20-F 1 sndl-20f_20191231.htm 20-F sndl-20f_20191231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

Commission file number: 001-39005

Sundial Growers Inc.

(Exact name of Registrant as specified in its charter)

 

#200, 919 - 11 Avenue SW

Calgary, AB, Canada, T2R 1P3

Tel.: (403) 948-5227

 

 

Securities registered or to be registered, pursuant to Section 12(b) of the Act

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

 

Common Shares

 

SNDL

 

Nasdaq Global Select Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. As at December 31, 2019, 107,180,423 common shares were issued and outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes      No      

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No      

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Emerging growth company  

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  

 

International Financial Reporting Standards as issued by the International Accounting Standards Board  

 

Other  

 

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17      Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

 

 

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

Presentation of Financial and Other Information

 

5

Cautionary Statement Regarding Forward-Looking Statements

 

5

 

 

 

 

PART I

 

 

 

 

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

7

 

 

 

 

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

 

7

 

 

 

 

ITEM 3.

KEY INFORMATION

 

7

 

A. Selected financial data

 

7

 

B. Capitalization and indebtedness

 

7

 

C. Reasons for the offer and use of proceeds

 

7

 

D. Risk factors

 

7

 

 

 

 

ITEM 4.

INFORMATION ON THE COMPANY

 

38

 

A. History and development of the company

 

38

 

B. Business overview

 

40

 

C. Organizational structure

 

49

 

D. Property, plant and equipment

 

50

 

 

 

 

ITEM 4A.

UNRESOLVED STAFF COMMENTS

 

51

 

 

 

 

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

51

 

A. Operating results

 

51

 

B. Liquidity and capital resources

 

51

 

C. Research and development, patents and licenses, etc.

 

52

 

D. Trend information

 

52

 

E. Off-balance sheet arrangements

 

52

 

F. Tabular disclosure of contractual obligations

 

52

 

 

 

 

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

52

 

A. Directors and senior management

 

52

 

B. Compensation

 

54

 

C. Board practices

 

62

 

D. Employees

 

67

 

E. Share ownership

 

68

 

 

 

 

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

68

 

A. Major shareholders

 

68

 

B. Related party transactions

 

69

 

C. Interests of experts and counsel

 

72

 

 

 

 

ITEM 8.

FINANCIAL INFORMATION

 

72

 

A. Consolidated statements and other financial information

 

72

 

B. Significant Changes

 

73

 

 

 

 

ITEM 9.

THE OFFER AND LISTING

 

74

 

A. Offer and listing details

 

74

 

B. Plan of distribution

 

74

 

C. Markets

 

74

 

D. Selling shareholders

 

74

 

E. Dilution

 

74

 

F. Expense of the issue

 

74

 

 

 

 

2


ITEM 10.

ADDITIONAL INFORMATION

 

74

 

A. Share capital

 

74

 

B. Memorandum and articles of association

 

74

 

C. Material contracts

 

74

 

D. Exchange controls

 

75

 

E. Taxation

 

75

 

F. Dividends and paying agents

 

81

 

G. Statement by experts

 

81

 

H. Documents on display

 

81

 

I. Subsidiary information

 

82

 

 

 

 

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

82

 

 

 

 

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

82

 

A. Debt Securities

 

82

 

 

 

 

PART II

 

 

 

 

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

83

 

 

 

 

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

83

 

 

 

 

ITEM 15.

CONTROLS AND PROCEDURES

 

83

 

 

 

 

ITEM 16

 

 

83

 

A. Audit committee financial expert

 

83

 

B. Code of Ethics

 

83

 

C. Principal Accountant Fees and Services

 

83

 

D. Exemptions from the Listing Standards for Audit Committees

 

84

 

E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

84

 

F. Changes in Registrant’s Certifying Accountant

 

84

 

G. Corporate Governance

 

84

 

H. Mine Safety Disclosure

 

84

 

 

 

 

PART III

 

 

 

 

 

 

 

ITEM 17.

FINANCIAL STATEMENTS

 

85

 

 

 

 

ITEM 18.

FINANCIAL STATEMENTS

 

85

 

 

 

 

ITEM 19.

EXHIBITS

 

85

 

 

3


INTRODUCTION

 

Unless otherwise indicated, all references in this annual report on Form 20-F (the “Annual Report”) to “Sundial,” “we,” “our,” “us,” “the Company” or similar terms refer to Sundial Growers Inc. and its consolidated subsidiaries. We publish our consolidated financial statements in Canadian dollars. In this Annual Report, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “$,” “C$,” “CDN$,” “CAD$,” and “dollars” mean Canadian dollars and all references to “US$” or “USD”, mean United States dollars.

Unless otherwise indicated, all references in this Annual Report 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.

 

This Annual Report contains our audited consolidated financial statements and related notes for the year ended December 31, 2019, the ten months ended December 31, 2018 and the year ended February 28, 2018. (“Annual Financial Statements”). Our Annual Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

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.

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report 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 ability to operate on a going concern basis, including our ability to raise future capital through debt or equity financing transactions;

our ability to successfully implement our cost and asset optimization initiatives;

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

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

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;

the number of flowering rooms and combined production capacity therefrom that we expect to have by the end of 2020;

our growth strategies, including plans to sell edibles and other forms of cannabis as well as CBD products;

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

the transition of Bridge Farm’s historical ornamental flower business to the cultivation of hemp and extraction of CBD;

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 future CBD products;

our ability to attract and retain key employees;

4


our ability to manage growth in our business;

our ability to execute a sale of Bridge Farm; and

our ability to identify and successfully execute strategic partnerships.

Although we base the forward-looking statements contained in this Annual Report 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 Annual Report. In addition, even if results and developments are consistent with the forward-looking statements contained in this Annual Report, 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 Annual Report include:

our ability to obtain and maintain financing on acceptable terms to allow us to maintain operations;

our ability to implement our operational and liquidity strategies;

our ability to optimize our costs by implementing cost-cutting initiatives, deferring capital expenditures and conducting a strategic review of certain facilities;

our competitive advantages;

the development of new products and product formats for our products that align market demand;

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, including as a result of COVID-19.

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 Annual Report 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 “Item 3D—Risk Factors” and elsewhere in this Annual Report. Readers of this Annual Report 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 Annual Report. 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 U.S. Securities and Exchange Commission (the “SEC”) after the date of this Annual Report.

This Annual Report 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 “Item 3D—Risk Factors”. These and other factors could cause our future performance to differ materially from our assumptions and estimates.

 

 

 

5


PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A.

Selected financial data.

 

 

 

Year ended

Dec 31

 

 

Ten months ended Dec 31

 

 

Year ended

Feb 28

Year ended

Feb 28

($000s, except as indicated)

 

2019

 

 

2018

 

 

2018

2017

Gross revenue

 

 

79,225

 

 

 

 

 

 

Net revenue

 

 

75,860

 

 

 

 

 

 

Net loss

 

 

(271,629)

 

 

 

(56,526)

 

 

 

(12,995)

(1,545)

Per share, basic and diluted

 

 

$(3.17)

 

 

 

$(0.82)

 

 

 

$(0.23)

$(0.04)

Total assets

 

 

510,036

 

 

 

110,200

 

 

 

25,754

12,666

Net assets (liabilities)

 

 

221,198

 

 

 

(7,908)

 

 

 

13,710

11,521

Total non-current liabilities

 

 

19,592

 

 

 

48,450

 

 

 

116

17

Share capital

 

 

509,654

 

 

 

65,133

 

 

 

25,769

15,136

Shareholder’s equity

 

 

216,484

 

 

 

(7,908)

 

 

 

13,710

11,521

 

B.

Capitalization and indebtedness.

Not applicable.

 

C.

Reasons for the offer and use of proceeds.

Not applicable.

 

D.

Risk factors.

Going Concern Risk

Our consolidated financial statements contain a going concern qualification, which indicates the existence of a material uncertainty that casts significant doubt on our ability to continue as a going concern. Our ability to continue as a going concern depends on a number of factors, including Health Canada maintaining our licences, the continued support of our lenders, our ability to achieve profitable operations and our ability to raise additional financing to fund current and future operations. Any delay or failure to achieve the foregoing would have a significant negative impact on our business, and we may be forced to reduce or discontinue operations or seek protection of the bankruptcy laws.

Our consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business.  Our liquidity and ability to comply with covenants in our Syndicated Credit Agreement and Term Debt Facility (as such terms are defined in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1) have been negatively impacted by our significant levels of indebtedness, the oversupply of cannabis in the Canadian adult-use market due to distribution bottlenecks and related pricing pressure. Additionally, at December 31, 2019, we were not in compliance with the interest coverage ratio in our Syndicated Credit Agreement, the full principal amount of our Syndicated Credit Agreement and Term Debt Facility was classified as a current liability on our balance sheet as of such date. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company.

6


In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020. In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar amendments in the past; however, there is no guarantee that we will be able to do so in the future.

Our present level of indebtedness, our significant accumulated losses, the existing legal cannabis distribution bottlenecks, production and expected demand disruptions caused by the COVID-19 pandemic present challenges to our ability to comply with the covenants in the agreements governing our indebtedness and management anticipates that our available cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy the our liquidity requirements for the next 12 months. As a result, we require additional funding to meet our ongoing obligations and to fund anticipated operating losses and no assurance can be given that future sources of capital will be available.

In addition, our ability to continue as a going concern depends on Health Canada and other regulators maintaining our licences and our ability to achieve profitable operations. We have incurred losses to date and 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. Additionally, if Health Canada or the other regulators that have jurisdiction over us were to revoke, suspend, fail to renew or otherwise materially change the terms of our licences, such action could have a significant negative impact on our business, results of operations and financial condition, and we may be forced to reduce or cease our operations or seek relief under the Canadian bankruptcy laws.

If we initiate (or are forced to initiate) a bankruptcy filing or other restructuring, (whether in or out of court), it is possible that holders of claims and interests with respect to, or rights to acquire, our equity securities, including our common shares, would be entitled to little or no recovery, and those claims and interests may be canceled for little or no consideration. If that were to occur, we anticipate that all or substantially all of the value of all investments in our equity securities would be lost and that our equity holders will lose all or substantially all of their investment. It is also possible that our other stakeholders, including our secured and unsecured creditors, will receive substantially less than the amount of their claims.

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 (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) (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 particular, our business model is dependent on additional licensed dispensaries opening in the provinces in which we operate, most importantly Ontario. To the extent there continue to be delays in licensing and opening of legal dispensaries in Ontario and the other provinces, or the legal cannabis market fails to develop as planned, our ability to achieve our near term or long term business objectives would be materially adversely affected.

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

7


that contain or are derived from cannabis to include edible cannabis, cannabis extracts and cannabis topicals. These regulations came into force on October 17, 2019 and sales of edible cannabis, cannabis extracts and cannabis topicals commenced in December, 2019. While we intend to continue to offer edible cannabis products in accordance with the final rules and regulations, 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.

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 (the “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 licence with a new expiry date will be issued once Health Canada confirms that all requirements have been met. Cannabis licence 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. 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. Bridge Farm also holds a and a high-THC research and development licence, which enables it to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. In addition, Bridge Farm will need additional licences to process hemp and otherwise commercialize any future CBD products. Should the U.K. Home Office not renew or delay the renewal of our licences (or renew our licences on different terms), or fail to grant any future necessary licences, our ability to recognize the strategic objectives of our acquisition of Bridge Farm could be materially adversely affected.

If we expand outside of Canada and the United Kingdom, our ability to operate and sell in foreign jurisdictions will be 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, Bridge Farm and other foreign operations. To the extent such permits and approvals are required and not obtained, we may be prevented from operating or expanding our business.

8


 

We intend to focus primarily on 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 focus primarily on 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 able to achieve or maintain attractive margins and our ability to achieve our near term or long term business objectives would be materially adversely affected. Further, 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 minors. 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 or retain existing customers, we may not be able to increase our sales or sustain our business.

Our business model, including our ability to successfully target the premium segment of the adult-use cannabis market and maintain our brand, is also dependent on being able to grow at scale different strains of cannabis with consistent yields and THC-levels by strain. To the extent we are unable to do so, or we are unable to achieve desired THC-levels, our ability to achieve our near term or long term business objectives would be materially adversely affected.

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 and the U.K. Home Office, 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. In addition, we have, and in the future may, self-report violations of regulatory requirements to Health Canada and other regulators. 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 or other regulators destroying or placing a hold on our inventory;

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harm our reputation; or

give rise to material liabilities.

 

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 (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 may pursue arrangements with third parties to produce cannabis on our behalf to supplement internal production. In addition, we use third parties to extract THC and CBD for use in various product offerings, including for use in our vape products. 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 AGLC, the Ontario Cannabis Store (the “OCS”), the BC Liquor Distribution Branch (the “BCLDB”), Manitoba Liquor and Lotteries (the “MLL”), Saskatchewan Liquor and Gaming Authority (the “SLGA”), New Brunswick Liquor Corporation (the “ANBL”), Nova Scotia Liquor Corporation (the “NSLC”), PEI Cannabis Management Corporation (the “PEICMC”) and Quebec SQDC (the “SQDC”). 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, MLL, SLGA, ANBL, NSLC, PEICMC or SQDC or, collectively, Provincial Buyers, may purchase under our supply agreements, or its price, may deviate significantly from our expectations. In addition, our results of operations 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, charges “slotting fees” in connection with carrying our products, charges additional taxes, 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 results of operations could be materially adversely affected. In addition, if the legal distributions channels in Canada for cannabis do not develop either because of delays in the opening of dispensaries or otherwise, our results of operations would be materially adversely affected.

 

We experience significant customer concentration, with a limited number of customers accounting for a significant portion of our revenues.

Our top five customers accounted for 81% for the year ended December 31, 2019. Of these customers, four customers have each accounted for more than 10% of our revenues for such period. Inherent risks exist when a large percentage of total revenues is concentrated with a limited number of customers.

 

It is not possible for us to predict the future level of demand for our products that will be generated by these customers or the future demand for the products of these customers in the consumer marketplace. In addition, revenues from these large customers may fluctuate from time to time based on market demand for our products among consumers, the level which may be affected by market conditions or other factors, some of which may be outside of our control. Further, our contracts with these large customers do not contain purchase commitments or otherwise obligate the purchasers to buy a minimum or fixed volume of products from us. If any of our major customers experience declining or delayed sales of our products to consumers due to market, economic or competitive conditions, we could be pressured to reduce the prices we charge for our products, reduce the volume of products we supply to such customers or we could lose the customer. Additionally, although historically, our reserves for doubtful accounts have not been material, if any of our large customers were to suffer financial instability, they could refuse or delay payment of outstanding receivables. Any such development may have a material adverse effect on our business, results of operations and financial condition.

The legal cannabis market is a relatively new industry (including the recent introduction of additional Canadian cannabis regulations, or Cannabis 2.0). 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 the total addressable market as well as comparable companies available for potential investors to review in deciding about whether to invest in us. In addition, the development of the legal cannabis market is dependent on Health Canada and other regulators approving licences for retail stores and other distribution channels in a timely fashion. Any delays in such approvals or other regulatory developments may impact our market and price estimates, which may make it difficult to develop reliable expectations and assumptions. 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 be profitable or 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.

 

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Following legalization, there was a shortfall in supply in the Canadian adult-use cannabis market leading to increased prices, increases in out-of-stocks and the consumers opting to buy cannabis on the illicit market. We and other licensed producers responded by increasing capacity. Recently, the increase in production combined with slower than expected retail store growth has resulted in over-supply. As inventory levels become greater than consumer demand, we have had to, and may in the future have to, engage in sale of excess inventory at discounted prices, which could significantly impair operating results and 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. For example, we have experienced shortages and out-of-stocks in our vape products due to supply constraints. 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 dependent upon a limited number of facilities that are integral to our business.

As of the date of this Annual Report, 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, have had and could have negative impacts on our production, the quality of our products, our reputation in the market and our financial results – any one of which could materially adversely impact our business. 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.

Any expansion on current facilities or future development and construction of new facilities would 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 new development projects or future construction at any of our existing facilities and any delay or failure to receive approval could adversely affect our business and results of operations. The final costs relating to any development or construction of our facilities may be significantly greater than anticipated, in which case we may be required to curtail or delay such development or construction projects, 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.

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.

We currently rely on a limited number of suppliers for our extraction requirements.

Although we have recently commenced extraction activities at our facility at Olds, we currently and may continue to depend on a limited number of suppliers for extracting THC and CBD for use in certain of our cannabis products. We cannot ensure that these suppliers will remain in business, have sufficient capacity or supply to meet our needs or that they will not be purchased by one of our competitors or another company that is not interested in continuing to work with us. Our use of single-source suppliers exposes us to several risks, including disruptions in supply, price increases or late deliveries. There are, in general, relatively few alternative sources of supply for substitute components. Our current vendors may be unable or unwilling to meet our future demands for our supply needs. Establishing additional or replacement suppliers for these components, materials and processes could take a substantial amount of time and it may be difficult to establish replacement suppliers who meet regulatory requirements. Any disruption in supply from

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any single-source supplier or service provider could lead to supply delays or interruptions, which would damage our business, financial condition, prospects and results of operations.

If we were to have to switch to a replacement supplier, the manufacture and delivery of our product candidates or components of our product candidates could be interrupted for an extended period, which could adversely affect our business. Furthermore, although we are developing our own extraction capabilities, there is no guarantee that we will be successful in doing so or that we will have sufficient capacity to meet our supply needs. We may not be able to quickly establish additional or replacement suppliers for our extraction needs, if required. If we are able to find a replacement supplier, the replacement supplier would need to be licensed by Health Canada, which might require additional regulatory authority approval, which could result in further delay. While we seek to maintain adequate inventory of the single source components and materials used in our products, any interruption or delay in the supply of components or materials or our inability to obtain components or materials from alternate sources at acceptable prices, or at all, in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.

Our reliance on these suppliers, service providers and manufacturers subjects us to a number of risks that could harm our reputation, business, financial condition, prospects and results of operations, including, among other things:

 

delays to the development timelines for our products;

 

interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;

 

delays in product shipments resulting from uncorrected defects, reliability issues or a supplier’s variation in a component;

 

a lack of long-term supply arrangements for key components with our suppliers;

 

inability to obtain adequate supply in a timely manner or to obtain adequate supply on commercially reasonable terms;

 

difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner;

 

production delays related to the evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications;

 

delay in delivery due to our suppliers prioritizing other customer orders over ours;

 

damage to our reputation caused by defective components produced by our suppliers; and

 

fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.

If any of these risks materialize, our costs could significantly increase and our ability to meet demand for our products could be impacted.

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, achieving pricing differentiation, 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.

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.

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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 $271.6 million, $56.5 million for the fiscal years ended December 31, 2019 and 2018, respectively, and had negative operating cash flows for each of these periods. Our accumulated deficit as of December 31, 2019 was $360.3 million. Although we have announced business optimization initiatives and temporarily suspended construction of certain facilities, we will continue to expend significant funds to maintain our growing and production capacity, fund certain planned capital investments, invest in research and development, expand our marketing and sales operations and meet the increased compliance requirements associated with our operation as a public company. We expect the aggregate amount of our operating expenses will 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 have incurred, and may in the future incur, significant losses for a number of reasons, including as a result of unforeseen expenses, difficulties, complications and delays in obtaining governmental licences and the other factors and risks described in this Annual Report. 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.

