’s delivery of the Contract to Lessor under Section 4(b)(i) above. Lessee shall furnish Lessor with a schedule setting forth the projected date of the completion of the Tenant Improvements and showing the critical time deadlines for each phase, item or trade relating to the construction of the Tenant Improvements.

 

4.             SUBSTANTIAL COMPLETION. Definition of Substantial Completion of the Tenant Improvements. For purposes of this Lease, the “Substantial Completion of the Tenant Improvements” shall mean completion of construction of the Tenant Improvements in the Premises pursuant to the Approved Working Drawings with the exception of any punch list items, any furniture, fixtures, work stations, built-in furniture or equipment (even if the same requires installation or electrification by Tenant’s Agents), and any tenant improvement finish items and materials which are selected by Lessee but which are not available within a reasonable time (given the anticipated date of the Lease Commencement Date), and Lessee’s receipt of any governmentally-required permits and/or approvals to allow occupancy of the Premises (provided that Lessee shall use reasonable efforts and diligence in good faith to obtain such permits and/or approvals as soon as reasonably possible).

 

5.             MISCELLANEOUS.

 

(a)           Lessee’s Representative. Lessee has designated __________ as its sole representative with respect to the matters set forth in this Exhibit, who, until further notice to Lessor, shall have full authority and responsibility to act on behalf of the Lessee as required in this Exhibit.

 

(b)           Lessor’s Representative. Lessor has designated __________ as its sole representative with respect to the matters set forth in this Exhibit, who, until further notice to Lessee, shall have full authority and responsibility to act on behalf of the Lessor as required in this Exhibit.

 

(c)           Lessee’s Lease Default. Notwithstanding any provision to the contrary contained in this Lease, in the event of a default by Lessee under this Lease (which default is not cured within the applicable period for cure following Lessee’s receipt of written notice from Lessor pursuant to Lease Section 7.08) at any time on or before the Substantial Completion of the Premises, then (i) in addition to all other rights and remedies granted to Lessor pursuant to the Lease, Lessor shall have the right to withhold payment of all or any portion of the Lessee Improvement Allowance and/or Lessor may cause Contractor to cease the construction of the Premises (in which case, Lessee shall be responsible for any delay in the substantial completion of the Premises caused by such work stoppage), and (ii) all other obligations of Lessor under the terms of this Exhibit shall be forgiven, until such time as such default is cured pursuant to the terms of the Lease.

 

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Schedule I

 

Description of Improvements

 

Power upgrades and other improvements are required to operate a cannabis processing facility in the Premises.

 

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Schedule II

 

Construction Budget

 

Power Upgrades $150,000.00

 

Other Improvements $200,000.00

 

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Exhibit 99.79

 

INVESTOR RIGHTS AGREEMENT

 

THIS INVESTOR RIGHTS AGREEMENT (this “Agreement”), dated as of April 8, 2021, is made by and among Mercer Park Brand Acquisition Corp. (the “Corporation”), Mercer Park Brand, L.P. (formerly know as Mercer Park CB II, L.P.) (“Mercer” or the “Sponsor”), the signatories listed as “Sponsor Parties” on the signature pages hereto (together with the Sponsor, in its capacity as such, the “Sponsor Parties”), the signatories listed as “Sellers” on the signature pages hereto and any holder of shares of Class B common stock of GH Group, Inc. that hereafter joins this Agreement pursuant to such holder’s execution of a joinder (the “Sellers”), and any other entity that hereafter joins this Agreement pursuant to the execution of a joinder (together with the Corporation, Sponsor, Sponsor Parties, and Sellers, each a “Party” and collectively the “Parties”).

 

WHEREAS, the Corporation, the Sellers, and GH Group, Inc., intend to enter into an agreement and plan of merger dated the date hereof (the “Merger Agreement”) by and among certain of the Parties, MPB Acquisition Corp. (“Buyer”), and MPB Mergersub Corp. (“Merger Sub”) in order to give effect to the Corporation’s qualifying transaction within the meaning of Section 10.16 of the Neo Exchange Listing Manual (the “Qualifying Transaction”);

 

WHEREAS, the Corporation wishes to provide the Parties with certain director nomination rights in the Corporation following the closing of the Qualifying Transaction as more fully described herein;

 

WHEREAS, in connection with the Qualifying Transaction, the Sponsor and certain of the Company Shareholders (as defined in the Merger Agreement) will receive certain earnout consideration from the Corporation upon achieving identified milestones as more fully described herein;

 

WHEREAS, the Sponsor Parties own SPAC Class B Shares (as defined in the Merger Agreement); and

 

WHEREAS, the Sponsor Parties have agreed to vote their SPAC Class B Shares in favor of adopting and approving the Qualifying Transaction and the other transactions contemplated by the Merger Agreement.

 

NOW, THEREFORE, in consideration of the foregoing and the mutual promises and covenants contained in this Agreement, the receipt and sufficiency of which is acknowledged, the Parties agree as follows:

 

ARTICLE 1

 

NOMINATION OF DIRECTORS; ELECTION OF OFFICERS

 

Section 1.1      Board Nomination Rights

 

i. Notwithstanding anything to the contrary contained in any definitive agreement or other transaction document pertaining to the Qualifying Transaction and subject to the rules of any securities exchange on which the subordinate, restricted and limited voting shares in the capital of the Corporation (and any other share into which they convert or are otherwise exchanged, the “Shares”) may trade on or after the closing of the Qualifying Transaction, from and after the Closing until the date that is three (3) years after the closing date of the Qualifying Transaction the Sponsor, the Corporation and the Sellers shall take all reasonable actions (to the extent such actions are not prohibited by applicable law and within such Party’s control, and in the case of any action that requires a vote or other action on the part of the Board, to the extent such action is consistent with fiduciary duties that the Corporation directors may have in such capacity) which are necessary (“Necessary Action”) to cause the Board to be comprised of eight (8) directors and for those individuals to be nominated in accordance with this Section 1.1 as follows:

 

a. The Sponsor shall, until the earlier to occur of (x) the date that is three (3) years after the closing date of the Qualifying Transaction and (y) the date upon which the Sponsor ceases to own at least 50% of the Shares owned by it at closing of the Qualifying Transaction (assuming forfeited shares continue to be owned), be entitled to nominate one (1) individual (the “Sponsor’s Director Nominee”), who shall initially be Jamie Mendola.

 

 

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b. Two (2) independent directors (for audit committee purposes within the meaning of the Canadian Securities Administrators’ National Instrument 52-110) shall be nominated upon the unanimous consent of Kyle Kazan, Graham Farrar, and the Sponsor (the “Independent Director Nominees”), which directors shall initially be Hector De La Torre and George Raveling.

 

c. The Sellers shall be entitled to nominate four (4) individuals (the “Seller Director Nominees”), which directors shall initially be Kyle Kazan, Graham Farrar and two additional nominees who shall be independent (for audit committee purposes within the meaning of the Canadian Securities Administrators’ National Instrument 52-110), which additional nominees shall be Jocelyn Rosenwald and Humble Lukanga.

 

d. Element 7 CA, LLC (“Element 7”) shall be entitled to nominate one (1) individual who shall be independent (for audit committee purposes within the meaning of the Canadian Securities Administrators’ National Instrument 52-110) (the “E7 Director Nominee”, and together with the Sponsor’s Director Nominee, the Independent Director Nominees, and the Seller Director Nominees, the “Nominees”), who shall initially be Bob Hoban.

 

ii. The Parties shall be entitled to nominate their respective nominees as set forth in Section 1.1.i for election to the board of directors (the “Board”) at the applicable Corporation shareholders meeting by written notice to the Corporation given (i) in the case of an annual meeting of the shareholders of the Corporation, no less than 60 days prior to the one-year anniversary of the preceding year’s annual meeting date (provided, however, that, if no annual meeting of the Corporation’s shareholders was held in the preceding year, not later than the 60th day prior to such annual meeting or, if later, the tenth (10) day following the day on which public disclosure of such meeting was first made by the Corporation); provided, further, that if the date of the annual meeting of the shareholders of the Corporation is more than thirty (30) days before or more than sixty (60) days after such anniversary date, not later than the 60th day prior to such annual meeting or, if later, the tenth (10) day following the day on which public disclosure of the date of such annual meeting was first made by the Corporation), and (ii) in the case of a special meeting of the shareholders of the Corporation, not less than the later of 60 days prior to such special meeting or the tenth (10) day following the day on which public disclosure of the date of such special meeting was first made by the Corporation, which such notice shall include all information relating to the applicable Nominee(s) that is required to be disclosed in a proxy circular or other filings required to be made in connection with solicitations of proxies for election of directors by a dissident in a contested election pursuant to Part 9 of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”), any other applicable Canadian securities laws and the rules and regulations of the securities exchange on which the Shares are then listed (including such applicable Nominee’s written consent to being named in the proxy circular as a nominee and to serving as a director if elected). If the applicable Parties shall elect to nominate a Nominee as provided in this Section 1.1, the Corporation shall, unless such Nominee fails to qualify to act as a director of the Corporation pursuant to the requirements of applicable law, including applicable Canadian securities laws and the rules and regulations of the securities exchange on which the Shares are then listed (i) include such Nominee as a nominee for election as a director of the Board at the applicable Corporation shareholders meeting in the Corporation’s proxy solicitation materials (including any form of proxy the Corporation distributes); and (ii) recommend to the Corporation’s shareholders that they vote in favor of such Nominee at such Corporation shareholders meeting.

 

iii. For the avoidance of doubt, no Party shall be subject to any requirement that shareholders provide advance notice of, or comply with any other procedures governing, the nomination of individuals for election to the Board as provided in the Corporation’s articles, and each Nominee shall otherwise be nominated and remain a member of the Board in accordance with the Corporation’s articles and other policies determined from time to time by the Board for nominating directors.

 

 

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iv. Any Nominee must be qualified to act as a director of the Corporation pursuant to the applicable requirements under applicable law, including applicable Canadian securities laws, the rules of any securities exchange on which the Shares are then listed, and in compliance with any other applicable law and the Corporation’s articles.

 

v. In the event that the applicable Parties do not nominate a Nominee at a particular meeting as provided in this Section 1.1, then the Corporation shall proceed with the applicable Corporation shareholder meeting and all further rights of such Parties to nominate such Nominee for election at such meeting shall terminate without any further action of the Parties.

 

vi. In the event that the Parties entitled to nominate a Nominee desire to remove such Nominee from the Board, all of the other Parties shall, upon written notice from the Parties desiring such removal, take all Necessary Action to cause such Nominee to be removed. At such time as the Sponsor is no longer entitled to nominate a Nominee pursuant to Section 1.1.i.a, the Sponsor and the Corporation shall if requested by a majority of the remaining Nominees take all Necessary Action to cause the Sponsor’s Director Nominee to tender his or her resignation.

 

vii. Any Nominee shall be subject to the Corporation’s customary due diligence process, including its review of a customary questionnaire and background check. Based on the foregoing, the Corporation may reasonably object to any such Nominee within fifteen (15) days of receiving such completed questionnaire and background check authorization, (a) provided it does so in good faith and (b) solely to the extent such objection is based upon any of the following: (i) such Nominee was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses); (ii) such Nominee was the subject of any order, judgment or decree not subsequently reversed, suspended or vacated of any court of competent jurisdiction, permanently or temporarily enjoining such Nominee from, or otherwise limiting his or her ability to, engage in (x) any type of business practice or (y) any activity in connection with the purchase or sale of any security or in connection with any violation of applicable securities laws; (Hi) such Nominee was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal, state or provincial authority barring, suspending or otherwise limiting for more than sixty (60) days the right of such person to engage in any activity described in clause (ii)(y), or to be associated with persons engaged in such activity; (iv) such Nominee was found by a court of competent jurisdiction in a civil action or by applicable securities authorities to have violated any federal, state or provincial securities law, and the judgment in such civil action or finding by such authorities has not been subsequently reversed, suspended or vacated; or (v) such Nominee was the subject of, or a party to, any federal, state or provincial judicial or administrative order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to a violation of any federal, state or provincial securities laws or regulations. In the event the Board reasonably finds any such Nominee to be unsuitable based upon one or more of the foregoing clauses (i) through (v) and reasonably objects to such Nominee, the Party(ies) that nominated such Nominee shall be entitled to propose a different Nominee to the Board within fifteen (15) days of the Corporation’s notice to such Party(ies) of its objection to such Nominee, and such replacement Nominee shall be subject to the review process outlined in this Section 1.1.vii.

 

Section 1.2      Officers

 

i. Each Party shall take all Necessary Action to cause, as of immediately following the closing of the Qualifying Transaction, (a) Kyle Kazan to be appointed as the Chief Executive Officer of the Corporation, (b) Graham Farrar to be appointed as the President of the Corporation, and (c) Derrek Higgins to be appointed as the Chief Financial Officer of the Corporation.

 

 

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ARTICLE 2

 

EARNOUT AND FORFEITURE

 

Section 2.1      Earnout and Forfeiture Provisions

 

i. The ultimate number of the issued and outstanding Shares of the Corporation that were issued for nominal consideration and are held by the Sponsor Parties as the date hereof (the “Sponsor’s Founder Shares”) that are subject to forfeiture will be determined as follows:

 

a. 50% of the Sponsor’s Founder Shares (which equals 5,044,875 Shares) will be deemed earned upon closing of the Qualifying Transaction and not subject to forfeiture; and

 

b. 25% of the Sponsor’s Founder Shares (which equals 2,522,438 Shares) will be deemed earned based on meeting the following share price trading thresholds (the “Price Based Earnout Shares”):

 

i. If within two (2) years following the closing of the Qualifying Transaction, the volume weighted average price per share of the Shares on the Neo Exchange Inc. or any other nationally recognized Canadian or United States stock exchange for twenty (20) consecutive trading days (the “20-day VWAP”) meets or exceeds $13.00 (as adjusted for stock splits, consolidations, extraordinary distributions and other customary events), the Sponsor Parties shall earn 2/3rds (66.66%) of the Price Based Earnout Shares; and

 

ii. If within two (2) years following the closing of the Qualifying Transaction, the 20-day VWAP meets or exceeds $15.00 (as adjusted for stock splits, consolidations, extraordinary distributions and other customary events), the Sponsor Parties shall earn the remaining 1/3rd (33.34%) of the Price Based Earnout Shares.

 

In the event the Sponsor Parties have not earned any Price Based Earnout Shares under paragraphs (i) or (ii) above, the Sponsor shall promptly tender the unearned Price Based Earnout Shares to the Corporation for forfeiture for no consideration on the date that is the first business day that immediately follows the two (2)-year anniversary of the closing of the Qualifying Transaction. For each Price Based Earnout Share earned under paragraphs (i) or (ii) above, the Company Shareholders and the holders of Vested Exchanged Options (as defined in the Merger Agreement) (the “Vested Optionholders”) shall be entitled to receive, in the proportions set forth in the Merger Consideration Spreadsheet (as defined in the Merger Agreement), in the aggregate and not individually, 1.5 Buyer Exchangeable Shares (as defined in the Merger Agreement). Promptly following any such Buyer Exchangeable Shares becoming issuable to the Company Shareholders and the Vested Optionholders, the Corporation shall cause Buyer to deliver such Buyer Exchangeable Shares to the Exchange Agent (as defined in the Merger Agreement), to be held and delivered by the Exchange Agent to the Company Shareholders and the Vested Optionholders in accordance with Section 2.9 of the Merger Agreement.

 

c. 25% of the Sponsor’s Founder Shares (which equals 2,522,438 Shares) (the “Capital Based Earnout Shares”) will be deemed earned based on the amount of cash held by the Corporation at the closing of the Qualifying Transaction, such cash being equal to a minimum of $185.0 million, (i) before any cash consideration, as applicable, is payable for any additional acquisitions which may or may not occur in conjunction with or following the closing of the Qualifying Transaction, (ii) after any payments due and payable for the Corporation’s expenses (including those of Buyer and Merger Sub) related to the closing of the Qualifying Transaction, including all costs, fees, expenses and payments contingent on the closing of the Qualifying Transaction (the “Transaction Expenses”), (iii) after the aggregate amount of payments required to be made in connection with the SPAC Stockholder Redemption (as defined in the Merger Agreement), (iv) after receipt by the Corporation of the Aggregate PIPE Proceeds (as defined in the Merger Agreement) and the proceeds from any additional PIPE or other equity or debt offerings (not including the Permitted Equity Financing (as defined in the Merger Agreement), and (v) after taking into account any debt or payables on the Corporation’s balance sheet as of the closing of the Qualifying Transaction (collectively, the “Closing Cash”), plus any net proceeds from equity or equity-linked financings (e.g., issuance of convertible debt, sale of common or preferred stock, etc.) closed by the Corporation within one (1) year following the closing of the Qualifying Transaction (the “Post Closing Cash”, together with the Closing Cash, the “Total Cash”, not to exceed an aggregate of $402.5 million).

 

 

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The Capital Based Earnout Shares ultimately deemed earned by the Sponsor Parties shall be calculated based on the following formula (but in no event will more than 2,522,438 Capital Based Earnout Shares be deemed earned):

 

= Total Cash - $185.0 million *2,522,438
$202.5 million

 

Notwithstanding the above:

 

i. in the event less than $185.0 million in Closing Cash is available immediately following the closing of the Qualifying Transaction, as reflected on the Corporation’s balance sheet, then no Capital Based Earnout Shares will be deemed earned by the Sponsor; and

 

ii. in the event the 20-day VWAP reaches $17.00 (as adjusted for stock splits, consolidations, extraordinary distributions and other customary events) within two (2) years following the closing of the Qualifying Transaction, the Sponsor Parties shall be deemed to have earned 100% of the Capital Based Earnout Shares; provided that: (A) if the Closing Cash is less than $185.0 million, no Capital Based Earnout Shares will be deemed earned by the Sponsor Parties; and (B) if an Anti-Dilution Payment (as defined below) was paid to the Company Shareholders and the Vested Optionholders the amount of the Capital Based Earnout Shares to be deemed earned will be reduced by the amount of Shares issued to the Company Shareholders and the Vested Optionholders under the Anti-Dilution Payment (as defined below).

 

In the event the Sponsor Parties have not earned any Capital Based Earnout Shares, the Sponsor Parties shall promptly tender the unearned Capital Based Earnout Shares for forfeiture to the Corporation for no consideration (x) if the condition set forth in clause (i) is not satisfied, on the date of the closing of the Qualifying Transaction, and (y) otherwise, on the date that immediately follows the two (2)-year anniversary of the closing of the Qualifying Transaction.

 

d. The Sponsor will use its reasonable best efforts to assist the Corporation with fundraising efforts and to leverage their capital markets expertise and relationships for a period of at least one (1) year after the closing of the Qualifying Transaction. In the event any Post Closing Cash is raised by the Corporation below $10.00 per Share in gross proceeds to the Corporation, the Company Shareholders and the Vested Optionholders will have the benefit of anti-dilution protection whereby the Company Shareholders and the Vested Optionholders shall be entitled to receive in the proportions set forth in the Merger Consideration Spreadsheet additional Buyer Exchangeable Shares (i) in an amount equal to the number of Shares issued at a price per share of less than $10.00 and (ii) at a price per share payable by the Company Shareholders and the Vested Optionholders equal to the price per share at which such shares were issued (the “Anti-Dilution Payment”). Promptly following any such Buyer Exchangeable Shares becoming issuable to the Company Shareholders and the Vested Optionholders, the Corporation shall cause Buyer to deliver such Buyer Exchangeable Shares to the Exchange Agent (as defined in the Merger Agreement), to be held and delivered by the Exchange Agent to the Company Shareholders and the Vested Optionholders in accordance with Section 2.9 of the Merger Agreement. Any Anti-Dilution Payment will be deducted from any Capital Based Earnout Shares otherwise earned or earnable by the Sponsor Parties, subject to a cap equal to the Capital Based Earnout Shares.

 

 

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e. The Corporation shall not intentionally take actions to seek to cause forfeiture to occur.

 

f. If the conditions for more than one triggering event are met under Section 2.1, then all of the Shares to be earned and retained in connection with each such triggering event will be earned and retained by the Sponsor.

 

g. If the Corporation consummates a transaction which results in the holders of Shares having the right to exchange their Shares for cash, securities or other property having a value per Share equaling or exceeding a 20-day VWAP threshold set forth above (for any non-cash proceeds, as determined based on the agreed valuation set forth in the applicable definitive agreements for such transaction or, in the absence of such valuation, their fair market value), the 20-day VWAP threshold will be considered met and the applicable Sponsor’s Founder Shares will be considered earned and retained and may participate in such transaction.

 

h. Each of the Corporation and the Sponsor Parties shall take all actions that are reasonably necessary or advisable to reflect the forfeiture of any Sponsor’s Founder Shares that are forfeited pursuant to this Section 2.1.

 

i. Without limiting any other transfer restrictions that may apply to the Sponsor’s Founder Shares, no Sponsor Party shall be permitted to transfer, sell, or otherwise dispose of, directly or indirectly, any Sponsor’s Founder Shares unless and until such Sponsor’s Founder Shares are earned in accordance with this Section 2.1 (except to a controlled affiliate which agrees to be bound by such provisions).

 

ARTICLE 3

 

GENERAL

 

Section 3.1     Governing Law

 

This Agreement shall be governed by and interpreted and enforced in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein.

 

Section 3.2     Merger Agreement Support

 

a. Each Sponsor Party will vote all SPAC Class B Shares that it holds in favor of the transactions contemplated by the Merger Agreement and all other matters set forth in the SPAC Resolution (as defined in the Merger Agreement). When a meeting of shareholders is held to approve the transactions contemplated in the Merger Agreement, each Sponsor Party will appear at such meeting or otherwise cause the SPAC Class B Shares held by it to be counted as present for the purpose of establishing a quorum at such meeting.

 

b. Without limiting any other transfer restrictions that may apply to the SPAC Class B Shares, each Sponsor Party agrees that from and after the date hereof until the closing of the Qualifying Transaction or the earlier termination of the Merger Agreement in accordance with its terms, such Sponsor Party shall not, without the prior written consent of the Sellers, transfer, sell or otherwise dispose of any SPAC Class B Shares now owned or held, or hereafter acquired, directly or indirectly, by such Sponsor Party except as reasonably necessary or desirable in connection with completing the Qualifying Transaction (and without adversely affecting any of the forfeiture provisions hereof); provided that no such transfer, sale or disposition shall be effective unless and until the transferee agrees in writing to be bound by the obligations set forth in Section 3.2.a with respect to the subject SPAC Class B Shares.

 

 

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Section 3.3     Expenses

 

The Corporation shall bear all Transaction Expenses incurred in connection with and prior to the closing of the Qualifying Transaction to the extent not paid prior to or at the closing of the Qualifying Transaction, including, without limitation, those expenses incurred by the Sponsor on behalf of the Corporation.

 

Section 3.4     Currency

 

All references to “$” are to U.S. dollars unless otherwise stated.

 

Section 3.5     Enurement

 

This Agreement becomes effective when executed by the parties. After that time, it will be binding upon and enure to the benefit of the parties and their respective successors and permitted assigns. Notwithstanding anything herein to the contrary, the Company Shareholders shall be express third party beneficiaries of Section 2.1 and the Sellers’ Representative (but no other Company Shareholders) shall be entitled to enforce Section 2.1 on behalf of the Company Shareholders.

 

Section 3.6     Entire Agreement

 

This Agreement, together with the Merger Agreement, constitutes the entire agreement between the parties with respect to the transactions contemplated in this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties with respect to the subject matter of this Agreement. There are no representations, warranties, covenants, conditions or other agreements, express or implied, collateral, statutory or otherwise, between the parties in connection with the subject matter of this Agreement, except as specifically set forth in this Agreement. The parties have not relied and are not relying on any other information, discussion or understanding in entering into and completing the transactions contemplated by this Agreement.

 

Section 3.7     Severability

 

If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, the illegality, invalidity or unenforceability of that provision will not affect (i) the legality, validity or enforceability of the remaining provisions of this Agreement, or (ii) the legality, validity or enforceability of that provision in any other jurisdiction.

 

Section 3.8     Further Assurances

 

Each of the parties covenants and agrees to do such things, to attend such meetings and to execute such further documents and assurances as may be deemed necessary or advisable from time to time in order to carry out the terms and conditions of this Agreement in accordance with their true intent.

 

Section 3.9     Counterparts

 

This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via electronic mail or other transmission method and any counterpart so delivered is deemed to have been duly and validly delivered and be valid and effective for all purposes.

 

 

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Section 3.10     Remedies

 

Each party acknowledges and agrees that in the event of a breach or threatened breach of its covenants hereunder, the harm suffered would not be compensable by monetary damages alone and, accordingly, in addition to other available legal or equitable remedies, each non-breaching party shall be entitled to an injunction or specific performance with respect to such breach or threatened breach, without proof of actual damages (and without the requirement of posting a bond, undertaking or other security), and each party agrees not to plead sufficiency of damages as a defence in such circumstances.

 

Section 3.11     Joinder

 

Any holder of shares of Class B common stock of GH Group, Inc. may become a party to this Agreement by executing and delivering a joinder agreement, in form and substance reasonably satisfactory to the Corporation and the Sellers, and shall thereafter be deemed a “Seller” for all purposes hereunder. The Sellers shall use reasonably best efforts following the date hereof to cause Element 7 to execute and deliver a joinder agreement to this Agreement, in form and substance reasonably satisfactory to the Corporation and the Sellers, and following such execution and delivery Element 7 shall be deemed a “Party” for all purposes hereunder.

 

[Remainder of this page intentionally left blank. Signature page follows.]

 

 

 

 

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on the date first written above.

 

  MERCER PARK BRAND ACQUISTION CORP.
   
  By: /s/ Lou Karger
    Name:
    Title:
     
  MERCER PARK BRAND, L.P., by its general partner
     
  By: /s/ Lou Karger
    Name:
    Title:

 

 

 

 

  SPONSOR PARTIES:
   
  /s/ Charles Miles
  Charles Miles
   
  /s/ Sean Goodrich
  Sean Goodrich

 

 

 

 

  SELLERS:
   
  THE ENTRUST GROUP INC. FBO KYLE
D. KAZAN
   
  By: /s/ Kyle D. Kazan
  Name: Kyle D. Kazan
  Title: Authorized Signatory
     
  JOCELYN MAY ROSENWALD TRUST DATED
DECEMBER 18, 1997
     
  By: /s/ Jill Rosenwald
  Name: Jill Rosenwald
  Title: Co-Trustee
     
  By: /s/ Walter Parker
  Name: Walter Parker
  Title: Co-Trustee

 

  /s/ Jocelyn Rosenwald
  Jocelyn Rosenwald

 

  GRAHAM S. FARRAR 2000 LIVING TRUST
ESTABLISHED FEBRUARY 2, 2000
   
  By: /s/ Graham Farrar
  Name: Graham Farrar
  Title: Trustee

 

 

 

 

Exhibit 99.80

 

FIRST AMENDMENT TO 

CAMARILLO ACQUISITION AGREEMENT

 

This FIRST AMENDMENT TO CAMARILLO ACQUISITION AGREEMENT (this “Amendment”) is made effective as of March 21, 2021 (the “Amendment Date”) by and between GH GROUP, INC., a Delaware corporation (“Glass House”) and MERCER PARK BRAND ACQUISITION CORP, a British Columbia corporation (“Mercer Park”, and together with Glass House, “GH/MPBAC”), on the one hand, and Glass Investments Projects, Inc., a Delaware corporation (the “GIPI”), on the other, to amend that certain letter agreement bearing a date for reference purposes of February 13, 2021 (the “Camarillo Acquisition Agreement”). Capitalized terms used but not defined herein shall have the meanings give to such terms in the Camarillo Acquisition Agreement.

 

RECITALS

 

WHEREAS, GH/MPBAC and GIPI entered into the Camarillo Acquisition Agreement, whereby GIPI agreed, among other things, to sell the Option Rights (as defined in the Camarillo Acquisition Agreement) to GH/MPBAC;

 

WHEREAS, GH/MPBAC and GIPI desire to extend the expiration of the Contingency Period from 5:00 p.m. Pacific Time on March 22, 2021 to 5:00 p.m. Pacific Time on March 24, 2021; and

 

WHEREAS, GH/MPBAC and GIPI desire to amend the Camarillo Acquisition Agreement to provide for such extension in the manner set forth below.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.            Extension of Contingency Period. The Contingency Period shall now expire at 5:00 p.m. Pacific Time on March 24, 2021.

 

2.            Effect. In the event of any conflict between this Amendment and the Camarillo Acquisition Agreement, the terms of this Amendment shall control. The Camarillo Acquisition Agreement, as amended by this Amendment and together with that certain side letter between the parties hereto bearing a date for reference purposes of February 13, 2021, shall be in full force and effect and constitutes the entire agreement between GH/MPBAC and GIPI with respect to the transactions contemplated hereby and thereby.

 

3.            Benefit and Authority. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and each party warrants and represents to the other that it has due and lawful authority to execute this Amendment.

 

4.            Counterparts. This Amendment may be executed in any number of counterparts (which may be delivered by facsimile or electronic mail which attaches a portable document format (.pdf) document) and each counterpart shall represent a fully executed original as if executed by all parties hereto, with all such counterparts together constituting but one and the same instrument.

 

The signature page follows this page.

 

1 

 

 

IN WITNESS WHEREOF, the undersigned have executed this Amendment effective as of Amendment Date.

 

  GH/MPBAC:
   
  GH GROUP, INC.,
  a Delaware corporation
   
  By: /s/ Kyle D. Kazan
  Name: Kyle D. Kazan
  Title: Chief Executive Officer

 

  MERCER PARK BRAND ACQUISITION CORP.,
  a British Columbia corporation
     
  By: /s/ Louis F. Karger
  Name: Louis F. Karger
  Title: CEO

 

  GIPI:
   
  GLASS INVESTMENTS PROJECTS, INC.,
  a Delaware corporation
   
  By: /s/ Jeanette Lombardo
  Name: Jeanette Lombardo
  Title: Chief Executive Officer

 

[Signature Page to First Amendment to Camarillo Acquisition Agreement]

 

 

 

 

 

Exhibit 99.81

 

SECOND AMENDMENT TO

OPTION AGREEMENT

(California Option Assets)

 

THIS SECOND AMENDMENT TO OPTION AGREEMENT (this “Amendment) dated effective as of February 20, 2021 (the Amendment Date"), is made by and among CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent,” and, together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc., a Delaware corporation (the “Option Holder”), to amend the Option Agreement, dated as of December 28, 2018, as amended by that certain First Amendment to Option Agreement, dated as of March 23, 2020 (collectively, the “Agreement”). Capitalized terms used but not defined herein shall have the meanings give to such terms in the Agreement.

 

RECITALS

 

WHEREAS, the CEFF Parties and the Option Holder entered into the Agreement on the premises set forth therein whereby the CEFF Parties granted to the Option Holder the Option to purchase either the California Option Assets or the CEFF Camarillo Propco Equity;

 

WHEREAS, the California APA Closing Date (as defined in the Agreement) occurred on January 31, 2019; and

 

WHEREAS, pursuant to the terms of the Agreement, the Capital Multiplier was specified to increase from 1.479 to 1.619 on the second (2nd) anniversary of the California APA Closing Date (the “Capital Multiplier Step-Up”), subject to the effects of Section 1.2 of the Agreement.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.            Diligence Period. From the Amendment Date until the expiration of the Inspection Period (as defined below), the Camarillo Buyer shall be entitled to perform customary due diligence investigations with respect to the California Option Assets in accordance with applicable terms of the Agreement, as amended by this Amendment, and the CEFF Parties will reasonably cooperate with the Camarillo Buyer in an attempt to resolve any and all diligence-related issues; provided, however, that during the Contingency Period (as defined below) any oral or written communication by the Camarillo Buyer, the Option Holder, or their respective agents and Affiliates with (i) any Governmental Authority or other third party (other than the Camarillo Buyer, the Option Holder or their respective agents and Affiliates) or (ii) any employee of the CEFF Parties or their respective Affiliates, will in each case require the prior e-mail consent of either the CEFF Parent or, in the case of any employee of California OpCo, the Chief Executive Officer of California OpCo; provided, however, that no such prior or other consent shall be required for customary diligence inquiries made with Governmental Authorities for zoning or code compliance information (but specifically excluding any inquiries pertaining to entitlements or zoning clearances related to the Cannabis Use (as defined below) or any disclosure of prospective changes to the use of the Property). “Inspection Period” means the period that begins on the Amendment Date and ends on the date that is the earliest to occur of (i) the termination of the Agreement, (ii) the Outside Date (as amended by Section 3 below), or (iii) the closing of the transactions contemplated by the Definitive Property PSA (the “Closing”). In connection with the foregoing, the CEFF Parties agree to execute the Exercise Notice and provide Option Holder and the Camarillo Buyer with a copy of the same no later than two (2) calendar days after the date of this Amendment.

 

1 

 

 

2.            Earnest Money Deposit. Section 2.3(e)(ii) of the Agreement shall be amended by replacing “Twenty Million Dollars ($20,000,000)” with “(A) no later than three (3) Business Days after the Trigger Date, Two Million Dollars ($2,000,000), and (B) no later than three (3) Business Days after the expiration of the Contingency Period, Eight Million Dollars ($8,000,000)”. Such deposits shall be made pursuant to the terms of a real estate industry standard escrow agreement (The “Escrow Deposit Agreement”), executed among CEFF Parent, the Camarillo Buyer and Escrow Holder (as defined below), which shall provide that CEFF Parent and the Camarillo Buyer shall cause the Escrow Holder to release (i) such $2 million deposit to the Camarillo Buyer immediately after the Camarillo Buyer (or GH Group, Inc., a Delaware corporation (“Glass House”), or Mercer Park Brand Acquisition Corp, a British Columbia corporation (“Mercer Park”)), advises CEFF Parent in writing prior to the expiration of the Contingency Period (as defined below) that the Camarillo Buyer has elected, for any or no reason (and in the sole and absolute discretion of Glass House, Mercer Park or Camarillo Buyer), not to proceed with the transaction contemplated by the Agreement, the Definitive Property PSA (as defined below), the Camarillo Acquisition Agreement (as defined below), or the Definitive Option PSA (as defined below), (ii) such $10 million deposit (in total) to the Camarillo Buyer if less than all of the CB Closing Conditions (as defined below) have been satisfied in all material respects by the Outside Date (it being agreed, however, that the Camarillo Buyer shall have the right, but not the obligation, to waive any one or more of the CB Closing Conditions); and (iii) such $10 million deposit to CEFF Parent (for allocation to CEFF Parent and the Option Holder in accordance with the terms of the Agreement) if all of the following are satisfied in all material respects by the Outside Date and the Closing does not occur on or prior to the Outside Date: (x) neither the Agreement, the Definitive Property PSA, the Camarillo Acquisition Agreement, nor the Definitive Option PSA shall have been previously terminated by the Option Holder or the Camarillo Buyer pursuant to and in accordance with any right of termination that the Option Holder or the Camarillo Buyer may have under the Agreement, the Definitive Property PSA or the Definitive Option PSA, and (y) all CB Closing Conditions shall have been satisfied in all material respects in accordance with their respective terms. For purposes hereof:

 

(a)             “Camarillo Acquisition Agreement” shall have the meaning assigned to such term in that certain letter agreement of even date herewith between Option Holder and the Camarillo Buyer.

 

(b)            “Contingency Period” means the period that begins on the date the CEFF Parties shall have countersigned and delivered to the Option Holder the Exercise Notice (the “Trigger Date”) and ends at 5:00 pm Pacific time on the date that is thirty (30) days after the Trigger Date, unless extended by mutual agreement of the parties.

 

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(c)             “CB Closing Conditions” means, collectively, all of the closing conditions set forth on Exhibit A hereto, all of which are hereby agreed to by each of the parties solely for the benefit of the Camarillo Buyer.

 

(d)            “Definitive Option PSA” shall have the meaning assigned to such term in the Camarillo Acquisition Agreement.

 

(e)             “Definitive Property PSA” means that certain purchase and sale agreement and related Definitive Documents contemplated by Section 2.4 of the Agreement between CEFF Parent and Option Holder (all of which each of the parties hereto covenants in good faith to negotiate and attempt to finalize prior to the expiration of the Contingency Period). In connection therewith, the parties hereto further agree that the Definitive Property PSA shall: (i) contain customary representations, warranties, limitations of liability, pre-closing covenants, closing conditions, and other conditions consistent with the terms and conditions of the Agreement, as amended by this Amendment, legally-enforceable liquidated damages provisions with respect to the deposit described in Section 2 above (which shall provide that such deposit or any portion thereof shall be the CEFF Parties’ sole and exclusive remedy against Option Holder, Camarillo Buyer, Glass House, Mercer Park, and their respective Affiliates, in the event the Closing does not occur as a result of any default by the Camarillo Buyer), allocation of the title insurance premiums and escrow closing costs in accordance with the Agreement, as amended by this Amendment, a closing condition that the CEFF Parties must pay off and satisfy all monetary Liens that they have caused to encumber the California Option Assets (other than any Liens which are the responsibility of Option Holder under the Agreement or the Camarillo Buyer under the Definitive Property PSA), and post-closing covenants reasonable and customary for commercial real estate transactions substantially comparable to the transaction contemplated hereby; and (ii) without any additional or further consent from CEFF Parties, be assignable by Option Holder to the Camarillo Buyer on or after the date the Camarillo Buyer elects in its sole discretion, pursuant to the Camarillo Acquisition Agreement or the Definitive Option PSA, to take an assignment of Option Holder’s rights and obligations under the Agreement. For the avoidance of doubt, the parties agree that the execution of the Definitive Property PSA by both CEFF Parent and the Option Holder shall be a condition of extending the Inspection Period beyond the Contingency Period. Notwithstanding anything to the contrary contained in this Amendment or the Agreement, if the Definitive Property PSA or the License Occupancy Agreement (as defined below) is not executed on or before the expiration of the Contingency Period (including any extensions mutually agreed by the parties), then this Amendment shall become null and void and of no effect immediately after the expiration of the Contingency Period; provided, however, that the foregoing shall not adversely affect the rights of the Camarillo Buyer with respect to the deposit as provided in Section 2 above or in the Escrow Deposit Agreement (all of which rights shall survive this Amendment becoming null and void).

 

3.            Outside Date. The Outside Date shall be revised to mean August 20, 2021 with respect to the contemplated transaction with the Camarillo Buyer, unless otherwise extended by mutual agreement of the parties. This Amendment shall only apply to a transaction occurring on or prior to the Outside Date whereby Glass House or Mercer Park, or any of their respective Affiliates (or any other entity approved in writing by CEFF Parent), is the Camarillo Buyer. In a case where any other party is the Camarillo Buyer, or any transaction occurs following the Outside Date (but specifically excluding any delays in Closing extending beyond the Outside Date due to a breach by one or more of the CEFF Parties), this Amendment and the Definitive Property PSA shall be null and void and of no effect and the Asset Option under Section 2.3 of the Agreement shall automatically revert to GIPI (with this Amendment becoming automatically null and void) without further action of the parties and all rights of GIPI shall be reserved thereunder.

