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Filed Pursuant to Rule 424(b)(4)
Registration Statement No.333-232573

 

PROSPECTUS

11,000,000 Shares

LOGO

Common Shares

This offering is an initial public offering of our common shares. We are offering 11,000,000 shares. Prior to this offering, there has been no public market for our common shares. Our common shares were approved for listing on the Nasdaq Global Select Market, or the Nasdaq, in the United States under the symbol “SNDL”. The public offering price is US$13.00 per share.

We are an “emerging growth company” and a “foreign private issuer” under applicable Securities and Exchange Commission rules, and will be subject to reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Foreign Private Issuer”.

Our business and an investment in our common shares involve significant risks. These risks are described under the caption “Risk Factors” beginning on page 23 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per
Share
    Total  

Initial public offering price

   US$ 13.00     US$ 143,000,000  

Underwriting commission(1)

   US$ 0.78     US$ 8,580,000  

Proceeds, before expenses

   US$ 12.22     US$ 134,420,000  

 

(1)

We refer you to the section entitled “Underwriting” in this prospectus for additional information regarding underwriting compensation.

The underwriters may also purchase up to an additional 1,650,000 common shares from us on the same terms as set out above, within 30 days from and including the date of closing of this offering to cover over-allotments.

The underwriters expect to deliver the common shares against payment on or about August 6, 2019.

 

 

 

Cowen

 

BMO Capital Markets

  RBC Capital Markets
Barclays     CIBC Capital Markets
  Scotiabank  

July 31, 2019


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LOGO

Sundial’s mission is to proudly craft pioneering
cannabis brands to Heal, Help and Play.
Heal
Cannabis products used
as prescription medicine
Cannabis products that strive to promote
overall health and wellness through CBD
Help
Cannabis products to enhance social, spiritual
and recreational occasions
Play


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LOGO

MARKETING
INSIGHTS & ANALYTICS
SUPPLY CHAIN
CUSTOMER MANAGEMENT
Cannabis as a Consumer Packaged Good
We are leveraging our management team’s extensive experience at global blue-chip companies to bring a differentiated and integrated CPG approach to our industry.
We believe cannabis is rapidly becoming a consumer good just like any product in the Consumer Packaged Goods (CPG) industry.


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LOGO

ISLAND
NUKEN
BC
SUNDIAL


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LOGO

Our Brands
SUNDIAL CANNABIS
Sundial Cannabis offers consumers safe, consistent, functional products tailored to emphasize specific desired experiences.
TOP LEAF
Top Leaf celebrates “the craft of cannabis,” growing premium bud for discerning consumers.
BC WEED CO.
Home, sweet home. Embrace the rich history of BC bud—famous for a reason.


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LOGO

Cultivation & Production Craft Cannabis at Scale Our Canadian operation is designed and purpose built to produce high-quality cannabis products at a commercial scale. OLDS MERRITT ROCKY VIEW * AWAITING LICENCE AND START OF CONSTRUCTION STATE-OF-THE-ART Our purpose-built facilities are modern, advanced and specifically designed to produce high-quality cannabis flower and products. Using modular rooms, we emphasize small-batch care and attention but at scale with over 95 million grams projected to be harvested in Canada annually once our facilities are fully constructed and operational. HANDS-ON CARE Our products are crafted by highly experienced growers, researchers, quality assurance specialists, processing technicians and more – experts in the art and the science of growing and producing cannabis products. CONTINUOUS IMPROVEMENT Once fully constructed and operational, Sundial’s Olds facility will have 126 individual cultivation rooms. Our modular cultivation rooms allow us to learn and experiment to continuously improve our manufacturing process and end products. Olds / Canada • Purpose-built cultivation rooms • Optimized and tightly controlled room environments • Diverse genetic library • Experienced cultivation team • 448,000 sq ft facility in Olds, Alberta once fully constructed and licenced • Production of premium flower and extracted products for Sundial’s Canadian Heal, Help and Play businesses


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LOGO

Fueling Global Expansion Our European operation has been designed and built for the efficient production of hemp and will enable Sundial to produce low-cost CBD to fuel our global Help business. HOMESTEAD FACILITYENERGY-EFFICIENT Sundial’s Bridge Farm production facilities utilize environmentally sustainable biomass boilers for heat and boilers for energy production. When combined with a UK power government credit, our energy costs are more than offset. AUTOMATION with extensive automation, including rolling benches, clone planting and camera-based flower assessment, our UK production facilities are highly efficient, consistent and reduce the amount of non-productive labour. TRUSTED LOW-COST PRODUCTION The combination of low energy costs and highly-efficient use of labour results in a very low cost of production of hemp biomass. Our UK facilities will provide Sundial with a scalable, consistent and trusted source of low cost CBD that will fuel our global Help products and brands. Bridge Farm / UK• 1.6MM sq ft of existing production with approximately 3.6MM sq ft once fully constructed1• Existing relationships with Tesco, Morrisons, Asda, Lidl, Amazon and Aldi2• 20 Year UK Power Government Credit for biomass boilers to offset energy costs(1) Our SAF Credit Agreement (as defined herein) requires us, in certain circumstances, to (i) maintain at least 60% of the square footage of Bridge Farm’s existing facilities in the United Kingdom dedicated to non-CBD plant production and inventory and (ii) achieve certain minimum gross margin targets in respect of Bridge Farm’s non-CBD plants business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Other Secured Debt—SAF Jackson Facility”. (2) We have engaged with a few of these retailers, all of whom have expressed interest in selling Bridge Farm’s CBD products, although we have not yet entered into any agreements to sell our CBD products.


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LOGO

SUNDIAL


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     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     23  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     57  

USE OF PROCEEDS

     59  

DIVIDEND POLICY

     60  

CAPITALIZATION

     61  

DILUTION

     64  

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

     65  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

     76  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     78  

BUSINESS

     114  

REGULATION

     134  

MANAGEMENT

     142  

EXECUTIVE COMPENSATION

     154  

DIRECTOR COMPENSATION

     171  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     173  

PRINCIPAL SHAREHOLDERS

     177  

DESCRIPTION OF SHARE CAPITAL

     180  

PRE-CLOSING ARRANGEMENT

     203  

SHARES ELIGIBLE FOR FUTURE SALE

     204  

CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. PERSONS

     207  

CANADIAN TAX IMPLICATIONS FOR NON-CANADIAN HOLDERS

     211  

CANADIAN TAX IMPLICATIONS FOR CANADIAN HOLDERS

     213  

UNDERWRITING

     216  

EXPENSES OF THIS OFFERING

     224  

LEGAL MATTERS

     225  

EXPERTS

     225  

CHANGE IN THE REGISTRANT’S CERTIFYING ACCOUNTANT

     225  

ENFORCEMENT OF CIVIL LIABILITIES

     227  

WHERE YOU CAN FIND MORE INFORMATION

     228  

INDEX TO FINANCIAL STATEMENTS

     F-1  

We are responsible for the information contained in this prospectus and in any free writing prospectus we prepare or authorize. Neither we nor the underwriters have authorized anyone to provide you with different information, and neither we nor the underwriters take responsibility for any other information others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information in this prospectus is only accurate as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Persons who come into possession of this prospectus and any applicable free writing prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this prospectus and any such free writing prospectus applicable to that jurisdiction.

 

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Industry and Market Data

This prospectus includes market data and forecasts with respect to current and projected market sizes for adult-use cannabis, cannabidiol, or CBD, products and medical cannabis. Although we are responsible for all of the disclosure contained in this prospectus, in some cases we rely on and refer to market data and certain industry forecasts that were obtained from third-party surveys, market research, consultant surveys, publicly available information and industry publications and surveys that we believe to be reliable. Unless otherwise indicated, all market and industry data and other statistical information and forecasts contained in this prospectus are based on independent industry publications, reports by market research firms or other published independent sources and other externally obtained data that we believe to be reliable.

Some market and industry data, and statistical information and forecasts, are also based on management’s estimates. Any such market data, information or forecast may prove to be inaccurate because of the method by which we obtain it or because it cannot always be verified with complete certainty given the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties, including those discussed under the captions “Risk Factors” and “Special Note Regarding Forward-Looking Statements”. As a result, although we believe that these sources are reliable, we have not independently verified the information.

Trademarks, Trade Names and Service Marks

We own or otherwise have rights to the trademarks, trade names and service marks, including Heal, Help and Play and others mentioned in this prospectus, used in conjunction with the marketing and sale of our products. Solely for convenience, the trademarks, trade names and service marks may appear in this prospectus without the ® and symbols, but any such references are not intended to indicate, in any way, that we forgo or will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, trade names and service marks. All trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

Basis of Presentation

Unless otherwise indicated, all references in this prospectus to the “Company”, “Sundial”, “we”, “us”, “our” or similar terms refer to Sundial Growers Inc. and its subsidiaries.

Unless otherwise indicated, all references in this prospectus to “Bridge Farm” refer to Bridge Farm Nurseries Limited, its subsidiaries and, subsequent to August 11, 2017, Project Seed Topco Limited, the parent of Bridge Farm Nurseries Limited. We completed the acquisition of Bridge Farm on July 2, 2019.

Presentation of Financial Information

We present our financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or the IASB.

The financial statements of the Company that are included in this prospectus consist of:

 

   

unaudited condensed interim consolidated financial statements of Sundial Growers Inc. as at March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018; and

 

   

the audited consolidated financial statements of Sundial Growers Inc. as at and for the ten months ended December 31, 2018 and the years ended February 28, 2018 and 2017.

Bridge Farm presented its financial statements in accordance with IFRS as issued by the IASB.

The financial statements of Bridge Farm that are included in this prospectus consist of:

 

   

unaudited condensed consolidated financial statements of Project Seed Topco Limited as at and for the three and nine month periods ended March 31, 2019; and

 

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the consolidated financial statements of Project Seed Topco Limited as at June 30, 2018 (Successor) and June 30, 2017, June 30, 2016 and July 1, 2015 (Predecessor) and for the period from June 5, 2017 to June 30, 2018 (Successor), for the period from July 1, 2017 to August 10, 2017 (Predecessor), for the year ended June 30, 2017 (Predecessor), and for the year ended June 30, 2016 (Predecessor).

None of the financial statements included herein were prepared in accordance with generally accepted accounting principles in the United States, or US GAAP.

Effective for the fiscal year ended December 31, 2018, we changed our fiscal year end from February 28 to December 31. As a result of this change, the figures presented in our consolidated financial statements for the ten months ended December 31, 2018, or the Transition Period, are not entirely comparable to those for the fiscal years ended February 28, 2018 and 2017. We do not present financial statements for a separate historical period that is comparable to the Transition Period. Following the Transition Period, we will prepare annual consolidated financial statements for each fiscal year ending December 31, beginning with the fiscal year ending December 31, 2019. References in this prospectus to our “fiscal year ended December 31, 2018” shall mean the ten months ended December 31, 2018.

We publish our consolidated financial statements in Canadian dollars and Bridge Farm has historically published its financial statements in British pound sterling. In this prospectus, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$”, “C$”, “CDN$”, “CAD$” and “dollars” mean Canadian dollars, all references to “£”, “pounds” and “pound sterling” mean British pound sterling and all references to “US$” and “USD” mean U.S. dollars. Except with respect to U.S. dollar and British pound sterling, amounts presented as contractual terms or as otherwise indicated, all amounts that are presented in U.S. dollars herein have been translated from Canadian dollars solely for convenience at an exchange rate of $1.3038 per US$1.00, which was the daily exchange rate as of July 12, 2019, as reported by the Bank of Canada and all amounts that are presented in British pound sterling herein have been translated from Canadian dollars solely for convenience at an exchange rate of $1.6371 per £1.00, which was the daily exchange rate as of July 12, 2019, as reported by the Bank of Canada.

Numerical figures included in this prospectus have been subject to rounding adjustments. Accordingly, numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.

Presentation of Certain Non-IFRS Measures

In addition to our financial results presented in accordance with IFRS as issued by the IASB, we believe certain non-IFRS measures provide useful information both to management and investors in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by IFRS (or US GAAP); and, therefore, they may not be comparable to similarly titled measures presented by other companies, and they should not be construed as an alternative to other financial measures determined in accordance with IFRS.

We define Adjusted EBITDA as net income/(loss) before finance costs, depreciation and amortization, accretion expense and income tax recovery and excluding increase/(decrease) in fair value of biological assets, change in fair value realized through inventory, unrealized foreign exchange loss/(gain), share-based compensation expense, asset impairment and (loss)/gain on disposal of property, plant and equipment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Basis of Presentation—Adjusted EBITDA” for a reconciliation of net loss to Adjusted EBITDA.

Presentation of Share Information

All references to “shares” or “common shares” in this prospectus refer to the common shares of Sundial Growers Inc., no par value.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before deciding to invest in our shares, you should read this entire prospectus carefully, including the sections of this prospectus entitled “Risk Factors”, “Special Note Regarding Forward-Looking Statements”, “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes contained elsewhere in this prospectus. Unless the context otherwise requires, references in this prospectus to the “Company”, “Sundial”, “we”, “us” and “our” refer to Sundial Growers Inc. and its subsidiaries.

Our Company

Sundial’s mission is to proudly craft pioneering cannabis brands to Heal, Help and Play. We view these as three distinct consumer opportunities, defined as follows:

 

   

Heal – cannabis products used as prescription medicine

 

   

Help – cannabis products that strive to promote overall health and wellness through CBD

 

   

Play – cannabis products to enhance social, spiritual and recreational occasions

We intend to pursue these opportunities globally as regulations permit.

As public perceptions and regulations around the world evolve, we believe cannabis is rapidly becoming a consumer good just like any other product in the Consumer Packaged Goods (CPG) industry. We are leveraging our management team’s extensive experience at global blue-chip companies to bring a differentiated, integrated CPG approach to the new cannabis industry that spans insights and analytics, supply chain, marketing and customer management. We believe this holistic and integrated approach gives us a competitive advantage over our peers in the cannabis industry.

In Canada, we currently produce and market premium cannabis for the adult-use (Play) market. In our purpose-built indoor modular grow rooms, we produce high-quality, consistent cannabis in individual, fully controlled room environments. We have established supply agreements with, or been approved to supply cannabis directly to retailers by, five provincial regulating authorities, specifically the Alberta Gaming, Liquor and Cannabis Commission, the Ontario Cannabis Store, the British Columbia Liquor Distribution Branch, Manitoba Liquor and Lotteries, and the Saskatchewan Liquor and Gaming Authority. In addition, we are working to establish supply agreements in all remaining Canadian jurisdictions, as our production capacity allows. Our supply agreements do not contain minimum purchase commitments. We have an initial focus on premium inhalable products to exploit the Play opportunity and will expand our portfolio to edibles, extracts, topicals and other products once legally permitted. We are currently marketing our adult-use products under our Sundial Cannabis brand and intend to offer products under our Top Leaf and BC Weed Co. brands, among others. We are also actively pursuing Help and Heal opportunities in Canada. In the past, we have entered into agreements to supply cannabis to other licensed producers in Canada, and although currently most of our sales are to other licensed producers, we expect our sales to other licensed producers to decrease as a percentage of our total sales throughout the remainder of 2019 and constitute a minority of total sales in the future.

We plan to enter the rapidly growing global CBD market (Help) with our acquisition of Bridge Farm, a leading agricultural indoor producer of edible herbs and ornamental flowers in the United Kingdom. Bridge Farm provides us with a number of state-of-the-art, fully operational facilities, a hemp cultivation licence at one of Bridge Farm’s facilities and established relationships with a number of large U.K. and multi-national retailers. We intend to produce CBD products at low cost, driven by Bridge Farm’s scale, automation and energy subsidies.



 

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To enhance and differentiate our medical cannabis (Heal) offerings, we are working to build industry-leading research capabilities regarding the use of cannabis and cannabinoids as medical treatments. We have established partnerships with a number of private and public Canadian research institutions, which we are leveraging to facilitate a research-informed approach to identify and develop cannabis strains for medicinal use. In addition, our joint venture with Pathway Rx Inc., or Pathway Rx, uses advanced technology and an extensive library of cannabis strains to identify and customize treatments for a wide range of medical conditions.

Our Industry

 

 

 

LOGO

 

(a) In the United States, CBD products are legal in a number of states subject to certain conditions; however, the FDA has stated that under U.S. federal law, it is illegal to market products that add CBD to a food or label CBD as a dietary supplement.

(b) Represents jurisdictions in which CBD products are not prohibited under federal or state controlled substances legislation.

We are currently serving the adult-use cannabis industry in Canada. In October 2018, Canada became the first major industrialized nation to legalize adult-use cannabis (Play) at the federal level. Since then, demand for legal adult-use cannabis products from Canadian consumers has been strong. Deloitte’s 2018 Cannabis Report estimates that the Canadian adult-use cannabis market will reach up to $4.3 billion in 2019. Currently, edible cannabis products, including both solids and beverages, cannabis extracts and cannabis topicals are not yet legal for sale in Canada. The Canadian government has, however, published finalized amendments to the Cannabis Regulations and Schedules to the Cannabis Act, which are not yet in force, to permit the production and sale of cannabis edibles, extracts and topicals by holders of federal licences specific for these product classes. The Canadian federal government has announced that these new additional classes of cannabis will be authorized under the Cannabis Act on October 17, 2019 with legal sale of these additional classes of cannabis expected to commence in December 2019. Processing license holders are required to notify Health Canada at least 60 days before making a new product available for sale. Therefore, the earliest date that notified products in the new classes could be made available for sale to provincially or territorially authorized distributors is expected to be December 16, 2019. We expect that additional countries will also legalize adult-use cannabis, creating the opportunity for us to serve the adult-use market in those other countries in the future, although we cannot predict how long it will take for that to occur.

Under the Cannabis Regulations, each of our directors and officers must obtain and maintain a security clearance from Health Canada. Certain additional key personnel are also required to obtain and maintain a security



 

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clearance. Greg Mills and Elizabeth Cannon (two of our recently appointed directors), Torsten Kuenzlen (our Chief Executive Officer and director) and all of our other executive officers, with the exception of Edward Hellard and Geoff Thompson, have not obtained security clearance from Health Canada. Failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations. See “Risk Factors—Risks Related to Our Business and Our Industry—Our future success is dependent on our ability to attract or retain key personnel, including our Executive Chairman, Chief Executive Officer and other key employees. In addition, our directors, officers and certain other key employees are subject to security regulations due to the nature of our industry, which may make it more difficult for us to attract, develop and retain talent”.

Initially, we plan to begin selling CBD products (Help) in the United Kingdom and other European countries as soon as we start producing CBD products at Bridge Farm’s facilities. The World Health Organization has recently recommended that CBD should no longer be classified as a controlled substance, a move supported by the European Parliament. Certain CBD products have recently been added to the European Union’s Novel Food Catalogue, which will help provide a regulatory framework for EU member states to follow. CBD products have become available in the United Kingdom, Germany, Spain and other European countries. Brightfield Group’s market research estimates the European CBD market will reach US$1.6 billion ($2.1 billion) by 2023. Although we do not currently have plans to address the U.S. CBD market in the near term, recently adopted U.S. federal legislation has legalized hemp-derived CBD products, subject to certain conditions, including compliance with state and federal regulations.

We intend to become a global leader in medical cannabis as the legalization of cannabis for medical purposes (Heal) continues to spread around the world. In Canada, we plan to launch a digital medical platform for direct sales to patients who use cannabis as medicine. As of June 30, 2019, 41 countries have legalized medical cannabis in some form. In addition, the European Parliament passed a resolution calling for the European Union to distinguish between medical and other uses of cannabis, increase funding for research regarding medical cannabis and require insurance coverage for effective cannabis-based medication. We believe that doctors and professionals will increasingly prescribe and recommend cannabis to treat symptoms associated with a wide range of medical conditions, including rheumatism, cancer, epilepsy, depression and anxiety, sleep disorders and auto-immune diseases.

As cannabis products continue to gain acceptance around the world, the cannabis industry, and the laws that govern it, are evolving quickly. As such, we believe that we are well-positioned to address a large and growing global legal market. We estimate the global legal and illicit cannabis market to be US$150 billion annually, based on reports from the United Nations.

Our Approach

Play

We are developing high-quality, premium cannabis brands for the adult-use market. We intend to capture a leading position in this market by offering differentiated brands underpinned by premium products that deliver consistent and superior user experiences. We believe that premium inhalable cannabis products will command a significant portion of the Canadian market and will yield higher margins than lower quality brands. We expect increasing price segmentation as the adult-use cannabis industry matures, similar to other CPG industries, such as alcohol and tobacco.

We are currently marketing our adult-use products under our Sundial Cannabis brand and intend to offer products under our Top Leaf and BC Weed Co. brands, among others. We grow cannabis for the modern consumer. We believe that modern cannabis consumers are varied in their tastes—we anticipate that our



 

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consumers will be multi-category shoppers who may prefer one format but use many. We currently sell Sundial Cannabis-branded dried flower cannabis and intend to sell additional products in a wide-range of formats, such as pre-rolls, oils, capsules and sublinguals, in accordance with existing regulations. As further regulations permit, we will also offer edibles, beverages, including dried tea products, vape products, concentrates, extracts and topicals.

Our purpose-built indoor modular grow rooms enable us to produce large volumes of high-quality cannabis in small batches. Our individual room-based cultivation format affords us several advantages compared to other growing methods, including optimized and customizable environments for each one of our strains, efficient scaling of our production capacity, higher and more predictable yields and real-time collection of cultivation data and multiple harvests per day. Our modular cultivation rooms have been designed with the objective of improving our ability to learn and experiment and improving our cultivation process and end products. This approach also helps mitigate the risk of crop loss. We believe that the combination of this craft-at-scale cultivation model, our diverse genetic library and our experienced cannabis cultivation team will result in the highest quality cannabis on the market.

By capitalizing on our CPG industry experience and consistently delivering high-quality products, we believe that we can become a trusted and preferred partner to retailers and other distribution partners. We do not operate our own retail stores. We use analytics based on customer and consumer data and research to develop and market superior branded products. We believe that our customer service, value-add tools and focus on the consumer experience will result in consumer loyalty, engagement and retention. Our value-add tools are anticipated to include digital kiosks with interactive content, point-of-sale materials, cannabis journals and customized strain descriptions designed to educate and enhance consumer engagement in compliance with applicable regulations.

Help

There is rapidly growing global consumer demand for products containing CBD, based on the belief it has therapeutic effects and promotes overall wellness. CBD, unlike tetrahydrocannabinol, or THC, does not have any psychotropic effects, making CBD products appealing for broad consumer use.

To date, we have not developed or sold any CBD products. We intend to leverage certain of Bridge Farm’s large-scale, low-cost production facilities to become a leader in the global CBD market, as further regulations permit.

Bridge Farm’s current facility footprint is approximately 1.6 million square feet and plans are in place to expand to approximately 3.6 million square feet. We intend to leverage Bridge Farm’s existing distribution relationships with retailers such as Tesco, Morrisons, Asda (a Walmart subsidiary), Lidl, Amazon and Aldi to launch CBD product sales in the United Kingdom and globally. We have engaged with a few of these retailers, all of whom have expressed interest in selling Bridge Farm’s CBD products, although we have not yet entered into any agreements to sell our CBD products. As the global CBD regulatory landscape continues to evolve, we plan to utilize these relationships as well as establish new partnerships with international retailers to become a recognized global CBD leader.

We will transition certain of Bridge Farm’s existing revenue-producing facilities to hemp cultivation in a phased approach. Bridge Farm holds a hemp cultivation licence at its facility located in Spalding, Lincolnshire, United Kingdom, or the Homestead Facility, making it one of the few indoor producers licensed to cultivate hemp in the United Kingdom. Bridge Farm currently cultivates hemp in approximately 40,000 square feet at the Homestead Facility. We expect to transition an additional portion of the Homestead Facility to hemp cultivation by the end of the third quarter of 2019, and we plan to apply for licenses and transition certain of Bridge Farm’s



 

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other facilities to hemp cultivation, although we are evaluating the timing for such transition and do not yet have a timetable for doing so. We expect to retain a portion of Bridge Farm’s existing herbs and ornamental flower business and cultivation operations in compliance with debt covenants and until such time as we would need to transition more space to hemp cultivation and CBD extraction in order to meet demand for our CBD products, subject to certain regulatory, licencing and other restrictions related to such transition. See “Business—Current and Planned Facilities—Bridge Farm Facilities”.

Bridge Farm has highly automated, state-of-the-art facilities with advanced plant movement and monitoring technology. Through its use of biomass fuel for heating, Bridge Farm qualifies for a U.K. government credit that more than offsets its energy costs. We believe that Bridge Farm’s scale, automation and energy subsidy will make us a global low-cost producer.

Heal

We intend to become a global leader in medical cannabis. We believe that the medical cannabis market will continue to grow globally as an increasing number of jurisdictions legalize cannabis for medical uses. We have not made any sales of medical cannabis to date. Our Heal approach will initially focus on providing branded prescription cannabis products for patients who use cannabis as medicine. In Canada, we will launch a digital medical platform for direct sales to such patients. We will pursue medical cannabis opportunities in the United Kingdom and international medical cannabis markets as regulations permit. We will also pursue opportunities to export medical cannabis where legally permitted and partner with pharmaceutical companies to develop and market prescription drugs in accordance with applicable regulations.

We also own a 50% interest in Pathway Rx, a company that uses advanced technologies, including machine learning approaches, to screen an extensive library of cannabis strains with the ultimate goal of being able to identify and customize treatments for symptoms associated with a wide range of medical conditions. In the future, we intend to leverage Pathway Rx’s cannabis strains to develop cannabis-based pharmaceutical drugs, including strains targeted towards symptoms associated with cancer, skin disorders, skin protection and rejuvenation, and inflammatory processes. To date, neither we nor Pathway Rx have submitted any potential drug candidates to any regulatory body for approval. If we submit drug candidates for approval to the applicable drug regulatory authorities, the approval process will be lengthy and may not be successful. See “Regulation—Regulatory Framework in Canada—Drug Approval Process” for more information.

In addition, we are working to build industry-leading research capabilities. We are leveraging partnerships with leading research institutions, including the University of Saskatchewan’s Cannabinoid Research Initiative of Saskatchewan, or CRIS, and the University of Calgary’s Cumming School of Medicine, to facilitate a research-informed approach to identify and develop cannabis strains for medical use. We believe this approach differentiates us from our peers and will give us a competitive advantage.

Our Strengths

We believe that we have a differentiated operating model designed to generate superior margins and shareholder returns, underpinned by the following competitive strengths.

Experienced management team brings a differentiated, holistic CPG approach to the emerging cannabis industry

We view cannabis as a consumer packaged good, just like any other CPG product. We designed our operating model based on CPG principles and best practices with the goal of building the leading global branded cannabis company. Our management team has extensive experience working in senior positions with some of the



 

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world’s most successful CPG companies, including The Coca-Cola Company, Molson Coors Brewing Company, Diageo plc, Mars Incorporated and The Kellogg Company. We believe that our leadership team’s holistic CPG expertise in general management, marketing, product development, supply chain management, consumer insights and analytics, sales and customer management differentiates us among our global peers.

Proud cannabis culture, focused on attracting and motivating the best talent

We believe that culture is the only true sustainable competitive advantage. Our corporate values are centered on health, happiness and personal well-being, driven by our shared mission to proudly craft pioneering cannabis brands to Heal, Help and Play. We have created a collaborative working environment where everyone is valued for their contribution to the team and rewarded for their accomplishments. As we rapidly grow our team, we strive to create a culture of co-ownership, including by granting equity to all of our permanent employees. We also continuously invest in training and development programs across all functions and levels of our organization.

Global growth strategy grounded in Heal, Help and Play opportunities with tailored supply chains

We believe consumers primarily use cannabis in three ways: as medicine (Heal), for wellness (Help) and for adult use (Play). We have tailored supply chains that address each market opportunity based on these consumer uses. For Play, we are producing premium cannabis products in purpose-built indoor modular grow rooms. For Help, we will produce CBD products using large-scale, low-cost production facilities and, until such time as our own CBD extraction facilities are operational, we anticipate entering into CBD extraction arrangements with third parties, although we have yet to do so. For Heal, we will leverage our facilities in Canada and the United Kingdom to optimally produce medical cannabis products, depending on the specific opportunity.

Consumer-centric global brands that deliver premium experiences

Using proven CPG best practices, we leverage deep consumer insights and analytics to develop a portfolio of premium brands and products to meet consumer needs across Heal, Help and Play. Our approach starts with analyzing market trends, transactional and behavioral data and identification of market opportunities. Our portfolio of brands will include Sundial Cannabis, Top Leaf and BC Weed Co., among others. Some of these will span Heal, Help and Play while others will be tailored to specific opportunities. Core to the establishment of superior brands are high quality and consistent product offerings that are targeted to meet evolving consumer needs. We strengthen our brands through innovative, iterative and targeted product development that leverages a flexible production infrastructure and continuous consumer feedback loops. We intend to target consumers within retail stores through our anticipated in-store digital experiences, including digital kiosks with interactive content, designed to educate and enhance consumer engagement in compliance with applicable regulations. Outside of retail stores, we reach consumers with targeted online and social media marketing, as well as our e-commerce presence, in compliance with applicable regulations. We will also leverage our online platforms to collect data and analytics to drive informed business decisions based on consumer and customer insights. We believe that this approach will result in brands that resonate with consumers, leading to brand recognition and loyalty.

Strong distribution relationships

We intend to become a trusted and preferred partner to our retailer and other distribution partners. Leveraging our deep knowledge of customer and consumer habits and preferences, we will provide products and advice that is tailored to our customers’, and their customers’, needs. Our retail partners include Fire and Flower, High Tide, The Clinic Network, Delta 9 Cannabis, Compass Cannabis Clinic, Innerspirit, and 420 Premium



 

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Market, among others. We will provide educational and training tools for retailers and consumers. These tools will include digital kiosks with tablet-based interactive content and other educational materials in compliance with applicable regulations. We believe that our customer service, value-add tools and focus on the consumer experience will be key to customer loyalty, engagement and retention.

We also intend to leverage certain of Bridge Farm’s distribution relationships with retailers such as Tesco, Morrisons, Asda (a Walmart subsidiary), Lidl, Amazon and Aldi to initially launch CBD product sales in the United Kingdom, capitalizing on Bridge Farm’s U.K.-based production and traceable supply chain. To date, we have not entered into any agreements with such retailers to sell our CBD products.