In addition, our consolidated financial statements at December 31, 2019 have been prepared on a going concern basis, which assumes that we will be able to realize our assets and discharge our liabilities in the normal course of business.  Our present level of indebtedness and our significant accumulated losses as well as a number of other factors present challenges to our ability to comply with the covenants in the agreements governing our indebtedness and management anticipates that our available cash and cash equivalents and cash generated from financing activities will be insufficient to satisfy the our liquidity requirements for the next 12 months. As a result, we require additional funding to meet our ongoing obligations and to fund anticipated operating losses and no assurance can be given that future sources of capital will be available.

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 and certain hemp-derived products, such as CBD, continue to be categorized at the federal level as a Schedule I controlled substance under the Controlled Substances Act (“CSA”), and subject to the Controlled Substances Import and Export Act, as amended (“CSIEA”). We believe that we are not subject to the CSA or CSIEA, because we have no 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 the listing of our common shares on the Nasdaq Global Select Market (“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

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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 are 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.

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 March 25, 2020, approximately 350 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. 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, command a significant percentage of the total market for cannabis and cannabis products in Canada and may be able to (i) offer products with higher concentrations of active ingredients, including THC, than permitted by the Cannabis Act and Cannabis Regulations or offered in the legal market, (ii) use delivery methods, that licensed producers are prohibited from offering to individuals in Canada, (iii) brand products more explicitly, (iv) sell products at lower prices and (v) market and distribute 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.

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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 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 use of cannabis for medical purposes or consumption of cannabis with physical or mental illness or other negative effects or events, the safety, efficacy and quality of cannabis or cannabis products generally, as well

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as our current or future products and facilities, specifically 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, declines in our stock price, litigation, 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.

The vape market is a new market that is still evolving and is subject to significant uncertainty, including as a result of recent negative press and regulatory scrutiny of vape products in the United States.

In connection with Cannabis 2.0, we have begun selling vape products in Canada. In Canada, vape products are regulated under the Cannabis Act and associated regulations, and such regulations were drafted prior to the recent reports of vaping-related deaths and illnesses in the United States. As a result, Health Canada or the individual provinces may amend or further review the rules governing vape products and restrict or prohibit sales of such products. For example, the AGLC delayed the legalization of vaping products in Alberta and, currently, vaping products are illegal in Quebec and Newfoundland. There can be no assurance that we will be able to meet any additional compliance requirements or regulatory restrictions, or remain competitive in the face of unexpected changes in market conditions.

There is a limited history and volume of research on the health effects of vaping, electronic cigarettes and other similar products. If the medical community were to determine that vaping or use of any of related products caused or posed a risk of long-term health risks, market demand for these products and their use could materially decline. Such a determination could expose us to litigation and result in increased regulation. Furthermore, vaping products sold on the illicit market that contain harmful chemicals or other ingredients may adversely impact the demand for such products in the legal market and create the perception that such products were dangerous. In addition, regulators may prohibit the sale of vaping products all together or severely restrict their use. A decline in the market demand for our vaping products, product liability claims and increased regulation could have a material adverse effect on 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.

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There has been limited study on the health effects of cannabis and cannabis products, including vaping 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.

We may not be successful at transitioning and growing the business of Bridge Farm or leveraging Bridge Farm’s existing retail relationships, and we may not be able to recoup our investment in Bridge Farm.

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 intend to proceed with the completion of phase 2 of Bridge Farm’s Clay Lake facility located in Spalding, Lincolnshire, United Kingdom, the (“Clay Lake Phase 2 facility”), and we may invest incremental capital into Bridge Farm’s production facilities to transition certain facilities to the cultivation of hemp plants and high-THC cannabis. 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 complete the Clay Lake Phase 2 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 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. Furthermore, we will need additional licences to commercialize any future CBD products in the United Kingdom or elsewhere.

Bridge Farm’s business and future capital requirements will depend on many factors, including: the successful integration of Bridge Farm and its personnel, 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.

The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets. There is no guarantee that we will be able to complete a transaction with respect to Bridge Farm on terms acceptable to us or at all. In addition, it is unlikely we will be able to recoup our investment in Bridge Farm as part of such process.

We will be exposed to risks relating to the laws of various countries as a result of any international expansion.

We may 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 may expand production of hemp at certain of Bridge Farm’s facilities in the United Kingdom with a view toward facilitating exports of future CBD products to countries in the European Union, 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. In February 2020, the UK Food Standards Agency (FSA) stated that CBD suppliers must receive a “novel food” approval by March 31, 2021 to sell CBD products in retail locations or such products will be removed from stores. New entrants, like Bridge Farm, will not be able to sell products without first receiving approval. There is no guarantee that Bridge Farm will receive such approval and any failure to receive such approval may materially adversely affect our business. 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 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,” which was consummated on January 31, 2020. The United Kingdom has until December 31, 2020 to reach and ratify a new agreement with the European Union which, among other things, would include terms of trade. However, there can be no assurance regarding the duration of such negotiations or the terms thereof. Any withdrawal agreement reached 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 may 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 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

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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% 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 (the “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 CBD 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.

 

The hemp and CBD 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 CBD product 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.

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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 and create additional revenue streams, including leasing any unused or excess facility space to other licensed producers. 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, cross-contamination, damage to our products or facilities and harm to our brand, 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.

Our contracts with other licensed producers may expose us to additional costs and negatively impact our results of operations.

We derive a significant portion of our revenue from sales of cannabis flower to other licensed producers in Canada. Our supply contracts with these other licensed producers contain provisions governing, among other things, the quality and THC-content of the cannabis supplied and the manner, time and place of such delivery. We have experienced issues with such supply agreements, including a legal dispute with one of our customers resulting from our failure to timely deliver product and the provision of additional product at no cost to another customer due to a disagreement over the THC-content of product supplied. In addition, we have a contract with another licensed producer to purchase a minimum amount of cannabis every month until 2038 at agreed upon prices and subject to certain revenue sharing arrangements. Such contract requires us to purchase such cannabis even if we have an excess supply of inventory (as we are currently experiencing). Issues with our contracts, including disagreements with our counterparties and any resulting publicity, and failure to comply with such agreements may have an material adverse impact on our results of operation and business. In addition, we are exposed to the credit risk of the licensed producers to which we sell. If any of our licensed producer-customers were to suffer financial difficulty, including bankruptcy, our business and liquidity may be materially adversely affected.

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 may 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. For example, we incurred a $100.3 million goodwill impairment related to our acquisition of Bridge Farm. 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.

 

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 pathogens. 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. In addition, we have experienced, and may in the future experience, production issues at our facilities, including poor crop yields, harvests of product with THC concentration that is too low to meet product specifications, fires, floods and contamination of our product from foreign objects. As a result of the foregoing, our products

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may not be suitable for commercialization, our products may be returned to us by our customers, and we may have to destroy the applicable portions of our crops.

Natural disasters, unusual weather, pandemic outbreaks such as COVID-19, boycotts and geo-political events or acts of terrorism could adversely affect our operations and financial results.

The occurrence of one or more natural disasters, such as hurricanes, floods and earthquakes, unusually adverse weather, pandemic outbreaks of influenza and other highly communicable diseases or viruses, such as the COVID-19 virus, boycotts and geo-political events, such as civil unrest in countries in which our operations are located and acts of terrorism, or similar disruptions could adversely affect our business, financial condition, liquidity and results of operations. These events could result in physical damage to one or more of our properties, increases in fuel or other energy prices, the temporary or permanent closure of one or more of our facilities or our customers, the temporary lack of an adequate workforce in a market, the temporary or long-term disruption in the supply of products from suppliers, the temporary disruption in the transport of goods, delay in the delivery of goods to and from our facilities, and disruption to our information systems.

In March 2020, as a result of the COVID-19 pandemic, Alberta declared a state of emergency and ordered the closure of schools and certain other public facilities. Alberta also amended its rules around paid sick leave to allow full and part-time employees to take 14 days of job-protected leave if they are required to self-isolate or caring for a dependent that is required to self-isolate. In addition, Sundial announced enhanced safety protocols at its Canadian and U.K. facilities, staffing measure changes and implemented remote work procedures for its corporate staff. Such measures and government mandates may not be effective and one or more of our employees may get sick and may come to work infected, necessitating a short or long-term closure of the affected facilities, disrupting production. Such measures and mandates may also increase our expenses and otherwise impair our production levels or cause us to close or severely limit production at our facilities. Further, legal cannabis dispensaries in Canada may close voluntarily or be forced to close by the provincial governments, reducing our ability to distribute cannabis. Consumer demand for cannabis and our other products may be reduced as a result of reductions in consumers’ disposable income associated with lay-offs and work or pay limitations due to mandatory social distancing and lockdown measures implemented by governments in the geographies where we operate. Production limitations or stoppages, social distancing measures and other impediments affecting our suppliers, partners or producers of goods, such as vape hardware, should they materialize, may make it difficult, more costly, or impossible for Sundial to produce or distribute cannabis, conduct quality testing, extract cannabis oils, or otherwise market and sell its products. For example, we have experienced delays in shipment of vape cartridge hardware for our products from China. Limitations on the function of Health Canada and other regulators as a result of remote work of its employees or redeployment of its resources to addressing the pandemic may delay our communications with the regulatory authorities and delay renewal of our existing licences or the receipt of additional licences required for our operations, should such licences be sought. Bridge Farm is facing similar challenges, conditions and risks in the United Kingdom, including cancellation of deliveries of flowers and plants by retailers, which has resulted in lost revenue. In addition, at least one employee at Bridge Farm has tested positive for the COVID-19 virus and is being attended to by health professionals. Although we do not expect to close the Bridge Farm facilities, we have taken additional precautions and plan to reduce operations at Bridge Farm starting April 1, 2020. There can be no guarantee that we will not have to suspend operations at Bridge Farm for a significant period of time. If macroeconomic conditions continue to worsen in Canada, the United Kingdom and the rest of the world, demand for cannabis and our other products may significantly decline and industry participants, including our customers and suppliers, may face financial hardship. In addition, the increased market volatility resulting from global business and economic disruption related to the pandemic and measures to contain it has made it more difficult for companies to access capital markets. Such volatility has hampered, and may in the future hamper, Sundial’s efforts to secure additional financing or amendments to its credit agreements. The duration and severity of the COVID-19 pandemic is currently unknown and the pandemic may continue for a significant period of time. Any of the foregoing may adversely affect our financial position, results of operations and liquidity. The longer the pandemic continues, the more severe such impacts may be.

We have undergone changes to management and our board of directors as well as implemented business optimization initiatives — all of which may distract from our operation of the business and may not the be successful.

On January 30, 2020, we announced certain changes to our executive team and board of directors, including the resignation of Torsten Kuenzlen as our Chief Executive Officer and a member of our board of directors, the resignation of Edward Hellard as our Executive Chairman, the appointment of one of our directors, Zach George, as Chief Executive Officer, and the promotion of Andrew Stordeur as President and Chief Operating Officer.

Due to the early-stage nature of our business and our strategy, our success is largely dependent on the performance of our management team as well as our ability to continue to attract, develop, motivate and retain highly qualified and skilled employees. Consequently, the loss of any member of management or other key operational employees 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

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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.

In addition, in response to slower than expected regulatory approvals of new retail stores and delays in some cannabis 2.0 products, we implemented several cost savings and business optimization initiatives, including the enhancement of facility workflows and processes, realignment of product lines and product formats to areas of stronger demand, workforce optimization and a heightened discipline in cost management. As of the date of this Annual Report, a substantial portion of these initiatives have been implemented, with cost reductions expected to be realized beginning in the first quarter of 2020. As part of the leadership team's focus on improved efficiency, cost management and long-term sustainability, the Company will continue to monitor operations to ensure it remains responsive in the current environment.

A variety of factors could cause us not to realize some or all of the expected cost savings, including, among others, delays in the anticipated timing of activities related to our cost savings programs, lack of sustainability in cost savings over time, unexpected costs associated with operating our business, our ability to reduce headcount and our ability to achieve the efficiencies contemplated by the business optimization initiatives. We may be unable to realize all of these cost savings within the expected timeframe, or at all, and we may incur additional or unexpected costs in order to realize them. In such event, we may have difficulty complying with the terms of our indebtedness. The magnitude of expected cost savings are based upon a number of assumptions and estimates that are in turn based on our analysis of the various factors which currently, and could in the future, impact our business. These assumptions and estimates are inherently uncertain and subject to significant business, operational, economic and competitive uncertainties and contingencies. Certain of the assumptions relate to business decisions that are subject to change, including, among others, our anticipated business strategies, our marketing strategies, our product development and licensing strategies and our ability to anticipate and react to business trends. Other assumptions relate to risks and uncertainties beyond our control, including, among others, the economic environment in which we operate, cannabis regulation and licensing and other developments in our industry as well as capital markets conditions from time to time. The actual results of implementing the various cost savings initiatives may differ materially from our estimates if any of these assumptions prove incorrect. Moreover, our continued efforts to implement these cost savings may divert management attention from the rest of our business and may preclude us from seeking attractive new product and other opportunities.  Additionally, former employees may file lawsuits against us, which may be expensive to defend and could potentially result in adverse judgements against us. Any of the foregoing may materially and adversely affect our business, results of operations and liquidity.

Directors and certain key employees of a licensed producer must obtain and maintain a security clearance from Health Canada. Certain of our directors and key employees have not yet obtained such clearance. There is no assurance that any of our existing directors or employees 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.

Each director and certain key employees 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. All of our directors and executive officers have obtained security clearance from Health Canada with the exception of Greg Mills and Bryan Pinney (two of our directors) and Zach George (our Chief Executive Officer and director).  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 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

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

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. Certain of our energy subsidies were contingent on our ability to meet certain milestones by January 31, 2020. While we believe we have met all milestones and have made application for all subsidies, there is no assurance that subsidies will continue or that our outstanding applications will be approved. 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 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, destroying or repurposing such inventory, providing replacement products to our customers or recalling such 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 our products whether affected or not and our brand may be materially damaged. 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 negatively impact our results of operations. 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 or returns 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 product returns, 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

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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. In addition, from time to time we have customers return our products alleging, among other things, contamination and failure to meet designated specifications. As a result of any such recall or return, 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 or return may require significant management attention, expose us to liabilities or damage our reputation and goodwill or that of our products or brands.

Additionally, product recalls and returns 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 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 litigation and 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

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

We are, and may in the future become, subject to litigation, regulatory or agency proceedings, investigations and audits from time to time, 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.

For example, in 2019, we entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under a supply agreement and agreed to pay penalties in the amount of $1.7 million.

Additionally, 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 at December 31, 2019 in respect of this matter.

In connection with our initial public offering (“IPO”), we and certain of our current and former officers and directors, as well as the underwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and November 1, 2019. The cases have been consolidated in two separate actions depending on the court in which they were first filed, one in the Supreme Court of New York, New York County, captioned In re Sundial Growers Inc. Securities Litigation, Index No. 655178/2019, and the other in the United States District Court for the Southern District of New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC. The complaints in each of the two consolidated actions assert claims under Sections 11, 12(a)(2), and 15 of the U.S. Securities Act of 1933, as amended (the “Securities Act”). They generally allege that the we made material misstatements and omissions in the prospectus and registration statement in connection with the IPO with respect to, among other things, the failure to disclose systemic quality control issues as well as the return of cannabis and termination of the supply agreement by one of the Company’s customers. Additionally, we have received a threat of litigation from an investor in our Senior Convertible Notes.

While we intend to defend ourselves vigorously in all pending and future legal proceedings, we may settle certain matters for strategic reasons, as a part of a resolution of other matters or in order to avoid potentially worse consequences arising from inherently uncertain

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judicial or administrative processes. Moreover, regardless of the merits of our defenses, if we are unable to resolve certain legal proceedings or regulatory actions, indirect consequences arising from unproven allegations or appealable regulatory findings may have adverse consequences to us. 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, liquidity 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 Annual Report 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.

 

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 (“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 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

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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 periods ended December 31, 2019 and 2018, our management and independent auditors concluded that there were 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 included a lack of segregation of duties related to the review and approval of journal entries. It was noted that there is no review process in place to approve journal entries by someone other than the preparer. Similar material weaknesses were identified at Bridge Farm by the independent auditors thereof prior to our acquisition of Bridge Farm. We are currently implementing a remediation plan and taking the measures necessary to address the underlying causes of this material weaknesses and expect to remediate this material weaknesses for the fiscal year ending December 31, 2020. 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 (“SOX 404”) of the Sarbanes Oxley Act of 2002 (“SOX”), we will be required, beginning with the second annual report that we file with the SEC, 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 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.

We recognized a goodwill impairment charge for the year ended December 31, 2019 and may be required to recognize additional goodwill and intangible asset impairment charges in the future.

In connection with the accounting for the Bridge Farm acquisition, we recorded 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. Events or changes indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include reduced future cash flow estimates, slower growth rates in industry segments in which we participate and a decline in our stock price and market capitalization. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, negatively affecting our results of operations and shareholders’ equity. For the year ended December 31, 2019, we recorded $100.3 million in non-cash charges for the impairment of goodwill for our acquisition of Bridge Farm based on an impairment in Bridge Farm’s ability to generate revenue from the cultivation, processing and distribution of CBD products as a result of significant delays and uncertainties in the licensing and regulatory requirements in the United Kingdom. The goodwill impairment was recognized in relation to the portion of goodwill assigned to Bridge Farm’s CBD business.

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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 financing agreements 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 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 “Liquidity and Capital Resources—Debt—Term Debt Facility” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

At December 31, 2019, the Syndicated Credit Agreement, as written, contained certain financial covenants to maintain:

 

(i)

An available cash balance to March 31, 2020;

 

(ii)

A certain interest coverage ratio as at December 31, 2019;

 

(iii)

A certain senior funded debt to EBITDA ratio as at March 31, 2020 and as at the end of every fiscal quarter thereafter; and

 

(iv)

A fixed charge coverage ratio at March 31, 2020 and as at the end of every fiscal quarter thereafter.

At December 31, 2019 the Company was not in compliance with the interest coverage ratio covenant, which caused a cross-acceleration of its Term Debt Facility. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020. In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar waivers in the past; however, there is no guarantee that we will be able to do so in the future. See “Liquidity and Capital Resources—Debt—Syndicated Credit Agreement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

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.

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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 our IPO); (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 contrast to other reporting companies that must provide audited financial statements for three fiscal years;

 

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 Annual Report. We cannot predict whether investors will find 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 Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the U.S. Exchange Act of 1934, as amended (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.

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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.

 

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 Inc. (“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 licence 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 licence agreements in place at such time or otherwise replace existing technology. We are unable to predict whether these licence 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 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

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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.

 

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.

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

The market price for our common shares has been and may in the future 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 or instruments convertible or exercisable for our common shares; (vii) significant dispositions, 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

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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 (as defined below) may delist our common shares from trading, in which case the liquidity and market price of our common shares could decline.

Our common stock is listed on the Nasdaq. In order to maintain that listing, we must satisfy minimum financial and other requirements including, without limitation, a requirement that our closing bid price be at least US$1.00 per share. In March 2020, the price of one of our common shares fell below US$1.00.  If our common shares were to trade below US$1.00 per share for 30 consecutive business days, we will receive a notification letter from Nasdaq and will have 180 calendar days (subject to extension in some circumstances) to regain compliance with the minimum bid price rule.  To regain compliance, the closing bid price of our common shares must be at least US$1.00 per share for a minimum of ten consecutive business days (or such longer period of time as the Nasdaq may require in some circumstances). If we fail to regain compliance with the minimum bid price rule or fail to maintain compliance with all other applicable Nasdaq continued listing requirements, Nasdaq may determine to delist our common stock, at which time our common stock would be quoted on the over-the-counter markets. 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;

 

defaults or breaches of covenants in our financing agreements; and

 

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

We cannot assure you that we will be able to meet the continued listing standards of Nasdaq in the future.

