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.
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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).
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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
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Creates the most expansive, fully-integrated
cannabis brand-building business in the world’s largest cannabis market
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Unmatched cost structure to ensure
low cost, high-quality cannabis production at scale
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Significant growth opportunities both
organically and via accretive M&A in California’s highly fragmented market
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A compelling valuation, strong balance
sheet and the capital resources needed to ensure success
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Superior management team with financial
management and cannabis operating expertise
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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 “Shareholders’
Meeting”) 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
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.
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:
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Strong,
competitive position within an attractive industry.
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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.
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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”.
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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”.
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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.
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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.
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Concurrent
private placement. Certain private investors have committed to a US$85 million private
investment in public equity to close concurrently with the Transaction.
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See “The Transaction”.
Other considerations that we believe demonstrate
the attractiveness of the Transaction, and that provide protection to BRND Shareholders include the following:
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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.
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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.
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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.
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.
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”.
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.
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.
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:
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1.
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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:
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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;
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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:
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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”);
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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;
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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;
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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);
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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:
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alter
the authorized share structure of BRND to remove the BRND Class A Restricted Voting
Shares and BRND Class B Shares; and
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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.
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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.
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2.
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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.
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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.
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3.
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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.
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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.
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4.
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To
transact such further or other business as may properly come before the Shareholders’
Meeting or any adjournment(s) or postponement(s) thereof.
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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.
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.
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
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.
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:
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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;
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BRND
proposes to amend its notice of articles and articles in order to:
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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;
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·
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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;
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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;
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·
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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
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·
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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);
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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:
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alter
the authorized share structure of BRND to remove the BRND Class A Restricted Voting
Shares and BRND Class B Shares; and
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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
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BRND
proposes that its auditors following closing of the Transaction shall be Macias, Gini &
O’Connell LLP.
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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.
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.
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.
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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.
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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.
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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.
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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.
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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?”.
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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.
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.
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”.
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.
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.
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TABLE OF
CONTENTS
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INTRODUCTION
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1
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FORWARD-LOOKING STATEMENTS
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2
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REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
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3
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GLOSSARY OF TERMS
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3
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SUMMARY
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8
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GENERAL PROXY INFORMATION
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1
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Solicitation of Proxies
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1
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Participation in the Shareholders’
Meeting
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1
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Appointment and Revocation
of Proxies
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2
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Virtual Attendance and
Participation in the Shareholders’ Meeting
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4
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Asking Questions
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4
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Advice to Beneficial BRND
Shareholders
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5
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INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED
UPON
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5
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Founders’ Shares
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5
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INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS
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6
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VOTING SHARES AND THE PRINCIPAL HOLDERS THEREOF
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6
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THE TRANSACTION
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7
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Background to the Transaction
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9
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The Definitive Agreement
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10
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Exchangeable Shares and
Exchange Rights Agreement
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10
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Amendments to Notice of
Articles and Articles
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11
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Recommendation of the BRND
Board
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15
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Reasons for the Recommendation
of the BRND Board
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15
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Qualifying Transaction
Fair Market Value Threshold
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17
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Transaction Steps
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17
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BRND Founders and GH Group
Founders
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18
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BRND Shareholder Approval
of the Transaction
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19
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Post-Transaction Structure
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19
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Interests of Certain Persons
in the Transaction
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19
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PROCEDURE FOR THE EXCHANGE OF BRND SHARES
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21
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REDEMPTION RIGHTS
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21
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EQUITY INCENTIVE PLAN
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23
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ELECTION OF DIRECTORS
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23
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Cease Trade Orders, Bankruptcies,
Penalties or Sanctions
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27
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Conflicts of Interest
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28
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SUMMARY PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
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28
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STOCK EXCHANGE LISTINGS
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28
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CANADIAN SECURITIES LAW MATTERS
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28
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UNITED STATES SECURITIES LAWS MATTERS
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28
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CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
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30
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
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34
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RISKS ASSOCIATED WITH THE TRANSACTION
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35
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INFORMATION CONCERNING BRND AND
GH GROUP
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37
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CONTRACTUAL RIGHTS OF RESCISSION AND DAMAGES
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37
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OTHER BUSINESS
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38
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DOCUMENTS INCORPORATED BY REFERENCE
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38
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ADDITIONAL INFORMATION
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38
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SECURITIES LAW EXEMPTIONS
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39
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ADDENDA
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APPENDIX “A”
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TRANSACTION RESOLUTION
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SCHEDULE “A”
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PARTS 27 AND 29-32 OF ARTICLES
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SCHEDULE “B”
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AMENDED AND RESTATED ARTICLES
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APPENDIX “B”
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EQUITY INCENTIVE PLAN RESOLUTION
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APPENDIX “C”
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PROPOSED EQUITY INCENTIVE PLAN
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APPENDIX “D”
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INFORMATION STATEMENT
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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”, “Corporation” or “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.
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:
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anticipated approval
of each of Transaction Resolution and the Equity Incentive Plan Resolution by the BRND Shareholders;
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·
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completion and timing
of the Transaction;
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·
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receipt and timing of
required approvals and consents from applicable regulatory authorities to complete the Transaction;
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·
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satisfaction or waiver
of closing conditions in accordance with the Definitive Agreement;
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·
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expectation that no
change or other circumstance will occur that could cause the termination of or a material
change to the Definitive Agreement;
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·
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the anticipated acquisition
of SoCal Greenhouse by GH Group:
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·
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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;
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receipt and timing of
new licenses and license transfers;
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no unforeseen changes
in legislative and operating frameworks for the business of GH Group;
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general economic, industry
and market segment conditions;
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changes
in applicable environmental, taxation and other laws and regulations, as well as how such
laws and regulations are interpreted and enforced;
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stock market volatility;
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ability to obtain and
maintain current and additional financings;
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·
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the execution of strategic
growth plans;
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·
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the ability of GH Group
to continue to develop and grow; and
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·
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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.
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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”;
“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”;
“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”;
“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”;
“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”.
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.
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:
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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;
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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;
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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;
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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);
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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:
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alter
the authorized share structure of BRND to remove the BRND Class A Restricted Voting
Shares and BRND Class B Shares; and
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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.
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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:
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strong, competitive
position within an attractive industry;
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strong, experienced
and well-aligned management team;
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strong
current Adjusted EBITDA generation, with potential for growth by virtue of the Transaction
and positive industry momentum;
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attractive return on
investment relative to risk profile;
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opportunities for platform
growth through acquisitions;
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benefit from being a
public company in Canada; and
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concurrent private placement.
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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 shareholder approval and redemption rights considerations.
In the course of their deliberations, the BRND Board also identified
and considered a variety of risks, including:
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risks of the business
being acquired;
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risks if the Transaction
is not completed;
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the Definitive Agreement
may be terminated in certain circumstances; and
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no certainty that all
conditions precedent to the Transaction will be satisfied.
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Transaction Steps
At the Effective Time, among other things:
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(a)
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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;
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(b)
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BRND’s
notice of articles and articles will be amended, ultimately resulting in:
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(i)
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the
conversion of each non-redeemed BRND Class A Restricted Voting and each BRND Class B
Share then outstanding into one Equity Share; and
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(ii)
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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”;
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(c)
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BRND
will, if it is approved by the registered BRND Shareholders, adopt the Equity Incentive Plan;
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(d)
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the
merger with GH Group is expected to occur;
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(e)
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Macias,
Gini & O’Connell LLP shall be appointed the auditors of the Corporation; and
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(f)
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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).
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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.
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.
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).
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.
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”.
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.
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.
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.
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.
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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.
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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”.
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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.
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”).
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.
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:
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|
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Percentage of Class of
|
|
Percentage of All
|
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Name of
Shareholder
|
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Number and
Type of
|
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Outstanding
BRND
|
|
Outstanding
BRND
|
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|
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brnd
Shares
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Shares
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Shares
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|
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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
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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.
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.
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.
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.
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:
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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;
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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;
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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;
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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
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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);
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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:
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alter
the authorized share structure of BRND to remove the BRND Class A Restricted Voting
Shares and BRND Class B Shares; and
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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.
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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:
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one
vote per Subordinate Voting Share;
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one
vote per Restricted Voting Share;
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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;
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equivalent
dividends among the Subordinate, Restricted and Limited Voting Shares on a per share basis;
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equal
rights on liquidation among the Subordinate, Restricted and Limited Voting Shares on a per
share basis;
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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;
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the
Subordinate Voting Shares can only be held of record by non-United States residents; and
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the
Restricted Voting Shares and Limited Voting Shares can only be held of record by United States
residents.
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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.
If the Transaction Resolution is approved, the
Multiple Voting Shares will have the following features:
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50
votes per Multiple Voting Shares;
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no
entitlement to receive any dividends;
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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);
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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;
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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);
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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.
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.
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:
|
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·
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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”.
|
|
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·
|
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”.
|
|
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·
|
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.
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·
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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.
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|
|
·
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Concurrent
private placement. Certain private investors have committed to a $85 million private
investment in public equity to close concurrently with the Transaction.
|
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:
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|
·
|
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.
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·
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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.
|
|
|
·
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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.
|
|
|
·
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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.
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|
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·
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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.
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:
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(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;
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(b)
|
BRND’s
notice of articles and articles will be amended, ultimately resulting in:
|
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(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
|
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(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”;
|
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(c)
|
BRND
will, if it is approved by the registered BRND Shareholders, adopt the Equity Incentive Plan;
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(d)
|
the
merger with GH Group is expected to occur;
|
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(e)
|
Macias,
Gini & O’Connell LLP will be appointed the auditors of the Corporation; and
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(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.
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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|
|
|
|
|
|
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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.