 

3 

 

 

4.            Deletion of Current Capital Multiplier; Purchase Price. Notwithstanding anything in this Amendment or the Agreement that may be construed to the contrary, the Capital Multiplier Step-Up shall be null and void if, with respect to any Exercise Notice delivered to the CEFF Parties as contemplated by Section 1 above, the Camarillo Buyer posts with the Escrow Holder the $10 million deposit set forth in Section 2.3(e)(ii)(B) of the Agreement (as amended by Section 2 above) as follows: (x) $2 million no later than three (3) Business Days after the Trigger Date; and (y) the balance of the $10 million deposit (i.e., $8 million) no later than three (3) Business Days after the expiration of the Contingency Period. In the event that the foregoing deletion of the Capital Multiplier Step-Up shall have occurred, then the Purchase Price payable at the Closing to CEFF Camarillo PropCo for the California Option Assets shall be $118,890,000.00. For the avoidance of doubt, the Capital Multiplier Step-Up shall continue to apply if (a) the Camarillo Buyer is an entity other than Glass House or Mercer Park, or any of their respective Affiliates (or any other entity reasonably approved in writing by CEFF Parent), or (b) the Closing does not occur on or prior to the Outside Date (as amended by Section 3 above). For the further avoidance of doubt, the Capital Multiplier Step-Up shall not continue to apply if the Closing does not occur on or prior to the Outside Date due to a breach by any of the CEFF Parties under the Agreement, as amended by this Amendment, or the Definitive Property PSA. Notwithstanding the provisions of this Amendment or the Agreement that may be construed to the contrary, if the Camarillo Buyer is ready, willing and able to close but for an Entitlement Condition (as defined below) is not satisfied prior to the Outside Date or if the Camarillo Buyer reasonably determines that it is unlikely that the Entitlement Condition will be satisfied before the Outside Date notwithstanding the diligent efforts of the Camarillo Buyer, then the parties hereto agree to negotiate in good faith to reach agreement on commercially reasonable terms and conditions pursuant to which the Outside Date would be extended only by mutual agreement of the parties, with each party acting in its sole discretion, to allow the Camarillo Buyer the reasonable opportunity to satisfy the Entitlement Condition in the period of time as agreed by the parties.

 

5.            Escrow Holder/Title Company. Peninsula Escrow (Rancho Palos Verdes, California office) shall be the escrow holder  (“Escrow Holder”) and Orange Coast Title shall be the Title Company; provided, however, that if the Option Holder or the Camarillo Buyer determines that a change in Title Company is necessary for the issuance of any title policies contemplated hereby, then such party shall designate a new Title Company subject to the consent of the CEFF Parties, such consent not to be unreasonably withheld, conditioned or delayed.

 

6.            Governing Law. This Amendment shall be governed by and construed in accordance with the laws of New York, excluding any laws thereof which would direct application of law of another jurisdiction.

 

4 

 

 

7.            Termination of Non-Compete; License/Occupancy Agreement; Cessation of Capital Improvements. California OpCo shall terminate its current non-compete agreement with Cornelius (Casey) Houweling and his affiliates (collectively, “Houweling”) on or before the date of the Closing. Further, California OpCo shall be afforded up to fourteen (14) weeks following the date of the closing (the “Holdover Period”) to harvest, remove and liquidate any vine crops (tomatoes, cucumbers and peppers) (the “Existing Crop Inventory”) existing at the land upon which the Project is located (the “California Land”) without obligation to pay any rent or license fees (including base rent or performance rent) or any portion of the Camarillo Buyer’s commercial liability, property and casualty insurance costs for insuring the California Land and the Facility (but with obligation to pay its full and proportionate share of all other use, occupancy, secured property taxes, operating expenses and maintenance costs attributable to the use, occupancy, or damage done by California OpCo during such period with respect to the portion of the California Land and the Facility occupied by or used in connection with the Existing Crop Inventory); provided, however, that California OpCo enter into, on or prior to the end of the Contingency Period, a license agreement or similar occupancy agreement with the Camarillo Buyer to allow for such activities at the California Land, which agreement shall contain typical and customary indemnities and covenants on the part of California OpCo (but shall not require any type of occupancy or use fee) for the benefit of the Camarillo Buyer, provided such indemnities and covenants shall not be materially more onerous than those certain indemnities and covenants provided by California OpCo under the Master Lease, shall not limit the Camarillo Buyer’s ability to complete necessary capital improvements to the California Land (for conversion to commercial cannabis use) that do not materially interfere with the Existing Crop Inventory, and shall otherwise be in form and substance reasonably acceptable to the Camarillo Buyer and California OpCo (the “License/Occupancy Agreement”). In addition to the foregoing, effective upon the Trigger Date, and for so long as this Amendment remains in effect as contemplated by Section 3 of this Amendment, California OpCo shall cease, and refrain from performing, any activities on the California Land that are in the nature of capital improvements except for those ongoing capital improvements that have been previously disclosed to the Camarillo Buyer and any other capital improvements reasonably necessary to mitigate or stop an imminent and material threat to human health and public safety. The satisfaction of each of the covenants set forth in the foregoing provisions of this Section 7 shall also constitute conditions to Closing solely for the benefit of the Camarillo Buyer.

 

8.            Other Provisions. In the event of any conflict between this Amendment and the Agreement, the provisions of this Amendment shall control. The Agreement, as amended by this Amendment, remains in full force and effect. The provisions of Sections 8.2, 8.7, 8.8, 8.10, 8.12 and 8.13 of the Agreement shall apply, mutatis mutandis, to this Amendment. Notwithstanding anything to the contrary contained in this Amendment, until such time as is specified in the Camarillo Acquisition Agreement, Mercer Park shall have no binding obligations hereunder, but shall have the rights specified herein.

 

[Signature page follows]

 

5 

 

 

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the Amendment Date.

 

  CEFF PARTIES:

 

    CEFF CAMARILLO PROPERTY, LLC

 

  By: EqCEF I, LLC, its manager

 

    By: /s/ R.Thomas Amis
  Name: R.Thomas Amis
    Title: Principal
     
    CEFF CAMARILLO HOLDINGS, LLC

 

    By: EqCEF I, LLC, its manager
       
    By: /s/ R.Thomas Amis
  Name: R.Thomas Amis
    Title: Principal
     
    OPTION HOLDER:
     
    GLASS INVESTMENTS PROJECTS, INC.

 

  By:  /s/ Jeanette Lombardo
  Name: Jeanette Lombardo
    Title: Chief Executive Officer
     
    CAMARILLO BUYER:
     
    GH CAMARILLO LLC

 

  By: /s/ Kyle D. Kazan
  Name: Kyle D. Kazan
    Title: Authorized Signatory

 

[Signature Page to Second Amendment to Option Agreement]

 

 

 

 

  ACKNOWLEDGED AND AGREED:
     
    MERCER PARK BRAND ACQUISITION CORP.

 

  By: /s/ Louis Karger
  Name: Louis Karger
    Title: Chief Executive Officer
     
    HOUWELING NURSERIES OXNARD, INC.

 

  By: /s/ Kevin Doran
  Name: Kevin Doran
    Title: President

 

[Signature Page to Second Amendment to Option Agreement]

 

 

 

 

Exhibit A

 

CB Closing Conditions

 

Notwithstanding anything in the Agreement that may be construed to the contrary, the following shall be conditions precedent to the obligations of the Option Holder or the Camarillo Buyer to proceed with the Closing pursuant to the Agreement, the Definitive Property PSA and the Definitive Option PSA:

 

(i)            The Entitlement Condition (as defined below) shall have been satisfied prior to the date that is thirty (30) days prior to the Outside Date, unless extended by mutual agreement of the parties;

 

For purposes hereof, “Entitlement Condition” means the occurrence of the following:

 

(x)             the approval, issuance or certification, as the case may be, by applicable state and local governmental agencies and authorities of all entitlements, approvals, licenses and permits necessary for the operation of the California Option Assets (i.e., 5 million square feet of existing greenhouses) for Cannabis Use (as defined below);

 

(y)            the approval, issuance or certification, as the case may be, by applicable state and local governmental agencies and authorities of all discretionary entitlements, approvals, permits and amendments and modifications thereto necessary to (A) increase the capacity or occupancy of the California Land as may be required for the Cannabis Use, and (B) complete the construction of improvements to the California Land in accordance with conceptual plans disclosed by the Camarillo Buyer to the CEFF Parties prior to the expiration of the Contingency Period;

 

(z)             In the event of any timely made appeal or legal challenge being pursued (whether by administrative appeal, lawsuit or otherwise) before a governmental authority or court of competent jurisdiction with respect to the issuance of one or more of the above-described entitlements, approvals and permits (each, an “Entitlement Appeal”), upon the final resolution of any such Entitlement Appeal in favor of the Camarillo Buyer (whether by final judgment, dismissal with prejudice, dismissal of any appeal, settlement or otherwise);

 

(ii)           No governmental moratorium shall have been enacted and is continuing with respect to the cultivation, processing, packaging and storage of cannabis and that would apply to all or any “material” portion of the California Option Assets (collectively, the “Cannabis Use”), it being agreed that a portion of the California Option Assets shall be deemed “material” if the surface land area of such portion comprises three percent (3%) or more of the aggregate surface land area of the Property;

 

(iii)          The Title Company shall be irrevocably committed to issue an Optionee’s Policy to Title Insurance in favor of Glass Investments Projects, Inc., a Delaware Corporation (“GIPI”), or the Camarillo Buyer, as the case may be, insuring that such party is, as of the date of issuance, the holder of the Asset Option, with a liability limit in the amount of the purchase price payable by the Camarillo Buyer to GIPI for the Asset Option, and which contains no exceptions to coverage other than (x) Permitted Liens which have been recorded against the California Option Assets prior to the expiration of the Contingency Period; and (y) any other Liens approved or consented to in writing by the Camarillo Buyer in its sole and absolute discretion;

 

Exhibit A

 

 

 

(iv)         The Definitive Documents shall contain a provision to the effect that any legal entities which owned or controlled the California Option Assets immediately prior to the Closing are subject to audit pursuant to U.S. PCAOB auditing standards for the three (3) fiscal years immediately preceding the Closing, at the Camarillo Buyer’s or its Affiliate’s sole expense (or such lesser number of fiscal years corresponding to the time periods such entities have been in existence);

 

(v)          The Master Lease shall have been terminated pursuant to a form of termination agreement satisfactory to the Camarillo Buyer; provided, however, that the parties hereto acknowledge that the termination of the Master Lease requires the consent of the Lessee, which consent is conditioned upon (i) the reasonable cooperation of the parties with respect to the timely satisfaction of the conditions precedent set forth on this Exhibit A, and (ii) the grant of rights in favor of California OpCo pursuant to the License Agreement;

 

(vi)         GIPI, as the seller, and the Camarillo Buyer, as the purchaser, shall be in a position to close the sale to the Camarillo Buyer of the Asset Option in accordance with the Definitive Documents (including the Definitive Option PSA) immediately prior to the closing (or any such earlier date as may be exercisable by the Camarillo Buyer under the Definitive Option PSA) as it pertains to the transaction contemplated by the Definitive Property PSA and the Definitive Option PSA; and

 

(viii)       No material breach on the part of any of the CEFF Parties shall have occurred and remains uncured under the Agreement or the Definitive Property PSA.

 

If less than all of the foregoing conditions precedent shall have been satisfied in the time and manner provided above, unless otherwise waived in writing by the Camarillo Buyer in its sole discretion, then the Camarillo Buyer may elect, by written notice to the Option Holder and the CEFF Parties, not to proceed with the transactions contemplated by the Agreement, the Definitive Option PSA and/or the Definitive Property PSA, in which event (i) the Camarillo Buyer shall have no further liability or obligation under the Agreement, the Definitive Option PSA, or the Definitive Property PSA, (ii) the CEFF Parties shall have no further liability or obligation under the Definitive Property PSA, (iii) as a covenant that shall survive any termination of the Agreement, the Definitive Option PSA or the Definitive Property PSA, the entire $10 million deposit shall be immediately returned to the Camarillo Buyer, and (iv) the option rights under the Agreement shall automatically revert to the Option Holder without further action of the parties and the original terms of the Agreement, as amended (other than with respect to this Amendment), shall continue to apply.

 

Exhibit A

 

 

Exhibit 99.82

 

THIRD AMENDMENT TO

OPTION AGREEMENT

(California Option Assets)

 

This THIRD AMENDMENT TO OPTION AGREEMENT (this “Amendment”) is made effective as of March 21, 2021 (the “Amendment Date”) by and among CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent,” and, together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc., a Delaware corporation (the “Option Holder”).

 

RECITALS

 

WHEREAS, the CEFF Parties and the Option Holder are parties to that certain Option Agreement dated as of December 28, 2018 (“Original Agreement”), as amended by (i) a First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, (“First Amendment”) and (ii) a Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021 (“Second Amendment”) (the Original Agreement, as amended by the First Amendment and Second Amendment, collectively, is the “Option Agreement”). Capitalized terms used but not defined herein shall have the meanings give to such terms in the Option Agreement; and

 

WHEREAS, the CEFF Parties and Option Holder desire to extend the expiration of the Contingency Period from 5:00 p.m. Pacific Time on March 22, 2021 to 5:00 p.m. Pacific Time on March 24, 2021 and, accordingly, to amend the Option Agreement to provide for such extension in the manner set forth below.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.          Extension of Contingency Period. The Contingency Period shall now expire at 5:00 p.m. Pacific Time on March 24, 2021.

 

2.          Effect. In the event of any conflict between this Amendment and the Option Agreement, the terms of this Amendment shall control. The Option Agreement, as amended by this Amendment, shall be in full force and effect and constitutes the entire agreement between the CEFF Parties and the Option Holder with respect to the transactions contemplated thereby.

 

3.          Benefit and Authority. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and each party warrants and represents to the other that it has due and lawful authority to execute this Amendment.

 

4.          Counterparts. This Amendment may be executed in any number of counterparts (which may be delivered by facsimile or electronic mail which attaches a portable document format (.pdf) document) and each counterpart shall represent a fully executed original as if executed by all parties hereto, with all such counterparts together constituting but one and the same instrument.

 

The signature page follows this page.

 

  1  

 

 

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of Amendment Date.

 

  CEFF PARTIES:
   
  CEFF CAMARILLO PROPERTY, LLC
   
  By: EqCEF I, LLC, its manager
     
     
    By: /s/ R. Thomas Amis
    Name: R. Thomas Amis
    Title: Principal

 

  CEFF CAMARILLO HOLDINGS, LLC
   
  By: EqCEF I, LLC, its manager
     
     
    By: /s/ R. Thomas Amis
    Name: R. Thomas Amis
    Title: Principal

 

 

  OPTION HOLDER:
   
  GLASS INVESTMENTS PROJECTS, INC.
   
   
  By: /s/ Jeanette Lombardo

  Name: Jeanette Lombardo
  Title: Chief Executive Officer

 

 

  CAMARILLO BUYER:
   
  GH CAMARILLO LLC
   
   

  By: /s/ Kyle D. Kazan

  Name: Kyle D. Kazan
  Title: Authorized Signatory

 

[Signature Page to Third Amendment to Option Agreement]

 

 

 

 

  ACKNOWLEDGED AND AGREED:
   
  MERCER PARK BRAND ACQUISITION CORP.
   
   

  By: /s/ Louis Karger

  Name: Louis Karger
  Title: Chief Executive Officer

 

 

  HOUWELING NURSERIES OXNARD, INC.
   
   

  By: /s/ Kevin Doran

  Name: Kevin Doran
  Title: President

 

[Signature Page to Third Amendment to Option Agreement]

 

 

Exhibit 99.83

 

FOURTH AMENDMENT TO OPTION AGREEMENT

(California Option Assets)

 

This FOURTH AMENDMENT TO OPTION AGREEMENT (this “Amendment”) is made effective as of March 24, 2021 (the “Amendment Date”) by and among CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent,” and, together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc., a Delaware corporation (the “Option Holder”).

 

RECITALS

 

WHEREAS, the CEFF Parties and the Option Holder are parties to that certain Option Agreement dated as of December 28, 2018 (“Original Agreement”), as amended by (i) a First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, (“First Amendment”), (ii) a Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021 (“Second Amendment”) and (iii) a Third Amendment to Option Agreement (California Option Assets), made effective as of March 21, 2021 (“Third Amendment”) (the Original Agreement, as amended by the First Amendment, Second Amendment and Third Amendment, collectively, is the “Option Agreement”). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Option Agreement; and

 

WHEREAS, the CEFF Parties and Option Holder desire to further extend the expiration of the Contingency Period and, accordingly, to amend the Option Agreement to provide for such extension in the manner set forth below.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.          Extension of Contingency Period. The Contingency Period shall now expire at 5:00 p.m. Pacific Time on March 26, 2021.

 

2.          Effect. In the event of any conflict between this Amendment and the Option Agreement, the terms of this Amendment shall control. The Option Agreement, as amended by this Amendment, shall be in full force and effect and constitutes the entire agreement between the CEFF Parties and the Option Holder with respect to the transactions contemplated hereby and thereby.

 

3.          Benefit and Authority. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and each party warrants and represents to the other that it has due and lawful authority to execute this Amendment.

 

4.          Counterparts. This Amendment may be executed in any number of counterparts (which may be delivered by facsimile or electronic mail which attaches a portable document format (.pdf) document) and each counterpart shall represent a fully executed original as if executed by all parties hereto, with all such counterparts together constituting but one and the same instrument.

 

The signature page follows this page.

 

  1  

 

 

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of Amendment Date.

 

  CEFF PARTIES:
   
  CEFF CAMARILLO PROPERTY, LLC
   
  By: EqCEF I, LLC, its manager
     
     
    By: /s/ R. Thomas Amis
    Name: R. Thomas Amis
    Title: Principal
     
  CEFF CAMARILLO HOLDINGS, LLC
   
  By: EqCEF I, LLC, its manager
     
     
    By: /s/ R. Thomas Amis
    Name: R. Thomas Amis
    Title: Principal

 

 

  OPTION HOLDER:
   
  GLASS INVESTMENTS PROJECTS, INC.
     
     
  By: /s/ Jeanette Lombardo
  Name:   Jeanette Lombardo
  Title:   Chief Executive Officer
   
   
  CAMARILLO BUYER:
   
  GH CAMARILLO LLC
     
     
  By: /s/ Kyle D. Kazan
  Name:   Kyle D. Kazan
  Title:   Authorized Signatory

 

[Signature Page to Fourth Amendment to Option Agreement]

 

 

 

 

  ACKNOWLEDGED AND AGREED:
   
  MERCER PARK BRAND ACQUISITION CORP.
   
   
  By: /s/ Louis Karger
  Name: Louis Karger
  Title: Chief Executive Officer
     
     
  HOUWELING NURSERIES OXNARD, INC.
   
   
  By: /s/ Kevin Doran
  Name: Kevin Doran
  Title: President

 

[Signature Page to Fourth Amendment to Option Agreement]

 

 

 

Exhibit 99.84

 

mercer park brand acquisition corp.

 

glass house group inc.

 

February 13, 2021

 

Via Email

 

Glass Investments Projects, Inc. 

11344 Pacific Coast Highway 

Malibu, CA 90265 

Attn: Ms. Jeanette Lombardo 

Email:  Jeanette.Lombardo@glassinvestmentsprojects.com

 

Re:      Option Agreement (California Option Assets), dated December 28, 2018, by and among CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC (“CEFF Parent” together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc., a Delaware corporation (“Option Holder” or “GIPI”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and Option Holder (“First Amendment”) and (ii) the Second Amendment to Option Agreement (California Option Assets), dated effective February [ ], 2021, by and among the CEFF Parties and Option Holder (“Second Amendment”) (as so amended by the First Amendment and Second Amendment, collectively, the “California Option Agreement”).

 

Ladies and Gentlemen:

 

Reference is made to the California Option Agreement. Capitalized terms not defined herein shall have the meanings set forth in the California Option Agreement.

 

It is our understanding that GIPI intends to exercise its Asset Option under the California Option Agreement by a letter to be delivered to the CEFF Parties pursuant to Section 2.3 of the California Option Agreement and to which this letter, once fully-executed, is to be attached (the “Exercise Notice”). In that regard, and on behalf of GH Group, Inc., a Delaware corporation (“Glass House”), and Mercer Park Brand Acquisition Corp, a British Columbia corporation, (“Mercer Park”), we are pleased to submit the following offer to purchase the Option Rights (as defined below).

 

Upon the acceptance of this offer by GIPI, which shall be evidenced only by GIPI’s execution of this letter below, this letter shall constitute a binding agreement between Glass House, as the purchaser, and GIPI, as the seller, subject to and in accordance with the terms set forth below, in which event this letter shall constitute the Camarillo Acquisition Agreement contemplated by Section 2.3 of the California Option Agreement. For greater certainty, Mercer Park shall have no binding obligations hereunder, but shall have the rights specified herein. This letter nonetheless represents Mercer Pack’s non-binding intent to proceed with the transactions contemplated herein. Mercer Park confirms that it is engaged in confidential negotiations with Glass House with respect to a proposed business combination with Glass House with an anticipated closing on or before May 31, 2021.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 2 of 17

 

Purchaser: Glass House-selected designee(s).

 

Option Rights: All rights, options and interests held by GIPI, as the Option Holder under the California Option Agreement, including, without limitation, all rights relating to the Property.

 

Property: The California Option Assets (the “Property”). The purchase price payable to the CEFF Parties for the Property shall be as set forth in the California Option Agreement or, if different, the definitive purchase and sale agreement for the Property anticipated to be entered into between the CEFF Parties and Purchaser (the “Definitive Property PSA”), in each case as may hereafter be amended.

 

Restrictions on GIPI: From and after the Trigger Date (as defined below) until the earlier to occur of (x) the termination of this letter, or (y) the termination of the Definitive Option PSA, GIPI shall neither do, nor permit, any one or more of the following, unless in each instance GIPI shall have obtained the prior written consent of Purchaser or Mercer park (which consent Purchaser or Mercer Park may withhold in its sole and absolute discretion):

 

(i) Enter into, amend or terminate, the Definitive Property PSA;

 

(ii) Amend or terminate the California Option Agreement;

 

(iii) Waive any breach by the CEFF Parties, or any rights or remedies of GIPI, under the California Option Agreement or the Definitive Property PSA; and

 

(iv) Exercise or implement any right or election under the California Option Agreement or the Definitive Property PSA.

 

Purchase Price: The Purchase Price shall be comprised of the following:

 

(i) Upon the closing of the transactions (collectively, the “Closing”) contemplated by this letter with respect to the Option Rights and by the California Option Agreement with respect to the Property in accordance with, as applicable, the Definitive Option PSA and the Definitive Property PSA (collectively, the “Transactions”), Mercer Park shall issue Ten Million (10,000,000) shares of its publicly traded stock (such shares are the “Closing Shares”) to GIPI or its designee, as appropriate, based on the definitive structure of the Transactions (the “GIPI Shares Designee”), at a share price equal to Ten Dollars ($10) per share, for total consideration of One Hundred Million and 00/100 Dollars ($100,000,000.00), subject in any case to applicable securities laws and stock exchange rules. The Closing Shares will be subject to customary lockup agreements restricting the sale of 50% of the Closing Shares for six (6) months following the Closing and the remaining 50% of the Closing Shares for twelve (12) months following the Closing;

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 3 of 17

 

(ii) As Mercer Park and GIPI may hereafter agree in a separate written agreement (the “Earnout Agreement”), an earnout arrangement in the form of the issuance to GIPI or the GIPI Shares Designee, as appropriate, based on the definitive structure of the Transactions, of additional shares in Mercer Park (such additional shares are, collectively, the “Earnout Shares”), which Earnout Shares shall be subject to an agreed upon earnout formula and customary lockup agreement, as well as a “claw back” provision as contemplated below in connection with the Agricultural Lease (which “claw back” provision shall contain waivers by GIPI of all guarantor and surety defenses); and

 

(iii) The opportunity to participate, after the Closing, in Mercer Park’s equity incentive plan for certain of GIPI’s legacy key employees and contractors mutually acceptable to Mercer Park and GIPI, and who will continue, after the Closing, to perform services for the Purchaser in connection with the operation of the Property as a commercial cannabis facility, in all cases subject to the incentive plan’s general terms and conditions applicable to all such other eligible key employees or contractors of Mercer Park and Glass House.

 

Deposit: No later than three (3) business days after the date (the “Trigger Date”) on which this letter shall have been executed and delivered by Mercer Park, Purchaser and GIPI and the Exercise Notice shall have been executed and delivered by GIPI to the CEFF Parties (and countersigned by the CEFF Parties), Purchaser shall deliver to Escrow Holder (as defined below) an earnest money deposit in the amount of $2,000,000 (the “Initial Deposit”).

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 4 of 17

 

In the event that Purchaser does not deliver the CP Termination Notice (as defined below) prior to the expiration of the Contingency Period (as defined below), then no later than three (3) business days after the expiration of the Contingency Period, Purchaser shall deliver to Escrow Holder an additional earnest money deposit in the amount of $8,000,000 (the “Additional Deposit”, and together with the Initial Deposit, the “Deposit”).

 

From and after the delivery of the Additional Deposit to Escrow, the entire Deposit shall be non-refundable other than as may be provided to the contrary in this letter, the Definitive Property PSA or the Definitive Option PSA (as defined below).

 

Contingency Period: The period that begins on the Trigger Date and ends at 5:00 pm Pacific Time on the date that is thirty (30) days after the Trigger Date, unless further extended by mutual agreement of Purchaser and GIPI (the “Contingency Period”). In connection therewith, Purchaser and GIPI agree that if the corresponding contingency period under the California Option Agreement or Definitive Property PSA is hereafter extended, then the Contingency Period shall be automatically extended to be coterminous with the extended contingency period under the California Option Agreement or Definitive Property PSA, as the case may be. Prior to the expiration of the Contingency Period, Purchaser shall notify GIPI, in writing, of its election to proceed or not proceed with the Transactions. If, prior to the expiration of the Contingency Period, Purchaser notifies GIPI that Purchaser has elected (for any or no reason and in Purchaser’s sole and absolute discretion) not to proceed with the Transactions (the “CP Termination Notice”), then this letter shall terminate concurrently with Purchaser’s delivery of the CP Termination Notice, in which event (i) each party hereto shall have no further liability or obligation to the other (other than any liabilities or obligations that, by the express terms of this letter, are provided to survive the termination of this letter), (ii) as a covenant that shall survive any termination of this letter pursuant to this paragraph, the Initial Deposit shall be immediately returned to Purchaser, and (iii) as an additional covenant that survives any termination of this letter pursuant to this paragraph, the option rights exercisable pursuant to the California Option Agreement shall automatically revert back to GIPI without further action of the parties.

 

Inspection Rights: Commencing upon the date on which this letter shall have been executed and delivered by Mercer Park, Purchaser and GIPI and continuing until the earliest to occur of (i) the termination of this letter, (ii) the termination of the Definitive Option PSA, (iii) the termination of the Definitive Property PSA or (iv) the Closing, Purchaser and Mercer Park shall have the right to make certain investigations of and inquiries regarding the Option Rights and the Property and to review all Due Diligence Materials, including those which GIPI shall use commercially reasonably efforts to promptly cause to be prepared (as agreed to) and delivered to Purchaser and Mercer Park following the Trigger Date at the sole expense of Purchaser.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 5 of 17

 

Due Diligence Materials” shall include, but not be limited to, all title information, surveys, agreements, contracts, appraisals, licenses, permits and entitlements, property inspection reports, and geotechnical and environmental reports relating to the Option Rights or the Property.

 

Within five (5) calendar days of the Trigger Date, GIPI shall use commercially reasonably efforts to deliver to Purchaser and Mercer Park copies of the following Due Diligence Materials to the extent available and if not previously provided:

 

a. A current title report for the entire Property;

 

b. All ALTA surveys relating to the Property;

 

c. All environmental assessments and reports;

 

d. All soils and geotechnical reports;

 

e. All other inspection reports relating to the Property or any buildings thereon;

 

f. Copies of service contracts;

 

g. Property tax bills for the current calendar year and the prior two (2) calendar years;

 

h. Building plans and certificates of occupancy for all buildings, greenhouses and other structures on the Property;

 

i. Copies of all licenses, permits, regulatory approvals and entitlements pertaining to the Property;

 

j. Capital expenditure budget or plan;

 

k. All leases and license agreements;

 

l. All information and reports received by GIPI pursuant to or in connection with the California Option Agreement; and

 

m. Any other information reasonably requested by Purchaser.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 6 of 17

 

In addition to the foregoing, GIPI shall cause, at Purchaser’s sole cost and expense:

 

(i) except as may otherwise be provided in the Definitive Property PSA, the following items to be promptly delivered to Purchaser and Mercer Park, which items shall also constitute Due Diligence Materials: (x) a current Phase One environmental site assessment for the entire Property issued in accordance with the most current versions of the ASTM standards and the EPA “all appropriate inquiries” rule; and (y) a current ALTA survey; and

 

(ii) Successor Tenant (as defined below) and Successor Tenant’s predecessors-in-interest and affiliates to disclose to Purchaser and Mercer Park in writing all material adverse conditions and circumstances relating to the Property, to the extent such conditions and circumstances are known to any one or more of the Successor Tenant and Successor Tenant’s predecessors-in-interest and affiliates.

 

Closing Date; Advance Assignment of Option: Subject to all terms set forth in this letter or the Definitive Option PSA, as the case may be, the Closing shall occur no later than August 10, 2021. At any time after the Trigger Date:

 

(i) GIPI shall, upon demand by Purchaser and Mercer Park, assign all Option Rights to an entity designated by Purchaser and Mercer Park, pursuant to a form of assignment in commercially reasonable form and otherwise satisfactory to Purchaser and Mercer Park, which assignment shall be held by the assignee subject to the other terms and conditions set forth in this letter or the Definitive Option PSA, as the case may be, including, without limitation, the terms relating to Purchaser’s Closing Conditions; and

 

(ii) GIPI shall, upon demand by Purchaser and Mercer Park, assign to an entity designated by Purchaser and Mercer Pack all of GIPI’s rights and interests, if any, to and under the Definitive Property PSA, as applicable, pursuant to a form of assignment in commercially reasonable form and otherwise satisfactory to Purchaser and Mercer Park, which assignment shall be held by the assignee subject to the other terms and conditions set forth in this letter or the Definitive Option PSA, as the case may be, including, without limitation, the terms relating to Purchaser’s Closing Conditions.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 7 of 17

 

Mercer Park Post-
Closing Capital
Commitment;
Working Capital:
If the Closing occurs, then Mercer Park shall, after the Closing, commit and fund up to Forty Million and 00/100 Dollars ($40,000,000.00) for capital expenditures (the “CapEx Commitment”) required to further develop or repurpose the Property for commercial cannabis operations. To the extent that the cost of the capital expenditures is less than the CapEx Commitment, such remaining funds shall be used as working capital to fund the operations of the commercial cannabis business for the Property. The expenditure of the CapEx Commitment and/or any savings from the CapEx Commitment used for working capital, if any, shall be subject in each instance to meaningful consultation with GIPI. For the sake of further clarity, GIPI shall not be responsible for any working capital expenses or similar obligations related to the commercial cannabis business operations at the Property.

 

Exclusivity Period: The period that begins on the Trigger Date and ends on the earliest to occur of (i) the termination of this letter, (ii) the termination of the Definitive Option PSA, (iii) the termination of the Definitive Property PSA or (iv) the Closing.

 

Exclusivity: The parties will each be devoting a significant amount of time, effort, and expense in connection with the Transactions, including the Purchaser’s and Mercer Pack’s due diligence review of the Option Rights and the Property, and the preparation of the Definitive Agreements (as defined below). Therefore, in consideration of such expense, time, and efforts by the Purchaser and Mercer Park, GIPI agrees during the Exclusivity Period to not, and to cause its affiliates and the CEFF Parties to not, and to cause each of his and their (including affiliates and CEFF Parties’) respective, agents, equity holders, directors, managers, officers, affiliates, representatives, successors and assigns to not (individually an “Exclusivity Party”, and collectively, the “Exclusivity Parties”), directly or indirectly, commit to, agree to, enter into, or solicit, entertain, discuss, negotiate or encourage any inquiries, offers, or proposals concerning any purchase or sale of any interest in any or all of the Option Rights or the Property or the sale, recapitalization, liquidation, financing, acquisition, merger or similar transaction of, involving or relating to all or any the Option Rights or the Property (an “Acquisition Proposal”) from or with any other person or entity, other than Purchaser and Mercer Park. GIPI agrees, and will cause Designee (as defined below), to immediately notify the Purchaser and Mercer Park, if any Exclusivity Party receives any unsolicited indications of interest, requests for information, or offers in respect of an Acquisition Proposal, and will communicate to Purchaser and Mercer Park and in reasonable detail the terms of any such indication, request, or offer, and will provide Purchaser and Mercer Park with copies of all written communications relating to any such indication, request, or offer. Immediately upon the Trigger Date, GIPI will, and will cause Designee to, terminate, and cause the Exclusivity Parties to terminate, any and all existing discussions or negotiations with any other person or group of persons other than Purchaser and Mercer Park, their respective agents, representatives and affiliates regarding an Acquisition Proposal. In the event of any breach of this paragraph (and as a covenant that shall survive any termination of this letter or the Definitive Option PSA), Purchaser and Mercer Park will be entitled to exercise all rights and remedies available at law and in equity.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 8 of 17

 

Escrow Holder/Title
Company:
Peninsula Escrow (Rancho Palos Verdes, California) shall be the escrow holder and Orange Coast Title (Santa Ana, California) shall be the Title Company; provided, however, that if Purchaser and Mercer Park determine that a change in Title Company is necessary for the issuance of any title policies contemplated hereby, then Purchaser and Mercer Park shall designate a new Title Company and provide notice thereof to GIPI.

 

Purchaser Closing
Conditions:
The following shall be conditions precedent to the obligation of Purchaser and Mercer Park to proceed with the Closing pursuant to this letter or the Definitive Option PSA:

 

(i) The Entitlement Condition (as defined below) shall have been satisfied prior to the date that is thirty (30) days prior to the scheduled Closing Date.

 

For purposes hereof, “Entitlement Condition” means the occurrence of all of the following:

 

(x)            the approval, issuance or certification, as the case may be, by applicable governmental agencies and authorities of all entitlements, approvals, licenses and permits necessary for the operation of the entire Property (i.e., 5 million square feet of existing greenhouses) for cultivation, processing, packaging and storage of cannabis;

 

(y)            the approval, issuance or certification, as the case may be, by applicable governmental agencies and authorities of all discretionary entitlements, approvals and permits necessary for the construction and completion of improvements to the Property in accordance with conceptual plans disclosed by Purchaser to GIPI and Mercer Park prior to the expiration of the Contingency Period; and

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 9 of 17

 

(z)            in the event of any timely made appeal or legal challenge being pursued (whether by administrative appeal, lawsuit or otherwise) with respect to the issuance of one or more of the above-described entitlements, approvals and permits (each, an “Entitlement Appeal”), upon the final resolution of any such Entitlement Appeal in favor of Purchaser (whether by final judgment, dismissal with prejudice, dismissal of any appeal, settlement or otherwise)

 

(ii) GIPI shall have caused, and will cause, a mutually acceptable designee (“Designee”) to enter into an employment agreement with such title as is mutually agreed by the parties hereto, and report directly to the President, Chief Executive Officer or such other designees of Glass House,/Meccec Pack’s or Purchaser’s board(s). At all times, the board(s) shall hold final decision-making authority with respect to the Property and all facilities thereon. If Designee is unable to be onsite on a full time basis, he may enter into a consulting agreement with comparable responsibilities to those contemplated under an employment agreement. Either form of agreement shall contain terms to be mutually agreed upon between Designee and Glass House, Mercer Park or Purchaser, including specific responsibilities and work functions, which may be amended from time to time. Except for Designee’s ownership and management of Propagation Services Canada Inc., either form of agreement shall provide that Designee will be bound by customary and geographically broad in scope non-compete provisions for a term of no less than five (5) years (excluding future passive ownership of less than 5.0% on a fully-diluted basis of public companies);

 

(iii) No governmental moratorium shall have been enacted and is continuing with respect to the cultivation, processing, packaging and storage of cannabis and that would apply to all or any “material” portion of the Property (collectively, “Cannabis Use”), it being agreed that a portion of the Property shall be deemed “material” if the surface land area of such portion comprises three percent (3%) or more of the aggregate surface land area of the Property;

 

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 10 of 17

 

(iv) The Title Company (as defined below) shall be irrevocably committed to issue, upon the Closing, an Optionee’s Policy of Title Insurance in favor of Purchaser, insuring that Purchaser is, as of the Closing, the holder of the Asset Option, with a liability limit in the amount of the Purchase Price, and which contains no exceptions to coverage other than (x) Permitted Liens which have been recorded against the Property prior to the expiration of the Contingency Period; and (y) any other Liens approved or consented to in writing by Purchaser;

 

(v) The Definitive Agreements (as defined below) shall contain a provision to the effect that entities which owned or controlled the Property immediately prior to the Closing must be audited pursuant to U.S. PCAOB auditing standards, for three (3) fiscal years, plus interim periods with review reports, all as required by Mercer Park (or such lesser time period that such entities have been in existence);

 

(vi) Mercer Park shall have completed its acquisition of Glass House;

 

(vii) The Master Lease shall have been terminated pursuant to a form of termination agreement satisfactory to Purchaser and Mercer Park;

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 11 of 17

 

(viii) To the extent that GIPI, Designee or their respective affiliates have been released from any non-competitive provisions or restrictions which restrict any of them from entering into the Agricultural Lease (as defined below), GIPI or its designee, as the tenant (in such capacity, the “Successor Tenant”), and Purchaser, as the landlord, shall have entered into an arm’s length fixed-term lease of no less than three years (the “Agricultural Lease”) for the portion of the Property that is not then being used for the Cannabis Use (such portion is the “Leased Premises”). Pursuant only to the Agricultural Lease, Successor Tenant shall be entitled to cultivate, harvest and sell vine crops in the Leased Premises during the period in which the Purchaser is seeking to satisfy any remaining Entitlement Conditions and is completing required capital improvements for conversion of the Property to the Cannabis Use to the extent such improvements do not materially interfere with Successor Tenant’s use of the Leased Premises; provided, however, that the Purchaser shall not be responsible for any direct or indirect fees, costs or expenses of any kind associated with Successor Tenant’s actual use and occupancy of the Leased Premises during the term of the Agricultural Lease. In any event, the Agricultural Lease, which is to be effective immediately following the date that is fourteen (14) weeks after the Closing, shall provide for a base rent equal to $1.00 per square meter (subject to abatement as provided below), shall provide that Successor Tenant will be responsible for the costs and expenses relating to the lease, occupancy, operation, use, repair, maintenance and replacement of the Leased Premises and improvements thereon pursuant to an equitable cost-allocation or cost-sharing formula to be further documented in the Agricultural Lease (including, without limitation, property taxes (with no “Prop 13” protection), liability and property insurance in commercially reasonable amounts (but excluding any obligation to pay a premium or surplus associated with the Leased Premises if an insurer were to reclassify the Leased Premises or Successor Tenant’s use as Cannabis Use), water, natural gas, electricity and other utilities, costs relating to fertilizers and chemicals, carbon dioxide, cogeneration and boiler heating services, waste removal, and costs of repair, maintenance and replacement (allocated on the basis of the Successor Tenant’s reasonably estimated usage)), and shall contain commercially reasonable provisions, including, without limitation, typical and customary indemnities and insurance covenants on the part of and/or for the benefit of the Purchaser, and shall otherwise be in a form and substance reasonably acceptable to the Purchaser and Mercer Park. With respect to the base rent contemplated above, the Agricultural Lease shall provide that the base rent shall be abated; provided, however, that in the event that Successor Tenant breaches any obligation under the Agricultural Lease resulting in financial harm or loss to Purchaser, then at Purchaser’s election, such abatement shall be deemed null and void and Successor Tenant shall be liable for all base rent as if such abatement was never granted. Notwithstanding the foregoing, Purchaser will, however, have the right to terminate the Agricultural Lease with respect to all or any portion of the Leased Premises upon delivery of 60 days’ advance written notice to Successor Tenant; upon expiration of such notice period, Successor Tenant will promptly vacate, peacefully yield possession and harvest/remove all growing vine crops from the portion of the Leased Premises required to be returned to Purchaser. At such time, Purchaser will reduce the total rent for the Leased Premises pro rata based on the square meters of the Leased Premises returned to Purchaser. In connection with the foregoing, the parties hereto agree that the documentation for the Agricultural Lease and Earnout Agreement shall be structured to provide for the following: (x) GIPI shall be jointly and severally liable with Successor Tenant for the payment and performance of the liabilities and obligations of Successor Tenant under the Agricultural Lease; and (y) in addition to all other rights and remedies of Purchaser, as the landlord, under the Agricultural Lease, (or at law or in equity) with respect to any monetary or other breach by Successor Tenant thereunder, Purchaser or Mercer Park shall have the right pursuant to the Earnout Agreement or a separate agreement (which shall be governed by Canadian law or another appropriate jurisdiction selected by Purchaser in its reasonable discretion), promptly upon written demand, to claw back from GIPI that amount of Earnout Shares (or Closing Shares to the extent the number of Earnout Shares is insufficient therefor), as Purchaser or Mercer Park may elect, with a market value that is then equal to One Hundred Fifty Percent (150%) of all aggregate losses, damages, liabilities, costs and expenses (including attorneys’ fees and costs) incurred or suffered by Purchaser in connection with any such breach by Successor Tenant, which amount shall be reasonably established by proof of competent evidence.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 12 of 17

 

(ix) The CEFF Parties, as the seller, and Purchaser, as the buyer, shall be in a position to close the sale to Purchaser of the Property in accordance with the Definitive Agreements for such transaction immediately after the closing of the transaction contemplated by the Definitive Option PSA.