 

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. Although a significant percentage of our outstanding shares of common stock remain subject to lock-up arrangements entered into in connection with our IPO (including voluntarily extensions by certain current and former officers and directors), those lock-up arrangements will allow for the release of significant portions of shares of common stock in the first, second and third quarters of 2020. 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.

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.

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

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 December 31, 2019, there were 623,850 stock options, 9,816,800 simple warrants and 5,798,822 performance warrants outstanding, of which 22,500 stock options, 5,110,400 simple warrants, and 4,456,422 performance warrants, were vested and exercisable into an aggregate number of 9,589,322 common shares, at weighted average exercise prices of $3.12, $1.28 and $1.02, respectively. In addition, restricted and deferred share units of 416,807 were outstanding and are exchangeable for an equal number of 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 our common shares. For instance, our by-laws 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

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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.

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 (“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 “Item 10E Taxation—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 “Item 10E Taxation—Certain U.S. Federal Income Tax Considerations for U.S. Persons—PFIC Rules”.

 

 

The agreements governing our indebtedness contain covenants that reduce our financial flexibility and could impede our ability to operate.

 

The agreements governing our indebtedness each impose significant operating and financial restrictions on us. These restrictions will limit our and our subsidiaries’ ability to, among other things:

• incur or guarantee additional debt or issue disqualified stock or preferred stock;

• pay dividends and make other distributions on, or redeem or repurchase, capital stock;

• make certain investments;

• incur certain liens;

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• enter into transactions with affiliates;

• merge or consolidate; and

• transfer or sell assets.

In addition, such agreements subject us and our subsidiaries to covenants, representations and warranties, and our Syndicated Credit Agreement and our Term Debt Facility, each as amended, include various financial and other maintenance covenants. See the section entitled “Selected Annual Information—Debt” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

At December 31, 2019, the Company was not in compliance with the interest coverage ratio covenant under its Syndicated Credit Agreement. As a result, as at December 31, 2019, the full principal amount of the Syndicated Credit Agreement and the Term Debt Facility, which was cross-accelerated, was classified as a current liability on the Company’s balance sheet. Subsequent to December 31, 2019, the Company has obtained a waiver under the Syndicated Credit Agreement for the December 31, 2019 interest coverage ratio covenant breach and a waiver for any breaches of the Term Debt Facility. Under the terms of the waivers, the Company has agreed that on or before April 15, 2020 it will (i) enter into a definitive purchase agreement related to the sale of Bridge Farm and (ii) enter into term sheets with each of the respective lenders under the Syndicated Credit Agreement and Term Debt Facility that sets out a financing strategy for the Company. In addition, the requirement to maintain an interest reserve cash balance of $10.0 million was removed. The $10.0 million was applied as a permanent reduction to amounts outstanding under the Syndicated Credit Agreement on March 30, 2020. The Term Debt Facility lenders have also agreed to defer a minimum of $1.2 million of the $2.8 million interest payment due April 1, 2020 to April 20, 2020.

In addition, we anticipate that we will not be in compliance with the covenants under our Syndicated Credit Agreement (and, thus, our Term Debt Facility) as of March 31, 2020. Under the terms of our debt documents, we have until May 15, 2020 to deliver our financial results for the three months ended March 31, 2020 and associated compliance certification, and if we do not obtain a waiver of covenant compliance or similar relief before then, we will be in default under such agreements. We are in active dialogue with our lenders and have been able to obtain similar amendments in the past; however, there is no guarantee that we will be able to do so in the future.

As a result of these restrictions, we will be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to fund our operations, compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants.

Our failure to comply with the restrictive covenants described above as well as the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date and may result in the acceleration of any other debt that is subject to an applicable cross-acceleration or cross-default provision.

Furthermore, if we were unable to repay the amounts due and payable under the Syndicated Credit Agreement and our Term Debt Facility, those lenders could proceed against the collateral securing such indebtedness. In the event our lenders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness or if we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected.

 

 

 

 

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Item 4. Information on the Company

A.

History and development of the company.

Sundial was incorporated under the Business Corporations Act (Alberta) on August 19, 2006. On July 22, 2019, we filed articles of amendment to effect a 1 to 1.6 share split. We have 14 direct and indirect subsidiaries, all of which are wholly-owned, and a 50% interest in Pathway Rx. On August 1, 2019, our common shares commenced trading on the Nasdaq under the symbol “SNDL”.

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

We are subject to the informational requirements of the Exchange Act and are required to file reports and other information with the SEC. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that make electronic filings with the SEC using its EDGAR system.

 

Over the three most recently completed fiscal years and for the current fiscal year, we have undertaken and/or completed several business acquisitions and capital expenditures, including, among others, the following:

 

Business acquisitions

 

On July 2, 2019, the Company, through its wholly owned subsidiary, Sundial UK Limited, acquired all the issued and outstanding shares of Project Seed Topco Limited (“Bridge Farm”) a private company located in the United Kingdom of Great Britain and Northern Ireland (“UK”). Bridge Farm was acquired to expand the Company’s business to cannabidiol (“CBD”) extraction and production, with the intent to sell CBD products in the UK, subject to certain regulatory, licensing and other restrictions. The acquisition consideration was comprised of:

 

 

Cash consideration in the amount of £45.0 million;

 

 

The issuance of 2.4 million common shares valued at $37.2 million based on the fair value of a common share of the Company on the closing date and contingent consideration of $8.4 million representing the value of incremental shares potentially issuable on the one year anniversary of the closing date; and

 

 

Contingent consideration valued at $7.2 million representing the fair value of earn-out payments ranging from nil to a maximum of an additional 1.6 million common shares of the Company based on a prescribed formula.

At December 31, 2019, the Company recorded a goodwill impairment of $100.3 million based on significant delays and uncertainties in the CBD licensing and regulatory framework in the UK.

On March 13, 2019, the Company 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.

Concurrently with the acquisition of our interest in Pathway Rx, we entered into a license agreement (the “Pathway Rx License Agreement”), which granted us an exclusive right to use Pathway Rx’s intellectual property in exchange for:

 

a royalty of 3% of gross revenues derived from activities which use the intellectual property that is the subject matter of the license agreement (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;

 

 

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;

 

 

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

 

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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.

 

Capital expenditures

 

Olds Facility

 

Capital expenditures in 2019 totaled $138.1 million of which $98.8 million was spent continuing the construction and expansion of our flagship facility in Olds, Alberta. Furthermore, the Company has commenced construction of an extraction and processing facility, estimated to be approximately 20,000 square feet at our Olds facility. The full build out of the Olds facility is expected to cost approximately $190 million, of which approximately $5 to $10 million remains to be invested.

 

Capital expenditures of $76.3 million during the ten months ended December 31, 2018 and $7.6 million during the year ended February 28, 2018 were primarily related to the construction and development of our Olds Facility, which commenced in July 2017. Remaining capital spending was directed toward renovations and upgrades to our Rocky View facility along with the purchase of land and equipment to support construction and expansion efforts.

 

 

Merritt Facility

 

Construction of our Merritt facility began in March 2019 with capital spending totaling approximately $10 million in 2019; however, construction of the Merritt facility has been temporarily deferred pending increases in market demand and availability of appropriate financing. The Merritt facility, if constructed and licensed, will serve as the primary production facility of our BC Weed Co. brand. 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 is expected to cost $15 million to construct, while a larger facility with extraction capabilities is expected to cost up to $30 million to complete.

 

Clay Lake Facilities

 

Following the acquisition of Bridge Farm on July 2, 2019, we incurred $27.8 million of capital expenditures primarily related to the construction and development of the Clay Lake Phase 2 facility. We expect to spend an additional $10 million to complete the development of Clay Lake Phase 2 facility resulting in a total cost of approximately $42 million. We expect to complete construction in the second quarter of 2020.

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” filed herewith as Exhibit 15.1 for information about significant financing transactions.

 

 

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B.

Business overview.

Our Company

Sundial is a licensed producer that grows cannabis using state-of-the-art indoor facilities.

Sundial’s Canadian operations cultivate cannabis using an individualized “room” approach, in approximately 470,000 square feet of total space. In the United Kingdom, the Company grows traceable plants, including hemp, ornamental flowers and edible herbs in approximately 1.75 million square feet of environmentally friendly facilities. Sundial is headquartered in Calgary, Alberta, with operations in Olds, Alberta, and Rocky View County, Alberta.

In Canada, Sundial currently produces and markets cannabis products for the adult-use market. Sundial’s purpose-built indoor modular grow rooms create consistent, highly controlled cultivation environments and are the foundation of the Company’s production of high-quality, strain-specific cannabis products. The Company has established supply agreements with or has been approved to supply cannabis directly to retailers in nine Canadian provinces, with approval recently received from Quebec. Once supply agreement with Quebec is finalized, Sundial’s distribution network will cover 98% of the national recreational industry.

The Company’s primary focus has been on producing and distributing premium inhalable products and brands (flower, pre-rolls and vapes). On October 24, 2019, the Company received a licence from Health Canada to sell cannabis oil products and began the sale and distribution of cannabis vape products in December 2019. The Company plans to expand to edibles, extracts, topicals and other products which became legally permitted in the fourth quarter of 2019.

The Company is currently marketing its adult-use products under its Top Leaf (Premium), Sundial Cannabis (Premium Core), Palmetto (Core) and Grasslands (Value) brands and intends to introduce new products under these brands as it expands its brand portfolio.

The Company also continues to enter into agreements to supply other licensed producers in Canada. Although in 2019 most of the Company’s sales were to other licensed producers, the Company expects these sales to decrease as a percentage of total sales going forward assuming retail market capacity in Canada expands.

In July 2019, the Company acquired Bridge Farm, a grower of ornamental plants and herbs, based in the United Kingdom, with the intention of converting Bridge Farm’s existing facilities to the cultivation, processing and distribution of CBD products. Bridge Farm has several state-of-the-art, fully operational facilities and established relationships with a number of large U.K. and multi-national retailers. Bridge Farm holds an industrial hemp cultivation licence and a high-THC research and development licence, which enables it to conduct research and development for phenotyping exercises and to refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants. Upon receipt of a commercial controlled substances licence, Bridge Farm will have the ability to produce cannabis derived products at low cost, driven by Bridge Farm’s scale, automation and energy subsidies. The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.

To enhance and differentiate the Company’s medical cannabis offerings, Sundial is working to build research capabilities, proprietary strains and novel extracts for the use of cannabis-based medical treatments. The Company has established partnerships with a number of private and public Canadian research institutions to facilitate a research-informed approach to identify and develop strain-specific treatments and novel extracts for targeted medicinal use. In addition, in 2019, the Company acquired a 50% interest in Pathway Rx, which uses advanced technology and an extensive library of cannabis strains to identify and customize targeted treatments for a wide range of medical conditions.

Our Industry

Adult-use Cannabis

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 at the federal level. On October 17, 2019, the Canadian government has amended the Cannabis Regulations and Schedules to the Cannabis Act, to permit the production and sale of cannabis edibles, extracts and topicals by holders of federal licenses specific for these product classes. Products in the new classes were made available for sale to provincially or territorially authorized distributors beginning in December 2019. We expect that additional countries will also legalize adult-use

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cannabis, creating the opportunity for us to serve the adult-use market in those other countries in the future, although we cannot predict whether and when this will occur.

CBD

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. Further to designation of CBD as a “novel food” in the European Union, the United Kingdom recently moved to introduce a regulatory framework for CBD products. In February 2019, the UK Food Standard Agency (“FSA”) issued a statement requiring suppliers of CBD-infused food products to submit a novel food authorization application by March 31, 2021, after which date any CBD products without a valid application submitted will not be permitted to stay on the market.

Furthermore, 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.

Medical Cannabis

As of December 31, 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.

Our Brands and Products

We offer and continue to develop cannabis brands for the adult-use market. Currently, we sell dried flower cannabis, pre-rolls and vapes and intend to sell additional products in a wide-range of formats, such as edibles, oils, capsules and sublinguals, in accordance with existing regulations.

Sundial is marketing our adult-use products under the following brand portfolio:

Sundial – The Sundial product line encompasses five experiences: Calm, Ease, Flow, Lift and Spark. Initial sales consisted primarily of two whole flower products sold under our Sundial brand: Zen Berry, which is a indica-dominant whole dried flower under the Calm series, and Daydream, which is a hybrid whole dried flower under the Flow series. During the second half of 2019, we introduced Lemon Riot and Citrus Punch as part of our Lift series and introduced Berry Bliss and Twilight as part of our Calm series. Sundial plans to continue the launch of new product formats and strains under the Ease and Spark series, while launching vape formats under our Lift, Calm and Flow series going forward in 2020.

Grasslands - To maximize the value of our cultivation assets, Sundial developed and deployed the Grasslands brand during the fourth quarter of 2019. The Grasslands brand focuses on value-driven inhalable products and provides Sundial with increased flexibility in the Company’s production and distribution strategies and practices. The Grasslands brand has released multiple products to British Columbia, Alberta, Saskatchewan and Manitoba markets and will continue to expand distribution to other provincial jurisdictions in 2020.

Palmetto – Launched during the fourth quarter of 2019, the Palmetto brand offers convenient, ready-to-use products to accommodate consumers looking for a user-friendly cannabis experience. Palmetto's initial strain offering for pre-rolls is Agent Orange, a sativa-dominant hybrid with the distinct smell and taste of fresh Florida oranges. Additional product formats under the Palmetto brand, including vape pens, along with additional strain offerings, will continue to be developed and offered going forward into 2020.

Top Leaf – In the fourth quarter of 2019, Sundial launched its Top Leaf brand with the release of Strawberry Cream whole flower, with initial shipments to Alberta, British Columbia and Nova Scotia. Distribution of Top Leaf products is expected to continue to expand to other provincial jurisdictions in 2020, along with the release of several new Top Leaf products including Strawberry Cream and Jager OG whole flower and vape cartridges.

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Our Operations

Our purpose-built indoor modular grow rooms enable us to produce large volumes of 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. Different strains may have different harvest cycles and different harvest yields. Our modular cultivation rooms have been designed with the objective of improving our ability to learn, experiment and improve our cultivation process and end products. This approach also helps mitigate the risk of crop loss.

We do not operate our own retail stores. We use analytics based on customer and consumer data and research to develop and market our branded products. In the long term, we intend to develop value-add tools which would 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.

Bridge Farm’s current facility footprint is approximately 1.7 million square feet and plans are in place to complete expansion to approximately 2.4 million square feet by the end of the second quarter of 2020. 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. In addition, Bridge Farm has existing distribution relationships with retailers in the United Kingdom. Over time, as the global CBD regulatory landscape continues to evolve, we may leverage such relationships to launch CBD product sales in the United Kingdom as well as establish new partnerships with international retailers to expand globally.

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. Bridge Farm currently cultivates hemp in approximately 40,000 square feet at the Homestead Facility. Bridge Farm also holds a high THC research and development licences which enables us to conduct research and development for phenotyping exercises and refine extraction methods to produce CBD extracts from the controlled parts of the cannabis plants.  

We continue to operate Bridge Farm’s existing herbs and ornamental flower business and cultivation operations in compliance with debt covenants and expect to do so until such time as we may need to transition more space to hemp cultivation and CBD extraction in order to meet demand for our future CBD products, subject to available capital resources as well as certain regulatory, licensing and other restrictions.

The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.

Our Research and Innovation

We 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.

In addition, we are working to build partnerships with leading research institutions, including the University of Saskatchewan’s Cannabinoid Research Initiative of Saskatchewan (“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.

Regulatory Framework in Canada

Background to the Cannabis Act and Regulations

On December 13, 2016, the Task Force on Cannabis Legalization and Regulation, which was established by the Canadian federal government to seek input on the design of a new system to legalize, regulate and restrict access to cannabis, published its report outlining its recommendations. On April 13, 2017, the Canadian federal government released Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts, which proposed the enactment of the Cannabis Act to regulate the production, distribution and sale of cannabis for unqualified adult use.

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On October 17, 2018, the Cannabis Act, together with its accompanying regulations, including the Cannabis Regulations and the IHR and, together with the Cannabis Regulations, the Regulations, came into force. The Regulations, among other things, outline the rules for the legal cultivation, processing, research, testing, distribution, sale, importation and exportation of cannabis and hemp in Canada, including the various classes of licences that can be granted, and set standards for cannabis products that became available for legal sale on October 17, 2018.

Pursuant to the regulatory framework, each province and territory in Canada is also permitted to adopt its own laws governing the distribution, sale and consumption of cannabis and cannabis accessory products within the province or territory. See “—Provincial and Territorial Regulatory Framework for Adult-Use Cannabis” below.

Given that the Cannabis Act and the Regulations were only recently enacted and are still developing, the impact of the regulatory framework on our business is uncertain. See “Risk Factors—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”.

Adult-Use Cannabis

The Cannabis Act provides a licensing and permitting scheme for the cultivation, processing, research, testing, distribution, sale, importation and exportation of cannabis for non-medicinal use (i.e., adult use), to be implemented by regulations made under the Cannabis Act.

In particular, among other things, the Cannabis Act:

 

Restricts the amounts of cannabis that individuals can possess and distribute, public consumption and use, and prohibits the sale of cannabis unless authorized by the Cannabis Act.

 

Permits individuals who are 18 years of age or older to cultivate, propagate, and harvest up to and including four cannabis plants in their dwelling-house, propagated from a seed or plant material authorized by the Cannabis Act.

 

Restricts (but does not strictly prohibit) the promotion and display of cannabis, cannabis accessories and services related to cannabinoids to consumers, including restrictions on branding and a prohibition on false or misleading promotion and on sponsorships.

 

Permits the informational promotion of cannabis by entities licensed to produce, sell or distribute cannabis in specified circumstances to individuals 18 years and older.

 

Introduces packaging and labelling requirements for cannabis and cannabis accessories, and prohibits the sale of cannabis or cannabis accessories that could be appealing to young persons.

 

 

Provides the designated minister with the power to recall any cannabis or class of cannabis on reasonable grounds that such a recall is necessary to protect public health or public safety.

 

Permits the establishment of a national cannabis tracking system.

 

Provides powers to inspectors for the purpose of administering and enforcing the Cannabis Act and a system for administrative monetary penalties.

Cannabis for Medical Purposes

Effective October 17, 2018, the Cannabis Act and the Cannabis Regulations replaced the Controlled Drugs and Substances Act’s Access to Cannabis for Medical Purposes Regulation (“ACMPR”), as the governing regulations in respect of the production, sale and distribution of medical cannabis and related oil products in Canada. Transitional provisions of the Cannabis Act provide that every licence to produce and sell cannabis issued under the ACMPR that was in force immediately before the day on which the Cannabis Act came into force was deemed to be a licence issued under the Cannabis Act, and that such licence will continue in force until it is revoked or expires.

The Cannabis Regulations set out the regime for medical cannabis following legalization, which is substantively the same as the ACMPR with adjustments to create consistency with rules for non-medical use, improve patient access, and reduce the risk of abuse within the medical access system. Patients who have the authorization of their healthcare provider continue to have access to cannabis under the Cannabis Act and Cannabis Regulations, either purchased directly from a federally licensed entity under the Cannabis Act and the Cannabis Regulations, or by registering to produce a limited amount of cannabis for their own medical purposes, or designating someone to produce cannabis for them in the manner prescribed.