Operating model that strives to deliver optimal profitability for all stakeholders

We believe our integrated CPG operating model will deliver superior benefits for all stakeholders in the value chain. Our focus on the premium segment of the global cannabis market is expected to support higher prices and, as a result, deliver higher margins to our distribution and retail partners, as well as the Company. We also believe that our premium, high quality brands and products will deliver superior consumer experiences, resulting in strong consumer loyalty and advocacy. Our tailored supply chains are intended to optimally balance high quality products and low-cost production, which we believe will further contribute to our superior margins and maximize stakeholder returns over time.

Our Growth Strategies

We intend to be a leader in the global cannabis industry through the following primary strategies.

Expand our production capacity

In the near term, our primary strategy is to expand our production capacity as quickly as possible to meet existing demand in Canada, the United Kingdom and other markets. In Canada, we plan to continue the build-out of our Olds Facility to increase our current annual capacity in Canada from approximately 60 million grams to over 75 million grams by the end of 2019. We expect our annual capacity to reach 95 million grams once our Olds Facility and Merritt Facility are fully constructed and operational. To allow us to meet excess demand on a flexible production schedule, we may from time to time enter into arrangements with third parties to produce cannabis on our behalf. In the United Kingdom, we will begin to convert existing and build new cultivation and extraction space at Bridge Farm to economically produce CBD at scale. Our ability to increase our production capacity in Canada, the United Kingdom and other markets is subject to regulatory approvals, licencing requirements and other restrictions (see “Business—Current and Planned Facilities” for more information).

Expand geographic footprint

We expect to have a national sales footprint in Canada as soon as our production capacity allows. By the end of 2019, we expect to have our product available in at least the five Canadian provinces where we currently have supply agreements or have been approved to supply cannabis to retailers, and will pursue supply agreements and approvals with all remaining Canadian jurisdictions through 2020. Subject to capacity and compliance with Health Canada export permit requirements, local import permit requirements and other applicable local regulations, we will begin the export of medical cannabis from Canada to priority opportunity markets, including the United Kingdom and Germany, as early as 2020. When other countries legalize adult-use cannabis, we will move quickly to establish ourselves in these markets, which may include building local infrastructure that replicates our Canadian model. Leveraging our significant planned capacity in the United Kingdom, we will aggressively pursue CBD exports into other European and global markets. We will also pursue medical cannabis opportunities in the United Kingdom and other international medical cannabis markets as regulations permit.



 

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Maximize Play opportunity with new brand and product offerings

As capacity allows, we will launch additional products under our Sundial Cannabis brand in Canada. These will include multiple tailored offerings of strains and product formats to meet specific consumer needs. We are currently scaling production of multiple new strains to commercial quantities and introducing new strains on an ongoing basis and have received a licence from Health Canada to process cannabis and extract cannabis oil in Canada. We also intend to sell products in a wide range of additional formats, if and when regulations permit, and we receive the requisite Health Canada approvals to do so. We expect that regulations will permit sales of additional product formats and that we will receive the required Health Canada approvals by the end of 2019. In addition to our Sundial Cannabis brand, we will launch other premium brands, including Top Leaf and BC Weed Co., which will further enhance our market presence and margins. We expect to launch our first products under the Top Leaf brand by the fourth quarter of 2019. We will begin production and commercialization of BC Weed Co. products following the completion and licensing of our Merritt Facility.

Leverage Bridge Farm to establish global CBD brands

We will launch branded CBD offerings in the United Kingdom and other European countries through Bridge Farm, with an initial focus on health supplements, topicals and vapes, and plan to add additional product formats over time. As production capacity permits, we will expand our CBD offerings into other markets, leveraging Bridge Farm’s existing customer relationships with multi-national retailers such as Tesco, Morrisons, Asda (a Walmart subsidiary), Lidl, Amazon and Aldi. All of the retailers we have engaged to date have expressed interest in selling Bridge Farm’s CBD products, with some citing its U.K.-based production and traceable supply chain as advantages. To date, we have not entered into any agreements with such retailers to sell our CBD products. We will also work with other international retailers and selected wholesalers to export products into opportunity markets.

Maximize Heal opportunity

In Canada, we plan to launch our medical, direct-to-consumer website and expect sales of medical cannabis in Canada to constitute all or substantially all of our Heal business in the near term. In addition, subject to applicable regulations, we intend to target other established markets with strong demand for medical cannabis products, including the United Kingdom and Germany, as early as 2020, and will continue to evaluate these and other opportunities as we scale and develop our production. We intend to build on our strong research partnerships and our Pathway Rx joint venture to develop intellectual property to commercialize functional medicines. We intend to partner with pharmaceutical companies globally to develop and market cannabis as medicine. We further intend to sell and distribute our medical products internationally through partnerships with licensed pharmaceutical wholesalers, who generally have a wide distribution reach and are well-established importers of medical cannabis, especially in Europe. We are also working closely with potential new distribution channels, led by pharmacies, to exploit emerging opportunities as the regulatory framework evolves.

Explore strategic partnerships

Building on our differentiated CPG experience, we believe that we can create a competitive advantage by partnering with national and multi-national companies, including those in the CPG and pharmaceutical industries, across various product categories to jointly develop and market branded cannabis offerings. In addition, we intend to leverage our expertise and relationships to form partnerships with global retailers to pursue distribution arrangements. We also intend to partner with other industry players, nationally and internationally, as opportunities arise.

Pursue accretive acquisitions to supplement our organic growth

The cannabis industry is highly fragmented and as it continues to evolve, we expect significant industry consolidation in existing and new markets. Our management team has witnessed similar developments in other



 

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CPG industries, and we believe that our deal-making capabilities and experience will allow us to successfully identify, consummate and integrate acquisitions. As a public company, we will have greater ability to finance acquisitions, including through using our equity as consideration and accessing the capital markets.

Due to the competitive and dynamic nature of the emerging cannabis market and rapid changes in the regulatory environment, we recognize the need to remain flexible so we can react to opportunities and risks as they develop. We will continue to re-evaluate and re-prioritize our strategies to respond to these developments. We are actively fostering a culture of continued agility and exploration since the ability to pivot depending on market dynamics will deliver competitive advantage. We believe that our management team’s deep CPG experience equips us with the expertise and capability to react to market changes more quickly than our competitors.

Acquisition of Bridge Farm

On July 2, 2019, we, through our wholly-owned subsidiary, Sundial UK Limited, acquired all the issued and outstanding shares of Project Seed Topco Limited and its subsidiaries, which we refer to collectively as Bridge Farm, pursuant to a Sale and Purchase Agreement, dated February 22, 2019. The shares were acquired by payment of (i) cash consideration in the amount of £45.0 million, (ii) the issuance of $45 million aggregate principal amount of unsecured notes of Sundial, which have subsequently been converted into 2,400,000 of our common shares and (iii) contingent consideration in the form of earn-out payments of up to an additional 1,600,000 common shares of the Company based on a prescribed formula. In the event that the fair market value of the 2,400,000 common shares issued to the sellers is less than $45 million on the first anniversary of the closing date of the acquisition, we have agreed to issue additional common shares to make up for the difference between such fair market value and $45 million. In connection with the acquisition, we repaid certain third-party indebtedness of Bridge Farm amounting to £16.6 million, and replaced this debt with intercompany debt payable to Sundial amounting to £20.3 million, repayable on demand by Bridge Farm.

Bridge Farm is a leading supplier of herbs and ornamental flowers including basil, coriander, mint, dill, tulips, roses, and poinsettias in the United Kingdom, which generated revenue of £15.3 million for the period from July 1, 2017 to June 30, 2018. All of these products have been approved by the British Food Standards Agency. We expect to retain a portion of Bridge Farm’s existing herbs and ornamental flower business and cultivation operations in compliance with debt covenants and until such time as we would need to transition more space to hemp cultivation and CBD extraction in order to meet demand for our CBD products, subject to certain regulatory, licencing and other restrictions related to such transition. Bridge Farm’s existing facilities are highly automated, state-of-the-art facilities, with advanced plant movement and monitoring technology. In addition, through its use of biomass fuel for heating, Bridge Farm qualifies for a U.K. government credit that more than offsets its energy costs, further contributing to low production costs.

Bridge Farm holds a hemp cultivation licence at its Homestead Facility, making it one of the few indoor producers licensed to cultivate hemp in the United Kingdom. This licence was granted on December 28, 2018 and is set to expire on December 31, 2021 and we intend to seek renewal of this licence with the U.K. Home Office prior to its expiry. The renewal application will be submitted online and it takes approximately two to four weeks for the U.K. Home Office to review the application and issue its decision. Should the U.K. Home Office not renew or delay the renewal of our licence, or renew our licence on different terms, our ability to recognize the strategic objectives of our acquisition of Bridge Farm could be materially adversely affected. Bridge Farm currently cultivates hemp in approximately 40,000 square feet at the Homestead Facility.

We expect to transition an additional portion of the Homestead Facility to hemp cultivation by the end of the third quarter of 2019, and we plan to apply for licenses and transition certain of Bridge Farm’s other facilities to hemp cultivation, although we are evaluating the timing for such transition and do not yet have a timetable for doing so. In addition, we have applied for a high-THC cannabis licence to cultivate small amounts of high-THC cannabis for research and development purposes in certain Bridge Farm facilities as required under



 

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the applicable U.K. regulations. We believe we will receive this research and development licence in the fourth quarter of 2019. Following demonstration of our ability to satisfy regulatory requirements, including the disposal of any waste material containing THC extracted in processing, we will then be able to apply for a licence to cultivate high-THC cannabis in larger quantities in the United Kingdom with the goal of extracting CBD for use in our CBD products. See “Business—Current and Planned Facilities—Bridge Farm Facilities”. We will also pursue medical cannabis opportunities in the United Kingdom and other international medical cannabis markets as regulations permit.

We intend to leverage Bridge Farm’s existing distribution relationships with retailers such as Tesco, Morrisons, Asda (a Walmart subsidiary), Lidl, Amazon and Aldi to launch CBD product sales in the United Kingdom. Each of Tesco, Morrisons, Asda (a Walmart subsidiary), Lidl and Aldi currently has over 3,400, 400, 600, 700 and 700 stores in the United Kingdom, respectively. These retailers currently sell Bridge Farm’s herbs and ornamental flowers, and we have already engaged with a few of these retailers to discuss our intended transition of certain of Bridge Farm’s business to hemp cultivation and CBD production although we have not yet entered into any agreements to sell our CBD products. All of the retailers we have engaged to date have expressed interest in selling Bridge Farm’s CBD products, with some citing its U.K.-based production and traceable supply chain as advantages.

Acquisition of Interest in Pathway Rx

On March 13, 2019, we signed a share purchase agreement with Darryl Hudson, Olga Kovalchuk and Igor Kovalchuk, who is our non-executive employee, to acquire 50% of the issued and outstanding shares of Pathway Rx in consideration for an aggregate of 296,800 of our common shares. Pathway Rx is governed by a board of directors, to which we have the right to appoint two of four members. The results of Pathway Rx are included in our financial statements from March 13, 2019, the date of the acquisition, and will continue to be included in our consolidated financial statements in the future. Please see our unaudited condensed interim consolidated financial statements included elsewhere in this prospectus for more information.

Concurrently with the acquisition of our interest in Pathway Rx, we entered into a license agreement, or the Pathway Rx License Agreement, which granted us an exclusive right to use Pathway Rx’s intellectual property in exchange for (i) a royalty of 3% of gross revenues derived from activities which use the intellectual property that is the subject matter of the license agreement, or the Pathway Royalty Activities, which royalty percentage is increased to 5% of gross revenues derived from Pathway Royalty Activities upon the achievement of certain gross revenue milestones in one calendar year, (ii) the grant of up to 280,000 of warrants to purchase our common shares at an exercise price of $1.81 per share, subject to achievement of certain milestone gross revenues derived from the Pathway Royalty Activities, (iii) 50% of net revenues received by the Company from the sale of certain of the licensed products or the use of certain of the licensed intellectual property, and (iv) a fixed payment of $1.4 million, payable in quarterly installments of $87,500 over the first four years of the term of the Pathway Rx License Agreement. The initial term of the Pathway Rx License Agreement is ten years, and it is automatically renewable for consecutive one year terms unless we notify Pathway Rx of the intention not to renew the agreement at least 30 days prior to the expiration of the initial term or the applicable renewal term.

Recent Developments

Sun 8 Agreement and Acquired Brands

On May 1, 2019, we entered into an agreement with Sun 8 Holdings Inc., or the Sun 8 Agreement, to acquire the world-wide proprietary rights, including copyrights, licences and trademarks, to a portfolio of brand names, designs, domain names and other intellectual property associated with Top Leaf, BC Weed Co. and certain other brands, or the Acquired Brands. The consideration paid for the Acquired Brands pursuant to the Sun 8 Agreement consisted of: (a) 480,000 common shares, (b) a contingent obligation to make certain royalty payments and (c) performance warrants to acquire up to 1,800,000 common shares at an exercise price of $0.94 per share, subject to vesting conditions contingent upon achieving minimum thresholds of revenue derived from the Acquired Brands or Acquired Cultivars (as defined below) over five years.



 

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The Sun 8 Agreement also provided for the settlement of obligations owed in respect of past services Sun 8 Holdings Inc. had provided to the Company. Pursuant to a prior service agreement dated as of October 24, 2018, Sun 8 Holdings Inc. had performed certain services for the Company, including (i) assisting the Company in its acquisition of certain cultivars, the Acquired Cultivars, (ii) the identification, interview and hiring of cultivation staff, and (iii) the assessment and optimization of the Company’s growing and production methods and techniques, collectively the Past Services. The Sun 8 Agreement sets the consideration to be paid in respect of the Past Services at $1.5 million. There are no ongoing or continued services to be provided to the Company by Sun 8 Holdings Inc.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Sun 8 Agreement and Acquired Brands”.

The Acquired Cultivars include several award-winning cultivars, such as Sweet J (previously Sweet Jesus), first place sativa flower winner, and Strawberry Cream (previously Voodoo Child), second place hybrid flower winner, both of the High Times Cannabis Cup Canada 2017.

Offering of 8% Convertible Notes

In May 2019, we closed a private placement offering of 8% convertible unsecured promissory notes, or the 8% Convertible Notes, to accredited investors in Canada, the United States and elsewhere in aggregate principal amount of approximately $92.6 million. In July 2019, we issued a further $0.6 million of 8% Convertible Notes to an affiliate of the Canadian chartered bank that provided the Bridge Facility as consideration for past services rendered by the bank in providing the Bridge Facility. Upon the completion of an IPO (as defined in the indenture relating to the 8% Convertible Notes), each holder of the 8% Convertible Notes will have a one-time right to elect to convert all of its 8% Convertible Notes, plus accrued interest thereon (approximately $1.7 million as of the date of this prospectus), into a number of shares of the Company at a specified discount to the price of such shares offered to the public in connection with the IPO, calculated in accordance with the terms of the indenture.

The proceeds from the sale of the 8% Convertible Notes were used, in part, to repay the Bridge Facility (as defined herein) and otherwise applied to the purchase price for the acquisition of Bridge Farm. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Contractual Commitments and Obligations—8% Convertible Notes”.

SAF Jackson Facility

On June 27, 2019, we entered into a credit agreement, or the SAF Credit Agreement, between SGI Partnership, a general partnership controlled by us, and SAF Jackson II LP, or SAF, a limited partnership affiliated with the SAF Group, as lender and administrative agent, providing for a secured credit facility, or the SAF Jackson Facility, to be advanced in two tranches totalling $159.575 million, less (i) a 6% original issue discount and (ii) upfront fees totalling up to approximately $2.4 million. The first tranche of $115.0 million, less the original issue discount and upfront fees, was advanced to fund the acquisition of Bridge Farm. The second tranche of $44.575 million is available prior to December 31, 2019 and is subject to a number of conditions precedent, including our meeting certain performance and liquidity targets. Amounts advanced under the SAF Jackson Facility will bear interest at a rate of 9.75% per annum. Additionally, in connection with the SAF Jackson Facility, SAF also received warrant certificates representing warrants exercisable upon the earlier of (i) the completion of an initial public offering, (ii) December 31, 2020, or (iii) a default or event of default under the SAF Credit Agreement or certain other specified events. The first tranche expires in three years from the date of this offering and the second tranche expires four years following the date of this offering. The number of warrants issuable under the warrant certificates and the exercise price of such warrants issued is indexed to the Company’s share price determined at the date of the completion of an initial public offering. Based on the foregoing and the initial public offering price of US$13.00 ($16.95) per share, the Company under the warrant



 

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certificates will issue to SAF, for the first tranche, warrants to acquire 977,026 shares at an exercise price of $21.19 per share and, for the second tranche, warrants to acquire 1,526,603 shares at an exercise price of $20.34 per share.

The SAF Credit Agreement contains customary affirmative and negative covenants, including negative covenants restricting our ability to incur debt, incur liens, make restricted payments, dispose of assets, make investments or change our business, subject to certain exceptions. In addition, so long as at least $75.0 million principal amount of loans is outstanding under the SAF Credit Agreement, we are subject to certain financial covenants, including certain leverage ratios and covenants requiring us to (i) maintain at least 60% of the square footage of Bridge Farm’s existing facilities in the United Kingdom, representing approximately 900,000 of the total 3.6 million square feet of expected capacity following the completion of our planned expansion of Bridge Farm’s facilities, dedicated to non-CBD plant production and inventory and (ii) achieve certain minimum gross margin targets in respect of Bridge Farm’s non-CBD plant business for the three months ending December 31, 2019 and the three months ending March 31, 2020. The SAF Credit Agreement also provides for customary events of default, including any breach of the aforementioned covenants if not cured by the deadline specified in the agreement.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Other Secured Debt—SAF Jackson Facility”.

Investment and Royalty Agreement

On August 16, 2018, we entered into an amended and restated investment and royalty agreement, or the Investment and Royalty Agreement, with 2082033 Alberta Ltd., an entity controlled by our Executive Chairman, to receive an investment of up to a total of $11.0 million in multiple instalments, in consideration for the issue of a total of up to 7,200,000 common shares, valued at $1.53 per common share to our Executive Chairman, and a series of quarterly royalty payments, calculated on the basis of our revenue generated from certain portions of our Olds Facility for the prior quarter multiplied by 6.5%, beginning on October 1, 2018 and ending on September 30, 2027. As at March 31, 2019, a total of $10.9 million had been invested under the Investment and Royalty Agreement, in consideration for which we issued 7,149,035 common shares to our Executive Chairman. In July 2019, we issued an additional 50,963 shares to our Executive Chairman in consideration for advancing the remaining funds available to be advanced under the Investment and Royalty Agreement.

In contemplation of our proposed initial public offering, and in consultation with and at the recommendation of our financial advisors, we determined that it would be advisable to terminate the Investment and Royalty Agreement to facilitate the completion of a successful initial public offering. During April 2019, our board of directors began its consideration of terminating the Investment and Royalty Agreement. Our board of directors undertook an assessment of the liquidation value of the royalty payments in order to engage in a negotiation with our Executive Chairman regarding such termination. Our board of directors considered a variety of factors in coming to a view of the value of the future royalty payments over the 10 year term of the agreement. Our board assessed the value of the future royalty payments under the Investment and Royalty Agreement based on a discounted cash flow basis, under which anticipated royalty payments were estimated based on the material assumptions noted below that we utilized in assessing the value of the ongoing royalty payments for purposes of our financial statements (i.e. square footage of our Olds Facility subject to the royalty, average plant yield, total cannabis production per year and average price per gram), and taking into account our future growth prospects. Based on continuing improvements in our operations as our production ramped up in the second quarter of 2019, our board of directors considered a variety of ranges in respect of the appropriate discount rate, the average grams per square foot, the number of growing cycles and the anticipated price per gram, in each case over the 10 year term of the Investment and Royalty Agreement. Our board of directors also considered additional intangible value drivers that were expected to result from the termination of the Investment and Royalty Agreement, namely: (i) the elimination of a fixed obligation that, if kept in place, was expected to adversely affect our balance sheet and EBITDA results going forward; and (ii) the elimination of a related party contract with our Executive Chairman that may not be well-received by the market and which would likely have an



 

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adverse impact on our share price insofar as valuations are based, in part, on comparable valuations of peers that rely on forecasted EBITDA. As a result of such assessment and certain sensitivity analyses in respect of the material assumptions, our board of directors determined the liquidation value of the royalty payments to be in the range of $50 million to $70 million. Our Executive Chairman did not participate in any of the deliberations of our board of directors regarding this value determination.

In July 2019, we and our Executive Chairman agreed to terminate the Investment and Royalty Agreement for aggregate consideration of 3,680,000 common shares, 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) and a cash payment of $9.5 million (to be paid on or before December 31, 2019 or on such earlier date as permitted by certain of our lenders), subject to consummation of this offering. Per the terms of the termination agreement, in the event that the cash payment is not received in whole or in part by December 31, 2019, interest at a rate of 1% per month shall accrue on any amount outstanding until payment in full of $9.5 million, plus any applicable interest, is made.

In the event the Investment and Royalty Agreement is terminated, we will record a finance expense representing the difference between the value of the aggregate consideration paid by the Company in connection with the termination and the $18.5 million previously-recorded amortized value of the financial obligation. As of the date of this prospectus, the preliminary value assigned to the consideration paid by the Company is approximately $72 million, reflecting a valuation of approximately $57 million assigned to the 3,680,000 common shares and approximately $4.8 million assigned to the 480,000 share purchase warrants. Based on this preliminary value, we estimate the amount of the associated finance expense to be approximately $53 million. The value assigned to the consideration is preliminary and subject to change—to the extent the value changes, the corresponding finance expense will also change. We have not yet determined the portion of this finance expense that will be recognized in the three months ended June 30, 2019 and the portion that will be recognized in the three months ending September 30, 2019.

The material assumptions we used to determine the $18.5 million valuation for the royalty disclosed in our financial statements for the fiscal year ended December 31, 2018 and the three months ended March 31, 2019, determined as at December 31, 2018 and March 31, 2019, respectively, and held flat for the 10 year term of the royalty payments, and assuming a discount rate of 18%, were as follows: (i) 44,403 square feet at the Olds Facility (out of an aggregate of 288,000 square feet at such facility currently, representing approximately 15.4% of the current square footage) subject to the royalty, (ii) average plant yield per square foot equal to 45 grams, (iii) 12 million grams of total cannabis production per year and (iv) a $5.50 average price per gram. The foregoing assumptions, made as at December 31, 2018 and March 30, 2019, respectively, will be retested as at June 30, 2019 and disclosed in our financial statements for the six-month period ended June 30, 2019.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Investment and Royalty Agreement”.

Possible Refinancing of Bank Credit Facilities

As of the date of this prospectus, we are considering replacing our existing bank credit facilities extended to us under the Commitment Letter (as defined herein) with ATB Financial with a new $90.0 million secured credit facility provided by ATB Financial, consisting of a $5.0 million senior secured revolving credit facility and a $85.0 million senior secured term credit facility, as well as the right to subsequently increase the size of the facilities by a maximum of $50.0 million, subject to certain conditions. A portion of the proceeds from the new secured credit facility would be used to repay amounts outstanding under the Commitment Letter and any excess proceeds would be used for general corporate purposes, including funding capital expenditures. The terms and conditions of the new secured credit facility have not been finalized, and there is no assurance that the refinancing will be consummated. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Bank Credit Facilities”. In addition, while we have not entered into any binding agreements to do so as of the date of this prospectus, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be



 

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needed for additional working capital, capital expenditures or other strategic investments.

Risk Factors

Investing in our common shares involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our common shares. If any of these risks actually occur, our business, financial condition, results of operations and prospects would likely be materially adversely affected. In such case, the trading price of our common shares would likely decline and you may lose part or all of your investment. Below is a summary of some of the principal risks we face:

 

   

our industry is new and rapidly developing and may develop in ways that are different from our expectations;

 

   

we are dependent upon a limited number of facilities that are integral to our business;

 

   

we intend to target the premium segment of the adult-use cannabis market, which may not materialize, or in which we may not be able to develop or maintain a brand that attracts or retains customers;

 

   

any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure;

 

   

any failure on our or our suppliers’ part to comply with supplier standards established by provincial or territorial distributors could prevent us from accessing certain markets in Canada;

 

   

we currently sell a significant share of our products to provincial governments through supply contracts that may not generate orders as expected or which may not be renewed;

 

   

we are constrained by law in our ability to market our products in Canada;

 

   

we have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future;

 

   

we may be unable to sustain and effectively manage our growth and development;

 

   

we may be unsuccessful in competing in the overall legal adult-use cannabis market in Canada and any other countries we intend to operate in;

 

   

consumer preferences may change, and we may be unsuccessful in acquiring or retaining consumers and keeping pace with changing market developments; and

 

   

the success of Bridge Farm’s business will require the commitment of substantial resources and will depend on the development of the market for CBD products in the United Kingdom, Europe and elsewhere.

Implications of Being an Emerging Growth Company and a Foreign Private Issuer

As a company with less than US$1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include an exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, or SOX.

We may choose to take advantage of some but not all of these reduced burdens, and therefore the information that we provide to holders of our shares may be different than the information you might receive from other public companies in which you hold equity. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards applicable to public companies. We currently prepare our consolidated financial statements in accordance with IFRS as issued by the IASB, so we are unable to make use of the extended



 

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transition period. However, in the event that we convert to accounting principles generally accepted in the United States (which we do not currently intend to do) while we remain an emerging growth company, we have irrevocably elected to opt out of such extended transition period.

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We will cease to be an emerging growth company upon the earliest of the following:

 

   

the last day of the first fiscal year in which our annual revenues were at least US$1.07 billion;

 

   

the last day of the fiscal year following the fifth anniversary of this offering;

 

   

the date on which we have issued more than US$1.0 billion of non-convertible debt securities over a three-year period; and

 

   

the last day of the fiscal year during which we meet the following conditions: (i) the worldwide market value of our common equity securities held by non-affiliates as of our most recently completed second fiscal quarter is at least US$700 million, (ii) we have been subject to U.S. public company reporting requirements for at least 12 months and (iii) we have filed at least one annual report as a U.S. public company.

Upon the effectiveness of the registration statement of which this prospectus forms a part, we will report under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we continue to qualify as a foreign private issuer under the Exchange Act, we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including:

 

   

the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;

 

   

the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and

 

   

the rules under the Exchange Act requiring the filing with the Securities and Exchange Commission, or the SEC, of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events.

In addition, we will not be required to file annual reports and financial statements with the SEC as promptly as U.S. domestic companies whose securities are registered under the Exchange Act, and are not required to comply with Regulation FD, which restricts the selective disclosure of material information.

Both foreign private issuers and emerging growth companies are also exempt from certain more stringent executive compensation disclosure rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Even if we no longer qualify as an emerging growth company, so long as we remain a foreign private issuer, we will continue to be exempt from the more stringent compensation disclosures required of companies that are neither an emerging growth company nor a foreign private issuer.

Corporate Information

Sundial Growers Inc. was incorporated under the Business Corporations Act (Alberta), or the ABCA, on August 19, 2006. On July 22, 2019, we filed articles of amendment to effect a 1 to 1.6 share split. We have 13 direct and indirect subsidiaries, all of which are wholly-owned, and a 50% interest in Pathway Rx. See “Business—Corporate Information” and “Business—Acquisition of Interest in Pathway Rx”.

Our headquarters, principal executive and registered offices are located at #200, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3 and our telephone number is (403) 948-5227. Our website address is www.sundialcannabis.com. The information on or accessible through our website is not part of and is not incorporated by reference into this prospectus, and the inclusion of our website address in this prospectus is only for reference.



 

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The Offering

 

Common shares offered by us

11,000,000 common shares

 

Common shares to be outstanding after this offering

83,807,315 common shares

 

Over-allotment option to purchase additional common shares

We have granted the underwriters an option, exercisable within 30 days from and including the date of closing of the offering, to purchase up to an additional 1,650,000 common shares to cover over-allotments, if any, in connection with this offering.

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately US$131.0 million, or approximately US$151.2 million if the underwriters exercise their over-allotment option in full, based on the initial public offering price of US$13.00 per share, after deducting the underwriting commission and estimated offering expenses payable by us.

 

  We are undertaking this offering in order to increase our liquidity and raise capital to, in combination with cash on hand, other anticipated sources of financing and expected cash flow from operations, further develop our cultivation and processing capacity, including for the completion of the construction, expansion and transition of our cultivation and processing facilities. We plan on allocating the remainder, if any, for capital expenditures required to maintain our productive capacity on an ongoing basis, future acquisitions and general corporate purposes. See “Use of Proceeds” for additional information.

 

Directed share program

At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of our common shares offered by this prospectus (excluding the common shares that may be issued upon the underwriters’ exercise of their option to purchase additional shares), referred to as the reserved shares, to certain individuals, who may include our officers, directors and employees, as well as friends and family members of our officers and directors. If purchased by persons who are not officers or directors, the shares will not be subject to a lock-up restriction. Our directors and officers have agreed that any shares purchased by them in the directed share program will be subject to the transfer undertaking described under “Pre-Closing Arrangement”. In addition, the underwriters have reserved 50% of the shares available for sale under the directed share program for holders of the 12% Convertible Notes who elect to participate in the Lockup Incentive Offer (as defined below). To the extent holders elect to participate in the Lockup Incentive Offer and receive common shares in the directed share program, such shares will not be subject to any lock-up restriction (except for any shares purchased by any director or officer). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—12% Convertible Notes”.


 

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  The number of shares available for sale to the general public, referred to as the general public shares, will be reduced to the extent that these individuals purchase all or a portion of the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. Likewise, to the extent demand by these persons exceeds the number of shares reserved for sale in the program, and there are remaining shares available for sale to these persons after the general public shares have first been offered for sale to the general public, then such remaining shares may be sold to these persons at the discretion of the underwriters. For further information regarding our directed share program, see “Certain Relationships and Related Party Transactions” and “Underwriting.”

 

Nasdaq trading symbol for our common shares

“SNDL”

 

Risk Factors

You should carefully read the section entitled “Risk Factors” and other information included in this prospectus for a discussion of factors that you should consider before deciding to invest in our common shares.

Unless we specifically state otherwise, all information in this prospectus assumes (i) no exercise by the underwriters of their over-allotment option to purchase up to an additional 1,650,000 common shares from us and (ii) a 1 for 1.6 split of our shares, which was effected on July 22, 2019.