 

If less than all of the foregoing conditions precedent shall have been satisfied in the time and manner provided above, then Purchaser and Mercer Park may elect, by written notice to GIPI, to terminate this letter or the Definitive Option PSA, as the case may be (the “Conditions Termination Notice”). This letter or the Definitive Option PSA, as the case may be, shall terminate concurrently with Purchaser’s and Mercer Park’s delivery of the Conditions Termination Notice, in which event (i) each party hereto shall have no further liability or obligation to the other (other than any liabilities or obligations that, by the express terms of this letter, are provided to survive the termination of this letter), (ii) as a covenant that shall survive any termination of this letter pursuant to this paragraph, the entire Deposit shall be immediately returned to Purchaser subject to the terms in the California Option Agreement, as amended, and (iii) as an additional covenant that shall survive any termination of this letter pursuant to this paragraph, the option rights under the California Option Agreement shall automatically revert to GIPI without further action of the parties. For the avoidance of doubt and notwithstanding anything to the contrary herein or in any other Definitive Agreement, in the event that the Closing does not occur by August 10, 2021 for any reason other than as a result of a breach by GIPI, unless such Closing is extended by mutual agreement of the parties or the parties are proceeding in good faith and diligently to close the Transactions, the option rights under the California Option Agreement shall automatically revert to GIPI without further action of the parties.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 13 of 17

 

Commissions: Each party shall be responsible for the payment of all brokerage commissions that now or may hereafter become due and payable in connection with the Transactions, if any, based on any arrangement or agreement made by on or behalf of such party.

 

Closing Costs: To the extent allocable to “standard coverage”, GIPI shall pay the cost of any policy of title insurance that Purchaser and Mercer Park may elect to obtain with respect to the Option Rights or Purchaser’s interest therein (which expressly excludes title insurance on an owner’s policy with respect to the California Option Assets which policy shall be paid in accordance with the Definitive Property PSA), and Purchaser shall be responsible for (i) the title insurance premium to the extent charged by the Title Company for “extended coverage” or endorsements, and (ii) all of the escrow fees. Each party shall pay its own fees and expenses for attorneys and consultants, except as otherwise provided to the contrary in this letter.

 

Further Assurances: Each of the parties hereto shall execute such other and further documents and do such further acts as may be reasonably required to effectuate the intent of the parties and carry out the terms of this letter or the Definitive Option PSA.

 

Confidentiality; Escrow Account; Waiver: In the absence of a termination or expiration (each, an “NDA Sunset”) in accordance with the express provisions of that certain Mutual Non Disclosure Agreement, executed in January 2021, among GIPI, Glass House and Mercer Park with respect to confidentiality, non-disclosure, non-solicitation and other matters as provided therein (the “Confidentiality Agreement”), each of GIPI, Glass House and Mercer Park shall remain bound by the Confidentiality Agreement. GIPI shall cause Designee (who is not a party to the Confidentiality Agreement) to agree to be bound by the Confidentiality Agreement as if he executed it. For greater certainty, Mercer Park may make such disclosure as is required by applicable law or stock exchange rules.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 14 of 17

 

In addition (and as covenants that shall survive any termination of this letter or the Definitive Option PSA until the occurrence of an NDA Sunset), each of the parties hereto will (and in the case of Designee, GIPI shall cause Designee to) keep the existence and contents of this letter and the Definitive Agreements strictly confidential except for disclosures required to be made to each respective party’s professional advisors, officers, shareholders, directors, and other representatives, or required disclosures pursuant to applicable stock exchange or regulatory requirements.

 

GIPI, for itself, and on behalf of the Exclusivity Parties, hereby irrevocably waives and releases (and in the case of Designee, GIPI shall have caused Designee to irrevocably waive and release) any access to or claims against the funds in the “SPAC escrow account” established at the time of Mercer Park’s initial public offering, or the escrow agent, and shall execute such further documents in respect thereof as may be requested from time to time by Mercer Park. This waiver and release shall survive any termination of this letter.

 

Binding/Definitive Agreements: This letter is intended as, and constitutes, a binding agreement by each party (other than Mercer Park) to enter into a separate binding agreement as described below. This letter is intended to be an interim agreement and contains the terms and conditions of the transaction prior to Purchaser and GIPI entering into (i) a definitive purchase and sale agreement governing the sale to Purchaser of the Option Rights (the “Definitive Option PSA”) and (ii) all other definitive agreements for the Transactions (including, without limitation, an escrow agreement for the Deposit, the Definitive Property PSA, the Agricultural Lease, and any ancillary agreements related thereto or described elsewhere in this letter) (collectively, the “Definitive Agreements”), all of which each of the parties hereto (other than Mercer Park) covenants in good faith to negotiate and attempt to finalize prior to the expiration of the Contingency Period.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 15 of 17

 

The Definitive Option PSA and other Definitive Agreements will contain representations, warranties, limitations of liability, pre-closing covenants, closing conditions, a legally-enforceable liquidated damages provision with respect to the Deposit (which shall provide that, with the exception of reversion of the option rights under the California Option Agreement back to GIPI), the Deposit shall be GIPI’s sole remedy in the event the Closing does not occur as a result of any default by Purchaser), and post-closing covenants reasonable and customary for commercial real estate transactions substantially comparable to the Transactions, with limited representations and warranties by GIPI regarding current operations and the physical condition of the Property (which may be qualified to GIPI’s knowledge). Notwithstanding the foregoing, if the CEFF Parties are, by the terms of the California Option Agreement or the Definitive Property PSA, entitled to keep all or any portion of the Deposit as a result of the Closing not occurring due to a default by Purchaser under the California Option Agreement or the Definitive Property PSA, then (i) the amount of the Deposit payable by Purchaser to GIPI as liquidated damages shall be automatically reduced by the amount of the Deposit that the CEFF Parties is entitled to keep, and GIPI shall receive such reduced amount of the Deposit without further entitlement to any other damages, relief or other monetary consideration, and (ii) in the event that, by reason of the foregoing clause (i), the amount of the Deposit payable by Purchaser to GIPI as liquidated damages is zero, then GIPI’s sole remedy in the event the Closing does not occur as a result of any default by Purchaser shall be the reversion of the option rights under the California Option Agreement back to GIPI; provided, however, that the foregoing provisions of this sentence is not intended to be a waiver by GIPI of any obligations of the CEFF Parties under any other agreement between GIPI and the CEFF Parties to share or allocate any portion of the Deposit with GIPI.

 

Attorneys’ Fees: If GIPI or Purchaser or Mercer Park brings any suit or other proceeding, including an arbitration proceeding, with respect to the subject matter or the enforcement of this letter or the Definitive Option PSA, the prevailing party (as determined by the court, agency, arbitrator or other authority before which such suit or proceeding is commenced), in addition to such other relief as may be awarded, shall be entitled to recover reasonable attorneys’ fees, expenses and costs actually incurred. The foregoing includes attorneys’ fees, expenses and costs of investigation (including those incurred in appellate proceedings), costs incurred in establishing the right to indemnification, or in any action or participation in, or in connection with, any case or proceeding under Chapter 7, 11 or 13 of the Bankruptcy Code (11 United States Code Sections 101 et seq.), or any successor statutes. The provisions of this paragraph shall survive any termination of this letter or the Definitive Option PSA.

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 16 of 17

 

Effectiveness of
Letter:
Except as otherwise specifically provided in this letter to the contrary, this letter shall be binding upon the parties and take effect upon the occurrence of the Trigger Date.

 

Governing Law: This letter will be governed by and interpreted in accordance with the laws of the State of California without regard to California’s choice of law rules or principles.

 

Miscellaneous: This letter may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts taken together will constitute but one and the same instrument. This letter supersedes any prior written or oral understanding or agreements between the parties hereto relating to the Transactions (however, the Confidentiality Agreement shall remain in effect according to its terms and will terminate as set forth therein). This letter may be amended, modified, or supplemented only by written agreement of the Parties. Any dispute or claim arising under or related to this letter will be exclusively brought in the state or federal courts situated in Los Angeles County, California, and the parties expressly submit to the jurisdiction thereof and to venue therein.

 

[SIGNATURE PAGE FOLLOWS]

 

 

 

 

Glass Investments Projects, Inc. 

February 13, 2021 

Page 17 of 17

 

If the terms and conditions set forth above are acceptable, please sign below and return a copy to Glass House and Mercer Park. We look forward to your favorable response.

 

Sincerely,

 

GH Group, Inc.,   Mercer Park Brand Acquisition Corp.,
a Delaware corporation   a British Columbia corporation
     
By: /s/ Kyle D. Kazan   By: /s/ Louis F. Karger
Name: Kyle D. Kazan   Name: Louis F. Karger
Title: Chief Executive Officer   Title: CEO

 

Accepted and agreed as of February 13, 2021, by:

 

Glass Investments Projects, Inc.,

a Delaware corporation

 

By: /s/ Jeanette Lombardo  
Name: Jeanette Lombardo  
Title: Chief Executive Officer  

 

 

 

 

Exhibit 99.85

 

GLASS INVESTMENTS PROJECTS, INC.

 

EXERCISE NOTICE

 

February 20, 2021

 

Via E-Mail

 

TO: CEFF Camarillo Property, LLC

c/o Controlled Environment Foods Fund, LLC

415 NW 11th Avenue

Portland, Oregon 97209

Attn: General Counsel

 

CEFF Camarillo Holdings, LLC

c/o Controlled Environment Foods Fund, LLC

415 NW 11th Avenue

Portland, Oregon 97209

Attn: General Counsel

 

Reference is hereby made to that certain Option Agreement (California Option Assets), dated December 28, 2018, by and among CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC (“CEFF Parent” together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc. (“Option Holder” or “GIPI”), as amended by the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and Option Holder, as amended by the Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and among the CEFF Parties and Option Holder (the “Second Amendment”) (as amended, the “California Option Agreement”). Capitalized terms used but not defined herein shall have the meanings set forth in the California Option Agreement.

 

1.            Option. Option Holder hereby elects to exercise the Asset Option.

 

2.            Camarillo Buyer. GIPI’s designee shall be GH Group, Inc., a Delaware corporation (“GH Group”), and Mercer Park Brand Acquisition Corp, a British Columbia corporation (“MP Brand”), or its designee (MP Brand, together with GH Group, the “Camarillo Buyer”). The Camarillo Buyer is a Cannabis Company because GH Group is a vertically-integrated California cannabis business and MP Brand is a Cannabis SPAC. Evidence that the Camarillo Buyer has financial resources (including by way of the right to draw funds under binding funding commitments) sufficient to pay the purchase price set forth in the Camarillo Acquisition Agreement in cash at the Option Closing pursuant to the requirements set forth therein is set forth on Schedule I attached hereto; provided, however, that the parties acknowledge and agree such financial resources shall be exclusively sourced from MP Brand, a Canadian special purpose acquisition company (SPAC), and the release of the required funds sufficient to pay such purchase price is expressly conditioned upon a process called de-SPACing which involves the completion of a business combination with GH Group.

 

 

 

 

3.            Proposed Option Closing Date. The proposed closing date of the Option shall be no later than August 20, 2021.

 

4.            Purchase Price. The Purchase Price is $118,890,000.

 

5.            Camarillo Acquisition Agreement. Attached as Schedule II hereto is an executed copy of the Camarillo Acquisition Agreement, by and between the Option Holder and the Camarillo Buyer.1

 

6.            Additional Terms. If the Option Holder elects to only exercise the California Option and elects not to cause HNL Utah Holdings Ltd. (the “Utah Option Holder”) to exercise the Utah Option, it is the Option Holder’s expectation that the parties will negotiate in good faith: (a) the waiver/release of the non-competition and non-solicitation provisions set forth in the Equity Purchase Agreement and any other similar provisions in any applicable agreements in context of the wind-down of the California facility which may take up to 4 years after close; and (b) the termination/modification of the applicable trademark license, IP license agreements and any other applicable agreements.

 

OPTION HOLDER: Glass Investments Projects, Inc.

 

  By: /s/ Jeanette Lombardo
      Jeanette Lombardo
      Its: Chief Executive Officer

 

By their execution below, CEFF Parties hereby acknowledge and agree that (i) they have received the Exercise Notice set forth above, (ii) the Exercise Notice set forth above (inclusive of the documents attached hereto as Schedule I and Schedule II) constitutes a valid exercise by Option Holder of the Asset Option under Section 2.3 of the California Option Agreement, and that such exercise complies with all applicable terms and conditions of the California Option Agreement and (iii) in the event that either the Camarillo Acquisition Agreement, the Definitive Option PSA (as defined in the Camarillo Acquisition Agreement) or the Definitive Property PSA (as defined in the Camarillo Acquisition Agreement) is terminated by the Camarillo Buyer, Option Holder or the CEFF Parties in accordance with the terms of the Camarillo Acquisition Agreement, the Definitive Option PSA or the Definitive Property PSA, as applicable, prior to August 20, 2021, the Asset Option under Section 2.3 of the California Option Agreement shall automatically revert to GIPI (with the Second Amendment becoming automatically null and void) without further action of the parties and all rights of GIPI shall be reserved thereunder.

 

 

1The non-competition and non-solicitation provisions set forth in the that certain Equity Purchase Agreement, dated as of March 23, 2020, by and among HUSHI, GIPI and Casey Houweling to which Houweling is subject shall terminate pursuant to a separate written form of release and waiver to be provided by the CEFF Parties.

 

 

 

 

CEFF Camarillo Property, LLC    

 

By: EqCEF I, LLC, its manager    

 

By: /s/ R. Thomas Amis    
Name: R. Thomas Amis    
Title: Principal    

 

CEFF Camarillo Holdings, LLC    

 

By: EqCEF I, LLC, its manager    

 

By: R. Thomas Amis    
Name: R. Thomas Amis    
Title: Principal    

 

 

 

 

Schedule I

 

Evidence of Camarillo Buyer

 

[Copies previously provided to the CEFF Parties]

 

 

 

 

Schedule II

 

Camarillo Acquisition Agreement

 

[Attached.]

 

 

 

 

Mercer Park Brand Acquisition Corp.

 

Glass House Group Inc.

 

February 13, 2021

 

Via Email

 

Glass Investments Projects, Inc.

11344 Pacific Coast Highway

Malibu, CA 90265

Attn: Ms. Jeanette Lombardo

Email: Jeanette.Lombardo@glassinvestmentsprojects.com

 

Re:           Option Agreement (California Option Assets), dated December 28, 2018, by and among CEFF Camarillo Property, LLC (“ceff Camarillo Propco”), CEFF Camarillo Holdings, LLC (“ceff Parent” together with CEFF Camarillo Propco, the “ceff Parties”), and Glass Investments Projects, Inc., a Delaware corporation (“Option Holder” or “gipi”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and Option Holder (“First Amendment”) and (ii) the Second Amendment to Option Agreement (California Option Assets), dated effective February [ ], 2021, by and among the CEFF Parties and Option Holder (“Second Amendment”) (as so amended by the First Amendment and Second Amendment, collectively, the “California Option Agreement”).

 

Ladies and Gentlemen:

 

Reference is made to the California Option Agreement. Capitalized terms not defined herein shall have the meanings set forth in the California Option Agreement.

 

It is our understanding that GIPI intends to exercise its Asset Option under the California Option Agreement by a letter to be delivered to the CEFF Parties pursuant to Section 2.3 of the California Option Agreement and to which this letter, once fully-executed, is to be attached (the “Exercise Notice”). In that regard, and on behalf of GH Group, Inc., a Delaware corporation (“Glass House”), and Mercer Park Brand Acquisition Corp, a British Columbia corporation, (“Mercer Park”), we are pleased to submit the following offer to purchase the Option Rights (as defined below).

 

Upon the acceptance of this offer by GIPI, which shall be evidenced only by GIPI’s execution of this letter below, this letter shall constitute a binding agreement between Glass House, as the purchaser, and GIPI, as the seller, subject to and in accordance with the terms set forth below, in which event this letter shall constitute the Camarillo Acquisition Agreement contemplated by Section 2.3 of the California Option Agreement. For greater certainty, Mercer Park shall have no binding obligations hereunder, but shall have the rights specified herein. This letter nonetheless represents Mercer Park’s non-binding intent to proceed with the transactions contemplated herein. Mercer Park confirms that it is engaged in confidential negotiations with Glass House with respect to a proposed business combination with Glass House with an anticipated closing on or before May 31, 2021.

 

 

 

 

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February 13, 2021

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Purchaser: Glass House-selected designee(s).
     
  Option Rights: All rights, options and interests held by GIPI, as the Option Holder under the California Option Agreement, including, without limitation, all rights relating to the Property.

 

Property: The California Option Assets (the “Property”). The purchase price payable to the CEFF Parties for the Property shall be as set forth in the California Option Agreement or, if different, the definitive purchase and sale agreement for the Property anticipated to be entered into between the CEFF Parties and Purchaser (the “Definitive Property PSA”), in each case as may hereafter be amended.
     
  Restrictions on GIPI: From and after the Trigger Date (as defined below) until the earlier to occur of (x) the termination of this letter, or (y) the termination of the Definitive Option PSA, GIPI shall neither do, nor permit, any one or more of the following, unless in each instance GIPI shall have obtained the prior written consent of Purchaser or Mercer park (which consent Purchaser or Mercer Park may withhold in its sole and absolute discretion):

 

(i) Enter into, amend or terminate, the Definitive Property PSA;

 

(ii) Amend or terminate the California Option Agreement;

 

(iii) Waive any breach by the CEFF Parties, or any rights or remedies of GIPI, under the California Option Agreement or the Definitive Property PSA; and

 

(iv) Exercise or implement any right or election under the California Option Agreement or the Definitive Property PSA.

 

Purchase Price: The Purchase Price shall be comprised of the following:

 

(i) Upon the closing of the transactions (collectively, the “Closing”) contemplated by this letter with respect to the Option Rights and by the California Option Agreement with respect to the Property in accordance with, as applicable, the Definitive Option PSA and the Definitive Property PSA (collectively, the “Transactions”), Mercer Park shall issue Ten Million (10,000,000) shares of its publicly traded stock (such shares are the “Closing Shares”) to GIPI or its designee, as appropriate, based on the definitive structure of the Transactions (the “GIPI Shares Designee”), at a share price equal to Ten Dollars ($10) per share, for total consideration of One Hundred Million and 00/100 Dollars ($100,000,000.00), subject in any case to applicable securities laws and stock exchange rules. The Closing Shares will be subject to customary lockup agreements restricting the sale of 50% of the Closing Shares for six (6) months following the Closing and the remaining 50% of the Closing Shares for twelve (12) months following the Closing;

 

 

 

 

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(ii) As Mercer Park and GIPI may hereafter agree in a separate written agreement (the “Earnout Agreement”), an earnout arrangement in the form of the issuance to GIPI or the GIPI Shares Designee, as appropriate, based on the definitive structure of the Transactions, of additional shares in Mercer Park (such additional shares are, collectively, the “Earnout Shares”), which Earnout Shares shall be subject to an agreed upon earnout formula and customary lockup agreement, as well as a “claw back” provision as contemplated below in connection with the Agricultural Lease (which “claw back” provision shall contain waivers by GIPI of all guarantor and surety defenses); and

 

(iii) The opportunity to participate, after the Closing, in Mercer Park’s equity incentive plan for certain of GIPI’s legacy key employees and contractors mutually acceptable to Mercer Park and GIPI, and who will continue, after the Closing, to perform services for the Purchaser in connection with the operation of the Property as a commercial cannabis facility, in all cases subject to the incentive plan’s general terms and conditions applicable to all such other eligible key employees or contractors of Mercer Park and Glass House.

 

Deposit: No later than three (3) business days after the date (the “Trigger Date”) on which this letter shall have been executed and delivered by Mercer Park, Purchaser and GIPI and the Exercise Notice shall have been executed and delivered by GIPI to the CEFF Parties (and countersigned by the CEFF Parties), Purchaser shall deliver to Escrow Holder (as defined below) an earnest money deposit in the amount of $2,000,000 (the “Initial Deposit”).

 

 

 

 

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In the event that Purchaser does not deliver the CP Termination Notice (as defined below) prior to the expiration of the Contingency Period (as defined below), then no later than three (3) business days after the expiration of the Contingency Period, Purchaser shall deliver to Escrow Holder an additional earnest money deposit in the amount of $8,000,000 (the “Additional Deposit”, and together with the Initial Deposit, the “Deposit”).

 

From and after the delivery of the Additional Deposit to Escrow, the entire Deposit shall be non-refundable other than as may be provided to the contrary in this letter, the Definitive Property PSA or the Definitive Option PSA (as defined below).

 

Contingency Period:          The period that begins on the Trigger Date and ends at 5:00 pm Pacific Time on the date that is thirty (30) days after the Trigger Date, unless further extended by mutual agreement of Purchaser and GIPI (the Contingency Period”). In connection therewith, Purchaser and GIPI agree that if the corresponding contingency period under the California Option Agreement or Definitive Property PSA is hereafter extended, then the Contingency Period shall be automatically extended to be coterminous with the extended contingency period under the California Option Agreement or Definitive Property PSA, as the case may be. Prior to the expiration of the Contingency Period, Purchaser shall notify GIPI, in writing, of its election to proceed or not proceed with the Transactions. If, prior to the expiration of the Contingency Period, Purchaser notifies GIPI that Purchaser has elected (for any or no reason and in Purchaser’s sole and absolute discretion) not to proceed with the Transactions (the “CP Termination Notice”), then this letter shall terminate concurrently with Purchaser’s delivery of the CP Termination Notice, in which event (i) each party hereto shall have no further liability or obligation to the other (other than any liabilities or obligations that, by the express terms of this letter, are provided to survive the termination of this letter), (ii) as a covenant that shall survive any termination of this letter pursuant to this paragraph, the Initial Deposit shall be immediately returned to Purchaser, and (iii) as an additional covenant that survives any termination of this letter pursuant to this paragraph, the option rights exercisable pursuant to the California Option Agreement shall automatically revert back to GIPI without further action of the parties.

 

Inspection Rights:              Commencing upon the date on which this letter shall have been executed and delivered by Mercer Park, Purchaser and GIPI and continuing until the earliest to occur of (i) the termination of this letter, (ii) the termination of the Definitive Option PSA, (iii) the termination of the Definitive Property PSA or (iv) the Closing, Purchaser and Mercer Park shall have the right to make certain investigations of and inquiries regarding the Option Rights and the Property and to review all Due Diligence Materials, including those which GIPI shall use commercially reasonably efforts to promptly cause to be prepared (as agreed to) and delivered to Purchaser and Mercer Park following the Trigger Date at the sole expense of Purchaser.

 

 

 

 

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Due Diligence Materials shall include, but not be limited to, all title information, surveys, agreements, contracts, appraisals, licenses, permits and entitlements, property inspection reports, and geotechnical and environmental reports relating to the Option Rights or the Property.

 

Within five (5) calendar days of the Trigger Date, GIPI shall use commercially reasonably efforts to deliver to Purchaser and Mercer Park copies of the following Due Diligence Materials to the extent available and if not previously provided:

 

a. A current title report for the entire Property;

 

b. All ALTA surveys relating to the Property;

 

c. All environmental assessments and reports;

 

d. All soils and geotechnical reports;

 

e. All other inspection reports relating to the Property or any buildings thereon;

 

f. Copies of service contracts;

 

g. Property tax bills for the current calendar year and the prior two (2) calendar years;

 

h. Building plans and certificates of occupancy for all buildings, greenhouses and other structures on the Property;

 

i. Copies of all licenses, permits, regulatory approvals and entitlements pertaining to the Property;

 

j. Capital expenditure budget or plan;

 

k. All leases and license agreements;

 

l. All information and reports received by GIPI pursuant to or in connection with the California Option Agreement; and

 

m. Any other information reasonably requested by Purchaser.

 

 

 

 

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In addition to the foregoing, GIPI shall cause, at Purchaser’s sole cost and expense:

 

(i) except as may otherwise be provided in the Definitive Property PSA, the following items to be promptly delivered to Purchaser and Mercer Park, which items shall also constitute Due Diligence Materials: (x) a current Phase One environmental site assessment for the entire Property issued in accordance with the most current versions of the ASTM standards and the EPA “all appropriate inquiries” rule; and (y) a current ALTA survey; and

 

(ii) Successor Tenant (as defined below) and Successor Tenant’s predecessors-in-interest and affiliates to disclose to Purchaser and Mercer Park in writing all material adverse conditions and circumstances relating to the Property, to the extent such conditions and circumstances are known to any one or more of the Successor Tenant and Successor Tenant’s predecessors-in-interest and affiliates.

 

Closing Date; Advance Assignment of Option: Subject to all terms set forth in this letter or the Definitive Option PSA, as the case may be, the Closing shall occur no later than August 10, 2021. At any time after the Trigger Date:

 

(i) GIPI shall, upon demand by Purchaser and Mercer Park, assign all Option Rights to an entity designated by Purchaser and Mercer Park, pursuant to a form of assignment in commercially reasonable form and otherwise satisfactory to Purchaser and Mercer Park, which assignment shall be held by the assignee subject to the other terms and conditions set forth in this letter or the Definitive Option PSA, as the case may be, including, without limitation, the terms relating to Purchaser’s Closing Conditions; and

 

(ii) GIPI shall, upon demand by Purchaser and Mercer Park, assign to an entity designated by Purchaser and Mercer Park all of GIPI’s rights and interests, if any, to and under the Definitive Property PSA, as applicable, pursuant to a form of assignment in commercially reasonable form and otherwise satisfactory to Purchaser and Mercer Park, which assignment shall be held by the assignee subject to the other terms and conditions set forth in this letter or the Definitive Option PSA, as the case may be, including, without limitation, the terms relating to Purchaser’s Closing Conditions.

 

 

 

 

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Mercer Park Post- Closing Capital Commitment; Working Capital:

If the Closing occurs, then Mercer Park shall, after the Closing, commit and fund up to Forty Million and 00/100 Dollars ($40,000,000.00) for capital expenditures (the “CapEx Commitment”) required to further develop or repurpose the Property for commercial cannabis operations. To the extent that the cost of the capital expenditures is less than the CapEx Commitment, such remaining funds shall be used as working capital to fund the operations of the commercial cannabis business for the Property. The expenditure of the CapEx Commitment and/or any savings from the CapEx Commitment used for working capital, if any, shall be subject in each instance to meaningful consultation with GIPI. For the sake of further clarity, GIPI shall not be responsible for any working capital expenses or similar obligations related to the commercial cannabis business operations at the Property.

 

Exclusivity Period: The period that begins on the Trigger Date and ends on the earliest to occur of (i) the termination of this letter, (ii) the termination of the Definitive Option PSA, (iii) the termination of the Definitive Property PSA or (iv) the Closing.

 

Exclusivity: The parties will each be devoting a significant amount of time, effort, and expense in connection with the Transactions, including the Purchaser’s and Mercer Park’s due diligence review of the Option Rights and the Property, and the preparation of the Definitive Agreements (as defined below). Therefore, in consideration of such expense, time, and efforts by the Purchaser and Mercer Park, GIPI agrees during the Exclusivity Period to not, and to cause its affiliates and the CEFF Parties to not, and to cause each of his and their (including affiliates and CEFF Parties’) respective, agents, equity holders, directors, managers, officers, affiliates, representatives, successors and assigns to not (individually an “Exclusivity Party”, and collectively, the “Exclusivity Parties”), directly or indirectly, commit to, agree to, enter into, or solicit, entertain, discuss, negotiate or encourage any inquiries, offers, or proposals concerning any purchase or sale of any interest in any or all of the Option Rights or the Property or the sale, recapitalization, liquidation, financing, acquisition, merger or similar transaction of, involving or relating to all or any the Option Rights or the Property (an “Acquisition Proposal”) from or with any other person or entity, other than Purchaser and Mercer Park. GIPI agrees, and will cause Designee (as defined below), to immediately notify the Purchaser and Mercer Park, if any Exclusivity Party receives any unsolicited indications of interest, requests for information, or offers in respect of an Acquisition Proposal, and will communicate to Purchaser and Mercer Park and in reasonable detail the terms of any such indication, request, or offer, and will provide Purchaser and Mercer Park with copies of all written communications relating to any such indication, request, or offer. Immediately upon the Trigger Date, GIPI will, and will cause Designee to, terminate, and cause the Exclusivity Parties to terminate, any and all existing discussions or negotiations with any other person or group of persons other than Purchaser and Mercer Park, their respective agents, representatives and affiliates regarding an Acquisition Proposal. In the event of any breach of this paragraph (and as a covenant that shall survive any termination of this letter or the Definitive Option PSA), Purchaser and Mercer Park will be entitled to exercise all rights and remedies available at law and in equity.

 

 

 

 

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Escrow Holder/Title Company:

Peninsula Escrow (Rancho Palos Verdes, California) shall be the escrow holder and Orange Coast Title (Santa Ana, California) shall be the Title Company; provided, however, that if Purchaser and Mercer Park determine that a change in Title Company is necessary for the issuance of any title policies contemplated hereby, then Purchaser and Mercer Park shall designate a new Title Company and provide notice thereof to GIPI.

 

Purchaser Closing Conditions:

The following shall be conditions precedent to the obligation of Purchaser and Mercer Park to proceed with the Closing pursuant to this letter or the Definitive Option PSA:

 

(i) The Entitlement Condition (as defined below) shall have been satisfied prior to the date that is thirty (30) days prior to the scheduled Closing Date.

 

For purposes hereof, “Entitlement Condition” means the occurrence of all of the following:

 

(x)            the approval, issuance or certification, as the case may be, by applicable governmental agencies and authorities of all entitlements, approvals, licenses and permits necessary for the operation of the entire Property (i.e., 5 million square feet of existing greenhouses) for cultivation, processing, packaging and storage of cannabis;

 

(y)            the approval, issuance or certification, as the case may be, by applicable governmental agencies and authorities of all discretionary entitlements, approvals and permits necessary for the construction and completion of improvements to the Property in accordance with conceptual plans disclosed by Purchaser to GIPI and Mercer Park prior to the expiration of the Contingency Period; and

 

 

 

 

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(z)            in the event of any timely made appeal or legal challenge being pursued (whether by administrative appeal, lawsuit or otherwise) with respect to the issuance of one or more of the above-described entitlements, approvals and permits (each, an “Entitlement Appeal”), upon the final resolution of any such Entitlement Appeal in favor of Purchaser (whether by final judgment, dismissal with prejudice, dismissal of any appeal, settlement or otherwise)

 

(ii) GIPI shall have caused, and will cause, a mutually acceptable designee (“Designee”) to enter into an employment agreement with such title as is mutually agreed by the parties hereto, and report directly to the President, Chief Executive Officer or such other designees of Glass House,/Mercer Park’s or Purchaser’s board(s). At all times, the board(s) shall hold final decision-making authority with respect to the Property and all facilities thereon. If Designee is unable to be onsite on a full time basis, he may enter into a consulting agreement with comparable responsibilities to those contemplated under an employment agreement. Either form of agreement shall contain terms to be mutually agreed upon between Designee and Glass House, Mercer Park or Purchaser, including specific responsibilities and work functions, which may be amended from time to time. Except for Designee’s ownership and management of Propagation Services Canada Inc., either form of agreement shall provide that Designee will be bound by customary and geographically broad in scope non-compete provisions for a term of no less than five (5) years (excluding future passive ownership of less than 5.0% on a fully-diluted basis of public companies);

 

(iii) No governmental moratorium shall have been enacted and is continuing with respect to the cultivation, processing, packaging and storage of cannabis and that would apply to all or any “material” portion of the Property (collectively, “Cannabis Use”), it being agreed that a portion of the Property shall be deemed “material” if the surface land area of such portion comprises three percent (3%) or more of the aggregate surface land area of the Property;

 

 

 

 

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(iv) The Title Company (as defined below) shall be irrevocably committed to issue, upon the Closing, an Optionee’s Policy of Title Insurance in favor of Purchaser, insuring that Purchaser is, as of the Closing, the holder of the Asset Option, with a liability limit in the amount of the Purchase Price, and which contains no exceptions to coverage other than (x) Permitted Liens which have been recorded against the Property prior to the expiration of the Contingency Period; and (y) any other Liens approved or consented to in writing by Purchaser;

 

(v) The Definitive Agreements (as defined below) shall contain a provision to the effect that entities which owned or controlled the Property immediately prior to the Closing must be audited pursuant to U.S. PCAOB auditing standards, for three (3) fiscal years, plus interim periods with review reports, all as required by Mercer Park (or such lesser time period that such entities have been in existence);

 

(vi) Mercer Park shall have completed its acquisition of Glass House;

 

(vii) The Master Lease shall have been terminated pursuant to a form of termination agreement satisfactory to Purchaser and Mercer Park;

 

 

 

 

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(viii) To the extent that GIPI, Designee or their respective affiliates have been released from any non-competitive provisions or restrictions which restrict any of them from entering into the Agricultural Lease (as defined below), GIPI or its designee, as the tenant (in such capacity, the “Successor Tenant”), and Purchaser, as the landlord, shall have entered into an arm’s length fixed-term lease of no less than three years (the “Agricultural Lease”) for the portion of the Property that is not then being used for the Cannabis Use (such portion is the “Leased Premises”). Pursuant only to the Agricultural Lease, Successor Tenant shall be entitled to cultivate, harvest and sell vine crops in the Leased Premises during the period in which the Purchaser is seeking to satisfy any remaining Entitlement Conditions and is completing required capital improvements for conversion of the Property to the Cannabis Use to the extent such improvements do not materially interfere with Successor Tenant’s use of the Leased Premises; provided, however, that the Purchaser shall not be responsible for any direct or indirect fees, costs or expenses of any kind associated with Successor Tenant’s actual use and occupancy of the Leased Premises during the term of the Agricultural Lease. In any event, the Agricultural Lease, which is to be effective immediately following the date that is fourteen (14) weeks after the Closing, shall provide for a base rent equal to $1.00 per square meter (subject to abatement as provided below), shall provide that Successor Tenant will be responsible for the costs and expenses relating to the lease, occupancy, operation, use, repair, maintenance and replacement of the Leased Premises and improvements thereon pursuant to an equitable cost-allocation or cost-sharing formula to be further documented in the Agricultural Lease (including, without limitation, property taxes (with no “Prop 13” protection), liability and property insurance in commercially reasonable amounts (but excluding any obligation to pay a premium or surplus associated with the Leased Premises if an insurer were to reclassify the Leased Premises or Successor Tenant’s use as Cannabis Use), water, natural gas, electricity and other utilities, costs relating to fertilizers and chemicals, carbon dioxide, cogeneration and boiler heating services, waste removal, and costs of repair, maintenance and replacement (allocated on the basis of the Successor Tenant’s reasonably estimated usage)), and shall contain commercially reasonable provisions, including, without limitation, typical and customary indemnities and insurance covenants on the part of and/or for the benefit of the Purchaser, and shall otherwise be in a form and substance reasonably acceptable to the Purchaser and Mercer Park. With respect to the base rent contemplated above, the Agricultural Lease shall provide that the base rent shall be abated; provided, however, that in the event that Successor Tenant breaches any obligation under the Agricultural Lease resulting in financial harm or loss to Purchaser, then at Purchaser’s election, such abatement shall be deemed null and void and Successor Tenant shall be liable for all base rent as if such abatement was never granted. Notwithstanding the foregoing, Purchaser will, however, have the right to terminate the Agricultural Lease with respect to all or any portion of the Leased Premises upon delivery of 60 days’ advance written notice to Successor Tenant; upon expiration of such notice period, Successor Tenant will promptly vacate, peacefully yield possession and harvest/remove all growing vine crops from the portion of the Leased Premises required to be returned to Purchaser. At such time, Purchaser will reduce the total rent for the Leased Premises pro rata based on the square meters of the Leased Premises returned to Purchaser. In connection with the foregoing, the parties hereto agree that the documentation for the Agricultural Lease and Earnout Agreement shall be structured to provide for the following: (x) GIPI shall be jointly and severally liable with Successor Tenant for the payment and performance of the liabilities and obligations of Successor Tenant under the Agricultural Lease; and (y) in addition to all other rights and remedies of Purchaser, as the landlord, under the Agricultural Lease, (or at law or in equity) with respect to any monetary or other breach by Successor Tenant thereunder, Purchaser or Mercer Park shall have the right pursuant to the Earnout Agreement or a separate agreement (which shall be governed by Canadian law or another appropriate jurisdiction selected by Purchaser in its reasonable discretion), promptly upon written demand, to claw back from GIPI that amount of Earnout Shares (or Closing Shares to the extent the number of Earnout Shares is insufficient therefor), as Purchaser or Mercer Park may elect, with a market value that is then equal to One Hundred Fifty Percent (150%) of all aggregate losses, damages, liabilities, costs and expenses (including attorneys’ fees and costs) incurred or suffered by Purchaser in connection with any such breach by Successor Tenant, which amount shall be reasonably established by proof of competent evidence.

 

 

 

 

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(ix) The CEFF Parties, as the seller, and Purchaser, as the buyer, shall be in a position to close the sale to Purchaser of the Property in accordance with the Definitive Agreements for such transaction immediately after the closing of the transaction contemplated by the Definitive Option PSA.

 

If less than all of the foregoing conditions precedent shall have been satisfied in the time and manner provided above, then Purchaser and Mercer Park may elect, by written notice to GIPI, to terminate this letter or the Definitive Option PSA, as the case may be (the “Conditions Termination Notice”). This letter or the Definitive Option PSA, as the case may be, shall terminate concurrently with Purchaser’s and Mercer Park’s delivery of the Conditions Termination Notice, in which event (i) each party hereto shall have no further liability or obligation to the other (other than any liabilities or obligations that, by the express terms of this letter, are provided to survive the termination of this letter), (ii) as a covenant that shall survive any termination of this letter pursuant to this paragraph, the entire Deposit shall be immediately returned to Purchaser subject to the terms in the California Option Agreement, as amended, and (iii) as an additional covenant that shall survive any termination of this letter pursuant to this paragraph, the option rights under the California Option Agreement shall automatically revert to GIPI without further action of the parties. For the avoidance of doubt and notwithstanding anything to the contrary herein or in any other Definitive Agreement, in the event that the Closing does not occur by August 10, 2021 for any reason other than as a result of a breach by GIPI, unless such Closing is extended by mutual agreement of the parties or the parties are proceeding in good faith and diligently to close the Transactions, the option rights under the California Option Agreement shall automatically revert to GIPI without further action of the parties.

 

 

 

 

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Commissions: Each party shall be responsible for the payment of all brokerage commissions that now or may hereafter become due and payable in connection with the Transactions, if any, based on any arrangement or agreement made by on or behalf of such party.

 

Closing Costs: To the extent allocable to “standard coverage”, GIPI shall pay the cost of any policy of title insurance that Purchaser and Mercer Park may elect to obtain with respect to the Option Rights or Purchaser’s interest therein (which expressly excludes title insurance on an owner’s policy with respect to the California Option Assets which policy shall be paid in accordance with the Definitive Property PSA), and Purchaser shall be responsible for (i) the title insurance premium to the extent charged by the Title Company for “extended coverage” or endorsements, and (ii) all of the escrow fees. Each party shall pay its own fees and expenses for attorneys and consultants, except as otherwise provided to the contrary in this letter.