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Licences, Permits and Authorizations

The Cannabis Regulations establish six classes of licences:

 

licence for cultivation;

 

licence for processing;

 

licence for analytical testing;

 

licence for sale for medical purposes;

 

licence for research; and

 

a cannabis drug licence.

The Cannabis Regulations also create sub-classes for cultivation licences (standard cultivation, micro-cultivation and nursery) and processing licences (standard processing and micro-processing). Different licences, and each sub-class therein, carry differing rules and requirements that are intended to be proportional to the public health and safety risks posed by each licence category and each sub-class. Producers holding production and sales licences under the ACMPR were transferred to similar licences under the Cannabis Act. Licences issued under the Cannabis Regulations have associated expiry dates and are subject to renewal requirements.

As of May 8, 2019, Health Canada will require new applicants for cannabis licences under the Cannabis Act to have a fully built site that meets all requirements of the Cannabis Regulations at the time of their application. Existing applicants will not be substantively reviewed until the facilities associated with a licence application are fully constructed and accepted by Health Canada as to have met all requirements of the Cannabis Regulations.

Security Clearances

Certain people associated with cannabis licensees, including individuals occupying “key positions”, such as directors, officers, individuals who exercise, or are in a position to exercise, direct control over the corporation licensee, and individuals identified by the Canadian Federal Minister of Health (the “Minister of Health”), must hold a valid security clearance issued by the Minister of Health. Under the Cannabis Regulations, the Minister of Health may refuse to grant security clearances to individuals with associations to organized crime or with past convictions for, or an association with, drug trafficking, corruption or violent offences. Individuals who have histories of nonviolent, lower-risk criminal activity (for example, simple possession of cannabis, or small-scale cultivation of cannabis plants) are not precluded from participating in the legal cannabis industry. However, grant of security clearance to such individuals is at the discretion of the Minister of Health and such applications will be reviewed on a case-by-case basis.

All of our directors and executive officers have obtained security clearance from Health Canada with the exception of Greg Mills, and Bryan Pinney (two of our directors) and Zach George (our Chief Executive Officer and director). 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 “Item 3D Risk Factors—Risks Related to Our Business and Our Industry—Our future success is dependent on our ability to attract or retain key personnel”.

Cannabis Tracking System

Under the Cannabis Act, the Minister of Health is authorized to establish and maintain a national cannabis tracking system. The purpose of this system is to track cannabis throughout the supply chain, to help prevent cannabis from being diverted to an illicit market or activity and to help prevent illicit cannabis from being a source of supply of cannabis in the legal market. Pursuant to the Ministry of Health’s Cannabis Tracking System Order, holders of a federal licence for cultivation, a licence for processing or a licence for sale for medical purposes that authorizes the possession of cannabis, must report monthly to the Minister of Health with specific information about their authorized activities with cannabis (e.g. cannabis inventory quantities), in the form and manner specified by the Minister of Health. The order also provides for monthly reporting by provincial bodies and provincially authorized private retailers of certain information in the form and manner specified by the Minister of Health.

Cannabis Products

The Cannabis Regulations set out the requirements for the sale of cannabis products at the retail level, including the THC content and serving size of cannabis products and cannabis products containing CBD. As of October 17, 2019, the Cannabis Act and the Cannabis Regulations permit the sale, subject to certain transitional periods, of only dried cannabis, fresh cannabis, edible cannabis, cannabis extracts, cannabis topicals, cannabis plants and cannabis plant seeds, each as defined in the Cannabis Act.

Prior to the coming-into-effect of the amended forms of the Cannabis Act and Cannabis Regulations, which occurred on October 17, 2019, the Cannabis Act only permitted the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants and cannabis plant

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seeds. The amended forms of the Cannabis Act and Cannabis Regulations (i) remove cannabis oil from the list of permitted classes of cannabis products and (ii) authorize and regulate the production and sale of edible cannabis, cannabis extracts and cannabis topicals.

The amended forms of the Cannabis Act and Cannabis Regulations introduced restrictions on product composition specific to each of edible cannabis, cannabis extracts and cannabis topicals, including specific THC limits. Examples of other class-specific restrictions include:

 

Edible cannabis: must be shelf stable; only food and food additives will be allowed to be used as ingredients in edible cannabis and the use of food additives will need to be in accordance with the limits and purposes that are prescribed for foods; must not have caffeine added, however the use of ingredients containing naturally occurring caffeine will be permitted in edible cannabis products provided that the total amount of caffeine in each immediate container does not exceed 30 milligrams; must not contain alcohol in excess of 0.5% w/w; must not contain anything that would cause the sale of the edible cannabis, if it was a food regulated under the Food and Drugs Act (Canada), to be prohibited and must not be fortified with vitamins or mineral nutrients.

 

 

Cannabis extracts: must not contain ingredients that are sugars, sweeteners or sweetening agents, nor any ingredient listed on Column 1 of Schedule 2 to the Tobacco and Vaping Products Act (Canada) (which is a list of ingredients that are prohibited in vaping products) except if those ingredients and their levels are naturally occurring in an ingredient used to produce the extract.

 

 

Cannabis topicals: must not contain anything that may cause injury to the health of the consumer when the product is used as intended or in a reasonably foreseeable way.

As is the case for cannabis oil, a processing licence is required in order to legally produce edible cannabis, cannabis extracts and cannabis topicals. Though a processing licence is required in order to package and label all types of cannabis products for sale to consumers. Holders of processing licences issued prior to October 17, 2019, were required to amend their processing licences before they could begin manufacturing products constituting edible cannabis, cannabis extracts or cannabis topicals. The Cannabis Regulations require the filing of a notice with Health Canada at least 60 days before releasing a new cannabis product to the market. As a result, mid-December 2019, was the earliest date that any products constituting edible cannabis, cannabis extracts or cannabis topicals could be made available for sale to consumers.

In addition, if a holder of a processing licence chooses to process edible cannabis and food products on the same site, then the production, packaging, labelling, and storage of cannabis and the production, packaging, and labelling of food products must be conducted in distinctly separate portions of the holder’s licensed facility. All cannabis production is required to occur in a sufficiently separate area from any food production.

Packaging, Labeling and Advertising

The Cannabis Regulations set out requirements pertaining to the packaging and labelling of cannabis products. These requirements are intended to promote informed consumer choice and allow for the safe handling and transportation of cannabis, while also reducing the appeal of cannabis to youth. The Cannabis Regulations require all cannabis products to be packaged in a manner that is tamper-proof and child-resistant.

Limits are also imposed on the use of colors, graphics, and other special characteristics of packaging. For example, all-over packaging wraps must be clear, and the interior surface and exterior surface of any container in which a cannabis product is packaged must be one uniform color. Cannabis package labels must include specific information, such as (i) product source information, including brand name, the class of cannabis and the name, phone number and email of the licensed processor or cultivator, (ii) mandatory warnings, including rotating health warning messages on Health Canada’s list of standard health warnings; (iii) the Health Canada standardized cannabis symbol; and (iv) information specifying THC and CBD content. Amendments to the Cannabis Regulations effective as of October 17, 2019 impose additional packaging and labelling requirements for all classes of cannabis production.

A cannabis product’s brand name may only be displayed once on the principal display panel or, if there are separate principal display panels for English and French, only once on each principal display panel. It can be in any font style and any size, so long as it is equal to or smaller than the health warning message. The font must not be in metallic or fluorescent color. In addition to the brand name, only one other brand element can be displayed. Such brand element must meet the same requirements as the brand name, noted above, and if an image, it must be in a size equal to or smaller than the surface area of the standardized cannabis symbol.

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. Also, among other restrictions, the Cannabis Act prohibits testimonials and endorsements, lifestyle branding, depictions of a person, character or animal, whether real or fictional, and promotion that is appealing to young persons.

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Health Products Containing Cannabis

Health Canada is taking a scientific, evidenced-based approach for the oversight of health products with cannabis that are approved with health claims, including prescription drugs. Under the current regulatory framework, these health products are subject to the Food and Drugs Act (Canada) and its regulations, in addition to the Cannabis Act and the Regulations. For many of these products, such as drugs, pre-market approval is required.

Drug Approval Process

Manufacturers of prescription drugs must receive authorization from Health Canada before prescription drugs may be sold. In order to obtain such authorization, a manufacturer must file a robust regulatory submission with evidence of safety, efficacy and quality of the proposed drug. As part of the approval process, Health Canada reviews the evidence submitted to ensure that the product complies with applicable safety, efficacy and quality requirements. Health Canada’s review of the evidence and a manufacturer’s response to Health Canada’s inquiries can take several years from the date that the manufacturer files its regulatory submission. A manufacturer is prohibited from marketing its product claiming to provide a health benefit, until Health Canada issues the authorization to the manufacturer for the product for the health benefit. There is no assurance that Health Canada will issue an authorization for a product. The typical regulatory process for prescription drug approval from pre-market to post-market in Canada, involves (1) pre-clinical studies, using for example, laboratory studies involving cell or tissue samples, or tests conducted on animals, to collect preliminary safety and efficacy data, (2) clinical trials on human subjects, which require authorization by Health Canada to collect further safety and efficacy data, (3) a drug submission with Health Canada, (4) drug submission review by Health Canada, (5) market authorization decision by Health Canada, and (6) post-market authorization public access to the drug product, subject to surveillance, inspection and investigation by Health Canada. In the United States, drug approval is regulated by the FDA and follows a similar process.

Import and Export Permits for Medical or Scientific Purposes

Pursuant to the Cannabis Act, import and export licences and permits will only be issued for medical or scientific purposes, or for industrial hemp. The Cannabis Regulations set out the process by which a licence holder may apply for an import or export permit for medical or scientific purposes. A permit must be obtained for each shipment of cannabis. An application for an import or export permit must contain specific information including the name and address of the holder, licence number and specifics of the particular shipment including the intended use of the cannabis and specific shipment details. The Cannabis Regulations contain reporting requirements in respect of the import and export of cannabis in reliance on a permit issued under the Cannabis Regulations.

Provincial and Territorial Regulatory Framework for Adult-Use Cannabis

Pursuant to the regulatory framework, each province and territory in Canada is also permitted to adopt its own laws governing the distribution, sale and consumption of adult-use cannabis and cannabis accessory products within the province or territory. As a result, provincial and territorial governments may choose to set lower maximum permitted quantities for individuals and higher age requirements. Currently, each of the Canadian provincial and territorial jurisdictions has established a minimum age of 19 years old for the consumption of adult-use cannabis, except for Québec and Alberta, where the minimum age is 18.

Retail-distribution models vary nationwide from one province and territory to another. All Canadian provinces and territories have implemented mechanisms for the distribution and sale of cannabis for adult-use purposes within their jurisdictions. Quebec, New Brunswick, Nova Scotia and Prince Edward Island have adopted government-run models for retail and distribution. Ontario, British Columbia, Alberta, Manitoba and Newfoundland have adopted hybrid models, with some aspects, including stores, distribution and online retail being government-run, while allowing for private retail. Saskatchewan has implemented a private retail system. Yukon, Northwest Territories and Nunavut have adopted a model that resembles their government-run liquor distribution model. As the laws continue to evolve, and the distribution models mature, there is no assurance that provincial and territorial legislation enacted for the purpose of regulating adult-use cannabis will continue to allow, or be conducive to, our business model. Differences in provincial and territorial regulatory frameworks could result in, among other things, increased compliance and supply costs.

Municipal and regional governments may also choose to impose additional requirements and regulations on the sale of adult-use cannabis, adding further uncertainty and risk to our business. Municipal by-laws may restrict the number of adult-use cannabis retail outlets that are permitted in a certain geographical area, or restrict the geographical locations wherein such retail outlets may be opened. See “Item 3D Risk Factors—Risks Related to Our Business and Our Industry—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.”

As of the date of this Annual Report, we believe we are in compliance in all material respects with the Cannabis Act and the Regulations, and all other applicable Canadian federal and provincial laws and regulatory requirements relating to cannabis, with the exception of obtaining security clearance from Health Canada for certain of our executive officers and directors, which we are

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working to obtain. 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. See “Item 3D Risk Factors—Risks Related to Our Business and Our Industry—Our future success is dependent on our ability to attract or retain key personnel.”

 

Regulatory Framework in the United Kingdom

CBD Regulation—Overview

Cannabis, cannabis resin, cannabinol and other cannabinol derivatives (among others) are listed as Class B controlled drugs under Schedule 2, of the Misuse of Drugs Act 1971, (the “MDA”), based on a harms assessment. They are also listed under Schedule 1 to the Misuse of Drugs Regulations 2001, the (“MDR”), together with other chemical constituents such as the cannabinoid THC (defined below). As such, it is unlawful to cultivate, possess, supply, produce, import or export these controlled drugs except under licence. The Hemp (Third Country Imports) Regulations 2002 also require, except in specified circumstances, that hemp from non-EU countries be imported under a licence and, in the case of hemp seeds other than for sowing, under an authorization.

CBD is one of the main chemical compounds found in the cannabis plant, together with THC. CBD, as an isolated substance (i.e containing no THC) is not a controlled drug under the MDA/MDR. Unlike CBD, THC is the main ‘psychoactive’ component of cannabis and is a controlled drug.

A CBD product containing THC (in any amount), or any other controlled cannabinoid under the regulations can not be practically prescribed, administered or supplied to the public unless it is an ‘exempt product’ or a cannabis based product for medicinal use in humans (“CBPM”). CBPMs are subject to further regulation and licencing given the medicinal purpose for which they are marketed and prescribed.

The U.K. Home Office (specifically, the Drugs & Firearms Licensing Unit (“DFLU”)) prescribes two separate licencing regimes relating to cannabis cultivation, according to whether the varieties are high THC (above 0.2% THC content) or low THC (below 0.2% THC content). A licence is required to cover both cultivation and possession.

The sale of CBD products (i.e the “finished products” following extraction and processing of CBD into products) is subject to additional regulations and licencing regimes – see below CBD Extraction for General Commercial Purposes and CBD Extraction for Medicinal Purposes for a more detailed discussion.

Low-THC Cultivation Licence (Industrial Hemp)

Cultivation of low-THC cannabis (known as industrial hemp) is permitted under licence in the United Kingdom. Under the MDA, where low-THC cannabis is grown for the commercial production of industrial hemp fiber or the pressing of seed for oil, only the non-controlled parts of the plant can be used, i.e., seeds and fibre/mature stalk. The controlled parts of the plant (i.e., the flowers and leaves, which produce higher concentrations of CBD) must be retted at the licensed location or otherwise lawfully disposed of after harvesting. There needs to be a defined commercial end use and the Home Office only issued licences for cultivation of plants from approved seed types with a THC content not exceeding 0.2%.

Prospective licensees must first register with the Home Office and submit an online application form known as a “MD 29 Application” which provides inter alia the following details: the field location numbers, hectarage details, farm map and seed type, THC content and confirmation of whether the respective seed is an EU-approved seed. Applicants must also undergo a check by the U.K. Disclosure and Barring Service (“DBS”) (formerly, the Criminal Records Bureau) to be eligible for a licence and may be subject to a compliance visit. The licence must be issued before a grower can commence cultivation. It may contain conditions and restrictions, such as where the crop may be grown, and is typically issued for a term of three growing seasons. 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.

High-THC Cultivation Licence

Cultivation of high-THC cannabis (where the THC content exceeds 0.2%) is also permitted under licence in the U.K. These licences may be issued by the Home Office to cultivate, produce and supply high THC for research purposes and to enable the lawful extraction of controlled cannabinoids.

 

Extraction of a higher concentration of CBD (which is an uncontrolled drug in its pure form) often requires use of the controlled parts of a cannabis plant (i.e., flowers and leaves). Where a proposal of this nature is made, it would be considered by the Home Office within the remit of their high-THC cultivation licensing policy.

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Controlled Drugs Licence

Companies wishing to possess, supply, produce/manufacture, import or export ‘controlled drugs’ can only lawfully do so under a Controlled Drugs Licence issued by the Home Office.

Applications for a controlled drug licence are submitted online and prospective licensees are advised that it can take up to 16 weeks for the Home Office to review and ensure that various security and record- keeping requirements have been met. Where an enhanced DBS check has been obtained within the last three years for all persons named on the application, such checks do not need to be repeated. The DFLU may also conduct site visits, where needed. The term of the licence is typically one year from the date of issuance and is not renewable.

CBD Extraction for General Commercial (Retail) Purposes

CBD products such as CBD oil are becoming increasingly prevalent in the U.K. retail market. Where a CBD product contains a controlled drug (in any quantity) such as THC, the product needs to satisfy the requirements for an ‘exempt product’ under the MDR to be lawfully available to the public.

In general, an exempt product is a product containing a controlled drug that is: (a) not designed to be administered to a human being or animal, (b) not packaged in such a way that it can be recovered by readily applicable means, and (c) does not contain more than 1 mg (per container) of the controlled drug. All three elements are required to be established, including significant testing by an independent and licensing U.K. company and the provision of comprehensive and independently verifiable research and information. Notably, the 0.2% THC threshold for the cultivation of industrial hemp does not apply to CBD finished products, Rather, only 1 mg of THC (per container) is permissible in any given product that is placed on the U.K. market.

CBD Extraction for Medicinal Purposes (Medical Cannabis)

CBPMs are preparations or products that are: (a) or contain cannabis or other cannabinol derivatives, (b) produced for medicinal use in humans, and (c) a medicinal product, substance or preparation for use as an ingredient in a medicinal product. A CBD preparation or product containing controlled cannabinoids (e.g., THC) which meets the three elements of this definition may be a CBPM.

Companies wishing to possess, supply and or import/export CBPMs will require a controlled drug licence in addition to a high-THC cannabis cultivation licence if they are involved in production/manufacturing, which are both issued by the Home Office, unless an exemption applies to that licensing requirement.

In addition, the regulation of CBPMs in the U.K. is undertaken by the Medicines and Healthcare Products Regulatory Agency (the “MHRA”). The MHRA is responsible for ensuring all medicines and medical devices in the U.K. are safe and appropriate in accordance with the Human Medicines Regulations 2012 (SI 2012/1916) (“HMR”). Under the HMR, CBPMs must be manufactured and assembled in accordance with the specifications of a doctor listed on the General Medical Council Specialist Register and must meet a ‘special’ clinical need of the individual patient.

The manufacturer or assembler of a CBPM must also hold a Manufacturer’s “Specials” Licence granted by the Licencing Authority (specifically, the UK Ministers designated under the HMR). The manufacturing and/or assembly site and its operations will be inspected for compliance with the European Union’s ‘good manufacturing practice’ and the conditions of the licence. These require that the manufacture or assembly is carried out under the supervision of appropriately qualified staff, including a named quality controller and production manager, who are acceptable to the Licensing Authority. Licence applications are submitted online to the MHRA and take approximately 90 business days to process.

 

CBD Sales and “Novel Food” Status

In the United Kingdom, the sale of CBD products falls under the regulatory purview of the FSA. The FSA, in turn, follows the guidance and regulations set by the European Union, specifically the European Food Standards Agency, the EFSA, and the European Commission (the “EC”), respectively.

In November 2015, the European Parliament and the Council of the European Union adopted a new regulation on novel food, Regulation (EU) 2015/2283 (the “Novel Food Regulation”), with the intent of making the novel food authorization process more efficient while ensuring high standards of food safety for consumers. The Novel Food Regulation came into force on January 1, 2018.

The Novel Food Regulation provides that a food is “novel” if it has not been used for human consumption to a significant degree within the European Union before May 15, 1997. The regulations further provide that a food stuff will be authorized only if it can be demonstrated that the product is safe, properly labeled so as to not mislead consumers and is not nutritionally disadvantageous.