The number of common shares to be outstanding after this offering includes 11,000,000 common shares to be issued in this offering (assuming the underwriters do not exercise their over-allotment option) and 72,807,315 common shares outstanding as of March 31, 2019, after giving effect to the 1 for 1.6 split of our shares, and excludes:

 

   

3,014,541 shares that were issued from April 1, 2019 to June 30, 2019;

 

   

up to 11,455,303 shares that may be issued as of June 30, 2019 to holders of our 12% unsecured subordinated convertible notes, or the 12% Convertible Notes (which are convertible at a conversion price of US$3.13 ($4.08) per unit for notes issued to U.S. investors and $3.91 per unit for notes issued to Canadian investors into units comprising common shares and common share purchase warrants), comprised of (i) 7,263,984 shares issuable upon the conversion of our 12% Convertible Notes and (ii) 4,191,319 shares issuable in connection with the exercise of the common share purchase warrants at an exercise price of US$3.75 ($4.89) per warrant for notes issued to U.S. investors and $4.38 per warrant for notes issued to Canadian investors, each in accordance with its terms and assuming that holders representing approximately 77% of the aggregate principal amount of 12% Convertible Notes participate in the Lockup Incentive Offer (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—12% Convertible Notes”);

 

   

up to 6,999,757 shares issuable in connection with the potential conversion of our 8% Convertible Notes upon the completion of this offering at the option of the holders thereof, at a conversion price of $13.56 per share, which is equal to 80% (the discount to the offering price prescribed in the indenture governing the 8% Convertible Notes) of US$13.00 ($16.95) per share (the initial public offering price per share) (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—8% Convertible Notes”);



 

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up to 1,800,000 shares that may be issued upon the exercise of performance warrants held by Sun 8 Holdings Inc., which are exercisable at an exercise price of $0.94 per share and vest annually over five years, beginning on March 31, 2020, in amounts contingent upon the achievement of certain revenue milestones (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Sun 8 Agreement and Acquired Brands”);

 

   

up to 280,000 shares that may be issued upon the exercise of warrants issuable to Pathway Rx, at an exercise price of $1.81 per share, subject to the achievement of certain milestone gross revenues derived from the Pathway Royalty Activities (see “Business—Acquisition of Interest in Pathway Rx”);

 

   

up to 977,026 shares issuable to SAF pursuant to the exercise of warrants at an exercise price of $21.19 per share and up to 1,526,603 shares issuable to SAF pursuant to the exercise of warrants at an exercise price of $20.34 per share (in each case based on the initial public offering price of US$13.00 ($16.95) per share), in connection with the SAF Jackson Facility (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Other Secured Debt—SAF Jackson Facility”);

 

   

9,321,866 simple warrants and 6,062,822 performance warrants outstanding as of June 30, 2019, of which 2,227,731 simple warrants and 2,206,290 performance warrants were vested and exercisable into an aggregate number of 4,434,021 common shares, at weighted average exercise prices of $1.32 and $0.72, respectively;

 

   

24,000 simple warrants and 75,200 performance warrants, collectively exercisable into an aggregate of 99,200 common shares at a weighted average exercise price of $15.52 and $9.21, respectively, granted as equity incentives to certain of our employees from July 1, 2019 to July 15, 2019;

 

   

up to 21,760 shares reserved for future issuance under our employee equity incentive plan, or our Harvest Club Plan, as of June 30, 2019;

 

   

warrants issued to Greg Mills, one of our directors, exercisable for 720,000 common shares at an exercise price of $6.25 per warrant (which only vest in the event Mr. Mills becomes our Executive Chairman) and warrants issued to Mr. Mills exercisable for 80,000 common shares at an exercise price of $7.50 per warrant (which only vest if our market capitalization exceeds a certain threshold) (see “Director Compensation”);

 

   

2,400,000 of our common shares as part of the consideration for the acquisition of Bridge Farm (see “Business—Acquisition of Bridge Farm”);

 

   

up to 1,600,000 shares that may be issued in the form of earn-out payments to the sellers of Bridge Farm (see “Business—Acquisition of Bridge Farm”);

 

   

480,000 warrants (each exercisable for one common share each at an exercise price of $6.25) issued to David Ball pursuant to the terms of his employment agreement effective upon closing of the Bridge Farm acquisition;

 

   

(1) 50,963 shares issued to our Executive Chairman as consideration for the advance of the remaining funds available under the Investment and Royalty Agreement and (2) 3,680,000 of our common shares and 480,000 warrants (exercisable for one common share each at an exercise price of $15.94) which we have agreed to issue to our Executive Chairman in connection with the termination of the Investment and Royalty Agreement (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Investment and Royalty Agreement”);

 

   

120,000 common shares, 240,000 common share purchase warrants (exercisable into an aggregate of 240,000 common shares at an exercise price of $3.91 per share), 144,000 common share purchase warrants (exercisable into 144,000 common shares at an exercise price of $3.91, and 160,000 common share purchase warrants exercisable into 160,000 common shares at an exercise price of $6.25) each issuable to one of our advisors as consideration for certain financial advisory services in connection with this offering (see “Description of Share Capital—Common Shares” and “Description of Share Capital—Warrants”); and



 

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$1.3 million of shares to be issued at the price to public in this offering to certain of our directors in connection with their service to the Company, in equal quarterly installments between September 30, 2019 and June 30, 2020 (representing 76,699 common shares issuable at the initial public offering price of US$13.00 ($16.95) per share (see “Director Compensation”)).

Upon completion of the offering, assuming no exercise of the over-allotment option by the underwriters, and without giving effect to any shares issuable pursuant to convertible notes or warrants, our issued and outstanding share capital will consist of 93,125,619 common shares.



 

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Summary Historical Consolidated Financial and Other Data

The following tables present summary historical consolidated financial and other data for our business. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Capitalization”, “Selected Historical Consolidated Financial Data”, “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

We have derived the summary consolidated statements of loss and comprehensive loss data for the three months ended March 31, 2019 and March 31, 2018, and the summary consolidated statement of financial position data as at March 31, 2019, from our unaudited condensed interim consolidated financial statements included elsewhere in this prospectus, and for the fiscal years ended December 31, 2018, February 28, 2018 and February 28, 2017 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited condensed interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for those periods. Our historical results are not necessarily indicative of the results that should be expected in any future period and results for the interim period are not necessarily indicative of the results of any future period the full year.

 

Consolidated Statements of Loss and
Comprehensive Loss Data:
  Three months ended     Fiscal years ended  
(in thousands, except per share data)   March 31, 2019     March 31, 2018     December 31, 2018(1)     February 28, 2018     February 28, 2017  
    (Unaudited)                    

Gross revenue

  $ 1,691     $     $     $     $  

Excise taxes

    192                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    1,499                          

Cost of sales

    778                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin before fair value adjustments

    721                          

Increase (decrease) in fair value of biological assets

    692       366       (1,280     366        

Change in fair value realized through inventory

    80                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    1,493       366       (1,280     366        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative

    5,074       1,602       8,830       3,169       1,420  

Sales and marketing

    1,212       820       2,380       1,274        

Research and development

    95       494       275       413        

Pre-production expenses(2)

          637       6,457       1,249        

Depreciation and amortization

    120       163       920       411       80  

Foreign exchange (gain)/loss

    (269     1       141              

Accretion expense

                            29  

Share-based compensation expense

    12,625       1,561       6,889       4,551        

Asset impairment

    162       2,184       523       2,184        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (17,526     (7,096     (27,695     (12,885     (1,529
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance costs

    (2,785           (28,814     (75     (37

(Loss)/gain on disposal of property, plant and equipment

          (52     (17     (35     12  

Sub-lease income

                            9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before tax

    (20,311     (7,148     (56,526     (12,995     (1,545

Income tax recovery

    3,609                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

    (16,702     (7,148     (56,526     (12,995     (1,545
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss attributable to:

         

Sundial Growers Inc.

  $ (16,702   $ (7,148   $ (56,526   $ (12,995   $ (1,545

Non-controlling interest

                             
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share(3)

  $ (0.24   $ (0.12   $ (0.82   $ (0.23   $ (0.04

Other Data:

         

Adjusted EBITDA(4):

  $ (5,524   $ (3,554   $ (18,083   $ (6,105   $ (1,419
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Fiscal year ended December 31, 2018 consists of the ten months ended December 31, 2018.

(2)

Our pre-production expenses for the fiscal year ended December 31, 2018 include approximately $3.3 million related to reserves taken by management associated with our non-delivery of cannabis under certain legacy supply agreements with other licensed cannabis producers. See “Business—Legal Proceedings”.



 

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(3)

See Note 16 to our unaudited condensed interim consolidated financial statements and Note 12 to our audited consolidated financial statements included elsewhere in this prospectus for further details regarding the calculation of basic and diluted loss per share for the three months ended March 31, 2019 and 2018, and the fiscal years ended December 31, 2018 and February 28, 2018 and 2017, respectively.

(4)

We define Adjusted EBITDA as net income (loss) before finance costs, depreciation and amortization, accretion expense and income tax recovery and excluding increase (decrease) in fair value of biological assets, change in fair value realized through inventory, unrealized foreign exchange loss (gain), share-based compensation expense, asset impairment and (loss)/gain on disposal of property, plant and equipment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Basis of Presentation—Adjusted EBITDA” for a reconciliation of net loss to Adjusted EBITDA.

Estimated Preliminary Results for the Three Months Ended June 30, 2019 (unaudited)

Presented below are certain estimated preliminary financial results as at and for the three months ended June 30, 2019. These estimated preliminary results are based on the information available to us at this time. For estimates of gross revenue and net revenue, we have provided ranges, rather than specific amounts, because these results are preliminary. We are not able to provide an estimate of net loss and comprehensive loss and net loss and comprehensive loss per share at this time, however, we have provided descriptions of the key factors and drivers in the period that we expect will impact our final results. As these estimates and descriptions are preliminary in nature, our actual results may vary materially from the estimated preliminary results presented here and will not be finalized until after we close this offering.

These are forward-looking statements and may differ from actual results. These estimates should not be viewed as a substitute for our full interim or annual financial statements prepared in accordance with IFRS. Accordingly, you should not place undue reliance on this preliminary data. Please refer to the section titled “Special Note Regarding Forward-Looking Statements”. These estimated preliminary results should be read in conjunction with the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. For additional information, please see the section titled “Risk Factors”.

This data has been prepared by, and is the responsibility of, management. Our independent registered public accounting firm, KPMG LLP, or KPMG, has not audited, reviewed, compiled, or performed any procedures with respect to the preliminary financial results. Accordingly, KPMG does not express an opinion or any other form of assurance with respect thereto.

For the three months ended June 30, 2019, we expect our gross revenue to be between $19.0 million and $21.0 million and net revenue to be between $18.0 million and $20.0 million compared to gross revenue and net revenue of $1.7 million and $1.5 million, respectively, for the three months ended March 31, 2019 (we did not have any gross revenue or net revenue in the comparative three months ended June 30, 2018); however, we expect to report a significant net loss and comprehensive net loss for the three months ended June 30, 2019.

The gross margin as a percentage of gross revenue is expected to be substantially consistent for the three months ended June 30, 2019, as compared to the three months ended March 31, 2019, as a result of increases in net revenue, increases in fair value of biological assets and fair value realized through inventory, offset by higher cost of sales proportionate to the increase in net revenue.

In addition, we expect general and administrative, sales and marketing, research and development and finance expenses (excluding estimated finance expense associated with the Investment and Royalty Agreement), in the aggregate, to increase approximately 100% in the three months ended June 30, 2019 as compared to the three months ended March 31, 2019, consistent with our continued growth, including the acquisition of new cultivars and increased debt levels and fees paid in connection with the retirement of certain debt obligations. Share-based compensation is expected to be significant in the three months ended June 30, 2019 due to the equity grants to our officers, directors and employees, but less than our share-based compensation expense for the three months ended March 31, 2019, which was $12.6 million.



 

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As a result of the foregoing, we expect that net loss and comprehensive loss and net loss and comprehensive loss per share (excluding changes in estimated finance expense associated with the Investment and Royalty Agreement) in the three months ended June 30, 2019 will be less than the net loss and comprehensive loss and net loss and comprehensive loss per share we reported for the three months ended March 31, 2019.

In July 2019, we and our Executive Chairman agreed to terminate the Investment and Royalty Agreement), subject to consummation of this offering. Assuming the Investment and Royalty Agreement is terminated, we will record a finance expense representing the difference between the aggregate consideration paid in connection with the termination and the previously recorded amortized value of the financial obligation. As of date of this prospectus, we had not yet determined the portion of this finance expense that will be recognized in the three months ended June 30, 2019 and the portion that will be recognized in the three months ending September 30, 2019. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Investment and Royalty Agreement”.



 

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RISK FACTORS

This offering and investing in our common shares involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this prospectus, before deciding to invest in our common shares. Other risks and uncertainties that we do not presently consider to be material, or of which we are not presently aware, may become important factors that affect our future financial condition and results of operations. If any of the following risks actually occurs, our business, financial condition, results of operations, liquidity and prospects could suffer materially, the trading price of our common shares could decline and you could lose all or part of your investment. See also “Special Note Regarding Forward-Looking Statements”.

Risks Related to Our Business and Our Industry

Cannabis for adult use only recently became legal in Canada. As a result, the industry and the regulations governing the industry are rapidly developing, and if they develop in ways that differ from our expectations, our business and results of operations may be adversely impacted.

Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts, or the Cannabis Act, federally legalized adult-use (non-medical) cannabis in Canada effective as of October 17, 2018. Under the Cannabis Act, each province and territory of Canada has the ability to separately regulate the distribution and sale of cannabis within such province or territory, and the laws (including associated regulations) adopted by each province and territory may vary significantly. Each Canadian province and territory has enacted and implemented regulatory regimes for the distribution and sale of cannabis for adult use; however, there is no guarantee that provincial and territorial legislation regulating the distribution and sale of cannabis for adult use, or the application and enforcement of such legislation, will not change in the future. Any such change could result in significant additional compliance or other costs and may make participation in such markets uneconomical. Since cannabis was only recently legalized in Canada, there may be inconsistencies in the interpretation and enforcement of the Cannabis Act and the Cannabis Regulations (SOR/2018-144), or the Cannabis Regulations, and associated provincial and territorial rules and regulations. In addition, Health Canada has experienced delays in approving applications for new licences, capacity expansions and employee security checks, including with respect to the expansion of our Olds Facility and the approval of certain members of our management to perform functions requiring regulatory approval. Additional inconsistencies, changes or delays could have a material adverse effect on our business and results of operations.

In addition, regulations are continuing to be developed for different aspects of the adult-use cannabis industry in Canada. For example, on June 26, 2019, Health Canada published amendments to the Cannabis Regulations to expand the permitted formats for products that contain or are derived from cannabis to include edible cannabis, cannabis extracts and cannabis topicals. These regulations will come into force on October 17, 2019 and sales of edible cannabis, cannabis extracts and cannabis topicals are expected to begin no earlier than December 16, 2019. While we intend to offer edible cannabis products once legal and will assess the final rules and regulations once effective, the regulations and market for such products and adult-use cannabis generally may not develop, or may not develop as we expect or on the timeline that we expect, which could have a material adverse effect on our business and results of operations.

The federal and provincial or territorial legislation and regulatory regimes for cannabis products also include excise duties payable by licensed cannabis producers on adult-use cannabis products, in addition to goods and services tax or harmonized sales tax in certain provinces and territories. The rate of the excise duties for cannabis products varies by province and territory. Any significant increase in the rate of excise duties on cannabis products in the future could reduce consumer demands for cannabis products and adversely impact the adult-use cannabis industry and market in general. In addition, any increase in the rate of excise duties on cannabis products in the future could reduce our margins and profitability in the event that we could not or chose not to pass along such increases to consumers.

 

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We are dependent upon regulatory approvals and licences for our ability to grow, process, package, store and sell cannabis and other products derived therefrom, and these regulatory approvals are subject to ongoing compliance requirements, reporting obligations and fixed terms requiring renewal.

Our Canadian business operations are dependent on licences issued by Health Canada. Our licence for our Olds Facility expires on September 14, 2021, and our licence for our facility located in Rocky View, Alberta, or our Rocky View Facility, expires on June 12, 2020. Each of these licences was issued for a period of three years. A holder of a cannabis licence under the Cannabis Act and Cannabis Regulations must apply to renew its licence on or before the licence expiry date. Following receipt of the renewal application, Health Canada will (i) confirm the security clearance status of all relevant individuals; (ii) confirm the status of fees paid (if applicable) and (iii) confirm the status of licences issued by the Canada Revenue Agency under the Excise Act, 2001 (if applicable). Health Canada may also conduct an inspection to verify compliance or ask the licence holder to provide additional information. A renewed license with a new expiry date will be issued once Health Canada confirms that all requirements have been met. Cannabis license holders can apply to renew their licence up to four months before the licence expires. Failure to comply with the requirements of the licences or any failure to renew the licences would have a material adverse impact on us. There can be no guarantee that Health Canada will renew our licences, or that such renewals will occur in a timely fashion or on terms similar to our existing licences or otherwise acceptable to us. Any new facilities or the expansion of our business at existing facilities requires the approval of Health Canada, and there is no guarantee that Health Canada will grant such approvals. We have applied to expand capacity at our Olds Facility and to build and licence our Merritt Facility, for the cultivation of cannabis. Our ability to expand our production capacity depends on our ability to obtain such approvals. Health Canada requires new applicants for cannabis licences under the Cannabis Act to have a fully built site that meets all the requirements of the Cannabis Regulations at the time of their application, as well as satisfying other application criteria. Further, according to Health Canada, it will not substantively review our licence applications until the facilities associated with such licence applications are fully constructed and meet all the requirements of the Cannabis Regulations. Any delay in renewing or granting a licence, revocation of an existing licence, refusal to grant a licence or change in the terms of licence could materially adversely impact our expected future operations.

Pursuant to the Cannabis Act, only industrial hemp or cannabis used for medical or scientific purposes may be imported into or exported from Canada. Any such import or export requires a permit. In the future, we may seek permits to import or export cannabis and cannabis products. If we do not receive the required permits or receive licences with limitations that we do not expect, our ability to import and export cannabis and cannabis products could be materially adversely affected.

Bridge Farm currently holds a hemp cultivation licence granted by the U.K. Home Office at one of its facilities and cultivates hemp in a portion of this facility. This licence was granted on December 28, 2018 and is set to expire on December 31, 2021, and we intend to seek renewal of this licence with the U.K. Home Office prior to its expiry. The renewal application is submitted online and it takes approximately two to four weeks for the U.K. Home Office to review the application and issue its decision. Should the U.K. Home Office not renew or delay the renewal of our licence, or renew our licence on different terms, our ability to recognize the strategic objectives of our acquisition of Bridge Farm could be materially adversely affected.

We intend to expand internationally, and our ability to operate in foreign jurisdictions is dependent on our ability to obtain and comply with the necessary regulatory licences and requirements. Additional government licences may be required in the future in connection with our operations, in addition to other known and unknown permits and approvals which may be required, including with respect to our Canadian and foreign operations. To the extent such permits and approvals are required and not obtained, we may be prevented from operating or expanding our business.

 

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We intend to target the premium segment of the adult-use cannabis market, which may not materialize, or in which we may not be able to develop or maintain a brand that attracts or retains customers.

We intend to target users of cannabis in the Canadian adult-use cannabis market who are looking for premium products; however, such a market may not materialize or be sustainable. If this premium market does materialize, we may not be successful in creating and maintaining consumer perceptions of the value of our premium products. The promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to the place of sale and subject to prescribed conditions set out in the Cannabis Act and the Cannabis Regulations. Among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding and promotion that is appealing to young persons. Such restrictions on advertising, marketing and the use of logos and brand names, and other restrictions on advertising imposed by Canadian federal or provincial laws or regulations, or similar regulations imposed in other jurisdictions, may prevent us from creating and maintaining consumer perceptions in the value of our premium products and establishing ourselves as premium producers. If we cannot successfully enter into or compete in the premium market, we may face significant challenges in gaining or maintaining a market share in Canada or in other cannabis markets in which we intend to operate, or we may be forced to sell our products at a lower price, which may materially adversely affect our results of operations.

Our success depends, in part, on our ability to attract and retain customers who in turn sell to ultimate consumers of cannabis and cannabis-related products. To do this, we are dependent upon, among other things, continually producing desirable and effective products and the continued growth in the aggregate number of adult-use cannabis consumers. We have made significant investments in enhancing our brand to attract consumers. Subject to the applicable legal restrictions, we expect to continue to make significant investments to promote our current products to new consumers and new products to current and new consumers. Such campaigns can be expensive and may not result in increased sales. If we are unable to attract new consumers, we may not be able to increase our sales.

Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.

Our business activities are heavily regulated in all jurisdictions where we do business. Our operations are subject to various laws, regulations and guidelines by governmental authorities, including Health Canada, relating to the cultivation, processing, manufacture, marketing, management, distribution, transportation, storage, sale, packaging, labelling, pricing and disposal of cannabis and cannabis products. In addition, we are subject to laws and regulations relating to employee health and safety, insurance coverage and the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.

Health Canada inspectors routinely assess our facilities for compliance with applicable regulatory requirements. Any failure by us to comply with the applicable regulatory requirements could:

 

   

require extensive changes to our operations;

 

   

result in regulatory or agency proceedings or investigations;

 

   

result in the revocation of our licences and permits, increased compliance costs;

 

   

result in damage awards, civil or criminal fines or penalties;

 

   

result in restrictions on our operations;

 

   

result in Health Canada placing a hold on our inventory;

 

   

harm our reputation; or

 

   

give rise to material liabilities.

 

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Further, our employees or other agents may, without our knowledge and despite our efforts, policies and procedures, engage in prohibited conduct under applicable regulatory requirements for which we may be held responsible.

There can be no assurance that any future regulatory or agency proceedings, investigations or audits will not result in substantial costs, a diversion of management’s attention and resources or other adverse consequences to our business.

Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all necessary regulatory approvals for the cultivation, processing, production, storage, distribution, transportation, sale, import and export, as applicable, of our products. Any failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions, including:

 

   

the revocation or imposition of additional conditions on licences to operate our business;

 

   

the suspension or expulsion from a particular market or jurisdiction or of our key personnel;

 

   

the imposition of additional or more stringent inspection, testing and reporting requirements;

 

   

product recalls or seizures; and

 

   

the imposition of fines and censures.

In addition, changes in regulations, government or judicial interpretation of regulations, or more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licences and other permits. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely impact our ongoing regulatory compliance costs. There is no assurance that we will be able to comply or continue to comply with applicable regulations.

Any failure on our or our suppliers’ part to comply with supplier standards established by provincial or territorial distributors could prevent us from accessing certain markets in Canada.

Government-run provincial and territorial distributors in Canada require suppliers to meet certain service and business standards, and routinely assess their suppliers for compliance with these standards. For example, our current supply agreement with the Alberta Gaming, Liquor and Cannabis Commission, or the AGLC, permits the AGLC to inspect and test our products for compliance with a rigorous set of criteria, including packaging, labelling, timing and stated quality test results. We are also pursuing arrangements with third parties to produce cannabis on our behalf to supplement internal production. Any failure by us or our third-party suppliers to comply with such standards could result in our being disqualified as a supplier and could lead to the termination or cessation of orders under existing or future supply contracts. Further, provincial and territorial purchasers, including the AGLC, may terminate or cease ordering under existing contracts at any time without cause. If any of the foregoing events were to occur, our access to such markets may be limited or eliminated.

We currently sell, and expect to continue to sell, a significant share of our product to provincial governments through supply contracts that may not generate orders as expected or which may not be renewed.

Under the terms of our licences and the Cannabis Act, we are restricted as to whom we can sell our cannabis products. We currently, and expect to continue to, derive a significant portion of our revenues from supply agreements with Canadian provincial and territorial governments, including through our agreement with the AGLC. We have also signed supply agreements with the Ontario Cannabis Store, or the OCS, and the BC Liquor Distribution Branch, or the BCLDB, Manitoba Liquor and Lotteries, or MLL, and have had our application to supply cannabis to the Saskatchewan market approved by the Saskatchewan Liquor and Gaming Authority, or the SLGA. We also intend to expand our offerings to other provincial and territorial governments across Canada.

 

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Our provincial or territorial supply agreements do not contain purchase commitments or otherwise obligate the purchaser to buy a minimum or fixed volume of products from us. As a result, the amount of cannabis that the AGLC, the OCS, the BCLDB and MLL, or, collectively, Provincial Buyers, may purchase under our supply agreements, or its price, may deviate significantly from our expectations. In addition, our revenues could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the Provincial Buyers and any other future government purchasers. If any of the Provincial Buyers decides to purchase lower volumes of products from us than we expect, insists on a price that is lower than we expect, alters its purchasing patterns at any time with limited notice, decides not to continue or begin to purchase our cannabis products at all or does not renew its agreement with us on similar terms or other terms acceptable to us, our revenues could be materially adversely affected.

Trade of cannabis for non-medical purposes within Canada may be restricted by the Canadian Free Trade Agreement.

We have entered into supply agreements with the Provincial Buyers for the supply of adult-use cannabis and cannabis derivative products. We have also been cleared by the SLGA to supply cannabis to retail and wholesale permit holders in Saskatchewan. The Canadian Free Trade Agreement, which generally reduces or eliminates the barriers to the free movement of persons, goods, services, and investments within Canada, specifically excludes cannabis for non-medical purposes from its scope and instead leaves the intra-Canadian movement of non-medical cannabis to future negotiations among the provinces and territories. There is a risk that the outcome of the negotiations will result in the interprovincial and interterritorial trade of cannabis for non-medical purposes in Canada being entirely restricted or subject to conditions that will negatively impact our ability to sell cannabis in provinces and territories in which we do not have cultivation and production facilities, including those in which we have already executed agreements or been approved to supply cannabis to retailers.

We are dependent upon a limited number of facilities that are integral to our business.

As of the date of this prospectus, all our cultivation and production activities are conducted at our Olds Facility and Rocky View Facility, and our licences from Health Canada are specific to those facilities. Disruptions at, or adverse changes or developments affecting, our Olds Facility or Rocky View Facility, including municipal rezoning, facility design errors, environmental pollution, equipment or process failures, production errors, disease or infestation of our crops, fires, breakdowns of our sewage system, explosions, power failures, natural disasters or security failures, could materially adversely impact our production of cannabis. For example, a fire at our Olds Facility in December 2018 damaged a portion of our crops and caused some delays in our production cycle. In addition, any failure to comply with regulatory requirements under the Cannabis Act could result in the suspension or termination of our Health Canada licences and could have an adverse impact on our ability to renew such licences.

We are in the process of expanding our Olds Facility and are in the process of planning construction of a new facility in Merritt, British Columbia. We expect that the expanded and additional facility will increase our cultivation, growing, processing and distribution capacity; however, licensing or construction delays or cost over-runs in respect to the development of these facilities could delay, diminish or prevent our ability to produce cannabis at these facilities. Furthermore, we are required to fully construct such facilities or expansions and ensure that such facilities or expansions are compliant with the requirements of the Cannabis Regulations prior to receiving Health Canada approval. There is no guarantee that Health Canada will approve the new facility or the contemplated expansion at our Olds Facility and any delay or failure to receive approval could adversely affect our business and results of operations. The final amount of our capital expenditures relating to the development of our Merritt Facility may be significantly greater than anticipated, in which case we may be required to curtail or delay such construction, which could reduce our planned production capacity. In addition, we may be required to raise additional capital, which may not be available on acceptable terms or at all.

We are pursuing arrangements with third parties to produce cannabis on our behalf to supplement internal production. If we are unsuccessful in scaling operations at our facilities, we may need to procure

 

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cannabis from third parties in a greater amount than we expect, which may be at a higher price than our own cost to produce, which would have a negative impact on our gross margin. Additionally, cannabis produced by third parties may not meet our quality standards or regulatory requirements and may not be delivered on a timely basis, which may cause shortages in our inventory, resulting in our inability to deliver cannabis under our contractual obligations in a timely manner, to the required specifications, or at all.

In addition, we do not currently have extraction capabilities and, until we develop such capabilities, we will be reliant on third parties to extract THC and CBD for use in various product offerings. Such third-party extraction may cost more than we anticipate, which would negatively impact our margins. In addition, such third-party extraction may not be delivered on schedule, meet our standards of quality or comply with applicable regulatory requirements, any of which may cause inventory shortages and cause us to fail to deliver certain offerings on a timely basis or at all. Similarly, we may rely on third parties to manufacture vaporizers and other consumption accessories product offerings on our behalf (or we may license our brands to thirty-party manufacturers). Such third-parties may fail to deliver product offerings that meet our or our customers’ expectations, and we may have difficulty obtaining satisfactory products in sufficient quantities or at all. Any interruption in the supply or consistency of these products may adversely impact our ability to deliver products to our customers, may harm our relationships and reputation with our customers, and may have a material adverse effect on our business, results of operations and financial condition.

The legal cannabis market is a relatively new industry. As a result, the size of our target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.

Because the cannabis industry is in a nascent stage, there is a lack of information about comparable companies available for potential investors to review in deciding about whether to invest in us and, few, if any, established companies whose business model we can follow or upon whose success we can build. Accordingly, investors should rely on their own estimates regarding the potential size, economics and risks of the cannabis market in deciding whether to invest in our common shares. We are an early-stage company that has not generated net income. There can be no assurance that our growth estimates are accurate or that the cannabis market will be large enough for our business to grow as projected.

Although we are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets or products, if any, will be commercially viable or successfully produced and marketed. We must rely largely on our own market research to forecast sales and design products as detailed forecasts and consumer research are not generally obtainable from reliable third-party sources in Canada and in other international jurisdictions.

In addition, there is no assurance that the industry and market will continue to exist and grow as currently estimated or anticipated or function and evolve in the manner consistent with management’s expectations and assumptions. We could also be subject to other events or circumstances that that adversely affect the cannabis industry, such as the imposition of further restrictions on sales and marketing or further restrictions on sales in certain areas and markets.

The adult-use cannabis market in Canada has experienced, and may in the future experience, supply and demand fluctuations.