 

Further Assurances: Each of the parties hereto shall execute such other and further documents and do such further acts as may be reasonably required to effectuate the intent of the parties and carry out the terms of this letter or the Definitive Option PSA.

 

 

 

 

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Confidentiality; Escrow Account; Waiver:

In the absence of a termination or expiration (each, an “NDA Sunset”) in accordance with the express provisions of that certain Mutual Non- Disclosure Agreement, executed in January 2021, among GIPI, Glass House and Mercer Park with respect to confidentiality, non-disclosure, non-solicitation and other matters as provided therein (the “Confidentiality Agreement”), each of GIPI, Glass House and Mercer Park shall remain bound by the Confidentiality Agreement. GIPI shall cause Designee (who is not a party to the Confidentiality Agreement) to agree to be bound by the Confidentiality Agreement as if he executed it. For greater certainty, Mercer Park may make such disclosure as is required by applicable law or stock exchange rules.

 

In addition (and as covenants that shall survive any termination of this letter or the Definitive Option PSA until the occurrence of an NDA Sunset), each of the parties hereto will (and in the case of Designee, GIPI shall cause Designee to) keep the existence and contents of this letter and the Definitive Agreements strictly confidential except for disclosures required to be made to each respective party’s professional advisors, officers, shareholders, directors, and other representatives, or required disclosures pursuant to applicable stock exchange or regulatory requirements.

 

GIPI, for itself, and on behalf of the Exclusivity Parties, hereby irrevocably waives and releases (and in the case of Designee, GIPI shall have caused Designee to irrevocably waive and release) any access to or claims against the funds in the “SPAC escrow account” established at the time of Mercer Park’s initial public offering, or the escrow agent, and shall execute such further documents in respect thereof as may be requested from time to time by Mercer Park. This waiver and release shall survive any termination of this letter.

 

Binding/Definitive Agreements: This letter is intended as, and constitutes, a binding agreement by each party (other than Mercer Park) to enter into a separate binding agreement as described below. This letter is intended to be an interim agreement and contains the terms and conditions of the transaction prior to Purchaser and GIPI entering into (i) a definitive purchase and sale agreement governing the sale to Purchaser of the Option Rights (the “Definitive Option PSA”) and (ii) all other definitive agreements for the Transactions (including, without limitation, an escrow agreement for the Deposit, the Definitive Property PSA, the Agricultural Lease, and any ancillary agreements related thereto or described elsewhere in this letter) (collectively, the “Definitive Agreements”), all of which each of the parties hereto (other than Mercer Park) covenants in good faith to negotiate and attempt to finalize prior to the expiration of the Contingency Period.

 

 

 

 

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February 13, 2021

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The Definitive Option PSA and other Definitive Agreements will contain representations, warranties, limitations of liability, pre-closing covenants, closing conditions, a legally-enforceable liquidated damages provision with respect to the Deposit (which shall provide that, with the exception of reversion of the option rights under the California Option Agreement back to GIPI), the Deposit shall be GIPI’s sole remedy in the event the Closing does not occur as a result of any default by Purchaser), and post-closing covenants reasonable and customary for commercial real estate transactions substantially comparable to the Transactions, with limited representations and warranties by GIPI regarding current operations and the physical condition of the Property (which may be qualified to GIPI’s knowledge). Notwithstanding the foregoing, if the CEFF Parties are, by the terms of the California Option Agreement or the Definitive Property PSA, entitled to keep all or any portion of the Deposit as a result of the Closing not occurring due to a default by Purchaser under the California Option Agreement or the Definitive Property PSA, then (i) the amount of the Deposit payable by Purchaser to GIPI as liquidated damages shall be automatically reduced by the amount of the Deposit that the CEFF Parties is entitled to keep, and GIPI shall receive such reduced amount of the Deposit without further entitlement to any other damages, relief or other monetary consideration, and (ii) in the event that, by reason of the foregoing clause (i), the amount of the Deposit payable by Purchaser to GIPI as liquidated damages is zero, then GIPI’s sole remedy in the event the Closing does not occur as a result of any default by Purchaser shall be the reversion of the option rights under the California Option Agreement back to GIPI; provided, however, that the foregoing provisions of this sentence is not intended to be a waiver by GIPI of any obligations of the CEFF Parties under any other agreement between GIPI and the CEFF Parties to share or allocate any portion of the Deposit with GIPI.

 

Attorneys’ Fees: If GIPI or Purchaser or Mercer Park brings any suit or other proceeding, including an arbitration proceeding, with respect to the subject matter or the enforcement of this letter or the Definitive Option PSA, the prevailing party (as determined by the court, agency, arbitrator or other authority before which such suit or proceeding is commenced), in addition to such other relief as may be awarded, shall be entitled to recover reasonable attorneys’ fees, expenses and costs actually incurred. The foregoing includes attorneys’ fees, expenses and costs of investigation (including those incurred in appellate proceedings), costs incurred in establishing the right to indemnification, or in any action or participation in, or in connection with, any case or proceeding under Chapter 7, 11 or 13 of the Bankruptcy Code (11 United States Code Sections 101 et seq.), or any successor statutes. The provisions of this paragraph shall survive any termination of this letter or the Definitive Option PSA.

 

 

 

 

Glass Investments Projects, Inc.

February 13, 2021

Page 16 of 17

 

Effectiveness of Letter:

Except as otherwise specifically provided in this letter to the contrary, this letter shall be binding upon the parties and take effect upon the occurrence of the Trigger Date.

 

Governing Law: This letter will be governed by and interpreted in accordance with the laws of the State of California without regard to California’s choice of law rules or principles.

 

Miscellaneous: This letter may be executed in any number of counterparts and any party hereto may execute any such counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts taken together will constitute but one and the same instrument. This letter supersedes any prior written or oral understanding or agreements between the parties hereto relating to the Transactions (however, the Confidentiality Agreement shall remain in effect according to its terms and will terminate as set forth therein). This letter may be amended, modified, or supplemented only by written agreement of the Parties. Any dispute or claim arising under or related to this letter will be exclusively brought in the state or federal courts situated in Los Angeles County, California, and the parties expressly submit to the jurisdiction thereof and to venue therein.

 

[SIGNATURE PAGE FOLLOWS]

 

 

 

 

Glass Investments Projects, Inc.

February 13, 2021

Page 17 of 17

 

If the terms and conditions set forth above are acceptable, please sign below and return a copy to Glass House and Mercer Park. We look forward to your favorable response.

 

Sincerely,

 

GH Group, Inc.,
a Delaware corporation
  Mercer Park Brand Acquisition Corp.,
a British Columbia corporation

 

By: /s/ Kyle D. Kazan   By: /s/ Louis F. Karger
Name: Kyle D. Kazan   Name: Louis F. Karger
Title: Chief Executive Officer   Title: CEO

 

Accepted and agreed as of February 13, 2021, by:

 

Glass Investments Projects, Inc.,
a Delaware corporation

 

By: /s/ Jeanette Lombardo    
Name: Jeanette Lombardo    
Title: Chief Executive Officer    

 

 

 

 

Exhibit 99.86

 

Execution Copy

 

AGREEMENT TO SELL AND ACQUIRE REAL ESTATE

AND JOINT ESCROW INSTRUCTIONS

 

THIS AGREEMENT TO SELL AND ACQUIRE REAL ESTATE AND JOINT ESCROW INSTRUCTIONS (this “Agreement”) is made and entered into effective as of March 29, 2021 (“Effective Date”) by and between CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco”), and CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent”, and together with CEFF Camarillo Propco, the “Seller”), and GH CAMARILLO LLC, a Delaware limited liability company (“Purchaser”), as the person designated by GLASS INVESTMENTS PROJECTS, INC., a Delaware corporation (“GIPI”), as the “Camarillo Buyer” contemplated by the California Option Agreement (as defined below).

 

RECITALS

 

A.           Seller owns that certain land located in the County of Ventura, State of California and more particularly described on Exhibit A attached hereto and incorporated herein (the “Land”, and together with fixtures, greenhouses and other structures and improvements located thereon (collectively, the “Improvements”) and appurtenances relating thereto, as more fully defined in Section 2.81 below, the “Real Property”).

 

B.            Pursuant to that certain Option Agreement (California Option Assets), dated December 28, 2018, by and between the Seller and GIPI (the “Original California Option Agreement”), as amended by (i) the First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and between the Seller and GIPI (“First Amendment”) and (ii) the Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and between the Seller and GIPI (“Second Amendment”) (as amended by the First Amendment and Second Amendment and any other amendments entered into after the Second Amendment, collectively, the “California Option Agreement”), GIPI owns an option to purchase the California Option Assets (the “Option” and collectively with all rights, option and interests held by GIPI in, to and under the California Option Agreement including, without limitation, the Real Property and other components of the Property (as defined below) and all other California Option Assets (as defined in the California Option Agreement), the “Option Rights”).

 

C.            Before the Effective Date, GIPI exercised the Option via a letter bearing a date of February 20, 2021 and which was delivered to the Seller pursuant to Section 2.3 of the California Option Agreement (the “Exercise Notice”). The Exercise Notice has been signed by the Seller to acknowledge, among other things, that GIPI has validly exercised the Option in accordance with the California Option Agreement.

 

D.            Before the Effective Date, GH GROUP, INC., a Delaware corporation (“Glass House”) and MERCER PARK BRAND ACQUISITION CORP, a British Columbia corporation (“Mercer Park”, and together with Glass House, “GH/MPBAC”) and GIPI entered into that certain letter agreement made as of February 13, 2021 (the “Camarillo Acquisition Agreement”), pursuant to which, among other things, GIPI agreed to sell the Option Rights to GH/MPBAC or Purchaser. Subsequently, as contemplated by the California Option Agreement and Camarillo Acquisition Agreement, GIPI designated Purchaser to be the “Camarillo Buyer” (as defined in the California Option Agreement) pursuant to the Exercise Notice.

 

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E.            Pursuant to the California Option Agreement, the Seller and Purchaser, as GIPI’s assignee, have agreed to negotiate in good faith and attempt to finalize this Agreement and any other documents, agreements, instruments, or certificates as may be executed and delivered in connection with this Agreement and the transactions contemplated hereunder (all such agreements and instruments are, collectively, the “Definitive Property Agreements”).

 

F.            Accordingly, Seller and Purchaser desire to enter in this Agreement to provide for the more definitive terms and conditions under which Seller will sell the Property to Purchaser, and Purchaser will buy the Property from Seller.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser (each herein sometimes called a “Party” and jointly the “Parties”) hereby agree as follows:

 

1.             Incorporation of Recitals. The above recitals are hereby incorporated in and made a part of this Agreement as fully as if set forth herein.

 

2.             Certain Defined Terms. As used herein, the following defined terms shall have the meanings set forth in this Section 2.

 

2.1           “Act” shall have the meaning set forth in Section 8.3 hereof.

 

2.2           “Additional Deposit” shall have the meaning set forth in Section 4.2 hereof.

 

2.3           “Additional Deposit Date” shall mean the latest to occur of (a) the Termination Agreement Escrow Date, (b) the date that the Termination Agreement is executed into escrow by Lessee, and (c) one (1) Business Day after the date all noncompliance items that form the basis of any notice of violation dated on or before the Effective Date issued by any Governmental Authority for the Land or Improvements under or in connection with any conditional use permit issued by Ventura County (including any modification thereto) (each, a “Notice of Violation”), have been fixed and cured in accordance with Applicable Law and the requirements of applicable Governmental Authorities.

 

2.4           “Affiliate” shall mean, with respect to any Person, another Person that controls, is controlled by, or is under common control with, that Person. For purposes of this definition, “control” with respect to any Person, means the possession directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through contract or otherwise.

 

2.5           “Agreement” shall have the meaning set forth in the preamble hereof.

 

2.6           “AML Laws” shall have the meaning set forth in Section 7.1.5 hereof.

 

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2.7           “Anti-Corruption Laws” shall have the meaning set forth in Section 7.1.5 hereof.

 

2.8           “Applicable Law” shall mean all national, state, provincial, local or municipal laws, statutes, codes, acts, treaties, ordinances, common laws, orders, judgments, writs, decrees, injunctions, rules, regulations, governmental approvals, licenses, Permits, directives, and requirements (including all Environmental Laws) of all regulatory and other Governmental Authorities having jurisdiction over, as applicable, Seller, Purchaser, and the Property.

 

2.9           “Basket” shall have the meaning set forth in Section 9.4 hereof.

 

2.10         “Business Day” shall mean any day other than a Saturday, Sunday or a legal holiday in the State of California.

 

2.11         “California APA” shall mean that certain Asset Purchase and Sale Agreement, dated as of December 28, 2018, by and among Houweling California Property, Inc., Houweling California Holdings, Inc., Houweling Nurseries Property Ltd., Lessee, and CEFF Camarillo Propco.

 

2.12         “California APA Closing Date” means January 31, 2019.

 

2.13         “California Option Agreement” shall have the meaning set forth in Recital B hereof.

 

2.14         “California Option Assets” shall have the meaning set forth in the California Option Agreement.

 

2.15         “Cannabis Use” shall mean the cultivation, processing, packaging and storage of cannabis.

 

2.16         “CEFF Camarillo Propco” shall have the meaning set forth in the preamble hereof.

 

2.17         “CEFF Parent” shall have the meaning set forth in the preamble hereof.

 

2.18         “Closing” shall have the meaning set forth in Section 5.1 hereof.

 

2.19         “Closing Date” shall have the meaning set forth in Section 6.1 hereof.

 

2.20         “Closing Statement” shall have the meaning set forth in Section 10.3 hereof.

 

2.21         “Commitment” shall have the meaning set forth in Section 8.4 hereof.

 

2.22         “Compelled Party” shall have the meaning set forth in Section 15.14 hereof.

 

2.23         “Conditions Termination Notice” shall have the meaning set forth in Section 12.1 hereof.

 

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2.24         “Contracts” shall mean, to the extent assignable, Seller’s rights, title, and interests in all contracts and other agreements (other than the Leases) relating to the Land, Improvements, Personal Property or Leases and that will remain in existence after Closing, including, without limitation, contracts or agreements relating to construction, architectural services, maintenance or other supplies or services, and utility services or any equipment leases, a current list of which is attached hereto as Schedule 2.24. Contracts shall include Lessee’s rights, title, and interest in those contracts set forth in Schedule 2.24 but shall, however, exclude all Excluded Contracts, it being agreed that Seller shall, solely at its cost and expense, cause all Excluded Contracts to remain with Lessee or be terminated effective as of the Closing.

 

2.25         “Deed” shall have the meaning set forth in Section 10.1(a) hereof.

 

2.26         “Definitive Option PSA” shall have the meaning set forth in Section 12.1.6 hereof.

 

2.27         “Definitive Property Agreements” shall have the meaning set forth in Recital E hereof.

 

2.28         “Deposit” shall have the meaning set forth in Section 4.2 hereof.

 

2.29         “Disclosure Report” shall have the meaning set forth in Section 8.3 hereof.

 

2.30         “Disclosure Vendor” shall have the meaning set forth in Section 8.3 hereof.

 

2.31         “Due Diligence Materials” shall mean the title information, surveys, agreements, contracts, appraisals, licenses, Permits and entitlements, and geotechnical and environmental reports relating to the Property, and all other documents and information relating to the Property, in each case reasonably requested in writing by Purchaser; provided, however, that for purposes of this Agreement, Due Diligence Materials shall not include items existing prior to the California APA Closing Date provided such items are in the possession of GIPI or GIPI’s Affiliates.

 

2.32         “Earliest Closing Date” shall mean May 13, 2021.

 

2.33         “ED Event” shall have the meaning set forth in Section 14.1 hereof.

 

2.34         “Effective Date” shall have the meaning set forth in the preamble hereof.

 

2.35         “Entitlement Appeal” shall have the meaning set forth in Section 12.1.1(c) hereof.

 

2.36         “Entitlement Condition” shall have the meaning set forth in Section 12.1.1 hereof.

 

2.37         “Escrow Holder” shall mean Peninsula Escrow, Inc., a California corporation (Rancho Palos Verdes, California office).

 

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2.38         “Environmental Laws” means any and all federal, state and local statutes, ordinances, orders, rules, regulations, guidance documents, judgments, or government authorizations in effect as of the Effective Date or as may be rescinded, amended or supplemented thereafter, relating to the presence, Release, generation, use, handling, treatment, storage, or transportation of Hazardous Materials or the protection of the environment or human, plant or animal health, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C.A. §9601), the Hazardous Materials Transportation Act (49 U.S.C. §1801 et. seq.), the Resource Conservation Recovery Act (42 U.S.C. §6901 et. seq.), the Federal Water Pollution Control Act (33 U.S.C. §1251 et. seq.), the Clean Air Act 42 U.S.C. §7401 et. seq.), the Toxic Substances Control Act (15 U.S.C. §2601 et. seq.), the Oil Pollution Act (33 U.S.C. §2701 et. seq.), the Emergency Planning and Community Right to Know Act (42 U.S.C. §11001 et. seq.), the Reporter-Cologne Water Quality Control Act (Cal. Water Code §13020 et seq.), the Safe Drinking Water and Toxic Enforcement Act of 1986 (Cal. Health & Safety Code §25249.5 et seq.), the Hazardous Waste Control Act (Cal. Health ;& Safety Code §25100 et seq.) the Hazardous Materials Release Response Plans & Inventory Act (Cal. Health & Safety Code §25500 et seq.) and the Carpenter-Presley-Tanner Hazardous Substances Account Act (Cal. Health & Safety Code §25300 et seq.) and the Occupational Safety and Health Act, 29 USC §651 et seq. (with respect to regulation of occupational exposure to Hazardous Materials), and any state or local counterparts or equivalents to any of the foregoing.

 

2.39         “Excluded Contracts” shall mean, collectively, the contracts and agreements listed on Schedule 2.39 attached hereto.

 

2.40         “Excluded Property” shall mean, collectively, the Excluded Contracts and the Personal Property and Intangibles listed on Schedule 2.40 attached hereto.

 

2.41         “Exercise Notice” shall have the meaning set forth in Recital C hereof.

 

2.42         “First Amendment” shall have the meaning set forth in Recital B hereof.

 

2.43         “GH/MPBAC” means, collectively, Glass House and Mercer Park.

 

2.44         “GH/MPBAC Affiliate” shall have the meaning set forth in Section 15.12 hereof.

 

2.45         “GIPI” shall have the meaning set forth in the preamble hereof.

 

2.46         “Glass House” shall have the meaning set forth in Recital D hereof.

 

2.47         “Governmental Authority” means any (a) national, state, county, municipal or local government (whether domestic or foreign) or any governmental subdivision thereof, (b) court or administrative tribunal, (c) other governmental, quasi-governmental, judicial, or statutory instrumentality, authority, body, agency, bureau or entity of competent jurisdiction, or (d) arbitrator with authority to bind a party at law.

 

2.48         “Ground Lease” means that certain Ground Lease Agreement, dated as of the California APA Closing Date, by and between Seller and Lessee.

 

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2.49         “Hazardous Materials” means “Hazardous Substance,” “Pollutant or Contaminant,” and “Petroleum” and “Natural Gas Liquids,” as those terms are defined or used in Section 101 of CERCLA, and any other substances regulated under Environmental Laws due to their effect or potential effect on public health and the environment, including, without limitation, polychlorinated biphenyls, lead-based paint, asbestos or asbestos-containing material, urea formaldehyde, radioactive materials, and biohazardous materials.

 

2.50         “Improvements” shall have the meaning set forth in Recital A hereof.

 

2.51         “Independent Contract Consideration Payment”” shall have the meaning set forth in Section 5.2 hereof.

 

2.52         “Initial Deposit” shall have the meaning set forth in Section 4.1 hereof.

 

2.53         “Intangibles” shall mean all of Seller’s rights, title, and interests and all of Lessee’s rights, title and interests, in and to all names, trade names, street numbers, marks, other symbols and general intangibles, which relate exclusively to the Land or the Improvements, to the extent assignable, but excluding any of the same that expressly reference “Houweling,” “CEFF” or “Equilibrium Capital”.

 

2.54         “Knowledge” means, (a) with respect to Seller, information or matters actually known to Gavin Haladay or R. Thomas Amis, (b) with respect to Purchaser, information or matters actually known to Kyle D. Kazan or Graham Farrar, and (c) with respect to GIPI, information or matters actually known to Cornelius (Casey) Houweling.

 

2.55         “Land” shall have the meaning set forth in Recital A hereof.

 

2.56         “Leases” shall mean all of Seller’s rights, title, and interests in (i) all leases with tenants currently leasing all or any portion of the Improvements and all current subleases, and (ii) to the extent assignable, all license agreements, occupancy agreements, and other similar agreements with licensees using any portion of the Improvements, in each case to the extent the same are in effect as of the Closing. A current list of all Leases is attached hereto as Schedule 2.56.

 

2.57         “Lessee” means Houweling Nurseries Oxnard, Inc., a California corporation.

 

2.58         “License Agreement” shall have the meaning set forth in Section 10.1(f) hereof.

 

2.59         “Lien” means any mortgage, deed of trust, lien (choate or inchoate), pledge, charge, security interest, assessment, reservation, assignment, hypothecation, defect in title, encroachments and other burdens, restrictive covenant, condition or restriction or easement or encumbrance of any kind, including any pledge or restriction on use, voting, transfer, receipt of income or exercise of any other attribute of ownership, whether arising by contract or under any applicable law and whether or not filed, recorded or otherwise perfected or effective under any applicable law, or any preference, priority or preferential arrangement of any kind or nature whatsoever including the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement.

 

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2.60         “Master Lease” means that certain Amended and Restated Master Lease Agreement, dated as of the California APA Closing Date, by and between Seller and Lessee.

 

2.61         “Mercer Park” shall have the meaning set forth in Recital D hereof.

 

2.62         “OFAC” shall have the meaning set forth in Section 7.1.5 hereof.

 

2.63         “OFAC’s List” shall have the meaning set forth in Section 7.1.5 hereof.

 

2.64         “Option” shall have the meaning set forth in Recital B hereof.

 

2.65         “Option Rights” shall have the meaning set forth in Recital B hereof.

 

2.66         “Original California Option Agreement” shall have the meaning set forth in Recital B hereof.

 

2.67         “Outside Date” shall mean July 23, 2021.

 

2.68         “Party” shall mean either Seller or Purchaser.

 

2.69         “Parties” shall mean Seller and Purchaser.

 

2.70         “Permits” shall mean all of Seller’s rights, title, and interests, and all of Lessee’s rights, title and interests, in all permits, licenses, authorizations, variances, certificates of occupancy, entitlements and governmental approvals issued by or required under Applicable Law to be filed with a Governmental Authority which relate to the Land or Improvements, to the extent assignable.

 

2.71         “Permitted Exceptions” shall have the meaning set forth in Section 8.4 hereof.

 

2.72         “Permitted Liens” means (a) those Liens set forth on Schedule 2.72; (b) Liens for taxes and other governmental charges and assessments which are not yet due and payable or which are being contested in good faith by appropriate proceedings and in accordance with this Agreement and for which Seller has set aside appropriate reserves; (c) Liens expressly granted under, or created by, existing or pursuant to, the terms and conditions of the Contracts so long as such Liens will be terminated at the Closing; (d) Liens created pursuant to, or as a result of the existence of, the California Option Agreement; (e) Liens existing as of the California APA Closing Date and not otherwise disclosed in writing to Seller or its Affiliates; (f) easements, rights-of-way, licenses, utility agreements, restrictions, and other similar encumbrances, in each case to the extent recorded as of the Effective Date against the Real Property in the Official Records of the County Recorder’s Office of Ventura County; (g) mechanics, carriers, workers, repairers and similar Liens (collectively, “Mechanics’ Liens”) arising or incurred in the ordinary course of Seller’s business with respect to the Real Property provided that the aggregate amount of such Mechanics’ Liens shall in no event exceed Two Hundred Thousand Dollars ($200,000); (h) Liens securing any financing obligations of Seller or an Affiliate thereof, so long as such Liens will be terminated at the Closing; (i) other Liens arising in the ordinary course business or by operation of law so long as, in any such case, the existence of such Lien shall not have a material adverse impact on the Property; and (j) any Liens approved or consented to in writing by the Purchaser. Notwithstanding the foregoing (and for the avoidance of doubt), in no event shall Permitted Liens include Liens securing any obligations of Lessee or any of its Affiliates to either of the entities that comprise the Seller or any of their respective Affiliates under or in connection with the Master Lease or Ground Lease, or any pledge or security agreement executed in connection with the Master Lease or Ground Lease, or any Liens created on or after the California APA Closing Date (or created prior to the California APA Closing Date if disclosed in writing to Purchaser) which encumber any Personal Property required to be conveyed to Purchaser hereunder.

 

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2.73         “Person” shall mean any natural person, corporation, limited liability company, partnership, firm, association, governmental authority or any other entity whether acting in an individual, fiduciary or other capacity.

 

2.74         “Personal Property” shall mean all of Seller’s rights, title and interests, and all of Lessee’s rights, title and interests, in and to the following: (i) mechanical systems, fixtures, machinery and equipment comprising a part of or attached to or located upon or within the Improvements or Land; (ii) maintenance equipment and tools, if any, owned by Seller or Lessee and used exclusively in connection with, and located in or at, the Improvements; (iii) to the extent assignable, site plans, surveys, plans and specifications, warranties, manuals and instruction materials, and floor plans in Seller’s possession which relate to the Land or Improvements; (iv) pylons and other signs situated on or at the Land or Improvements; (v) any property acquired by Seller pursuant to the California APA or otherwise included in the calculation of the Purchase Price set forth in the California Option Agreement; and (vi) all other personal property owned by Lessee other than the Excluded Property.

 

2.75         “Property” shall mean, collectively, the following: (i) Real Property; (ii) Personal Property; (iii) Permits; (iv) Intangibles; and (v) Contracts, but shall exclude the Excluded Property.

 

2.76         “Property Escrow Agreement” shall have the meaning set forth in Section 4.1 hereof.

 

2.77         “Purchase Price” shall have the meaning set forth in Section 5.1 hereof.

 

2.78         “Purchaser” shall have the meaning set forth in the preamble hereof.

 

2.79         “Purchaser Closing Certificate” shall have the meaning set forth in Section 10.2(c) hereof.

 

2.80         “Purchaser Closing Conditions” shall have the meaning set forth in Section 12.1 hereof.

 

2.81         “Real Property” shall mean and include the Land and Improvements as defined in Recital A hereof, as well as all appurtenances thereto, including, without limitation, all of Seller’s rights, title and interests in and to (i) all minerals, oil, gas, and other hydrocarbon substances on or under the surface of the Land and all rights related thereto, (ii) all strips, streets, roads, alleys and rights-of-way, public or private, open or proposed, which are adjacent to or service the Land, (iii) all easements, privileges and hereditaments relating to or used in connection with the beneficial use and enjoyment of the Land or Improvements, whether or not of record, and (iv) all access, agricultural, air, water, riparian, development, utility, and solar rights relating to the Land or Improvements.

 

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2.82         “Release” means any spill, leak, discharge, emission, migration, leaching, disposal, abandonment, pumping, pouring, emptying, injecting, dumping, deposition, dispersion, release, discarding, decomposition or denaturing in, at, to or from the environment, including surface and subsurface soils, strata and pore space, surface water and groundwater, ambient and indoor air, flora, fauna and other natural resources.

 

2.83         “Sanctions” shall have the meaning set forth in Section 7.1.5 hereof.

 

2.84         “Second Amendment” shall have the meaning set forth in Recital B hereof.

 

2.85         “Seller” shall have the meaning set forth in the preamble hereof.

 

2.86         “Seller Closing Certificate” shall have the meaning set forth in Section 10.1(c) hereof.

 

2.87         “Seller Fundamental Representations” shall mean the representations and warranties made by Seller in Sections 7.1.1, 7.1.2, 7.1.4, 7.1.5, 7.1.8 and 7.1.10.

 

2.88         “Seller Insurance Policies” shall have the meaning set forth in Section 7.3.2 hereof.

 

2.89         “Seller Liability Cap” shall have the meaning set forth in Section 9.4 hereof.

 

2.90         “Seller Liens” shall have the meaning set forth in Section 8.4 hereof.

 

2.91         “Seller Parent” means CEFF US Holdings, LLC, a Delaware limited liability company.

 

2.92         “Seller Parent Guaranty” means a guaranty in the form of Exhibit H, by Seller Parent in favor of Purchaser.

 

2.93         “Surveyor” shall have the meaning set forth in Section 8.4 hereof.

 

2.94         “Survival Period” shall have the meaning set forth in Section 7.1 hereof.

 

2.95         “Termination Agreement” shall have the meaning set forth in Section 12.1.5 hereof.

 

2.96         “Termination Agreement Escrow Date” means April 13, 2021.

 

2.97         “Title Company” mean Orange Coast Title (Santa Ana, California office).; provided, however, that if Purchaser determines that a change in Title Company is necessary for the issuance of any title policies contemplated by this Agreement, then Purchaser shall propose a new Title Company for Seller’s approval, which approval shall not be unreasonably withheld, conditioned or delayed.

 

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2.98         “Title Objection” shall have the meaning set forth in Section 8.4 hereof.

 

2.99         “Transaction” shall have the meaning set forth in Section 5.1 hereof.

 

3.             Purchase and Sale of Property. Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees to cause to be sold to Purchaser, and Purchaser agrees to buy, the Property. In connection therewith, Seller agrees that each person or entity comprising the Seller shall be jointly and severally liable for all covenants, representations, warranties, liabilities and obligations of Seller under to this Agreement or any document executed or delivered pursuant to or in connection with this Agreement.

 

4.             Deposit.

 

4.1           Initial Deposit. Pursuant and subject to the terms of that certain Deposit Escrow Agreement (California Option Agreement) dated February 20, 2021 by and among Purchaser, Seller and Escrow Holder (the “Property Escrow Agreement”), Beach Front Properties, LLC, a California limited liability company, on behalf of Purchaser, delivered to Escrow Holder on February 22, 2021 an earnest money deposit in the amount of TWO MILLION and 00/100 DOLLARS ($2,000,000.00) (the “Initial Deposit”).

 

4.2           Additional Deposit. No later than three (3) Business Days after the Additional Deposit Date, Purchaser shall deliver to Escrow Holder an additional earnest money deposit in the amount of EIGHT MILLION and 00/100 DOLLARS ($8,000,000.00) (the “Additional Deposit”, and together with the Initial Deposit, the “Deposit”) as provided by the Property Escrow Agreement.

 

4.3          Application of Deposit. The earnest money deposit required under Section 2.3 of the California Option Agreement will be funded by the Deposit, and the Deposit will be refundable only as provided under Section 4.4. At the Closing, the Deposit shall be applied against the Purchase Price.

 

4.4           Refund of Deposit. From and after the Additional Deposit Date, the entire Deposit shall be non-refundable except as provided to the contrary in this Section 4.4. Notwithstanding the immediately preceding sentence (and as a covenant that shall survive the termination of this Agreement), the Deposit will be fully and promptly refunded to Purchaser, and the Parties shall cause Escrow Holder to return the entire Deposit to Purchaser in accordance with the Property Escrow Agreement, if any one or more of the following occurs: (i) any one or more of the Purchaser Closing Conditions is not satisfied in any material respect by or as of the Outside Date; or (ii) Purchaser terminates this Agreement pursuant to Section 8.4, Section 12.1, Section 13.2 or Section 14 of this Agreement.

 

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5.             Purchase Price; Independent Consideration.

 

5.1           Upon the closing of the transaction contemplated by this Agreement (the “Closing”) with respect to the Property (the “Transaction”), the aggregate purchase price (“Purchase Price”) payable by Purchaser for the Property shall be ONE HUNDRED EIGHTEEN MILLION EIGHT HUNDRED NINETY THOUSAND AND 00/100 DOLLARS ($118,890,000.00). The balance of the Purchase Price due from Purchaser at Closing (after crediting the Deposit and after application of prorations and adjustments provided for in this Agreement) shall be delivered by Purchaser to Escrow Holder by wire transfer of immediately available federal funds no later than 3:00 p.m. Eastern Time/12:00 p.m. Pacific Time on the Closing Date and disbursed to Seller at Closing in accordance with applicable provisions of this Agreement.

 

5.2           Seller and Purchaser agree that the amount of ONE HUNDRED DOLLARS ($100) (“Independent Contract Consideration Payment”) has been bargained for as consideration for Seller’s execution and delivery of this Agreement and for Purchaser’s rights of review, inspection, and termination as set forth herein, and is independent of any other consideration or payment provided for in this Agreement. Notwithstanding anything to the contrary contained herein, the Independent Contract Consideration Payment is non-refundable in all instances. The Parties acknowledge and agree that Purchaser has paid the Independent Contract Consideration Payment to Seller prior to the Effective Date. In no event shall the Independent Contract Consideration Payment be credited towards the Purchase Price at Closing.

 

6. Closing Date.

 

6.1           Closing Date. The Closing shall take place via email exchange of signatures and execution documents on a date mutually agreed to by the Parties within three (3) Business Days after the satisfaction or waiver by the applicable Party of each of the Purchaser Conditions Precedent (the date upon which the Closing occurs, the “Closing Date”); provided, that the Closing shall not take place before the Earliest Closing Date; provided, further, that the Closing Date may be delayed by Purchaser up to (but not beyond) the Outside Date to the extent necessary to obtain any approvals from Canadian or United States securities exchanges required to legally disburse the Purchase Price to Seller on the Closing Date. If the Purchaser Closing Conditions have been satisfied or waived at least three (3) Business Days prior to the Outside Date but Closing does not occur by the Outside Date (other than for reasons of force majeure), the Parties shall cause the Escrow Holder to immediately distribute the entire Deposit to Seller for allocation to Seller and GIPI pursuant to the terms of the California Option Agreement. Notwithstanding the previous sentence, the following events shall not constitute force majeure, except to the extent affecting the physical ability of Purchaser to consummate the Transaction (e.g., an interruption of communication networks): (i) changes in general economic or political conditions; (ii) changes in conditions generally affecting the industries in which Purchaser operates; (iii) any changes in the financial condition of Purchaser, including Purchaser’s ability to secure financing or otherwise access financial, banking or securities markets; and (iv) any changes in financial, banking or securities markets in general, including any disruption thereof and any decline in the price of any security or any market index or any change in prevailing interest rates.

 

6.2          Outside Date. Subject to the other terms and conditions set forth in this Agreement, the Closing shall occur no later than Outside Date, as such date may be extended upon the mutual agreement of the Parties. If the Closing has not occurred on or before the Outside Date, then this Agreement shall terminate and, other than as set forth in Section 6.1 and to the extent provided in Section 4.4, the Deposit shall be promptly returned to Purchaser, and thereafter neither party hereto shall have any further rights, obligations, or liabilities hereunder except for those matters which expressly survive termination of this Agreement.

 

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6.3           Transfer of Property; State of Title. On the Closing Date, Seller shall cause the Property to be transferred and conveyed to Purchaser subject to and in accordance with applicable terms of this Agreement. At the Closing, Seller shall cause to be transferred and conveyed to Purchaser fee title to the Property, free from all liens, encumbrances, encroachments, and other exceptions to title except for the following: (i) Permitted Liens; (ii) any other Liens approved or consented to in writing by Purchaser in accordance with this Agreement; and (iii) the Permitted Exceptions.

 

6.4           Closing Costs; Transaction Expenses. As between Seller and Purchaser, Purchaser shall be responsible for (i) all county documentary transfer taxes charged by Ventura County in connection with the recordation of the Deed, (ii) recordation fees for the Deed, (iii) the cost of the Commitment (and updates thereto) issued prior to Closing, (iv) the premium charged by the Title Company for the issuance to Purchaser, in connection with the Closing, of an owner’s policy of title insurance, and the cost of all endorsements thereto, (v) any closing or escrow fees of Escrow Holder, and (vi) all costs associated with updating the Survey to the extent ordered by Purchaser.

 

7. Representations and Warranties; Interim Covenants of Seller.

 

7.1            Seller Representations and Warranties. Seller represents and warrants to Purchaser that as of the Effective Date and as of the Closing:

 

7.1.1            Each entity comprising Seller is a limited liability company duly formed and validly existing under the laws of the State of Delaware, and is duly qualified to conduct business in the State of California;

 

7.1.2            Seller has the requisite power and authority to enter into and carry out the terms of this Agreement and the execution, performance and delivery hereof and of all other agreements and instruments referred to herein to be executed, performed or delivered by Seller. Neither the execution of this Agreement, nor the performance by Seller of its obligations under this Agreement will result in any breach or violation of the terms of any Applicable Law, rule, ordinance, or regulation or of any decree, judgment or order now in effect from any court or governmental body. Except for third-party consents indicated on Schedule 7.1.2 to be obtained from the persons or entities identified therein, which consents Seller represents and warrants are needed solely for the applicable Contracts and Permits identified on Schedule 7.1.2 to be assigned to Purchaser, there are no consents, waivers, authorizations or approvals from any third party necessary to be obtained by Seller in order to perform its obligations under this Agreement. Assuming receipt of the consents set forth in Schedule 7.1.2, the execution and delivery of this Agreement and performance by Seller of its obligations under this Agreement will not conflict with or result in a breach or default (or constitute an event which, with the giving of notice or the passage of time, or both, would constitute a default) under any instrument to which Seller is a party or by which Seller or any of its assets may be bound;

 

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7.1.3            The execution and delivery of this Agreement and performance by Seller of its obligations under this Agreement will not result in the creation of any new, or the acceleration of any existing, lien, charge, or encumbrance upon the Property or any portion thereof (other than Permitted Liens);

 

7.1.4            This Agreement is a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, or other similar laws affecting the rights of creditors generally;

 

7.1.5            Neither Seller nor any Affiliates of Seller or shareholders of Seller are named on Office of Foreign Assets Control’s (“OFAC”) Specially Designated and Blocked Persons List (the “OFAC’s List”) and Seller and its Affiliates are currently in compliance with the regulations of OFAC (including those named on OFAC’s List) and any statute, executive order or other governmental action relating thereto. “AML Laws” means all U.S. anti-money laundering laws that criminalize money laundering or any predicate crimes to money laundering. “Anti-Corruption Laws” means the U.S. Foreign Corrupt Practices Act and any similar applicable statute, rule, or regulation relating to bribery or corruption. “Sanctions” means any economic, trade, or financial sanctions, sectoral sanctions, secondary sanctions, trade embargoes, or anti-terrorism laws imposed from time to time by the United States government including but not limited to those administered or enforced by the OFAC. Seller is not a target of Sanctions and shall not directly or indirectly transfer any of its interest in this Agreement to a target of Sanctions. Seller is not in violation of AML Laws or Anti-Corruption Laws;

 

7.1.6            Except as set forth in Schedule 7.1.6, Seller is not a party to any pending or, to Seller’s Knowledge, threatened action, suit, proceeding or investigation, at law or in equity or otherwise, in, for or by any court or governmental board, commission, agency, department or officer arising from or relating to the Property or any portion thereof;

 

7.1.7            The California Option Agreement is in full force and effect, and neither Seller nor, to Seller’s Knowledge, GIPI is in default thereof. Seller has delivered to Purchaser a true, correct and complete copy of the California Option Agreement;

 

7.1.8            Except for the prior grant to GIPI of the Option Rights pursuant to the terms of the California Option Agreement and other than Purchaser, as the assignee of GIPI of such Option Rights, Seller has not granted to any person or entity (other than Purchaser) any right or option to acquire the Property, or any part thereof or interest therein;

 

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7.1.9            Except as set forth in Schedule 7.1.9, neither Seller nor, to Seller’s Knowledge, Lessee has received written notice from any Governmental Authority or any other person or entity of any violation of any Applicable Laws (including, but not limited to, those relating to land use or other entitlements or zoning matters, or any Environmental Laws or those relating to Hazardous Materials), which violation remains uncured, or that there may be an investigation of the Property or any portion thereof by any Governmental Authority; provided, however, that as of the Closing, Seller represents and warrants to Purchaser that all noncompliance items that form the basis of any one or more Notices of Violation have been cured in accordance with Section 7.3. Neither Seller nor any of its Affiliates has Released or caused to be Released, any Hazardous Materials on the Real Property in violation of any Environmental Laws. To Seller’s Knowledge, no Hazardous Materials currently exist on, under or about the Real Property and to Seller’s Knowledge, there are no underground storage tanks, wells or pipes located on the Real Property other than as disclosed in writing or set forth in any environmental site assessment provided to Purchaser prior to the Effective Date. To Seller’s Knowledge, the ownership, operation, use and condition of the Real Property is not in violation of any Environmental Laws other than as disclosed in writing to Purchaser prior to the Effective Date. Neither Seller nor any of its Affiliates has received from or given to any Governmental Authority or other person or entity any written notice or other communication relating in any way to the presence, storage, Release, or treatment of any Hazardous Materials on, under or about the Real Property;

 

7.1.10          No bankruptcy, insolvency, reorganization, or similar action or proceeding, whether voluntary or involuntary, is pending, or, to Seller’s Knowledge, has been threatened in writing, against Seller or, to Seller’s Knowledge, Lessee. Neither Seller nor, to Seller’s Knowledge, Lessee has caused, suffered or consented to the appointment of a receiver, trustee, administrator, conservator, liquidator or other similar official in any federal, state, or foreign judicial or non-judicial proceedings to hold, administer and/or liquidate all or substantially of Seller’s or Lessee’s assets. Neither Seller nor, to Seller’s Knowledge, Lessee has admitted in writing its inability to pay its debts as they come due;

 

7.1.11          Except for the Contracts listed on Schedule 2.24, there are no contracts or agreements with respect to the Property to which Seller or, to Seller’s Knowledge, Lessee is a party or by which the Property or any portion thereof will be bound after Closing. Seller has provided Purchaser with true, correct and complete copies of the Contracts. Neither Seller nor, to Seller’s Knowledge, Lessee, is in breach of any Contract set forth on Schedule 2.24;

 

7.1.12          There are no Leases other than as set forth on Schedule 2.56. Seller has delivered to Purchaser a true, correct and complete copy of the Leases set forth on Schedule 2.56. Neither Seller nor Lessee is in breach of any Lease set forth on Schedule 2.56;

 

7.1.13          To Seller’s Knowledge, there are not present on the Property any endangered, protected or threatened species of animals or vegetation;

 

7.1.14          To Seller’s Knowledge, there are no human burial sites or historical or archeological artifacts in, under or upon the Real Property or Improvements;

 

7.1.15          Neither Seller nor, to Seller’s Knowledge, Lessee has entered into any collective bargaining agreements affecting the Property or any portion thereof and, to Seller’s Knowledge, there are no collective bargaining agreements affecting the Property or any portion thereof;

 

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7.1.16          Except as set forth on Schedule 7.1.16, neither Seller nor any of its Affiliates has commenced or filed, and there are not pending, any tax certiorari proceeding with any Governmental Authority with respect to the Real Property or any portion thereof;

 

7.1.17          Neither Seller nor any of its Affiliates is in breach of any document or instrument that is recorded as of the Effective Date or the Closing Date in the Official Records of the Ventura County, California Recorder’s Office against or with respect to the Real Property or any portion thereof; and

 

7.1.18          Seller has provided Purchaser with all material Due Diligence Materials in Seller’s possession or control in accordance with this Agreement.