47


On January 15, 2019, the EC updated the European Union’s Novel Foods Catalogue, specifically, the entries relating to cannabis sativa and cannabinoids, to include other cannabinoids extracts used in food and food supplements and hemp-derived products in food.

While the Novel Foods Catalogue is non-exhaustive and carries no legal effect, it is frequently updated and amended with input from Member States and is used as reference by authorities in EU countries to aid enforcement of the Novel Food Regulation.

A novel food can only be sold in the European Union once it has successfully gone through the authorization process (involving a safety risk assessment) and an implementing act is published authorizing the addition of the novel food to the Novel Foods Catalogue. This process can take up to 18 months from receipt of the initial application. As of the date of this Annual Report, there was one application pending to authorize CBD food supplements in the European Union for adults with a daily intake of up to 130 mg. This application was made by Cannabis Pharma s.r.o, a company from the Czech Republic and is based on publicly available safety and toxicology information and toxicity reviews. A final opinion from the EFSA was expected in March of 2019, but has not yet been provided. If approved, the EC must draft an implementing act authorizing the use of the product within seven months. Any other company that can meet the conditions of use stated in the authorization of the approved product would be able to market CBD food supplements in the European Union.

In March 2019, the Novel Foods Commission met in Brussels to discuss the EC’s classification of CBD as a “novel food”. Various industry groups presented at this meeting and lobbied for a reversal of the decision. As a result, the EFSA is reviewing its original decision to classify CBD as a novel food. A decision is expected “imminently” but there has been no further clarification on this timing. Neither the EFSA nor the FSA have released official guidance in this regard.

To date, the FSA has stated that it accepts the clarification from the European Union that CBD extracts are considered novel foods. In February 2020, the FSA introduced a regulatory framework for CBD, issuing a statement requiring suppliers of CBD-infused food products to submit a novel food authorization application by March 31, 2021, after which date any CBD products without a valid application submitted will not be permitted to stay on the market. See “Risk Factors—Risks Related to Our Business and Our Industry—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”.

It is expected that Brexit will not affect the novel foods status of CBD as under the United Kingdom’s proposed Withdrawal Act, the Novel Food Regulations will be adopted as U.K. law.

 

C.

Organizational structure.

Below, and attached as Exhibit 8.1 to this Annual Report, is the list of our significant subsidiaries as at December 31, 2019, each of which is directly or indirectly wholly-owned by Sundial unless otherwise indicated.

 

48


Subsidiaries

Jurisdiction of incorporation

Percentage ownership

Sprout Technologies Inc.

Alberta, Canada

100%

KamCan Products Inc.

British Columbia, Canada

100%

2011296 Alberta Inc.

Alberta, Canada

100%

Sundial Deutschland GmbH

Germany

100%

Sundial Portugal, Unipessoal LDA

Portugal

100%

Pathway Rx Inc.

Alberta, Canada

50%

2082033 Alberta Ltd.

Alberta, Canada

100%

SGI Managing Partner Inc.

Alberta, Canada

100%

SGI Partnership(1)

Alberta, Canada

100%

Sundial UK Limited

England and Wales

100%

Project Seed Topco

England and Wales

100%

Project Seed Bidco

England and Wales

100%

Bridge Farm Nurseries Limited

England and Wales

100%

Neame Lea Nursery Limited

England and Wales

100%

Neame Lea Marketing Limited

England and Wales

100%

Neame Lea Fresh Limited

England and Wales

100%

Zyon UK Flowers and Plants Limited

England and Wales

100%

 

(1)

Sundial. owns 99.99% of this entity and the remaining 0.01% is held by SGI Managing Partner Inc. which is wholly owned by Sundial.

 

D.

Property, plants and equipment.

Information regarding our material tangible fixed assets are as follows:

 

 

 

 

 

 

 

Olds,
Alberta

 

Rocky View,
Alberta

 

Merritt,
British Columbia

 

Bridge Farm,
United Kingdom

 

Format

Indoor Modular

Indoor

Indoor Modular

Greenhouses

Primary Purpose

Cultivation and
Extraction

Research and
Development

Cultivation and
Extraction

Cultivation and
Extraction

Capital expenditures to December 31, 2019

$180 million

$8 million

$10 million

$65 million

Capital expenditures remaining (approximately)

$5 - $10 million

$15 - 30 million(6)

$64 million

 

 

 

 

 

 

Facility Size at December 31, 2019 (Sq. Ft.)

428,000

31,000

1,596,000(3)

Additional Facility Size (Sq. Ft.)

20,000(1)

35,000(2)

1,991,000(4)

 

 

 

 

 

Projected Facility Size (Sq. Ft.)

448,000

31,000

35,000

3,587,000

Current Maximum Annual Capacity in Canada(5)

75 million grams

 

 

 

Current Utilized Annual Capacity in Canada(5)

37 million grams

 

 

 

 

(1)

People and processing building (20,000 sq. ft.).

(2)

Subject to construction and licensing.

(3)

Bridge Farm has received a cultivation licence to grow hemp from the U.K. government at its Homestead Facility and currently cultivates hemp in a portion of this facility. We plan to convert a further portion of the Homestead Facility and certain other of Bridge Farm’s existing and planned facilities to hemp and high-THC cannabis cultivation operations subject to the terms of the Term Debt Facility and subject to increases in market demand and availability of appropriate financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity—Term Debt Facility”.

(4)

Subject to construction and licensing of Clay Lake Phase 2 (807,000 sq. ft.) and Phase 3 (1,184,000 sq. ft.). Construction of Clay Lake Phase 3 has been temporarily deferred pending availability of appropriate financing.

(5)

Maximum capacity is based on utilization of all licensed 114 flowering grow rooms. The Company is currently utilizing 55 flowering grow rooms.  

49


(6)

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. Construction of the Merritt facility has been temporarily deferred pending increases in market demand and availability of appropriate financing.

 

Bridge Farm Facilities

The Clay Lake Facility is located on our property in Spalding, Lincolnshire, United Kingdom. Clay Lake Phase 1 is an 893,000 square foot facility that was completed in March 2019.

Prior to our acquisition of Bridge Farm, it 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. Following the acquisition of Bridge Farm on July 2, 2019, we continued with the development and construction of Clay Lake Phase 2 through the remainder of 2019 and into the first quarter of 2020. Phase 2 is expected to be completed in the second quarter of 2020. Construction of Clay Lake Phase 3 has been temporarily deferred pending availability of appropriate financing.

The Homestead Facility, located in Spalding, Lincolnshire, United Kingdom, is approximately 218,000 square feet with approximately 110,000 square feet of high-quality and efficient growing sites. We lease the land on which the Homestead Facility is located from Bridge Farm Holdings Ltd, for a term of 30 years from October 8, 2017. Bridge Farm holds a licence to cultivate hemp at the Homestead Facility and cultivates hemp in a portion of this facility.

The Horseshoe Facility, also located in Spalding, Lincolnshire, United Kingdom, is a 484,000 square foot facility with approximately 286,000 square feet of grow space that was completed in March 2016 and provided proof of concept for the energy-efficient, automated and low-cost production model of ornamental plants. We lease the land on which the Horseshoe Facility is located from Bridge Farm Holdings Ltd, for a term of 30 years from October 8, 2017.

 

Asset Optimization Initiatives

The Company has temporarily suspended construction of its Merritt facility in British Columbia and is evaluating all options to maximize the value of its asset base. In January 2020, the Company entered into an agreement to sell its Kamloops, British Columbia, property for $2.1 million. The transaction closed on March 27, 2020. Sundial plans to limit capital expenditures to essential expenditures required to complete its Olds facility and Clay Lake Phase 2 facility, subject to available capital resources and liquidity. The Company is currently conducting a strategic review of Bridge Farm, including, but not limited to, a sale of all of its assets.

Item 4A. Unresolved Staff Comments

None.

 

Item 5. Operating and Financial Review and Prospects

 

 

A.

Operating Results

Refer to the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1 filed herewith for a discussion of our financial condition and results of operations as of and for the year ended December 31, 2019 as compared to the fiscal year ended December 31, 2018. A discussion of liquidity and capital resources as of and for the year ended December 31, 2018 as compared to the fiscal year ended February 28, 2018 can be found in the section entitled “Management’s Discussion and Analysis of Financial Results of Operations—Results of Operations—Fiscal Year Ended December 31, 2018 Compared to Fiscal Year Ended February 28, 2018” in our prospectus filed with the SEC on August 1, 2019.

 

B.

Liquidity and Capital Resources

For a discussion of liquidity and capital resources as of and for the year ended December 31, 2019 as compared to December 31, 2018, refer to the sections entitled “Cash Flow Summary” and “Liquidity and Capital Resources” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. A discussion of liquidity and capital resources as of and for the year ended December 31, 2018 as compared to the fiscal year ended February 28, 2018 can be found in the section entitled “Management’s Discussion and Analysis of Financial Results of Operations—Cash Flows for the Fiscal Years ended December 31, 2018 and February 28, 2018” in our prospectus filed with the SEC on August 1, 2019.

50


 

C.

Research and Development, Patents and Licenses, etc.

See “Item 4.B –Business Overview—Our Research” above.

 

D.

Trend Information

See “Item 4.B –Business Overview—Our Industry” and the section entitled “Strategy & Outlook” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

 

E.

Off-Balance Sheet Arrangements

None.

 

F.

Tabular Disclosure of Contractual Obligations

 

See the section entitled “Contractual Commitments and Contingencies” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Item 6. Directors, Senior Management and Employees

 

A.

Directors and senior management.

The following table sets forth certain information regarding our directors and executive officers as of the date of this Annual Report. The terms of office of each of our directors expires on the date of the next annual meeting of our shareholders. The business address for our directors and executive officers is c/o Sundial Growers Inc., #200, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3.

 

 

 

 

Name, Province or State and

Country of Residence

 

Age

 

Position/Title

 

Zachary George(2)(3)

Connecticut, USA

41

Chief Executive Officer and Director

 

 

 

James Keough

Alberta, Canada

55

Chief Financial Officer

 

 

 

Andrew Stordeur

Alberta, Canada

40

President and Chief Operating Officer

 

 

 

Ryan Hellard

British Columbia, Canada

31

Chief Marketing and Product Officer

 

 

 

Charlotte Collett

Alberta, Canada

44

Chief People Officer

 

 

 

Louise Motala

Lincolnshire, UK

45

Managing Director UK

 

 

 

Greg Mills(1)(2)(3)

Ontario, Canada

57

Non-Executive Chairman and Director

 

 

 

Edward Hellard

British Columbia, Canada

64

Director

 

 

 

Gregory Turnbull(1)

Alberta, Canada

64

Director

 

 

 

Elizabeth Cannon

Alberta, Canada

57

Director

 

 

 

Bryan Pinney(1)(2)(3)

Alberta, Canada

66

Director

 

 

(1)

Independent director for the purposes of National Instrument 58-101 – Disclosure of Corporate Governance Practices (the “NI 58-101”), of the Canadian Securities Administrators and the Nasdaq Stock Market Rules (the “Nasdaq Rules”). See “—Corporate Governance—Director Independence”.

 

(2)

Subject to an undertaking to resign if unable to obtain security clearance as required by the Cannabis Regulations and Health Canada.

51


 

(3)

Awaiting security clearance as required by the Cannabis Regulations and Health Canada and subject to termination if unable to obtain the required security clearance pursuant to his or her employment agreement.

 

Biographical Information Regarding Our Directors and Executive Officers

Zachary George – Chief Executive Officer and Director

Mr. George joined Sundial as director in November 2019 and was appointed Chief Executive Officer in January 2020. Mr. George has spent more than 15 years evaluating catalyst-based investment opportunities across the capital structure of North American companies with a focus on real assets. Mr. George has worked in a management capacity, including as a chief executive officer, with numerous corporate boards to turn around operations, affect corporate action and implement governance policies in order to maximize shareholder value.

James Keough – Chief Financial Officer

Mr. Keough joined Sundial as Chief Financial Officer in May 2018. Mr. Keough began his career with KPMG and Ernst & Young in Canada and Europe. Prior to joining Sundial, he was a sole practitioner as a Chartered Accountant (“CA”), for two and a half years. Prior to that role, he served for 20 years as Chief Financial Officer of a diversified private company with operations in energy, real estate and hospitality. Mr. Keough holds a Bachelor of Commerce degree from the University of Calgary. He holds chartered public accountant (“CPA”), CA, and CPA (USA) designations.

Andrew Stordeur – President and Chief Operating Officer

Mr. Stordeur joined the Company as Chief Commercial Officer in March 2018 and became President – Canada in May 2019 and President and Chief Operating Officer in January 2020. From August 2011 to March 2018, Mr. Stordeur held increasingly senior sales-related positions, including Chief Sales and Customer Officer, at Molson Coors, and has also spent time at Mars Canada. Mr. Stordeur completed a Bachelor of Arts degree (sociology) at the University of Calgary and a Master of Business Administration degree at Queen’s University.  

Ryan Hellard – Chief Marketing and Product Officer

Mr. Hellard joined the Company as the Chief Marketing and Product Officer in March 2018. From 2012 and until joining Sundial, he held increasingly senior roles, including as President, at AppColony, an agency that develops marketing strategies and digital solutions for Canadian companies. Mr. Hellard completed a Bachelor of Commerce degree at the University of Calgary. Mr. Hellard is the son of one of our directors, Mr. Edward Hellard.

Charlotte Collett – Chief People Officer

Ms. Collett joined the Company as Chief People Officer in June 2018. Most recently, she was Principal Consultant at her company, Charlotte Collett Consulting. Prior to that, she was VP Human Resources at Tervita Corporation. Ms. Collett completed a Business Commerce degree at the University of Calgary. She is a Chartered Professional in Human Resources (“CPHR”), and is a standing member of the CPHR of Alberta.

Louise Motala – Managing Director UK

Ms. Motala was Commercial Director of Bridge Farm when acquired and was subsequently promoted to Managing Director UK in October 2019. Most recently, Ms. Motala was Category Manager at IPL (part of Walmart).  Prior to that, she was Category Buying Manager for three major retailers: Morrisons, Waitrose and Asda, and was Business Unit Manager at World Flowers.  Ms. Motala completed a BSc (Hons) (1st Class) degree in Business Management from South Bank University, London.

Greg Mills – Non-Executive Chairman and Director

Mr. Mills joined our board of directors in June 2019. Mr. Mills has 34 years of experience in capital markets, including 20 years with RBC Dominion Securities Inc. Mr. Mills has extensive leadership experience, having served as managing director of RBC Capital Markets’ Global Equities division and on RBC Capital Markets’ Spending and Global Risk committees. Mr. Mills is currently a director of RISE Life Sciences Corp. and was previously a director of RBC USA Holdco Corporation. Mr. Mills holds a Bachelor of Science degree in geology from the University of Windsor.

52


Edward Hellard – Director

Mr. Hellard joined our board of directors in January 2018 and served as Executive Chairman from January 2018 to January 2020. Mr. Hellard has founded various companies. In 1996, he founded Critical Mass, a digital marketing agency based in Calgary, Alberta. From 2009 to 2010, Mr. Hellard was Managing Partner and co-owner of the Calgary Stampeders Football Club. In 2012, he founded AppColony, a mobile software creator, where he continues to work today as Managing Partner. Mr. Hellard holds a bachelor’s degree in education from the University of Calgary. Mr. Hellard is the father of our Chief Marketing and Product Officer.

Gregory Turnbull – Director

Mr. Turnbull joined our board of directors in October 2018. Mr. Turnbull is a partner in the Calgary office of McCarthy Tétrault LLP. He has worked as a lawyer since 1980, having held a variety of roles with firms including Gowlings LLP, Donahue LLP and MacKimmie Matthews. In addition to being a director of the Company, Mr. Turnbull is a director of Storm Resources, Target Capital, and 420 Investments. Throughout his career, Mr. Turnbull has served as an officer or director of many other public and private companies. He is a member of the Law Society of Alberta, the Canadian Bar Association and the Calgary Bar Association. He holds a Bachelor of Arts degree (with honors) from Queen’s University and a Bachelor of Law degree from the University of Toronto. He has also previously been chair of the Calgary Zoo.

Elizabeth Cannon – Director

Ms. Cannon joined our board of directors in July 2019. Since January 2019, Ms. Cannon has been President Emerita and Professor of Geomatics Engineering at the University of Calgary. From July 2010 to December 2018, Ms. Cannon was President and Vice Chancellor of the University of Calgary. Ms. Cannon serves on the board of Mancal Corporation. She holds a Bachelor of Applied Science degree in mathematics from Acadia University, as well as Bachelor of Science, Master of Science and Doctor of Philosophy degrees in geomatics engineering from the University of Calgary.

Bryan D. Pinney – Director

Mr. Pinney joined our board of directors in December 2019. Bryan was a partner with Deloitte between 2002 and 2015. He served as Calgary Managing Partner from 2002 through 2007, as National Managing Partner of Audit & Assurance from 2007 to 2010, and Vice-Chair until 2015. Prior to joining Deloitte, Bryan was a partner with Andersen LLP and served as Calgary Managing Partner from 1991 through May of 2002. Bryan is currently a Board Member with TransAlta Corporation, serving on their Audit and HR Compensation Committees. He is also the lead Board Director for North American Energy Partners Inc. and a Board Director on a Hong Kong listed oil and gas company, Persta Resources Inc. Previously, Bryan served as Chair of the Board of Governors of Mount Royal University and on numerous other non-profit boards. He is also a director on one private company. He is a Fellow of the Institute of Chartered Accountants, a Chartered Business Valuator and is a graduate of the Ivey Business School at the University of Western Ontario with an honours degree in Business Administration. He is also a graduate of the Canadian Institute of Corporate Directors.

B.

Compensation.

 

Overview

In order to succeed in the highly competitive and evolving market in which we operate, we need to attract, retain and motivate a highly talented executive team. Our executive compensation program is designed to achieve the following objectives:

 

provide compensation opportunities in order to attract and retain talented, high-performing and experienced executive officers, whose knowledge, skills and performance are critical to our success;

 

 

motivate our executive team to achieve our strategic business and financial objectives;

 

 

align the interests of our executive officers with those of our shareholders by tying a meaningful portion of compensation directly to the long-term value and growth of our business; and

 

 

provide incentives that encourage appropriate levels of risk-taking by our executive team.

We currently offer our executive officers, including our NEOs’ cash compensation in the form of base salary and annual short-term and long-term incentives that will reward participants for the achievement of pre-established corporate, team and individual goals and

53


objectives. From time to time, our board of directors may also grant discretionary cash bonuses to our executives to reward them for exemplary performance. Long-term annual incentives may consist of stock options, performance share units (“PSUs”) and/or restricted share units (“RSUs”).

Our compensation philosophy is to motivate our employees to participate directly in the value that their efforts create for shareholders because our employees are also shareholders. We believe that equity-based compensation awards motivate our executive officers to achieve our strategic business and financial objectives, and also align their interests with the long-term interests of our shareholders.

We continue to evaluate our compensation philosophy and compensation program on an ongoing basis to ensure that we are providing competitive compensation opportunities for our executive team as a publicly-traded company in this evolving industry. As part of the annual compensation review process, we expect to be guided by the philosophy and objectives outlined above, as well as other factors which may become relevant.