There has been a shortfall in supply in the Canadian adult-use cannabis market since legalization. We believe such supply shortages have led to increased prices, increases in out-of-stocks and the consumers opting to buy cannabis on the illicit market. Although we and other licensed producers have increased capacity, there is no guarantee that such entities will be able to produce enough cannabis to meet existing demand. Such demand, however, may not be sustained and the increase in production may result in over-supply and lower prices. If our inventory levels in the future become greater than consumer demand, we may have to engage in sale of excess

 

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inventory at discounted prices, which could significantly impair our brand image. Conversely, if we underestimate demand for our products, we may experience inventory shortages, which might delay shipments to customers, reduce revenue, negatively impact customer relationships and diminish brand loyalty. In addition, demand for cannabis and cannabis products is dependent on a number of social, political and economic factors that are beyond our control, including the novelty of legalization, which may wear off. A material decline in the economic conditions affecting consumers can cause a reduction in disposable income for the average consumer, change consumption patterns and result in a reduction in spending on cannabis products or a switch to other products obtained through illicit channels. There can be no assurance that market demand for cannabis will continue to be sufficient to support our current or future production levels or that we will be able to generate sufficient revenue to be profitable.

We are constrained by law in our ability to market our products in Canada.

The development of our business and operating results may be hindered by applicable restrictions on production, sales and marketing activities imposed on us and other licensed producers under the Cannabis Act by Health Canada. All products we distribute into the Canadian adult-use market are subject to restrictions with respect to product formats, product packaging and labelling. In addition, the Cannabis Act regulates our marketing activities, including prohibitions on testimonials and endorsements, lifestyle branding, and promotion that is appealing to young persons. Each Canadian province and territory has also enacted regulatory regimes for the distribution and sale of cannabis for adult-use purposes within its jurisdiction. As such, our portfolio of brands and products must be specifically tailored, and our marketing activities carefully structured, to comply with individual provincial and territorial rules and regulations. These restrictions may preclude us from establishing our branding, effectively marketing our cannabis products or competing for market share, and may impose costs on us that cannot be absorbed through increased selling prices for our cannabis products.

We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.

We were incorporated in 2006, began cultivating cannabis in 2012, and started selling cannabis in 2018 after the federal legalization of adult-use cannabis in Canada. We have yet to generate an annual profit. We generated a net loss of $16.7 million, $56.5 million, $13.0 million and $1.5 million for the three months ended March 31, 2019 and the fiscal years ended December 31, 2018, February 28, 2018 and February 28, 2017, respectively, and also had negative operating cash flows for each of these periods. Our accumulated deficit as of March 31, 2019 was $105.6 million. We will continue to expend significant funds to increase our growing and production capacity, fund our planned capital investments in Bridge Farm, invest in research and development, expand our marketing and sales operations and meet the increased compliance requirements associated with our transition to, and operation as, a public company. As we continue to grow, we expect the aggregate amount of our operating expenses will also continue to increase and we may not achieve or maintain profitability.

We are an early-stage company, and our efforts to grow our business may be more costly than we expect and we may not generate enough revenue to offset our operating expenses. We may incur significant losses in the future for a number of reasons, including as a result of unforeseen expenses, difficulties, complications and delays in obtaining governmental licences and the other risks described in this prospectus. The amount of any future losses will depend, in part, on our ability to generate revenue on the one hand and any increases in our expenses on the other hand. If we continue to incur losses in the future, the net losses and negative cash flows incurred to date, together with any such future losses, will have an adverse effect on our shareholders’ equity and working capital. Because of the numerous risks and uncertainties associated with our business and industry, we are unable to accurately predict when, or if, we will be able to achieve profitability. Even if we achieve profitability at some point in the future, we may not be able to sustain profitability in subsequent periods. If we are unable to achieve and sustain profitability, the market price of our common shares may significantly decrease and our ability to raise capital, expand our business or continue our operations may be impaired. A decline in the value of our common shares may also cause you to lose all or part of your investment.

 

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Our consolidated financial statements contain a going concern qualification.

Our consolidated financial statements included elsewhere in this prospectus contain a going concern qualification. We are an early-stage company and have accumulated significant losses. Furthermore, we and certain of our subsidiaries have a limited operating history and a history of negative cash flow from operating activities. Our ability to continue as a going concern is dependent upon our ability to raise additional capital, successfully obtain or maintain licences to produce and sell cannabis, achieve sustainable revenues and profitable operations and, in the meantime, obtain the necessary financing to meet our obligations and repay our liabilities when they become due. No assurances can be given that we will be successful in achieving these goals. While we have been successful in raising capital in the past, there is no assurance that we will be able to obtain additional financing or that such financing will be available on acceptable terms or in a timely fashion. These conditions combined with the accumulated losses to date indicate the existence of a material uncertainty regarding on our ability to continue as a going concern. If we are unable to obtain financing or achieve these goals, our ability to carry out and implement our planned business objectives and strategies will be significantly delayed, limited or may not occur.

We may be unable to sustain and effectively manage our growth and development.

We are an early-stage company attempting to grow our business rapidly. Our ability to grow will depend on a number of factors, many of which are beyond our control, including the availability of sufficient capital on acceptable terms, potential changes in laws and regulations respecting the cultivation, production, sales and distribution of cannabis products, competition from other licensed producers, our ability to recruit and retain experienced personnel, our ability to manage complex international operations and other factors outlined herein. In addition, we are subject to a variety of business risks generally associated with developing companies. As our operations grow in size, scope and complexity, and as we identify and pursue new opportunities, we may have difficulty in implementing or maintaining required new or improved controls and such difficulty has resulted in, and in the future may result, in material weaknesses in our internal control over financial reporting or material misstatements in our future consolidated financial statements.

In addition, as we grow our business, we will need to effectively execute on business opportunities, continue to build on and deploy our assets and access new capital. Our ability to execute these initiatives successfully, as well as to complete acquisitions and otherwise capitalize on other growth opportunities, may redirect our limited resources and require expansion of our infrastructure. As a result, we may be required to commit financial, operational and technical resources in advance of any increase in our revenues or sales volumes, and there is no assurance that revenue or sales volumes will actually increase. We may not respond adequately or quickly enough to the changing demands that expansion will impose on our management, employees and existing infrastructure, and any changes to our operating structure may result in unanticipated costs or inefficiencies. Changes as we grow may have a negative impact on our operations, and cost increases resulting from our inability to effectively manage our growth could adversely impact our profitability.

Any failure to effectively manage our growth could result in difficulty or delays in servicing our customers, declines in quality or consumer satisfaction, increases in costs, difficulties in introducing new products or other operational difficulties, and any of these difficulties could adversely impact our business and results of operations. There can be no assurance that we will be able to effectively manage our expanding operations, achieve profitability, attract and retain sufficient personnel or successfully make or integrate strategic investments or acquisitions.

Our business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.

In the United States, despite cannabis having been legalized for medical use or adult use in a number of states, cannabis and cannabis products, other than hemp-derived CBD under certain circumstances, continue to

 

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be categorized at the federal level as a Schedule I controlled substance under the Controlled Substances Act, or CSA, and subject to the Controlled Substances Import and Export Act, as amended, or CSIEA. We believe that we are not subject to the CSA or CSIEA, because we have no active business operations in the United States and we do not distribute any products in the United States. Nonetheless, we are or may become subject to various other U.S. federal laws and regulations, including in connection with this offering and the listing of our common shares on Nasdaq, and violations of any U.S. federal laws or regulations, including the CSA and CSIEA, whether intentionally or inadvertently, could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings initiated by either the U.S. federal government or private citizens or criminal charges, including disgorgement of profits, cessation of business activities or divestitures. Further, the status of cannabis as a Schedule I controlled substance may cause us, and our business, to be negatively perceived by prospective U.S. investors or other parties, who may incorrectly believe that the CSA or CSIEA apply to us, or who may have reputational or other concerns about dealings with a cannabis grower even if it is not conducting business in, or distributing any products in, the United States.

We are, or expect to become, subject to a variety of laws and regulations in Canada, the United States, the United Kingdom, the European Union and elsewhere that prohibit money laundering, including the Proceeds of Crime and Terrorist Financing Act (Canada), the Money Laundering Control Act (United States), as amended, the UK Bribery Act 2010, the UK Proceeds of Crime Act 2002, Directive (EU) 2015/849 and the rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by governmental authorities in Canada, the United States, the United Kingdom, the European Union or any other jurisdiction in which we have or are developing business operations or to which we export. Although we believe that none of our activities implicate any applicable money laundering statutes, in the event that any of our business activities, any dividends or distributions therefrom, or any profits or revenue accruing thereby are found to be proceeds of crime under one or more of the statutes described above or any other applicable legislation, any persons, including investors, found to be aiding and abetting us in such violations could be subject to criminal or civil liability. Any violations of these laws, or allegations of such violations, could disrupt our operations, significantly distract management and involve significant costs and expenses, including legal fees. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other remedial measures.

Our business is also subject to Canadian laws which generally prohibit companies and employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are, or will become, subject to the anti-bribery laws of any other countries in which we conduct or will conduct business, and as a company listed on a national securities exchange in the United States, we will become subject to the Federal Corrupt Practices Act of 1977, as amended. Our employees or other agents may, without our knowledge and despite our efforts, policies and procedures, engage in prohibited conduct under anti-bribery laws for which we may be held responsible. Our policies mandate compliance with these anti-corruption and anti-bribery laws; however, there can be no assurance that our internal controls and procedures will protect us from liability for the recklessness, fraudulent behavior, dishonesty or other inappropriate acts of our affiliates, employees, contractors or agents. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences.

We may be unsuccessful in competing in the overall legal adult-use cannabis market in Canada and any other countries we intend to operate in.

Our Canadian adult-use business faces enhanced competition from others who are licensed under the Cannabis Act to participate in the adult-use cannabis industry. The Cannabis Act has established a licensing regime for the cultivation, production, processing, testing, packaging, labelling, delivery, transportation, distribution, sale, possession and disposal of cannabis for adult use. Pursuant to transitional provisions in the Cannabis Act, existing holders of medical cannabis licences under the Access to Cannabis for Medical Purposes Regulations have, subject to satisfying certain requirements, automatically been deemed licensed under the Cannabis Act for corresponding activities, and other individuals and corporations are now able to apply for such licences.

 

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Subject to certain restrictions set out in the Cannabis Act, adults are permitted to cultivate, propagate, harvest and distribute up to four cannabis plants per household. If a significant number of individuals take advantage of the ability to cultivate and use their own cannabis, our success in the adult-use business may be limited and may not fulfill our expectations.

As of July 15, 2019, 196 licences were issued by Health Canada. Certain of these competitors have longer operating histories and significantly greater financial, production, marketing, research and development and technical and human resources than we do. Some of these competitors have become public companies in the United States or Canada, giving them the ability to raise significant amount of capital quickly or use their publicly traded equity securities to conduct acquisitions. In addition, many other competitors have established retail locations. As a result, our competitors may be able to bring more and better products to market more quickly than us. Our commercial opportunity in the adult-use market could be reduced or eliminated if our competitors produce and commercialize products for the adult-use market that, among other things, are safer, more effective, more convenient, better quality or less expensive than the products that we produce, have greater sales, marketing and distribution support than our products, enjoy enhanced timing of market introduction and perceived effectiveness advantages over our products and receive more favorable publicity than our products. If our adult-use cannabis products do not achieve an adequate level of acceptance by the adult-use cannabis market, we may not generate sufficient revenue from these products, and our adult-use cannabis business may not become profitable. There are currently hundreds of applications for licensed producer status being processed by Health Canada. We expect that competition in the adult-use cannabis market and other cannabis markets in which we expect to participate will become more intense, as current and future competitors begin to offer an increasing number of diversified products. As competition increases, we may experience downward price pressure on our cannabis products, loss of market share and increased marketing costs. To remain competitive, we will require a continued high level of investment in research and development, marketing, sales and client support, and we may not have sufficient resources to maintain such efforts.

We also face competition from the illicit cannabis market. Illegal dispensaries and ‘black market’ operations and participants, despite not having a valid licence under the Cannabis Regulations, may be able to (i) offer products with higher concentrations of active ingredients than permitted by the Cannabis Act and Cannabis Regulations, (ii) use delivery methods, including edibles, concentrates and extract vaporizers, that we are currently prohibited from offering to individuals in Canada, (iii) brand products more explicitly, (iv) sell products at lower prices and (v) market products in ways not permissible by law. As these illicit market participants do not comply with the regulations governing the cannabis industry in Canada, their operations may also have significantly lower costs.

As well, the legal landscape for medical and adult-use cannabis is changing internationally. An increasing number of jurisdictions globally are passing laws that allow for the production and distribution of medical or adult-use cannabis. Increased international competition, including competition from suppliers in other countries who may be able to produce at lower cost, and limitations placed on us by Canadian or other regulations, might lower the demand for our products on a global scale.

Consumer preferences may change, and we may be unsuccessful in acquiring or retaining consumers and keeping pace with changing market developments.

As a result of changing consumer preferences, many consumer products attain financial success for a limited period of time. Even if our products find success at retail, there can be no assurance that such products will continue to be profitable. Our success will be significantly dependent upon our ability to develop new and improved product lines and adapt to consumer preferences. Even if we are successful in introducing new products or developing our current products, a failure to gain consumer acceptance or to update products could cause a decline in our products’ popularity and impair our brand. In addition, we may be required to invest significant capital in the creation of new product lines, strains, brands, marketing campaigns, packaging and other product features—none of which are guaranteed to be successful. Failure to introduce new features and

 

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product lines and to achieve and sustain market acceptance could result in us being unable to satisfy consumer preferences and generate revenue.

Our success depends on our ability to attract and retain consumers. There are many factors which could impact our ability to attract and retain consumers, including our ability to continually produce desirable and effective products, the successful implementation of our consumer acquisition plan and the continued growth in the aggregate number of potential consumers. Our failure to acquire and retain consumers could have a material adverse effect on us.

The legal cannabis industry is in its early stages of development and it is likely that we, and our competitors, will seek to introduce new products in the future. In attempting to keep pace with any new market developments, we may need to spend significant amounts of capital in order to successfully develop and generate revenues from new products we introduce. As well, we may be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. We may not be successful in developing effective and safe new products, anticipating shifts in social trends and consumer demands, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may have a material adverse effect on our business and results of operations.

In addition, the patterns of cannabis consumption in Canada and elsewhere in the world may shift over time due to a variety of factors, including changes in demographics, social trends, public health polices and other leisure or consumption behaviors. If consumer preferences for our products or cannabis products in general do not develop, or if once developed they were to move away from our products or cannabis products in general, or if we are unable to anticipate and respond effectively to shifts in consumer behaviors, we may be adversely affected.

Legalization of cannabis in Canada may have an adverse impact on our ability to develop and grow a medical cannabis business in Canada.

Adult-use cannabis was legalized in October 2018 and the full effect of that on the Canadian medical cannabis market remains unknown. If medical-use consumers decide to purchase products available in the adult-use market instead of continuing to purchase them under the medical use regime, our ability to develop and grow a medical cannabis business in Canada may be negatively affected.

We, or the cannabis industry more generally, may receive unfavorable publicity or become subject to negative consumer or investor perception.

We believe that the cannabis industry is highly dependent upon positive consumer and investor perception regarding the benefits, safety, efficacy and quality of cannabis and cannabis products. Such categories of products having previously been commonly associated with various other narcotics, violence and criminal activities, and there is a risk that our business might attract negative publicity. Perception of the cannabis industry and cannabis products, currently and in the future, may be significantly influenced by scientific research or findings, regulatory investigations or proceedings, litigation, political statements, media attention and other publicity (whether or not accurate or with merit) both in Canada and in other countries relating to the benefits and risks of consuming cannabis or cannabis products, including unexpected safety or efficacy concerns or the activities of industry participants. There can be no assurance that future scientific research, findings, regulatory investigations or proceedings, litigation, political statements, media attention or other research findings or publicity will be favorable to cannabis or cannabis products. Adverse future scientific research reports, findings, regulatory investigations or proceedings, and political statements, that are, or litigation, media attention or other publicity that is, perceived as less favorable than, or that questions, earlier research reports, findings or publicity (whether or not accurate or with merit) could result in a significant reduction in the demand for cannabis or cannabis products. Further, adverse publicity reports or other media attention regarding the safety, efficacy and

 

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quality of cannabis or cannabis products, our current or future products, the use of cannabis for medical purposes or associating the consumption of cannabis with physical or mental illness or other negative effects or events, could adversely affect us. Adverse publicity could arise even if the adverse effects associated with cannabis-use resulted from consumers’ failure to use such products legally, appropriately or as directed.

There is also a risk that the actions of other companies and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and, thereby, negatively impact our reputation. 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 negative opinions and views in Canada and elsewhere in regard to our activities and the cannabis industry in general, whether true or not. The legal restrictions with respect to labelling and marketing cannabis may exacerbate these risks by increasing the influence of social media users and prohibiting us from effectively responding to negative publicity.

We do not ultimately have direct control over how we or the cannabis industry is perceived by others. Reputational issues may result in decreased investor confidence, difficulty in obtaining financing, increased challenges in developing and maintaining community relations and present an impediment to our overall ability to advance our business strategy and grow our business.

We may not be able to store or transport our cannabis products to customers in a safe, timely and cost-efficient manner, and we may experience breaches of security at our facilities or loss as a result of theft of our products.

Because of the nature of our products and the limited legal channels for distribution, as well as the concentration of inventory in our facilities, we are subject to a heightened risk of theft of our product and other security breaches.

Canadian adult-use distribution rules take various forms on a jurisdiction-by-jurisdiction basis and often require us to employ third parties to deliver our products to central government sites. Any prolonged disruption of third-party transportation services could have a material adverse effect on our sales volumes or our end users’ satisfaction with our products. Rising costs associated with third-party transportation services used by us to ship our products may also adversely impact our profitability.

The security of our products during transportation to and from our facilities is of the utmost concern. A breach of security at our Olds Facility, Rocky View Facility or, once completed, one of our future facilities, or during transport or delivery, could result in the significant loss of product as well as customers and may expose us to additional liability, including regulatory fines, litigation or increased expenses relating to the resolution and future prevention of similar events. Any failure to take steps necessary to ensure the safekeeping of our cannabis could also have an impact on our ability to continue operating under our existing licences, to renew or receive amendments to our existing licences or to receive required new licences.

There has been limited study on the health effects of cannabis and cannabis products, and future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the benefits, viability, safety, efficacy, dosing and social acceptance of such products.

Research in Canada, the United States and internationally regarding the benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids, such as CBD and THC, remains in relatively early stages. Few clinical trials on the benefits and risks of cannabis or isolated cannabinoids have been conducted.

Future research and clinical trials may draw opposing conclusions to statements contained in the articles, reports and studies currently favored, or could reach different or negative conclusions regarding the benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical or adult-use cannabis, which could adversely affect social acceptance of cannabis and the demand for our cannabis products.

 

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We may not be successful in integrating Bridge Farm.

While we conducted substantial due diligence in connection with the acquisition of Bridge Farm, there are risks inherent in any acquisition. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for which we are not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect our business and results of operations. We could encounter additional transaction and integration related costs or other factors such as the failure to realize all of the benefits from the acquisition.

We may not be successful at transitioning and growing the business of Bridge Farm, or leveraging Bridge Farm’s existing retail relationships.

Transitioning and growing the business of Bridge Farm over the longer-term will require continued investment in Bridge Farm’s operations, which may be significant. We currently expect to invest incremental capital into Bridge Farm’s production facilities to assist in the transition of certain of its facilities to the cultivation of hemp plants and high-THC cannabis. We have also assumed Bridge Farm’s existing liabilities as part of the acquisition. In addition, we intend to proceed with the expansion of Bridge Farm’s facility located in Spalding, Lincolnshire, United Kingdom, or the Clay Lake Facility, which will require significant capital expenditures. There is no assurance that we will be able to successfully transition Bridge Farm’s facilities to the cultivation of hemp and high-THC cannabis plants or expand the Clay Lake Facility on a timely manner or within budget or successfully develop CBD or medical cannabis products from such plants. Although Bridge Farm has longstanding relationships with retailers in the United Kingdom, we may not be able to maintain and leverage such relationships or such relationship, may change. Retailers with which Bridge Farm has existing commercial relationships have not agreed to, and may choose not to sell our CBD products or may only sell our products on terms that we do not view as advantageous. Moreover, retailers could choose to sell our CBD products in the United Kingdom but not in other countries. In addition, although Bridge Farm currently cultivates hemp in a portion of one of its facilities, it has not previously manufactured, produced or sold hemp or CBD products. Such efforts may not prove successful or profitable. In addition, we do not currently have extraction capabilities and, until we develop such capabilities, we will be reliant on third parties to extract THC and CBD for use in various product offerings. Such third-party extraction may cost more than we anticipate, which would negatively impact our margins. In addition, such third-party extraction may not be delivered on schedule, meet our standards of quality or comply with applicable regulatory requirements, any of which may cause inventory shortages and cause us to fail to deliver certain offerings on a timely basis or at all.

Bridge Farm’s business and future capital requirements will depend on many factors, including: the successful integration of Bridge Farm and its personnel, including our ability to transition certain of Bridge Farm’s facilities to the cultivation of hemp and high-THC cannabis and production of CBD, consumer trends in the United Kingdom, European Union and elsewhere regarding the use of CBD products, regulatory developments with respect to the cannabis industry in the United Kingdom, European Union and elsewhere, the development of new products and offerings and maintaining and expanding customer relationships. We may not have sufficient capital to fund these activities and may not be able to obtain financing on acceptable terms or at all.

We are exposed to risks relating to the laws of various countries as a result of our planned international operations.

We currently plan to expand our operations to various countries, including the United Kingdom and other European countries. As a result of these expansions, we may become exposed to various levels of political, economic, legal, regulatory and other risks and uncertainties associated with operating in or exporting to these jurisdictions. These risks and uncertainties include changes in the laws, regulations and policies governing the production, sale and use of cannabis and cannabis-based products, political instability, currency controls, fluctuations in currency exchange rates and rates of inflation, labor unrest, changes in taxation laws, regulations and policies, restrictions on foreign exchange and repatriation and changing political conditions and governmental regulations relating to foreign investment and the cannabis business more generally.

 

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Changes, if any, in the laws, regulations and policies relating to the advertising, production, sale and use of cannabis and cannabis-based products or in the general economic policies in these jurisdictions, or shifts in political attitude related thereto, may adversely affect the operations or profitability of our international operations in these countries. Specifically, our operations may be affected in varying degrees by government regulations with respect to labelling, branding, marketing, health warnings, production, price controls, export and import controls, controls on currency remittance, increased income taxes, restrictions on foreign investment, land and water use restrictions and government policies rewarding contracts to local competitors or requiring domestic producers or vendors to purchase supplies from a particular jurisdiction. Failure to comply strictly with applicable laws, regulations and local practices could result in additional taxes, costs, civil or criminal fines or penalties or other expenses being levied on our international operations, as well as other potential adverse consequences such as the loss of necessary permits or governmental approvals or the inability to grow our business in these jurisdictions.

Furthermore, although we plan to expand production of hemp at certain of Bridge Farm’s facilities in the United Kingdom with a view toward facilitating exports of our CBD products to countries in the European Union, (subject to applicable regulations), there is no assurance that these countries will authorize the import of our CBD products from the United Kingdom, or that the United Kingdom will authorize or continue to authorize such exports, or that an ability to export products from the United Kingdom into the European Union will provide us with any advantage. Each country in the European Union (or elsewhere) may impose restrictions or limitations on imports that require the use of, or confer significant advantages upon, producers within that particular country. As a result, we may be required to establish production facilities similar to Bridge Farm in one or more countries in the European Union where we wish to distribute our products in order to gain access to these markets or to take advantage of the favorable legislation offered to producers in these countries.

We must rely on international advisors and consultants in the foreign countries in which we intend to operate.

The legal and regulatory requirements in the foreign countries in which we intend to operate with respect to the cultivation and sale of cannabis, banking systems and controls, as well as local business culture and practices are different from those in Canada. Our officers and directors must rely, to a great extent, on local legal counsel and consultants in order to keep abreast of material legal, regulatory and governmental developments as they pertain to and affect our business operations, and to assist with governmental relations. We must rely, to some extent, on those members of management and the board of directors who have previous experience working and conducting business in these countries, if any, to enhance our understanding of and appreciation for the local business culture and practices. We also rely on the advice of local experts and professionals in connection with current and new regulations that develop in respect of the cultivation and sale of cannabis as well as in respect of banking, financing, labor, litigation and tax matters in these jurisdictions. Any developments or changes in such legal, regulatory or governmental requirements or in local business practices are beyond our control.

The United Kingdom’s impending departure from the European Union could adversely affect our ability to execute on our plans for the Bridge Farm facilities.

In June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, commonly referred to as “Brexit”. Negotiations have commenced to determine the United Kingdom’s future relationship with the European Union, including terms of trade. However, there can be no assurance regarding the duration of such negotiations or the terms thereof. A withdrawal could significantly disrupt the free movement of goods, services, and people between the United Kingdom and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. There may be similar referendums or votes in other European countries in which we intend to do business. The uncertainty surrounding the terms of the United Kingdom’s withdrawal and its consequences, as well as the impact of any similar circumstances that may arise elsewhere in Europe, could increase our costs and adversely impact consumer and investor confidence, and the level of consumer discretionary purchases, including purchases of our products. Furthermore, regulatory changes could harm our interest in Bridge Farm by

 

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raising the cost of input goods, increasing the cost to export or import between the United Kingdom and the European Union, or imposing other limits on the movement of goods or services.

The hemp and CBD product markets are new and heavily regulated with rules subject to rapidly changing laws and uncertainty, compliance with which may come with significant cost.

The markets for the production of hemp and CBD products are competitive and evolving. Continued development of the hemp and CBD product markets within the broader cannabis industry will be dependent upon new legislative authorization of such products. Any number of events or occurrences could slow or halt progress altogether in these industries. While the progress of the hemp and CBD product markets is currently encouraging, growth of such markets is not assured. Numerous factors may impact or negatively affect the lawmaking process within the various jurisdictions where we have business interests. Any one of these factors could slow or halt the use of hemp or CBD products, which could negatively impact our business and possibly cause us to discontinue the related operations as a whole.

In Canada, the new Industrial Hemp Regulations, or IHR, under the Cannabis Act replaced the previous Industrial Hemp Regulations under the Controlled Drugs and Substances Act on October 17, 2018. The regulatory scheme for industrial hemp largely remains the same; however, the IHR permits the sale of hemp to federally licensed cannabis processors under certain circumstances, and licensing requirements were softened in accordance with the perceived lower risk posed by industrial hemp. The IHR defines industrial hemp as a cannabis plant, or any part of that plant, in which the concentration of THC is 0.3% weight by weight or less in the flowering heads and leaves. In Canada, cannabis products containing CBD are subject to the Cannabis Act and the Cannabis Regulations. Not every activity involving industrial hemp falls within the scope of the IHR. For example, the extraction of CBD or another phytocannabinoid from the flowering heads, leaves and branches of the plant falls under the Cannabis Regulations and requires a cannabis processing licence.

In the EU, legislative approaches to the regulation of CBD products vary country by country, including local regulations with respect to THC content, and continue to evolve; however, EU-wide rules require products to contain no more than 0.2% THC. There is no assurance that any EU country will authorize or continue to authorize exports, imports, cultivation or production of hemp or CBD products. If any of these local laws or regulations prevent or discourage us from achieving our business goals, they may have an adverse effect upon our operations or restrict our ability to produce or sell products in the future.

In the United States, the Agriculture Improvement Act of 2018, or the Farm Bill, removed hemp-derived CBD containing less than 0.3% THC from the list of scheduled narcotics in December 2018 if certain conditions relating to its production are satisfied; however, the U.S. Food and Drug Administration, or FDA, and the United States Department of Agriculture have asserted their authority to regulate hemp-derived products in the United States. In addition, many states regulate hemp and hemp-derived products, including CBD. In particular, the FDA has declared that it is illegal under the U.S. Federal Food, Drug, and Cosmetic Act to market or sell CBD products as dietary supplements or to market or sell food to which CBD has been added, absent the issuance of an authorizing regulation by the FDA. In March 2019, the FDA formed a task force to develop legislation proposals regarding the regulation of CBD. Until regulations surrounding hemp and hemp-derived products are clarified in the United States, there will be substantial uncertainty around hemp and hemp-derived CBD, and the viability of the market for any such products.

The shifting compliance environment with respect to the hemp and hemp-derived products and the need to build and maintain robust systems to comply with different regulations in multiple jurisdictions increases the possibility that we may violate one or more of the requirements. If our operations are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines or the curtailment or restructuring of our operations.

 

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The hemp and hemp-derived product markets in Canada, the European Union and elsewhere are also subject to many of the same risks as the adult-use cannabis industry and market.

The hemp and hemp-derived product (such as hemp-derived CBD) markets in Canada, the European Union and elsewhere are subject to many of the same risks that are applicable to the broader cannabis industry and adult-use cannabis market, including risks related to the need for regulatory approvals, the early status and uncertain growth of the industry, agricultural farming, consumer acceptance and perception of hemp-derived products, competition, regulations regarding labelling, branding and marketing and the lack of clinical studies regarding the benefits, viability, safety, efficacy and dosing of such products.

Third parties with whom we do business may perceive themselves as being exposed to reputational risk as a result of their relationship with us.

The parties with whom we do business, or would like to do business with, may perceive that they are exposed to reputational risk as a result of our business activities relating to cannabis, which could hinder our ability to establish or maintain business relationships or raise capital. These perceptions relating to the cannabis industry may interfere with our relationship with service providers in Canada and other countries.

We may seek to enter into extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships, or expand the scope of currently existing relationships, with third parties that we believe will have a beneficial impact on us, and there are risks that such strategic alliances or expansions of our currently existing relationships may not enhance our business in the desired manner.

We currently have, and may expand the scope of, and may in the future enter into, extraction agreements, co-packing agreements, joint ventures, licensing arrangements or other relationships with third parties that we believe will complement or augment our existing business. Our ability to complete additional arrangements is dependent upon, and may be limited by, among other things, the availability of suitable candidates and capital. In addition, such third-party arrangements could present unforeseen integration obstacles or costs, may not enhance our business and may involve risks that could adversely affect us, including the investment of significant amounts of management time that may be diverted from operations in order to pursue and complete such transactions or maintain such relationships. Future third-party arrangements could result in the incurrence of debt, costs and contingent liabilities, and there can be no assurance that future such arrangements will achieve, or that our existing arrangements will continue to achieve, the expected benefits to our business or that we will be able to consummate future arrangements on satisfactory terms, or at all.