 

As a covenant that shall survive the Closing, the Parties agree that all representations and warranties of Seller set forth above or elsewhere in this Agreement are made as of the Effective Date and as of the Closing, and shall survive the Closing for a period of eighteen (18) months following the Closing Date; provided, however, that in the event that a written notice of a claim related to a representation or warranty shall have been provided within the survival period, then the survival period for such representations and warranties that are the subject of such claim shall be automatically extended with respect to such claim until such time as the claim is fully and finally resolved (the “Survival Period”). It shall be a material default on the part of Seller (i) if any one or more of such representations or warranties is not true on the Effective Date or becomes false at any time during the period between the Effective Date and the Closing or (ii) if Seller is unable to make all such representations and warranties truthfully as of the Closing.

 

7.2            Purchaser Representations and Warranties. Purchaser hereby represents and warrants to Seller that as of the Effective Date and as of the Closing:

 

7.2.1            Purchaser is a limited liability company duly organized and validly existing under the laws of the State of Delaware, and is duly qualified to conduct business in the State of California;

 

7.2.2            Purchaser has the requisite power and authority to enter into and carry out the terms of this Agreement and the execution, performance and delivery hereof and of all other agreements and instruments referred to herein to be executed, performed or delivered by Purchaser. Neither the execution of this Agreement, nor the performance by Purchaser of its obligations under this Agreement will result in any breach or violation of the terms of any Applicable Law, rule, ordinance, or regulation or of any decree, judgment or order now in effect from any court or governmental body. There are no consents, waivers, authorizations or approvals from any third party necessary to be obtained by Purchaser in order to perform its obligations under this Agreement. The execution and delivery of this Agreement and performance by Purchaser of its obligations under this Agreement will not conflict with or result in a breach or default (or constitute an event which, with the giving of notice or the passage of time, or both, would constitute a default) under any instrument to which Purchaser is a party or by which Purchaser or any of its assets may be bound;

 

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7.2.3            This Agreement is a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency, reorganization, or other similar laws affecting the rights of creditors generally;

 

7.2.4            Neither Purchaser nor any members of Purchaser are named on OFAC’s List and Purchaser and its members are in compliance with the regulations of OFAC (including those named on OFAC’s List) and any statute, executive order or other governmental action relating thereto. Purchaser is not a target of Sanctions and shall not directly or indirectly transfer any of its interest in this Agreement to a target of Sanctions. Purchaser is not in violation of AML Laws or Anti-Corruption Laws;

 

7.2.5            Purchaser is not a party to any pending or, to Purchaser’s Knowledge, threatened action, suit, proceeding or investigation, at law or in equity or otherwise, in, for or by any court or governmental board, commission, agency, department or officer, in each case that would, if Purchaser were to receive an adverse ruling thereunder, materially adversely affect Purchaser’s ability to perform its obligations under this Agreement;

 

7.2.6            No bankruptcy, insolvency, reorganization, or similar action or proceeding, whether voluntary or involuntary, is pending, or, to Purchaser’s Knowledge, has been threatened in writing, against Purchaser. Purchaser has not caused, suffered or consented to the appointment of a receiver, trustee, administrator, conservator, liquidator or other similar official in any federal, state, or foreign judicial or non-judicial proceedings to hold, administer and/or liquidate all or substantially of Purchaser’s assets. Purchaser has not admitted in writing its inability to pay its debts as they come due; and

 

7.2.7            Other than as set forth in this Agreement, Purchaser is not required to obtain prior authorization from any federal or state regulatory agency for Purchaser’s consummation of the Transaction.

 

7.3            Certain Covenants of Seller. From and after the Effective Date until the earlier to occur of the termination of this Agreement and the Closing:

 

7.3.1            Seller shall promptly comply with all of its obligations and liabilities under the Master Lease, Ground Lease and Contracts;

 

7.3.2            Seller shall keep in force all of its insurance policies relating to the Property or any portion thereof (collectively, “Seller Insurance Policies”);

 

7.3.3            Seller shall use good faith efforts to cause the Termination Agreement to be executed into escrow by Lessee on or before the Termination Agreement Escrow Date; provided, that if the Termination Agreement has not been executed into escrow on or before the Termination Agreement Escrow Date, then, from the period from the Termination Agreement Escrow Date until the date that the Termination Agreement has been executed into escrow, Purchaser shall have the right to terminate this Agreement upon written notice to Seller, in which case the Deposit shall be promptly returned to Purchaser and thereafter neither Party shall have any further rights, obligations, or liabilities hereunder except for those matters which expressly survive termination of this Agreement;

 

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7.3.4            Seller shall cause all written notices received by Seller indicating any event, condition or circumstance that would constitute a violation of Applicable Law relating to the Property to be promptly delivered to Purchaser;

 

7.3.5            Seller shall use commercially reasonable efforts to, prior to the Closing, cause all noncompliance items that form the basis of any Notice of Violation to be fixed and cured in accordance with Applicable Law and the requirements of applicable Governmental Authorities, all at Seller’s cost and expense

 

7.3.6            Seller shall use prompt and diligent efforts to cause to be applied for and obtained all consents listed on Schedule 7.1.2 in accordance with the respective terms of the applicable Contracts and Permits; and

 

7.3.7            Unless in each instance Seller shall have obtained the prior written consent of Purchaser (which consent Purchaser may withhold in its sole and absolute discretion), Seller shall neither do, nor permit, any one or more of the following:

 

(a)            The further encumbrance of the Property or any portion thereof (other than Permitted Liens);

 

(b)           Amend the coverage under any of the Seller Insurance Policies to be less than the coverage in place as of the Effective Date;

 

(c)            Enter into or amend any Leases; and

 

(d)            Enter into or amend any Contracts, except as would not materially adversely impact Purchaser or the Transaction, and would not bind the Property or any portion thereof after the Closing.

 

8. Inspection and Indemnity; Title and Survey.

 

8.1            Inspection Rights. Commencing on the Effective Date and ending on the earlier to occur of (i) the termination of this Agreement, or (ii) the Closing, Purchaser shall have the right to make certain investigations of and inquiries regarding the Property or any portion thereof, including, without limitation, the physical condition of Property, and to continue to review Due Diligence Materials. Upon not less than forty-eight (48) hours’ notice (which may be made via email to Gavin Haladay at haladay@eq-cap.com with no requirement to copy any other person or entity), Purchaser and its agents, employees and contractors shall have the right to access the Real Property during normal business hours, for the purpose of making such investigations as Purchaser deems prudent with respect to the physical condition of the Property or any portion thereof.

 

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8.2            Indemnity. Purchaser shall, at Purchaser’s cost, promptly cause to be discharged all mechanics’ liens to the extent resulting from Purchaser’s failure to pay for inspections or tests conducted by Purchaser, its agents, contractors, employees or representatives with respect to the Property. Purchaser further agrees to indemnify, defend and hold harmless Seller for, from and against all causes of action, claims, demands, damages, costs, losses and expenses arising or incurred with respect to any personal injury or physical property damage to the extent caused by Purchaser, its agents, contractors, employees or representatives during their respective due diligence activities on the Property. For the avoidance of doubt, in no event shall Purchaser be liable to Seller for any causes of action, claims, demands, damages, costs, losses and expenses to the extent arising or incurred in connection with any pre-existing condition affecting the Property or any portion thereof and not caused by Purchaser. If any inspection or test conducted by or on Purchaser’s behalf causes physical damage to the Property, Purchaser shall promptly restore the affected portion of the Property to the same physical condition (to the extent reasonably practicable) as existed immediately prior to any such inspection or test.

 

8.3            Natural Hazards Disclosure Requirement. Within five (5) Business Days of the Effective Date, Seller shall, at Purchaser’s cost, provide Purchaser with a disclosure report and natural hazard disclosure statement (the “Disclosure Report”) issued by a vendor selected by Seller and reasonably acceptable to Purchaser (“Disclosure Vendor”), and that is intended to comply with the natural hazard disclosure requirements that may be imposed on Seller pursuant to the Natural Hazard Disclosure Act, California Government Code Sections 8589.3, 8589.4, and 51183.5, and California Public Resources Code Sections 2621.9, 2694, and 4136, and any successor statutes or laws (collectively, the “Act”) and Purchaser acknowledges that the Disclosure Report will fully and completely discharge Seller from any disclosure obligations under the Act. Nothing contained in the Disclosure Report releases Purchaser from its obligation to fully investigate and satisfy itself with the condition of the Property, including, without limitation, whether the Real Property is located in a natural hazard area as identified in the Act. Purchaser further acknowledges and agrees that matters set forth in the Disclosure Report may change on or prior to the Closing and that Seller has no obligation to update, modify, or supplement the Disclosure Report. Purchaser acknowledges that Seller retained the services of Disclosure Vendor to examine the maps and other information made available to the public by government agencies for the purpose of enabling Seller to fulfill its disclosure obligations with respect to the Act and to prepare the Disclosure Report, in the form required by the Act. Purchaser is solely responsible for preparing and delivering its own Disclosure Report to subsequent prospective purchasers of the Property.

 

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8.4            Title and Survey. Purchaser has received a title insurance commitment bearing a commitment date of March 22, 2021 (“Commitment”) for an Owner’s Policy of Title Insurance (Commitment No. 140-2226749-20) from the Title Company, covering the Real Property, together with copies of all instruments reflected as exceptions set forth therein, as well as an ALTA survey of the Land prepared by WM Surveys, Inc. (“Surveyor”) and bearing a last revision date of March ___, 2021 (the “Survey”). Purchaser hereby acknowledges and agrees that Purchaser has approved all matters and documents expressly identified in the Commitment and all matters expressly identified in the Survey, and that all such matters and documents constitute permitted exceptions to title (the “Permitted Exceptions”); provided, however, that Items 27, 29, 30, 31, 32, 34, 36, 37, 38, 39 and 40 in Schedule B, Section Two of the Commitment shall not be considered Permitted Exceptions, and shall be removed (or deleted as an exception from the title policy issued to Purchaser at Closing pursuant to this Agreement) by Seller at or before Closing. Purchaser shall have five (5) Business Days after receipt of notice of any title or survey matters not reflected on the Commitment or Survey to deliver to Seller and Title Company an objection to the same in its sole and absolute discretion (a “Title Objection”). If Purchaser shall timely notify Seller of any Title Objections, Seller shall have the right, but not the obligation (except as set forth below with respect to Seller Liens), to cure such Title Objection(s) in its sole and absolute discretion. Within three (3) Business Days after receipt of Purchaser’s notice of Title Objection(s), Seller shall notify Purchaser in writing whether Seller elects to attempt to cure such Title Objection(s). Failure of Seller to give such notice within said three (3) Business Day period shall be deemed an election by Seller not to cure such Title Objection(s) (except to the extent the same are Seller Liens). If Seller elects or is deemed to have elected not to cure any Title Objection(s) specified in Purchaser’s notice, Purchaser shall have the following options, to be given by written notice to the Seller within two (2) Business Days after Purchaser’s receipt of Seller’s notice electing not to cure such objection(s) (or, if Seller fails to deliver such notice, within two (2) Business Days after the day on which Seller was required to deliver such notice): (a) to accept a conveyance of the Property subject to the Permitted Exceptions, specifically including any Title Objections that Seller has elected, or is deemed to have elected, not to cure (which such matter(s) shall thereafter be deemed to be a Permitted Exception), without reduction of the Purchase Price, or (b) to terminate this Agreement by sending written notice thereof to Seller and Escrow Agent, and upon delivery of such notice of termination, this Agreement shall terminate and the Deposit shall be promptly returned to Purchaser, and thereafter neither party hereto shall have any further rights, obligations, or liabilities hereunder except for those matters which expressly survive termination of this Agreement. Failure of Purchaser to give such notice within said two (2) Business Day period shall be deemed an election by Purchaser to accept a conveyance of the Property as provided in clause (a) above. In addition, if Seller fails prior to the Outside Date to cure or satisfy any Title Objections(s) that Seller has elected, or is required hereunder, to cure or satisfy, then Purchaser may: (y) accept a conveyance of the Property subject to the Permitted Exceptions, specifically including such Title Objection(s) which Seller has failed to cure or satisfy (which such Title Objection(s) shall thereafter be deemed to be a Permitted Exception), without reduction of the Purchase Price, or (z) terminate this Agreement by sending written notice thereof to Seller and Escrow Agent, and upon delivery of such notice of termination, this Agreement shall terminate, the Deposit shall be returned to Purchaser, and thereafter neither party hereto shall have any further rights, obligations, or liabilities hereunder except for those matters which expressly survive termination of this Agreement; provided, however, that the foregoing shall not limit Purchaser’s rights or remedies under Section 13.2 if the uncured Title Objection(s) arose as a result of a breach by Seller of its covenants under this Agreement or if the uncured Title Objection(s) constitute defects or matters which, by the other provisions of this Agreement, Seller is required to cure, pay off or satisfy. Notwithstanding the foregoing or anything in this Agreement that may be construed to the contrary (and as covenants that shall survive the Closing), Seller shall be obligated at its expense (including any prepayment or defeasance costs) to pay off, satisfy and remove as an encumbrance against the Property, on or prior to the Closing, all mortgage or deed of trust liens, delinquent taxes and mechanics’ and other monetary liens of an ascertainable amount created by Seller or Lessee that encumber the Property and that can be satisfied with the payment of money (such liens are, collectively, “Seller Liens”), and in no event shall Seller Liens constitute Permitted Exceptions or, as of the Closing Date, Permitted Liens (it being agreed, for the avoidance of doubt, that nothing in the foregoing provisions of this Section 8.4 nor anything else in this Agreement shall limit Purchaser’s remedies with respect to the obligations of Seller relating to Seller Liens). If Seller neither removes nor so deletes Seller Liens by Closing, then in addition to all rights and remedies that Purchaser may have pursuant to this Agreement, the Purchase Price shall, as directed by Purchaser, be applied to pay off and satisfy all Seller Liens. In addition to the foregoing, and as a covenant that shall survive the Closing, Seller shall, at Seller’s cost and expense, cause all Mechanics’ Liens (other than Mechanics’ Liens caused by Purchaser) to be paid and satisfied prior to any material risk of foreclosure thereof with respect to any portion of the Property; provided, however, that Seller may, in good faith and appropriate proceedings and in accordance with Applicable Law, promptly and diligently contest all such Mechanics’ Liens.

 

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9.              AS-IS; Limitations on Liability. The provisions of this Section 9 shall survive the Closing and any termination of this Agreement.

 

9.1 PURCHASER ACKNOWLEDGES AND AGREES THAT, EXCEPT AS SET FORTH IN THIS AGREEMENT OR THE OTHER DEFINITIVE PROPERTY AGREEMENTS, SELLER SHALL SELL AND CONVEY TO PURCHASER AND PURCHASER SHALL ACCEPT THE PROPERTY “AS IS, WHERE IS, WITH ALL FAULTS,” AND THAT EXCEPT FOR THE REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER SET FORTH IN THIS AGREEMENT OR THE OTHER DEFINITIVE PROPERTY AGREEMENTS, PURCHASER HAS NOT RELIED AND WILL NOT RELY ON, AND SELLER HAS NOT MADE, DOES NOT MAKE AND SPECIFICALLY NEGATES AND DISCLAIMS, AND SELLER IS NOT LIABLE FOR OR BOUND BY, ANY REPRESENTATIONS, WARRANTIES, PROMISES, COVENANTS, AGREEMENTS OR GUARANTIES OF ANY KIND OR CHARACTER WHATSOEVER, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, CONCERNING OR WITH RESPECT TO (I) THE VALUE OF, OR INCOME TO BE DERIVED FROM, THE PROPERTY; (II) THE SUITABILITY OF THE REAL PROPERTY AND IMPROVEMENTS FOR ANY AND ALL ACTIVITIES AND USES WHICH PURCHASER MAY CONDUCT THEREON, INCLUDING THE POSSIBILITY FOR FUTURE DEVELOPMENT OF THE REAL PROPERTY; (III) THE HABITABILITY, MERCHANTABILITY, MARKETABILITY, PROFITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE PROPERTY; (IV) THE QUALITY, STATE OF REPAIR OR LACK OF REPAIR OF THE PROPERTY; (V) THE QUALITY OR CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION, THE WATER, SOIL AND GEOLOGY; (VI) THE PAST, PRESENT OR FUTURE COMPLIANCE OF OR BY THE REAL PROPERTY OR ITS OPERATION WITH ANY LAWS, RULES, ORDINANCES OR REGULATIONS OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR BODY (INCLUDING, WITHOUT LIMITATION, PARKING, ZONING AND BUILDING CODES); (VIII) COMPLIANCE WITH ANY ENVIRONMENTAL LAWS; (IX) THE PRESENCE OR ABSENCE OF HAZARDOUS MATERIALS AT, ON UNDER, OR ADJACENT TO THE REAL PROPERTY; (X) THE CONTENT, COMPLETENESS OR ACCURACY OF ANY DUE DILIGENCE MATERIALS DISCLOSED OR DELIVERED TO PURCHASER; (XI) THE FACT THAT ALL OR A PORTION OF THE REAL PROPERTY MAY BE LOCATED ON OR NEAR AN EARTHQUAKE FAULT LINE; (XII) THE EXISTENCE OF VESTED LAND USE, ZONING OR BUILDING ENTITLEMENTS AFFECTING THE REAL PROPERTY (EXCEPT WITH REGARD TO THE ENTITLEMENT CONDITION); OR (XIII) ANY OTHER MATTER AFFECTING OR RELATED TO THE PROPERTY. PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT SOME OR ALL OF ANY INFORMATION MADE AVAILABLE TO PURCHASER WITH RESPECT TO THE PROPERTY WERE OBTAINED FROM UNAFFILIATED THIRD-PARTY CONSULTANTS AND THAT SELLER HAS NOT MADE ANY INDEPENDENT INVESTIGATION OR VERIFICATION OF SUCH INFORMATION AND MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION, EXCEPT TO THE EXTENT SET FORTH IN THIS AGREEMENT OR IN ANY OTHER DEFINITIVE PROPERTY AGREEMENT.

 

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9.2 PURCHASER REPRESENTS TO SELLER THAT PURCHASER HAS CONDUCTED, OR WILL CONDUCT PRIOR TO CLOSING, SUCH INVESTIGATIONS OF THE PROPERTY, INCLUDING, BUT NOT LIMITED TO, THE PHYSICAL AND ENVIRONMENTAL CONDITIONS THEREOF, WATER RIGHTS, AND THE CONDITION OF THE IMPROVEMENTS LOCATED THEREON, AS PURCHASER DEEMS NECESSARY OR DESIRABLE TO SATISFY ITSELF AS TO THE CONDITION OF THE PROPERTY AND THE EXISTENCE OR NONEXISTENCE OR CURATIVE ACTION TO BE TAKEN WITH RESPECT TO ANY HAZARDOUS OR TOXIC SUBSTANCES ON OR DISCHARGED FROM THE PROPERTY, AND WILL RELY SOLELY UPON SAME AND NOT UPON ANY INFORMATION PROVIDED BY OR ON BEHALF OF SELLER OR ITS AGENTS OR EMPLOYEES WITH RESPECT THERETO, OTHER THAN SUCH REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER AS ARE EXPRESSLY SET FORTH IN THIS AGREEMENT. UPON CLOSING, PURCHASER SHALL ASSUME THE RISK THAT ADVERSE MATTERS, INCLUDING, BUT NOT LIMITED TO, CONSTRUCTION DEFECTS AND ADVERSE PHYSICAL AND ENVIRONMENTAL CONDITIONS, MAY NOT HAVE BEEN REVEALED BY PURCHASER’S INVESTIGATIONS, AND PURCHASER, UPON CLOSING, SHALL BE DEEMED TO HAVE WAIVED, RELINQUISHED AND RELEASED SELLER AND ITS AFFILIATES (AND THEIR OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES AND AGENTS) FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS, CAUSES OF ACTION (INCLUDING CAUSES OF ACTION IN TORT), LOSSES, DAMAGES, LIABILITIES, COSTS AND EXPENSES (INCLUDING REASONABLE ATTORNEYS’ FEES) OF ANY AND EVERY KIND OR CHARACTER, KNOWN OR UNKNOWN, WHICH PURCHASER MIGHT HAVE ASSERTED OR ALLEGED AGAINST SELLER AT ANY TIME BY REASON OF OR ARISING OUT OF ANY LATENT OR PATENT CONSTRUCTION DEFECTS OR PHYSICAL CONDITIONS, VIOLATIONS OF ANY APPLICABLE LAWS AND ANY AND ALL OTHER ACTS, OMISSIONS, EVENTS, CIRCUMSTANCES OR MATTERS REGARDING THE PROPERTY, IN EACH CASE EXCEPT WITH RESPECT TO ANY ONE OR MORE OF THE FOLLOWING: (I) THE EXPRESS REPRESENTATIONS, WARRANTIES OR COVENANTS OF SELLER SET FORTH IN THIS AGREEMENT OR IN ANY OTHER DEFINITIVE PROPERTY AGREEMENT; (II) ANY ACT OR OMISSION OF SELLER THAT CONSTITUTES FRAUD, INTENTIONAL MISREPRESENTATION, GROSS NEGLIGENCE, CRIMINAL ACT OR WILLFUL MISCONDUCT IN CONNECTION WITH THIS AGREEMENT, ANY DEFINITIVE PROPERTY DOCUMENTS OR THE TRANSACTION; AND (III) ANY PERSONAL INJURY OR PROPERTY DAMAGE CLAIMS THAT ARISE AS A RESULT OF ANY EVENT OR CONDITION THAT OCCURS OR EXISTS PRIOR TO THE CLOSING PROVIDED SUCH INJURY OR DAMAGE OCCURS PRIOR TO THE CLOSING AND IS CAUSED BY SELLER OR ANY OF ITS AFFILIATES. WITH RESPECT SOLELY TO THE MATTERS RELEASED BY PURCHASER PURSUANT TO THE FOREGOING PROVISIONS OF THIS SECTION 9.2, PURCHASER WAIVES, UPON CLOSING, THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES THAT:

 

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“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR OR RELEASING PARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE AND THAT, IF KNOWN BY HIM OR HER, WOULD HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR OR RELEASED PARTY.”

 

/s/ [ILLEGIBLE]   /s/ [ILLEGIBLE]
SELLER’S INITIALS   PURCHASER’S INITIALS

 

9.3 Except with respect to (a) damages as may be awarded to any person that is neither the Seller nor an Affiliate of Seller in connection with any claim brought by such person that is within the scope of the indemnification obligations of Purchaser pursuant to Section 8.2 or (b) any act or omission of Seller that constitutes fraud, intentional misrepresentation, gross negligence, criminal conduct or willful misconduct in connection with this Agreement, any Definitive Property Documents or the Transaction, in no circumstances shall either Party (or the Affiliates of each, and their respective members, shareholders, officers, directors, agents and employees) be liable to the other Party (or its Affiliates, and their respective successors, assigns, partners, members, shareholders, officers, directors, agents, representatives and employees) for any consequential, incidental, indirect, special, exemplary or punitive damages (including loss of production, goodwill, actual or anticipated profits, revenues or product, increased expense of borrowing or financing, damage to property or equipment; and increased cost of capital) arising out of this Agreement; and, regardless of whether any such claim arises out of breach of contract, guarantee or warranty, tort (including negligence and strict liability), product liability, indemnity, contribution, strict liability or any other legal or equitable theory.

 

9.4 Notwithstanding anything to the contrary contained in this Agreement, if the Closing occurs, then Seller’s liability to Purchaser thereafter for any damages, claims, demands, suits, causes of action, losses, costs, expenses or liabilities arising from or in connection with Seller’s breach of any of its representations or warranties set forth in this Agreement shall not, in the aggregate, exceed an amount equal to (a) with respect to a breach by Seller of a Seller Fundamental Representation, one hundred percent (100%) of the Purchase Price, and (b) with respect to any other breach, ten percent (10%) of the Purchase Price (the “Seller Liability Cap”), regardless of whether such liability arises out of breach of contract, tort, product liability, contribution, strict liability or any other legal or equitable theory; provided, that Purchaser shall not be entitled to assert any claim for indemnification under this Agreement for a breach of any representation or warranty until the aggregate amount of the indemnifiable losses that may be recovered equals or exceeds Two Hundred and Fifty Thousand Dollars ($250,000) (the “Basket”), in which case Seller will be liable for all losses, including the Basket, subject to the Seller Liability Cap; provided, further, that as covenants that shall survive the Closing, this Section 9.4 shall not apply to any damages, CLOSING AND IS CAUSED BY SELLER OR ANY OF ITS AFFILIATES. WITH RESPECT SOLELY TO THE MATTERS RELEASED BY PURCHASER PURSUANT TO THE FOREGOING PROVISIONS OF THIS SECTION 9.2, PURCHASER WAIVES, UPON CLOSING, THE PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542 WHICH PROVIDES THAT:

 

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9.5 In the event the Closing occurs, then Seller shall not thereafter be liable to Purchaser for any claim or damages to the extent resulting from a breach of a representation, warranty or covenant of Seller set forth in this Agreement if Purchaser or, with respect to facts, events or conditions existing prior to the California APA Closing Date, GIPI had Knowledge, at any time prior to the Closing, of the facts, events or conditions constituting or resulting in such breach of representation, warranty or covenant unless on or prior to the Closing, Seller represents or warrants to Purchaser, or otherwise informs Purchaser in writing, that such breach has been cured.

 

10.          Escrow Instructions and Closing Deliveries. Escrow Holder is instructed to conduct the Closing process in accordance with the provisions of this Agreement.

 

10.1 Delivery by Seller. At least one (1) Business Day prior to the Closing Date, Seller shall provide, or cause to be provided, to Escrow Holder:

 

(a)               A grant deed in the form of Exhibit B (the “Deed”), duly executed and acknowledged by Seller;

 

(b)               A bill of sale and assignment agreement in the form of Exhibit C (the “Bill of Sale and Assignment”), duly executed by Seller;

 

(c)               A certificate of Seller in the form of Exhibit D (the “Seller Closing Certificate”), duly executed by Seller through its duly-authorized representative;

 

(e)               A certificate of “non-foreign” status in the form of Exhibit E and an original certificate sufficient to exempt Seller from any applicable state withholding requirement with respect to the sale contemplated by this Agreement, each duly executed by Seller;

 

(f)                As contemplated by the Second Amendment, an original license agreement in the form of Exhibit F (the “License Agreement”), duly executed by the licensee thereunder;

 

(g)               The Termination Agreement, duly executed by Seller and Lessee (which Termination Agreement shall, in any event, provide for prorations substantially in the manner of prorations under Section 11 with respect to Contracts in the name of Lessee and which are being assigned to Purchaser hereunder);

 

(h)               A bill of sale and assignment agreement with respect to those Personal Property, Contracts and Intangibles in the name of Lessee (other than the Excluded Property), in substantially of the form of the Bill of Sale and Assignment and otherwise in form and substance reasonably acceptable to Purchaser (the “Lessee Bill of Sale and Assignment”), duly executed by Lessee;

 

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(i)                The Seller Parent Guaranty, duly executed by Seller Parent;

 

(j)                To the extent they are then in Seller’s possession and have not theretofore been delivered to Purchaser, all keys and other access control devices for the Property; and

 

(k)               Such other instruments and documents, duly executed by Seller, as may be reasonably requested by Escrow Holder or Title Company and are reasonably required to transfer and convey the Property to Purchaser in accordance with this Agreement, including, without limitation, an owner’s affidavit and gap indemnity in Title Company’s customary form.

 

10.2 Delivery by Purchaser. At least one (1) Business Day prior to the Closing Date, Purchaser shall provide, or cause to be provided, to Escrow Holder:

 

(a)               The Bill of Sale and Assignment and Lessee Bill of Sale and Assignment, each duly executed by Purchaser;

 

(b)               The License Agreement, duly executed by Purchaser;

 

(c)               A certificate of Purchaser in the form of Exhibit G (the “Purchaser Closing Certificate”), duly executed by Purchaser through its duly-authorized representative; and

 

(d)              Such other instruments and documents as may be reasonably requested by Escrow Holder and are reasonably required to transfer and convey the Property to Purchaser in accordance with this Agreement.

 

10.3 Closing Statement. At least five (5) Business Days prior to the Closing Date, Escrow Holder shall deliver to Seller and Purchaser a pro forma closing statement which sets forth the prorations and other credits and debits contemplated by this Agreement, which closing statement shall be subject to the approval of Seller and Purchaser prior to the Closing (as approved by Seller and Purchaser, the “Closing Statement”). The Closing Statement shall be promptly executed and delivered by Seller and Purchaser in order to allow the Closing to occur on the Closing Date as contemplated by this Agreement.

 

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11.            Prorations and Credits; Audit.

 

11.1  General. The following shall be prorated between Seller and Purchaser as of the Closing Date (on the basis of the actual number of days elapsed over the applicable period), with Purchaser being deemed to be the owner of the Property during the entire day on the Closing Date and being entitled to receive all operating income of the Property, and being obligated to pay all operating expenses of the Property, with respect to the Closing Date:

 

11.1.1            All real estate and personal property taxes and assessments on the Property for the current year. If any assessments on the Property are payable in installments, then the installment for the current period shall be prorated (with Purchaser assuming the obligation to pay any installments due after the Closing Date);

 

11.1.2            Any other items of operating income or operating expense which are customarily apportioned between the parties in real estate closings of comparable properties in the metropolitan area where the Property is located, as applicable; and

 

11.1.3            Purchaser shall transfer all utilities to its name as of the Closing Date, and where necessary. Seller shall use commercially reasonable efforts to cause all utility meters to be read as of the Closing Date. Within thirty (30) days after the Closing Date, Purchaser shall pay to Seller an amount equal to all utility deposits that were assigned to Purchaser at or following Closing. All charges for utilities shall be prorated outside of the escrow contemplated herein within sixty (60) days after the Closing Date.

 

11.2 Calculation. The prorations and corresponding adjustments or payments shall be made on the basis of the Closing Statement. In the event any prorations or apportionments made under this Section 11 shall prove to be incorrect for any reason, then any Party shall be entitled to an adjustment to correct the same. Any item which cannot be finally prorated because of the unavailability of information shall be tentatively prorated on the basis of the best data then available and reprorated when the information is available, but in any event no later than one (1) year after the Closing Date, whereupon each Party agrees to promptly make adjusting payment(s) corresponding to any such reproration. The provisions of this Section 11.2 shall survive the Closing.

 

11.3 Property Tax Appeals. Seller may file and/or prosecute an application for the reduction of the assessed valuation of the Property or any portion thereof for real estate taxes or a refund of real estate taxes previously paid to the State of California and/or to Ventura County, the City of Camarillo or any other local Governmental Authority (i) for any fiscal period prior to the fiscal year in which the Closing shall occur without the prior consent of Purchaser, and (ii) for the fiscal year in which the Closing shall occur, provided Purchaser shall have consented with respect thereto, which consent shall not be unreasonably withheld or delayed. The amount of any tax refunds (net of attorneys’ fees and other costs of obtaining such tax refunds) with respect to any portion of the Property for the tax year in which the Closing occurs shall be apportioned between Seller and Purchaser as of the Closing with a prior allocation of the portion thereof that must be returned to Lessee pursuant to the terms of the Leases; Seller hereby agreeing to be responsible for the return of such refund to such tenants or licensees for the period up to and including the Closing and Purchaser having such obligation for the return of such refunds attributable to the period after the Closing. If, in lieu of a tax refund, a tax credit is received with respect to any portion of the Property for the tax year in which the Closing occurs, then with a prior allocation of the portion thereof which must be returned to Lessee pursuant to the terms of the Leases in the same manner as set forth above, (x) the tax credit apportionment shall be readjusted between Seller and Purchaser within thirty (30) days after receipt by Seller or Purchaser, as the case may be, of evidence of the actual amount of such tax credit (net of attorneys’ fees and other costs of obtaining such tax credit), and (y) upon realization by Purchaser of a tax savings on account of such credit, Purchaser shall pay to Seller an amount equal to the savings realized (as apportioned). The provisions of this paragraph shall survive the Closing.

 

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11.4 Audit. Seller agrees, on behalf of itself and the relevant Affiliates of Seller, that Seller and its Affiliates which owned or controlled the Property immediately prior to the Closing shall be subject to audit, promptly upon demand by Purchaser, pursuant to U.S. PCAOB auditing standards, for the three (3) fiscal years immediately preceding the Closing (or such lesser number of fiscal years corresponding to the time periods such entities have been in existence) and, in that regard, Seller shall cause its relevant Affiliates to be so audited, all at Seller’s cost and expense. The provisions of this paragraph shall survive the Closing.

 

12.            Conditions to Closing.

 

12.1 Purchaser Conditions to Closing. Notwithstanding anything in this Agreement that may be construed to the contrary, the following shall be conditions precedent to the obligation of Purchaser to proceed with the Closing (collectively, the “Purchaser Closing Conditions”):

 

12.1.1      The Entitlement Condition shall have been satisfied. For purposes of this Agreement, “Entitlement Condition” means the issuance of all of the following:

 

(a)           a Ventura County Commercial Cannabis Activity Zoning Clearance issued by the Ventura County Resources Management Agency, Planning Division, in accordance with the Ventura County Ordinance Code and provisions of Measure O approved by Ventura County ballot referendum on November 3, 2020;

 

(b)           a Ventura County Cannabis Business License allowing Purchaser to conduct Cannabis Use on the Property; and

 

(c)           in the event of any timely made appeal or legal challenge being pursued (whether by administrative appeal, lawsuit or otherwise) before an applicable Governmental Authority with respect to the issuance of one or more of the above-described entitlements, approvals and Permits (each, an “Entitlement Appeal”), upon the final resolution of any such Entitlement Appeal in favor of Purchaser (whether by final judgment, dismissal with prejudice, dismissal of any appeal, settlement or otherwise);

 

12.1.2      No governmental moratorium shall have been enacted and be continuing with respect to Cannabis Use that would apply to all or any “material” portion of the Real Property; provided, that a portion of Real Property shall be deemed “material” if the surface land area of such portion comprises three percent (3%) or more of the aggregate surface land area of the Property;

 

12.1.3      Prior to the Closing, the Title Company shall have irrevocably committed to issue, as of the Closing, a guaranty or an optionee’s policy of title insurance in favor of Purchaser, guaranteeing or insuring that Purchaser is, as of the Closing, the holder of the Option, with a liability limit in an amount not less than $100,000,000, and which contains no exceptions to coverage other than (x) Permitted Liens; and (y) Permitted Exceptions;

 

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12.1.4      The Title Company shall be irrevocably committed to issue, as of the Closing, an Owner’s Policy of Title Insurance in favor of Purchaser, insuring that Purchaser is, as of the Closing, the fee owner of the Property, with a liability limit in an amount not less than the Purchase Price, and which contains no exceptions to coverage other than (x) Permitted Liens; and (y) Permitted Exceptions;

 

12.1.5      The Master Lease and Ground Lease shall each have been terminated, pursuant to a form of termination agreement satisfactory to Purchaser (the “Termination Agreement”), which Termination Agreement shall be deemed to be effective immediately prior to the Closing, conditioned only on Purchaser’s execution and delivery of the License Agreement as of the Closing; provided, that Purchaser may not waive the Purchaser Condition Precedent set forth in this Section 12.1.5;

 

12.1.6      GIPI, as the seller, and the Purchaser, as the buyer, shall have been in a position to close the sale to the Purchaser of the Option Rights in accordance with the Definitive Option PSA immediately prior to the Closing (or on any such earlier date as may be exercisable by Purchaser under the Definitive Option PSA);

 

12.1.7      Prior to the Closing, Seller shall have obtained, at Seller’s cost and expense, all consents listed on Schedule 7.1.2 in accordance with the respective terms of the applicable Contracts and Permits; and

 

12.1.8      As of the Closing Date, no material breach by Seller of any covenant, representation or warranty of Seller set forth in the California Option Agreement or this Agreement shall have occurred and remains uncured.

 

If less than all of the foregoing Purchaser Closing Conditions shall have been satisfied by the Outside Date, unless otherwise waived in writing by Purchaser, then Purchaser may elect, by written notice to Seller, to terminate this Agreement (the “Conditions Termination Notice”). This Agreement shall terminate concurrently with Purchaser’s delivery of the Conditions Termination Notice, in which event (i) each Party hereto shall have no further liability or obligation to the other (other than any liabilities or obligations that, by the express terms of this Agreement, are provided to survive the termination of this Agreement), (ii) as a covenant that shall survive any termination of this Agreement pursuant to this paragraph, the Deposit shall be immediately returned to Purchaser without deduction in accordance with Section 4.4, and (iii) as an additional covenant that shall survive any termination of this Agreement pursuant to this paragraph, the Option Rights under the California Option Agreement shall automatically revert to GIPI without further action of the Parties, and Purchaser shall be deemed to have waived all rights (but not defenses) under the California Option Agreement.