Base Salary

Base salary is provided as a fixed source of compensation for our executive officers. Base salaries are determined on an individual basis, taking into account the scope of the executive officer’s role, responsibilities, expertise and prior experience. Base salaries for our executive officers, including our NEOs, are expected to be reviewed annually by the board of directors and may be adjusted based on the executive officer’s success in meeting or exceeding individual objectives, as well as to maintain market competitiveness. In addition, base salaries can be adjusted by the board of directors throughout the year to reflect promotions or other changes in the scope or breadth of an executive officer’s role or responsibilities.

Short-Term Annual Cash Incentive

Our short-term annual cash incentive plan is designed to reward the achievement of pre-determined corporate, team and personal goals and objectives over the ensuing year, with the intention of aligning compensation with corporate strategies. Annual incentive targets under the plan may be set as a percentage of the relevant executive officer’s base salary and payout of the annual cash incentive (if any) are linked to the achievement of corporate, team and personal performance. In order to further increase alignment with shareholders, executives and employees may also have the ability to elect to receive short-term cash incentive payments in the form of RSUs.

Long-Term Equity Incentives

Stock Option Plan and Restricted and Performance Share Unit Plan

The Sundial Growers Inc. Stock Option Plan and Sundial Growers Inc. Restricted and Performance Share Unit Plan each provides eligible participants with compensation opportunities that will support the achievement of the Company’s performance objectives, align the interests of eligible participants with those of the Company’s shareholders, and attract, retain and motivate eligible participants critical to the long term success of the Company and its subsidiaries.

 

Benefit Plans

We provide our executive officers, including our NEOs, with life, medical, dental and vision insurance programs on the same basis as other employees, or an allowance to purchase individual benefit and insurance coverage. We offer these benefits consistent with local market practice.

Perquisites

Other than living expense allowances provided for in the employment agreements for our former Chief Executive Officer and former Executive Chairman, we do not offer significant perquisites as part of our compensation program.

Executive Share Ownership Guidelines

Our executive share ownership guidelines are intended to further align the interests of our executive officers with those of our shareholders. The ownership guidelines establish minimum equity ownership levels for executive officers based on a multiple of their base salary and their level of seniority. Executive officers are expected to meet the prescribed ownership levels within five years of the later of our initial offering and the date of their appointment to an executive position.

54


The following table shows the expected ownership guideline for the executive officers:

 

 

 

Level

 

Base Salary
Multiple

 

Chief Executive Officer

3x

Other Executive Officers

2x

 

Summary Compensation Table

Our NEOs for the fiscal year ended December 31, 2019 were our former Chief Executive Officer, Torsten Kuenzlen, Chief Financial Officer, James Keough, former Executive Chairman, Edward Hellard, President and Chief Operating Officer, Andrew Stordeur, and Chief Marketing and Product Officer Ryan Hellard. For the fiscal year ended December 31, 2019, the aggregate compensation and benefits in kind accrued or paid to our then serving executive officers for services in all capacities was $19,282,528, and the aggregate compensation paid to each of our NEOs is set forth below.

 

 

 

 

 

 

 

 

 

Name and Principal Position

 

Year

 

Salary(1)

 

Share-
Based
Awards

 

Option-
Based
Awards(2)

 

Annual
Incentive
Plans(3)

 

All Other
Compensation(4)

 

Total
Compensation

 

Zachary George(10)

Chief Executive Officer and Director

2019

 

 

 

 

 

 

 

 

Torsten Kuenzlen(5)

Former Chief Executive Officer

2019

$358,125

$6,517,736

$882,768(6)

$7,758,629

 

 

 

 

 

 

 

 

James Keough

Chief Financial Officer

2019

$191,667

$1,455,856

$50,000

$1,697,523

 

 

 

 

 

 

 

 

Edward Hellard(5)

Former Executive Chairman

2019

$272,977(7)

$5,501,658

$364,575

$218,425(8)

$6,357,635

 

 

 

 

 

 

 

 

Andrew Stordeur

President and Chief Operating Officer

2019

$254,167

$1,256,129

$446,143(9)

$1,956,438

 

 

 

 

 

 

 

 

Ryan Hellard

Chief Marketing and Product Officer

2019

$206,250

$1,256,052

$50,000

$—

$1,512,302

 

Notes:

 

(1)

Represents the base salary paid in Fiscal 2019.

 

(2)

Reflects the grant date fair value of warrants that were granted in Fiscal 2019 (determined in accordance with the Black-Scholes valuation model, assuming a risk-free rate of 1.875% and an expected volatility of 106%).

 

(3)

Amounts reflect annual target bonus for each NEO. For Mr. Hellard, this represent 250,000 EUR at an exchange rate of 1.4583.

 

(4)

None of our NEOs, other than Messrs. Kuenzlen and Hellard, are entitled to perquisites or other personal benefits which, in aggregate, are worth over $50,000 or over 10% of their base salary.

 

(5)

On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors.

 

(6)

Represents a monthly living allowance, taxable vehicle benefit and a performance bonus for 2019.

 

(7)

Mr. Hellard commenced employment as the Company’s Executive Chairman on April 1, 2019. Mr. Hellard’s compensation is earned and paid to him in Euros. The amount included in the summary compensation table is in Canadian dollars, which was calculated using the Bank of Canada’s closing exchange rate on December 31, 2019 (€1 to $1.4583).

 

(8)

Represents a monthly living allowance and reimbursement for an annual medical examination.

 

(9)

Represents a signing bonus.

 

(10)

Mr. George joined Sundial as director in November 2019 and did not earn any executive compensation in 2019 other than amounts paid as a director, which amounted to $34,551 Please see “Item 6B—Compensation” for information regarding directors compensation. Mr. George was appointed Chief Executive Officer in January 2020.

The table below shows the incremental payments that would be made to our NEOs under the terms of their employment agreements upon the occurrence of certain events.

 

 

55


Name and Principal
Position

 

Event

 

Severance

 

Option-
Based
Awards(1)

 

Other
Payments

 

Total

 

Torsten Kuenzlen

Termination without cause

$377,500

$1,049,600

$11,325

$1,438,425

Former Chief Executive Officer(2)

 

 

 

 

 

 

James Keough

Termination without cause

$500,000

$7,500

$507,500

Chief Financial Officer

Termination and change of control

$500,000

$7,500

$507,500

 

 

 

 

 

 

Edward Hellard

Termination without cause

$377,450

$11,324

$388,774

Former Executive Chairman(2)

 

 

 

 

 

 

Andrew Stordeur

President and Chief Operating Officer

Termination without cause

$600,000

$9,000

$609,000

Termination and change of control

$600,000

$9,000

$609,000

 

 

 

 

 

 

Ryan Hellard

Termination without cause

$500,000

$7,500

$507,500

Chief Marketing and Product Officer

Termination and change of control

$500,000

$7,500

$507,500

 

Notes:

 

(1)

The value of unexercised in-the-money option-based awards is calculated based on the December 31, 2019 price of USD$3.01 (CAD$3.91) per common share.

 

(2)

On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. On January 29, 2020, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors. Negotiations regarding actual settlement payment pursuant to Messrs. Kuenzlen and Hellard’s resignation with their respective roles are ongoing and may be higher or lower than as disclosed in this table. The receipt of which will be conditions on each of Messrs. Kuenzlen and Hellard’s execution of a release of claims in favor of the Company.

 

Outstanding Share-Based Awards and Option-Based Awards

The following table sets out information on the outstanding warrants and other option-based awards held by each of our NEOs as at December 31, 2019. None of our NEOs hold any share-based awards.

 

Name

 

Number of
common shares
underlying
unexercised
option-based
awards

 

Exercise
price

 

Expiration date

 

Value of
unexercised in-the-
money option-
based awards(1)

 

Torsten Kuenzlen

Former Chief Executive Officer

144,000

 

160,000

1,349,333

160,000

160,000

720,000

160,000

160,000

160,000

$0.63

 

0.63

0.63

0.63

0.63

6.25

0.63

0.63

0.63

February 1, 2023

 

February 1, 2024

August 1, 2024

January 20, 2025

January 20, 2026

January 11, 2027

January 20, 2027

January 20, 2028

January 20, 2029

$472,320

 

524,800

4,425,812

524,800

524,800

524,800

524,800

524,800

 

 

 

 

 

James Keough

Chief Financial Officer

80,000

 

108,000

160,000

$2.97

 

2.97

6.25

August 14, 2023

 

August 1, 2024

June 15, 2027

$75,200

 

101,520

 

 

 

 

 

Edward Hellard

Former Executive Chairman

480,000

 

480,000

480,000

240,000

240,000

240,000

$0.63

 

0.63

0.63

6.25

6.25

6.25

September 1, 2023

 

September 1, 2024

September 1, 2025

January 11, 2025

January 11, 2026

January 11, 2027

$1,574,400

 

1,574,400

1,574,400

 

 

 

 

 

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Name

 

Number of
common shares
underlying
unexercised
option-based
awards

 

Exercise
price

 

Expiration date

 

Value of
unexercised in-the-
money option-
based awards(1)

 

Andrew Stordeur

President and Chief Operating Officer

38,400

 

38,400

115,200

160,000

192,000

192,000

$0.63

 

0.63

0.63

6.25

0.63

3.13

March 6, 2023

 

March 6, 2024

August 1, 2024

January 11, 2027

5 years from vest date

5 years from vest date

$125,952

 

125,952

377,856

629,760

149,760

 

 

 

 

 

Ryan Hellard

Chief Marketing and Product Officer

38,400

 

38,400

115,200

160,000

192,000

192,000

$0.63

 

0.63

0.63

6.25

0.63

3.13

March 1, 2023

 

March 1, 2024

August 1, 2024

January 11, 2027

5 years from vest date

5 years from vest date

$125,952

 

125,952

377,856

629,760

149,760

 

Notes:

 

(1)

The value of unexercised in-the-money option-based awards is calculated based on the December 31, 2019 closing price of US$3.01 ($3.91) per common share.

 

 Incentive Plan Awards – Value Expected to be Vested or Earned During the Year

The following table sets out, for each of our NEOs, the value of the option-based awards that vested in accordance with their terms as of December 31, 2019. As of December 31, 2019, none of our NEOs hold any share-based awards.

 

 

 

Name and Principal Position

 

Option-Based Awards
– Value Vested During 2019(1)

 

Torsten Kuenzlen

Former Chief Executive Officer

$6,525,012

 

 

James Keough

Chief Financial Officer

$101,520

 

 

Edward Hellard

Former Executive Chairman

$3,148,800

 

 

Andrew Stordeur

President and Chief Operating Officer

$503,808

 

 

Ryan Hellard

Chief Marketing and Product Officer

$503,808

 

Notes:

 

(1)

The value of unexercised in-the-money option-based awards is calculated based on the December 31, 2019 closing price of US$3.01 ($3.91) per common share.

 

 

 

 

 

 

 

 

 

 Management Agreements

Employment Agreements

The Company has entered into employment agreements with each of our NEOs. The material terms of the employment agreements are discussed below.

 

Zachary George, Chief Executive Officer

The Company may terminate Mr. George at any time, without cause, and the Company will be required to provide him with his accrued but unpaid annual base salary, vacation pay and business expenses up to the termination date (the “Accrued Obligations”),

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plus (i) termination notice of one (1) year (which may be provided as pay in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) any unvested stock options or restricted share units will immediately vest on the termination date. The receipt of the separation package is conditioned on Mr. George’s execution of a release of claims.

Pursuant to Mr. George’s employment agreement, if a change of control occurs, and his employment with the Company is subsequently or contemporaneously terminated by the Company, Mr. George will be entitled to receive, within thirty (30) days after such termination, a lump sum payment equal to (i) the Accrued Obligations, (ii) one time his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits.

Mr. George’s employment agreement also contains a customary confidentiality covenant and certain covenants that will continue to apply following the termination of his employment, including non-competition and non-solicitation provisions which are in effect during Mr. George’s employment and for the twelve (12) months following the termination of his employment (collectively, the “Restrictive Covenants”).

James Keough, Chief Financial Officer

The Company may terminate Mr. Keough at any time without cause and the Company will be required to provide him with his accrued but unpaid annual base salary, pay for accrued and unused vacation and business expenses up to the cessation date (the “Accrued Obligations”), plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), and (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to Mr. Keough will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Keough’s execution of a release of claims.

Pursuant to Mr. Keough’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Keough will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) one times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits.

Mr. Keough’s employment agreement also contains the Restrictive Covenants.

Andrew Stordeur, President and Chief Operating Officer, former President – Canada

The Company may terminate Mr. Stordeur at any time without cause and the Company will be required to provide him with his Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) all of his outstanding performance warrants will immediately vest on the cessation date. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to Mr. Stordeur will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Stordeur’s execution of a release of claims.

Pursuant to Mr. Stordeur’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Stordeur will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) two times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits, and all of his outstanding performance warrants will immediately vest on the cessation date.

Mr. Stordeur’s employment agreement also contains the Restrictive Covenants, except that if Mr. Kuenzlen ceases to be employed by the Company at the same time or within the preceding 30 days of Mr. Stordeur’s cessation of employment, then Mr. Stordeur will not be subject to a non-competition restriction.

Ryan Hellard, Chief Marketing and Product Officer

 

The Company may terminate Mr. Hellard at any time without cause and the Company will be required to provide him with his Accrued Obligations, plus (i) termination notice of two years (which may be provided as pay in the form of base salary in lieu of notice), (ii) a lump sum payment in lieu of benefits equivalent to 3% of his annual base salary, and (iii) all of his outstanding performance warrants will immediately vest on the cessation date. Additionally, subject to the terms of the applicable equity plan and of any applicable agreement, any issued but unvested stock options, simple warrants and performance warrants previously granted to

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Mr. Hellard will immediately vest on the cessation date. The receipt of the separation package is conditioned on Mr. Hellard’s execution of a release of claims.

 

Pursuant to Mr. Hellard’s employment agreement, if a change of control occurs and his employment is subsequently or contemporaneously terminated by the Company or its successor, Mr. Hellard will be entitled to receive, within 30 days after such termination, a sum of money equal to (i) the Accrued Obligations, (ii) two times his annual base salary, and (iii) 3% of his annual base salary in lieu of benefits, and all of his outstanding performance warrants will immediately vest on the cessation date.

Edward Hellard, Former Executive Chairman

Mr. Hellard’s employment agreement is for a three-year fixed term, commencing as of April 1, 2019 (subject to extension or earlier termination). On January 29, 2020, Mr. Hellard stepped down from his role as Executive Chairman and continues to serve on the Board of Directors. Negotiations regarding settlement payments pursuant to Mr. Hellard’s resignation as Executive Chairman are ongoing and the receipt of his separation package is conditioned on Mr. Helland’s execution of a release of claims.

Mr. Hellard’s employment agreement also contains the Restrictive Covenants.

Torsten Kuenzlen, Former Chief Executive Officer

Mr. Kuenzlen’s employment agreement was for a three-year fixed term commencing as of April 1, 2019 (subject to extension or earlier termination). On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. Negotiations regarding settlement payments pursuant to Mr. Kuenzlen’s resignation are ongoing and the receipt of his separation package is conditioned on Mr. Kuenzlen’s execution of a release of claims.

Mr. Kuenzlen’s employment agreement also contains the Restrictive Covenants.

Director Compensation

Our board of directors, on the recommendation of our compensation committee, is responsible for reviewing and approving any changes to the directors’ compensation arrangements.

In consideration for serving on our board of directors, each director, other than directors who are employees of the Company (the “Excluded Directors”), is paid an annual cash retainer of $75,000. In addition, for serving during the Company’s first year as a publicly traded company, Messrs Turnbull and Mills and Ms. Cannon each received $175,000 payable in deferred share units at the IPO price in equal installments on September 30, 2019, December 31, 2019, March 31, 2020 and June 30, 2020. Mr, Tamkee received $43,750 in deferred share units at the IPO price prior to his resignation from the board effective December 14, 2019. Upon joining the board on November 27, 2019, Mr. George became entitled to receive $350,000 during the time he serves as Chair of the Operating and Capital Committee and 250,000 deferred share units in equal installments on December 1, 2019, March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022. Upon joining the board on December 16, 2019, Mr. Pinney is entitled to $175,000 in deferred share units payable in equal installments on March 31, 2020, June 30, 2020, September 30, 2020 and December 31, 2020. The number of deferred share units issuable are determined by the installment payment divided by the fair market value of our common shares at each installment date.

If a change of control occurs, all of these equity grants (except those granted to Mr. Mills and Mr. Turnbull) will immediately vest.

In addition, to reflect the additional workload required in respect of special projects performed, Mr. George was entitled to receive 500,000 warrants (subsequently amended to an entitlement to 500,000 stock options in accordance with the Company Stock Option Plan, in equal installments on , March 31, 2020, June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021, March 31, 2022 and June 30, 2022. Mr. George’s compensation as a director (if unvested) was terminated when he became Chief Executive Officer on January 29, 2020.

In addition, to reflect the additional workload and responsibilities of his position as Non-Executive Chairman of our board of directors, Greg Mills is entitled to receive $600,000 during our first year as a publicly traded company payable in deferred share units at the IPO price comprised of quarterly installments of $150,000 which were paid on September 30, 2019 and December 31, 2019 with the remaining installments payable on March 31, 2020 and June 30, 2020. In addition, Mr. Mills was issued 720,000 warrants on July 1, 2019 to purchase our common shares, with an exercise price of $6.25 per warrant. Under the terms of Mr. Mills’ director services agreement, those warrants vest in three equal annual installments in the event Mr. Mills assumes the position of Executive Chairman and will expire five years from the vesting date; however, if Mr. Mills does not assume the position of Executive Chairman

59


by December 31, 2021, then all of such warrants will expire. In addition, if Mr. Mills were to assume the position of Executive Chairman, he would receive an annual salary of $500,000 payable quarterly in equal installments. Mr. Mills’ director services agreement contemplates that he may assume the position of Executive Chairman as early as July 2020. Although, our former Executive Chairman, Mr. Hellard, resigned from his position on January 29, 2020, our board of directors has not agreed to nominate Mr. Mills, nor has Mr. Mills agreed to serve in such position as of the date of this Annual Report.

Furthermore, on July 1, 2019, Mr. Mills was issued warrants to purchase 80,000 of our common shares, with an exercise price of $7.50 per warrant, which vest if, during the term of Mr. Mills’ director services agreement, the equity market capitalization value of the Company (as calculated in accordance with the agreement) exceeds $5.5 billion. These warrants expire three years following the vesting date.

If a change of control occurs, Mr. Mills will be entitled to receive any unpaid portion of the annual cash retainer for the calendar year in which the change of control occurs and any unpaid portion of the $600,000 fee payable in deferred share units referred to above. In addition, if a change of control occurs, all outstanding warrants held by Mr. Mills and Mr. Turnbull will immediately vest.

All directors will be reimbursed for their reasonable out-of-pocket expenses incurred while serving as directors.

 

The aggregate of compensation and benefits in kind, accrued or paid to our directors in the year ended December 31, 2019 for services in all capacities was $187,532 (2018 - $230,580).

Director Share Ownership Guidelines

We have director share ownership guidelines for directors (other than Excluded Directors) to further align the interests of such directors with those of our shareholders. The ownership guidelines have established minimum equity ownership levels for each of our directors, other than Excluded Directors, based on a multiple of their annual retainer. Such directors are expected to meet the prescribed ownership levels within five years of the later of (i) the completion of the IPO and (ii) the date of their appointment to the board of directors. Common shares and other equity-based awards will be included in determining an individual’s equity ownership value. The expected ownership guideline for these directors is 3x their annual retainer.

 

C.

Board practices.