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.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
In addition, the following additional provisions
apply to actions against the BRND directors or the signatories:
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(a)
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each
has a due diligence defence and the other defences and rights contemplated in section 130
of the Securities Act and at law; and
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(b)
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each
is entitled to be indemnified by BRND and GH Group to the maximum extent permitted by law.
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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.
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
APPENDIX “A”
TRANSACTION RESOLUTION
(See attached)
TRANSACTION RESOLUTION
of
MERCER PARK BRAND ACQUISITION CORP.
(the “Corporation”)
RESOLVED AS SPECIAL RESOLUTIONS THAT:
GH Group, SoCal Greenhouse and Element 7
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1.
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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.
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2.
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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.
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3.
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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.
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First Amendment of Notice of Articles and Articles (the “First
Amendment”)
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4.
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The
authorized share structure of the Corporation is authorized to be altered by:
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(a)
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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
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(b)
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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.
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5.
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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.
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6.
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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.
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7.
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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”.
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8.
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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.
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9.
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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.
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Second Amendment of Notice of Articles and Articles (the “Second
Amendment”)
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10.
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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.
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11.
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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.
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12.
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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.
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13.
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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.
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14.
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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.
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15.
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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.
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Private Placement
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16.
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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.
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17.
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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.
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General
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18.
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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.
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SCHEDULE “A”
PARTS 27 AND 29-32 OF ARTICLES
(See attached)
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27
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SPECIAL RIGHTS AND RESTRICTIONS – SUBORDINATE, RESTRICTED
AND LIMITED VOTING SHARES AND MULTIPLE VOTING SHARES
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27.1
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Subordinate
Voting Shares
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(1)
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For
the purposes of this Article 27.1, the following terms will have the meanings specified
below:
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“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).
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(2)
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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:
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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.
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.
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(b)
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Constraints
on Ownership.
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Subject to the Specified Exceptions,
the Subordinate Voting Shares may only be held of record by Non-U.S. Persons.
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.
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(d)
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Liquidation,
Dissolution or Winding-Up.
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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)
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Rights
to Subscribe; Pre-Emptive Rights.
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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)
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Subdivision
or Consolidation.
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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.
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(g)
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Conversion
of Subordinate Voting Shares.
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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.
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(i)
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For
the purposes of this Article 27.1(2)(g)(2):
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“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:
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(i)
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is
a General Offer; and
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(ii)
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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;
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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;
“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);
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(ii)
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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;
|
|
|
(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);
|
|
|
(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;
|
|
|
(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
|
|
|
(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.
|
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:
|
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.
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.
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.
|
|
(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.
|
|
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:
|
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.
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.
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.
|
|
(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.
|
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.
|
|
(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;
|
|
|
(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:
|
|
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(i)
|
is
a General Offer; and
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(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;
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|
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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;
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(F)
|
“Expiry
Date” means the last date on which holders of the Subject Equity Shares may accept
an Exclusionary Offer;
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(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);
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(H)
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“Offer
Date” means the date on which an Exclusionary Offer is made;
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(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;
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(J)
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“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
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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);
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(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:
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(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;
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(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:
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|
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(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:
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|
|
(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;
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(iii)
|
act jointly or in concert with any Person
that makes any Exclusionary Offer; or
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(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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|
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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:
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|
|
(i)
|
the number of Subject Equity Shares owned
by the shareholder;
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(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;
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(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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|
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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;
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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;
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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;
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(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
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|
|
(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;
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|
|
(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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|
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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 an electronic position), with appropriate changes.
|
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:
|
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.
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.
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.
|
|
(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.
|
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.
|
|
(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);
|
|
|
(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
|
|
|
(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
|
|
|
(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);
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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:
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|
|
(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;
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|
|
(iii)
|
act jointly or in concert with any Person
that makes any Exclusionary Offer; or
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|
|
(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:
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|
|
(i)
|
the number of Subject Equity Shares owned by the shareholder;
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|
|
(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;
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|
|
(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;
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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;
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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;
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|
|
(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;
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|
|
(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 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;
“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;
|
|
|
(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
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|
|
(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.
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|
|
(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.
|
|
|
(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.
|
|
|
(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.
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|
|
(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.
|
|
|
(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
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|
|
(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
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|
|
(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.
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|
|
(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
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|
|
(2)
|
any information received from Broadridge
Investor Communications Corporation, or any affiliate, successor or assign thereof;
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(3)
|
any information received from CDS Clearing
and Depositary Services Inc., or any affiliate, successor or assign thereof; and/or
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(4)
|
the knowledge of any director, officer,
employee or agent (including the Transfer Agent) of the Company.
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(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.
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|
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(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.
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(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:
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|
(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;
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(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;
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(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;
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(4)
|
“Class A Restricted Voting Shares”
means the Class A restricted voting shares of the Company;
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(5)
|
“Class B Shares” means the Class B shares
of the Company;
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(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;
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(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;
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(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;
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(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;
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(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;
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|
(12)
|
“IPO
Closing Date” means the closing date of the IPO;
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|
(13)
|
“Limited
Voting Shares” means the limited voting shares in the capital of the Company;
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(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;
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(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);
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|
(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);
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(17)
|
“Restricted
Voting Shares” means the restricted voting shares in the capital of the Company;
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(18)
|
“Sponsor”
means Mercer Park Brand, L.P., a limited partnership formed under the laws of the State of
Delaware;
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(19)
|
“Tax
Act” means Income Tax Act (Canada) and the regulations thereunder; and
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|
(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.
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(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
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(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.
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(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.
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(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.
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(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.
|
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.
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|
(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.
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(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.
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(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.
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|
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(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.
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|
|
(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.
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|
|
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.
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|
|
(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.
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|
|
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.
|
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.
|
|
(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.
|
|
|
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:
The definitions set forth in Section 29.1 shall apply to this
Article 30.
|
|
(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).
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|
|
(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.
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|
|
(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.
|
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.
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.
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.
|
|
(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
|
“Preferred
Shares” means the preferred shares in the capital of the Company.
|
|
(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;
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|
|
(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;
|
|
|
(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.
|
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.
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.
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.
|
|
(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.
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
|
|
|
|
|
|
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
|
|
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
|
|
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
|
|
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
|
|
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
|
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;
|
|
|
(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.
|
|
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.
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.
|
|
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.
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.
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.
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.
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;
|
|
|
(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.
|
|
4.1
|
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.
The Company must not at any time close its central securities register.
|
|
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
|
|
|
(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.
|
|
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.
|
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
|
|
|
(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.
|
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.
|
|
9.1
|
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.
|
|
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.
The Company may by directors’ resolution or ordinary resolution
authorize an alteration to its Notice of Articles in order to change its name.
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.
|
|
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;
|
|
|
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;
|
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
|
|
|
(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.
|
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
|
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.
|
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.
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.
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.
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.
|
|
|
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.
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.
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.
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
|
|
|
(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.
|
|
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.
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”)
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.
|
|
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.
|
|
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.
|
|
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;
|
|
|
(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.
|
|
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.
|
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
|
|
|
(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.
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.
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.
Notwithstanding the foregoing, the board may, in its sole discretion,
waive any or all requirements in this Article 15.
|
|
(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;
|
|
|
(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.
|
|
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.
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.
|
|
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.
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.
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:
|
|
(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.
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.
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.
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.
|
|
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.
|
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.
|
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.
|
|
|
20.1
|
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.
|
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.
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;
|
|
|
(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.
|
|
22.1
|
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.
The directors need not give notice to any shareholder
of any declaration under Article 22.2.
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.
|
|
|
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.
|
|
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.
|
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;
|
|
|
(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.
|
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.
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.
|
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:
|
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.
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.
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.
|
|
(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.
|
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.
|
|
(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;
“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;
|
|
|
(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);
|
|
|
(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
|
|
|
(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
|
|
|
(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.
|
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:
|
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.
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.
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.
|
|
(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:
|
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.
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.
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.
|
|
(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.
|
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.
|
|
(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;
|
|
|
(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;
|
|
|
(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;
|
|
|
(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.
|
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.
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).
(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;
|
|
|
(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
|
|
|
(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
|
|
|
(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
|
|
|
(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;
|
|
|
(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
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(C)
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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;
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(ix)
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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)
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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
(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;
“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;
“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:
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(i)
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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)
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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
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(iii)
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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.
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(2)
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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.
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(3)
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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.
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(4)
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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:
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(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;
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(b)
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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);
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(c)
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the
holding by a recognized clearing agency or recognized depositary in the ordinary course of
its business; or
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(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)
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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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(6)
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Notwithstanding
anything to the contrary contained herein, all transfers of Multiple Voting Shares are subject
to the terms of these Articles.
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(7)
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Following
any Redemption in accordance with the terms of this Article 27.5, the redeemed Equity
Shares will be cancelled.
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(8)
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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.
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(9)
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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.
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(10)
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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.
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(11)
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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)
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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.
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(13)
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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.
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(14)
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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.
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(15)
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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.
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(16)
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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.
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(17)
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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).
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(18)
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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.
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(19)
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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)
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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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(21)
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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.
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(22)
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The
board can waive any provision of this Article 27.5.
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(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.
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(B)
|
Board
Powers, Declarations and Deeming Provisions
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(1)
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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.
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(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.
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(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:
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(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:
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(i)
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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
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(ii)
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the
Equity Shares are held of record by a U.S. Person or a Non-U.S. Person;
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and declaring any further facts or provide any
other documents that the directors consider relevant;
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(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
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(c)
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determine
the circumstances in which any declarations are required, their form and the times when they
are to be furnished.
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(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.
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(5)
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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)
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Administration by the
Board
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(1)
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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.