 

12.2         Seller Conditions to Closing. Seller shall have no obligation to proceed with the Closing unless and until the following conditions precedent and contingencies have been satisfied (or waived in writing by Seller):

 

12.2.1      All funds and instruments required under this Agreement to be delivered by Purchaser to Seller or Escrow Holder on or prior to the Closing Date shall have been delivered in accordance with applicable provisions of this Agreement; and

 

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12.2.2      As of the Closing Date, no material breach by Purchaser of any covenant, representation or warranty of Purchaser set forth in this Agreement shall have occurred and remains uncured.

 

13.           Default and Remedies. The provisions of this Section 13 shall survive the termination of this Agreement.

 

13.1 DEFAULT (PURCHASER). IF ALL OF PURCHASER’S CLOSING CONDITIONS SHALL HAVE BEEN SATISFIED AS REQUIRED BY SECTION 12.1 AND PURCHASER BREACHES THIS AGREEMENT IN ANY MATERIAL RESPECT AND, AS A RESULT OF SUCH BREACH, THE CLOSING DOES NOT OCCUR, THEN AS SELLER’S SOLE AND EXCLUSIVE REMEDY, SELLER SHALL BE RELEASED FROM SELLER’S OBLIGATION TO SELL THE PROPERTY TO PURCHASER AND, AS LIQUIDATED DAMAGES, SHALL BE ENTITLED TO KEEP SUCH PORTION OF THE DEPOSIT AS SELLER IS ENTITLED TO KEEP PURSUANT TO THE TERMS AND CONDITIONS OF THE PROPERTY ESCROW AGREEMENT (TAKING INTO ACCOUNT ANY AGREEMENT SELLER MAY HAVE WITH GIPI WITH RESPECT TO THE SHARING OR ALLOCATION OF SUCH DEPOSIT), WHICH SHALL BE DEEMED TO CONSTITUTE A REASONABLE ESTIMATE OF THE DAMAGES AND COSTS INCURRED BY SELLER AS A RESULT OF SUCH DEFAULT BY PURCHASER, IT BEING AGREED THAT SELLER’S ACTUAL DAMAGES WOULD BE DIFFICULT TO COMPUTE AND THAT SAID AMOUNT OF LIQUIDATED DAMAGES BEARS A REASONABLE RELATIONSHIP TO SELLER’S PROBABLE ACTUAL DAMAGES IN THE EVENT OF PURCHASER’S DEFAULT. THE REMEDIES SET FORTH IN THE FOREGOING PROVISIONS OF THIS SECTION 13.1 SHALL CONSTITUTE THE SOLE AND EXCLUSIVE REMEDY OF SELLER AND SHALL BE IN LIEU OF ANY OTHER MONETARY RELIEF AND OTHER RIGHTS AND REMEDIES TO WHICH SELLER MIGHT OTHERWISE BE ENTITLED (EXCEPT THAT NOTHING IN THIS SECTION 13.1 SHALL LIMIT (I) THE INDEMNITY OBLIGATIONS OF PURCHASER EXPRESSLY SET FORTH ELSEWHERE IN THIS AGREEMENT, OR (II) THE OBLIGATIONS OF PURCHASER UNDER SECTION 15.1 OR SECTION 15.4 HEREOF). PAYMENT OF THE SUMS DESCRIBED BY THE FOREGOING PROVISIONS OF THIS PARAGRAPH TO SELLER AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT INSTEAD, IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO SECTIONS 1671, 1675, 1676 AND 1677 OF THE CALIFORNIA CIVIL CODE.

 

/s/ [ILLEGIBLE]   /s/ [ILLEGIBLE]
SELLER’S INITIALS   PURCHASER’S INITIALS

 

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13.2            Default (Seller). If Seller breaches, in any material respect, any one or more of Seller’s covenants, representations or warranties under this Agreement and as result thereof, the Closing fails to occur, then Purchaser must send Seller a notice that Purchaser considers Seller to be in default, which notice provides a reasonably detailed statement of the nature of the default. Upon receipt of that notice, Seller shall have thirty (30) days in which to fulfill Seller’s obligations. Purchaser agrees that Purchaser’s sole remedy in the event that Seller does not fulfill its obligations prior to the expiration of the thirty (30) day cure period shall be to elect one (but not both) of the following: (i) terminate this Agreement upon written notice delivered promptly to Seller, in which event, the Deposit shall be immediately returned to Purchaser without deduction and Seller shall reimburse Purchaser for all out-of-pocket costs and expenses paid or incurred by Purchaser in connection with the Transaction, up to a maximum reimbursement of One Million Dollars ($1,000,000) (and in the event of such termination, the Parties shall have no further obligation to each other under this Agreement except for those obligations hereunder which, by their terms, survive the termination of this Agreement), or (ii) provided that Purchaser is ready, willing and able to proceed with the Closing in accordance with this Agreement, keep this Agreement in full force and effect and pursue an action for specific performance against Seller by filing a suit for specific performance in a court of competent jurisdiction no later than the date that is sixty (60) days after the Closing was to have occurred under this Agreement. Failure by Purchaser to timely and validly file such action for specific performance shall be deemed Purchaser’s election to terminate this Agreement in accordance with clause (i) of the preceding sentence. Notwithstanding the foregoing or anything in this Agreement that may be construed to the contrary: (x) if the nature of Seller’s breach or default is in the nature of fraud, intentional misrepresentation or failure to disclose, gross negligence, criminal conduct or willful misconduct, then Purchaser shall have all rights and remedies at law or in equity, including the right to pursue damages, including, without limitation, punitive or exemplary damages; and (y) nothing in this Section 13.2 shall limit the obligations of Seller under Section 15.1 or Section 15.4 hereof.

 

14.            Casualty/Condemnation.

 

14.1            Condemnation. In the event that, prior to the Closing Date, all or a portion of the Property is taken pursuant to eminent domain proceedings or any Governmental Authority issues any written notice indicating the intent on the part of any Governmental Authority to take all or any portion of the Property by eminent domain proceedings (each, an “ED Event”), then Purchaser may, at its sole and absolute discretion, thereafter terminate this Agreement by written notice to Seller, whereupon the Deposit shall be promptly returned to Purchaser and no Party hereto shall have any further obligation in connection herewith except under those provisions that expressly survive a termination of this Agreement. If, notwithstanding the occurrence of any ED Event, Purchaser elects not to terminate this Agreement pursuant to its rights under this Section 14.1, then Seller shall, upon the Closing, assign to Purchaser all rights and claims of Seller respecting such ED Event and all condemnation proceeds relating thereto; provided, however, that to the extent Seller shall have, prior to the Closing, received any such condemnation proceeds, then at the Closing, the aggregate amounts so received by Seller shall be credited against the Purchase Price.

 

14.2            Casualty. If, prior to the Closing, all or any portion of the Property is damaged by fire or any other cause whatsoever, Seller shall promptly give Purchaser written notice of such damage. Risk of loss for damage to all or any part of the Property by fire or other casualty from the Effective Date up to the Closing Date will be on Seller.

 

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14.2.1         Minor Damage. If the cost for repairing such damage is equal to or less than FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($500,000.00) (as determined by an independent construction professional and appraiser selected by Seller and reasonably acceptable to Purchaser), then Purchaser shall have the right at Closing to receive a credit for the amount of the deductible (to the extent not already applied by Seller to the repair or restoration of the Property) plus all insurance proceeds received by Seller as a result of such damage, or an assignment of Seller’s rights to such insurance proceeds, and this Agreement shall continue in full force and effect with no reduction in the Purchase Price, and Seller shall have no further liability or obligation to repair such damage or to replace the Property. Notwithstanding the foregoing, if any portion, but less than one hundred percent (100%), of such cost of repair is covered by Seller’s insurance (other than Seller’s deductible), then Purchaser shall, at the Closing, receive a credit against the Purchase Price for the amount of the uninsured portion (or if the entire cost of repair is not covered by insurance, a credit for the amount of the entire cost of repair, with no deduction for Seller’s deductible).

 

14.2.2         Major Damage. If the cost for repairing such damage is greater than FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($500,000.00) (as determined by an independent construction professional and appraiser selected by Seller and reasonably acceptable to Purchaser), then Purchaser shall have the option, exercisable by written notice delivered to Seller and Escrow Agent within five (5) Business Days after Seller’s notice of damage to Purchaser, either (i) to receive a credit for the amount of the deductible (to the extent not already applied by Seller to the repair or restoration of the Property) plus all insurance proceeds received by Seller as a result of such loss, or an assignment of Seller’s rights to such insurance proceeds, and this Agreement shall continue in full force and effect with no reduction in the Purchase Price, and Seller shall have no further liability or obligation to repair such damage or to replace the Property; or (ii) to terminate this Agreement. If Purchaser elects to terminate this Agreement, the Deposit shall be promptly returned to Purchaser, and thereafter neither party will have any further rights or obligations hereunder, except for any obligations that expressly survive the termination of this Agreement. If Purchaser fails to notify Seller within such five (5) Business Day of its election, then Purchaser shall be deemed to have elected option (ii). The provisions of this Section 14.2.2 shall survive the termination of this Agreement pursuant to this Section 14.2.2.

 

15.            Miscellaneous. The provisions of this Section 15 shall survive the Closing and any termination of this Agreement.

 

15.1            Broker’s Commissions. Seller represents and warrants to Purchaser that Seller has not engaged or otherwise dealt with any finder or broker in connection with this Agreement. Purchaser represents and warrants to Seller that Purchaser has not engaged or otherwise dealt with any finder or broker in connection with this Agreement. Each Party shall be responsible for the payment of all brokerage commissions that now or may hereafter become due and payable in connection with this Agreement, if any, based on any arrangement or agreement made by on or behalf of such Party, and such Party (the “Indemnifying Party”) shall indemnify, defend and hold harmless the other Party for, from and against all claims, suits, demands, losses, damages, costs and expenses (including attorneys’ fees and costs) arising as a result of or in connection with any breach by the Indemnifying Party of any of its representations, warranties or covenants set forth in this Section 15.1.

 

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15.2            Further Assurances. Each of the Parties shall execute such other and further documents and do such further acts as may be reasonably required to effectuate the intent of the parties and carry out the terms of this Agreement.

 

15.3            Waiver, Consent and Remedies. Either Party may specifically and expressly waive in writing any portion of this Agreement or any breach thereof, but no such waiver shall constitute a further or continuing waiver of any preceding or succeeding breach of the same or any other provision. A waiving party may at any time thereafter require further compliance by the other with any provision previously waived or breached. The consent by one party to any act by the other for which such consent was required shall not be deemed to imply consent or waiver of the necessity of obtaining such consent for the same or any similar acts in the future. No waiver or consent shall be implied from silence or any failure or any party to act, except as otherwise specified in the Agreement. All rights and remedies contained in this Agreement shall be cumulative and no one of them shall be exclusive of any other.

 

15.4            Attorneys’ Fees. If Seller or Purchaser brings any suit or other proceeding, including an arbitration proceeding, with respect to the subject matter or the enforcement of this Agreement, the prevailing party (as determined by the court, agency, arbitrator or other authority before which such suit or proceeding is commenced), in addition to such other relief as may be awarded, shall be entitled to recover reasonable attorneys’ fees, expenses and costs actually incurred. The foregoing includes attorneys’ fees, expenses and costs of investigation (including those incurred in appellate proceedings), costs incurred in establishing the right to indemnification, or in any action or participation in, or in connection with, any case or proceeding under Chapter 7, 11 or 13 of the Bankruptcy Code (11 United States Code Sections 101 et seq.), or any successor statutes.

 

15.5            Notices. Any communications between or among the parties hereto or regular notices provided herein to be given shall be given to the following addresses:

 

To Purchaser:

 

GH Camarillo LLC 

3645 Long Beach Boulevard 

Long Beach, California 90807 

Attn: Kyle D. Kazan 

Email: kyle@glasshousegroup.com

 

With a copy (which shall not constitute notice) to:

 

Venable LLP 

2049 Century Park East, Suite 2300 

Los Angeles, California 90064 

Attn: Matthew A. Portnoff, Esq. 

Email: mportnoff@venable.com

 

31 

 

 

To Seller:

 

CEFF Camarillo Property, LLC 

c/o Controlled Environment Foods Fund, LLC 

411 NW Park Ave, Suite 401 

Portland, Oregon 97209 

Attn: General Counsel 

Email: campbell@eq-cap.com

 

With a copy (which shall not constitute notice) to:

 

Amis, Patel & Brewer, LLP 

1399 New York Ave, NW, Suite 701 

Washington, DC 20005 

Attn: Rusty Brewer 

Email: rustybrewer@apbllp.com

 

Any notice that is personally served shall be effective upon the date of service; any notice given by U.S. Mail shall be deemed effectively given, if deposited in the United States Mail, registered or certified with return receipt requested, postage prepaid and addressed as provided above, on the date of receipt, refusal or non-delivery indicated on the return receipt. In addition, a party hereto may send notices by electronic mail, or by a nationally recognized overnight courier service which provides written proof of delivery (such as U.P.S. or Federal Express). Any notice sent by electronic mail shall be effective upon confirmation of receipt in legible form, and any notice sent by a nationally recognized overnight courier shall be effective on the date of delivery to the appropriate party hereto at its address specified above as set forth in the courier’s delivery receipt. A party hereto may, by notice to the other parties from time to time in the manner herein provided, specify a different address for notice purposes.

 

15.6            Entire Agreement; No Recording. This Agreement and the documents contemplated herein constitute the entire agreement between the Parties hereto pertaining to the subject matter hereof, and the final, complete and exclusive expression of the terms and conditions hereof. All prior agreements, representations, negotiations and understandings of the Parties, oral or written, express or implied, pertaining to the subject matter hereof are hereby superseded and are null and void. This Agreement shall not be recorded unless the prior written consent of Seller is obtained, which consent Seller may withhold in Seller’ sole discretion; provided, however, that if Purchaser notifies the Seller that Purchaser desires to record a memorandum of this Agreement, then within a reasonable period of time after the Effective Date, Purchaser and Seller to execute, acknowledge and record a short memorandum of this Agreement, in form and substance reasonably acceptable to Purchaser and the Seller.

 

15.7            Governing Law; Venue. The validity, construction and operational effect of this Agreement shall be governed by the laws of the State of California, without regard to California’s choice of law rules or principles. Any dispute or claim arising under or related to this letter will be exclusively brought in the state or federal courts situated in Los Angeles County, California, and the parties expressly submit to the jurisdiction thereof and to venue therein.

 

32 

 

 

15.8            Invalidity of Provision. If any portion of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, the remainder of this Agreement shall remain in full force and effect.

 

15.9            Amendments. This Agreement may be amended only by written agreement signed by both of the Parties.

 

15.10          Counterparts. This Agreement may be executed in several counterparts and all such executed counterparts shall constitute one agreement, binding on all of the Parties, notwithstanding that all of the Parties are not signatories to the original or to the same counterpart. This Agreement shall not be binding unless and until all Parties have executed the Agreement.

 

15.11          Successors and Assigns. Subject to Section 15.12 below, this Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties hereto.

 

15.12          Assignment. Purchaser shall not directly or indirectly, in whole or in part, assign, transfer, pledge, delegate, encumber or hypothecate its rights, interests, claims or obligations under this Agreement without Seller’s prior written consent. Notwithstanding the foregoing, Purchaser shall have the right, without Seller’s consent, to assign all of Purchaser’s right, title and interest in and to this Agreement to any entity that GH/MPBAC directly or indirectly controls, is controlled by or is under common control with GH/MPBAC (a “GH/MPBAC Affiliate”). No assignment or other transfer by Purchaser shall be effective unless and until (a) no later than ten (10) days prior to the Closing, Purchaser shall have delivered written notice to Seller of Purchaser’s intent to enter into assignment or transfer to a GH/MPBAC Affiliate; and (b) Purchaser shall have delivered to Seller a written agreement fully executed by Purchaser and such GH/MPBAC Affiliate by which Purchaser unconditionally assigns to such assignee all of Purchaser’s rights and interests in and to this Agreement, and any amendments thereto, and such assignee presently and unconditionally assumes all of Purchaser’s duties, obligations and liabilities under this Agreement, and any amendments thereto.

 

15.13          Relationship of Parties. Seller and Purchaser shall not, by virtue of this Agreement, in any way or for any reason be deemed to have become a partner of the other in the conduct of its business or otherwise, or a joint venturer. In addition, by virtue of this Agreement there shall not be deemed to have occurred a merger or any joint enterprise between Seller and Purchaser.

 

15.14          Confidentiality. As covenants that shall survive the Closing and any termination of this Agreement for a period of one (1) year, each of the Parties will keep the existence and contents of this Agreement and the other Definitive Property Agreements strictly confidential except for disclosures required to be made to each respective party’s professional advisors, officers, shareholders, directors, and other representatives, or required disclosures pursuant to applicable stock exchange or regulatory requirements. In the event that either Seller or Purchaser becomes legally compelled to disclose any of the terms and conditions of this Agreement (the “Compelled Party”), the Compelled Party and its representatives shall provide the other Party with prompt prior written notice of such requirements so that such Party may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this statement of confidentiality.

 

33 

 

 

15.15          Public Statements. Neither Party may issue or make any public announcement, press release or statement regarding this Agreement or the Transaction unless such public announcement, press release or statement is issued jointly by the Parties; or, prior to the release of the public announcement, press release or statement, any such Party wishing to make any such public statement furnishes the other Party with a copy of such public announcement, press release or statement and obtains the approval of the other Party, such approval not to be unreasonably withheld, conditioned or delayed; provided, however, that, notwithstanding any failure to obtain such approval, no Party shall be prohibited from issuing or making any such public announcement, press release or statement if it is necessary to do so in order to comply with Applicable Laws, legal proceedings or the rules and regulations of any stock exchange having jurisdiction over such Party.

 

15.16          Headings. Headings at the beginning of each paragraph and subparagraph are solely for the convenience of the Parties and are not a part of this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Agreement shall not be construed as if it had been prepared by one of the Parties, but rather as if both Parties had prepared the same. Unless otherwise indicated, all references to paragraphs and subparagraphs are to this Agreement. All exhibits referred to in this Agreement are attached hereto and incorporated by this reference.

 

15.17          Relationship of Seller and Lessee. The Parties acknowledge and agree that Lessee is not an Affiliate of Seller, and Seller does not control Lessee. Notwithstanding anything herein to the contrary, with respect to any obligations of Seller hereunder that will require an action to be undertaken by Lessee, Seller will use good faith efforts to cause Lessee to take such action, and any failure of Seller to fulfill an obligation material to the Transaction due to Lessee failing to take a required action will not be considered a breach of Seller’s obligation but may constitute a failure to satisfy the Purchaser Closing Conditions.

 

[Signature page follows]

 

34 

 

 

IN WITNESS WHEREOF, Seller and Purchaser have executed this Agreement as of the date first above written.

 

Seller:  
   
CEFF Camarillo Property, LLC,  
a Delaware limited liability company  
   
  By: EqCEF I, LLC, its manager  
   
By: /s/ R. Thomas Amis  
Name: R. Thomas Amis  
Title: Principal  

 

CEFF Camarillo Holdings, LLC,  
a Delaware limited liability company  
   
  By: EqCEF I, LLC, its manager  
   
By: /s/ R. Thomas Amis  
Name: R. Thomas Amis  
Title: Principal  

 

 

Purchaser:  
   
GH CAMARILLO LLC,  
a Delaware limited liability company  
   
   
By:  /s/ Kyle D. Kazan  
Name: Kyle D. Kazan  
Title: Authorized Signatory  

 

[Signature Page to Agreement to Sell and Acquire Real Estate 

and Joint Escrow Instructions]

 

 

 

 

JOINDER BY ESCROW HOLDER

 

Peninsula Escrow, Inc., a California corporation, referred to in this Agreement as the “Escrow Holder,” hereby acknowledges that it received this Agreement executed by Seller and Purchaser as of March 29, 2021, and accepts the obligations of the Escrow Holder as set forth herein.

 

Peninsula Escrow, Inc., a California corporation  
     
By: /s/ Judy Shepherd  
Name: Judy Shepherd  
Title: 3-29-2021  

 

 

 

 

List of Exhibits and Schedules

 

Exhibit A Legal Description of Land
Exhibit B Form of Deed
Exhibit C Form of Bill of Sale and Assignment
Exhibit D Form of Seller Closing Certificate
Exhibit E Form of FIRPTA
Exhibit F Form of License Agreement
Exhibit G Form of Purchaser Closing Certificate
Exhibit H Form of Seller Parent Guaranty
   
Schedule 2.24 Contracts
Schedule 2.39 Excluded Contracts
Schedule 2.40 Excluded Property
Schedule 2.56 Leases
Schedule 2.72 Permitted Liens
Schedule 7.1.2 Consents
Schedule 7.1.6 Proceedings
Schedule 7.1.9 Compliance with Law
Schedule 7.1.16 Tax Proceedings

 

37 

 

 

Exhibit A

 

Legal Description of Real Property

 

Parcel A:

 

The East 160 acres of Parcel C, Subdivision 68, Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, as per Map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County.

 

EXCEPT from the East 160 acres, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface, as excepted in deed from John A. Maring, et al., recorded June 16,1964, Book 2561, Page 491 of Official Records.

 

ALSO EXCEPT the interest in a portion said land excepted in the deed from John A. Maring and wife, recorded May 31, 1967, Book 3149, Page 109 of Official Records, as follows: “Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

EXCEPT all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 500 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 500 feet below the surface, as reserved by Coast Farms, Inc., a California corporation, recorded November 30, 1995, as Document No. 95-148132 of Official Records.

 

Parcel B: A non-exclusive easement for irrigation water pipelines for use, repair, or replacement of the existing water line over the Northerly 25 feet of the following described property:

 

Parcel 1: The Northerly 1489.29 feet of the Westerly 1169.95 feet of Parcel B, Subdivision 60 of the Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California. according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County.

 

EXCEPT the Easterly 16.4459 acres thereof.

 

ALSO EXCEPT any portion lying within Parcel 6 herein.

 

Exhibit A

 

 

Parcel 2: That portion of Parcel B, Subdivision 68 of the Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County, described as follows: 

 

Beginning at the intersection of the Northerly line of said Parcel B with the Westerly line of the Easterly 200 acres of Parcels B and C of said Subdivision 68; thence along said Westerly line, 

1st: South 2655.84 feet to the Southerly line of Parcel B; thence along said Southerly line, 

2nd: West 343.21 feet, more or less, to the Southeasterly corner of the South 925 feet of the West 1656 feet of said Parcel B; thence along the East line of said land, 

3rd: North 925 feet on the Northeast comer of said land; thence along the North line of said land, 

4th: West 480.95 feet more or less, to the intersection with a line parallel with said Westerly line of the Easterly 200 acres, distant Westerly 823.26 feet measured at right angles from said Westerly line of the Easterly 200 acres; thence along said parallel line, 

5th: North 1730.84 feet to said Northerly line of Parcel B; thence along said Northerly line, 

6th: East 823.26 feet to the point of beginning.

 

EXCEPT the interest in said land excepted in the deed from American Crystal Sugar Company, a corporation, recorded January 29, 1951 in Book 977, Page 58, Official Records, as follows: 

 

ALSO EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967 in Book 3149, Page 109 of Official Records, as follows: “Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

Parcel 3:

 

The East 16.4556 acres of the following described property, the West line thereof to be parallel with the East line thereof; that portion of Parcel B, Subdivision 68 of the Rancho El Rio De Santa Clara o’ La Colonia, in the County of Ventura, State of California, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County, described as follows: 

 

Beginning at the intersection of a line parallel with and distant Westerly 823.26 feet measured at right angles from the Westerly line of the Easterly 200 acres of Parcels B and C of said Subdivision 68, with the Northerly line of said Parcel B; thence along said parallel line, 

1st: South 1489.20 feet; thence parallel with said Northerly line of Parcel B, 

2nd: West 1169.95 feet to the Westerly line of said Parcel B; thence along said Westerly line, 

3rd: North 1489.29 feet to the Northwesterly comer of said Parcel 8: thence along the Northerly line thereof 

4th: East 1169.95 feet to the point of beginning.

 

ALSO. EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967 in Book 3149, Page 109 of Official Records, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

Exhibit A

 

 

Parcel 4:

 

The Westerly 40 acres of the Easterly 200 acres of Parcels Band C of Subdivision 68 of Rancho El Rio de Santa Clara o’ La Colonia, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County.

 

ALSO EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967 in Book 3149, Page 109 of Official Records, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

Parcel 5:

 

That portion of Parcel B of Subdivision 68, of the Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, as per Map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County, described as follows:

 

Beginning at a point in the North line of said Parcel B. distant Easterly 334 feet from the East line of Wood Road; thence from said point of beginning, 

1st: Easterly 170 feet along the North line of said Parcel B; thence, 

2nd: South 185 feet; thence, 

3rd: West 170 feet; thence, 

4th: North 185 feet to the point of beginning.

 

ALSO EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967, in Book 3149 Page 109, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

Exhibit A

 

 

Exhibit B

 

Form of Deed

 

RECORDING REQUESTED BY AND 

WHEN RECORDED MAIL THIS DEED 

AND TAX STATEMENTS TO

 

   
   
   
   

 

 

(space above this line for Recorder’s use only)

 

GRANT DEED

 

[Transfer Tax Declaration – to be inserted]

 

FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, CEFF Camarillo Property, LLC, a Delaware limited liability company ( “Grantor”), hereby GRANTS AND CONVEYS to GH CAMARILLO LLC, a Delaware limited liability company (“Grantee”), that certain real property (“Property”) located in the County of Ventura, State of California, and more particularly described on Exhibit A attached hereto and incorporated into this Grant Deed by this reference.

 

Dated:                                   , 2021

 

GRANTOR:  
   
CEFF Camarillo Property, LLC,  
a Delaware limited liability company  
   
  By: EqCEF I, LLC, its manager  
   
By:     
Name: R. Thomas Amis  
Title: Principal  

 

[Notary Acknowledgement Block – to be inserted]

 

[Exhibit A – to be inserted]

 

Exhibit B

 

 

Exhibit C

 

Form of Bill of Sale and Assignment

 

BILL OF SALE AND ASSIGNMENT AGREEMENT

 

FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, the undersigned, CEFF Camarillo Property, LLC, a Delaware limited liability company, and CEFF Camarillo Holdings, LLC, a Delaware limited liability company, jointly and severally as the seller (“Seller”), hereby sells, transfers, assigns and conveys to GH CAMARILLO LLC, a Delaware limited liability company (“Purchaser”), all of Seller’s rights, title and interests in the following, in each case free and clear of all Liens (other than Permitted Liens):

 

(i)            All Personal Property, including, without limitation, the Personal Property listed on Exhibit A attached hereto;

 

(ii)           Contracts to the extent listed on Exhibit B attached hereto (collectively, the “Assigned Contracts”); and

 

(iii)          All Permits and Intangibles.

 

Purchaser hereby accepts the foregoing assignment and agrees to assume and discharge, in accordance with the terms thereof, all of the duties, burdens and obligations of Seller under the Assigned Contracts, Permits and Intangibles, in each case only to the extent of duties, burdens and obligations first arising or accruing on or after the date hereof.

 

Seller agrees to indemnify, defend and hold harmless Purchaser for, from and against all causes of action, claims, demands, damages, costs, losses and expenses (including attorneys’ fees and costs) to the extent arising or incurred by reason of any breach of Seller under the Assigned Contracts arising prior to the Closing Date. Purchaser agrees to indemnify, defend and hold harmless Seller for, from and against all causes of action, claims, demands, damages, costs, losses and expenses (including attorneys’ fees and costs) to the extent arising or incurred by reason of any breach of Purchaser under the Assigned Contracts arising on or after the Closing Date.

 

This Bill of Sale and Assignment Agreement (“Bill of Sale and Assignment”) is given pursuant to that Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions dated as of March 29, 2021 between the Seller and Purchaser (together with all amendments and addenda that may thereafter have been entered into, the “Purchase Agreement”). This Bill of Sale and Assignment shall inure to the benefit of and shall be binding upon Seller and Purchaser, and their respective successors and assigns. Capitalized terms used but not otherwise defined in this Bill of Sale shall have the meanings ascribed to such terms in the Purchase Agreement.

 

[Signature page follows]

 

Exhibit C

 

 

 

IN WITNESS WHEREOF, Seller and Purchaser have signed and delivered this Bill of Sale and Assignment as of the date first written above.

 

Seller:
     
CEFF Camarillo Property, LLC,
a Delaware limited liability company

 

  By: EqCEF I, LLC, its manager

 

By:    
Name: R. Thomas Amis  
Title: Principal  

     
CEFF Camarillo Holdings, LLC,
a Delaware limited liability company

 

  By: EqCEF I, LLC, its manager

 

By:    
Name: R. Thomas Amis  
Title: Principal  

 

Purchaser:
     
GH CAMARILLO LLC,
a Delaware limited liability company

 

By:    
Name:    
Title:    

 

[Exhibits – to be inserted]

 

Exhibit C

 

 

Exhibit D

 

Form of Seller Closing Certificate

 

SELLER CLOSING CERTIFICATE

 

This SELLER CLOSING CERTIFICATE (“Closing Certificate”) is made as of                                       , 2021, by CEFF Camarillo Property, LLC, a Delaware limited liability company, and CEFF Camarillo Holdings, LLC, a Delaware limited liability company, jointly and severally as the seller (“Seller”), to and for the benefit of GH CAMARILLO LLC, a Delaware limited liability company (“Purchaser”).

 

R E C I T A L S:

 

A.            Pursuant to that certain Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions dated as of March 29, 2021 between Seller and Purchaser (together with all amendments and addenda that may thereafter have been entered into, the “Agreement”), Seller has agreed to sell to Purchaser certain real property located in the County of Ventura, State of California.

 

B.            The Agreement requires the delivery of this Closing Certificate.

 

NOW THEREFORE, pursuant to the Agreement, Seller does hereby certify to Purchaser that:

 

1.             I am a duly qualified and acting authorized representative of Seller.

 

2.             Except as specifically set forth on Exhibit A attached hereto, each and all of the representations and warranties of Seller contained in the Agreement are correct, in all material respects, as of the date hereof as if made on and as of the date hereof.

 

3.             Attached hereto as Exhibit B is a true, complete and correct copy of a certificate issued by the Secretary of State of the State of Delaware, dated within fifteen (15) days of the date hereof, certifying that Seller is validly existing and in good standing under the laws of the State of Delaware.

 

4.             Attached hereto as Exhibit C is a true, complete and correct copy of the resolutions adopted by the sole member of Seller duly authorizing the execution, delivery and performance by Seller of the Agreement, the Definitive Property Documents to which it is a party and the transactions contemplated thereby, and such resolutions are in full force and effect as of the date hereof.

 

The undersigned has executed this Closing Certificate solely in his capacity as authorized representative of Seller, and not in his personal capacity, and the undersigned shall not be personally liable for any inaccuracy in the statements made above.

 

[Signature page follows]

 

Exhibit D

 

 

IN WITNESS WHEREOF, Seller has executed this Certificate as of the day and year first above written.

 

Seller:
     
CEFF Camarillo Property, LLC,
a Delaware limited liability company

 

  By: EqCEF I, LLC, its manager

 

By:    
Name: R. Thomas Amis  
Title: Principal  

 

CEFF Camarillo Holdings, LLC,
a Delaware limited liability company

 

  By: EqCEF I, LLC, its manager

 

By:    
Name: R. Thomas Amis  
Title: Principal  

 

[Exhibit A – to be inserted]

 

Exhibit D

 

 

Exhibit E

 

Form of FIRPTA Certificate

 

[     ], 2021

 

Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a U.S. real property interest must withhold tax if the transferor (seller) is a foreign person. For U.S. tax purposes (including Section 1445), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity. To inform the transferee (buyer) that withholding of tax is not required upon the disposition of a U.S. real property interest by CEFF US Holdings, LLC, a Delaware limited liability company (“Transferor”), the undersigned hereby certifies to GH CAMARILLO LLC, a Delaware limited liability company, as follows:

 

1.             Transferor indirectly or directly owns one hundred percent (100%) of the membership interests of CEFF Camarillo Property, LLC, a Delaware limited liability company (the “Company”), and CEFF Camarillo Holdings, LLC, a Delaware limited liability company (together, with the Company, the “Seller”).

 

2.             The Seller and each entity in the chain of ownership between the Transferor and the Company (if any) is a disregarded entity as defined in section 1.1445-2(b)(2)(iii) of the Income Tax Regulations, and Transferor is treated as owning all of the assets of the Company for U.S. federal income tax purposes;

 

3.             Transferor is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations).

 

4.             Transferor is not a “disregarded entity” (as such term is defined in the Internal Revenue Code and Income Tax Regulations).

 

5.             The Seller’s U. S. employer identification number is 83-2931113.

 

6.             The Seller’s office address is: 411 NW Park Avenue, Suite 401, Portland, Oregon, 97209.

 

7.             The Seller understands that this certification may be disclosed to the Internal Revenue Service by the transferee (buyer) and that any false statement contained herein could be punished by fine, imprisonment, or both.

 

[Signature page follows]

 

Exhibit E

 

 

Under penalties of perjury, the undersigned declares that he or she has examined this certification and to the best of his or her knowledge and belief it is true, correct and complete, and he or she further declares that he or she has the authority to sign this document on behalf of Transferor.

 

Transferor:
     
CEFF US Holdings, LLC,
a Delaware limited liability company

 

  By: EqCEF I, LLC, its manager

 

By:    
Name: R. Thomas Amis  
Title: Principal  

 

Exhibit E

 

 

Exhibit F

 

Form of License Agreement

 

[Attached]

 

Exhibit F

 

 

LICENSE AGREEMENT

 

THIS LICENSE AGREEMENT (this “Agreement”) is made as of                  , 2021 (“License Effective Date”), by and among GH CAMARILLO LLC, a Delaware limited liability company, as licensor (“Licensor”), and HOUWELING NURSERIES OXNARD, INC., a California corporation, as licensee (“Licensee”).

 

RECITALS:

 

A.             Licensor, as the designated assignee of Glass Investments Projects, Inc., a Delaware corporation (“GIPI”), CEFF Camarillo Property, LLC (“CEFF Camarillo Propco”) and CEFF Camarillo Holdings, LLC (“CEFF Parent”, and together with CEFF Camarillo Propco, the “CEFF Parties”), are parties to that certain Option Agreement (California Option Assets), dated December 28, 2018 (the “Original California Option Agreement”), as amended by (i) a First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, by and among the CEFF Parties and GIPI (“First Amendment”) and (ii) a Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021, by and among the CEFF Parties and GIPI (“Second Amendment”). The Original California Option Agreement, as amended by the First Amendment and Second Amendment, are herein referred to as the “California Option Agreement”.

 

B.             Pursuant to the California Option Agreement, Licensor acquired the option to purchase certain assets from the CEFF Parties including, without limitation, that certain real property and existing improvements as specifically set forth in the Option Agreement, all located and situated in the County of Ventura, State of California and more particularly described on Exhibit A attached hereto and incorporated herein (together with fixtures and improvements now or hereafter located thereon, the “Real Property”).

 

C.             On the License Effective Date, Licensor purchased the Real Property.

 

D.             The Second Amendment requires, among other things, that, concurrently with Licensor’s purchase of the Real Property, Licensor shall grant a license of limited duration to Licensee to enter upon, use, and perform certain farming activities on, the Real Property, as described in the Second Amendment.

 

E.              Licensor desires to grant such license to Licensee, subject to and in accordance with the terms and conditions set forth below.

 

AGREEMENT:

 

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

Section 1. License. Subject to the terms and conditions of this Agreement, Licensor hereby grants a non-exclusive license (the “License”) to Licensee for the use and benefit of Licensee and Licensee’s officers, employees, agents, contractors, representatives, invitees and permittees (Licensee and each such party, each, a “Licensee Party” and collectively, the “Licensee Parties”) to enter upon and use the Real Property for only the following purposes (collectively, the “Permitted Activities”):

 

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(a) the continued cultivation of tomatoes, cucumbers and peppers (i.e., immature and mature vine crops) on the Real Property (collectively, the “Relevant Crops”) and the harvesting of the Relevant Crops including, without limitation, cleaning, processing, storing, packaging, shipping and other activities and work customarily performed in connection with cultivating, harvesting, packaging and shipping of the Relevant Crops;

 

(b) the removal from the Real Property of all Relevant Crops and all vines, plants, scions and rootstocks of the Relevant Crops and related pots and planting or growing containers, and cordons, support, irrigation lines, packing materials, soil, trash and related debris (the vines, plants, scions and rootstocks of the Relevant Crops and related pots and planting or growing containers, and cordons, support, irrigation lines, packing materials, soil, trash and related debris are, collectively, the “Crop Debris”);

 

(c) ingress, egress and such other activities reasonably necessary for Licensee’s performance, in accordance with the applicable terms of this Agreement, including, without limitations, the obligations of Licensee set forth therein or the obligations of Licensee under its operating approvals and permits for the performance of the other Permitted Activities; and

 

(d) use, maintenance and repair of any and all equipment, fixtures, facilities, systems, buildings and other improvements on or about the Real Property in connection with Licensee’s activities under subsections (a) through (c) above; provided, however, that prior to engaging in maintenance or repair activities that involve capital or structural improvements or equipment, or which materially affect power, water or other utilities, or which are not of a minor nature, Licensee shall obtain the prior written consent of Licensor (which consent may not be unreasonably delayed, withheld or conditioned).

 

Notwithstanding the foregoing, unless the prior written consent of Licensor shall have been obtained in each instance (which consent Licensor may withhold for any or no reason and in Licensor’s sole and absolute discretion), in no event shall Licensee have (i) the right to use the Real Property for any purpose or activity other than the Permitted Activities, and (ii) the right to use the Real Property for Permitted Activities on or after the expiration of the Term (as defined below).

 

Prior to the expiration of the Term, Licensee shall remove all Crop Debris and leave those portions of the Real Property where the Crop Debris was grown or located, or which are used or have been used by Licensee in performing or conducting Permitted Activities, in a good, neat and orderly condition.

 

Section 2. Term; Termination. The License granted hereunder shall commence on the License Effective Date and expire at 5:00 p.m. (local Camarillo, California time) on the date that is ninety-eight (98) calendar days after the License Effective Date (the “Term”). Notwithstanding the foregoing, Licensor shall have the right to immediately terminate this Agreement (by written notice to Licensee) at any time following the occurrence of any Event of Default (as defined below) provided that such right of immediate termination shall not be effective until the expiration of any applicable Licensee cure period under Section 6.

 

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Section 3. Costs and Expenses. During the Term, Licensee shall pay all of its own costs and expenses in connection with its exercise of the License including, without limitation, all costs and expenses of removing the Crop Debris or otherwise performing Permitted Activities and all taxes, charges, fees and assessments of any kind imposed on the portion of the Real Property being used by Licensee for the Permitted Activities, the Relevant Crops and related personal property of Licensee, and the conduct of Licensee’s business, including, without limitation, all net income, gross receipts, ad valorem, franchise, withholding, payroll, unemployment, social security, excise, and estimated taxes, fees, assessments and charges, and all interest, penalties, fines and additions to tax in connection therewith.

 

Section 4. License Fees; Nature of License.

 

(a) No rent, royalties, or fees of any kind shall be owed by Licensee to Licensor for the grant or use of the License; provided, however, that Licensee shall be responsible for its Proportionate Share (as defined below) of Relevant Operating Expenses (as defined below). Licensee shall pay its Proportionate Share of Relevant Operating Expenses within five (5) business days after Licensee receives, at any time, a written invoice from Licensor (which written invoice Licensor shall issue not more than once every thirty (30) days).

 

(b) In recognition and consideration of the License being granted for no rent, royalties or fees as provided above, Licensee acknowledges and agrees that this Agreement is intended to constitute a License to conduct the Permitted Activities at the Real Property but not the right by which Licensee may exercise or otherwise avail itself of rights or remedies that tenants under leases (or holders of such occupancy rights) would otherwise have under applicable law. In connection therewith, Licensee hereby irrevocably waives, to the maximum extent permissible under applicable law, rights and remedies that tenants under leases or other holders of such occupancy rights may have under applicable law but only to the extent such rights and remedies (i) are not expressly set forth in this Agreement, or (ii) are inconsistent with the other provisions of this Agreement.