We may not be able to successfully identify and execute future acquisitions or dispositions or to successfully manage the impacts of such transactions on our operations.

We expect to selectively seek strategic acquisitions in the future. Our ability to identify, consummate and integrate effectively any future potential acquisitions on terms that are favorable to us may be limited by the number of attractive acquisition targets, internal demands on our resources and, to the extent necessary, our ability to obtain financing on satisfactory terms, if at all. Any such activities may require, among other things, various regulatory approvals, licences and permits and there is no guarantee that all required approvals, licences and permits will be obtained in a timely fashion or at all. Acquisitions may expose us to additional risks including: difficulties in integrating administrative, financial reporting, operational and information systems; difficulties in managing newly acquired operations and improving their operating efficiency; difficulties in maintaining uniform standards, controls, procedures and policies through all our operations; difficulties entering into markets in which we have little or no direct experience; difficulties in retaining key employees of the acquired operations; and disruptions to our ongoing business. In addition, future acquisitions could result in the incurrence of additional debt, costs, and contingent liabilities. We may also incur costs for and divert management attention to potential acquisitions that are never consummated. For acquisitions that are consummated, expected synergies may not materialize.

 

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We are subject to risks inherent in an agricultural business, including the risk of crop failure.

The cultivation of cannabis, herbs and ornamental flowers are agricultural processes. As such, our business is subject to the risks inherent in the agricultural business, including risks of crop failure presented by weather, insects, fire, plant diseases and similar agricultural risks. Although we currently grow our products indoors under climate-controlled conditions, there can be no assurance that natural elements, such as extreme weather, insects and plant diseases, will not entirely interrupt our production activities or have an adverse effect on our business. In addition, cannabis plants, including cannabis, herbs and ornamental flowers, can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. We have had to dispose of crops in the past due to crop disease. Such instances often lead to reduced crop quality, stunted growth or death of the plant. Moreover, cannabis, including hemp, is “phytoremediative”, meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted. Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. If our cannabis plants, including hemp, are found to have levels of pathogens, toxins, chemicals or other undesirable compounds that exceed established limits, our product may not be suitable for commercialization and we may have to destroy the applicable portions of our crops. In addition, to the extent we engage third-parties to grow cannabis or other plants on our behalf, such crops would be subject to the same risks.

Our future success is dependent on our ability to attract or retain key personnel, including our Executive Chairman, Chief Executive Officer and other key employees. In addition, our directors, officers and certain other key employees are subject to security regulations due to the nature of our industry, which may make it more difficult for us to attract, develop and retain talent.

Due to the early-stage nature of our business and our strategy, our success is largely dependent on the performance of our management team and certain key employees, in particular our Executive Chairman, Edward Hellard, and our Chief Executive Officer, Torsten Kuenzlen, as well as our ability to continue to attract, develop, motivate and retain highly qualified and skilled employees. Consequently, the loss of any of those individuals may have a substantial effect on our future success or failure. We do not currently maintain key-person insurance on the lives of any of our key employees. Experienced personnel in the cannabis industry, or personnel with other industry experience transferrable to the cannabis industry, are in high demand and competition for their talents is intense. As a result of the foregoing, we have incurred, and may incur in the future, significant costs to attract and retain employees. We have entered into an agreement with one of our directors, Greg Mills, that provides for certain compensation in the event that he were to replace Edward Hellard as our Executive Chairman if Mr. Hellard were to vacate that position (which the agreement states could happen as early as July 2020). Mr. Hellard, however, has a three-year employment agreement and has not otherwise agreed to resign his position as of July 2020 or any other date. Furthermore, our board of directors has not agreed to nominate Mr. Mills in such event, nor has Mr. Mills agreed to serve in such position.

Furthermore, each director and officer of a company that holds a licence for cultivation, processing or sale under the Cannabis Regulations is subject to the requirement to obtain and maintain a security clearance from Health Canada. Certain additional key personnel are also required to obtain and maintain a security clearance. Under the Cannabis Regulations, a security clearance cannot be valid for more than five years and must be renewed before the expiry of a current security clearance. Greg Mills and Elizabeth Cannon (two of our recently appointed directors), Torsten Kuenzlen (our Chief Executive Officer and director) and all of our other executive officers, with the exception of Edward Hellard and Geoff Thompson, have not obtained security clearance from Health Canada. There is no assurance that any of our existing personnel who presently or may in the future require a security clearance will be able to obtain or renew such clearances in a timely manner or at all, or that new personnel who require a security clearance will be able to obtain one. A failure by an individual in a key operational position to maintain or renew his or her security clearance could result in a reduction or complete suspension of our operations or loss of our licences. In addition, if an individual in a key operational position leaves us, and we are unable to find a suitable replacement who is able to obtain a security clearance required by

 

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the Cannabis Act in a timely manner, or at all, we may not be able to conduct our operations at planned production volume levels or at all. Furthermore, the Cannabis Regulations require us to designate a qualified individual in charge who is responsible for supervising transactions with cannabis, which individual must meet certain educational and security clearance requirements. Moreover, depending on the activity, under current regulations a qualified person in charge or an individual with security clearance must be physically present in a space where other individuals are conducting activities with cannabis. If our current designated qualified person in charge fails to maintain his security clearance, or if our current designated qualified person in charge leaves us and we are unable to find a suitable replacement who meets these requirements, we may no longer be able to conduct activities with respect to the cultivation, production or sale of cannabis.

Significant interruptions in our access to certain key inputs such as labor, raw materials, electricity, water and other utilities may impair our growing operations.

Our business is dependent on a number of key inputs and their related costs, including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. Any significant interruption, price increase or negative change in the availability or economics of the supply chain for key inputs and, in particular, loss of any energy subsidies, rising or volatile energy costs could curtail or preclude our ability to continue production and may have a material adverse impact on our business and results of operations. Our energy subsidies are contingent on our ability to meet certain milestones by January 2020, which we currently expect to be able to meet, but we may not be able to do so if unforeseen circumstances arise. In addition, our operations could be significantly affected by a prolonged power outage. Furthermore, our cultivation operations require a significant amount of electricity as a result it may be difficult for us to locate areas to construct additional cultivation operations as we grow.

Our ability to compete and grow cannabis and other plants is dependent on us having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that we will be successful in maintaining our required supply of labor, equipment, parts and components.

Our headquarters, Olds Facility and Rocky View Facility, are in Alberta, a province whose economy has historically relied heavily on the oil and gas industry. As we are currently in an oil and gas downturn, we may temporarily have increased access to labor and benefit from lower employment expenses. If the oil and gas industry recovers and begins hiring in large numbers, we may face increased competition for employees, which could harm our ability to attract and retain employees or increase our compensation costs.

The valuation of our biological assets is subject to certain assumptions and estimates.

Pursuant to IFRS, we measure the value of our biological assets (consisting of plants in various stages of vegetation) using the income approach at fair value less costs to sell up to the point of harvest. As market prices are generally not available for biological assets while they are growing, we are required to make assumptions and estimates relating to, among other things, expected harvest yields, selling prices and costs to sell. The assumptions and estimates used to determine the fair value of biological assets, and any changes to such prior estimates, directly affect our reported results of operations. If actual yields, prices, costs, market conditions or other results differ from our estimates and assumptions, there could be material adjustments to our results of operations. In addition, the use of these future estimated metrics differs from US GAAP. As a result, our financial statements and reported earnings are not directly comparable to those of similar companies in the United States.

Failure in our quality control systems may adversely impact our sales volume, market share and profitability.

The quality and safety of our products are critical to the success of our business and operations. As such, it is imperative that our (and our service providers’) quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by the design of the quality control systems, the

 

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quality training program, and adherence by employees to quality control guidelines. Although we strive to ensure that all of our service providers have implemented and adhere to high caliber quality control systems, we could experience a significant failure or deterioration of such quality control systems. If, as a result of a failure in our (or our service providers’) quality control systems, contamination of, or damage to, our inventory or packaged products occurs, we may incur significant costs in replacing the inventory and recalling products. We may be unable to meet customer demand and may lose customers who have to purchase alternative brands or products. In addition, consumers may lose confidence in the affected products. A loss of sales volume from a contamination event may occur, and such a loss may affect our ability to supply our current customers and to recapture their business in the event they are forced to switch products or brands, even if on a temporary basis. We may also be subject to legal action as a result of a contamination, which could result in negative publicity and affect our sales. During this time, our competitors may benefit from an increased market share that could be difficult and costly to regain.

Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.

Manufacturers and distributors of consumer goods products are sometimes subject to the recall or return of their products for a variety of reasons, including public health and public safety risks, product defects, such as contamination, adulteration, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. Although we have detailed procedures in place for testing our finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits, whether frivolous or otherwise. While we have not been subject to a recall to date, if any of the products produced by us are recalled in the future due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any such recall, we 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 or damage our reputation and goodwill or that of our products or brands.

Additionally, product recalls may lead to increased scrutiny of our operations by Health Canada or other regulatory agencies, requiring further management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of such products, including products sold by us.

We may be subject to product liability claims or regulatory action if our products are alleged to have caused significant loss, injury or death, which is exacerbated by the fact that cannabis use may increase the risk of serious adverse side effects.

As a manufacturer and distributor of products which are ingested or otherwise consumed by humans, we face the risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused loss, injury or death. We may be subject to these types of claims due to allegations that our products caused or contributed to injury, illness or death, made false, misleading or impermissible claims, failed to include adequate labelling and instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. This risk is exacerbated by the fact that cannabis use may increase the risk of developing schizophrenia and other psychoses, symptoms for individuals with bipolar disorder, and other side effects. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could also occur. In addition, the manufacture and sale of cannabis products, like the manufacture and sale of any ingested or consumable product, involves a risk of injury to consumers due to tampering by unauthorized third parties or product contamination. We may in the future have to recall certain of our cannabis products as a result of potential contamination and quality assurance concerns. A product liability claim or regulatory action against us could result in increased

 

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costs and could adversely affect our reputation and goodwill with our consumers. There can be no assurance that we will be able to maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could result in us becoming subject to significant liabilities that are uninsured and also could adversely affect our commercial arrangements with third parties.

We may be subject to liability claims as a result of positive testing for THC or banned substances.

Our products are made from cannabis and contain varying levels of THC. THC is banned in many jurisdictions and heavily regulated in many others. Moreover, regulatory frameworks for legal amounts of consumed THC is evolving. Whether or not ingestion of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to end users who test positive for trace amounts of THC attributed to use of our products, including future CBD products. Positive tests may adversely affect the end user’s reputation, ability to obtain or retain employment and participation in certain athletic or other activities. A claim or regulatory action against us based on such positive test results could adversely affect our reputation.

We rely on third-party distributors to distribute our products, and those distributors may not perform their obligations.

We rely on third-party distributors, including provincial regulatory boards and private retailers, and may in the future rely on other third parties, to distribute and sell our products to consumers. If these distributors do not successfully carry out their contractual duties, if there is a delay or interruption in the distribution of our products or if these third parties damage our products, it could negatively impact our revenue from product sales. Furthermore, any damage to our products, such as product spoilage, could expose us to potential product liability, damage our reputation and the reputation of our brands or otherwise harm our business and results of operations.

We may not be able to obtain adequate insurance coverage in respect of the risks we and our business face, the premiums for such insurance may not continue to be commercially justifiable or there may be coverage limitations and other exclusions which may result in such insurance not being sufficient to cover potential liabilities that we face.

We currently have insurance coverage, including product liability, business interruption and property insurance, protecting many, but not all, of our assets and operations. Our insurance coverage is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities, including potential product liability claims, or will be generally available in the future or, if available, that premiums will be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, we may be exposed to material uninsured liabilities that could impede our liquidity, profitability or solvency.

If we are not able to comply with all safety, health and environmental regulations applicable to our operations and industry, we may be held liable for any breaches of those regulations.

Safety, health and environmental laws and regulations affect nearly all aspects of our operations, including product development, working conditions, waste disposal, emission controls, the maintenance of air and water quality standards and land reclamation, and, with respect to environmental laws and regulations, impose limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Compliance with safety, health and environmental laws and regulations can require significant expenditures, and failure to comply with such safety, health and environmental laws and regulations may result in the imposition of fines and penalties, the temporary or permanent suspension of operations, the imposition of clean-up costs resulting from contaminated properties, the imposition of damages and the loss of or refusal of governmental

 

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authorities to issue permits or licences to us. Exposure to these liabilities may arise in connection with our existing operations, our historical operations and operations that may in the future be closed or sold to third parties. We could also be held liable for worker exposure to hazardous substances and for accidents causing injury or death. There can be no assurance that we will at all times be in compliance with all safety, health and environmental laws and regulations notwithstanding our attempts to comply with such laws and regulations.

Changes in applicable safety, health and environmental standards may impose 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 and employees. We are not able to determine the specific impact that future changes in safety, health and environmental laws and regulations may have on our industry, operations or activities and our resulting financial position; however, we anticipate that capital expenditures and operating expenses will increase in the future as a result of the implementation of new and increasingly stringent safety, health and environmental laws and regulations. Further changes in safety, health and environmental laws and regulations, new information on existing safety, health and environmental conditions or other events, including legal proceedings based upon such conditions or an inability to obtain necessary permits in relation thereto, may require increased compliance expenditures by us.

We may become subject to litigation, regulatory or agency proceedings, investigations and audits.

We may become subject to litigation, regulatory or agency proceedings, investigations and audits from time to time in the ordinary course of business, some of which may adversely affect our business. Should any litigation, regulatory or agency proceeding, investigation or audit in which we become involved be determined against us, such a decision could adversely affect our ability to continue operating, the value or market price for the common shares and could require the use of significant resources. Even if we are involved in litigation, regulatory or agency proceedings, investigations and audits and are ultimately successful, they can require the redirection of significant resources and may also create a negative perception of our brand.

We have entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under a supply agreement. Under this settlement agreement, we have agreed to pay penalties in the amount of $1.7 million on or prior to December 31, 2019, for which we have recorded a reserve, and, upon the payment of such penalties, our obligations under such supply agreement will be terminated.

Although we do not have a supply agreement with the province of Quebec, we do have a license to sell cannabis to licensed producers, including those based in Quebec. We have received notice of a legal proceeding commenced against us in the province of Quebec by another licensed cannabis producer alleging breach of a supply agreement and have filed a statement of defence. We have recorded a reserve in the amount of $1.5 million in respect of this matter.

The outcome of any litigation, regulatory or agency proceedings investigations and audits is inherently uncertain. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and results of operations.

We are incorporated in the Province of Alberta and enforcement of actions may be difficult.

We are incorporated under the laws of the Province of Alberta and our head office is located in the Province of Alberta. All of our directors and officers and some of the experts named in this prospectus are residents of Canada or otherwise reside outside of the United States, and a substantial portion of their assets and our assets are located outside the United States. Consequently, it may be difficult for investors in the United States to bring an action against such directors, officers or experts or to enforce against those persons or us a judgment obtained in a United States court predicated upon the civil liability provisions of U.S. federal securities laws or other laws of the United States. See “Enforcement of Civil Liabilities”.

 

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We may be subject to risks related to our information technology systems, including the risk that we may be the subject of a cyberattack and the risk that we may be in non-compliance with applicable privacy laws.

We have entered into agreements with third parties for hardware, software, telecommunications and other information technology, or IT, services in connection with our operations. Our operations depend, in part, on how well we and our vendors protect networks, equipment, IT 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 or theft. Our operations also depend on the timely maintenance, upgrade and replacement of networks, equipment and IT systems and software, as well as preemptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays or increases 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 us.

We are subject to various laws relating to the use of customer information and other personal and confidential information and any non-compliance may result in material adverse consequences to our business.

We collect, process, maintain and use data, including sensitive personal information on individuals, available to us through online activities and other customer interactions with our business. Our current and future marketing programs may depend on our ability to collect, maintain and use this information, and our ability to do so is subject to evolving laws and enforcement trends in Canada and other jurisdictions. There are a number of laws protecting the confidentiality of certain patient health information, including patient records, and restricting the use and disclosure of that protected information. In particular, the privacy rules under the Personal Information Protection and Electronic Documents Act, or PIPEDA, and similar laws in other jurisdictions, protect medical records and other personal health information by limiting their use and the disclosure of health information to the minimum level reasonably necessary to accomplish the intended purpose. We collect and store personal information about our patients and are responsible for protecting that information from privacy breaches. A privacy breach may occur through a procedural or process failure, an IT malfunction or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated through employee collusion or negligence or through deliberate cyberattack. Moreover, if we are found to be in violation of the privacy or security rules under PIPEDA or other laws protecting the confidentiality of patient health information, including as a result of data theft and privacy breaches, we could be subject to sanctions and civil or criminal penalties, which could increase our liabilities and harm our reputation.

Certain of our marketing practices rely upon e-mail, social media and other means of digital communication to communicate with consumers on our behalf. We may face risk if our use of e-mail, social media or other means of digital communication is found to violate applicable laws. We post our privacy policy and practices concerning the use and disclosure of user data on our website. Any failure by us to comply with our posted privacy policy, anti-spam legislation or other privacy-related laws and regulations could result in proceedings which could potentially harm our business. In addition, as data privacy and marketing laws change, we may incur additional costs to ensure we remain in compliance. If applicable data privacy and marketing laws become more restrictive at the international, federal, provincial or state levels, our compliance costs may increase, our ability to effectively engage customers via personalized marketing may decrease, our investment in our e-commerce platform may not be fully realized, our opportunities for growth may be curtailed by our compliance burden and our potential reputational harm or liability for security breaches may increase.

We may not be able to secure adequate or reliable sources of funding required to operate our business or increase our production to meet consumer demand for our products.

The continued development of our business will require additional financing following the closing of this offering, and there is no assurance that we will obtain the financing necessary to be able to achieve our business objectives. Our ability to obtain additional financing will depend on investor demand, our performance

 

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and reputation, market conditions and other factors. Our inability to raise such capital could result in the delay or indefinite postponement of our current business objectives or in our inability to continue to carry on our business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to us.

In addition, from time to time, we may enter into transactions to acquire assets or the share capital or other equity interests of other entities. Our continued growth may be financed, wholly or partially, with debt, which may increase our debt levels above industry standards. Certain of our debt financing does, and any debt financing secured in the future could, involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business objectives, including potential acquisitions. Certain of our debt financing agreements contain, and any debt financing agreements entered into in the future may contain, provisions that, if breached, may entitle lenders or their agents to accelerate repayment of loans or realize upon security over our assets, and there is no assurance that we would be able to repay such loans in such an event or prevent the enforcement of security granted pursuant to any such debt financing. Certain of our debt agreements also contain covenants that may prohibit us from effecting transactions that would result in a change of control.

We will incur increased costs as a result of operating as a public company and our management will be required to devote substantial time to new compliance initiatives.

Historically, we have operated as a private company. As a public company, particularly after we are no longer an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, SOX, and rules implemented by the SEC and Nasdaq in the United States, and securities regulatory authorities in Canada, impose various requirements on public companies, including requirements to file annual, quarterly and event-driven reports with respect to our business and financial condition and operations and establish and maintain effective disclosure and financial controls and corporate governance practices. Our management and other personnel have limited experience operating a public company, which may result in operational inefficiencies or errors, or a failure to implement, improve or maintain effective internal control over financial reporting and disclosure controls necessary to ensure timely and accurate reporting of operational and financial results. Our existing management team will need to devote a substantial amount of time to these compliance initiatives, and we may need to hire additional personnel to assist us with complying with these requirements. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time consuming and costly.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some public company required activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This ambiguity could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and divert management’s time and attention from revenue generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

We also expect that being a public company and complying with applicable rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantially higher costs to obtain and maintain the same or similar coverage that is currently in place. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our board of directors.

 

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There is no assurance that our management’s past experience will be sufficient to enable us to operate successfully as a public company.

We and Bridge Farm have had material weaknesses in our internal control over financial reporting and our management may not be able to successfully implement adequate internal control over financial reporting or disclosure controls and procedures.

Proper systems of internal control over financial reporting and disclosure controls and procedures are critical to the operation of a public company. However, we do not expect that our internal control over financial reporting or disclosure controls and procedures will prevent all errors and remove all risk of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the benefits of such controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

In connection with the audit of our consolidated financial statements for the fiscal year ended December 31, 2018, our management and independent auditors concluded that there were three material weaknesses in our internal control over financial reporting. A material weakness is a significant deficiency, or a combination of significant deficiencies, in internal control over financial reporting such that it is reasonably possible that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified include lack of segregation of duties due to limited number of employees in the finance department, limited number of finance personnel with appropriate experience and knowledge to address complex accounting matters and lack of management review control over the valuation models used for biological assets and financing obligations. Similar material weaknesses were identified at Bridge Farm by the independent auditors thereof. We are currently implementing a remediation plan and taking the measures necessary to address the underlying causes of these material weaknesses and expect to remediate these material weaknesses for the fiscal year ending December 31, 2019. Remediation may take longer than we expect, the costs to be incurred in connection with remediation may be higher than we expect, and our efforts may not prove to be successful in remediating these material weaknesses.

If we fail to establish and maintain adequate internal controls, including by remediating the aforementioned material weaknesses, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information and we may not be able to comply with the applicable covenants in our financing arrangements. As a result, we may be subject to costly litigation and shareholder actions, our access to the capital markets may be limited or adversely affected, our results of operations may be adversely affected and the trading price of our common shares may decline. Additionally, ineffective internal controls could expose us to an increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchanges on which we list or to other regulatory investigations and civil or criminal sanctions. Furthermore, we may be the subject of negative publicity focusing on the restatement of our previously issued financial results and related matters, and may be adversely impacted by negative reactions from our shareholders, creditors, or others with whom we do business. This negative publicity may impact our ability to attract and retain customers, employees and suppliers.

Pursuant to Section 404 of SOX, or SOX 404, we will be required, beginning with the second annual report that we file with the SEC following the closing of this offering, to furnish a report by our management on our internal control over financial reporting, which, after we are no longer an emerging growth company, must be accompanied by an attestation report on such internal controls issued by our independent auditors. To achieve compliance with SOX 404 within the prescribed period, we will document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our internal control over financial reporting, continue steps to improve control processes as

 

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appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that neither we nor our independent auditors will be able to conclude within the prescribed timeframe that our internal control over financial reporting is effective as required by SOX 404.

The unaudited pro forma condensed consolidated financial information included in this prospectus may not be representative of our results and financial condition after the acquisition of Bridge Farm.

The unaudited pro forma condensed consolidated financial information included in this prospectus has been presented for informational purposes only and is not necessarily indicative of the financial position, cash flows or results of operations that we actually would have experienced had the acquisition of Bridge Farm been completed as of the dates indicated, nor is such information indicative of our future operating results or financial condition following the acquisition of Bridge Farm. Such unaudited pro forma condensed consolidated financial information, therefore, does not reflect future events that may occur after the acquisition of Bridge Farm. The unaudited pro forma condensed consolidated financial information is based on numerous variables, assumptions and estimates regarding the acquisition of Bridge Farm that we believe are reasonable under the circumstances, but we cannot assure you that the variables, assumptions and estimates will prove to be accurate over time. Moreover, other factors may affect our actual results and financial condition after the acquisition of Bridge Farm, which may cause our actual results and financial condition to differ materially from the results and financial condition contemplated in the unaudited pro forma condensed consolidated financial information.

If goodwill or other intangible assets that we recorded in connection with the Bridge Farm acquisition become impaired, we may have to take significant charges against earnings.

In connection with the accounting for the Bridge Farm acquisition, we have recorded a goodwill and other intangible assets. Under IFRS, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other indefinite-lived intangible assets has been impaired. Amortizing intangible assets will be assessed for impairment in the event of an impairment indicator. Any reduction or impairment of the value of goodwill or other intangible assets will result in a charge against earnings, which could materially adversely affect our results of operations and shareholders’ equity in future periods.

We may be subject to credit risk.

Credit risk is the risk that the counterparty to a financial instrument fails to meet its contractual obligations, resulting in a financial loss to us. We have credit risk exposure based on the balance of our cash, accounts receivable, subscriptions receivable, and taxes recoverable. There are no assurances that our counterparties or customers will meet their contractual obligations to us.

Our loans contain covenants that limit our ability to seek additional financing or perform desired business operations.

We have various loans, credit facilities and financing arrangements that impose certain covenants, including but not limited to and subject to certain exceptions, forbidding consolidation, amalgamation or merger, the incurrence of any debt not specifically permitted, the amendment or termination of certain supply agreements, the acquisition of any company not specifically permitted, the making of any capital expenditure not specifically permitted and the requirement to maintain a certain working capital and leverage ratios. For example, so long as at least $75.0 million principal amount of loans is outstanding under the SAF Credit Agreement, we are subject to certain financial covenants, including certain leverage ratios and covenants requiring us to (i) maintain at least 60% of the square footage of Bridge Farm’s existing facilities in the United Kingdom, representing approximately 900,000 of the total 3.6 million square feet of expected capacity following the completion of our planned expansion of Bridge Farm’s facilities, dedicated to non-CBD plant production and inventory and (ii) achieve certain minimum gross margin targets in respect of Bridge Farm’s non-CBD plant

 

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business for the three months ending December 31, 2019 and the three months ending March 31, 2020. Our ability to maintain the required gross margin depends on a number of factors outside our control, including known and unforeseen risks relating to our production volumes and operating expenses. Management believes that we will be able to meet the requirement of this minimum gross margin covenant. However, there is no assurance that we will be able to do so. In the event that we do not meet the required specified minimum gross margin for any reason, we will be in default of the SAF Credit Agreement, if not cured prior to the applicable deadline. In addition, the availability of incremental borrowings under our current or future debt facilities are subject to conditions precedent, including the achievement of certain operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Other Secured Debt—SAF Jackson Facility”.

Certain of these financing arrangements are secured by, among others, security agreements including but not limited to, liens over all our present and future assets. Events beyond our control, including changes in general economic and business conditions, may affect our ability to observe or satisfy these covenants, which could result in a default or event of default under one or more of our financing arrangements. If an event of default under one or more of our financing arrangements occurs, the lender or lenders thereto could elect to declare all principal amounts outstanding at such time under such financing arrangements to be immediately due. An event of default under one of our financing arrangements may also constitute a cross-default under one or more of our other financing arrangements, resulting in a default or event of default with respect to additional financing arrangements. In such an event, we may not have sufficient funds to repay amounts owing under such financing arrangements and we could lose all of our assets.

We are an emerging growth company and intend to take advantage of reduced disclosure requirements applicable to emerging growth companies, which could make our common shares less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. We will remain an emerging growth company until the earliest to occur of (i) the last day of the fiscal year in which we have total annual gross revenue of US$1.07 billion or more; (ii) December 31, 2024 (the last day of the fiscal year ending after the fifth anniversary of the date of the completion of the offering of our common shares); (iii) the date on which we have issued more than US$1.0 billion in non-convertible debt securities during the prior three-year period or (iv) the last day of the fiscal year during which we meet the following conditions: (x) the worldwide market value of our common equity securities held by non-affiliates as of our most recently completed second fiscal quarter is at least US$700 million, (y) we have been subject to U.S. public company reporting requirements for at least 12 months and (z) we have filed at least one annual report as a U.S. public company. For so long as we remain an emerging growth company, we are permitted to and intend to rely upon exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

not being required to comply with the auditor attestation requirements of SOX 404;

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);

 

   

being permitted to present only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in a prospectus filed with the SEC;

 

   

reduced disclosure about executive compensation arrangements; and

 

   

exemptions from the requirements to obtain a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute arrangements not previously approved.

We may take advantage of some, but not all, of the available exemptions described above. We have taken advantage of reduced reporting burdens in this prospectus. We cannot predict whether investors will find

 

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our common shares less attractive if we rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

We are a foreign private issuer and intend to take advantage of less frequent and detailed reporting obligations.

We are a “foreign private issuer”, as such term is defined in Rule 405 under the U.S. Securities Act of 1933, as amended, or the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we will not file the same reports that a U.S. domestic issuer would file with the SEC, although we will be required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.

As a foreign private issuer, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements. We will also be exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we will comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, we will have more time than U.S. domestic companies after the end of each fiscal year to file our annual report with the SEC and will not be required under the Exchange Act to file quarterly reports with the SEC.

In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We may in the future elect to follow home country practices in Canada with regard to certain corporate governance matters. As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all corporate governance requirements.

We may in the future lose our foreign private issuer status.

We may in the future lose our foreign private issuer status if a majority of our shares are held in the United States and we fail to meet the additional requirements necessary to avoid loss of foreign private issuer status, such as if: (i) a majority of either our directors or executive officers, considered as separate groups, are either U.S. citizens or residents; (ii) a majority of our assets are located in the United States; or (iii) our business is administered principally in the United States. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer will be significantly more than the costs incurred as a Canadian foreign private issuer. If we are not a foreign private issuer, we would not be eligible to use foreign issuer forms and would be required to file periodic and current reports and registration statements on U.S. domestic issuer forms with the SEC, which are generally more detailed and extensive than the forms available to a foreign private issuer. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on the Nasdaq that are available to foreign private issuers.

 

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Tax and accounting requirements may change in ways that are unforeseen to us and we may face difficulty or be unable to implement or comply with any such changes.

We are subject to numerous tax and accounting requirements, and changes in existing accounting or taxation rules or practices, or varying interpretations of current rules or practices, could have a significant adverse effect on our financial results, the manner in which we conduct our business or the marketability of any of our products. We currently have international operations and plan to expand such operations in the future. These operations, and any expansion thereto, will require us to comply with the tax laws and regulations of multiple jurisdictions, which may vary substantially. Complying with the tax laws of these jurisdictions can be time consuming and expensive and could potentially subject us to penalties and fees in the future if we were to fail to comply.

Fluctuations in foreign currency exchange rates could harm our results of operations.

We may be exposed to fluctuations of the Canadian dollar against certain other currencies because we publish our financial statements in Canadian dollars, while a portion of our assets, liabilities, revenues and costs are or will be denominated in other currencies, including the British pound sterling and euros. Exchange rates for currencies of the countries in which we intend to operate in the future, which currently include the United Kingdom and countries located within the Eurozone, may fluctuate in relation to the Canadian dollar, and such fluctuations may have a material adverse effect on our earnings or assets when translating foreign currency into Canadian dollars.