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(2)
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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:
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(a)
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a
statement made in a declaration referred to in Article 27.5(23)(B); and
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(b)
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any
information received from Broadridge Investor Communications Corporation, or any affiliate,
successor or assign thereof;
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(c)
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any
information received from CDS Clearing and Depositary Services Inc., or any affiliate, successor
or assign thereof; and/or
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(d)
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the
knowledge of any director, officer, employee or agent (including the Transfer Agent) of the
Company.
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(3)
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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.
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(4)
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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.
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(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.
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28.
|
SPECIAL
RIGHTS AND RESTRICTIONS OF PREFERRED SHARES
|
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:
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(a)
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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;
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(b)
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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:
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(i)
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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;
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(ii)
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any
right of redemption and/or purchase and the redemption or purchase prices and terms and conditions
of any such right;
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(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)
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any
rights upon dissolution, liquidation or winding-up of the Company;
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(v)
|
any
voting rights; and
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(vi)
|
any
other provisions attaching to any such series of Preferred Shares.
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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.
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:
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(a)
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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;
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(b)
|
effect
an exchange, reclassification or cancellation of the shares of such class or series; or
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(c)
|
create
a new class or series of shares equal or superior to the shares of such class or series.
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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.
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.
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)
EQUITY INCENTIVE PLAN RESOLUTION
of
MERCER PARK BRAND ACQUISITION CORP.
(the “Corporation”)
RESOLVED AS AN ORDINARY RESOLUTION THAT:
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1.
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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
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2.
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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.
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APPENDIX “C”
PROPOSED EQUITY INCENTIVE PLAN
(see attached)
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.
(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.
(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.
(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.
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(i)
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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.
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(ii)
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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.
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(iii)
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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)
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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.
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(v)
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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.
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(vi)
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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.
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(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.
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(i)
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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)
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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.
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(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,
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(i)
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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
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(ii)
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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:
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(i)
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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.
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(ii)
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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.
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(iii)
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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.
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(A)
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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.
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(B)
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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)
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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.
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(v)
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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:
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(A)
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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).
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(B)
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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.
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(C)
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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.
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(D)
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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)
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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.
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(F)
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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.
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(G)
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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.
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(H)
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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).
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(I)
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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.
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(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:
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(i)
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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).
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(ii)
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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)
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Acceleration
of Vesting. The Committee may, in its discretion, accelerate the vesting, all or in part,
of the Restricted Stock Units.
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(iv)
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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.
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(v)
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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).
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(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
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(i)
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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.
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(ii)
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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)
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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.
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(iv)
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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.
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(v)
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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)
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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.
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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:
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(i)
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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;
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(ii)
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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;
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(iii)
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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
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(iv)
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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:
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(i)
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increase
the shares authorized under this Plan as specified in Section 4 and Section 6(a)(v)(B) of
this Plan;
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(ii)
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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;
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(iii)
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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;
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(iv)
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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);
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(v)
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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;
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(vi)
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permit
Options to be transferable other than as provided in Section 6(e)(ii);
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(vii)
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amend
this Section 7(a); or
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(viii)
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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.
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(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:
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(i)
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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)
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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;
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(iii)
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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
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(iv)
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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.
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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.
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.
(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.
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.
APPENDIX “D”
INFORMATION STATEMENT
(see attached)
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.
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.
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
|
|
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
|
|
|
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
|
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;
“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”;
“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”;
“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”;
“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”;
“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
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;
“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”;
“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”;
“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”;
“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”;
“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”;
“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”;
“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”;
“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.
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.
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.
|
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”.
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.
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.
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.
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
|
|
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
|
)
|
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
|
|
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;
|
|
|
•
|
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;
|
|
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•
|
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;
|
|
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•
|
that
there will be no material changes in the U.S. legal and regulatory environment relating to
cannabis;
|
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•
|
taxes
payable;
|
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•
|
customer
growth, pricing, usage and churn rates; technology deployment;
|
|
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•
|
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.
|
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;
|
|
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•
|
legal,
regulatory or other political change;
|
|
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•
|
the
unpredictable nature of the cannabis industry;
|
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•
|
regulatory
scrutiny;
|
|
|
•
|
the
impact of regulatory scrutiny on the ability to raise capital;
|
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|
•
|
anti-money
laundering laws and regulations;
|
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|
•
|
any
reclassification of cannabis or changes in U.S. controlled substances and regulations;
|
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•
|
restrictions
on the availability of favourable locations;
|
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•
|
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;
|
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•
|
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;
|
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•
|
risk
of civil asset forfeiture;
|
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|
•
|
lack
of access to U.S. bankruptcy protection;
|
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•
|
BRND
Shareholders will only have limited and indirect recourse against the vendors of the Target
Business;
|
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|
•
|
enforceability
of contracts;
|
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|
•
|
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;
|
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|
•
|
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;
|
|
|
•
|
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;
|
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|
•
|
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.
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.
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”.
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.
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;
|
|
|
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.
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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”);
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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
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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.
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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.
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:
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no governmental authority making the transactions
contemplated in the Definitive GH Group Agreement illegal (other than existing federal cannabis
laws);
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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);
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receipt of all required consents and approvals;
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BRND will have received shareholder approval from the shareholders
of BRND;
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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;
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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;
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a final receipt for this prospectus will have been issued by or on
behalf of the OSC (as defined below);
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the strategic opportunities agreement between BRND and one of its
affiliates shall have been terminated;
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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
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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:
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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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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;
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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;
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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;
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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;
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GH Group Shareholders holding no more than
10% of the outstanding Company Stock shall have exercised their appraisal rights under Delaware
law;
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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
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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.
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• For
the benefit of Sellers and GH Group:
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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;
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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;
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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;
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no Material Adverse Effect on Buyer or
BRND will have occurred and be continuing;
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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;
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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;
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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;
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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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GH Group will have received a certified pro forma capitalization statement
and pro forma balance sheet of BRND as of the Closing;
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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
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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.
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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:
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by mutual written consent
of Buyer and the Seller’s Representative;
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by either Buyer or Sellers’
Representative if:
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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;
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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
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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
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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.
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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”.
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”.
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.
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.
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:
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(1)
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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.
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(2)
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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)
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See
“Corporate Structure – GH Group Financing”.
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(4)
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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%.
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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”).
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.
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.
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.
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.
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:
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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
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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.
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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).
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:
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(a)
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amend
the articles of MPB AcquisitionCo; or
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(b)
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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:
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(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;
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(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
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(c)
|
issues
or distributes to the holders of the-then outstanding Equity Shares:
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(i)
|
shares
or securities of the Resulting Issuer of any class other than Subordinate Voting Shares,
Restricted Voting Shares or Limited Voting Shares;
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(ii)
|
rights,
options or warrants other than those referred to in clause (b); or
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(iii)
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evidences
of indebtedness of the Resulting Issuer;
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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:
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(a)
|
subdivides,
redivides or changes the then outstanding Equity Shares into a greater number of Equity Shares;
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|
|
(b)
|
reduces,
combines, consolidates or changes the then outstanding Equity Shares into a lesser number
of Equity Shares; or
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|
|
(c)
|
reclassifies
or otherwise changes the Equity Shares or effects an amalgamation, merger, reorganization
or other similar transaction affecting the Equity Shares;
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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.
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:
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(a)
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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
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(b)
|
as soon
as practicable following the earlier of:
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|
(i)
|
receipt
by the Resulting Issuer of notice of; and
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(ii)
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BRND’s
otherwise becoming aware of,
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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.
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.
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.
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Specific
Disclosure Necessary to Fairly
|
|
|
|
Industry
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|
Present all Material
Facts, Risks and
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|
Prospectus Cross-Reference
|
|
Involvement
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|
Uncertainties
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|
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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.
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- Mercer
Park Brand Acquisition Corp.
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|
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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
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|
|
|
|
|
|
|
|
|
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
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|
|
|
|
|
|
|
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|
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
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Quantify
the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities.
|
|
-
Mercer Park Brand Acquisition Corp.
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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.
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|
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.
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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
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|
|
|
|
|
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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
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|
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|
|
|
|
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
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|
Uncertainties
|
|
|
|
|
|
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|
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
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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
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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.
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.
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:
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Preventing
the distribution of marijuana to minors;
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Preventing
revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
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Preventing
the diversion of marijuana from States where it is legal under State law in some form to
other States;
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Preventing
State-authorized marijuana activity from being used as a cover or pretext for the trafficking
of other illegal drugs or other illegal activity;
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Preventing
violence and the use of firearms in the cultivation and distribution of marijuana;
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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
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Preventing marijuana possession
or use on federal property.
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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.
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.”
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.
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.
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.
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:
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Maintain a fully operational security
alarm system;
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Contract for security guard services;
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Maintain a video surveillance system
that records continuously 24 hours a day;
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Ensure adequate lighting is installed
and maintained on and about licensed facilities;
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Only transact business during authorized
hours of operations;
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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;
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Store all cannabis and cannabis products
in a secured, locked room or a vault;
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Report to local law enforcement within
24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis;
and
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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.
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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.
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:
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integrated
pest management (“IPM”);
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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.
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:
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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.
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Personnel
records: GH Group’s human resources department keeps all employee files stored in office.
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Disposal
records: the cultivation management maintains a binder with all waste manifests/invoices/destruction
certificates.
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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.
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:
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|
·
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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.
|
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|
·
|
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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·
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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:
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·
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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.
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·
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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.
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·
|
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.
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|
·
|
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.
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·
|
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.
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·
|
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.