 

Section 5. Proportionate Share; Relevant Operating Expenses.

 

(c) Proportionate Share” means, initially, one hundred percent (100%); provided, however, that to the extent Licensee’s harvesting of Relevant Crops results in a material reduction of the portion of the Real Property being used by Licensee for Permitted Activities, Licensor shall, in the exercise of its commercially reasonable judgment, adjust the Proportionate Share no less than every thirty (30) days to equitably take into account any such reduction. Licensee shall promptly notify Licensor in writing of any material reduction of the portion of the Real Property being used by Licensee for the Permitted Activities and in turn Licensor shall promptly notify Licensee in writing of the corresponding adjustment of the Proportionate Share.

 

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(d)

 
Relevant Operating Expenses” means, collectively, all costs, fees, charges and expenses actually incurred or paid by Licensor in connection with the ownership, operation, maintenance and repair of, and services provided to, the Real Property during the Term (and any other period thereafter during which Licensee has failed to cease conducting Permitted Activities on the Real Property), including, but not limited to: (i) water, gas, electricity, carbon dioxide, co-generation (if used), sewer and other utility costs and charges; (ii) the cost of trash collection or recycling programs instituted at the Real Property; (iii) to the extent not otherwise payable by Licensee pursuant to Section 3 of this Agreement, all levies, taxes (including real estate taxes, sales taxes and gross receipt taxes), assessments, liens, license and permit fees, together with the reasonable cost of contesting any of the foregoing, which are applicable to the Term, and which are imposed by any authority or under any applicable law, or pursuant to any recorded covenants or agreements, upon or with respect to the Real Property, or any improvements thereto, or directly upon this Agreement or against Licensor because of Licensor’s estate or interest in the Real Property; (iv) the annual (pro-rated for the period of the Term) amortization (over their estimated economic useful life or payback period, whichever is shorter) of the costs (including reasonable financing charges) incurred during the Term (and any other period thereafter during which Licensee has failed to cease conducting Permitted Activities on the Real Property) of capital improvements or replacements (a) required by any applicable laws, (b) made for the purpose of reducing Operating Expenses, or (c) made for the purpose of directly enhancing the safety of users or occupants of buildings and other improvements on the Real Property; (v) repair and maintenance; and (vi) security services.

 

Notwithstanding the foregoing, Relevant Operating Expenses will not include: (i) financing and refinancing costs (except as provided above), interest on debt or amortization payments on any mortgage, or rental under any ground or underlying lease; (ii) insurance carried by Licensor; (iii) except as provided above, capital improvements or replacements, repair and maintenance, security services and other costs and expenses arising out of Licensor’s cultivation of any products; (iv) liens, claims, security interests and encumbrances to the extent not caused by Licensee or Licensee’s owners, officers, employees, representatives, agents, affiliates or permitted successors or assigns; and (v) income, excess profits or corporate capital stock taxes imposed or assessed upon Licensor, unless such taxes or any similar tax is levied or assessed in lieu of all or any part of any taxes includable in Relevant Operating Expenses above.

 

Section 6. Event of Default. As used in this Agreement, “Event of Default” means the occurrence of any of the following, regardless of the cause thereof, or the circumstances giving rise thereto:

 

(X)            Licensee fails to pay when due any amounts required to be paid under this Agreement, and such nonpayment continues for five (5) business days following notice to Licensee that the same is due and payable; or

 

(Y)            Licensee’s default in the performance of any other term, covenant or condition contained in this Agreement that is not cured within five (5) business days after written notice of such default given by Licensor to Licensee (except that, if the default is such that it cannot be cured within said five (5) business-day period, and Licensee promptly commences the cure of such default within five (5) business days after such written notice and diligently pursues such cure to completion, then such five (5) business-day period shall be extended to such period of time as may be reasonably necessary but not to exceed thirty (30) business days in total).

 

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Section 7. Waiver and Release. Licensee agrees to use the Real Property at its sole risk and hazard, and Licensor shall not be responsible for, and to the maximum extent permitted by applicable law, Licensee (on behalf of itself and its owners, officers, employees, representatives and agents) hereby releases, acquits, exonerates, and forever discharges, and hereby agrees never to file suit against, Licensor and Licensor’s owners, officers, employees, representatives, agents, affiliates and permitted successors and assigns, for, from and with respect to all claims, disputes, causes of action, proceedings, demands, liabilities, losses, damages, judgments, personal injury (including death), property damage, and all costs and expenses (including, without limitation, attorneys’ fees, costs and disbursements), whether known or unknown, accrued or unaccrued, in law, equity, or otherwise, including, without limitation, injury to persons, all Covid Matters (as defined below), and loss or any damage to Licensee or any or all of Licensee’s property, and any property of Licensee’s owners, officers, employees and agents from any cause, condition or event (collectively, “Claims and Liabilities”), in each case except to the extent caused by the gross negligence and/or intentional misconduct and/or uncured material breach of this Agreement on the part of Licensor or Licensor’s subsidiaries, members, shareholders, managers, directors, partners, officers, agents, representatives, affiliates or employees. In connection therewith, Licensee agrees that the operation, on or after the License Effective Date, by Licensor of the Real Property for the cultivation of cannabis in accordance with applicable state and local laws and regulations does not, in and of itself, constitute negligence or intentional misconduct by Licensor or Licensor’s owners, officers, employees, representatives or agents.

 

Covid Matters” means any one or more of the following:

 

(i)            The presence of, exposure to or release of SARS-CoV-2 or any other variant of the novel coronavirus (collectively, “Relevant Pathogens”); and

 

(ii)           All symptoms, diseases and other conditions caused by or resulting from any one or more of the Relevant Pathogens, including, without limitation, the Coronavirus disease of 2019 (a.k.a. COVID-19).

 

In connection with the foregoing, Licensee (on behalf of itself and its owners, officers, employees, representatives and agents) waives any and all rights under California Civil Code Section 1542 relating thereto, which states:

 

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR OR RELEASING PARTY DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE AND THAT, IF KNOWN BY HIM OR HER, WOULD HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR OR RELEASED PARTY.”

 

To the maximum extent permitted by applicable law, Licensee hereby acknowledges that factual matters now unknown to it may have given or may hereafter give rise to Claims and Liabilities which are presently unknown, unanticipated and unsuspected, and Licensee further agrees that the waivers and releases set forth above have been negotiated and agreed upon in light of that realization and that Licensee nevertheless hereby intends to release, discharge and acquit Licensor and its owners, officers, employees, representatives and agents from any such unknown Claims and Liabilities which might in any way be included in the waivers and matters released as set forth above. Licensee acknowledges that it has been represented by independent legal counsel of Licensee’s selection and Licensee the foregoing release and waiver of its own volition and after consultation with its counsel.

 

The provisions of this Section 7 shall survive the expiration of the Term or any termination of the License or this Agreement.

 

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Section 8. No Interference. Nothing in this Agreement shall limit Licensor’s ability or right to install or erect capital or other improvements to the Real Property, or to otherwise repair, maintain or operate the Real Property, in any manner or way that does not materially and unreasonably interfere with Licensee’s conduct or performance, in accordance with applicable terms of this Agreement, of Permitted Activities on the Real Property. Notwithstanding the foregoing or anything in this Agreement that may be construed to the contrary, Licensor shall have no obligation to install or construct, or repair or replace, any equipment, system, building or other improvement on or about the Real Property, nor shall Licensor have any liability to Licensee in the event of any disruption to, failure, or unavailability of, any equipment, improvements, utilities or services in each case except to the extent arising out of the negligence or willful misconduct on the part of Licensor or Licensor’s subsidiaries, members, shareholders, managers, directors, partners, officers, agents, representatives, affiliates or employees.

 

Section 9. Insurance. During the Term, Licensee shall maintain or cause to be maintained (including by its contractors and subcontractors) one or more policies of commercial general liability insurance, property liability insurance, and workers’ compensation insurance, each complying with the provisions of Exhibit B attached hereto. In connection therewith, Licensor and Licensee each hereby waives and releases any and all rights of action for negligence against the other which may hereafter arise on account of damage to the Real Property or any loss or any damage to Licensee or any or all of Licensee’s property, and any property of Licensee’s owners, officers, employees and agents, resulting from any fire, or other casualty of the kind covered by standard fire insurance policies with extended coverage, regardless of whether or not, or in what amounts, such insurance is now or hereafter carried by Licensor and Licensee, or either of them. These waivers and releases shall apply between the parties hereto and they shall also apply to any claims under or through either party as a result of any asserted right of subrogation. All policies of insurance obtained by either party hereto concerning the Real Property or Permitted Activities shall waive the insurer’s right of subrogation against the other party hereto.

 

Section 10. Claims for Labor and Materials. Licensee shall cause all claims for labor ordered by Licensee (or ordered at Licensee’s direction) and performed upon the Real Property or arising from any materials ordered by Licensee (or ordered at Licensee’s direction) and supplied to the Real Property to be fully paid and discharged. Licensee shall at all times keep the Real Property free and clear of liens, claims, security interests and encumbrances caused or suffered by any Licensee Party, including any such liens in favor of any contractor, subcontractor, material supplier or other person or entity making a claim by reason of having provided labor, materials or equipment relating to the Relevant Crops or Crop Debris. The foregoing covenant shall survive the expiration of the Term or any termination of the License or this Agreement.

 

Section 11. Compliance With Laws. Licensee shall conduct all Permitted Activities and all other activities affecting or relating to the Relevant Crops, Crop Debris or the Real Property in compliance with (i) all applicable federal, state and local laws; and (ii) generally accepted professional industry standards.

 

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Section 12. Indemnification. To the greatest extent permitted under applicable law, Licensee shall indemnify, defend and hold harmless Licensor and its subsidiaries, members, directors, partners, officers, agents, representatives, affiliates, employees and permitted successors and assign free and harmless from any and all claims, liabilities, damages, actions, causes of action, attorneys’ and all other costs, expenses and fees (each, a “Claim”) arising from or relating to the use of the Real Property by the Licensee Parties pursuant to this Agreement, except that Licensee shall have no indemnification obligations or liability pursuant to this Section 12 to the extent the Claim is caused by the negligence and/or intentional misconduct and/or uncured material breach of this Agreement on the part of Licensor or Licensor’s subsidiaries, members, shareholders, managers, directors, partners, officers, agents, representatives, affiliates or employees. In connection therewith, Licensee agrees that the operation, on or after the License Effective Date, by Licensor of the Real Property for the cultivation of cannabis in accordance with applicable state and local laws and regulations does not, in and of itself, constitute negligence or intentional misconduct by Licensor or Licensor’s owners, officers, employees, representatives or agents. To the greatest extent permitted under applicable law, Licensor shall indemnify, defend and hold harmless Licensee and its subsidiaries, members, directors, partners, officers, agents, representatives, affiliates, employees and permitted successors and assigns free and harmless from any and all Claims arising from or relating to the use of the Real Property by the Licensor or its subsidiaries, members, directors, partners, officers, agents, representatives, affiliates, employees and permitted successors and assigns, except that Licensor shall have no indemnification obligations or liability pursuant to this Section 12 to the extent of Claims that are caused by the negligence and/or intentional misconduct and/or uncured material breach of this Agreement on the part of Licensee or its subsidiaries, members, shareholders, managers, directors, partners, officers, agents, representatives, affiliates or employees. Damages under this Agreement are limited to direct damages, and in no event will a party be liable to the other party, and the parties hereby waive claims, for indirect, punitive, exemplary, special or consequential damages or loss of profits. The provisions of this Section 12 shall survive the expiration of the Term or any termination of the License or this Agreement.

 

Section 13. Subordination, Non Disturbance and Attornment. This Agreement and Licensee’s interest hereunder shall be subordinate to any deed of trust or other security instrument now or hereafter placed upon all or any part of the Real Property by Licensor, and to any and all indebtedness now or hereafter secured thereby, to the interest thereon, and all renewals, replacements and extensions thereof. In this connection, Licensee shall promptly upon demand execute a subordination, non-disturbance and attornment agreement (an “SNDA”) in recordable form and in a form that is reasonably acceptable to Licensee and such lender, provided that the SNDA does not adversely affect any right, benefit or privilege of Licensee or increase Licensee’s obligations under this Agreement in any material respect, and provided, further, that such lender executes such SNDA.

 

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Section 14. Notices. Any communications between or among the parties hereto or regular notices provided herein to be given shall be given to the following addresses:

 

Licensor: Licensee:
   
GH Camarillo LLC Houweling Nurseries Oxnard, Inc.
Attn: Kyle D. Kazan Attn: Chris Brocklesby
3645 Long Beach Boulevard 2776-64th Street
Long Beach, California 90807 Delta, BC
Email: kyle@glasshousegroup.com V4L2N7, Canada
  Email: chris.brocklesby@houwelings.com
   
With a copy to: With a copy to:
   
Venable LLP Parsons Behle & Latimer
Attn: Matthew A. Portnoff, Esq. Attn: Bruce H. White
2049 Century Park East, Suite 2300 201 S. Main Street, Suite 1800
Los Angeles, California 90064 Salt Lake City, Utah 84111
Email: mportnoff@venable.com Email: BWhite@parsonsbehle.com
   

Any notice that is personally served shall be effective upon the date of service; any notice given by U.S. Mail shall be deemed effectively given, if deposited in the United States Mail, registered or certified with return receipt requested, postage prepaid and addressed as provided above, on the date of receipt, refusal or non-delivery indicated on the return receipt. In addition, a party hereto may send notices by electronic mail, or by a nationally recognized overnight courier service which provides written proof of delivery (such as U.P.S. or Federal Express). Any notice sent by electronic mail shall be effective upon confirmation of receipt in legible form, and any notice sent by a nationally recognized overnight courier shall be effective on the date of delivery to the appropriate party hereto at its address specified above as set forth in the courier’s delivery receipt. A party hereto may, by notice to the other parties from time to time in the manner herein provided, specify a different address for notice purposes.

 

Section 15. Successors and Assigns. Licensee may not assign or transfer its rights or obligations under this Agreement to any person or entity without the written consent of Licensor (which such consent may be withheld for any or no reason and in Licensor’s sole and absolute discretion). Licensor may not assign or transfer its rights or obligations under this Agreement except upon an assignment or transfer of its rights in the Real Property (including, without limitation, pursuant to a ground lease of the Real Property). Any permitted assignee of an interest hereunder shall automatically, as of the effective date of assignment, (i) succeed to the rights herein granted to such assignor and (ii) be deemed to have assumed the obligations of such assignor accruing after such effective date. No such assignment by Licensee shall be deemed to release such assignor from its obligations hereafter accruing under this Agreement unless such release is in writing executed by the parties hereto. Subject to the foregoing provisions of this Section 15, this Agreement shall be binding upon and inure to the benefit of the parties hereto, and their successors-in-interest and permitted assigns.

 

Section 16. Headings; Severability. The headings of the sections of this Agreement are for convenience only and will not affect the interpretation or construction of any provision of this Agreement. The invalidity or unenforceability of any provision of this Agreement shall not affect any other provision hereof.

 

Section 17. Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of California, without reference to California’s choice of laws.

 

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Section 18. Entire Agreement; Modification. This Agreement constitutes the entire agreement between the parties hereto with regard to the subject matter hereof and may not be modified in any manner other than by written agreement, executed by all of the parties hereto or their successors in interest.

 

Section 19. Memorandum of Agreement. Licensee shall not record this Agreement or a memorandum of this Agreement.

 

Section 21. Counterparts. This Agreement may be executed by the parties hereto in one or more counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument.

 

Section 22. Attorneys’ Fees. If Licensor or Licensee brings any suit or other proceeding, including an arbitration proceeding, with respect to the subject matter or the enforcement of this Agreement, the prevailing party (as determined by the court, agency, arbitrator or other authority before which such suit or proceeding is commenced), in addition to such other relief as may be awarded, shall be entitled to recover reasonable attorneys’ fees, expenses and costs actually incurred. The foregoing includes attorneys’ fees, expenses and costs of investigation (including those incurred in appellate proceedings), costs incurred in establishing the right to indemnification, or in any action or participation in, or in connection with, any case or proceeding under Chapter 7, 11 or 13 of the Bankruptcy Code (11 United States Code Sections 101 et seq.), or any successor statutes.

 

Section 23. Miscellaneous. No waiver of any provision of this Agreement or any breach of this Agreement shall be effective unless such waiver is in writing and signed by the waiving party and any such waiver shall not be deemed a waiver of any other provision of this Agreement or any other or subsequent breach of this Agreement. In no event shall any draft of this Agreement create any obligation or liability, it being understood that this Agreement shall be effective and binding only when a counterpart hereof has been executed and delivered by each party hereto.

 

*Signatures Begin on Next Page*

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the License Effective Date.

 

Licensor:  
     
GH CAMARILLO LLC,  
a Delaware limited liability company  
     
By:    
Name:    
Title:    
     
Licensee:  
     
HOUWELING NURSERIES OXNARD, INC.,  
a California corporation  
     
By:    
Name: Kevin Doran  
Title: President  

 

 

 

 

Exhibit A

 

Description of Real Property

 

Parcel A:

 

The East 160 acres of Parcel C, Subdivision 68, Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, as per Map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County.

 

EXCEPT from the East 160 acres, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface, as reserved in deed from John A. Maring, et al., recorded June 16,1964, Book 2561, Page 491 of Official Records.

 

ALSO EXCEPT the interest in a portion said land excepted in the deed from John A. Maring and wife, recorded May 31, 1967, Book 3149, Page 109 of Official Records, as follows: “Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

ALSO EXCEPT all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 500 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 500 feet below the surface, as reserved by Coast Farms, Inc., a California corporation, recorded November 30, 1995, as Document No. 95-148132 of Official Records.

 

Parcel B: A non-exclusive easement for irrigation water pipelines for use, repair, or replacement of the existing water line over the Northerly 25 feet of the following described property:

 

Parcel 1: The Northerly 1489.29 feet of the Westerly 1169.95 feet of Parcel B, Subdivision 60 of the Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County.

 

EXCEPT the Easterly 16.4459 acres thereof.

 

ALSO EXCEPT any portion lying within Parcel 6 herein.

 

Parcel 2: That portion of Parcel B, Subdivision 68 of the Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County, described as follows:

 

Beginning at the intersection of the Northerly line of said Parcel B with the Westerly line of the Easterly 200 acres of Parcels B and C of said Subdivision 68; thence along said Westerly line,

 

1st: South 2655.84 feet to the Southerly line of Parcel B; thence along said Southerly line,

 

2nd: West 343.21 feet, more or less, to the Southeasterly corner of the South 925 feet of the West 1656 feet of said Parcel B; thence along the East line of said land,

 

 

 

 

3rd: North 925 feet on the Northeast comer of said land; thence along the North line of said land,

 

4th: West 480.95 feet more or less, to the intersection with a line parallel with said Westerly line of the Easterly 200 acres, distant Westerly 823.26 feet measured at right angles from said Westerly line of the Easterly 200 acres; thence along said parallel line,

 

5th: North 1730.84 feet to said Northerly line of Parcel B; thence along said Northerly line,

 

6th: East 823.26 feet to the point of beginning.

 

EXCEPT the interest in said land excepted in the deed from American Crystal Sugar Company, a corporation, recorded January 29, 1951 in Book 977, Page 58, Official Records, as follows:

 

ALSO EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967 in Book 3149, Page 109 of Official Records, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

Parcel 3:

 

The East 16.4556 acres of the following described property, the West line thereof to be parallel with the East line thereof; that portion of Parcel B, Subdivision 68 of the Rancho El Rio De Santa Clara o’ La Colonia, in the County of Ventura, State of California, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County, described as follows:

 

Beginning at the intersection of a line parallel with and distant Westerly 823.26 feet measured at right angles from the Westerly line of the Easterly 200 acres of Parcels B and C of said Subdivision 68, with the Northerly line of said Parcel B; thence along said parallel line,

 

1st: South 1489.20 feet; thence parallel with said Northerly line of Parcel B,

 

2nd: West 1169.95 feet to the Westerly line of said Parcel B; thence along said Westerly line,

 

3rd: North 1489.29 feet to the Northwesterly comer of said Parcel 8: thence along the Northerly line thereof

 

4th: East 1169.95 feet to the point of beginning.

 

ALSO. EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967 in Book 3149, Page 109 of Official Records, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

 

 

 

Parcel 4:

 

The Westerly 40 acres of the Easterly 200 acres of Parcels B and C of Subdivision 68 of Rancho El Rio de Santa Clara o’ La Colonia, according to the map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County.

 

ALSO EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967 in Book 3149, Page 109 of Official Records, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

Parcel 5:

 

That portion of Parcel B of Subdivision 68, of the Rancho El Rio de Santa Clara o’ La Colonia, in the County of Ventura, State of California, as per Map recorded in Book 3, Page 12 of Maps, in the office of the County Recorder of said County, described as follows:

 

Beginning at a point in the North line of said Parcel B. distant Easterly 334 feet from the East line of Wood Road; thence from said point of beginning,

 

1st: Easterly 170 feet along the North line of said Parcel B; thence,

 

2nd: South 185 feet; thence,

 

3rd: West 170 feet; thence,

 

4th: North 185 feet to the point of beginning.

 

ALSO EXCEPT the interest in said land excepted in the deed from John A. Maring and wife recorded May 31, 1967, in Book 3149 Page 109, as follows:

 

“Reserving and excepting however unto the grantors, their heirs, successors and assigns, a 1/4th interest in and to all oil, gas and other hydrocarbon substances and all other minerals of every kind and nature lying below a depth of 550 feet below the surface of said land, but without the right of entry on the surface of said land or the subsurface thereof to a depth of 550 feet below the surface.”

 

 

 

 

Exhibit B

 

Insurance Specifications

 

Additional Named Insured Parties:

 

GH CAMARILLO LLC, a Delaware limited liability company

 

Amount of Coverage:

 

Commercial general liability insurance (primary) not less than $1,000,000 per occurrence $2,000,000 in the aggregate, with an additional $5,000,000 umbrella (applicable to both commercial generality liability and auto liability). The deductible shall be not more than $50,000.

 

In addition to commercial general liability insurance, maintain (i) automobile insurance not less than $1,000,000 per occurrence, (ii) if required by law, workers compensation in the statutory required amounts, and (iii) if required by law, employer’s liability not less than $1,000,000 per occurrence. In addition to the foregoing, maintain policies of casualty insurance covering all trade fixtures, merchandise and other personal property owned by Licensee and placed or used from time to time in, on or about the Real Property. Such insurance shall cover not less than one hundred percent (100%) of the actual replacement cost from time to time of all such items, and shall provide protection against any peril included within the classification “Fire and Extended Coverage” together with insurance against sprinkler damage, vandalism and malicious mischief. The proceeds of such insurance shall be used for the repair or replacement of the property so insured.

 

Cancellation:

 

Each policy of such insurance shall provide that such policy may not be canceled or non-renewed without the giving of thirty (30) calendar days’ prior written notice by the insurer to Licensor.

 

Insurer:

 

Financially responsible insurance company with Best’s Rating of A8 or better, qualified and admitted to be an insurer in the State of California.

 

Evidence:

 

Licensee to furnish Licensor with certificate evidencing all such required policies of insurance. In addition, upon request by Licensor, an actual copy of each policy shall be furnished by Licensee to Licensor. If certain waivers of subrogation are needed to be specifically endorsed into Licensee’s policies before such certificates can be issued, then Licensee shall promptly cause the same to occur.

 

The insurance, in addition to the above requirements, shall otherwise be in form and substance reasonably satisfactory to Licensor.

 

 

 

 

Exhibit G

 

Form of Purchaser Closing Certificate

 

PURCHASER CLOSING CERTIFICATE

 

This PURCHASER CLOSING CERTIFICATE (“Closing Certificate”) is made as of                             , 2021, by GH CAMARILLO LLC, a Delaware limited liability company (“Purchaser”), to and for the benefit of CEFF Camarillo Property, LLC, a Delaware limited liability company, and CEFF Camarillo Holdings, LLC, a Delaware limited liability company, jointly and severally as the seller (“Seller”).

 

RECITALS:

 

A.            Pursuant to that certain Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions dated as of March 29, 2021 between Seller and Purchaser (together with all amendments and addenda that may thereafter have been entered into, the “Agreement”), Seller has agreed to sell to Purchaser certain real property located in the County of Ventura, State of California.

 

B.             The Agreement requires the delivery of this Closing Certificate.

 

NOW THEREFORE, pursuant to the Agreement, Purchaser does hereby certify to Seller that:

 

1.             I am a duly qualified and acting authorized representative of Purchaser.

 

2.             Each and all of the representations and warranties of Purchaser contained in the Agreement are correct, in all material respects, as of the date hereof as if made on and as of the date hereof.

 

3.             Attached hereto as Exhibit B is a true, complete and correct copy of a certificate issued by the Secretary of State of the State of Delaware, dated within fifteen (15) days of the date hereof, certifying that Purchaser is validly existing and in good standing under the laws of the State of Delaware.

 

4.             Attached hereto as Exhibit C is a true, complete and correct copy of the resolutions adopted by the sole or managing member, or by the manager, of Purchaser duly authorizing the execution, delivery and performance by Purchaser of the Agreement, the Definitive Property Documents to which it is a party and the transactions contemplated thereby, and such resolutions are in full force and effect as of the date hereof.

 

The undersigned has executed this Closing Certificate solely in his capacity as authorized representative of Purchaser, and not in his personal capacity, and the undersigned shall not be personally liable for any inaccuracy in the statements made above.

 

[Signature page follows]

 

Exhibit G

 

 

IN WITNESS WHEREOF, Purchaser has executed this Certificate as of the day and year first above written.

 

Purchaser:   
   
GH CAMARILLO LLC,   
a Delaware limited liability company   
   
By:  
Name:  
Title:  

 

Exhibit G

 

 

Exhibit H

 

Form of Seller Parent Guaranty

 

GUARANTY

 

THIS GUARANTY (this “Guaranty”) is made as of [   ], 2021 (the “Effective Date”) by CEFF US Holdings, LLC, a Delaware limited liability company (“Guarantor”), to and in favor of GH Camarillo LLC, a Delaware limited liability company (“Beneficiary”). Guarantor and Beneficiary are each referred to herein as a “Party” and collectively, the “Parties.”

 

RECITALS

 

A. CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco), and CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent”, and together with CEFF Camarillo Propco, “Seller”), each an affiliate of Guarantor, and Beneficiary have entered into that certain Agreement to Sell and Acquire Real Estate and Joint Escrow Instructions, dated as of March 29, 2021 (as such agreement may be amended, amended and restated or otherwise modified from time to time, the “Agreement”);

 

B. Beneficiary’s willingness to enter into the Agreement is conditioned upon the issuance by Guarantor of this Guaranty;

 

C. Guarantor will directly or indirectly benefit from the transactions contemplated by the Agreement; and

 

D. Guarantor is willing to issue this Guaranty on the terms and conditions set forth herein.

 

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Guarantor, and intending to be legally bound hereby, Guarantor covenants to, and agrees with, Beneficiary as follows:

 

1. Definitions and Interpretation. Unless otherwise defined or expressly set forth herein, all words and phrases used herein which are defined in the Agreement shall, for the purposes hereof, have the same meanings as are respectively given thereto in the Agreement, and this Guaranty shall be interpreted in accordance with the rules of interpretation set forth in the Agreement.

 

2. Guaranty. Subject to and in accordance with the provisions hereof, Guarantor hereby absolutely, unconditionally and irrevocably guarantees to Beneficiary and its successors and permitted assigns the full and timely payment of all amounts when and as the same shall become due and payable by Seller to Beneficiary under the Agreement (collectively, the “Obligations” and each an “Obligation”).

 

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3. Absolute Liability of Guarantor. Subject to the provisions hereof, the obligations and liabilities of Guarantor under this Guaranty are absolute, primary, direct and independent obligations of the Guarantor and are several from those of the Seller or any other person or entity. Beneficiary is not required to exhaust its recourse against the Seller, or any other Person, or any security it may hold before being entitled to make a Demand (as defined below) for payment of the Obligations from Guarantor. This Guaranty is a guaranty of payment, and not merely of collection.

 

4. Notices and Demands. All sums payable by Guarantor hereunder shall be made in freely transferable and immediately available funds and shall be made in the currency of the United States of America. If Seller fails to pay any Obligation which is due and owing pursuant to and in accordance with the Agreement after giving effect to any applicable notice or cure period in the Agreement, Beneficiary shall be entitled to make a demand on Guarantor for the payment of such Obligation (a “Demand”). A Demand shall be in writing and shall specify the Obligations for which payment is required to be made. A Demand satisfying the foregoing requirements shall be deemed sufficient notice to Guarantor that it must pay or discharge such Obligation and Guarantor shall pay or discharge such Obligation within three (3) Business Days after receipt of such Demand.

 

5. No Release of Guarantor. Except as expressly set forth herein, Guarantor has no right either to terminate this Guaranty or to be released or discharged from the Obligations, and the Obligations shall not be affected, released or diminished, upon the happening from time to time of any one or more of the following whether or not with notice to or consent of the Seller (except to the extent that the consent of the Seller may be required to effectuate a modification of the Agreement) or Guarantor:

 

(a) the compromise, settlement, release, change, modification, or termination of any of the Obligations;

 

(b) the waiver by Beneficiary of the payment of any of the Obligations;

 

(c) the extension of time for payment of any amounts due or of the time for payment of any of the Obligations;

 

(d) any taking (or any abstaining from taking) of any security or guarantee for the performance of the Obligations, in whole or in part, or the perfecting (or the failing to perfect) any such security;

 

(e) any bankruptcy, winding-up, liquidation, dissolution, insolvency, reorganization or other similar proceeding affecting the Seller or its assets or any release, stay or discharge of the Seller with respect to the Obligations resulting from such event;

 

(f) the addition, substitution or partial or entire release of Seller or any other person or entity primarily or secondarily liable or responsible for the payment of any of the Obligations or by any extension, waiver, amendment or thing whatsoever which may release Seller or any such other person or entity (other than payment); and

 

(g) the modification or amendment in any manner (whether or not material) of any of the Obligations.

 

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6. Waiver of Notice & Defenses. Except as expressly contemplated herein (including Section 4), Guarantor hereby waives: (a) diligence, presentment, protest, demand for payment, notice of dishonor or non-payment, notice of acceptance of this Guaranty and any other notice not expressly granted to Guarantor by this Guaranty; and (b) all defenses (legal or equitable) which, if asserted, would diminish the liability of Guarantor under this Guaranty.

 

7. No Subrogation against Seller. Until the payment or satisfaction of the Obligations in full, Guarantor agrees that it shall not exercise any rights of subrogation, reimbursement, contribution or indemnification against the Seller with respect to this Guaranty.

 

8. Continuing Guaranty. Subject to the provisions hereof, this Guaranty is a continuing guarantee and each and every default or failure by the Seller in performing any of the Obligations shall give rise to a separate liability of the Seller to Beneficiary and a separate cause of action hereunder and a separate suit may be brought hereunder as each liability or cause of action arises. If there is a default or failure by the Seller in performing any of the Obligations, Beneficiary shall have the right, in its sole judgment and discretion, from time to time, to make demand for payment and to proceed against Guarantor for recovery of the total of any and all Obligations then due to Beneficiary pursuant to this Guaranty as and when the same are due under the terms hereof, or to proceed from time to time against Guarantor for such portion of any and all amounts as Beneficiary may determine.

 

9. Limitations on Liability; Minimum Net Worth. Guarantor’s aggregate liability under this Guaranty shall not exceed ten percent (10%) of the Purchase Price (it being understood that any payment by Guarantor of any portion of the Obligations shall limit or reduce Guarantor’s maximum aggregate liability hereunder on a dollar-for dollar basis) (the “Liability Cap”). During the Term of this Guaranty, Guarantor shall maintain a minimum net asset value, as established in Guarantor’s most recent financial statement, equal to or greater than the Liability Cap.

 

10. Entire Guaranty and No Representations. This Guaranty constitutes the entire agreement between Beneficiary and Guarantor with respect to the guarantee by Guarantor of the Obligations herein provided for and cancels and supersedes any prior understandings and agreements with respect thereto. There are no representations, warranties, terms, conditions, undertakings or collateral agreements, expressed, implied or statutory, regarding the guarantee by Guarantor of the Obligations herein provided for other than as expressly stated and set forth in this Guaranty.

 

11. Assignment. This Guaranty inures to the benefit of, and is binding upon, Guarantor and Beneficiary and their respective successors and permitted assigns; provided, however, that Guarantor shall not assign any of its rights or obligations under this Guaranty, in whole or part, without the prior written consent of Beneficiary. No Person shall be a third-party beneficiary of this Guaranty.

 

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12. Governing Law. This Guaranty shall be governed by and construed in accordance with the laws of the State of New York (without reference to conflict of laws rules (other than Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York)).

 

13. Disputes.

 

(a) Meeting. In the event a dispute, controversy, or claim arises between Guarantor and Beneficiary relating to this Guaranty, the aggrieved Party shall promptly provide notice of the dispute to the other Party after such dispute arises. A meeting shall be held within fifteen (15) days between the Parties, attended by representatives of the Parties with decision-making authority regarding the dispute, to attempt in good faith for a period of not more than thirty (30) days to negotiate a resolution of the dispute.

 

(b) Consent to Jurisdiction. Each of the Parties hereto hereby agrees that any legal action or proceeding arising out of or relating to this Guaranty, or for recognition or enforcement of any judgment shall be brought in or removed to the federal or state courts located in New York County, New York, to the exclusion of any and all other courts, forums or venue. By execution and delivery of this Guaranty, the Parties hereto accept, for themselves and in respect of their property, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts. Each Party hereto hereby irrevocably consents to the service of process out of any of the aforementioned courts in any manner permitted by law. Each Party hereto hereby waives any right to stay or dismiss any action or proceeding under or in connection with this Guaranty brought before the foregoing courts on the basis of forum non-conveniens.

 

(c) Service of Process. Guarantor irrevocably consents to the service of process outside of the territorial jurisdiction of the courts identified in Section 13(b) by delivery in the manner and to the address set forth in Section 14.

 

(d) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS GUARANTY IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH OF GUARANTOR AND BENEFICIARY IRREVOCABLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED BY THIS GUARANTY. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS GUARANTY BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 13.

 

4

 

 

14. Notices. Except as otherwise set forth in this Guaranty (including Section 13), any communications between the Parties hereto or regular notices provided herein to be given shall be given to the following addresses:

 

If to the Guarantor:

 

CEFF US Holdings, LLC

c/o Controlled Environment Foods Fund, LLC

415 NW 11th Avenue

Portland, Oregon 97209

Attn: General Counsel

Telephone: (971) 352-8430

Email: campbell@eq-cap.com

 

If to Beneficiary:

 

GH Camarillo LLC

3645 Long Beach Boulevard

Long Beach, California 90807

Attn: Kyle D. Kazan

Email: kyle@glasshousegroup.com

 

With a copy (which shall not constitute notice) to:

 

Venable LLP

2049 Century Park East, Suite 2300

Los Angeles, California 90064

Attn: Matthew A. Portnoff, Esq.

Email: mportnoff@venable.com

 

Any notice that is personally served shall be effective upon the date of service; any notice given by U.S. Mail shall be deemed effectively given, if deposited in the U.S. Mail, registered or certified with return receipt requested, postage prepaid and addressed as provided above, on the date of receipt, refusal or non-delivery indicated on the return receipt. In addition, either Party may send notices by electronic mail, or by a nationally recognized overnight courier service which provides written proof of delivery (such as U.P.S. or Federal Express). Any notice sent by electronic mail shall be effective upon confirmation of receipt in legible form, and any notice sent by a nationally recognized overnight courier shall be effective on the date of delivery to the Party at its address specified above as set forth in the courier’s delivery receipt. Either Party may, by notice to the other from time to time in the manner herein provided, specify a different address for notice purposes.

 

15. Payment of Legal Expenses. Guarantor shall reimburse Beneficiary for all attorneys’ fees, disbursements and other expenses documented and reasonably incurred by Beneficiary in enforcing this Guaranty, except to the extent that Beneficiary eventually agrees, or a final non-appealable judgment of a court of competent jurisdiction determines, Guarantor is not liable for the Obligations sought in such enforcement of this Guaranty.

 

5

 

 

16. Severability. If any provision of this Guaranty is determined to be invalid or unenforceable in whole or in part, such invalidity or unenforceability will apply only to that provision and all other provisions of this Guaranty shall continue in full force.

 

17. No Waiver, Remedies. No failure on the part of any Party to exercise, and no delay in exercising, any right under this Guaranty shall operate as a waiver of it, nor does any single or partial exercise of any right under this Guaranty preclude the other or future exercise of it or any other right.

 

18. Termination.

 

(a) Subject to the provisions of Section 18(b), this Guaranty shall remain in full force and effect from the Effective Date until the earlier of (i) the payment or satisfaction of the Obligations in full and (ii) the expiration of the Survival Period (the “Term”).

 

(b) Notwithstanding Section 18(a), this Guaranty shall be automatically reinstated if at any time following the termination of this Guaranty under Section 18(a), any payment by Guarantor or Seller under or pursuant to this Guaranty or the Agreement is rescinded or must otherwise be or is restored or returned by Beneficiary upon the insolvency, bankruptcy, reorganization, dissolution or liquidation of Beneficiary or Guarantor all as though such payment had not been made. Such period of continued effectiveness or reinstatement, as the case may be, shall continue until satisfaction of the conditions contained in the Agreement and this Guaranty, and shall continue to be subject to the provisions of this Section 18.

 

19. Counterparts. This Guaranty may be executed and delivered in counterparts, each of which when executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. This Guaranty may be duly delivered by electronic transmission including facsimile or electronic mail of a portable document format (.pdf) of the signature page of a counterpart to the other Party and shall be binding and enforceable whether or not an original counterpart is delivered.

 

20. Further Assurances. The Parties shall cause to be promptly and duly taken, executed and acknowledged and delivered, such further documents and instruments as Beneficiary may from time to time reasonably request in order to carry out the intent and purposes of this Guaranty.

 

6

 

 

21. Authority of Guarantor. As of the Effective Date, Guarantor represents and warrants to Beneficiary that (a) it is a legal entity duly formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation; (b) it has the power and authority to execute, deliver and carry out the terms and provisions of this Guaranty; (c) the execution, delivery and performance of this Guaranty by Guarantor have been duly authorized by all necessary organizational action, and no other proceedings on the part of Guarantor are necessary to authorize this Guaranty or to consummate the transactions contemplated hereby and this Guaranty has been duly executed and delivered by the Guarantor; (d) Guarantor has obtained any authorization, approval, consent or order of, or registration or filing with, any court or other governmental body having jurisdiction over Guarantor or any other person or entity that is required on the part of Guarantor for the execution, delivery or performance of this Guaranty; and (e) this Guaranty constitutes a valid and legally binding agreement of Guarantor enforceable against Guarantor in accordance with its terms, except as the enforceability of this Guaranty may be limited by the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general principles of equity.

 

22. Amendment. No term or provision of this Guaranty shall be amended, modified, altered, waived or supplemented except in writing signed by the Parties hereto.

 

[Signature pages follow.]

 

7

 

 

AND THIS GUARANTY is hereby executed and delivered to be effective as of the Effective Date.

 

  CEFF US HOLDINGS, LLC
       
    By: EqCEF I, LLC, its manager
       
  By:  
  Name: R. Thomas Amis
  Title: Principal

 

Exhibit H

 

 

Accepted and agreed as of the Effective Date:

 

  GH CAMARILLO LLC
   
   
  By:  
  Name:
  Title:

 

Exhibit H

 

 

Schedule 2.24

Contracts

 

1. Rule 21 Generator Interconnection Agreement (GIA) for Exporting Generating Facilities Interconnecting Under the Transmission Cluster Study or Independent Study Process, dated October 28, 2013, by and between Southern California Edison Company and Lessee (the “Rule 21 GIA”).

 

2. Power Purchase and Sale Agreement, dated October 28, 2013, by and between Southern California Edison Company and Lessee.