We may be subject to risks related to the protection and enforcement of our intellectual property rights, or intellectual property we license from others, and may become subject to allegations that we or our licensors are in violation of intellectual property rights of third parties.

The ownership, licensing and protection of trademarks and other intellectual property rights are significant aspects of our future success.

It is possible that we or Pathway Rx, as applicable, will not be able to make non-provisional applications, register, maintain registration for or enforce all of our intellectual property, including trademarks, in all key jurisdictions. The intellectual property registration process can be expensive and time-consuming, and we may not be able to file and prosecute all necessary or desirable intellectual property applications at a reasonable cost or in a timely manner or may obtain intellectual property registrations which are invalid. It is also possible that we will fail to identify patentable aspects of inventions made in the course of their development and commercialization activities before it is too late to obtain patent protection for them. Further, changes in either intellectual property laws or interpretation of intellectual property laws in Canada, and other countries may diminish the value of our intellectual property rights or narrow the scope of our intellectual property protection. As a result, our current or future intellectual property portfolio may not provide us with sufficient rights to protect our business, including our products, processes and brands.

Termination or limitation of the scope of any intellectual property license may restrict or delay or eliminate our ability to develop and commercialize our products, which could adversely affect our business. We cannot guarantee that any third-party technology we license will not be unenforceable or licensed to our competitors or used by others. In the future, we may need to obtain licences, renew existing license agreements in place at such time or otherwise replace existing technology. We are unable to predict whether these license agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.

Unauthorized parties may attempt to replicate or otherwise obtain and use our products, brands and technology. Policing the unauthorized use of our current or future trademarks, patents or other intellectual property rights could be difficult, expensive, time consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying the unauthorized use of intellectual property rights is difficult as

 

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we may be unable to effectively monitor and evaluate the products being distributed by our competitors, including parties such as unlicensed dispensaries and black market participants, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of our trademarks or other intellectual property rights or other proprietary know-how, or those we license from others, or arrangements or agreements seeking to protect the same for our benefit, may be found invalid, unenforceable, anti-competitive or not infringed; may be interpreted narrowly; or could put existing intellectual property applications at risk of not being issued.

In addition, other parties may claim that our products, or those we license from others, infringe on their intellectual property, including their proprietary or patent protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources and legal fees, result in injunctions or temporary restraining orders or require the payment of damages. As well, we may need to obtain licences from third parties who allege that we have infringed on their lawful rights. Such licences may not be available on terms acceptable to us, or at all. In addition, we may not be able to obtain or utilize on terms that are favorable to us, or at all, licences or other rights with respect to intellectual property that we do not own. In the event that we licence our intellectual property to a third party, including a third party manufacturer, such third party could misappropriate our intellectual property or otherwise violate the terms of our licence. If any of the foregoing events were to occur, it could have a material adverse effect on our business, results of operations and financial condition.

We also rely on certain trade secrets, technical know-how and proprietary information that are not protected by patents to maintain our competitive position. Our trade secrets, technical know-how and proprietary information, which are not protected by patents, may become known to or be independently developed by competitors.

Research and development and clinical trials may be protracted and require substantial resources.

Clinical trials of cannabis-based medical products and treatments are novel and there is a limited or non-existant history of clinical trials relating to cannabis generally. Clinical trials relating to our current or future products are or will be, subject to extensive and rigorous review and regulation by numerous government authorities in Canada and in other countries where we intend to test our products and product candidates. The process of obtaining regulatory approvals for pre-clinical testing and clinical trials can take many months or years and require the expenditure of substantial resources. We are subject to the risk that a significant portion of these development efforts may not be successfully completed, required regulatory approvals may not be obtained, or our products are may not be commercially successful.

Risks Related to the Offering and Ownership of Our Common Shares

Ownership of our common shares may be considered unlawful in some jurisdictions and holders of our common shares may consequently be subject to liability in such jurisdictions.

Cannabis-related financial transactions, including investment in the securities of cannabis companies and receipt of any associated benefits, such as dividends, are currently subject to anti-money laundering and a variety of other laws that vary by jurisdiction, many of which are unsettled and still developing. While the interpretation of these laws are unclear, in some jurisdictions, such as the United Kingdom, financial benefit directly or indirectly arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of these laws, and persons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability under such laws. Each prospective investor should therefore contact his, her or its own legal advisor regarding the ownership of our common shares and any related potential liability.

There is currently no public market for our common shares and none may develop following this offering.

There is currently no public market for our common shares. The offering price has been determined by negotiation among us and the underwriters. We cannot predict the price at which our common shares will trade

 

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upon the closing of this offering, and there can be no assurance that an active and liquid trading market will develop after closing or, if developed, that such a market will be sustained at the offering price. In addition, if an active public market does not develop or is not maintained, holders of our common shares may have difficulty selling their shares.

The price of our common shares in public markets may experience significant fluctuations.

The market price for our common shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control, including the following: (i) actual or anticipated fluctuations in our quarterly results of operations; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to us; (iv) the addition or departure of our executive officers and other key personnel; (v) the release or expiration of lock-up or other transfer restrictions on our common shares; (vi) sales or perceived sales, or expectation of future sales, of our common shares; (vii) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; and (viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or target markets.

Financial markets have experienced significant price and volume fluctuations which have affected the market prices of equity securities of public entities. Companies in the cannabis sector have also experienced extreme volatility in their trading prices. In many cases, these fluctuations, and the effect that they have on market prices, have been unrelated to the operating performance, underlying asset values or prospects of such entities. Accordingly, the market price of our common shares may decline even if our operating results or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed not to be temporary, which may result in impairment losses to us. Furthermore, certain investors may base their investment decisions on considerations of our environmental, governance and social practices or our industry as a whole, and our performance in these areas against such institutions’ respective investment guidelines and criteria. The failure to satisfy such criteria may result in limited or no investment in our common shares by those institutions, which could materially adversely affect the trading price of our common shares.

There can be no assurance that continuing fluctuations in the price and volume of equity securities will not occur and affect the trading price of our common shares.

If we fail to meet applicable listing requirements, Nasdaq may delist our common shares from trading, in which case the liquidity and market price of our common shares could decline.

We cannot assure you that we will be able to meet the continued listing standards of Nasdaq in the future. If we fail to comply with the applicable listing standards and Nasdaq delists our common shares, we and our shareholders could face significant material adverse consequences, including:

 

   

a limited availability of market quotations for our common shares;

 

   

reduced liquidity for our common shares;

 

   

a determination that our common shares are “penny stock”, which would require brokers trading in our common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our common shares;

 

   

a limited amount of news about us and analyst coverage of us; and

 

   

a decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future.

 

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A significant portion of our total outstanding shares are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common shares to drop significantly, even if our business is doing well.

Sales of a substantial number of our common shares in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of shares intend to sell shares, could reduce the market price of our common shares and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our common shares.

Based on the number of shares outstanding as of June 30, 2019 and adjusting for (i) the completion of this offering, (ii) the conversion of all of the 8% Convertible Notes and 12% Convertible Notes and exercise of the related warrants (assuming holders representing approximately 77% of the aggregate principal amount of 12% Convertible Notes participate in the Lockup Incentive Offer) and (iii) the issuance of approximately 7.1 million common shares in connection with simple and performance warrants that are vested and exercisable upon completion of this offering, we will have 112,432,914 outstanding common shares. This number includes the common shares that we are selling in this offering (assuming the underwriters do not exercise their over-allotment option), which may be resold in the public market immediately without restriction, unless purchased by our affiliates. Approximately 88.0% of our common shares will be restricted as a result of securities laws, the transfer undertaking of our current shareholders and warrantholders, or the Pre-IPO Securityholders, and the terms of the 8% Convertible Notes, and will only be able to be sold after the offering as described in “Shares Eligible for Future Sale”. We also intend to register all common shares that we may issue under our equity compensation plan. If we were to register these shares, they could be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates under Rule 144. For purposes of calculating the percentage of shares that will be subject to lockup restrictions, we have assumed that holders representing 77% of the aggregate principal amount of the 12% Convertible Notes elect to participate in the Lockup Incentive Offer. See “Shares Eligible for Future Sale”, “Pre-Closing Arrangement”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—8% Convertible Notes” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—12% Convertible Notes”.

If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our share price and trading volume could decline.

The trading market for our common shares will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our shares would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our shares could decrease, which might cause our share price and trading volume to decline.

Our articles permit us to issue an unlimited number of common shares without additional shareholder approval.

Our articles permit the issuance of an unlimited number of common shares, and shareholders will have no pre-emptive rights in connection with such further issuance. Additional issuances of our securities may involve the issuance of a significant number of common shares at prices less than the current market price for the common shares. Issuances of substantial numbers of common shares, or the perception that such issuances could occur, may adversely affect prevailing market prices of our common shares. Any transaction involving the

 

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issuance of previously authorized but unissued common shares, or securities convertible into common shares, would result in dilution, possibly substantial, to security holders.

Management has indicated its plan for the use of proceeds of this offering but will ultimately exercise its discretion in how such funds are put to use.

We currently intend to allocate the net proceeds received from the sale of our common shares hereunder as described in the section titled “Use of Proceeds”; however, we will have discretion in the actual application of the net proceeds and may elect to allocate the net proceeds differently than the allocation described in the section titled “Use of Proceeds” if we believe it would be in our best interest to do so. Shareholders may not agree with the manner in which management or our board of directors chooses to allocate and spend the net proceeds of this offering. The failure by management or our board of directors to apply these funds effectively could have a material adverse effect on our business. Additionally, we may not be successful in implementing our business strategies and our actual capital expenditures and capital expenditure requirements may be materially different from forecasted expenditures described in this prospectus.

Holders of our common shares may be subject to dilution resulting from future offerings of common shares and the issuance of equity-based compensation by us.

We may raise additional funds in the future by issuing equity securities. Holders of our common shares will have no preemptive rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our shares is warranted, the price at which such issuance is effected and the other terms of any future issuance of shares. In addition, additional common shares may be issued by us in connection with the exercise of options granted by us or as part of an employee compensation plan or agreement. Such additional equity issuances could, depending on the price at which such securities are issued, substantially dilute the interests of the holders of our common shares.

As of June 30, 2019, there were 9,321,866 simple warrants and 6,062,822 performance warrants outstanding, of which 2,227,731 simple warrants, and 2,206,290 performance warrants, were vested and exercisable into an aggregate number of 4,434,021 common shares, at weighted average exercise prices of $1.32 and $0.72, respectively. See “Executive Compensation—Annual Compensation Components—Long-Term Equity Incentives—Legacy Warrant Grants”. Subsequent to July 1, 2019 through July 15, 2019, we issued to directors, officers and third parties as consideration for acquisitions and services provided an aggregate of 99,200 simple and performance warrants with a weighted average strike price of $10.74. Following this offering, we plan to institute equity-based compensation plans for our directors, officers and employees. Any additional equity grants and any exercise of existing warrants will cause our shareholders to be diluted and may negatively impact the price of our common shares.

It is not anticipated that any dividends will be paid to holders of our common shares for the foreseeable future.

No dividends on our common shares have been paid to date. We anticipate that, for the foreseeable future, we will retain future earnings and other cash resources for the operation and development of our business. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our earnings, operating results, financial condition and current and anticipated cash needs. In addition, our ability to pay cash dividends on our common shares is limited by the terms of our financing arrangements. As a result, investors may not receive any return on an investment in our common shares unless they are able to sell their shares for a price greater than that which such investors paid for them.

Our by-laws, and certain Canadian legislation, contain provisions that may have the effect of delaying or preventing a change in control.

Certain provisions of our by-laws, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors may be willing to pay for

 

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our common shares. For instance, our by-laws, to be effective upon the completion of this offering, contain provisions that establish certain advance notice procedures for nomination of candidates for election as directors at shareholders’ meetings. A non-Canadian must file an application for review with the minister responsible for the Investment Canada Act and obtain approval of the minister prior to acquiring control of a “Canadian business” within the meaning of the Investment Canada Act, where prescribed financial thresholds are exceeded. Furthermore, limitations on the ability to acquire and hold our common shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. Otherwise, there are no limitations either under the laws of Canada or Alberta, or in our articles on the rights of non-Canadians to hold or vote our common shares. Any of these provisions may discourage a potential acquirer from proposing or completing a transaction that may have otherwise presented a premium to our shareholders.

Our by-laws provide that any derivative actions, actions relating to breach of fiduciary duties and other matters relating to our internal affairs will be required to be litigated in Canada, which could limit investors’ ability to obtain a favorable judicial forum for disputes with us.

We have adopted a forum selection by-law that provides that, unless we consent in writing to the selection of an alternative forum, the Alberta Court of Queen’s Bench of the Province of Alberta, Canada and appellate Courts therefrom (or, failing such Court, any other “court” as defined in the ABCA, having jurisdiction, and the appellate Courts therefrom), will be the sole and exclusive forum for (1) any derivative action or proceeding brought on our behalf; (2) any action or proceeding asserting a breach of fiduciary duty owed by any of our directors, officers or other employees to us; (3) any action or proceeding asserting a claim arising pursuant to any provision of the ABCA or our restated articles or by-laws; or (4) any action or proceeding asserting a claim otherwise related to our “affairs” (as defined in the ABCA), provided that the by-law does not apply to any action brought to enforce any liability or duty created by the Exchange Act or the Securities Act, including the respective rules and regulations promulgated thereunder, or any other claim under U.S. securities law for which the United States federal or state courts have exclusive jurisdiction. Our forum selection by-law also provides that our securityholders are deemed to have consented to personal jurisdiction in the Province of Alberta and to service of process on their counsel in any foreign action initiated in violation of our by-law. Therefore, it may not be possible for securityholders to litigate any action relating to the foregoing matters outside of the Province of Alberta.

Our forum selection by-law seeks to reduce litigation costs and increase outcome predictability by requiring derivative actions and other matters relating to our affairs to be litigated in a single forum. While forum selection clauses in corporate charters and by-laws are becoming more commonplace for public companies in the United States and have been upheld by courts in certain states, they are untested in Canada. It is possible that the validity of our forum selection by-law could be challenged and that a court could rule that such by-law is inapplicable or unenforceable. If a court were to find our forum selection by-law inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions and we may not obtain the benefits of limiting jurisdiction to the courts selected.

The regulated nature of our business may impede or discourage a takeover, which could reduce the market price of our common shares.

We require and hold various government licences to operate our business, which would not necessarily continue to apply to an acquiror of our business following a change of control. In addition, our directors, officers and certain other personnel are required to obtain, and maintain, security clearances from Health Canada. These licensing and security clearance requirements could impede a merger, amalgamation, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our common shares, which, under certain circumstances, could reduce the market price of our common shares.

 

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We may become a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors.

Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not believe we are a passive foreign investment company, or a PFIC, for the most recent taxable year, and we do not expect to become a PFIC in the current taxable year, although there can be no assurance in this regard. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets, from time to time. Specifically, for any taxable year, we will be classified as a PFIC for U.S. federal income tax purposes if either: (i) 75% or more of our gross income in that taxable year is passive income, or (ii) the average percentage of our assets by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets is expected to be based, in part, on the quarterly market value of our shares, which is subject to change. See “Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.

If we are or were to become a PFIC, such characterization could result in adverse U.S. federal income tax consequences to U.S. investors. For example, if we are a PFIC, U.S. investors may become subject to increased tax liabilities under U.S. federal income tax laws and regulations and will become subject to burdensome reporting requirements. We cannot assure U.S. investors that we will not be a PFIC for the current taxable year or any future taxable year. U.S. Holders should consult their tax advisor concerning the U.S. federal income tax consequences of holding and disposing shares of a PFIC, including the possibility of making any election that may be available under the PFIC rules (including a mark-to-market election) which may mitigate the adverse U.S. federal income tax consequences of holding shares of a PFIC. See “Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operations and financial performance and condition, as well as our plans, objectives and expectations for our business operations and financial performance and condition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim”, “anticipate”, “assume”, “believe”, “contemplate”, “continue”, “could”, “due”, “estimate”, “expect”, “goal”, “intend”, “may”, “objective”, “plan”, “predict”, “potential”, “positioned”, “pioneer”, “seek”, “should”, “target”, “will”, “would” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology.

These forward-looking statements include, but are not limited to, statements about:

 

   

our use of net proceeds from this offering;

 

   

the continued development and growth of the demand and markets for medical and adult-use cannabis and CBD products;

 

   

the number of flowering rooms and combined production capacity therefrom that we expect to have by the end of 2019;

 

   

our growth strategies, including plans to enter the global CBD market and plans to sell edibles when regulations permit;

 

   

the amount of capital expenditures related to the proposed expansion or conversion of our facilities;

 

   

the successful integration of Bridge Farm’s business;

 

   

the transition of certain of the existing Bridge Farm operations to the cultivation of hemp and extraction of CBD;

 

   

the maintenance of our existing licences and the ability to obtain additional licences as required;

 

   

the outcome of medical research by our partners and the acceptance of such findings in the medical community;

 

   

our ability to leverage Bridge Farm’s existing distribution relationships for CBD products;

 

   

our ability to establish and market our brands within our targeted markets and compete successfully;

 

   

our ability to produce and market additional products as regulations permit;

 

   

our ability to raise future capital through debt of equity financing transactions;

 

   

our ability to attract and retain key employees;

 

   

our ability to manage growth in our business; and

 

   

our ability to identify and successfully execute strategic partnerships.

Although we base the forward-looking statements contained in this prospectus on assumptions that we believe are reasonable, we caution you that actual results and developments (including our results of operations, financial condition and liquidity, and the development of the industry in which we operate) may differ materially from those made in or suggested by the forward-looking statements contained in this prospectus. In addition, even if results and developments are consistent with the forward-looking statements contained in this prospectus, those results and developments may not be indicative of results or developments in subsequent periods. Certain assumptions made in preparing the forward-looking statements contained in this prospectus include:

 

   

our ability to implement our growth strategies;

 

   

our ability to complete the conversion or buildout of our facilities on time and on budget;

 

   

our competitive advantages;

 

   

the development of new products and product formats for our products;

 

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our ability to obtain and maintain financing on acceptable terms;

 

   

the impact of competition;

 

   

the changes and trends in the cannabis industry;

 

   

changes in laws, rules and regulations;

 

   

our ability to maintain and renew required licences;

 

   

our ability to maintain good business relationships with our customers, distributors and other strategic partners;

 

   

our ability to keep pace with changing consumer preferences;

 

   

our ability to protect our intellectual property;

 

   

our ability to manage and integrate acquisitions, particularly Bridge Farm;

 

   

our ability to retain key personnel; and

 

   

the absence of material adverse changes in our industry or the global economy.

These forward-looking statements are based on our current expectations, estimates, forecasts and projections about our business and the industry in which we operate and management’s beliefs and assumptions, and are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and elsewhere in this prospectus. Potential investors are urged to consider these factors carefully in evaluating the forward-looking statements. These forward-looking statements speak only as of the date of this prospectus. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC, after the date of this prospectus. See “Where You Can Find More Information”.

This prospectus contains estimates, projections and other information concerning our industry, our business, and the markets for our products. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors”. These and other factors could cause our future performance to differ materially from our assumptions and estimates.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from our issuance and sale of 11,000,000 shares in this offering will be approximately US$131.0 million ($170.8 million), after deducting the underwriting commission and estimated offering expenses payable by us. This estimate is based on the initial public offering price of US$13.00 ($16.95) per share. If the underwriters exercise their over-allotment option in full to purchase additional shares from us, we estimate that our net proceeds will be approximately US$151.2 million ($197.1 million), after deducting the underwriting commission and estimated offering expenses payable by us.

We are undertaking this offering in order to increase our liquidity and raise capital to further develop our cultivation and processing capacity. We intend to use the net proceeds from this offering, in combination with cash on hand, other anticipated sources of financing and expected cash flow from operations, as follows, approximately: (i) $55.0 million to $60.0 million to complete the construction and expansion of our Olds Facility; (ii) $15.0 million to $30.0 million to complete the construction of our Merritt Facility; (iii) $92.0 million to fund the expansion and transition of certain of the Bridge Farm facilities to hemp cultivation and processing; and (iv) $1.0 million for research through Pathway Rx. The amount of remaining capital expenditures required at, and allocated to, the Merritt Facility will vary depending on the scale of the facility that will be constructed. At the Merritt Facility, a mini-pod, which is an approximately 35,000 square foot facility with eight flowering rooms, is expected to cost a further $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete. We plan on allocating the remainder of the net proceeds of this offering, if any, for capital expenditures required to maintain our productive capacity on an ongoing basis, future acquisitions and general corporate purposes, including payment of the cash portion of the consideration for termination of the Investment and Royalty Agreement. At present, we have no plan, arrangement or understanding to acquire any material business or asset.

We expect most of the expenditures described above to be incurred by the end of the first half of 2020. However, our business objectives and milestones may be adjusted at the discretion of management and the actual amounts and timelines for achieving these objectives and milestones are subject to many factors. The expected use of proceeds from this offering represent our intentions based upon our current plans and business conditions. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors and any unforeseen cash needs. As a result, management will retain broad discretion over the allocation of the net proceeds from this offering.

 

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DIVIDEND POLICY

We have never paid dividends on our common shares. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. As such, we do not intend to declare or pay cash dividends on our common shares in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our earnings, operating results, financial condition and current and anticipated cash needs. Our future ability to pay cash dividends on our common shares may be limited by the terms of any then-outstanding debt or preferred securities.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as at March 31, 2019:

 

   

on an actual basis, giving effect to the 1 to 1.6 share split;

 

   

on a pro forma basis giving effect to the 1 to 1.6 share split, the Bridge Farm acquisition, the entry into the SAF Jackson Facility and certain other adjustments in connection with the Bridge Farm acquisition; and

 

   

on a pro forma as adjusted basis giving effect to:

 

  (i)

the 1 to 1.6 share split;

 

  (ii)

the Bridge Farm acquisition, the entry into the SAF Jackson Facility in June 2019 and certain other adjustments in connection with the Bridge Farm acquisition;

 

  (iii)

the issuance of 11,000,000 common shares in this offering at the initial public offering price of US$13.00 per share, after deducting the underwriting commission and estimated offering expenses payable by us (excluding the potential exercise by the underwriters of their over-allotment option)(1);

 

  (iv)

(a) the issuance of the $93.2 million aggregate principal amount of the 8% Convertible Notes in May to July 2019, (b) the use of proceeds of the 8% Convertible Notes to repay the Bridge Facility and for general corporate purposes and (c) the issuance of 6,999,757 common shares assuming full conversion of the 8% Convertible Notes (including the related interest of approximately $1.7 million as of the date of this prospectus)(2);

 

  (v)

the repayment of the Bridge Facility in May 2019, the Farm Credit Canada Agreement in June 2019, and the Repurchase Agreement in June 2019; and

 

  (vi)

the issuance of 7,263,984 common shares and 4,191,319 warrants to purchase 4,191,319 common shares assuming full conversion of the 12% Convertible Notes(3).

Actual data as at March 31, 2019 in the table below is derived from our unaudited condensed interim consolidated financial statements included elsewhere in this prospectus. The actual, pro forma and pro forma as adjusted data included in the table below is unaudited is provided for illustrative purposes only. You should read this information together with our unaudited condensed interim consolidated financial statements included elsewhere in this prospectus and the information set forth under the headings “Unaudited Pro Forma Condensed Consolidated Financial Information”, “Selected Historical Consolidated Financial Data”, “Use of Proceeds” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

     As at March 31, 2019  
(in thousands)    Actual      Pro Forma      Pro Forma
As Adjusted
 
     (Unaudited)  

Cash and cash equivalents(4)

   $ 13,005      $ 20,146      $ 239,582  
  

 

 

    

 

 

    

 

 

 

Long-term debt (including current portion)(5)

   $ 111,755      $ 218,130      $ 147,799  

Shareholders’ equity:

        

Common shares, no par value(6)

     84,229        110,704        421,627  

Warrants(7)

     1,540        1,540        1,592  

Convertible notes – equity component

     3,232        3,232         

Contributed surplus(8)

     17,023        17,023        17,023  

Accumulated deficit

     (105,590      (105,590      (123,566

Contingent consideration(9)

     2,279        2,279        2,279  
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     2,713        29,188        318,955  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 114,468      $ 247,318      $ 466,754  
  

 

 

    

 

 

    

 

 

 

 

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(1)

Net proceeds to us from this offering have been translated into Canadian dollars for convenience only using the daily exchange rate of $1.3038 per US$1.00 as of July 12, 2019, as reported by the Bank of Canada.

(2)

Assumes all of the holders of the 8% Convertible Notes elect to convert their notes into an aggregate of 6,999,757 common shares upon the completion of this offering at a conversion price of $13.56 per share, which is equal to 80% (the discount to offering price prescribed in the indenture governing the 8% Convertible Notes) of the initial public offering price of US$13.00 ($16.95) per share.

(3)

Assumes holders representing approximately 77% of the aggregate principal amount of the 12% Convertible Notes elect to participate in the Lockup Incentive Offer and all of the holders elect to convert their notes upon the completion of this offering into units comprising common shares and common share purchase warrants at a conversion price of US$3.13 ($4.08) per unit for notes issued to U.S. investors and $3.91 per unit for notes issued to Canadian investors resulting in the issuance of (i) 7,263,984 shares issuable upon the conversion of the 12% Convertible Notes and (ii) 4,191,319 common share purchase warrants exercisable for 4,191,319 common shares at an exercise price of US$3.75 ($4.89) per warrant for notes issued to U.S. investors and $4.38 per warrant for notes issued to Canadian investors.

(4)

Excludes $350,000 of restricted cash. As at June 30, 2019, we expect our total amount of cash and cash equivalents to be approximately $37 million (including restricted cash). This estimate is preliminary in nature, our actual results may vary materially from the estimated preliminary result presented, see “Prospectus Summary—Estimated Preliminary Results for the Three Months Ended June 30, 2019 (unaudited)”. In addition, subsequent to June 30, 2019, we borrowed an additional $1.1 million under the bank credit facilities extended to us under the Commitment Letter (as defined herein) with ATB Financial.

(5)

On an actual basis, comprises (i) $41.4 million in non-current debt, (ii) $43.9 million in current debt, and (iii) $26.4 million representing the current liability component of 12% Convertible Notes. On a pro forma basis, comprises (i) $124.6 million in non-current debt, (ii) $43.9 million in current debt, (iii) $26.4 million representing the current liability component of 12% Convertible Notes, and (iv) $23.2 million of derivative liability representing the estimated fair value of the common share purchase warrants issued in connection with the SAF Jackson Facility, and excludes $40.9 million representing the current portion and non-current portion of promissory notes issued in connection with the Bridge Farm acquisition. On a pro forma as adjusted basis, comprises (i) $124.6 million in non-current debt, (ii) no current debt and (iii) $23.2 million of derivative liability representing the estimated fair value of the common share purchase warrants issued in connection with the SAF Jackson Facility, and excludes $40.9 million representing the current portion and non-current portion of promissory notes issued in connection with the Bridge Farm acquisition. The Company has agreed to satisfy payment of the promissory notes issued in connection with the Bridge Farm acquisition through the issuance of common shares in accordance with the terms of the Bridge Farm Sale and Purchase Agreement (see “Business—Acquisition of Bridge Farm”). Excludes borrowings of an additional $6.6 million under the bank credit facilities extended to us under the Commitment Letter (as defined herein) with ATB Financial subsequent to March 31, 2019, which brings the total amount drawn under these facilities to $47.8 million as of the date of this prospectus.

(6)

Excludes all common shares issued subsequent to March 31, 2019, unless otherwise provided above. See “Prospectus Summary—The Offering”.

(7)

Excludes all warrants issued subsequent to March 31, 2019, unless otherwise provided above. See “Prospectus Summary—The Offering” and the 280,000 warrants which may be issued to Pathway Rx (see note (9)).

(8)

Excludes all share-based compensation and warrants exercised subsequent to March 31, 2019.

(9)

Includes 280,000 warrants which may be issued to Pathway Rx, at an exercise price of $1.81 per share, subject to achievement of certain milestone gross revenues derived from the Pathway Royalty Activities. See “Business—Acquisition of Interest in Pathway Rx”.

As of the date of this prospectus, we are considering replacing our existing bank credit facilities extended to us under the Commitment Letter with ATB Financial with a new $90.0 million secured credit facility provided by ATB Financial, consisting of a $5.0 million senior secured revolving credit facility and a $85.0 million senior secured term credit facility, as well as the right to subsequently increase the size of the facilities by a maximum of $50.0 million, subject to certain conditions. See “Prospectus Summary—Our Company—Recent Developments—Possible Refinancing of Bank Credit Facilities”.

In June 2019, in connection with the SAF Jackson Facility, we issued SAF two tranches of warrants exercisable upon the earlier of (i) the completion of this offering, (ii) December 31, 2020, or (iii) a default or event of default under the SAF Credit Agreement or certain other specified events. The first tranche expires in three years from the date of this offering and the second tranche expires four years following the date of this offering. The number of warrants issuable under the warrant certificates and the exercise price of such warrants issued is indexed to the Company’s share price determined at the date of the completion of an initial public

 

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offering. Based on the foregoing and the initial public offering price of US$13.00 ($16.95) per share, the Company under the warrant certificates will issue to SAF, for the first tranche, warrants to acquire 977,026 shares at an exercise price of $21.19 per share, and for the second tranche, warrants to acquire 1,526,603 shares at an exercise price of $20.34 per share. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Other Secured Debt—SAF Jackson Facility”.

In July 2019, we and our Executive Chairman agreed to terminate the Investment and Royalty Agreement for aggregate consideration of 3,680,000 common shares, 480,000 share purchase warrants (each exercisable for one common share at an exercise price of $15.94 for a period of three years from the date of issue) and a cash payment of $9.5 million (to be paid on or before December 31, 2019 or on such earlier date as permitted by certain of our lenders), subject to consummation of this offering. Per the terms of the termination agreement, in the event that the cash payment is not received in whole or in part by December 31, 2019, interest at a rate of 1% per month shall accrue on any amount outstanding until payment in full of $9.5 million, plus any applicable interest, is made. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations—Investment and Royalty Agreement”.