Composition of our Board of Directors

Under our amended articles of incorporation, our board of directors consists of a minimum of one and a maximum of 15 directors as determined from time to time by the directors. Our board of directors is comprised of six directors, and under the ABCA, as a reporting issuer, we must have no fewer than three directors. Under the ABCA, a director may be removed with or without cause by a resolution passed by a majority of the votes cast by shareholders present in person or by proxy at a meeting and who are entitled to vote. The directors are appointed at the annual general meeting of shareholders and the term of office for each of the directors expires at the time of our next annual shareholders meeting. Our articles of incorporation  provide that, between annual general meetings of our shareholders, the directors may appoint one or more additional directors, but the number of additional directors may not at any time exceed one-third of the number of directors who held office at the expiration of the last meeting of our shareholders. Under the ABCA, at least one quarter of our directors must be resident Canadians as defined in the ABCA.

Majority Voting Policy

We have a majority voting policy to the effect that a nominee for election as a director of the Company who does not receive a greater number of votes “for” than votes “withheld” with respect to the election of directors by shareholders will be expected to offer to tender his or her resignation to the chairman of our board of directors promptly following the meeting of shareholders at which the director was elected. The nominating and corporate governance committee will consider such offer and make a recommendation to our board of directors about whether to accept it or not. Our board of directors will promptly accept the resignation unless it determines, in consultation with the nominating and corporate governance committee, that there are exceptional circumstances that should delay the acceptance of the resignation or justify rejecting it. Our board of directors will make its decision and announce it in a press release within 90 days following the meeting of shareholders. A director who tenders a resignation pursuant to our majority voting policy will not participate in any meeting of our board of directors or the nominating and corporate governance committee at which the resignation is considered. Our majority voting policy will not apply for contested meetings at which the number of directors nominated for election is greater than the number of seats available on the board.

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Director Term Limits and Other Mechanisms of Board Renewal

Our board of directors has not adopted director term limits or other automatic mechanisms of board renewal. Rather than adopting formal term limits, mandatory age-related retirement policies and other mechanisms of board renewal, the nominating and corporate governance committee of our board of directors is developing a skills and competencies matrix for our board of directors as a whole and for individual directors. The nominating and corporate governance committee will also conduct a process for the assessment of our board of directors, each committee and each director regarding his or her effectiveness and contribution, and will report evaluation results to our board of directors on a regular basis.

Director Independence

Under the Nasdaq Rules, independent directors must comprise a majority of a listed company’s board of directors. For purposes of the Nasdaq Rules, an independent director means a person other than an executive officer or employee of the company who, in the opinion of the board of directors, has no relationship with the company that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Under National Instrument 58-101 – Disclosure of Corporate Governance Practices (“NI 58-101”), a director is considered to be independent if he or she is independent within the meaning of Section 1.4 of National Instrument 52-110—Audit Committees (“NI 52-110”). Section 1.4 of NI 52-110 generally provides that a director is independent if he or she has no direct or indirect relationship with the issuer which could, in the view of the issuer’s board of directors, be reasonably expected to interfere with the exercise of the director’s independent judgment.

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, [our board of directors has determined that as of December 31, 2019, Messrs. Mills, Turnbull and Pinney, and Ms. Cannon, representing four of the six members of our board of directors, are “independent” as that term is defined under the Nasdaq Rules and NI 58-101. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director. As of December 31, 2019, Messrs. Hellard and Kuenzlen were not independent by reason of the fact that Mr. Hellard was our Executive Chairman and Mr. Kuenzlen was our Chief Executive Officer. On January 28, 2020, Mr. Kuenzlen resigned as the Company’s Chief Executive officer and stepped down as a director. Mr.  Hellard stepped down from his role as Executive Chairman on January 29, 2020 and continues to serve on the Board of Directors.

Certain members of our board of directors are also members of the boards of other public companies. See “—Biographical Information Regarding Our Directors and Executive Officers”. Our board of directors has not adopted a director interlock policy, but is keeping informed of other public directorships held by its members.

Mandate of the Board of Directors

Our board of directors is responsible for supervising the management of our business and affairs, including providing guidance and strategic oversight to management. Our board adopted a formal mandate that includes the following:

 

appointing our Chief Executive Officer;

 

developing the corporate goals and objectives that our Chief Executive Officer is responsible for meeting and reviewing the performance of our Chief Executive Officer against such corporate goals and objectives;

 

taking steps to satisfy itself as to the integrity of our Chief Executive Officer and other executive officers and that our Chief Executive Officer and other executive officers create a culture of integrity throughout the organization;

 

reviewing and approving our code of conduct and reviewing and monitoring compliance with the code of conduct and our enterprise risk management processes;

 

reviewing and approving management’s strategic and business plans and our financial objectives, plans and actions, including significant capital allocations and expenditures; and

 

reviewing and approving material transactions not in the ordinary course of business.

Meetings of Independent Directors

Our board of directors holds regularly-scheduled quarterly meetings as well as ad hoc meetings from time to time. The independent members of our board of directors also meet, as required, without the non-independent directors and members of management before or after each regularly scheduled board meeting.

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A director who has a material interest in a matter before our board of directors or any committee on which he or she serves is required to disclose such interest as soon as the director becomes aware of it. In situations where a director has a material interest in a matter to be considered by our board of directors or any committee on which he or she serves, such director may be required to absent himself or herself from the meeting while discussions and voting with respect to the matter are taking place. Directors will also be required to comply with the relevant provisions of the ABCA regarding conflicts of interest.

 

Position Descriptions

Our board of directors has written terms of reference for the chairman which sets out his or her key responsibilities, including duties relating to determining the frequency, dates and locations of meetings and setting board of directors meeting agendas, chairing board of directors and shareholder meetings and carrying out any other or special assignments or any functions as may be requested by our board of directors or management, as appropriate.

Our board of directors has written terms of reference for each of the committee chairs which sets out each of the committee chair’s key responsibilities, including duties relating to determining the frequency, dates and locations of meetings and setting committee meeting agendas, chairing committee meetings, reporting to our board of directors and carrying out any other special assignments or any functions as may be requested by our board of directors.

In addition, our board of directors, in conjunction with our Chief Executive Officer, has developed and implemented a written position description for the role of our Chief Executive Officer.

Orientation and Continuing Education

We have implemented an orientation program for new directors under which a new director will meet separately with the chairman of our board of directors, members of the senior executive team and the secretary.

The nominating and corporate governance committee is responsible for coordinating orientation and continuing director development programs relating to the committee’s mandate. The chairman of our board of directors is responsible for overseeing director continuing education designed to maintain or enhance the skills and abilities of our directors and to ensure that their knowledge and understanding of our business remains current.

Code of Conduct

We have adopted a code of conduct applicable to all of our directors, officers and employees, including our Chief Executive Officer and Chief Financial Officer, which is a “code of ethics” as defined in section 406(c) of SOX and which is a “code” under NI 58-101. The code of conduct sets out our fundamental values and standards of behavior that are expected from our directors, officers and employees with respect to all aspects of our business. The objective of the code of conduct is to provide guidelines for maintaining our integrity, reputation and honesty with a goal of honoring others’ trust in us at all times as well as to deter wrongdoing and promote (i) honest and ethical behavior and fair dealing by our directors, officers, employees, consultants and contractors, (ii) full, fair, accurate, timely and understandable disclosure in filings with the SEC and other public communications, (iii) compliance with applicable governmental rules and regulations, and (iv) accountability for adherence to the code of conduct and prompt reporting of its violations.

The full text of the code of conduct has been posted on our website at www.sundialcannabis.com. The information on or accessible through our website is not part of and is not incorporated by reference into this Annual Report, and the inclusion of our website address in this Annual Report is only for reference. If we make any amendment to the code of conduct or grant any waiver therefrom, whether explicit or implicit, to a director or executive officer, we will disclose the nature of such amendment or waiver on our website to the extent required by, and in accordance with, the rules and regulations of the SEC and the Canadian securities regulatory authorities.

 

Monitoring Compliance with the Code of Conduct

Our nominating and corporate governance committee is responsible for reviewing and evaluating the code of conduct at least annually and recommends any necessary or appropriate changes to our board of directors for consideration. The nominating and corporate governance committee assists our board of directors with the monitoring of compliance with the code of conduct, and is responsible for considering any waivers therefrom (other than waivers applicable to members of the nominating and corporate governance committee, which are considered by the audit committee, or waivers applicable to our directors or executive officers, which are subject to review by our board of directors as a whole).

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Requirement for Directors and Officers to Disclose Interest in a Contract or Transaction

In accordance with the ABCA, each director and officer must disclose the nature and extent of any interest that he or she has in a material contract or material transaction whether made or proposed with us, if the director or officer is a party to the contract or transaction, is a director or an officer or an individual acting in a similar capacity of a party to the contract or transaction, or has a material interest in a party to the contract or transaction. Subject to certain limited exceptions under the ABCA, no director may vote on a resolution to approve a material contract or material transaction which is subject to such disclosure requirement.

Benefits upon Termination of Employment

The service contracts with our directors do not provide for any benefits upon termination of employment, other than a “tail” directors and officers insurance policy.

Complaint Reporting

In order to foster a climate of openness and honesty in which any concern or complaint pertaining to a suspected violation of the law, our code of conduct or any of our policies, or any unethical or questionable act or behavior, our code of conduct requires that our employees promptly report the violation or suspected violation. In order to ensure that violations or suspected violations can be reported without fear of retaliation, harassment or an adverse employment consequence, we have adopted a whistleblowing policy which contains procedures that are aimed to facilitate confidential, anonymous submissions of complaints by our directors, officers, employees and others.

Diversity

We believe that having a diverse board of directors can offer a breadth and depth of perspectives that enhance the board’s performance. We value diversity of abilities, experience, perspective, education, gender, background, race and national origin. Recommendations concerning director nominees are based on merit and past performance, as well as expected contribution to the board’s performance and, accordingly, diversity is taken into consideration. As of December 31, 2019, we had one female director, which represents 16% of our board.

We similarly believe that having a diverse and inclusive organization overall is beneficial to our success, and we are committed to diversity and inclusion at all levels of our organization to ensure that we attract, retain and promote the brightest and most talented individuals. We have recruited and selected senior management candidates that represent a diversity of business understanding, personal attributes, abilities and experience. Currently, one out of eight of our executive officers is a woman.

We do not currently have a formal policy for the representation of women on the board of directors or senior management of the company. We already take gender and other diversity representation into consideration as part of our overall recruitment and selection process. We have not adopted targets for gender or other diversity representation, in part due to the need to consider a balance of criteria for each individual appointment. We do not believe that quotas or strict rules set out in a formal policy would result in improved identification or selection of the best candidates. Quotas based on specific criteria would limit our ability to ensure that the overall composition of the board of directors and senior management meets the needs of our organization and our shareholders.

The composition of the board of directors is shaped by the selection criteria established by the nominating and corporate governance committee. This is achieved through developing an evergreen list of potential candidates for anticipated board vacancies who fit the committee’s list of evolving selection criteria, ensuring that diversity considerations are taken into account in senior management, monitoring the level of female representation on the board and in senior management positions, continuing to broaden recruiting efforts to attract and interview qualified female candidates, and committing to retention and training to ensure that our most talented employees are promoted from within our organization, all as part of our overall recruitment and selection process to fill board or senior management positions as the need arises.

Committees of the Board of Directors

We have an audit committee, a compensation committee, a nominating and corporate governance committee, and an operations and capital committee with each committee having a written charter.

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Audit Committee

Our audit committee is comprised of Greg Mills and Elizabeth Cannon, and chaired by Bryan Pinney. Our board of directors has determined that each of Greg Mills, Elizabeth Cannon and Bryan Pinney is financially literate and meets the independence requirements for directors, including the heightened independence standards for members of the audit committee under Rule 10A-3 under the Exchange Act and NI 52-110. Our board of directors has determined that Bryan Pinney is “financially sophisticated” within the meaning of the Nasdaq Rules, “financially literate” within the meaning of NI 52-110, and a “financial expert” as defined by Rule 10A-3 under the Exchange Act. For a description of the education and experience of each member of the audit committee, see “—Biographical Information Regarding Our Directors and Executive Officers”.

Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the audit committee, consistent with the rules of the Nasdaq, the SEC and NI 52-110 and our audit committee reviews the charter annually. The principal purpose of our audit committee is to oversee the accounting and financial reporting processes and audits of the Company and to assist our board of directors in discharging its oversight of:

the quality and integrity of our financial statements and related information;

the independence, qualifications, appointment and performance of our external auditor;

our disclosure controls and procedures, internal control over financial reporting and management’s responsibility for assessing and reporting on the effectiveness of such controls;

our compliance with applicable legal and regulatory requirements; and

our enterprise risk management processes.

Our audit committee is directly responsible for the appointment, retention and compensation of external auditors and for considering their independence and any potential conflicts of interest. Our audit committee has access to all of our books, records, facilities and personnel and is able to request any information about us as it may deem appropriate. It also has the authority in its sole discretion and at our expense, to retain and set the compensation of outside legal, accounting or other advisors as necessary to assist in the performance of its duties and responsibilities.

Our audit committee also reviews our policies and procedures for reviewing and approving or ratifying related-party transactions, and will be responsible for reviewing and approving or ratifying all related-party transactions.

Compensation Committee

Our compensation committee is comprised of Elizabeth Cannon and Bryan Pinney, and is chaired by Greg Mills. Under SEC and the Nasdaq Rules, there are heightened independence standards for members of the compensation committee. Our board of directors has determined that each of Elizabeth Cannon, Bryan Pinney and Greg Mills meet this heightened standard and are also independent for purposes of NI 58-101. For a description of the background and experience of each member of our compensation committee, see “—Biographical Information Regarding Our Directors and Executive Officers”.

Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the compensation committee consistent with the rules of the Nasdaq, the SEC and the guidance of the Canadian securities regulatory authorities and our compensation committee will review the charter annually. The compensation committee’s purpose is to assist the board in its oversight of executive compensation, management development and succession, director compensation and executive compensation disclosure. The principal responsibilities and duties of the compensation committee include:

 

reviewing at least annually our executive compensation plans;

 

 

in the absence of the Chief Executive Officer, evaluating at least once a year our Chief Executive Officer’s performance in light of the goals and objectives established by our board of directors and, based on such evaluation, providing recommendations to our board of directors regarding the Chief Executive Officer’s annual compensation;

 

reviewing on an annual basis the evaluation process and compensation structure for our executive officers and, in consultation with our Chief Executive Officer, reviewing the performance of the other executive officers in order to make recommendations to our board of directors with respect to the compensation for such officers; and

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reviewing and, if appropriate, recommending to our board of directors the approval of any adoption, amendment and termination of our incentive and equity-based incentive compensation plans (and the aggregate number of shares to be reserved for issuance thereunder), and overseeing their administration and discharging any duties imposed on the compensation committee by any of those plans.

Further particulars of the process by which compensation for our executive officers is and will be determined are provided under the heading “Executive Compensation”.

Our compensation committee also has the authority in its sole discretion and at our expense, to appoint, compensate and oversee any compensation consultant, legal counsel or other adviser, upon taking into consideration various factors which could impact such consultant’s, counsel’s or adviser’s independence.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee is comprised of Bryan Pinney and Elizabeth Cannon, and chaired by Gregory Turnbull, each of whom is independent for purposes of NI 58-101 and the Nasdaq Rules.

Our board of directors has establish a written charter setting forth the purpose, composition, authority and responsibility of our nominating and corporate governance committee. The nominating and corporate governance committee’s purpose is to assist our board of directors in:

 

identifying individuals qualified to become members of our board of directors;

 

selecting, or recommending that our board of directors select, director nominees for the next annual meeting of shareholders and determining the composition of our board of directors and its committees;

 

developing and overseeing a process to assess our board of directors, the chairman of the board of directors, the committees of the board of directors, the chairs of the committees, individual directors and management; and

 

developing and implementing our corporate governance guidelines.

In identifying new candidates for our board of directors, the nominating and corporate governance committee considers what competencies and skills our board of directors, as a whole, should possess and assess what competencies and skills each existing director possesses, considering our board of directors as a group, and the personality and other qualities of each director, as these may ultimately determine the boardroom dynamic.

It is the responsibility of the nominating and corporate governance committee to regularly evaluate the overall efficiency of our board of directors and our chairman and all board committees and their chairs. As part of its mandate, the nominating and corporate governance committee conducts the process for the assessment of our board of directors, each committee and each director regarding his, her or its effectiveness and contribution, and report evaluation results to our board of directors on a regular basis..

Operations and Capital Committee

Our operations and capital committee is comprised of Greg Turnbull and Bryan Pinney, and is chaired by Zachary George. Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the operations and capital committee which the operations and capital committee will review annually. The operations and capital committee’s purpose is to assist the board in its oversight of the Company’s financial strategy and capital structure. The principal responsibilities and duties of the operations and capital committee include:

 

optimizing the Company’s debt to equity ratio and assessing current, and future, requirements for additional capital;

 

approving the Company’s negotiations with current and future secured lenders, unsecured lenders and other creditors and other financial advisors, including investment banks;

 

reviewing the Company’s financial efficiencies including ongoing review of its cost structure and cost controls; and

 

reviewing and, if appropriate, recommending to the board of directors the adoption or implementation of any of its recommendations.

Our operations and capital committee will also have the authority in its sole discretion and at our expense, to retain persons having special expertise and/or obtain independent professional advice to assist in fulfilling its responsibilities.

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Mergers and Acquisitions Committee

Our mergers and acquisitions committee is comprised of Greg Mills and Zachary George, and is chaired by Edward Hellard. Our board of directors has established a written charter setting forth the purpose, composition, authority and responsibility of the mergers and acquisitions committee which the mergers and acquisitions committee will review annually. The mergers and acquisitions committee’s purpose is to assist the board in its oversight of the Company’s strategy regarding mergers, acquisitions, investments and dispositions. The principal responsibilities and duties of the mergers and acquisition committee include:

 

 

approving the Company’s proposed mergers, acquisitions, investments and dispositions of material assets or a material portion of any business (a “Material Transaction”), including assessing risks to the Company in connection with Material Transactions, and approving and/or making recommendations to the board to approve Material Transactions, as appropriate;

 

assisting the Company with post-closing analysis of Material Transactions; and

 

reviewing and, if appropriate, making recommendations to the board regarding the adoption or implementation of any of its recommendations.

Our mergers and acquisitions committee also has the authority in its sole discretion and at our expense, to retain persons having special expertise and/or obtain independent professional advice to assist in fulfilling its responsibilities.

 

D.

Employees.

As of December 31, 2019, we employed 1,064 total employees, 868 of whom were full-time employees and 15 were engaged contractors located in Canada, comprised of 747 employees in facility operations and logistics roles, 93 employees in general, administrative and support roles, 28 employees in sales and marketing roles, and 196 employees located in the United Kingdom and employed by Bridge Farm. In 2020, the Company undertook headcount reductions as part of its business optimization initiatives.

We consider relations with our employees to be good and have never experienced a work stoppage. None of our employees are represented by a labor union or subject to a collective bargaining agreement.

 

 

E.

Share ownership.

 

See “Item 7A Major Shareholders and Related Party Transactions—Major Shareholders".

 

See “Item 6B Compensation” for information regarding option-based awards.

Item 7. Major Shareholders and Related Party Transactions

 

A.

Major shareholders.

The following table sets forth information relating to the beneficial ownership of our shares as of March 25, 2020, by:

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our outstanding shares;

each of our current directors;

each of our current executive officers; and

all the foregoing directors and executive officers as a group.