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·
|
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:
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|
·
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no one under age 21
may enter a limited-access area;
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·
|
only
authorized individuals are permitted entry to a limited-access area, which may include:
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|
|
o
|
anyone doing business that requires access to the limited-access area;
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·
|
authorized individuals
who are not employees must:
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|
o
|
be accompanied by an employee at all time;
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|
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
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·
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only
employees and contractors are permitted on site outside of retail store hours.
|
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.
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:
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staying open slightly
too late due to an excess of customers at stated closing time;
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minor inventory discrepancies
with regulatory reporting software;
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missing fields in
regulatory reports;
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cleaning schedules
not available on display;
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educational materials
and/or interpreter services not available in an sufficient number of languages;
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updated staffing plan
not immediately available on site;
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improper illumination
of external signage;
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marijuana infused
product utensils improperly stored;
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·
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labels out of compliance
with most recent regulatory guidelines;
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·
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partial obstruction
of camera views; and
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·
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onsite surveillance
room used for any other function (i.e., storage).
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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.
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.
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.
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.
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License
Holder
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Address
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Permit/License
No.
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Expiration/Renewal
Date (MM/DD/YY)
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License
Type
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G&K Produce, LLC
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3480 Via Real Carpinteria, CA 93013
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CCL18-0001702
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11/22/21
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Adult-Use-Nursery
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G&K Produce, LLC
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3480 Via Real Carpinteria, CA 93013
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CCL18-0001703
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11/22/21
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Adult-Use-Processor
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G&K Produce, LLC
|
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3480 Via Real Carpinteria, CA 93013
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CCL18-0001652
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02/20/22
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Adult-Use-Small Mixed-Light Tier 1
|
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G&K Produce, LLC
|
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3480 Via Real Carpinteria, CA 93013
|
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CCL18-0001633
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02/20/22
|
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Adult-Use-Small Mixed-Light Tier 1
|
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G&K Produce, LLC
|
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3480 Via Real Carpinteria, CA 93013
|
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CCL18-0001624
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02/20/22
|
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Adult-Use-Small Mixed-Light Tier 1
|
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G&K Produce, LLC
|
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3480 Via Real Carpinteria, CA 93013
|
|
CCL18-0001622
|
|
02/20/22
|
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Adult-Use-Small Mixed-Light Tier 1
|
|
G&K Produce, LLC
|
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3480 Via Real Carpinteria, CA 93013
|
|
CCL18-0001599
|
|
02/20/22
|
|
Adult-Use-Small Mixed-Light Tier 1
|
|
G&K Produce, LLC
|
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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
|
|
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
|
|
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
|
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
|
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.
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/.
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/.
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/.
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.
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.
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.
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
|
|
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•
|
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.
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:
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•
|
that
such Element 7 licensed entity possesses the required local authorization to conduct retail
cannabis operations;
|
|
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•
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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;
|
|
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•
|
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;
|
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•
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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
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•
|
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:
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•
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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.
|
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;
|
|
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•
|
Element
7 will have duly performed and complied in all material respects with all agreements, covenants
and conditions;
|
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•
|
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;
|
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•
|
no
termination or default under the Element 7 Consulting Agreement (described below); and
|
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•
|
delivery
of market rate leases related to the Element 7 properties in the Element 7 Merger Agreement.
|
For the benefit of Element 7:
|
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•
|
the
representations and warranties of GH Group will be true and correct in all respects as of
the date of closing;
|
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•
|
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;
|
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•
|
GH
Group will have delivered each of the closing deliverables;
|
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•
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the
closing of the transactions contemplated in the Definitive GH Group Agreement on or before
July 30, 2021;
|
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•
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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;
|
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•
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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
|
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•
|
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.
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:
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•
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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);
|
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•
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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
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•
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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.
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:
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•
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estimated
total annual revenue of $124.1 million in 2021, $326.4 million in 2022, and $600.9 million
in 2023;
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o
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the
revenue growth implied by these targets is 163% from 2021 to 2022 and 84% from 2022 to 2023;
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o
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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;
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estimated
gross profit of $61.6 million in 2021, $162.6 million in 2022, and $310.6 million in 2023;
and
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estimated
Adjusted EBITDA13 of $24.5 million in 2021, $103.8 million in 2022, and $240.0
million in 2023.
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In developing the targets above, GH Group has
made the following assumptions and relied on the following factors and considerations:
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•
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these
targets are based on the expertise of management and their historical results;
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•
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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:
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o
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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;
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o
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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
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o
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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;
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▪
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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;
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12
See “Non-U.S. GAAP Measures”.
13
See “Non-U.S. GAAP Measures”.
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•
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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:
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o
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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;
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o
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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
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o
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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;
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•
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these
targets assume growth of the GH Group base business as follows:
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o
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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;
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o
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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;
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o
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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;
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o
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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
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o
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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
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o
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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.
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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,
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approximately
$20-25 million of which is expected to be allocated to the buildout of GH Group’s existing
infrastructure,
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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
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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;
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•
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approximately
$120 million to the purchase price for SoCal Greenhouse;
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•
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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
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•
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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):
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approximately
20% to continued development of the Resulting Issuer’s brands;
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approximately
10% to operating capital and general corporate purposes; and
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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.
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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.
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.
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Twelve Months Ended December 31,
2020
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Pro-Forma
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BRND
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GH Group
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iCann
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Element
7
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Combined
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Adjustments
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Total
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Net
Income (Loss) Before Non-Controlling Interest
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$
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947,346
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$
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(16,659,479
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)
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$
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(1,726,818
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)
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$
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(274,397
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)
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$
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(17,713,348
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)
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$
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(6,000,000
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)
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$
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(23,713,348
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)
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Depreciation and amortization
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-
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2,576,263
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108,672
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-
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2,684,935
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-
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2,684,935
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Interest Expense
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-
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2,179,137
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327,104
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-
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2,506,241
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-
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2,506,241
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Interest Income
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(1,742,747
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)
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(115,572
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)
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-
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-
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(1,858,319
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)
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-
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(1,858,319
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)
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Income Tax Expense
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-
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6,418,533
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207,868
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-
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6,626,401
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-
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6,626,401
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EBITDA (non-GAAP)
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$
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(795,401
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)
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$
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(5,601,117
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)
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$
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(1,083,174
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)
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$
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(274,397
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)
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$
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(7,754,089
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)
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$
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(6,000,000
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)
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$
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(13,754,089
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)
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Adjusting Items:
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Share of (income)
loss on equity investments
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-
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2,126,112
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-
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-
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2,126,112
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-
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2,126,112
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Loss on change
in fair value of derivative liablities
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-
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251,663
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-
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-
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251,663
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-
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251,663
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Non-cash operating
lease costs
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-
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865,438
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-
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865,438
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-
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865,438
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Share-based compensation
expense
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-
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2,547,792
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-
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2,547,792
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-
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2,547,792
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Acquisition costs
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-
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479,501
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274,397
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753,898
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6,000,000
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6,753,898
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SPAC related costs
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752,259
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-
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-
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752,259
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-
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752,259
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Foreign exchange
loss (gain)
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43,142
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-
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-
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43,142
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-
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43,142
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Other expense
(income)
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-
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(203,345
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)
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32,566
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-
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(170,779
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)
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-
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(170,779
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)
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Other
non-operating expenses1
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-
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1,051,377
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-
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1,051,377
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-
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1,051,377
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Adjusted
EBITDA (non-GAAP)
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$
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-
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$
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1,517,421
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$
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(1,050,608
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)
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$
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-
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$
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466,813
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$
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6,000,000
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$
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466,813
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Notes:
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(1)
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Other adjustments made to exclude the impact of one time inventory
write-offs including outdated packaging and discontinued product lines.
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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.
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.
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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
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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
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Cash and cash equivalents
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381,177,330
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177,408,802
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Debt
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989,554
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|
989,554
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Shareholders’ equity(1)
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713,882,057
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512,632,057
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Total Capitalization
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714,871,611
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513,621,611
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Debt, net of cash
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(380,187,776
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)
|
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(176,419,248
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)
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Notes:
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(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”.
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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.
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”.
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
|
|
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
|
)
|
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”.
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).
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.
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”.
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.
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
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.
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.
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.
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.
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.
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.
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 ($)
|
|
|
Volume
|
|
|
April 2020
|
|
|
9.75
|
|
|
|
9.50
|
|
|
|
735,222
|
|
|
May 2020
|
|
|
9.80
|
|
|
|
9.60
|
|
|
|
632,950
|
|
|
June 2020
|
|
|
9.95
|
|
|
|
9.66
|
|
|
|
2,069,640
|
|
|
July 2020
|
|
|
9.93
|
|
|
|
9.71
|
|
|
|
210,274
|
|
|
August 2020
|
|
|
9.95
|
|
|
|
9.83
|
|
|
|
487,983
|
|
|
September 2020
|
|
|
9.95
|
|
|
|
9.80
|
|
|
|
5,539,402
|
|
|
October 2020
|
|
|
9.95
|
|
|
|
9.82
|
|
|
|
676,469
|
|
|
Period
|
|
High ($)
|
|
|
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”.
|
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
|
|
|
|
|
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.
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.
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.
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.
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;
|
|
|
•
|
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.
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.
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.
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.
|
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.
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.
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.
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;
|
|
|
(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;
|
|
|
(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.
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;
|
|
|
•
|
City of Walnut Creek;
|
|
|
•
|
City of Willows;
|
|
|
•
|
City of Napa;
|
|
|
•
|
City of Lompoc;
|
|
|
•
|
City of Chula Vista;
|
|
|
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City and County of San Francisco;
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City of Salinas;
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City of Moreno Valley;
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City of San Luis Obispo; and
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City of Hesperia.
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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.
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.
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.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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.
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.