 

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DILUTION

If you invest in our common shares in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share in this offering and the pro forma as adjusted net tangible book value per share after this offering. Dilution results from the fact that the initial public offering price per share is substantially in excess of the net tangible book value per share attributable to the existing shareholders for our presently outstanding shares. Our net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the number of shares issued and outstanding.

As of March 31, 2019, we had a historical net tangible book value of $13.3 million, or $0.18 per share, based on 72,807,315 pro forma common shares outstanding as of such date, after giving effect to the Bridge Farm acquisition and the entry into the SAF Jackson Facility. Dilution is calculated by subtracting net tangible book value per share from the initial public offering price of US$13.00 per share.

Investors participating in this offering will incur immediate and substantial dilution. Without taking into account any other changes in such net tangible book value after giving effect to the Bridge Farm acquisition, SAF Jackson Facility and other certain adjustments, and, after giving effect to the sale of common shares in this offering, based on the initial public offering price of US$13.00 per share, less the underwriting commission and estimated offering expenses payable by us, our pro forma net tangible book value as of March 31, 2019 would have been approximately $184.1 million, or $2.19 per share. This amount represents an immediate increase in net tangible book value of $2.01 per share to the existing shareholders and immediate dilution of $14.76 per share to investors purchasing our common shares in this offering.

The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share

        US$13.00 ($16.95)  

Pro forma net tangible book value per share as of March 31, 2019

     $0.18     

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     2.01     
  

 

 

    

Pro forma as adjusted net tangible book value per share after this offering

        2.19  
     

 

 

 

Dilution in net tangible book value per share to new investors in this offering

        $14.76  
     

 

 

 

For purposes of the foregoing discussion, the initial public offering price has been translated into Canadian dollars for convenience only using the daily exchange rate of $1.3038 per US$1.00 as of July 12, 2019, as reported by the Bank of Canada.

The following table summarizes, as of March 31, 2019, on the pro forma basis described above, the aggregate number of shares purchased from us, the total consideration paid to us, and the average price per share paid by purchasers of such shares and by new investors purchasing common shares in this offering.

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percent     Amount      Percent  

Existing shareholders

     72,807,315        86.9   $ 110,704,000        37.3   $ 1.52  

New investors

     11,000,000        13.1       186,443,400        62.7       16.95  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

     83,807,315        100.0   $ 297,147,400        100.0   $ 3.55  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated financial information is based upon the historical financial statements of the Company after giving effect to the acquisition of Bridge Farm. The unaudited pro forma condensed consolidated financial information also gives effect to the transactions undertaken to finance the acquisition of Bridge Farm.

The unaudited pro forma condensed consolidated statement of financial position as of March 31, 2019 combines the historical statement of financial position of the Company, giving effect to the acquisition of Bridge Farm, as if it had been completed on March 31, 2019. Since the acquisition of Bridge Farm occurred subsequent to March 31, 2019, the Company’s historical statement of financial position does not yet include the effects of that acquisition and, therefore, certain pro forma adjustments are necessary to present the unaudited pro forma condensed consolidated statement of financial position.

The unaudited pro forma condensed consolidated statements of loss and comprehensive loss for the three months ended March 31, 2019 and the ten months ended December 31, 2018 give effect to the acquisition of Bridge Farm as if it had occurred on March 1, 2018.

Bridge Farm has a fiscal year end of June 30, which differs from the Company’s fiscal year end of December 31. Accordingly, for purposes of the unaudited pro forma condensed consolidated statement of loss and comprehensive loss for the ten months ended December 31, 2018, the historical Bridge Farm amounts combine Bridge Farm’s historical unaudited consolidated statement of income for the nine months ended March 31, 2019 with adjustments for Bridge Farm’s historical consolidated statement of income for the month ended June 30, 2018.

The following unaudited pro forma condensed consolidated financial information and related notes present the historical financial information of the Company and Bridge Farm adjusted to give pro forma effect to events that are (i) directly attributable to the acquisition, (ii) factually supportable and (iii) with respect to the unaudited pro forma condensed consolidated statements of income, expected to have a continuing impact on the consolidated results. The unaudited pro forma condensed consolidated financial information should be read in conjunction with the:

 

   

separate audited consolidated financial statements of the Company as at and for the ten months ended December 31, 2018 and the related notes, included elsewhere in this prospectus;

 

   

the consolidated financial statements of Project Seed Topco Limited as at June 30, 2018 (Successor) and June 30, 2017, June 30, 2016 and July 1, 2015 (Predecessor) and for the period from June 5, 2017 to June 30, 2018 (Successor), for the period from July 1, 2017 to August 10, 2017 (Predecessor), for the year ended June 30, 2017 (Predecessor) and for the year ended June 30, 2016 (Predecessor) and the related notes, included elsewhere in this prospectus;

 

   

separate unaudited condensed interim consolidated financial statements of the Company as at and for the three months ended March 31, 2019 and the related notes, included elsewhere in this prospectus; and

 

   

separate unaudited condensed consolidated financial statements of Project Seed Topco Limited as at and for the three and nine months ended March 31, 2019 and the related notes, included elsewhere in this prospectus.

The presentation of the unaudited pro forma condensed consolidated financial information is prepared in conformity with Article 11 of Regulation S-X.

The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor is it indicative of future operating results or financial position or intended

 

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to project future financial position or results of the consolidated company. The pro forma adjustments represent management’s best estimate and are based upon currently available information and certain assumptions the Company believes are reasonable under the circumstances. Future results of the consolidated company may vary significantly from the results reflected because of various factors, including those discussed in “Risk Factors”. The final valuation may materially change the allocation of the purchase consideration, which could materially affect the fair values assigned to the assets and liabilities and could result in a material change to the unaudited pro forma condensed consolidated financial information. Refer to footnotes to the unaudited pro forma condensed consolidated financial information for more information on the basis of preparation.

 

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Sundial Growers Inc.

Unaudited Pro Forma Consolidated Statement of Financial Position

As at March 31, 2019

 

(amounts presented in CAD thousands)    Historical
Sundial
Growers Inc.
    Adjusted
Historical
Bridge
Farm (a)
    Pro Forma
Adjustments
    Note      Pro Forma
Sundial
Growers Inc.
 

Assets

           

Current assets

           

Cash and cash equivalents

     13,005             106,375       (b      20,146  
         (69,672     (c1   
         (29,562     (c2   

Restricted cash

     350                      350  

Accounts receivable

     2,448       11,707       (871     (c3      13,284  

Biological assets

     6,222       4,640                10,862  

Inventory

     5,049       2,851                7,900  

Prepaid expenses and deposits

     13,497             (8,709     (c4      4,788  
  

 

 

   

 

 

   

 

 

      

 

 

 
     40,571       19,198       (2,439        57,330  

Non-current assets

           

Property, plant and equipment

     118,960       54,048                173,008  

Intangible assets

     13,369       7,389                20,758  

Goodwill

           3,001       (3,001     (c5      127,220  
         127,220       (c5   
  

 

 

   

 

 

   

 

 

      

 

 

 
     132,329       64,438       124,219          320,986  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total assets

     172,900       83,636       121,780          378,316  
  

 

 

   

 

 

   

 

 

      

 

 

 

Liabilities

        

Current liabilities

        

Accounts payable and accrued liabilities

     33,807       13,868                47,675  

Current portion of debt

     43,945       29,731       (28,860     (c2      43,945  
         (871     (c3   

Current portion of promissory notes

                 18,525       (c6      18,525  

Current portion of convertible notes

     26,386                      26,386  

Current portion of lease obligation

     207       740                947  

Current portion of financial obligation

     2,247                      2,247  
  

 

 

   

 

 

   

 

 

      

 

 

 
     106,592       44,339       (11,206        139,725  
  

 

 

   

 

 

   

 

 

      

 

 

 

Non-current liabilities

           

Debt

     41,424       36,257       83,160       (b      124,584  
         (36,257     (c7   

Promissory notes

                 22,380       (c8      22,380  

Derivative liability

                 23,215       (b      23,215  

Financial obligations

     16,238                      16,238  

Lease obligations

     1,054       15,809                16,863  

Deferred tax liabilities

           1,244                1,244  
  

 

 

   

 

 

   

 

 

      

 

 

 
     165,308       97,649       81,292          344,249  
  

 

 

   

 

 

   

 

 

      

 

 

 

Equity

           

Share capital

     84,229       272       26,475       (c6      110,704  
         (272     (c9   

Contingent consideration

     2,279                      2,279  

Warrants

     1,540                      1,540  

Contributed surplus

     17,023                      17,023  

Convertible notes – equity component

     3,232                      3,232  

Accumulated deficit

     (105,590     (14,285     14,285       (c9      (105,590
  

 

 

   

 

 

   

 

 

      

 

 

 
     2,713       (14,013     40,488          29,188  
  

 

 

   

 

 

   

 

 

      

 

 

 

Non-controlling interest

     4,879                      4,879  
  

 

 

   

 

 

   

 

 

      

 

 

 

Total liabilities and equity

     172,900       83,636       121,780          378,316  
  

 

 

   

 

 

   

 

 

      

 

 

 

See accompanying Notes to Unaudited Pro Forma Consolidated Statement of Financial Position

 

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Sundial Growers Inc.

Notes to Unaudited Pro Forma Consolidated Statement of Financial Position

 

(a)

The Historical Bridge Farm financial statement of financial position has been constructed by adjusting the unaudited consolidated statement of financial position of Bridge Farm as of March 31, 2019 for the impact of adoption of IFRS 16 on January 1, 2019. Bridge Farm’s historical financial statements are presented in British pound sterling. For purposes of the pro forma consolidated statement of financial position, all amounts in British pound sterling have been translated to Canadian dollars at an exchange rate of $1.7418 per £1.00, which was the Bank of Canada daily exchange rate published on March 29, 2019.

 

(Amounts presented in thousands)

   Sundial Growers Account
Classification
     Historical
Bridge
Farm
(GBP)
    IFRS 16
Adjustments
(GBP)
    Adjusted
Historical
Bridge
Farm
(GBP)
    Currency
Translation
adjustments
    Adjusted
Historical
Bridge
Farm
(CAD)
 

Non-current assets

             

Goodwill

     Goodwill      1,723             1,723       1,278       3,001  

Intangible assets

     Intangible assets        4,242             4,242       3,147       7,389  

Property and equipment

     Property, plant and equipment        21,571       9,459       31,030       23,018       54,048  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

        27,536       9,459       36,995       27,443       64,438  

Current assets

             

Inventories

     Inventory        1,637             1,637       1,214       2,851  

Biological assets

     Biological assets        2,664             2,664       1,976       4,640  

Trade and other receivables

     Accounts receivable        6,721             6,721       4,986       11,707  

Cash and cash equivalents

     Cash and cash equivalents                                 
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

        11,022             11,022       8,176       19,198  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

        38,558       9,459       48,017       35,619       83,636  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity

             

Share capital

     Share capital        2             2       2       4  

Share premium

     Share capital        154             154       114       268  

Accumulated funds/(deficit)

     Accumulated deficit        (8,166     (35     (8,201     (6,084     (14,285
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity attributable to owners of the Company

        (8,010     (35     (8,045     (5,968     (14,013
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

        (8,010     (35     (8,045     (5,968     (14,013
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities

             

Loans and borrowings liabilities

     Debt        20,816             20,816       15,441       36,257  

Deferred tax liabilities

     Deferred tax liabilities        721       (7     714       530       1,244  

Lease obligations

     Lease obligations              9,076       9,076       6,733       15,809  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

        21,537       9,069       30,606       22,704       53,310  

Current liabilities

             

Trade and other payables

    
Accounts payable and
accrued liabilities
 
 
     7,962             7,962       5,906       13,868  

Loans and borrowings

     Current portion of debt        17,069             17,069       12,662       29,731  

Lease obligations

    
Current portion of lease
obligations
 
 
           425       425       315       740  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities 

        25,031       425       25,456       18,883       44,339  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

        46,568       9,494       56,062       41,587       97,649  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity and liabilities

        38,558       9,459       48,017       35,619       83,636  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(b)

Subsequent to March 31, 2019, the Company entered into a third party financing arrangement consisting of a first tranche of four year $115.0 million loan and a second tranche of four year $44.6 million each with an annual interest rate of 9.75% plus an agreement to issue warrants. Net proceeds of $106.4 million relating to the first tranche has been advanced to the Company. The amount of warrants issued will be in two tranches with the first consisting of $20.7 million divided by 125% of the price of the Company’s initial public offering and the second consisting of $31.1 million divided by 120% of the price of the Company’s initial public offering. The first tranche expires in three years from the Company’s initial public offering and the

 

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  second tranche expires four years following the Company’s initial public offering. The warrants are exercisable at anytime following the earlier of the closing of this offering, December 31, 2020, or the occurrence of certain other events. The SAF Jackson Facility was secured and used directly to fund the Bridge Farm acquisition. The third party financing arrangement have been recorded as $83.2 million in debt which is the net proceeds received of $106.4 million less the $23.2 million derivative liability which represents the estimated fair value of the warrants that were issued pursuant to the third party financing arrangement.

 

(c)

The pro forma consolidated statement of financial position reflects, effective March 31, 2019, the purchase all of the outstanding securities of Bridge Farm and shareholder loan notes, in exchange for (i) cash consideration in the amount of £45.0 million, (ii) the issuance of promissory notes in an amount equal to the greater of (1) 2,400,000 multiplied by the fair market value of a common share of the Company at the closing date of the transaction and (2) $45.0 million, and (iii) contingent consideration in the form of earn-out payments of up to an additional 1,600,000 common shares of the Company based on a prescribed formula. The initial deposit of £5 million, required under the Sale and Purchase Agreement, was made on February 22, 2019. The preliminary fair value estimate of the total purchase consideration was approximately $146.6 million. The preliminary purchase consideration of the acquired assets and assumed liabilities was allocated based on estimated fair values as follows:

 

Bridge Farm net assets

   CAD thousands  

Accounts receivable

     11,707  

Biological assets

     4,640  

Inventory

     2,851  

Property, plant and equipment

     54,048  

Intangible assets

     7,389  

Goodwill

     127,220  

Accounts payable

     (13,868

Deferred tax liabilities

     (1,244

Lease obligations

     (16,549

Secured bank debt

     (29,562
  

 

 

 

Total purchase price

     146,632  
  

 

 

 

This preliminary purchase price allocation has been used to prepare pro forma adjustments in the pro forma statement of financial position and statement of consolidated loss. The final purchase price allocation will be determined when we have completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include changes in allocations to intangible assets and goodwill, including the recognition of any deferred taxes thereon, and other changes to assets and liabilities. These pro forma financial statements do not include any incremental amortization or depreciation that may be required upon final allocations of fair value to the net assets acquired.

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma combined financial information:

 

1.

Adjustments to cash of $69.7 million (£40 million) representing the cash portion of the purchase price.

 

2.

Adjustments to cash of $29.6 million (£17 million) representing repayment of secured bank debt on behalf

of Bridge Farm.

 

3.

Adjustment to accounts receivable of $0.9 million relate to the £0.5 million loan issued to Bridge Farm by Sundial UK limited which will be eliminated upon acquisition.

 

4.

Adjustment to prepaid expenses and deposits of $8.7 million with respect to the £5 million initial deposit paid upon signing the Bridge Farm Sale and Purchase Agreement on February 22, 2019 which will be applied to the consideration for the acquisition.

 

5.

Adjustments to goodwill of $3.0 million representing the reversal of previously recognized goodwill on Bridge Farm’s statement of financial position and the addition of goodwill of $127.2 million identified as part of the preliminary purchase price allocation. The amount of assessed goodwill is preliminary and currently does not reflect the amount that will be allocated to intangible assets.

 

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6.

Adjustment for current portion of promissory notes and share capital consisting of $18.5 million and $26.5 million, respectively, representing the portion of the purchase price related to the issuance of promissory notes equal to the greater of (1) 1,500,000 multiplied by the fair market value of 1.6 times a common share of the Company at the closing date of the transaction and (2) $45.0 million. Upon closing of the acquisition of Bridge Farm, promissory notes were issued and immediately settled through the issuance of 2.4 million shares valued at $26.5 million. The remaining balance of $18.5 million will be settled through the issuance of additional promissory notes on the first anniversary of the Bridge Farm acquisition closing date.

 

7.

Adjustments to debt of $36.3 million representing repayment of $0.7 million of the long term portion of secured debt and $35.6 million of Bridge Farm shareholder loan notes pursuant to the Sale and Purchase Agreement.

 

8.

Adjustments to non-current promissory notes of $22.4 million representing the portion of the purchase price related to the fair value of contingent consideration issuable in the form of promissory notes based on the earn-out payments entitling the sellers to an additional 1,600,000 common shares of the Company using a prescribed formula based on adjusted annual operating income thresholds to be achieved over three years beginning with the fiscal period ending in 2020.

 

9.

Adjustments to share capital of $0.3 million and accumulated deficit of $14.3 million representing the effects of consolidation.

 

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Sundial Growers, Inc.

Unaudited Pro Forma Consolidated Statement of Loss and Comprehensive Loss

Three months ended March 31, 2019

 

(Amounts presented in CAD thousands)    Historical
Sundial
Growers Inc.(a)
    Adjusted
Historical
Bridge Farm(b)
    Pro forma
adjustments
    Notes     Pro Forma
Sundial
Growers Inc.
 

Revenue

          

Gross revenue

     1,691       9,084               10,775  

Excise taxes

     192                     192  
  

 

 

   

 

 

   

 

 

     

 

 

 

Net revenue

     1,499       9,084               10,583  

Cost of sales

     778       8,106               8,884  
  

 

 

   

 

 

   

 

 

     

 

 

 

Gross margin before fair value adjustments

     721       978               1,699  

Change in fair value of biological assets

     692       (14             678  

Change in fair value realized through inventory sold

     80                     80  
  

 

 

   

 

 

   

 

 

     

 

 

 

Gross margin

     1,493       964               2,457  

General and administrative

     5,074       1,853               6,927  

Sales and marketing

     1,212       450               1,662  

Research & development

     95                     95  

Pre-production expenses

                          

Depreciation and amortization

     120       679               799  

Foreign exchange (gain)/loss

     (269                   (269

Share based compensation

     12,625                     12,625  

Asset impairment

     162                     162  
  

 

 

   

 

 

   

 

 

     

 

 

 

Loss from operations

     (17,526     (2,018             (19,544
  

 

 

   

 

 

   

 

 

     

 

 

 

Finance costs

     (2,785     (1,371     1,371       (c1     (7,290
         (2,803     (c2  
         (1,702     (c3  

(Gain)/loss on disposal of property, plant and equipment

                          
  

 

 

   

 

 

   

 

 

     

 

 

 

Loss before tax

     (20,311     (3,389     (3,134       (26,834

Income tax (recovery)/expense

     3,609       450               4,059  
  

 

 

   

 

 

   

 

 

     

 

 

 

Net loss and comprehensive loss

     (16,702     (2,939     (3,134       (22,775
  

 

 

   

 

 

   

 

 

     

 

 

 

Basic and diluted loss per share

   $ (0.24         $ (0.32
  

 

 

   

 

 

   

 

 

     

 

 

 

See accompanying Notes to the Unaudited Pro Forma Consolidated Statement of Loss and Comprehensive Loss

 

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Sundial Growers, Inc.

Unaudited Pro Forma Consolidated Statement of Loss and Comprehensive Loss

Ten Months Ended December 31, 2018

 

(Amounts presented in CAD thousands)    Historical
Sundial
Growers Inc.(a)
    Adjusted
Historical
Bridge Farm(1)
    Pro forma
adjustments
    Notes     Pro Forma
Sundial
Growers Inc.
 

Revenue

          

Gross revenue

           20,402               20,402  

Excise taxes

                          
  

 

 

   

 

 

   

 

 

     

 

 

 

Net revenue

           20,402               20,402  

Cost of sales

           16,236               16,236  
  

 

 

   

 

 

   

 

 

     

 

 

 

Gross margin before fair value adjustments

           4,166               4,166  

Change in fair value of biological assets

     (1,280     (135             (1,415
  

 

 

   

 

 

   

 

 

     

 

 

 

Gross margin

     (1,280     4,031               2,751  

General and administrative

     8,830       5,150               13,980  

Sales and marketing

     2,380       965               3,345  

Research & development

     275                     275  

Pre-production expenses

     6,457                     6,457  

Depreciation and amortization

     920       1,890               2,810  

Foreign exchange (gain)/loss

     141                     141  

Share based compensation

     6,889                     6,889  

Asset impairment

     523                     523  
  

 

 

   

 

 

   

 

 

     

 

 

 

Loss from operations

     (27,695     (3,974             (31,669
  

 

 

   

 

 

   

 

 

     

 

 

 

Finance costs

     (28,814     (3,711     3,711       (c1     (43,968
         (9,344     (c2  
         (5,810     (c3  

(Gain)/loss on disposal of property, plant and equipment

     (17                   (17
  

 

 

   

 

 

   

 

 

     

 

 

 

Loss before tax

     (56,526     (7,685     (11,443       (75,654

Income tax recovery/(expense)

           1,468               1,468  

Deferred tax, net

                          
  

 

 

   

 

 

   

 

 

     

 

 

 

Net loss and comprehensive loss

     (56,526     (6,217     (11,443       (74,186
  

 

 

   

 

 

   

 

 

     

 

 

 

Basic and diluted loss per share

   $ (0.82         $ (1.04
  

 

 

         

 

 

 
(1)

The ten months ended December 31, 2018 reflect the historical results of operations for the nine months ended starting July 1, 2018 through to March 31, 2019, with adjustments to include the one month ended June 30, 2018. Refer to note (b) to the Unaudited Pro Forma Consolidated Statement of Loss and Comprehensive Loss for further details.

See accompanying Notes to the Unaudited Pro Forma Consolidated Statement of Loss and Comprehensive Loss

 

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Sundial Growers Inc.

Notes to Unaudited Pro Forma Consolidated Statement of Loss and Comprehensive Loss

 

(a)

The Company changed its fiscal year end from February 28 to December 31 and accordingly a ten-month period ended December 31, 2018 has been presented as the fiscal period for the last audited consolidated financial statements.

 

(b)

Bridge Farm financial statements presented in the accompanying unaudited pro forma consolidated statement of loss and comprehensive loss for the three months ended March 31, 2019 has been adjusted for the impact of adoption of IFRS 16. Bridge Farm’s historical financial statements are presented in British pound sterling. For purposes of the unaudited pro forma consolidated statement of loss and comprehensive loss for the three months ended March 31, 2019, all amounts in British pound sterling have been translated to Canadian dollars at an exchange rate of $1.7316 per £1.00, which was the average Bank of Canada daily exchange rate published between the periods of January 1, 2019 and March 31, 2019.

 

(amounts presented in thousands)  

Sundial Growers
Account classification

   Historical
Bridge
Farm
(GBP)
    IFRS 16
adjustments
(GBP)
    Adjusted
Historical
Bridge
Farm
(GBP)
    Foreign
currency
adjustments
    Adjusted
Historical
Bridge
Farm
(CAD)
 

Revenue

  Revenue      5,246             5,246       3,838       9,084  

Cost of sales

  Cost of sales      (4,760     71       (4,689     (3,431     (8,120
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

       486       71       557       407       964  

Distribution costs

  General and administrative      (260           (260     (190     (450

Administrative expenses

  General and administrative      (1,501           (1,501     (1,098     (2,599

Other operating income

  General and administrative      39             39       28       67  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

       (1,236     71       (1,165     (853     (2,018

Finance costs

  Finance costs      (679     (113     (792     (579     (1,371
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit/(loss) before tax

       (1,915     (42     (1,957     (1,432     (3,389

Income tax income /(expense)

  Income tax (recovery)/expense      253       7       260       190       450  
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit/(loss) for the period

       (1,662     (35     (1,697     (1,242     (2,939

Profit/(loss) attributable to:

            

Owners of the company

       (1,662     (35     (1,697     (1,242     (2,939
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income/(loss), net of tax

       (1,662     (35     (1,697     (1,242     (2,939
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

            

Owners of the company

       (1,662     (35     (1,697     (1,242     (2,939
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The ten months ended December 31, 2018 reflect the historical results of operations as if the acquisition of Bridge Farm had occurred on March 1, 2018. The Company selected the historical results of operations for the nine months ended starting July 1, 2018 through to March 31, 2019, with adjustments to include the one month ended June 30, 2018 which is within 93 days of the Company’s February 28, 2018 fiscal period end. The adjustments for the one month ended June 30, 2018 were obtained from the internal monthly accounting records provided by Bridge Farm management. There are no adjustments for the adoption of IFRS 16 due to the application of the modified retrospective approach consistent with the adoption methodology applied by the Company. Bridge Farm’s historical financial statements are published in British pound sterling. For purposes of the adjusted unaudited pro forma consolidated statement of loss and comprehensive loss for the ten months ended March 31, 2019, all amounts in British pound sterling have been translated to Canadian dollars at an exchange rate of $1.7147 per £1.00, which was the average Bank of Canada daily exchange rate published between the periods of June 1, 2018 and March 31, 2019.

 

(amounts presented in thousands)   

Sundial Growers Account
classification

   Historical
Bridge Farm
9 months
ended
March 31,
2019 (GBP)
    Historical
Bridge Farm
1 month
ended
June 30,
2018 (GBP)
    Historical
Bridge
Farm
10 months
ended
March 31,
2019
(GBP)
    Foreign
currency
adjustments
    Adjusted
Historical
Bridge
Farm
(CAD)
 

Revenue

   Revenue      10,369       1,529       11,898       8,504       20,402  

Cost of sales

   Cost of sales      (8,590     (957     (9,547     (6,823     (16,370
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

        1,779       572       2,351       1,681       4,032  

Distribution costs

   General and administrative      (563           (563     (402     (965

Administrative expenses

   General and administrative      (3,954     (261     (4,215     (3,012     (7,227

Other operating income

   General and administrative      107       9       116       83       199  

Other gains/(losses)

   General and administrative      (7           (7     (6     (13
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

        (2,638     320       (2,318     (1,656     (3,974

Finance costs

   Finance costs      (1,970     (194     (2,164     (1,547     (3,711

Profit/(loss) before tax

        (4,608     126       (4,482     (3,203     (7,685

Income tax income/(expense)

   Income tax (recovery)/expense      856             856       612       1,468  
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit/(loss) for the period

        (3,752 )      126       (3,626 )      (2,591 )      (6,217 ) 

Profit/(loss) attributable to:

             

Owners of the company

        (3,752     126       (3,626     (2,591     (6,217
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income/(loss), net of tax

        (3,752 )      126       (3,626 )      (2,591 )      (6,217 ) 
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to:

             

Owners of the company

        (3,752     126       (3,626     (2,591     (6,217
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(c)

In accordance with Article 11 of Regulation S-X, the following adjustments were made for the acquisition of Bridge Farm:

 

  (1)

The adjustment to finance costs of $1.4 million and $3.7 million for the three months ended March 31, 2019 and the ten months ended December 31, 2018, respectively, reflect the elimination of interest expense incurred by Bridge Farm relating to the shareholder loan notes in the historical financial statements, which are eliminated upon acquisition.

 

  (2)

Adjustments to finance costs of $2.8 million and $9.3 million for the three months ended March 31, 2019 and the ten months ended December 31, 2018, respectively, reflect the incremental interest costs associated with the four year $115.0 million 9.75% loan.

 

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  (3)

Adjustments to finance costs of $1.7 million and $5.8 million the three months ended March 31, 2019 and the ten months ended December 31, 2018, respectively, reflect the incremental accretion expense associated with the four year $115.0 million 9.75% loan.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables present selected historical consolidated financial data for our business. We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information under the captions “Capitalization”, “Unaudited Pro Forma Condensed Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

We have derived the selected consolidated statements of loss and comprehensive loss data for the three months ended March 31, 2019 and March 31, 2018, and the selected consolidated statement of financial position data as at March 31, 2019, from our unaudited condensed interim consolidated financial statements included elsewhere in this prospectus, and for the fiscal years ended December 31, 2018, February 28, 2018 and February 28, 2017 from our audited consolidated financial statements included elsewhere in this prospectus. The unaudited condensed interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for those periods. Our historical results are not necessarily indicative of the results that should be expected in any future period and results for the interim period are not necessarily indicative of the results of any future period the full year.

 

    Three months ended     Fiscal years ended  
Consolidated Statements of Loss and
Comprehensive Loss Data:
  March 31, 2019     March 31, 2018     December 31, 2018(1)     February 28, 2018     February 28, 2017  
(in thousands, except per share data)   (Unaudited)                    

Gross revenue

  $ 1,691     $     $     $     $  

Excise taxes

    192                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    1,499                          

Cost of sales

    778                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin before fair value adjustments

    721                          

Increase (decrease) in fair value of biological assets

    692       366       (1,280     366        

Change in fair value realized through inventory

    80                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    1,493       366       (1,280     366        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative

    5,074       1,602       8,830       3,169       1,420  

Sales and marketing

    1,212       820       2,380       1,274        

Research and development

    95       494       275       413        

Pre-production expenses(2)

          637       6,457       1,249        

Depreciation and amortization

    120       163       920       411       80  

Foreign exchange (gain)/loss

    (269     1       141              

Accretion expense

                            29  

Share-based compensation expense

    12,625       1,561       6,889       4,551        

Asset impairment

    162       2,184       523       2,184        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (17,526     (7,096   $ (27,695   $ (12,885   $ (1,529
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance costs

    (2,785           (28,814     (75     (37

(Loss)/gain on disposal of property, plant and equipment

          (52     (17     (35     12  

Sub-lease income

                            9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before tax

    (20,311     (7,148     (56,526     (12,995     (1,545

Income tax recovery

    3,609                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss

    (16,702     (7,148   $ (56,526   $ (12,995   $ (1,545
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss and comprehensive loss attributable to:

         

Sundial Growers Inc.

    (16,702     (7,148   $ (56,526   $ (12,995   $ (1,545

Non-controlling interest

    4,879                          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share(3)

  $ (0.24   $ (0.12   $ (0.82   $ (0.23   $ (0.04
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Fiscal year ended December 31, 2018 consists of the ten months ended December 31, 2018.

 

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(2)

Our pre-production expenses for the fiscal year ended December 31, 2018 include approximately $3.3 million related to reserves taken by management associated with our non-delivery of cannabis under certain legacy supply agreements with other licensed cannabis producers. See “Business—Legal Proceedings”.