 

3. Service Agreement for Wholesale Distribution Service, dated August 8, 2012, by and between Southern California Edison Company and Lessee, as amended by that certain letter agreement dated October 23, 2013.

 

4. Generator Interconnection Agreement (GIA) for a Generating Facility Interconnecting Under the Independent Study Process, dated August 8, 2012, by and between Lessee and Southern California Edison Company (the “GIA”).

 

5. Meter Service Agreement for CAISO Metered Entities, dated September 27, 2012, by and between Lessee and California Independent System Operator Corporation.

 

6. Power Purchase and Sale Agreement, dated October 25, 2012, by and between Southern California Edison Company and Lessee (the “PPA”).

 

7. Meter Service Agreement for CAISO Metered Entities, dated November 9, 2012, by and between Lessee and California Independent System Operator Corporation (the “Meter Service Agreement”).

 

8. Qualifying Facility Participating Generator Agreement, dated November 9, 2012, by and between Lessee and California Independent System Operator Corporation (the “QF Agreement”).

 

9. Agreement for Long-Term Maintenance of Equipment, dated January 10, 2020, by and between Lessee and Penn Power Group, LLC (d/b/a Western Energy Systems), as amended by that certain Amendment No. 1, dated October 15, 2020 (the “LTSA”).

 

10. Agreement for Priva Installation Work, dated June 23, 2020, by and between Dutch Growing Solutions B.V. and CEFF Camarillo Property, LLC, as amended by that certain Change Order #1, dated February 3, 2021.

 

11. Electric Forklift Capital Lease, dated December 9, 2019, by and between Power Machinery Center and Lessee.

 

12. Rotator Forklift Operating Lease, dated December 17, 2019, by and between Power Machinery Center and Lessee.

 

Schedule 2.24

 

 

13. Sideshift Forklift Capital Lease, dated December 18, 2019, by and between Power Machinery Center and Lessee.

 

14. Heavy Duty Mule Capital Lease, dated December 5, 2019, by and between Power Machinery Center and Lessee.

 

15. Packaging, Materials and Equipment Supply Agreement, by and between Lessee and Worldwide Plastics.

 

16. Labeling Agreement, dated June 13, 2014, by and between Lessee and Sinclair Systems International, LLC.

 

17. Supplier Program Agreement, dated September 18, 2019, by and between Apeel Technology, Inc. and Lessee, as modified by that certain Program Addendum #1, dated September 18, 2019.

 

18. Packaging, Materials and Equipment Supply Agreement, by and between Lessee and Bunzl/Coolpack.

 

19. Rental Agreement Addendum, dated June 8, 2020, by and between Lessee and UniFirst Corporation.

 

20. Copy Machine Lease Arrangement, by and between Xerox Financial Services and Lessee.*

 

21. Copy Machine Lease Arrangement, by and between Image Source and Lessee.*

 

22. Copy Machine Lease Arrangement, by and between U.S. Bank Equipment Finance and Lessee.*

 

23. Server Lease Arrangement, by and between Dell Financial Services and Lessee.*

 

24. Portable Toilet Services Arrangement, by and between Lessee and Unite Site Services.*

 

* The Contracts denoted with an asterisk are invoice-based arrangements and do not have executed definitive documentation.

 

Exhibit H

 

 

Schedule 2.39

Excluded Contracts

 

1. Packaging, Materials and Equipment Supply Agreement, by and between Lessee and Worldwide Plastics.

 

2. Labeling Agreement, dated June 13, 2014, by and between Lessee and Sinclair Systems International, LLC.

 

3. Supplier Program Agreement, dated September 18, 2019, by and between Apeel Technology, Inc. and Lessee, as modified by that certain Program Addendum #1, dated September 18, 2019.

 

4. Packaging, Materials and Equipment Supply Agreement, by and between Lessee and Bunzl/Coolpack.

 

Schedule 2.39

 

 

Schedule 2.40

Excluded Property

 

1. All of Lessee’s Crop Inventory.

 

2. All of Lessee’s Materials Inventory, including but not limited to:

 

a. packing supplies and materials;

 

b. fertilizer products and growing aids;

 

c. chemicals/pesticides and related materials;

 

d. liquid CO2 and related materials;

 

e. growing supplies and related materials including but not limited to cocoa bags, hooks, clips, and harvesting knives;

 

f. unfinished and finished goods inventory; and

 

g. pallets, totes and related materials.

 

3. Lessee Intangibles:

 

a. All customers, customer vendor numbers, online customer portals and i-trade accounts and related customer assets;

 

b. Lessee site food safety certifications and related policies;

 

c. Certifications not in the name of Lessee (i.e., pesticide applicator and similar licenses held by individuals);

 

d. All Equitable Food Initiative certifications in the name of Lessee; and

 

e. Site health and safety certifications in the name of Lessee.

 

4. Flow Wrap Machine, which is the property of Trophy Produce, to be returned to such party prior to the expiration of the License Agreement.

 

5. Lessee Cash, Accounts Receivable, Income Tax Receivables, Grant Receivables, Prepaids, Deposits, Intercompany Balances, Deferred Tax Assets, Investments in other affiliates.

 

6. All prepaids, refunds, deposits, insurance refunds, tax refunds and other amounts due Lessee of any kind.

 

7. All books and records of Lessee.

 

8. All bank accounts of Lessee.

 

Schedule 2.40

 

 

9. All trade names, logos, domain names and phone numbers related to Houweling US Holdings, Inc., Lessee, and their affiliates.

 

10. Box erector machines owned by Quality Packing Supplies.

 

11. Lessee IT Assets list sent to Graham Farrar send on March 25, 2021 and identified as “keep.”

 

12. Leased top seal packing equipment, including Proseal and GT2e machines.

 

13. Check scanner.

 

14. All actual and implied produce sales contracts of Lessee.

 

15. All supplier relationships of Lessee.

 

Schedule 2.40

 

 

Schedule 2.56

Leases

 

1. The Master Lease.

 

2. The Ground Lease.

 

Schedule 2.56

 

 

Schedule 2.72

Permitted Liens

 

None.

 

Schedule 2.72

 

 

Schedule 7.1.2

Consents

 

1. The consent of Southern California Edison Company is required to assign the PPA, the GIA, and the Rule 21 GIA from Lessee to Purchaser.

 

2. The consent of California Independent System Operator Corporation is required to assign the Meter Service Agreement and the QF Agreement from Lessee to Purchaser.

 

3. The consent of Penn Power Group, LLC (d/b/a Western Energy Systems) is required to assign the LTSA from Lessee to Purchaser.

 

4. The Los Angeles Regional Water Quality Control Board permit for the site requires thirty (30) days’ advance notice to the Board prior to transferring ownership of the permit.

 

5. The Stationary Source Permits to Operate require the consent of the Ventura County Air Pollution Control District following the transfer of ownership of the permit. Such consent will not be obtained prior to the Closing Date.

 

Schedule 7.1.2

 

 

Schedule 7.1.6

Proceedings

 

Seller has received communication, most recently as December 22, 2020, from a relative of Cornelius (Casey) Houweling, alleging wrongdoing in the business dealings between the relative and Cornelius (Casey) Houweling.

 

Schedule 7.1.6

 

 

Schedule 7.1.9

Compliance with Law

 

1. That certain Notice of Violation dated May 12, 2014, and issued by Ventura County with respect to Conditional Use Permit No. LU06-0126.

 

2. Any violation identified in the self-disclosure submittal filed with Ventura County Resource Management Agency under docket number WCO – C20-000036.

 

3. California Integrated Water Quality System violations identified by Purchaser on March 26, 2021, which Seller and Lessee are still investigating as of the Effective Date.

 

Schedule 7.1.9

 

 

Schedule 7.1.16

Tax Proceedings

 

Property tax appeals for the 2019, 2020, and Base Year tax years have been filed with Ventura County.

 

Schedule 7.1.16

 

Exhibit 99.87

 

FIFTH AMENDMENT TO OPTION AGREEMENT

(California Option Assets)

 

This FIFTH AMENDMENT TO OPTION AGREEMENT (this “Amendment”) is made effective as of March 26, 2021 (the “Amendment Date”) by and among CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent,” and, together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, Inc., a Delaware corporation (the “Option Holder”).

 

RECITALS

 

WHEREAS, the CEFF Parties and the Option Holder are parties to that certain Option Agreement dated as of December 28, 2018 (“Original Agreement”), as amended by (i) a First Amendment to Option Agreement (California Option Assets), dated March 23, 2020, (“First Amendment”), (ii) a Second Amendment to Option Agreement (California Option Assets), dated February 20, 2021 (“Second Amendment”), (iii) a Third Amendment to Option Agreement (California Option Assets), made effective as of March 21, 2021 (“Third Amendment”), and a Fourth Amendment to Option Agreement (California Option Assets), made effective as of March 24, 2021 (“Fourth Amendment”) (the Original Agreement, as amended by the First Amendment, Second Amendment, Third Amendment, and Fourth Amendment collectively, is the “Option Agreement”). Capitalized terms used but not defined herein shall have the meanings given to such terms in the Option Agreement; and

 

WHEREAS, the CEFF Parties and Option Holder desire to further extend the expiration of the Contingency Period and, accordingly, to amend the Option Agreement to provide for such extension in the manner set forth below.

 

NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

 

1.            Extension of Contingency Period. The Contingency Period shall now expire at 5:00 p.m. Pacific Time on March 29, 2021.

 

2.            Effect. In the event of any conflict between this Amendment and the Option Agreement, the terms of this Amendment shall control. The Option Agreement, as amended by this Amendment, shall be in full force and effect and constitutes the entire agreement between the CEFF Parties and the Option Holder with respect to the transactions contemplated hereby and thereby.

 

3.            Benefit and Authority. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and each party warrants and represents to the other that it has due and lawful authority to execute this Amendment.

 

4.            Counterparts. This Amendment may be executed in any number of counterparts (which may be delivered by facsimile or electronic mail which attaches a portable document format (.pdf) document) and each counterpart shall represent a fully executed original as if executed by all parties hereto, with all such counterparts together constituting but one and the same instrument.

 

1

 

 

The signature page follows this page.

 

2

 

 

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of Amendment Date.

 

  CEFF PARTIES:
   
  CEFF CAMARILLO PROPERTY, LLC

 

  By: EqCEF I, LLC, its manager

 

    By: /s/ R. Thomas Amis

    Name: R. Thomas Amis

    Title: Principal

 

  CEFF CAMARILLO HOLDINGS, LLC

 

  By: EqCEF I, LLC, its manager

 

    By: /s/ R. Thomas Amis

    Name: R. Thomas Amis

    Title: Principal

 

  OPTION HOLDER:
   
  GLASS INVESTMENTS PROJECTS, INC.

 

  By: /s/ Jeanette Lombardo

  Name: Jeanette Lombardo
  Title: Chief Executive Officer

 

  CAMARILLO BUYER:
   
  GH CAMARILLO LLC

 

  By: /s/ Kyle D. Kazan

  Name: Kyle D. Kazan
  Title: Authorized Signatory

 

[Signature Page to Fifth Amendment to Option Agreement]

 

 

 

  ACKNOWLEDGED AND AGREED:
   
  MERCER PARK BRAND ACQUISITION CORP.

 

  By: /s/ Louis Karger

  Name: Louis Karger
  Title: Chief Executive Officer

 

  HOUWELING NURSERIES OXNARD, INC.

 

  By: /s/ Kevin Doran

  Name: Kevin Doran
  Title: President

 

[Signature Page to Fifth Amendment to Option Agreement]

 

 

Exhibit 99.88

 

Mercer Park Brand Acquisition Corp.

 

Glass House Group

 

January 25, 2021

 

VIA ELECTRONIC MAIL

 

Glass Investments Projects, Inc.

2776-64th Street

Delta, BC

4V4L2N7, Canada

Attn: Jeanette Lombardo, CEO

 

Re: Letter of Intent Regarding the Acquisition of Rights or Assets under an Option Agreement for certain Agricultural Real Property in Camarillo, CA to be Operated as a Commercial Cannabis Business

 

Dear Ms. Lombardo,

 

This letter (this “Letter of Intent”) summarizes the proposal discussed by Glass Investments Projects, Inc., a Delaware corporation (“Glass Investments Projects”), GH Group, Inc., a Delaware corporation (“Glass House”), and Mercer Park Brand Acquisition Corp, a British Columbia corporation, or its designee(s) (“Mercer Park”, together with Glass House, the “Glass House/Mercer Park Entities”), for the purchase of certain agricultural assets described below to be operated as a commercial cannabis business, and will serve as the basis for Definitive Agreements (as hereinafter defined) which will supersede and replace this Letter of Intent. Glass Investments Projects and the Glass House/Mercer Park Entities are sometimes hereinafter individually referred to as a “Party” and collectively as the “Parties.”

 

For purposes of this Letter of Intent, reference is hereby made to that certain Option Agreement (California Option Assets) dated as of December 28, 2018, entered into by and among CEFF Camarillo Property, LLC, a Delaware limited liability company (“CEFF Camarillo Propco”), CEFF Camarillo Holdings, LLC, a Delaware limited liability company (“CEFF Parent”, together with CEFF Camarillo Propco, the “CEFF Parties”), and Glass Investments Projects, as amended by that certain First Amendment to Option Agreement (California Option Assets) dated as of March 23, 2020, entered into by and among CEFF Camarillo Propco, CEFF Parent and Glass Investments Projects (collectively, the “Option Agreement). Capitalized terms not defined herein shall have the meanings ascribed in the Option Agreement.

 

Except as otherwise set forth in this Letter of Intent, the Proposed Transactions (as hereinafter defined) are an expression of intent only, do not express the complete agreement of the Parties, are not meant to be binding on the Parties now or at any point in time in the future, and are meant to be used as a negotiation aid. Accordingly, except as otherwise provided in the Sections below entitled “Confidentiality,” “Exclusivity,” “Waiver,” “Expenses,” “Governing Law,” “Legal Effect,” and “Miscellaneous”, the Parties will not be bound until they enter into the Definitive Agreements.

 

 

 

 

January 25, 2021

Page Two

 

Upon the full execution and delivery of this Letter of Intent, the Glass House/Mercer Park Entities will, as soon as practicable, commence their detailed due diligence investigation and propose to Glass Investments Projects a structure for the Proposed Transactions (as hereinafter defined) that is as tax-efficient and legally protective of the Parties as possible. Glass Investments Projects will use commercially reasonable efforts to consummate the Proposed Transactions and remove any contingencies as soon as practicable, but in no event later than as required under the Option Agreement.

 

Terms of the Proposed Transactions: It is proposed that the Proposed Transactions include the following  material terms and conditions:
The Glass House/Mercer Park Entities, or their designee, will purchase the rights under the Option Agreement or all of the California assets (“the “Assets”) available under the Option Agreement (the “Proposed Transactions”).
   
The Assets shall be delivered at closing free and clear- of any liens, leases, entitlement deficiencies or other encumbrances except for certain permitted encumbrances as mutually agreed by the Parties. For the sake of further clarity, the Assets shall be delivered at closing fully entitled for cultivation, processing and storage of commercial cannabis (“Cannabis Use”) with a mutually acceptable amount of permitted greenhouse cultivation space, unless otherwise waived or modified by the Glass House/Mercer Park Entities.
   
Glass Investments Projects will indemnify the Glass House/Mercer Park Entities and assume all costs associated with correcting any and all regulatory and entitlement deficiencies associated with the existing improvements and structures located at the Facility (as hereinafter defined) for the specific purpose of obtaining all required state and local licenses, permits and regulatory approvals to conduct commercial cannabis activity at the Facility. The indemnity obligations of Glass Investments Projects will be (a) for non-operationally focused expenses, (b) subject to a mutually agreed upon cap to be determined after the Glass House/Mercer Park Entities complete their due diligence investigation, and (c) offset against the Closing Consideration payable to the GIPI Designee (as hereinafter defined).

 

 

 

 

January 25, 2021

Page Three

 

  During the period in which the Facility is modified and repurposed for Cannabis Use, Glass Investments Projects or its designee (“Successor Tenant”) will lease any unused greenhouse cultivation space located at the Facility (the “Leased Premises”) pursuant to an arm’s length, term agricultural lease (the “Agricultural Lease”) for any then-existing tomato and cucumber farming and all ancillary uses. The total rent under such Agricultural Lease will be $1.00 per square meter per month. The Glass House/Mercer Park Entities, or their designee, as landlord (“Landlord”), will have the right to terminate any portion of the Leased Premises subject to the Agricultural Lease upon delivery of 60 days’ advance written notice to Successor Tenant; upon expiration of such notice period, Successor Tenant will promptly vacate, peacefully yield possession and harvest/remove all growing crops from the portion of the Leased Premises to be returned to Landlord. At such time, Landlord will reduce the total rent for the Leased Premises pro rata based on the square meters of the Leased Premises returned to Landlord. The entry into the Agricultural Lease shall be a condition to closing of the Proposed Transactions.
     
    The purchase price payable by the Glass House/Mercer Park Entities for the Assets will be One Hundred and Thirty Million and 00/100 Dollars ($130,000,000.00) (the “Purchase Price”)1. To the extent that there are Purchase Price amounts remaining after the purchase of the Assets and the payment of the Value Destruction Payment (which for the sake of clarity will not be payable if the Utah Option is exercised and therefore such amount will reduce the Purchase Price), any excess cash shall be used for working capital to fund the operations of the cannabis business, as mutually agreed by the Parties. To the extent Glass Investments Projects desires to cause its affiliate to exercise the Utah Option, the Glass House/Mercer Park Entities shall fully cooperate; provided, however, that any net savings or other financial benefit to be achieved by exercising the rights under the Option Agreement and the Utah Option Agreement (concurrently or otherwise) shall be shared pro rata between the Parties based on relative values of the Assets and the Utah Assets.
     
    Mercer Park will commit and fund up to Forty Million and 00/100 Dollars ($40,000,000.00) for capital expenditures (the “CapEx Commitment”) required to further develop or repurpose the Assets for commercial cannabis operations (the “Facility”). To the extent that the cost of the capital expenditures is less than the CapEx Commitment, such remaining funds shall be used as working capital to fund the operations of the cannabis business, as mutually agreed by the Parties.

 

 

1 Purchase Price based on the exercise of the Option on or before January 31, 2021. A higher capital multiplier will apply if the Option is exercised after January 31, 2021.

 

 

 

 

January 25, 2021

Page Four

 

 

Upon closing of the transactions under the Definitive Agreements, Mercer Park will issue Ten Million (10,000,000) shares (the “Closing Shares”) of its publicly traded stock to Glass Investments Projects, or its designee (as appropriate based on the structure of the Proposed Transactions) (the “GIPI Designee”) at a share price equal to Ten Dollars ($10) per share (pricing also subject to applicable securities laws and stock exchange rules), for total consideration of One Hundred Million and 00/100 Dollars ($100,000,000.00) (the “Closing Consideration”)2. The GIPI Designee will enter into customary lockup agreements restricting the sale of 50% of the Closing Shares for six (6) months following closing and the remaining 50% for twelve (12) months following closing. .3

   
  In addition to the Closing Consideration, the GIPI Designee will be eligible to receive up to an additional Seventy-Five Million and 00/100 Dollars ($75,000,000.00) payable in publicly traded stock of Mercer Park (the “Earnout Shares”) over a period of twelve (12) consecutive months commencing July 1, 2023 and ending June 30, 2024 (the “Earnout Period”), unless the Parties mutually agree in their sole discretion to extend the Earnout Period. The vesting of the Earnout Shares will be based on the following formula as more particularly set forth on Exhibit A attached hereto:
   
  Earnout Shares Value = 3.5 x Adjusted EBITDA – Purchase Price – Facility-related capital expenditures as of June 30, 2024 – Closing Consideration.
   
  The formula shall be subject to each of the following: (i) a U.S. GAAP-compliant standardization or quality of earnings definition of “Adjusted EBITDA” which shall take into account, among other-things, market-based pricing for any transfers of cannabis products to affiliates of the Glass House/Mercer Park Entities; (ii) a cap of $75,000,000.00 of total Earnout Shares Value; and (iii) a floor if Adjusted EBITDA is less than $77,000,000.00, such that no Earnout Shares shall be payable to the GIPI Designee.
   
  The Earnout Shares, once vested, will be issued based on the volume weighted average price per share of Mercer Park for twenty (20) consecutive trading days prior to September 30, 2024 (pricing also subject to applicable securities laws and stock exchange rules). Further, the Earnout Shares will be subject to the same lockup restrictions applicable to the Closing Shares.

 

 

2 Parties to further discuss tax structuring strategies to enable the GIPI Designee to receive the most efficient U.S. income tax treatment. Mercer Park will provide a post-closing pro-forma capitalization table to Glass Investments Projects for this purpose.

 

 

 

 

January 25, 2021

Page Five

 

  As additional consideration, for those certain legacy key employees and contractors associated with the Facility who will continue to perform services for the Mercer Park/Glass House Entities on a post-closing basis (as mutually agreed by the Parties), such persons will be eligible to participate in Glass House’s equity incentive plan, pursuant to the incentive plan general terms and conditions applicable to all other employees or contractors of Glass House.
   
  Glass Investments Projects will cause Cornelius (Casey) Houweling (“Houweling”) to enter into an Employment Agreement with such title as is mutually agreed by the Parties, and report directly to the President, Chief Executive Officer or such other designees of the Glass House/Mercer Park Entities’ board(s). At all times, the board(s) shall hold final decision-making authority with respect to the Assets and the Facility.4 If Houweling is unable to be onsite on a full time basis, he may enter into a Consulting Agreement with comparable responsibilities to those contemplated under an Employment Agreement. Either form of agreement shall contain terms to be mutually agreed upon, including specific responsibilities and work functions, which may be amended from time to time. Except for Houweling’s ownership and management of Propagation Services Canada, Houweling also will be bound by customary non-compete provisions (excluding future passive ownership of less than 5.0% on a fully-diluted basis of public companies).
   
Deposit: No later than the expiration of the Exclusivity Period (as hereinafter defined), Mercer Park, Glass House or their designee, will deposit with an escrow agent an earnest money deposit in an amount to be mutually agreed by Glass Investments Projects, the Glass House/Mercer Park Entities, and CEFF Camarillo Propco, in immediately available funds (the “Deposit”), subject to entering into the Definitive Agreements, and recognizing that the deposit required under the Option Agreement, as may be further amended, will be funded in part by the Deposit pursuant to the terms of the Definitive Agreements and will be refundable in whole or part pursuant to the terms of the Definitive Agreements, including without limitation, if the required Ventura County cannabis permits for the Facility are not obtained by the Outside Date. The Deposit will be fully applied against the Purchase Price if the closing occurs under the Definitive Agreements. Notwithstanding the foregoing, if the closing does not occur for any reason other than due to the fault or willful acts of the Glass House/Mercer Park Entities, the Deposit will be fully refundable to the Glass House/Mercer Park Entities. For the sake of clarity, any amendments to the Option Agreement required to effectuate the purposes of this paragraph, will be negotiated with CEFF Camarillo Propco jointly by Glass Investments Projects and the Glass House/Mercer Park Entities.5

 

 

5 This paragraph remains subject to revision after the Parties discuss further with the CEFF Parties and to the terms of the Option Agreement.

 

 

 

 

January 25, 2021

Page Six

 

Definitive
Agreements:
The Glass House/Mercer Park Entities will prepare initial drafts of the definitive agreements for the Proposed Transactions (including, without limitation, an escrow agreement for the Deposit, a purchase and sale agreement for the Assets, the Agricultural Lease, and any ancillary agreements related thereto) (collectively, the “Definitive Agreements”) for review and approval by Glass Investments Projects. The Parties will expeditiously negotiate the Definitive Agreements in good faith and seek to execute mutually approved final versions as soon as practicable after completion of required due diligence investigations.
     
    The Definitive Agreements will contain representations, warranties, limitations of liability, pre-closing covenants, closing conditions and post-closing covenants reasonable and customary for commercial real estate transactions of this type, with more limited representations and warranties regarding current operations, condition of assets and the status of any contracts or other agreements in connection with the Assets.
     
    Additionally, the Definitive Documents will include as an additional condition to closing of the Proposed Transactions that the entities which owned or controlled the Assets immediately prior to the closing of the Proposed Transactions must be audited for the three (3) fiscal years immediately preceding the closing date of the Proposed Transactions.
     
Property Access: During the due diligence process, to the extent set forth in the Option Agreement, upon request, CEFF Camarillo Propco, Houweling Nurseries Oxnard, Inc., Glass Investments Projects and their affiliates will grant prompt and reasonable access to the Assets to the Glass House/Mercer Park Entities, their respective representatives, advisors, investors and potential investors, designated state and local officials, and other designated agents. Such parties also will provide the Glass House/Mercer Park Entities, their respective representatives, advisors, investors, potential investors, and other designated agents reasonable access to key employees, books, records, and other requested information and documentation relating to the Assets and the Equity.

 

 

 

 

January 25, 2021

Page Seven

 

Confidentiality: In the absence of a termination or expiration in accordance with its express provisions, each of Glass Investments Projects, Glass House and Mercer Park remain bound by the Mutual Non-Disclosure Agreement, executed by them in January 2021, among Glass Investments Projects, Glass House and Mercer Park with respect to confidentiality, non-disclosure, non-solicitation, etc. (the “Confidentiality Agreement”). Glass Investments Projects will cause Houweling who is not a party to the Confidentiality Agreement agree to be bound by the Confidentiality Agreement as if he executed it. In addition, each of the Parties will (and in the case of Houweling, Glass Investments Projects will cause Houweling to) keep the existence and contents of this Letter of Intent strictly confidential except for disclosures required to be made to each respective party’s professional advisors, officers, shareholders, directors, and other representatives, or required disclosures pursuant to applicable stock exchange or regulatory requirements.

 

Exclusivity: The Parties will each be devoting a significant amount of time, effort, and expense in connection with the Proposed Transactions, including the Glass House/Mercer Park Entities’ due diligence review of the Assets and the Equity, and the preparation of the Definitive Agreements. Therefore, in consideration of such expense, time, and efforts by the Glass House/Mercer Park Entities, for a period of sixty (60) calendar days following execution and delivery of this Letter of Intent or such earlier or later date that the Parties mutually agree in writing to the termination of negotiations concerning the Proposed Transactions (the “Exclusivity Period”), Glass Investments Projects agrees to not, and to cause its affiliates and Houweling and the CEFF Parties to not, and to cause each of his and their (including affiliates and CEFF Parties) respective, agents, equity holders, directors, managers, officers, affiliates, representatives, successors and assigns to not (individually an “Exclusivity Party”, and collectively, the “Exclusivity Parties”), directly or indirectly, commit to, agree to, enter into, or solicit, entertain, discuss, negotiate or encourage any inquiries, offers, or proposals concerning any purchase or sale of any interest in any or all of the Assets or the Equity or the sale, recapitalization, liquidation, financing, acquisition, merger or similar transaction of, involving or relating to all or any the Assets or the Equity (an “Acquisition Proposal”) from or with any other person or entity, other than the Glass House/Mercer Park Entities. Glass Investments Projects agrees, and will cause Houweling, to immediately notify the Glass House/Mercer Park Entities, if any Exclusivity Parly receives any unsolicited indications of interest, requests for information, or offers in respect of an Acquisition Proposal, and will communicate to the Glass House/Mercer Park Entities and in reasonable detail the terms of any such indication, request, or offer, and will provide the Glass House/Mercer Park Entities with copies of all written communications relating to any such indication, request, or offer. Immediately upon execution and delivery of this Letter of Intent, Glass Investments Projects will, and will cause Houweling to, terminate, and cause the Exclusivity Parties to terminate, any and all existing discussions or negotiations with any other person or group of persons other than the Glass House/Mercer Park Entities, their respective agents, representatives and affiliates regarding an Acquisition Proposal. In the event of any breach of this paragraph, the Glass House/Mercer Park Entities will be entitled to exercise all rights and remedies available at law and in equity.

 

 

 

 

January 25, 2021

Page Eight

 

Waiver: Glass Investments Projects for itself, and on behalf of the Exclusivity Parties, irrevocably waives and releases (and in the case of Houweling, Glass Investments Projects will cause Houweling to irrevocably waive and release) any access to or claims against the funds in the “SPAC escrow account” established at the time of Mercer Park’s initial public offering.

 

Governing Law: This Letter of Intent will be governed by and interpreted in accordance with the laws of the State of Delaware without regard to choice of law rules.

 

Expenses: Each Party will be responsible for its own fees, costs and expenses in connection herewith and the negotiation of the Definitive Agreements, whether or not such Definitive Agreements are entered into.

 

Legal Effect: The Parties understand that this Letter of Intent: (i) represents their current intentions with respect to the Proposed Transactions as outlined herein; (ii) except as otherwise provided in the Sections entitled “Confidentiality,” “Exclusivity,” “Waiver,” “Expenses,” “Governing Law,” “Legal Effect,” and “Miscellaneous” this Letter of Intent does not constitute a legally binding agreement to consummate the Proposed Transactions, an agreement to enter into a legally binding agreement with respect to the Proposed Transactions, an offer capable of acceptance, or an agreement to agree; and (iii) creates no legal or binding obligation on the part of any Party hereto except for the obligations set forth in subsection (ii) above, which will be binding upon the Parties upon execution of this Letter of Intent. Except for the obligations set forth in subsection (ii) above, legally binding obligations with respect to the Proposed Transactions will arise only upon the execution and delivery of the Definitive Agreements in the form and substance satisfactory to the Parties and their respective counsel.

 

 

 

 

January 25, 2021

Page Nine

 

Miscellaneous: This Letter of Intent may be executed in any number of counterparts and any Party hereto may execute any such counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts taken together will constitute but one and the same instrument. This Letter of Intent supersedes any prior written or oral understanding or agreements between the Parties related to the Proposed Transactions (however, any previously executed non-disclosure agreement or confidentiality agreement remains in effect according to its terms and will terminate as set forth therein). This Letter of Intent may be amended, modified, or supplemented only by written agreement of the Parties. Any dispute or claim arising under or related to this letter will be exclusively brought in the state or federal courts situated in Los Angeles County, California, and the parties expressly submit to the jurisdiction thereof and to venue therein.

 

We sincerely hope that you will accept this Letter of Intent as our best and final offer with respect to the Proposed Transactions, and look forward to working with you on the Proposed Transactions. If you understand and agree to the terms and conditions set forth in this Letter of Intent, please acknowledge your agreement by signing this Letter of Intent where indicated below and return an originally executed copy to me at your earliest convenience. This Letter of Intent and all terms and conditions contained herein will automatically expire and become null and void in all respects if not accepted by you and received by me by 5:00 p.m. PST on January 25, 2021, time being of the essence.

 

Very truly yours,

 

GH Group, Inc.

 

By: /s/ Kyle D. Kazan  
Name: Kyle D. Kazan  
Title: Chief Executive Officer  

 

 

Mercer Park Brand Acquisition Corp.

 

By: /s/ Louis F. Karger  
Name: Louis F. Karger  
Title: CEO  

 

 

 

 

January 25, 2021

Page Ten

 

AGREED AND ACCEPTED as of January 25, 2021:  
   
   
Glass Investments Projects, Inc.  
   
By: /s/ Jeanette Lombardo  
Name: Jeanette Lombardo  
Title: Chief Executive Officer  

 

 

 

 

January 25, 2021

Page Eleven

 

Exhibit A

Earnout Shares Value Formula (Examples)

(To be attached)

 

Houwelings Earnout                          
                            Earnout Cap  
                            75.0  
                               
                               
Adj EBITDA   Multiple   Total Valuation   Purchase Price   Closing Consideration   Capex   Total Invested   Total Earnout  
  75     3.50 x   263     130     100     40     270     -  
                                               
  85     3.50 x   298     130     100     40     270     28  
  85     3.50 x   298     130     100     45     275     23  
                                               
  95     3.50 x   333     130     100     40     270     63  
  95     3.50 x   333     130     100     45     275     58  
                                               
  100     3.50 x   350     130     100     40     270     75  
  100     3.50 x   350     130     100     45     275     75  

 

 

 

Exhibit 99.89

 

RECIPROCAL NONDISCLOSURE AND RESTRICTED USE AGREEMENT

 

Effective date: February 18, 2021

 

Equilibrium Capital Group, LLC (“Equilibrium”), whose address is 411 NW Park Ave., Suite 401, Portland, OR 97209, on the one hand, and Mercer Park Brand Acquisition Corp., a British Columbia corporation (“Mercer Park”), whose address is 590 Madison Avenue, 26th Floor, New York, New York 10022, and GH Group, Inc., a Delaware corporation, whose address is 3645 Long Beach Blvd., Long Beach, CA 90807 (“Glass House,” and, together with Mercer Park, the “Glass House/Mercer Park Entities”), on the other hand, each on behalf of itself and its affiliates, wish to preserve the confidentiality and trade secret status of certain proprietary information as set forth in this Reciprocal Nondisclosure and Restricted Use Agreement (this “Agreement”). Each of Equilibrium, on the one hand, and the Glass House/Mercer Park Entities, on the other hand, is sometimes referred to herein as a “Party,” and collectively, as the “Parties.” They therefore agree:

 

1. Each Party, as “Discloser,” may elect hereunder to disclose Proprietary Information to the other Party, as “Recipient,” for the sole purpose of evaluating a potential business relationship or transaction(s) (the “Purpose”).

 

2. “Proprietary Information” means any and all non-public, proprietary or confidential information given by either Party to the other in pursuit of the Purpose, subject to the limitations of paragraph 3. It may include information that Discloser holds under obligations of confidentiality from a third party; such information is also Proprietary Information hereunder (“Third Party Proprietary Information”) and subject to such limitations.

 

3. Proprietary Information loses that status if: (1) The information becomes publicly available (unless because Recipient breached this Agreement); (2) Recipient gets it without restriction from a third party who had the right to disclose it without restriction; (3) Recipient develops it independently, or already knew it when Discloser gave it; or (4) Discloser gives it to anyone else without confidentiality limitations.

 

4. The Parties may exchange Proprietary Information during the covered period of this Agreement, which covered period ends one (1) year from the effective date first written above unless earlier terminated by an agreement in writing signed by the Parties. This Agreement and the obligations set forth herein shall terminate three (3) years after the covered period ends, except (1) as otherwise expressly provided in paragraphs 6 and 11, (2) that the obligations set forth herein shall continue in respect to Proprietary Information with trade secret status for as long as it retains that status, and (3) as earlier terminated by an agreement in writing signed by the Parties.

 

5. Recipient will protect Proprietary Information as follows: A) Recipient will not disclose it to any third party without the Discloser’s prior written consent (except in the case of (1) disclosures expressly permitted by paragraph 7, or (2) required disclosures pursuant to applicable stock exchange requirements or legal or regulatory requirements). B) Recipient will protect it with at least the same degree of care (but no less than a reasonable degree of care) as Recipient uses to protect its own similar proprietary data. C) Recipient will use the Proprietary Information only for the Purpose. D) On written request from the Discloser, Recipient will promptly return, or have an officer certify the destruction of, all originals and copies of Proprietary Information, subject to paragraph 6.

 

6. Recipient may retain information as required by its own compliance and records retention policies, or as automatically retained in electronic backup. Retained copies will continue to be subject to the protective obligations of this Agreement for as long as retained.

 

7. Recipient may give Proprietary Information to its employees, contractors, representatives, consultants, advisors, board members, and current or prospective investors, if those individuals need to know it to assist Recipient to accomplish the Purpose. Such individuals must first be bound by nondisclosure obligations with Recipient (which may be general in form) limiting their right to use such information to the purposes for which they receive it. Recipient will use reasonable commercial efforts to enforce the nondisclosure agreements this paragraph requires.

 

8. Neither Party shall make any public announcement in relation to this Agreement or the transactions contemplated between the Parties without the prior written consent of the other Party, which consent shall not be unreasonably withheld, conditioned, or delayed.

 

9. Discloser warrants it has the rights to disclose the Proprietary Information it gives.

 

10. This Agreement creates no obligation to purchase, sell, develop, research, or disclose anything. It grants no license. It creates no agency or partnership.

 

 

  

 

 

 

11. Equilibrium hereby irrevocably waives and releases any access to or claims against the funds in the “SPAC escrow account” established at the time of Mercer Park’s initial public offering. The foregoing waiver and release shall survive any termination of this Agreement.

 

12. US and New York state law govern this Agreement without regard to conflicts of law principles. Breach of it can be enjoined, as money damages would not cure the harm from the breach. This Agreement contains the entire agreement between the Parties concerning the subject matter hereof and supersedes any prior agreement between them with respect to such subject matter. This Agreement may only be amended, modified or supplemented by an agreement in writing signed by the Parties.

 

[SIGNATURE PAGE FOLLOWS.]

 

equilibrium capital group, LLC
1331 NW Lovejoy Street, Suite 850 Portland, OR 97209

 

 

 

Equilibrium Capital Group, LLC   Mercer Park Brand Acquisition Corp.

 

By: /s/ R. Thomas Amis   By: /s/ Louis Karger

Print Name: R. Thomas Amis   Print Name: Louis Karger
Title: Principal   Title: Chief Executive Officer

 

    GH Group, Inc.

 

      By: /s/ Kyle D. Kazan

    Print Name: Kyle D. Kazan
    Title: Chief Executive Officer

 

 

 

 

Exhibit 99.90

 

UNDERTAKING

 

TO: Ontario Securities Commission, as the Principal Regulator
   
RE: Mercer Park Brand Acquisition Corp. (to be renamed Glass House Brands Inc. in connection with its qualifying acquisition of GH Group, Inc.) (the “Issuer”) – Non-Offering Prospectus dated May 6, 2021 (the “Prospectus”)

 

 

The Issuer hereby undertakes to provide the (i) Warrant Agreement; (ii) Registration Rights Agreement; (iii) Lockup Agreement; (iv) Exchange Rights Agreement; and (v) the SoCal Greenhouse Agreements (collectively, the “Documents”) and to file such Documents on SEDAR under the same project number as that of the Prospectus promptly, and, in any event, within seven (7) days of closing of the Offering.

 

Capitalized terms not defined herein have the meanings ascribed to them in the Prospectus.

 

[Remainder of page left intentionally blank, signature page follows]

 

 

DATED the 6th day of May, 2021.

 

  MERCER PARK BRAND ACQUISITION CORP.
     
  By: (signed) “Louis F. Karger”
    Name: Louis F. Karger
    Title:   Chief Executive Officer

 

[Signature Page - Undertaking to file Material Contracts]

 

 

Exhibit 99.91

 

MERCER PARK BRAND ACQUISITION CORP. (“BRND”)

 

SPECIAL MEETING OF THE CLASS A RESTRICTED VOTING SHAREHOLDERS

 

May 5, 2021

 

REPORT OF VOTING RESULTS

 

In accordance with Section 11.3 of National Instrument 51-102 – Continuous Disclosure Obligations, we hereby advise you of the following voting results obtained at the special meeting (the “Meeting”) of the holders of class A restricted voting shares of BRND (“Class A Restricted Voting Shares”) held on May 5, 2021. The matter set out below is described in greater detail in the Management Information Circular of BRND dated April 5, 2021. The total number of Class A Restricted Voting Shares represented by holders of Class A Restricted Voting Shares virtually present in person and represented by proxy at the Meeting was 23,281,780, representing 57.84% of the total number of issued and outstanding Class A Restricted Voting Shares as of May 5, 2021.

 

Approval of the Extension to the Permitted Timeline

 

The resolution approving the extension of the permitted timeline for BRND to consummate a qualifying transaction to July 30, 2021 was duly passed. The following are the voting results on this matter:

 

          Percentage of Votes Cast  
    Number of Votes Virtually     Virtually Represented in  
    Represented in Person and by     Person and by Proxy  
    Proxy     (rounded)  
Votes For:     21,664,080       93.05 %
Votes Against:     1,617,700       6.95 %

 

[Remainder of page intentionally left blank. Signature page follows.]

 

 

 

 

  MERCER PARK BRAND ACQUISITION CORP.
       
  By:   (signed) Louis Karger
    Name: Louis Karger
    Title: Chief Executive Officer