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.
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:
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frequently sanitizing high-touch surfaces;
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deep cleaning and sanitizing workstations;
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sanitizing or washing hands after
each transaction;
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ensuring hand sanitizer is easily
accessible;
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suspending all use of paper menus,
demo products, and demo samples;
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positioning staff at every other register
when possible;
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taking the temperature of store employees
before they begin their shift;
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requiring all dispensary staff to
wear face masks;
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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
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placed markers on the floor to dictate
6 feet + of space between patients/customers.
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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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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(i)
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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
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(ii)
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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.
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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”).
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.
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.
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:
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(i)
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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;
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(ii)
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U.S.
Holders should recognize no gain or loss as a result of the Conversion;
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(iii)
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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
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(iv)
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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.
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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.
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:
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(i)
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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)
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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;
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(iii)
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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;
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(iv)
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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
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(v)
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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.
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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:
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(vi)
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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;
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|
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(vii)
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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
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(viii)
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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.
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.
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.
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:
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(i)
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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;
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(ii)
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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
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(iii)
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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.
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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.
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:
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(i)
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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
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(ii)
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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.
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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.
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.
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:
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the Investor Rights Agreement;
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the Registration Rights Agreement;
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the Exchange Rights Agreement; and
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the SoCal Greenhouse Agreements.
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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:
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the lease dated as of June 4,
2017 by and between 3243 Sacramento LLC, as lessor, and Farmacy Berkeley, as lessee; and
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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.
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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):
|
|
(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”);
|
|
|
●
|
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”).
|
APPENDIX A –
BRND AUDITED ANNUAL FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER
31, 2020 AND 2019)
(See attached)
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
|
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
|
|
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.
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)
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.
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.
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.
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).
(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.
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
|
|
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.
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.
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.
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
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
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.
APPENDIX
B – MANAGEMENT’S DISCUSSION & ANALYSIS OF BRND
(See
attached)
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.
|
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
|
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.
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
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.
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 $381,137 from the Incorporation Date to December 31, 2019.
Off-Balance Sheet
Arrangements
As of the date of
this filing, the Corporation does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current
or future effect on the results of operations or financial condition of the Corporation including, without limitation, such considerations
as liquidity and capital resources that have not previously been discussed.
Proposed Transactions
Although
the Corporation has commenced the process of identifying potential acquisitions with a view to completing a Qualifying Transaction, the
Corporation has not yet entered into a definitive agreement. See “Subsequent Event”, below.
Selected Quarterly
Information
A summary of selected
information for each of the quarters presented below is as follows:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
Income
|
|
|
Net (Loss) Income
|
|
|
Loss
per Class B Share
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
(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
|
)
|
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.
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)
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.
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.
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.
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.
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.
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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.
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
|
%
|
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.
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
|
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.
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”.
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.
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.
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.
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.
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.
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
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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.
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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.
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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
|
|
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.
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.
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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
|
|
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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
|
|
GH GROUP, INC.
Notes to Consolidated and Combined Financial
Statements
For The Years Ended December 31,
2020, 2019 and 2018
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
|
|
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.
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.
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.
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.
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.
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
|
|
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.
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.
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.
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
|
|
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.
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”).
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.
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.
|
|
|
(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.
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)
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.
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.
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.
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.
BUD AND BLOOM
Notes to Combined Financial Statements
For The Period Ended August 31, 2019
and For The Year Ended December 31, 2018
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.
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.
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.
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.
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
|
|
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.
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
|
|
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.
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
|
|
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.
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.
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.
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)
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.
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.
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.
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.
iCANN, LLC
Notes to Financial Statements
For The Years Ended December 31, 2020,
2019 and 2018
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
APPENDIX
I – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FARMACY BERKELEY
(See
attached)
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)
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
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
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
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
E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO
Notes to Combined Financial Statements
For The Years Ended December 31,
2020 and 2019
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.
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%
|
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.
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.
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
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.
E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO
Notes to Combined Financial Statements
For The Years Ended December 31,
2020 and 2019
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.
E7 CARVE-OUT IN-PROCESS LICENSE PORTFOLIO
Notes to Combined Financial Statements
For The Years Ended December 31,
2020 and 2019
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.
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.
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.
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.
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%
|
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.
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.
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”).
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.
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.
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.
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 $25,000,000 for development
of retail licenses, and the delivery by E7 of certain leases.
APPENDIX
L – BRND UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(See
attached)
MERCER
PARK BRAND ACQUISITION CORP.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS
AT AND FOR THE YEAR ENDED DECEMBER 31, 2020
(EXPRESSED
IN UNITED STATES DOLLARS)
Mercer Park Brand
Acquisition Corp.
Pro Forma Consolidated
Financial Statements
|
Pro Forma
Consolidated Financial Position
|
1
|
|
Pro Forma Consolidated
Statement of Operations
|
2
|
|
|
|
|
Notes to the Pro Forma Consolidated Financial Statements
|
3-12
|
Mercer Park Brand Acquisition Corp.
Unaudited Pro Forma Consolidated Statement
of Financial Position
As at December 31, 2020
|
|
|
Mercer Park
BRAND
|
|
|
GH Group
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
Pro-Forma
|
|
|
Consolidated
|
|
|
|
|
December 31,
2020
|
|
|
December 31,
2020
|
|
|
iCann
|
|
|
Element 7
|
|
|
December 31,
2020
|
|
|
|
|
Adjustments
|
|
|
December 31,
2020
|
|
|
US$
|
|
$
|
|
|
$
|
|
|
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
|
|
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
|
)
|
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 $185 million in cash at the closing of the Transaction:
(i) before any cash consideration, as applicable, is payable for any additional acquisitions; (ii) after any payments due and
payable for BRND’s expenses related to the closing of the Transaction, including all costs, fees, expenses and payments
contingent on the closing of the Transaction; and (iii) after reduction for the aggregate amount of payments required to be made
in connection with the BRND stockholder redemptions; (iv) plus the aggregate PIPE proceeds and other replacement cash proceeds;
and (v)after taking into account any debt or payables on BRND’s balance sheet as of the closing of the Transaction (collectively,
the “Closing Cash”).
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
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 $8 million, respectively.
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
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 $10 per share (the “Private Placement”). The closing of the Private Placement will occur
contemporaneously with the closing of the Transaction and in connection therewith, the Private Placement Shares will be exchanged for
Equity Shares. The funds from the Private Placement will be used to fund the Resulting Issuer’s growth strategy, for working capital
and for general corporate purposes. The Private Placement is subject to customary conditions, including the closing of the Transaction.
The unaudited pro forma
consolidated statement of financial position as at December 31, 2020 has been prepared by BRND to give effect to the GH Group Proposed
Acquisitions and the iCANN Acquisition, as if they had occurred on December 31, 2020. The unaudited pro forma consolidated statement
of operations for the year ended December 31, 2020 have been prepared by BRND to give effect to the acquisitions, as if they had
occurred on December 31, 2019.
The Pro Forma Financial
Statements were prepared using the acquisition method of accounting in accordance with US GAAP ASC 805, Business Combinations,
with GH Group being the legal acquiree and accounting acquirer. As such, GH Group is treated as the continuing reporting entity. The
acquirer in a business combination is the combining entity that obtains control of the other combining business or businesses. The Pro
Forma Financial Statements do not purport to project the future operating results of the combined company.
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
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.
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.
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
|
|
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 $45,309 into equity interests of iCANN;
|
|
|
c)
|
GH
Group issued 7,554,679 Class A Common shares to holders of iCANN equity interests; and
GH Group issued an additional 500,000 Class A Common shares to brokers and consultants.
The shares represented 3.3% of the total outstanding shares of GH Group at the time of acquisition,
which were valued at the deemed valuation from the Transaction, for purposes of this estimated purchase price calculation.
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
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
|
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
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 $24 million for Element 7 by issuance of up to 2.4 million of subordinate
voting shares
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
|
|
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 $16.1 million underwriters’ commission on the Class A voting restricted
shares;
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
|
|
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 $10 per
Share
|
|
|
32,020,997
|
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated
Financial Statements
As at December 31, 2020 (expressed in
US$)
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
|
)
|
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 99.70
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.
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.
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”.
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”.
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.
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
|
|
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
|
|
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
|
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”;
“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;
“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”;
“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”;
“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”;
“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;
“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”;
“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”;
“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”;
“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”;
“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”;
“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”;
“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”;
“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.
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.
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.
|
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”.
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.
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.
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.