(3)

See Note 16 to our unaudited condensed interim consolidated financial statements and Note 12 to our audited consolidated financial statements included elsewhere in this prospectus for further details regarding the calculation of basic and diluted loss per share for the three months ended March 31, 2019 and 2018, and the fiscal years ended December 31, 2018 and February 28, 2018 and 2017, respectively.

 

     As at  
Consolidated Statement of Financial Position Data:    March 31, 2019      December 31, 2018     February 28, 2018  
(in thousands)    (Unaudited)               

Cash and cash equivalents(1)

   $ 13,005      $ 14,121     $ 7,678  

Biological assets

     6,222        876       54  

Inventory

     5,049        1,234       311  

Total Assets

   $ 172,900      $ 110,120     $ 25,754  
  

 

 

    

 

 

   

 

 

 

Current debt(2)

   $ 70,331      $ 47,926     $ 7,000  

Total Liabilities

     165,308        118,109       12,044  

Share capital

     84,229        65,133       25,769  

Total Shareholders’ Equity

   $ 2,713      $ (7,909   $ 13,710  
  

 

 

    

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 172,900      $ 110,200     $ 25,754  
  

 

 

    

 

 

   

 

 

 

 

(1)

Excludes $350,000 of restricted cash.

(2)

As at March 31, 2019, current debt comprises (i) $43.9 million representing the current portion of debt and (ii) $26.4 million representing the current liability component of 12% Convertible Notes. As at December 31, 2018, current debt comprises (i) $15.5 million representing the current portion of secured debt, (ii) $6.9 million representing the outstanding balance under the Repurchase Agreement (as defined below), and (iii) $25.4 million representing the current liability component of 12% Convertible Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Commitments and Obligations”. As at February 28, 2018, current debt includes the current portion of secured debt.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and the unaudited condensed consolidated pro forma financial information that appears elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, or beliefs. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors”. All dollar amounts, except per share data, included in the following discussion are presented in thousands.

Our Business

Sundial’s mission is to proudly craft pioneering cannabis brands to Heal, Help and Play. We view these as three distinct consumer opportunities, defined as follows:

 

   

Heal – cannabis products used as prescription medicine

 

   

Help – cannabis products that strive to promote overall health and wellness through CBD

 

   

Play – cannabis products to enhance social, spiritual and recreational occasions

We intend to pursue these opportunities globally as regulations permit.

As public perceptions and regulations around the world evolve, we believe cannabis is rapidly becoming a consumer good just like any other product in the Consumer Packaged Goods (CPG) industry. We are leveraging our management team’s extensive experience at global blue-chip companies to bring a differentiated, integrated CPG approach to the new cannabis industry that spans insights and analytics, supply chain, marketing and customer management. We believe this holistic and integrated approach gives us a competitive advantage over our peers in the cannabis industry.

In Canada, we currently produce and market premium cannabis for the adult-use (Play) market. In our purpose-built indoor modular grow rooms, we produce high-quality, consistent cannabis in individual, fully controlled room environments. We have established supply agreements with, or been approved to supply cannabis directly to retailers by, five provincial regulating authorities, specifically the Alberta Gaming, Liquor and Cannabis Commission, the Ontario Cannabis Store, the British Columbia Liquor Distribution Branch, Manitoba Liquor and Lotteries, and the Saskatchewan Liquor and Gaming Authority. In addition, we are working to establish supply agreements in all remaining Canadian jurisdictions, as our production capacity allows. Our supply agreements do not contain minimum purchase commitments. We have an initial focus on premium inhalable products to exploit the Play opportunity and will expand our portfolio to edibles, extracts, topicals and other products once legally permitted. We are currently marketing our adult-use products under our Sundial Cannabis brand and intend to offer products under our Top Leaf and BC Weed Co. brands, among others. We are also actively pursuing Help and Heal opportunities in Canada. In the past, we have entered into agreements to supply cannabis to other licensed producers in Canada, and although currently most of our sales are to other licensed producers, we expect our sales to other licensed producers to decrease as a percentage of our total sales throughout the remainder of 2019 and constitute a minority of total sales in the future.

We plan to enter the rapidly growing global CBD market (Help) with our acquisition of Bridge Farm, a leading agricultural indoor producer of edible herbs and ornamental flowers in the United Kingdom. Bridge Farm provides us with a number of state-of-the-art, fully operational facilities, a hemp cultivation licence at one of Bridge Farm’s facilities and established relationships with a number of large U.K. and multi-national retailers. We intend to produce CBD products at low cost, driven by Bridge Farm’s scale, automation and energy subsidies.

 

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To enhance and differentiate our medical cannabis (Heal) offerings, we are working to build industry-leading research capabilities regarding the use of cannabis and cannabinoids as medical treatments. We have established partnerships with a number of private and public Canadian research institutions, which we are leveraging to facilitate a research-informed approach to identify and develop cannabis strains for medicinal use. In addition, our joint venture with Pathway Rx uses advanced technology and an extensive library of cannabis strains to identify and customize treatments for a wide range of medical conditions.

We recorded revenue of $1.7 million in the three months ended March 31, 2019 and a net loss of $16.7 million for the same period. As of March 31, 2019, our accumulated deficit was $105.6 million.

We changed our fiscal year end from February 28 to December 31 effective for the fiscal year ended December 31, 2018. We had no revenues for the fiscal years ended December 31, 2018, February 28, 2018 and February 28, 2017. For the same periods, our net loss was $56.5 million, $13.0 million and $1.5 million, respectively. As of December 31, 2018, our accumulated deficit was $88.9 million.

We are currently exploring and negotiating several additional sources of equity or debt financing, including refinancing of the bank credit facilities extended under the Commitment Letter (see “Prospectus Summary—Recent Developments—Possible Refinancing of Bank Credit Facilities”). As of the date of this prospectus, we expect to use the net proceeds from this offering, cash on hand, other anticipated sources of financing and expected cash flow from operations over the next twelve months for the completion of the construction, expansion and transition of our cultivation and processing facilities. Based on our current operating plan, we believe that the net proceeds from this offering, together with any future debt financings, our existing cash and cash equivalents and the funds that we expect will be available under our debt facilities, combined with expected funds from operations, will be sufficient to satisfy the cash requirements associated with funding our operating expenses and capital expenditures in the next six months. In addition to a portion of the proceeds from this offering, we intend to fund the construction and transition to hemp and high-THC cannabis cultivation of certain of Bridge Farm’s facilities in the United Kingdom through existing sources of debt, as well as additional debt or equity financing, or a combination thereof. However, there can be no assurance that our products will gain adequate market acceptance or that we will be able to generate sufficient positive cash flow from operations to meet our capital requirements.

Key Factors Impacting Operating Results and Financial Condition

Our future performance is dependent, to a large extent, on the following factors. See “Risk Factors” and “Business” for more information.

Supply agreements

We expect to generate a significant portion of our revenue from sales of cannabis in the Canadian adult-use market. As a result, our revenue is dependent on our ability to enter into supply agreements with the counterparties legally able to purchase cannabis under the various Canadian provincial and territorial regulatory regimes. In some provinces, only provincially established and mandated agencies are permitted to buy cannabis from licensed producers for sales to adult consumers. As such, establishing and maintaining supply agreements on terms that are acceptable to us is essential to our ability to maintain and expand our customer base in the Canadian adult-use market. Moreover, in some jurisdictions we have a limited ability to affect or influence the price at which our product is sold to the end-user and as such are constrained in negotiating the wholesale price contained within our supply agreements. We have established supply agreements with, or been approved to supply cannabis directly to retailers by, five provincial regulating authorities, specifically the, AGLC, the OCS, the BCLDB, MLL, and the SLGA, and we are working to establish agreements in all remaining Canadian jurisdictions, as our production capacity allows. In the past, we have entered into agreements to supply cannabis to other licensed producers in Canada, and although currently most of our sales are to other licensed producers, we expect our sales to other licensed producers to decrease as a percentage of our total sales throughout the remainder of 2019 and constitute a minority of total sales in the future.

.

 

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Expanding capacity

As an early-stage company, our ability to scale-up production and realize efficiencies to reduce our per-unit cost is essential to our long-term success and profitability. As we expand into new markets, and expand our product offerings in existing markets, we will need to invest significant resources into building or expanding new cultivation and production facilities. We principally utilize two different kinds of “cultivation rooms”: “cloning and vegetation rooms”, where immature plants are kept for an average of four weeks until being transferred to our “flowering rooms” where the plants flower and are harvested. Once fully constructed, licensed and operational, our Olds Facility will be an approximately 448,000 square foot facility with 126 cultivation rooms. To date, we have received a licence from Health Canada for approximately 242,000 square feet at our Olds Facility, comprising H Block (approximately 32,000 square feet with 12 cloning and vegetation rooms), an extension to H Block (approximately 46,000 square feet with 14 flowering rooms) and Pods 1 through 3 (each approximately 70,000 square feet with 20 flowering rooms). Additionally, we are expecting to build and license Pods 4 and 5 which will be approximately 70,000 square feet with 20 flowering rooms each by the end of 2019. Furthermore, we are expecting to build a people and processing building, estimated to be approximately 20,000 square feet in size, to support a fully operational Olds Facility. At our Merritt Facility, we currently expect to build one mini-pod consisting of eight flowering rooms, with a total building size of approximately 35,000 square feet. Prior to the acquisition, Bridge Farm had completed planning for Clay Lake Phase 2, which is approximately 807,000 square feet, and Clay Lake Phase 3, which is approximately 1.2 million square feet. We intend to proceed with both of these projects. Over time, as demand for CBD products grows, we plan to convert certain of Bridge Farm’s facilities to hemp and high-THC cannabis cultivation operations and to build a CBD-extraction facility, subject to approvals and compliance with debt covenants. The cost of expanding or converting the Olds Facility, the Merritt Facility and certain of Bridge Farm’s facilities is estimated at approximately an additional $55 million to $60 million, $15 million to $18 million and $92 million, respectively. The amount of remaining capital expenditures at the Merritt Facility will vary depending on the scale of the facility that will be constructed. A mini-pod, which is an approximately 35,000 square foot facility with eight flowering rooms, is expected to cost a further $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete.

Creating brand identity

We are a “craft-at-scale” producer of cannabis, and we intend to target the premium portion of the adult-use cannabis market. Our success depends, in part, on our ability to attract and retain customers. While Canadian federal or provincial laws impose restrictions on advertising, marketing and the use of logos and brand names, and other restrictions on advertising, we expect to continue to make significant investments to promote our current products to new customers and new products to current and new customers. As capacity allows, we will launch additional products under our Sundial Cannabis brand in Canada. These will include multiple tailored offerings of strains and product formats to meet specific consumer needs. In addition to our Sundial Cannabis brand, we will launch other brands, including Top Leaf and BC Weed Co. among others, which we believe will further enhance our market presence and margins.

Expanding into new international and consumer markets

We intend to expand globally as other countries permit sales of cannabis and cannabis-derived products. We believe our expertise in the cultivation and distribution of cannabis products will place us in an advantageous position for expansion into such markets.

In October 2018, Canada became the first major industrialized nation to legalize adult-use cannabis at the federal level. We expect that additional countries will continue to legalize adult-use cannabis.

The legalization of cannabis for medical purposes continues to spread around the world. As of June 30, 2019, 41 countries have legalized medical cannabis in some form. In addition, the European Parliament passed

 

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a resolution calling for the European Union to distinguish between medical and other uses of cannabis, increase funding for research regarding medical cannabis and require insurance coverage for effective cannabis-based medication.

Finally, we intend to leverage certain of Bridge Farm’s large-scale, low-cost production facilities to become a leader in the global CBD market, as further regulations permit.

Basis of Presentation

Our consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB and interpretations of the International Financial Reporting Interpretations Committee, in effect as of the date of the period then ended. None of the financial statements included herein were prepared in accordance with US GAAP.

Effective for the fiscal year ended December 31, 2018, we changed our fiscal year end from February 28 to December 31. As a result of this change, the figures presented herein for the fiscal year ended December 31, 2018, are not entirely comparable to the figures for the years ended February 28, 2018 and 2017 and we do not present financial information for a separate historical period that is comparable to the fiscal year ended December 31, 2018. Following the fiscal year ended December 31, 2018, we will prepare annual consolidated financial statements for each fiscal year ending December 31, beginning with the fiscal year ending December 31, 2019.

Adjusted EBITDA

We define Adjusted EBITDA as net income/(loss) before finance costs, depreciation and amortization, accretion expense and income tax recovery and excluding increase/(decrease) in fair value of biological assets, change in fair value realized through inventory, unrealized foreign exchange loss/(gain), share-based compensation expense, asset impairment and (loss)/gain on disposal of property, plant and equipment.

In addition to net income/(loss) and other results under IFRS, we use Adjusted EBITDA to evaluate our business. We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management to evaluate our operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors, analysts and others in understanding and evaluating our operating results in the same manner as our management team and board of directors. Our calculation of Adjusted EBITDA may differ from similarly-titled non-IFRS measures reported by our peer companies. Non-IFRS financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with IFRS.

Adjusted EBITDA has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with IFRS. These limitations include the following:

 

   

Adjusted EBITDA excludes certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets and asset impairment, and although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect all cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

Adjusted EBITDA excludes share-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;

 

   

Adjusted EBITDA does not reflect period to period changes in taxes, or the cash necessary to pay income taxes;

 

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Adjusted EBITDA does not reflect the components of other income/(expense), net, which includes, unrealized foreign currency exchange gains/(losses), net, (losses)/gains on disposal of property, plant and equipment, unrealized gain on investments, change in fair value of biological assets and change in fair value realized through inventory; and

 

   

Adjusted EBITDA excludes legal, tax, and regulatory reserves and settlements that may reduce cash available to us.

The reconciliation of our net loss, the most directly comparable IFRS financial measure, to Adjusted EBITDA is as follows:

 

     Three Months Ended     Fiscal Year Ended  
(in thousands)    March 31, 2019     March 31, 2018     December 31,
2018(1)
    February 28,
2018
    February 28,
2017
 

Net Loss

   $ (16,702   $ (7,148   $ (56,526   $ (12,995   $ (1,545

Finance costs

     2,785       —         28,814       75       29  

Depreciation and amortization

     120       163       920       411       80  

Accretion expense

     —         —         —         —         29  

Income tax recovery

     (3,609     —         —         —         —    

(Increase)/decrease in fair value of biological assets

     (692     (366     1,280       (366     —    

Change in fair value realized through inventory

     (80     —         —         —         —    

Unrealized foreign exchange gain

     (133     —         —         —         —    

Share-based compensation expense

     12,625       1,561       6,889       4,551       —    

Asset impairment

     162       2,184       523       2,184       —    

Loss/(gain) on disposal of property, plant and equipment

     —         52       17       35       (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (5,524   $ (3,554   $ (18,083   $ (6,105   $ (1,419
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Fiscal year ended December 31, 2018 consists of the ten months ended December 31, 2018.

Key Operating Metrics

 

     Three Months Ended  
     March 31, 2019  

Kilogram equivalents sold

     323  

Kilograms harvested

     1,896  

Average gross selling price per gram(1)

   $ 5.24  

Average net selling price per gram(2)

   $ 4.64  

Average cost per gram sold

   $ 2.41  

 

(1)

Net of marketing fees, salvage fees and early payment discounts with respect to sales under our supply agreements with the Canadian provincial regulating authorities.

(2)

Gross selling price net of excise tax.

Due to our increased production, on a preliminary basis for the three months ended June 30, 2019, kilograms harvested increased to approximately 9,540. Our purpose-built indoor modular grow rooms enable us to optimize and customize environments for each one of our strains. Different strains may have different harvest cycles and different harvest yields. In addition, we have designed our modular cultivation rooms with the objective of improving our ability to learn and experiment and improving our cultivation process and end products. When introducing new strains, we may experience issues with our production, including longer harvest cycles and lower yields, as we learn more about the particular strains and their different growing environments. As a result of the foregoing, the number of harvests, kilograms harvested, and dry weight yields per harvest per square foot of growing space may fluctuate significantly from period to period.

 

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Average gross selling price per gram varies depending on, among other things, the product format and the customer. For instance, sales of trim generally result in lower prices and reduced margins, compared to sales of other products, and sales to other licensed producers generally result in lower prices, and reduced margins, compared to sales to the provincial regulating authorities. For the three months ended June 30, 2019, most of our sales were to other licensed producers. Although currently most of our sales are to other licensed producers, we expect our sales to other licensed producers to decrease as a percentage of our total sales throughout the remainder of 2019 and constitute a minority of total sales in the future.

Components of Our Results of Operations

Gross revenue

Gross revenue comprises bulk and packaged sales under the Cannabis Act pursuant to our supply agreements and to other licenced producers. Although currently most of our sales are to other licensed producers, we expect our sales to other licensed producers to decrease as a percentage of our total sales throughout the remainder of 2019 and constitute a minority of total sales in the future.

Excise taxes

Excise taxes are the federal excise duties and additional provincial or territorial duties payable on adult-use cannabis products at the time such product is delivered to the purchaser, such as provincially-authorized distributor or retailer or final consumer. Federal duties on adult-use cannabis products are calculated as the greater of (i) $0.25 per gram of flowering material, (ii) $0.075 per gram of non-flowering material or $0.25 per viable seed or seedling and (iii) 2.5% of the “dutiable amount” as calculated in accordance with the Excise Act, 2001.

The rates of provincial or territorial duties vary. Through March 31, 2019, all of our sales subject to duties were made in Alberta and, therefore, subject to duties equal to the greater of (i) $0.75 per gram of flowering material plus 16.8%, (ii) $0.225 per gram of non-flowering material plus 16.8% or $0.75 per viable seed or seedling and (iii) 24.3%.

Cost of sales

Cost of sales includes three main categories: pre-harvest, post-harvest and shipment and fulfillment costs. These costs are incurred in respect of cultivating, harvesting, processing and packaging our cannabis products. Pre-harvest costs include all direct and indirect costs incurred between initial recognition and the point of harvest, including labour-related costs, grow consumables, materials, utilities, facilities costs, and depreciation related to production facilities. Post-harvest costs include all direct and indirect costs incurred subsequent to the point of harvest, including labour-related costs, consumables, materials, utilities and facilities costs. Shipment and fulfillment costs include packaging, transportation, quality control and testing costs.

Pre-production expenses

Our operations were in a pre-commercial phase until the first quarter of 2019, following the effectiveness of the Cannabis Act on October 17, 2018. As a result, all costs related to cannabis production during such pre-commercial phase were expensed as pre-production expenses. Subsequent to the pre-commercial phase and going forward, all such costs are expected to be recorded as cost of sales.

Net effect of changes in fair value of biological assets

Our biological assets consist of cannabis plants in various stages of vegetation, including clones which have not been harvested. Net unrealized changes in fair value of biological assets less cost to sell during the period are included in the results of operations for the related period. Biological assets are valued in accordance with IAS 41 – “Agriculture” and are presented at their fair values less costs to sell up to the point of harvest. The fair values are determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts the amount for the expected selling price less costs to sell per gram. See “—Critical Accounting Policies and Estimates” below.

 

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Change in fair value realized through inventory

Our inventory is comprised of harvested cannabis, as well as supplies and consumables. Change in fair value realized through inventory comprises fair value adjustments associated with the cost of inventory when such inventory is sold. Inventories are carried at the lower of cost and net realizable value. When sold, the cost of inventory is recorded as cost of sales, while fair value adjustments are recorded as change in fair value realized through inventory.

General and administrative expenses

General and administrative expenses consist of salaries and wages, consulting fees, office and general expenses, professional fees, director fees, rent and certain other expenses.

Selling, marketing and promotion expenses

Selling marketing and promotion expenses consist of brand development and promotion expenses, shipping costs, marketing personnel and related costs.

Research and development expense

Research and development expenses comprise consulting fees and licence acquisition fees.

Depreciation and amortization

Depreciation and amortization expenses are incurred in respect of the reduction of useful life of our property, plant and equipment and intangible assets.

Foreign exchange (gain)/loss

Foreign exchange (gain)/loss includes the impact of foreign exchange rate changes on foreign currency denominated debt.

Share-based compensation expense

Share-based compensation expense includes the expense for the issue of simple and performance warrants to employees, directors, and others at the discretion of our board of directors. Given the absence of an active trading market for the Company’s common shares, determining the fair value of the Company’s common shares requires our board of directors to make complex and subjective judgments. Our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of the Company’s common shares as of the date of each grant. For periods prior to January 1, 2019, the fair value of share-based compensation expense was primarily estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee. Subsequent to January 1, 2019, the fair value of share-based compensation expenses is estimated using the value of the equity or convertible security issued to third parties for cash within a reasonable period of time of the grant to the employee, as well as other factors, including: the Company’s stage of development; the impact of significant corporate events, operational changes or milestones; material risks related to the business; regulatory developments in the Company’s industry that are expected to have an impact on its operations or available markets for its products; the Company’s financial condition and operating results, including its revenue, history of net losses and levels of available capital resources; equity market conditions affecting comparable public companies; general U.S. and Canadian market conditions; the likelihood and potential timing of achieving a liquidity event or completing an offering of common shares, such as an initial public offering; and the instruments involved illiquid securities of a private company. The estimated fair value of the Company’s common shares at the time of grant is used to determine the associated share-based compensation expense. In the case of

 

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warrants, the Company determines the amount of share-based compensation expense by utilizing the Black-Scholes pricing model with inputs based on the terms of the warrants, including the strike price, and other estimates and assumptions, including the expected life of the warrant, the volatility of the underlying share price, the risk-free rate of return and the estimated rate of forfeiture of the warrants granted.

We are evaluating our compensation policies, including with respect to share-based compensation as we become a public company. See “Executive Compensation” and “Director Compensation”.

Finance expense

Finance expense includes accretion expense associated with our convertible notes, finance costs, interest on our indebtedness and certain other expenses, net of capitalized interest related to construction in progress.

Income tax recovery

Income tax recovery represents the Company’s intention to settle provincial and federal income taxes payable and recoverable on a net basis between entities under common control subject to income tax under the same taxation authority.

Results of Operations

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

(in thousands)                     
     Three months ended         

Consolidated Statements of Loss and

Comprehensive Loss Data

   March 31, 2019      March 31, 2018            Change        

Gross revenue

   $ 1,691               1,691  

Excise taxes

     192               192  
  

 

 

    

 

 

    

 

 

 

Net revenue

     1,499               1,499  

Cost of sales

     778               778  
  

 

 

    

 

 

    

 

 

 

Gross margin before value adjustments

     721               721  

Increase in fair value of biological assets

     692        366        326  

Change in fair value realized through inventory

     80                
  

 

 

    

 

 

    

 

 

 

Gross margin

     1,493        366        1,127  

General and administrative

     5,074        1,602        3,472  

Sales and marketing

     1,212        820        392  

Research and development

     95        494        (399

Pre-production expenses

            637        (637

Depreciation and amortization

     120        163        (43

Foreign exchange (gain)/loss

     (269      1        (270

Share-based compensation

     12,625        1,561        4,700  

Asset impairment

     162        2,184        (2,022
  

 

 

    

 

 

    

 

 

 

Loss from operations

     (17,526      (7,096      (10,430
  

 

 

    

 

 

    

 

 

 

Finance expenses

     (2,785             (2,785

Loss on disposal of property, plant and equipment

            (52      52  
  

 

 

    

 

 

    

 

 

 

Loss before tax

     (20,311      (7,148      (13,163

Income tax recovery

     3,609               3,609  
  

 

 

    

 

 

    

 

 

 

Net loss and comprehensive loss

   $ (16,702    $ (7,148    $ (9,554
  

 

 

    

 

 

    

 

 

 

Net loss and comprehensive loss attributable to:

        

Sundial Growers Inc.

   $ (16,702    $ (7,148    $ (9,554

Non-controlling interest

     4,879                
  

 

 

    

 

 

    

 

 

 

Basic and diluted loss per share(1)

   $ (0.24    $ (0.12    $ (0.12
  

 

 

    

 

 

    

 

 

 

 

(1)

See “—Loss per share” below for further details regarding the calculation of basic and diluted loss per share.

 

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Gross revenue

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Gross revenue

   $ 1,691      $      $ 1,691  

Gross revenues of $1.7 million were driven by adult-use cannabis sales under our supply agreements, which commenced in December 2018 following the effectiveness of the Cannabis Act on October 17, 2018. 323 kilograms of cannabis were sold at an average gross selling price of $5.24 per gram. Of the total $1.7 million, $0.9 million was generated from sales to other licensed producers and $0.8 million was generated from sales to the AGLC. Although currently most of our sales are to other licensed producers, we expect our sales to other licensed producers to decrease as a percentage of our total sales throughout the remainder of 2019 and constitute a minority of total sales in the future. No sales were made in the three months ended March 31, 2018.

Historically, all of our revenues generated in Canada were derived from the sale of adult-use (Play) products. We expect revenue to increase throughout 2019 as a result of the ramp-up of our production capacity due to the expansion of our Olds Facility and construction of our Merritt Facility and the additional revenue generated by Bridge Farm’s existing herbs and ornamental flower business.

Excise taxes

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Excise taxes

   $ 192      $      $ 192  

Excise taxes of $0.2 million are associated with sales of adult-use cannabis made in the three months ended March 31, 2019. No such taxes were paid in the three months ended March 31, 2018 as no sales were made during that period. Excise taxes apply to sales to Provincial Buyers based on prescribed legislation but do not apply to sales to other licensed producers.

Cost of sales

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Cost of sales

   $ 778      $      $ 778  

Cost of sales of $0.8 million are associated with sales of adult-use cannabis made in the three months ended March 31, 2019. No cost of sales was recognized in the three months ended March 31, 2018 as no sales were made during that period. Cost of sales per gram sold were $2.41 in the three months ended March 31, 2019. We expect costs per gram to decrease through economies of scale and efficiencies as production capacity increases.

Increase in fair value of biological assets

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Increase in fair value of biological assets

   $ 692      $ 366      $ 326  

The increase in the net effect of changes in fair value of biological assets and inventory was $0.7 million for the three months ended March 31, 2019 compared to $0.4 million in the comparable period. The increase was primarily due to an increase in the number of cannabis plants and an increase in the weighted average maturity of the stage of growth.

General and administrative

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

General and administrative

   $ 5,074      $ 1,602      $ 3,472  

 

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General and administrative expenses were $5.1 million for the three months ended March 31, 2019 compared to $1.6 million in the comparable period. The increase in general and administrative expense was primarily driven by increases in salaries and human resources-related expenses of $1.8 million, office costs of $1.3 million relating to utilities, insurance and office supply costs, and business development costs of $0.5 million. These increases in general and administrative expenses are to support our growth and expansion initiatives.

We expect general and administrative expenses to continue to increase to the scale of our operations and with the costs of compliance and governance related to a public company.

Sales and marketing

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Sales and marketing

   $ 1,212      $ 820      $ 392  

Sales and marketing expenses were $1.2 million for the three months ended March 31, 2019 compared to $0.8 million in the comparable period. The increase in sales and marketing expense was primarily due to trade shows and marketing design related to the commencement of adult-use cannabis sales and developing our commercial capabilities.

We expect sales and marketing expenses to increase as we address additional market opportunities and international expansion.

Research and development expense

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Research and development expense

   $ 95      $ 494      $ (399

Research and development expense was $95 thousand for the three months ended March 31, 2019 compared to $0.5 million in the comparable period. The decrease in research and development expense was primarily due to certain employees spending less time on research and development activities as the Company focused on the commencement of its adult-use cannabis production operations.

We expect research and development expenses to increase as we develop new cannabis strains, formats and technologies.

Pre-production expenses

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Pre-production expenses

   $      $ 637      $ (637

The elimination of pre-production expenses was the result of the commencement of adult-use cannabis sales in the first quarter of 2019 following the effectiveness of the Cannabis Act on October 17, 2018, such that expenses are no longer classified as pre-production. Cultivation and production expenses are now capitalized directly to biological assets and inventory, respectively.

 

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Depreciation and amortization expense

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Depreciation and amortization expense

   $ 120      $ 163      $ (43

The decrease in depreciation and amortization expense was primarily due to the allocation of depreciation related to production facilities to biological assets and inventory. Depreciation and amortization expense for the three months ended March 31, 2019 related primarily to office and information systems equipment.

Foreign exchange (gain)/loss

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Foreign exchange (gain)/loss

   $ (269    $ 1      $ (270

The foreign exchange gain in the three months ended March 31, 2019 was due to the impact of foreign exchange rate changes on foreign currency denominated debt.

Share-based compensation expense

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Share-based compensation expense

   $ 12,625      $ 1,561      $ 11,064  

The increase in share-based compensation expense was primarily due to the increase in the value of the share-based compensation awards granted to our employees as well as the growth in the number of our employees and the increasing value of the Company’s shares. Share-based compensation expense incurred in the three months ended March 31, 2019 included the issuance of 1,248,000 simple warrants at an average exercise price of $7.13 and 528,000 performance warrants at an average exercise price of $3.59, as compared to 576,000 simple warrants at an average exercise price of $0.63 and 2,165,333 performance warrants at an average exercise price of $1.08 issued during the three months ended March 31, 2018.

Asset impairment

 

     Three months ended         
     March 31, 2019      March 31, 2018              Change          

Asset impairment

   $ 162      $ 2,184      $ (2,022

The asset impairment recognized for the three months ended March 31, 2019 was due to certain redundant assets being deemed unsalvageable. The asset impairment recognized in the three months ended March 31, 2018 was due to a portion of the property, plant and equipment at our Rocky View Facility being deemed no longer suitable for its originally intended use.

Financing costs

 

     Three months ended         
     March 31, 2019      March 31, 2018              Amounts          

Financing costs

   $ (2,785    $      $ (2,785

 

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The financing costs for the three months ended March 31, 2019 were incurred in connection with our outstanding debt instruments and facilities. Financing expenses are expected to increase as a result of our additional debt financings.

Loss on disposal of property, plant and equipment

 

     Three months ended         
     March 31, 2019      March 31, 2018              Amounts          

Loss on disposal of property, plant and equipment

   $      $ (52    $ 52  

There was no loss on disposal of property, plant and equipment recorded in the three months ended March 31, 2019. The gain on disposal of property, plant and equipment recorded in the three months ended March 31, 2018 related to the sale of redundant equipment. We have no current plans to dispose of significant property, plant and equipment.

Income tax recovery

 

     Three months ended