Beneficial ownership is determined in accordance with SEC rules. The information is not necessarily indicative of beneficial ownership for any other purpose. In general, under these rules a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares voting power or investment power with respect to such security. In addition, the rules include common shares issuable pursuant to the exercise of stock options, warrants or other convertible securities that are either immediately exercisable or exercisable on or before May 24, 2020, which is 60 days after March 25, 2020. These shares are deemed to be outstanding and beneficially

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owned by the person holding those options, warrants or other convertible securities for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

The percentage of common shares beneficially owned is based on 107,351,145 common shares outstanding as of March 25, 2020. The number and percentage of common shares beneficially owned do not include common shares that may be purchased pursuant to the directed share program. The address for each of our directors and executive officers listed below is c/o Sundial Growers Inc., #200, 919 – 11 Avenue SW, Calgary, Alberta, Canada T2R 1P3.

 

 

 

 

 

Common Shares
Beneficially Owned

 

Name of beneficial owner

Number

 

Percent

 

5% Shareholders(1)

 

 

ETF Managers Group LLC(2)

5,394,795

5.03%

 

 

 

Directors and Executive Officers

 

 

Zachary George

*

*

James Keough

*

*

Andrew Stordeur

*

*

Ryan Hellard(3)

1,094,560

1.02%

Charlotte Collett

*

*

Louise Motala

*

*

Greg Mills

*

*

Edward Hellard(4)

25,213,332

23.49%

Gregory Turnbull(5)

*

*

Elizabeth Cannon

*

*

Bryan Pinney

All current directors and executive officers as a group(6)

29,913,126

27.86%

 

*Represents beneficial ownership of less than one percent.

(1)Certain of our directors and executive officers are also 5% shareholders, as disclosed in the above table. No 5% shareholder has voting rights different from those of other shareholders.

(2)As reported on Schedule 13G filed by ETF Managers Group LLC on February 27, 2020, ETF Managers Group LLC beneficially owned 5,394,795 shares.

(3)On a fully-diluted basis (as defined below), Mr. Ryan Hellard beneficially holds common shares representing 0.84% of the total voting power of our common shares.

(4)Includes: (i) 800,000 shares purchased from Shelley Unser on October 31, 2017; (ii) 800,000 shares purchased from Shelley Unser on March 31, 2018; (iii) 5,600,000 shares purchased from Stanley Swiatek, in three transactions: 2,400,000 shares on October 31, 2017, 800,000 shares on January 5, 2018 and 2,400,000 shares on March 31, 2018; (iv) 7,149,035 shares issued in 2018 in connection with the Investment and Royalty Agreement; (v) 50,963 shares issued in July 2019 in consideration for advancing the remaining funds available to be advanced under the Investment and Royalty Agreement; and (vi) 3,680,000 shares and 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) issued in connection with the termination of the Investment and Royalty Agreement. See the section entitled “Results of Operations—Liquidity and Capital Resources—Other Significant Transactions—Investment and Royalty Agreement” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. In July 2019, Mr. Hellard transferred all of his Convertible Notes to his spouse and to Mr. Ryan Hellard and, therefore, no longer beneficially owns any Convertible Notes, or shares issuable on conversion of such notes. See the section entitled “Selected Annual Information—Debt—Convertible Notes” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. On a fully-diluted basis (as defined below), Mr. Edward Hellard beneficially holds common shares representing 19.37% of the total voting power of our common shares.

(5)Includes shares held in trust by GMP Securities LP for Mr. Turnbull.

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(6) Fully-diluted basis for purposes of this table means total number of shares outstanding as of December 31, 2019 as adjusted to include all issued and outstanding common shares and common shares issuable pursuant to outstanding warrants and share based compensation awards.

As of March 25, 2020, we had 1,130 record holders of our common shares, with 1,079 record holders in Canada, representing 95.49% of our outstanding common shares, 41 record holders in the United States, representing 3.63% of our outstanding common shares and ten record holders in other foreign jurisdictions, representing 0.88% of our outstanding common shares.

 

B.

Related party transactions.

In addition to the compensation arrangements discussed under “Executive Compensation”, the following is a description of the material terms of those transactions with related parties to which we are party and which we are required to disclose pursuant to the disclosure rules of the SEC.

Agreements with Directors and Officers

Indemnity Agreements

We have entered into indemnity agreements with each of our directors and officers undertaking to indemnify each of them to the fullest extent permitted by law from and against all liabilities, costs, charges and expenses incurred as a result of actions in the exercise of their duties as a director or officer.

 

Please see “Item 6B Compensation” for information regarding details on employment agreements and agreements with directors.

Registration Rights Agreement

Upon completion of the IPO, we entered into a registration rights agreement (the “Registration Rights Agreement”), with Edward Hellard (the “Principal Shareholder”), pursuant to which the Principal Shareholder was granted certain registration rights. We provided the Principal Shareholder with the right to require the Company to use reasonable commercial efforts to file one or more prospectuses or registration statements with applicable securities regulatory authorities qualifying common shares held by the Principal Shareholder or certain permitted affiliates (a “Demand Distribution”). The Principal Shareholder is entitled to request not more than three Demand Distributions per calendar year, and each Demand Distribution must be comprised of such number of common shares that would reasonably be expected to result in gross proceeds of at least $25 million. The Company may also distribute common shares in connection with a Demand Distribution provided that if the Demand Distribution involves an underwriting and the lead underwriter reasonably determines that the aggregate number of common shares to be included in such Demand Distribution should be limited for certain prescribed reasons, the common shares to be included in the Demand Distribution will be first allocated to the Principal Shareholder and certain permitted affiliates. In addition, the Registration Rights Agreement provides the Principal Shareholder with the right (the “Piggy-Back Registration Right”), to require the Company to include common shares held by the Principal Shareholder and/or certain permitted affiliates in any future offerings undertaken by the Company by way of prospectus or registration statement that it may file with applicable securities regulatory authorities, a (“Piggy-Back Distribution”). The Company is required to use reasonable commercial efforts to cause to be included in the Piggy-Back Distribution all of the common shares that the Principal Shareholder requests to be sold, provided that if the Piggy-Back Distribution involves an underwriting and the lead underwriter reasonably determines that the aggregate number of common shares to be included in such Piggy-Back Distribution should be limited for certain prescribed reasons, the common shares to be included in the Piggy-Back Distribution will be first allocated to the Company.

The registration rights described above expires at such time that the Principal Shareholder holds less than 10% of the outstanding common shares. All expenses in respect of a Demand Distribution and a Piggy-Back Distribution will be borne by the Company, except that any underwriting fee on the sale of any common shares by the Principal Shareholder or certain permitted affiliates will be borne by the Principal Shareholder.

As a result of the transfer undertaking in respect of common shares that was adopted following the completion of our IPO pursuant to a plan of arrangement, the demand and Piggy-Back Registration Rights granted pursuant to the Registration Rights Agreement are limited by the restrictions on transfer imposed by the transfer undertaking, unless a waiver of the transfer undertaking is obtained.

 

Equity Awards

 

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We describe our equity awards under “Item 6B Compensation— Long-Term Equity Incentives”.

 

Interest of Management and Others in Material Transactions

On January 15, 2018, we entered into a credit agreement with 2082033 Alberta Ltd., controlled by our Executive Chairman, and subsequently amended and restated this agreement on August 16, 2018, as the Investment and Royalty Agreement. In the fiscal year ended December 31, 2018, a total of $10.9 million had been invested under the Investment and Royalty Agreement in consideration for the issuance of 7,149,035 of our 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 addition, 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. Upon completion of our IPO, the purchase was completed resulting in a loss on a financial obligation of $59.6 million based on our IPO price of US$13.00 per share. The cash payment of $9.5 million was made on September 19, 2019. See the section titled “Other Significant Transactions – Investment and Royalty Agreement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1.

Additionally, in the fiscal year ended December 31, 2018, we entered into an agreement with 2119694 Alberta Inc., a company controlled by Stanley Swiatek, who resigned as director in connection with the execution of the agreement, to repurchase a total of 9,815,701 common shares, at a weighted average price of $1.69 per common share, for total consideration of $16.5 million, $6.9 million of which was paid by granting an unsecured, subordinated promissory note accruing interest at a rate of 1% per month until repayment. As at March 31, 2019, $14,000 in interest had been accrued on the promissory note, and a balance, including accrued interest, of $6.9 million remained outstanding. The full balance outstanding was repaid in June 2019. See the section titled “Debt—Promissory Note” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations attached to this Annual Report as Exhibit 15.1.

We had entered into a professional services agreement, dated May 8, 2017, with AppColony Inc., a company controlled by our former Executive Chairman and in which our Chief Marketing and Product Officer is a shareholder, for marketing, brand research, development and promotional services. The agreement provided for an initial term of two years, with specific services to be performed and amounts to be charged in respect of such services to be agreed between the parties from time to time pursuant to one or more statements of work. The initial term of this agreement had expired and on July 8, 2019, we have entered into a new professional services agreement with AppColony Inc. for certain information technology project and development services to be agreed between the parties from time to time pursuant to one or more statements of work, for a total monthly retainer of $0.3 million. The term of this agreement is two years. We paid AppColony Inc. $3.1 million during the year ended December 31, 2019, and owed a balance of $0.3 million at December 31, 2019 for services related to this agreement. In the fiscal year ended December 31, 2018, we also paid $2.3 million to AppColony Inc., and owed a balance of $0.3 million relating to services under this agreement as of December 31, 2018.

In the fiscal year ended December 31, 2018, we paid $0.2 million for research and development services and for access and license of certain strains of cannabis for research purposes, with a balance of $19,031 owing as at December 31, 2018, to PlantBiosis Ltd. and Inplanta Biotechnology Inc., in both of which one of our non-executive employees, Dr. Igor Kovalchuk, maintains influence. During the year ended December 31, 2019, we paid these companies $334,476 and owed $19,031 balance for their services.

In the fiscal year ended December 31, 2018, two of our directors, Lee Tamkee and Gregory Turnbull (through G.B.T. Holdings Ltd.), three of our executive officers, Edward Hellard, Geoff Thompson (through Boardwalk Management Consulting Ltd.) and Andrew Stordeur, as well as one of our non-executive employees, Kristine Dow, subscribed to our offering of Convertible Notes, in the aggregate amount of $7.0 million, representing approximately 24% of the proceeds of the offering, and received $137,870 in interest thereon, as well as commissions totaling $318,440, during the same period. See the section titled “Debt—Convertible Notes” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” attached to this Annual Report as Exhibit 15.1. All of the foregoing individuals or entities (or their transferees) participated in lockup agreements and, as a result, received additional fractional warrants.

On April 1, 2019, we entered into an employment agreement with our former Vice President, Processing, in connection with which we have also agreed to purchase certain equipment for THC and CBD extraction from the employee in consideration for $900,000 payable, at the employee’s option, in monthly installments of $100,000 beginning with July 2019, or in our shares, at a price per share equivalent to 90% of the fair market value of one share following the closing of the IPO.

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In May 2019, one of our directors, Greg Mills, subscribed to our offering of Senior Convertible Notes, in the aggregate amount of $100,000 of the total $92.3 million raised in the offering. See the section titled “Debt—Senior Convertible Notes” in  “Management’s Discussion and Analysis of Financial Condition and Results of Operations attached to this Annual Report as Exhibit 15.1.

We lease the land on which Bridge Farm’s Homestead Facility and Horseshoe Facility are located from an entity owned by family members of our former Chief Operating Officer—Europe, at an annual rent of £132,000 and £468,000, respectively. See “Item 4D Property, plant and equipment—Bridge Farm Facilities”.

Except as set out above or described elsewhere in this Annual Report, there are no material interests, direct or indirect, of any of our directors or executive officers, any shareholder that beneficially owns, or controls or directs (directly or indirectly), more than 10% of any class or series of our outstanding voting securities, or any associate or affiliate of any of the foregoing persons, in any transaction within the preceding three fiscal years that has materially affected or is reasonably expected to materially affect us or any of our subsidiaries.

Indebtedness of Directors, Executive Officers and Employees

Except as set out below or described elsewhere in this Annual Report, as of the date of this Annual Report, none of our directors, executive officers, employees, former directors, former executive officers or former employees or any of our subsidiaries, and none of their respective associates, is indebted to us or any of our subsidiaries or another entity whose indebtedness is the subject of a guarantee, support agreement, letter of credit or other similar agreement or understanding provided by us or any of our subsidiaries, except, as the case may be, for routine indebtedness as defined under applicable securities legislation.

Aggregate Indebtedness

 

 

 

 

(in thousands)

 

 

Purpose

 

To us or our
Subsidiaries

 

To Another Entity

 

Share purchases

Other

$800

We have entered into separate shareholder loan agreements to advance funds to our non-executive employees, Frank Luke Fallwell and Gregg Wigeland. These loans bear interest ranging from 0.0% to 1.5% per annum and are secured by the employees’ holdings of shares or warrants, as applicable, in the Company. They are repayable in full upon the employees’ departure, a change of control of the Company, sale of the Company or conclusion of the applicable term of the loan (which ranges from on demand to three years). As at December 31, 2019, $200,000 had been advanced under these loan agreements. We have also entered into a loan agreement to advance funds to a non-executive employee, Jamie Cox. The loan of $90,000 to Jamie Cox had been repaid in the first quarter of 2019.

Overall, as at December 31, 2019, we were owed $0.2 million from related parties and owed $1.0 million to related parties, including employees, directors and corporations related to these individuals.

 

Indebtedness of Directors and Executive Officers under Securities Purchase and Other Programs

 

We had entered into shareholder loan agreements with our Former Chief Executive Officer, Torsten Kuenzlen, on February 15, 2018 and with our President and Chief Operating Officer, Andrew Stordeur, on April 6, 2018. Mr. Stordeur was entitled to a loan facility of up to $510,000 and Mr. Kuenzlen was entitled to a loan facility of up to $200,000 per year. Each of the loans bore interest at a rate of 2.5% per annum and was secured against the borrowers’ shareholdings in the Company. The loans were repayable in full upon the officers’ departure, a change of control of the Company or sale of the Company. $245,000 had been advanced to Mr. Stordeur, and $400,000 has been advanced to Mr. Kuenzlen. Prior to June 30, 2019, these loans were settled in full and were no longer outstanding.

For a description of certain other related party transactions, see note 20 to our audited consolidated financial statements for the fiscal periods ended December 31, 2019 and 2018.

Directed Share Program

As part of our IPO completed in August, 2019, the underwriters had reserved for sale, at the public offering price, up to 5% of our common shares being offered in the offering to certain individuals, including certain of our officers, directors and employees, as part of a directed share program. Certain of our officers, directors and employees participated in this program and acquired shares thereunder.

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C.

Interests of experts and counsel.

Not applicable.

Item 8. Financial Information

 

A.

Consolidated Statements and Other Financial Information.

The Company’s Annual Financial Statements are included beginning on page F-1 of this Annual Report.

Legal Proceedings

Securities Class Actions

The Company and certain of our current and former officers and directors, as well as the underwriters of our IPO, were named as defendants in several putative shareholder class action lawsuits filed between September 9, 2019 and November 1, 2019. The cases have been consolidated in two separate actions depending on the court in which they were first filed, one in the Supreme Court of New York, New York County, captioned In re Sundial Growers Inc. Securities Litigation Index No. 655178/2019, and the other in the United States District Court for the Southern District of New York, captioned In re Sundial Growers Inc. Securities Litigation, Master Case No. 1:19-cv-08913-ALC.

The complaints in each of the two consolidated actions asserts claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. They generally allege that the Company made material misstatements and omissions in the prospectus and registration statement in connection with the Company’s IPO. In this regard, the complaints allege that the offering documents did not disclose systemic quality control issues at the Company and the return or rejection of cannabis and termination of the supply agreement by one of the Company’s customers.

We can provide no assurance as to the outcome of these proceedings or any other litigation matter in which we are a party. In particular, securities class action lawsuits are typically costly to defend, and divert the attention of management and other resources from operations and, accordingly, even if resolved in our favor, could have a material adverse effect on our business, financial condition, results of operations and liquidity and may force us to reduce or cease operations or seek relief under the applicable bankruptcy or insolvency laws.

LP Supply Agreements

We have several supply agreements or arrangements with other licensed cannabis producers (“LP Supply Agreements”), a certain number of which provide obligations for us to deliver bulk cannabis for resale by such other producer under its own brand.

We have entered into a settlement agreement with another licensed cannabis producer in connection with our non-delivery of cannabis under an LP 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 LP Supply Agreement will be terminated.

Although we do not have a supply agreement with the province of Quebec, we do have a licence 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, which is based in Quebec, alleging breach of an LP 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.

Other Proceedings

Our former Vice President, Processing, has sued us for $630,000 in respect of unpaid consideration for certain equipment we have purchased from him, unpaid wages and wrongful termination. We believe we have meritorious defenses to this claim and intend to vigorously defend it, but we can provide no assurance as to the outcome of this proceeding. We have recorded a reserve in the amount of $300,000 in respect of this matter.

Potential Litigation Proceedings

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Such proceedings, certain of which have been threatened against us, could include commercial litigation related to breach of contract claims brought by our customers, suppliers and contractors, as well as litigation related to termination of certain of our employees. Furthermore, in addition to the securities class actions described above, we have also received threats of litigation from certain holders of our Senior Convertible Notes. The outcome of any litigation is inherently uncertain.

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Although we believe we have meritorious defenses against all currently threatened proceedings and intend to vigorously defend all claims if they are brought, unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and results of operations.

 

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.

 

B.

Significant Changes.

Changes to executive team and board of directors

In January, 2020, Sundial announced the following changes to its executive team and board of directors;

 

Zach George, a recently appointed member of Sundial’s board of directors, was appointed as Chief Executive Officer;

 

Andrew Stordeur, formerly President of Sundial's Canadian operations was appointed as President and Chief Operating Officer;

 

Edward Hellard stepped down as Executive Chairman, but remains on the board of directors, and as chair of the Mergers and Acquisitions Committee;

 

Torsten Kuenzlen, Sundial’s former Chief Executive Officer, resigned and stepped down from the board of directors; and

 

Brian Harriman, Sundial's former Chief Operating Officer, left the Company.

Operational updates

In February 2020, Health Canada issued the Company a licence to sell dried and fresh cannabis from its Olds facility. This licence enables the Company to increase production capacity for sales of branded products to provincial boards by leveraging the processing capabilities of both its Olds and Rocky View facilities. The Company also commenced oil extraction operations at its Olds facility in the first quarter of 2020.

Sales and marketing updates

In the first quarter of 2020, the Company began making sales of cannabis through its medical platform to a limited customer base.

Item 9. The Offer and Listing.

 

A.

Offer and listing details.

Not applicable.

 

B.

Plan of distribution.

Not applicable.

 

C.

Markets.

The Company’s common shares were listed on the Nasdaq in the United States for trading in U.S. dollars since August 1, 2019 under the symbol “SNDL”.

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D.

Selling shareholders

Not applicable.

 

E.

Dilution.

Not applicable.

 

F.

Expenses of the issue.

Not applicable.

Item 10. Additional Information.

 

 

A.

Share capital.

Not applicable.

 

B.

Memorandum and articles of association.

Reference is made to the section entitled “Description of Share Capital—Other Important Provisions of our Amended Articles of Incorporation, By-Laws and the ABCA” and “Description of Share Capital—Comparison of Alberta Corporate Law and Our Articles of Incorporation and Delaware Corporate Law” in the Company’s prospectus, filed with the SEC on July 31, 2019.

 

 

C.

Material contracts.

We have not entered into any material contracts outside the ordinary course of business other than as described elsewhere in this Annual Report or exhibits hereto.