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
|
|
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
|
)
|
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
|
|
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;
|
|
|
●
|
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;
|
|
|
●
|
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.
|
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;
|
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legal, regulatory or other political change;
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the unpredictable nature of the cannabis industry;
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the impact of regulatory scrutiny on the ability to raise capital;
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anti-money laundering laws and regulations;
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any reclassification of cannabis or changes in U.S. controlled substances and regulations;
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restrictions on the availability of favourable locations;
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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;
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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;
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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;
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risk of civil asset forfeiture;
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lack of access to U.S. bankruptcy protection;
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BRND Shareholders will only have limited and indirect recourse against the vendors of the Target Business;
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enforceability of contracts;
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changes in Canadian regulation;
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general regulatory and licensing risks;
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California regulatory regime and transfer and grant of licenses;
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limitations on ownership of licenses;
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regulatory action from the Food and Drug Administration;
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conditions precedent or approvals required for the Transaction not being obtained;
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the potential benefits of the Transaction not being realized;
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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;
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future factors that may arise making it inadvisable to proceed with, or advisable to delay, all or part
of the Transaction;
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the costs related to the Transaction that must be paid even if the Transaction is not completed;
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no assurance that the Private Placement will be completed;
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risks inherent in the current state of scientific research related to the benefits of cannabis;
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ability to attract and retain customers;
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unfavourable publicity or consumer perception;
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results of future clinical research;
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future research may lead to findings that vaporizers and related products are not safe for their intended
use;
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controversy surrounding vaporizers and vaporizer products;
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limited market data and difficulty to forecast;
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constraints on marketing products;
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effects of the COVID-19 pandemic;
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execution of the Resulting Issuer’s business strategy;
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effective use of BRND’s non-redeemed escrowed funds and the net proceeds from the Private Placement;
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limited operating history of BRND and GH Group;
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reliance on management;
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conflicts of interests;
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the SoCal Greenhouse and/or Element 7 Merger may not be completed or, if completed, may not be successful;
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ability to establish and maintain effective internal control over financial reporting;
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competition from synthetic production and technological advances;
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fraudulent or illegal activity by employees, contractors and consultants;
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developments in the cannabis industry;
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reputational risks for BRND, the Resulting Issuer and third parties;
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advertising and promotional risk;
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risks related to product development and identifying markets for sale;
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dependence on suppliers, manufacturers, and contractors;
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reliance on equipment and skilled labour;
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intellectual property risks;
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information technology systems, cyber-attacks, security, and privacy breaches;
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bonding and insurance coverage;
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risks inherent in an agricultural business;
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future acquisitions or dispositions;
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difficulty attracting and retaining personnel;
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costs of being a public company;
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difficulty in enforcing judgments and effecting service of process on directors and officers;
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past performance not being indicative of future results;
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financial projections may prove materially inaccurate or incorrect;
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market price volatility risks;
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restrictions on and limited markets for securities of the Resulting Issuer;
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sales by existing shareholders;
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subsequent offers will result in dilution to holders of the Equity Shares;
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the Cashless Exercise (as defined below) feature of the BRND Warrants;
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global financial conditions;
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environmental regulation;
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unknown environmental risks;
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the dual United States and Canadian tax residence and tax classification of the Resulting Issuer;
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the deduction of certain expenses of the Resulting Issuer may be restricted;
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dividends paid by the Resulting Issuer may be subject to withholding tax; and
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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.
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”.
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.
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:
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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;
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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”);
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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”);
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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:
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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;
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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”):
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§
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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
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§
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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.
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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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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);
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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;
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notwithstanding the provisions above:
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§
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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
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§
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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.
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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”);
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o
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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
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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.
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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.
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:
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For the benefit of both parties:
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no governmental authority making the transactions contemplated in the Definitive GH Group Agreement illegal
(other than existing federal cannabis laws);
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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);
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receipt of all required consents and approvals;
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BRND will have received shareholder approval from the shareholders
of BRND;
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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;
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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;
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a final receipt for this prospectus will have been issued by or on behalf of the OSC (as defined below);
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the strategic opportunities agreement between BRND and one of its affiliates shall have been terminated;
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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
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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:
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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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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;
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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;
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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;
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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;
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GH Group Shareholders holding no more than 10% of the outstanding Company Stock shall have exercised their
appraisal rights under Delaware law;
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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
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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.
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For the benefit of Sellers and GH Group:
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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;
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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;
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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;
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no Material Adverse Effect on Buyer or BRND will have occurred
and be continuing;
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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;
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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;
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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;
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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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GH Group will have received a certified pro forma capitalization statement and pro forma balance sheet
of BRND as of the Closing;
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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
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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.
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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:
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by mutual written consent of Buyer and the Seller’s Representative;
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by either Buyer or Sellers’ Representative if:
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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;
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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
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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
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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.
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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”.
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”.
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.
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.
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:
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(1)
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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.
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(2)
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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)
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See “Corporate Structure – GH Group Financing”.
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(4)
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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%.
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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”).
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.
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.
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.
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.
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:
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•
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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
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•
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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.
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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).
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:
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(a)
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amend the articles of MPB AcquisitionCo; or
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(b)
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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:
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(a)
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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;
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(b)
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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
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(c)
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issues or distributes to the holders of the-then outstanding Equity Shares:
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(i)
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shares or securities of the Resulting Issuer of any class other than Subordinate Voting Shares, Restricted
Voting Shares or Limited Voting Shares;
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(ii)
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rights, options or warrants other than those referred to in clause (b); or
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(iii)
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evidences of indebtedness of the Resulting Issuer;
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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:
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(a)
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subdivides, redivides or changes the then outstanding Equity Shares into a greater number of Equity Shares;
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(b)
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reduces, combines, consolidates or changes the then outstanding Equity Shares into a lesser number of
Equity Shares; or
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(c)
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reclassifies or otherwise changes the Equity Shares or effects an amalgamation, merger, reorganization
or other similar transaction affecting the Equity Shares;
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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.
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:
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(a)
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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
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(b)
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as soon as practicable following the earlier of:
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(i)
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receipt by the Resulting Issuer of notice of; and
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(ii)
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BRND’s otherwise becoming aware of,
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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.
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.
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.
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Specific Disclosure Necessary to Fairly
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Industry
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Present all Material Facts, Risks and
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Involvement
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Uncertainties
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Prospectus Cross-Reference
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All Issuers with U.S. Marijuana-Related Activities
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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.
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- Mercer Park Brand Acquisition Corp.
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Prominently State that marijuana is illegal under U.S. federal law
and that enforcement of relevant laws is a significant risk.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Regulatory Framework – U.S. Federal Enforcement Priorities
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- Risk Factors – The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined
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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.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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-Legal and Regulatory Framework – California State Level Overview
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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.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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-Legal and Regulatory Framework – California State Level Overview
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- Risk Factors – Service providers could suspend or withdraw service
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- 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
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Industry
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Present all Material Facts, Risks and
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Involvement
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Uncertainties
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Prospectus Cross-Reference
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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.
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- Cannabis Market Overview - Ability to Access Public and Private Capital
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- Risk Factors – The Resulting Issuer may be subject to restricted access to banking in the United States and Canada
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- Risk Factors – The Resulting Issuer’s investments in the U.S. are subject to applicable anti-money laundering laws and regulations
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Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities.
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- Mercer Park Brand Acquisition Corp.
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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.
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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.
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U.S. Marijuana Issuers with direct involvement in cultivation or
distribution
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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.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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-
Legal and Regulatory Framework – California State Level Overview
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- Legal and Regulatory Framework – Compliance with State Regulatory Framework
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-
Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws
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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.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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-
Legal and Regulatory Framework – California State Level Overview
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- Legal and Regulatory Framework – Compliance with State Regulatory Framework
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-
Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws
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U.S. Marijuana Issuers with indirect involvement in cultivation or distribution
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Outline the regulations for U.S. states in which the issuer's
investee(s) operate.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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Legal and Regulatory Framework –
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Specific Disclosure Necessary to Fairly
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Industry
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Present all Material Facts, Risks and
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Involvement
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Uncertainties
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Prospectus Cross-Reference
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California State Level Overview
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- Legal and Regulatory Framework –Compliance with State Regulatory Framework
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-Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws
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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.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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-Legal and Regulatory Framework – California State Level Overview
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- Legal and Regulatory Framework –Compliance with State Regulatory Framework
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-Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws
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-Risk Factors - California Regulatory Regime and Transfer and Grant of Licenses
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U.S. Marijuana Issuers with material ancillary involvement
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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.
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- Cover Page (bold typeface)
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- Legal and Regulatory Framework – United States Federal Overview
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- Legal and Regulatory Framework – U.S. Federal Enforcement Priorities
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-Legal and Regulatory Framework –California State Level Overview
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- Legal and Regulatory Framework –Compliance with State Regulatory Framework
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-Legal and Regulatory Framework – Non-Compliance with State and Local Cannabis Laws
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-Risk Factors - California Regulatory Regime and Transfer and Grant of Licenses
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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.
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.
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:
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Preventing the distribution of marijuana to minors;
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Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;
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Preventing the diversion of marijuana from States where it is legal under State law in some form to other
States;
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Preventing State-authorized marijuana activity from being used as a cover or pretext for the trafficking
of other illegal drugs or other illegal activity;
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•
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Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
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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
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•
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Preventing marijuana possession or use on federal property.
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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.
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.”
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.
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.
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.
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:
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Maintain a fully operational security alarm system;
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Contract for security guard services;
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Maintain a video surveillance system that records continuously 24 hours a day;
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Ensure adequate lighting is installed and maintained on and about licensed facilities;
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Only transact business during authorized hours of operations;
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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;
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Store all cannabis and cannabis products in a secured, locked room or a vault;
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Report to local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion,
or loss of cannabis; and
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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.
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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.
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:
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integrated pest management (“IPM”);
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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.
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:
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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.
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Personnel records: GH Group’s human resources department keeps all employee files stored in office.
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Disposal records: the cultivation management maintains a binder with all waste manifests/invoices/destruction
certificates.
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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.
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:
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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.
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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.
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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.
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•
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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:
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•
|
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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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•
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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:
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•
|
no one under age 21 may enter a limited-access area;
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•
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only authorized individuals are permitted entry to a limited-access area, which may include:
|
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|
o
|
anyone doing business that requires access to the limited-access area;
|
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•
|
authorized individuals who are not employees must:
|
|
|
o
|
be accompanied by an employee at all time;
|
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|
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.
|
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.
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:
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•
|
staying open slightly too late due to an excess of customers at stated closing time;
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•
|
minor inventory discrepancies with regulatory reporting software;
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•
|
missing fields in regulatory reports;
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•
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cleaning schedules not available on display;
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•
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educational materials and/or interpreter services not available in an sufficient number of languages;
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•
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updated staffing plan not immediately available on site;
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•
|
improper illumination of external signage;
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•
|
marijuana infused product utensils improperly stored;
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•
|
labels out of compliance with most recent regulatory guidelines;
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•
|
partial obstruction of camera views; and
|
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|
•
|
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.
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.
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.
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.
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Expiration/Renewal
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License
Holder
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Address
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Permit/License
No.
|
Date
(MM/DD/YY)
|
License
Type
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G&K Produce, LLC
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3480 Via Real
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CCL18-0001702
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11/22/21
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Adult-Use-Nursery
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Carpinteria, CA
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93013
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G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001703
|
11/22/21
|
Adult-Use-Processor
|
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Carpinteria, CA
|
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93013
|
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G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001652
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
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|
Carpinteria, CA
|
|
|
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|
93013
|
|
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G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001633
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
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|
93013
|
|
|
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|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001624
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
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|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001622
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001599
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001589
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001582
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001700
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001696
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001695
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001683
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001678
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001664
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
G&K Produce, LLC
|
3480 Via Real
|
CCL18-0001655
|
01/02/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001673
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001670
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001668
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001667
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001665
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001649
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001647
|
11/22/21
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001660
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001657
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001654
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001635
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001630
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001629
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
|
K&G Flowers, LLC
|
3480 Via Real
|
CCL18-0001628
|
02/20/22
|
Adult-Use-Small Mixed-Light Tier 1
|
|
|
Carpinteria, CA
|
|
|
|
|
|
93013
|
|
|
|
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.
|
|
|
|
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
|
|
|
|
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
|
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.
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/.
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/.
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.
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License Holder
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Address
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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.
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License Holder
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Address
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Permit/License No.
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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/.
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.
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License Holder
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Address
|
Permit/License No.
|
Expiration/Renewal
Date (MM/DD/YY)
|
License Type
|
|
The Pottery Inc.
|
5042
Venice Blvd, Los Angeles, CA 90019
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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.
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License Holder
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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.
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.
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.
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:
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•
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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;
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•
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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;
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•
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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;
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•
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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;
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•
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the Existing Leases for SoCal Greenhouse will have been terminated pursuant to a form of termination agreement
satisfactory to Purchaser and BRND;
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•
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the entry into the Short-Term Lease for the portions of the property not then being used for cannabis
use;
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•
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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;
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•
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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);
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•
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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;
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•
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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
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•
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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.
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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.
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:
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that such Element 7 licensed entity possesses the required local authorization to conduct retail cannabis
operations;
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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;
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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;
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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
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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).
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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:
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adoption of the Element 7 Merger Agreement by the board of directors of GH Group and the managers and
members of Element 7; and
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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:
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the representations and warranties of Element 7 will be true and correct in all respects as of the date
of closing;
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Element 7 will have duly performed and complied in all material respects with all agreements, covenants
and conditions;
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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;
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the closing of the transactions contemplated in the Definitive GH Group Agreement on or before July 30,
2021;
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no termination or default under the Element 7 Consulting Agreement (described below); and
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delivery of market rate leases related to the Element 7 properties in the Element 7 Merger Agreement.
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For the benefit of Element 7:
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the representations and warranties of GH Group will be true and correct in all respects as of the date
of closing;
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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;
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GH Group will have delivered each of the closing deliverables;
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the closing of the transactions contemplated in the Definitive GH Group Agreement on or before July 30,
2021;
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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;
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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
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no termination or default under the Element 7 Consulting Agreement.
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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.
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:
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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);
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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
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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).
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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.
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”.
|
|
|
•
|
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:
|
|
•
|
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.
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.
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.
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”.
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
|
|
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
|
)
|
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”.
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).
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.
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)
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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”.
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.
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
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.
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.
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.
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.
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.
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.
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.
|
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 $10.00 per BRND Class B Unit). Pursuant to the Exchange Agreement and Undertaking, the BRND Founders
agreed not to transfer any of their Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the BRND
Class B Units), Founders’ Shares or Founders’ Warrants, or any securities of BRND received in exchange therefor, prior
to the closing of BRND’s qualifying transaction without the prior consent of the NEO Exchange. Such transfer restrictions only apply
to BRND Class B Units (including any BRND Class B Shares or BRND Warrants forming part of the Class B Units), Founders’
Shares and Founders’ Warrants and do not apply to any BRND Class A Restricted Voting Shares of the BRND Founders (if any).
Pursuant to the Investor Rights Agreement, none
of the Sponsor Shares (i.e., the Equity Shares to be issued to Mercer, Charles Miles and Sean Goodrich on Closing in exchange for their
BRND Founders’ Shares) subject to forfeiture thereunder shall be transferable until the expiry of the applicable forfeiture periods.
Exchangeable Shares
See “Corporate Structure – Exchangeable
Shares and Exchange Rights Agreements – Lockup and Transfer Restrictions Applicable to the Exchangeable Shareholders”.
PRIOR SALES
There have been no issuances of shares, including
any securities convertible or exchangeable into shares, during the 12-month period before the date of this prospectus, except for the
proposed Private Placement.
The BRND Class A Restricted Voting Shares
are listed on the NEO Exchange and trade under the symbol “BRND.A.U”. The following table sets forth, for the periods indicated,
the reported high and low prices and the aggregate volume of trading of the Class A Restricted Voting Shares on the NEO Exchange:
|
Period
|
|
High ($)
|
|
|
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”.
|
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.
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.
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.
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.
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.
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:
|
|
•
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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;
|
|
|
•
|
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
|
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|
•
|
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.
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.
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.
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.
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Directors
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Name
and Province/State and Country of Residence
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Present Principal Occupation
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Kyle Kazan
Palos Verdes Peninsula, CA, USA
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Chief Executive Officer, GH Group
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Graham Farrar
Santa Barbara, CA, USA
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President, GH Group
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Jamie Mendola
San Francisco, CA, USA
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Head of Strategy and M&A, Mercer Park L.P.
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Jocelyn Rosenwald(1)
Costa Mesa, CA, USA
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Director of Acquisitions
and Asset Management, Beach Front Property Management
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Lameck Humble Lukangka(1)
Los Angeles, CA, USA
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Principal, Life Line Financial Group
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George Raveling
Los Angeles, CA, USA
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Self-Employed Consultant, Coaching for Success
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Bob Hoban
Denver, CO, USA
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Principal Attorney of
Hoban Law Group and Global Proven Strategies
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Hector De La Torre(1)
Los Angeles, CA, USA
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Director, California Air Resources Board
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Notes:
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(1)
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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.
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.
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.
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:
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(i)
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review and approve corporate goals and objectives relevant to the compensation of the Resulting Issuer’s
CEO;
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(ii)
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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;
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(iii)
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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)
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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;
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(v)
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review the Resulting Issuer’s pension and retirement Transactions in light of the overall compensation
policies and objectives of the Resulting Issuer;
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(vi)
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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;
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(vii)
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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;
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(viii)
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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;
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(ix)
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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;
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(x)
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review executive compensation disclosure before the Resulting Issuer publicly discloses this information;
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(xi)
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submit a report to the Resulting Issuer Board on human resources matters at least annually; and
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(xii)
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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.
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It is expected that the C&CG Committee’s role with respect
to corporate governance is expected to include, among other things:
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(i)
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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;
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(ii)
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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;
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(iii)
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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)
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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;
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(v)
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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;
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(vi)
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conducting a periodic review of the Resulting Issuer’s corporate governance policies and making
policy recommendations aimed at enhancing board and committee effectiveness;
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(vii)
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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;
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(viii)
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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;
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(ix)
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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;
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(x)
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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;
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(xi)
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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;
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(xii)
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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;
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(xiii)
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recommending procedures to seek to ensure that the Resulting Issuer Board and each of its committees function
independently of management;
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(xiv)
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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
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(xv)
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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:
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•
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Audit Committee Mandate;
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•
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C&CG Committee Mandate;
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•
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Disclosure and Insider Trading Policy (which Insider Trading Policy shall apply to the Resulting Issuer’s
directors, executives and other employees); and
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•
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Code of Conduct (if adopted).
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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:
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•
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California Bureau of Cannabis Control;
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•
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California Department of Food and Agriculture;
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•
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California Department of Public Health;
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•
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City of American Canyon;
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•
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City and County of San Francisco;
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•
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City of San Luis Obispo; and
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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.
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.
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.
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.
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.
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.
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.
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”.
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.
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.
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.
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.
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.
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.
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.
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:
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frequently sanitizing high-touch surfaces;
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deep cleaning and sanitizing workstations;
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sanitizing or washing hands after each transaction;
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ensuring hand sanitizer is easily accessible;
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suspending all use of paper menus, demo products, and demo samples;
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positioning staff at every other register when possible;
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taking the temperature of store employees before they begin their shift;
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requiring all dispensary staff to wear face masks;
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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
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placed markers on the floor to dictate 6 feet + of space between patients/customers.
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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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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(i)
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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
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(ii)
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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.
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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”).
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.
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.
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:
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(i)
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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;
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(ii)
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U.S. Holders should recognize no gain or loss as a result of the Conversion;
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(iii)
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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
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(iv)
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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.
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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.
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:
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(i)
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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)
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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;
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(iii)
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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;
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(iv)
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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
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(v)
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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.
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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:
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(vi)
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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;
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(vii)
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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
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(viii)
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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.
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.
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.
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:
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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;
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(ii)
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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
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(iii)
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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.
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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.
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:
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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
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(ii)
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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.
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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.
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.
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:
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the Warrant Agreement;
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the Investor Rights Agreement;
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the Registration Rights Agreement;
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the Lockup Agreement;
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the Exchange Rights Agreement; and
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the SoCal Greenhouse Agreements.
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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:
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the lease dated as of June 4, 2017 by and between 3243 Sacramento LLC, as lessor, and Farmacy Berkeley,
as lessee; and
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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.
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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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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
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(ii)
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each is entitled to be indemnified by BRND to the maximum extent permitted by law.
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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:
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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”);
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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”);
|
|
|
•
|
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”).
|
APPENDIX A – BRND
AUDITED ANNUAL FINANCIAL STATEMENTS
(YEARS ENDED DECEMBER 31, 2020 AND 2019)
(See attached)
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
|
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
|
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
|
|
|
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.
|
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.
|
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
|
)
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
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.
APPENDIX B – MANAGEMENT’S DISCUSSION & ANALYSIS
OF BRND
(See attached)
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.
|
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).
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.
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.
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.
|
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.
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.
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
|
)
|
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.
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.
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.
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.
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.
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.
APPENDIX C – GH
GROUP ANNUAL FINANCIAL STATEMENTS
(YEAR ENDED DECEMBER
31, 2020; YEAR ENDED DECEMBER 31, 2019; YEAR ENDED
DECEMBER 31, 2018)
(See attached)
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
|
|
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.
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.
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.
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.
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.
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.
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
|
%
|
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.
|
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
|
|
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.
|
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”.
|
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.
|
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.
|
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.
|
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.
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.
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
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
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.
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.
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.
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.
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
|
|
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
|
|
GH GROUP, INC.
Notes to Consolidated and Combined Financial Statements
For The Years Ended December 31, 2020, 2019 and 2018
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
|
|
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.
|
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.
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.
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.
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.
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
|
|
|
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.
|
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.
|
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.
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
|
|
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.
|
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”).
|
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.
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.
|
|
|
(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:
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a)
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recommending to the Board the appointment and compensation of the Company’s external auditor;
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b)
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overseeing the work of the external auditor, including the resolution of disagreements between the external
auditor and management;
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c)
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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;
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d)
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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;
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e)
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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;
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f)
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reviewing and approving any proposed hiring of current or former partners or employees of the current
auditor of the Company; and
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g)
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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.
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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.
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:
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(1)
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Determine any desired agenda items;
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(2)
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Review and recommend to the Board changes to this Charter, as considered appropriate from time to time;
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(3)
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Review the public disclosure regarding the Audit Committee required by NI 52-110;
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(4)
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Review and seek to ensure that disclosure controls and procedures and internal control over financial
reporting frameworks are operational and functional;
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(5)
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Summarize in the Company’s annual information form the Audit Committee’s composition and activities,
as required; and
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(6)
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Submit the minutes of all meetings of the Audit Committee to the Board upon request.
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Documents / Reports Review
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(7)
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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.
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(8)
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Review other financial information provided to any governmental body or the public as they see fit.
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(9)
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Review, recommend and approve any of the Company’s press releases that contain financial information.
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(10)
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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.
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External Auditor
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(11)
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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.
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(12)
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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.
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(13)
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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.
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(14)
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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.
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(15)
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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.
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(16)
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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.
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(17)
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Review the performance of the external auditor and any proposed discharge of the external auditor when
circumstances warrant.
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(18)
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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.
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(19)
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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.
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(20)
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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.
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Audit Process
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(21)
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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.
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(22)
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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.
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(23)
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Review any significant disagreements among management and the external auditor in connection with the
preparation of the financial statements.
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(24)
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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.
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Financial Reporting Processes
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(25)
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Review the integrity of the financial reporting processes, both internal and external, in consultation
with the external auditor as they see fit.
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(26)
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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.
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(27)
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Review all material balance sheet issues, material contingent obligations (including those associated
with material acquisitions or dispositions) and material related party transactions.
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(28)
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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.
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(29)
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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.
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(30)
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If considered appropriate, establish separate systems of reporting to the Audit Committee by each of management
and the external auditor.
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(31)
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Periodically consider the need for an internal audit function, if not present.
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Risk Management
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(32)
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Review program of risk assessment and steps taken to address significant risks or exposures of all types,
including insurance coverage and tax compliance.
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General
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(33)
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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.
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(34)
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Respond to requests by the Board with respect to the functions and activities that the Board requests
the Audit Committee to perform.
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(35)
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Periodically review this Charter and, if the Audit Committee deems appropriate, recommend to the Board
changes to this Charter.
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(36)
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Review the public disclosure regarding the Audit Committee required from time to time by applicable Canadian
securities laws, including:
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·
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The Charter of the Audit Committee;
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·
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the composition of the Audit Committee;
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·
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the relevant education and experience of each member of the Audit Committee;
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·
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the external auditor services and fees; and
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·
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such other matters as the Company is required to disclose concerning the Audit Committee.
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(37)
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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.
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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)
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
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Page(s)
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Report of Independent Registered Public Accounting Firm
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1
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Combined Balance Sheets
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2
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Combined Statements of Operations
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3
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Combined Statements of Changes in Members’ Deficit
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4
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Combined Statements of Cash Flows
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5
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Notes to Combined Financial Statements
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6 - 14
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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
|
|
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.
|
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.
|
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.
|
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.
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.
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.
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.
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.
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
|
|
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
|
|
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.
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
|
|
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.
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.
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)
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
|
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.
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.
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.
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.
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.
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.
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.
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.
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.
|
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.
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.
|
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.
|
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.
|
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.
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.
APPENDIX I – MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FARMACY BERKELEY
(See attached)
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)
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
|
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
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
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
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
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.
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
|
%
|
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.
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.
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.
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.
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.
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.
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.
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
|
%
|
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.
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.
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”).
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.
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.
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.
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 $25,000,000 for development of retail
licenses, and the delivery by E7 of certain leases.
APPENDIX L – BRND UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(See attached)
MERCER
PARK BRAND ACQUISITION CORP.
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
AS
AT AND FOR THE YEAR ENDED DECEMBER 31, 2020
(EXPRESSED
IN UNITED STATES DOLLARS)
|
Mercer Park Brand Acquisition
Corp.
|
|
|
|
|
|
Pro Forma Consolidated Financial Statements
|
|
|
|
|
|
Pro Forma Consolidated
Financial Position
|
1
|
|
Pro Forma Consolidated
Statement of Operations
|
2
|
|
|
|
|
Notes to the Pro Forma Consolidated Financial Statements
|
3-12
|
Mercer Park Brand Acquisition Corp.
Unaudited Pro Forma Consolidated Statement of Financial Position
As at December 31, 2020
|
|
|
Mercer Park
BRAND
|
|
|
GH Group
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
Pro-Forma
|
|
|
Consolidated
|
|
|
|
|
December 31,
2020
|
|
|
December 31,
2020
|
|
|
iCann
|
|
|
Element 7
|
|
|
December 31,
2020
|
|
|
|
|
Adjustments
|
|
|
December 31,
2020
|
|
|
US$
|
|
$
|
|
|
$
|
|
|
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
|
|
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
|
)
|
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 $185 million in cash at the closing of the Transaction: (i) before any cash consideration,
as applicable, is payable for any additional acquisitions; (ii) after any payments due and payable for BRND’s expenses related
to the closing of the Transaction, including all costs, fees, expenses and payments contingent on the closing of the Transaction; and
(iii) after reduction for the aggregate amount of payments required to be made in connection with the BRND stockholder redemptions;
(iv) plus the aggregate PIPE proceeds and other replacement cash proceeds; and (v)after taking into account any debt or payables
on BRND’s balance sheet as of the closing of the Transaction (collectively, the “Closing Cash”).
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
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
$8 million, respectively.
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
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 $10 per share (the “Private
Placement”). The closing of the Private Placement will occur contemporaneously with the closing of the Transaction and in connection
therewith, the Private Placement Shares will be exchanged for Equity Shares. The funds from the Private Placement will be used to fund
the Resulting Issuer’s growth strategy, for working capital and for general corporate purposes. The Private Placement is subject
to customary conditions, including the closing of the Transaction.
The unaudited pro forma consolidated statement
of financial position as at December 31, 2020 has been prepared by BRND to give effect to the GH Group Proposed Acquisitions and
the iCANN Acquisition, as if they had occurred on December 31, 2020. The unaudited pro forma consolidated statement of operations
for the year ended December 31, 2020 have been prepared by BRND to give effect to the acquisitions, as if they had occurred on December 31,
2019.
The Pro Forma Financial Statements were prepared
using the acquisition method of accounting in accordance with US GAAP ASC 805, Business Combinations, with GH Group being the legal
acquiree and accounting acquirer. As such, GH Group is treated as the continuing reporting entity. The acquirer in a business combination
is the combining entity that obtains control of the other combining business or businesses. The Pro Forma Financial Statements do not
purport to project the future operating results of the combined company.
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
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.
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.
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
|
|
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 $45,309 into equity interests of iCANN;
|
|
|
c)
|
GH Group issued 7,554,679 Class A Common shares to holders of iCANN equity interests; and GH Group
issued an additional 500,000 Class A Common shares to brokers and consultants. The shares represented 3.3% of the total outstanding
shares of GH Group at the time of acquisition, which were valued at the
deemed valuation from the Transaction, for purposes of this estimated purchase price calculation.
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
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
|
|
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 $24 million for Element 7 by issuance of up to 2.4 million of subordinate voting shares
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
|
|
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 $16.1 million underwriters’ commission on the Class A voting restricted shares;
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
|
|
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 $10 per Share
|
|
|
32,020,997
|
|
Mercer Park Brand Acquisition Corp.
Notes to the Unaudited Pro Forma Consolidated Financial Statements
As at December 31, 2020 (expressed in US$)
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
|
)
|
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
|
