More annual reports from Tilray Brands:
2023 ReportUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
Commission File Number 001-38594
TILRAY, INC.
(Exact name of Registrant as specified in its Charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
655 Madison Avenue, Suite 1900
New York, NY
(Address of principal executive offices)
82-4310622
(I.R.S. Employer
Identification No.)
10065
(Zip Code)
Registrant’s telephone number, including area code: (844) 845-7291
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.0001 par value per share
Trading
Symbol(s)
TLRY
Name of each exchange on which registered
The Nasdaq Stock Market LLC
The Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☒ NO ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated
filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Smaller reporting company
☐
☐
Non-accelerated filer
Emerging growth company
☒
☐
☐
If an emerging growth company, 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-
Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of the Registrant’s Common Stock on The Nasdaq Global Select
Stock Market on June 30, 2020, was approximately $675.6 million.
As of July 22, 2021 there were 449,220,809 shares of the Registrant’s Common Stock, par value $0.0001 per share, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the definitive proxy statement to be filed by the registrant in connection with the 2021 Annual Meeting of Stockholders (the “Proxy Statement”) with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the year ended May 31, 2021, provided that if such Proxy Statement is not filed within such period, such information will be
included in an amendment to this Form 10‑K to be filed within such 120-day period.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
[Reserved]
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Page
5
17
45
45
46
50
51
52
53
72
74
128
128
130
131
131
131
131
131
132
136
In this Annual Report on Form 10-K, “we,” “our,” “us,” “Tilray,” and the “Company” refer to Tilray, Inc. and, where appropriate, its consolidated
subsidiaries. This report contains references to our trademarks and trade names and to trademarks and trade names belonging to other entities. Solely for
convenience, trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to
indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or
display of other companies’ trademarks or trade names to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
1
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
On December 15, 2020, Tilray, Inc. and Aphria Inc. (“Aphria”) entered into an Arrangement Agreement (as amended, the “Arrangement
Agreement”), pursuant to which Tilray acquired all of the issued and outstanding common shares of Aphria pursuant to a plan of arrangement (the “Plan of
Arrangement”) under the Ontario Business Corporations Act (the “Arrangement”). The transaction closed on April 30, 2021. The Arrangement was
structured as a reverse acquisition pursuant to which Tilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Aphria’s historical
financial statements became the historical financial statements of Tilray. The acquired assets and liabilities of Tilray are included in the consolidated
balance sheets as of April 30, 2021 and the results of its operations and cash flows are included in the consolidated statement of income (loss) and
comprehensive income (loss) and cash flows for periods beginning after April 30, 2021. The operating results for the prior years are those of Aphria. Prior
to April 30, 2021 Aphria was a foreign private issuer reporting its financial statements under International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standard Boards. The financial statements of Tilray in this Form 10-K are presented in accordance with generally
accepted accounting principles in the United States (“GAAP”).
In addition, on the effective date of the Arrangement, Tilray changed its fiscal year from a year ending December 31 to a year ending May 31, to
conform its fiscal year end to that of Aphria.
2
Cautionary Note Regarding Forward-Looking Statements
PART I
This Annual Report on Form 10-K for the fiscal year ended May 31, 2021 (the “Form 10-K”) contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, relating to our business and financial outlook, which are based on our current beliefs,
assumptions, expectations, estimates, forecasts and projections about future events only as of the date of this Form 10-K, and are not statements of
historical fact. We make such forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of
1995. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “project,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements
and forward-looking information are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the
timing of certain events to differ materially from future results expressed or implied by the forward-looking statements or forward-looking information.
Factors that could cause or contribute to such differences include, but are not limited to, those identified in this Form 10-K and those discussed in the
sections titled “Risk Factor Summary” set forth below, titled “Risk Factors” set forth in Part I, Item 1A of this Form 10-K, and titled “Management’s
Discussion and Analysis of Financial Condition and Results of Operation” set forth in Part II, Item 7 of this Form 10-K, and in our other SEC and
Canadian public filings. Therefore, these forward-looking statements are not guarantees or promises of our future performance and involve risks,
uncertainties, estimates and assumptions that are difficult to predict. As a result, our actual outcomes and results may differ materially from those
expressed in these forward-looking statements. You should not place undue reliance on any of these forward-looking statements. Further, any forward-
looking statement speaks only as of the date hereof, unless it is specifically otherwise stated to be made as of a different date. We undertake no obligation to
further update any such statement, or the risk factors described in Item 1A under the heading “Risk Factors,” to reflect new information, the occurrence of
future events or circumstances or otherwise.
Risk Factor Summary
Investing in our securities involves a high degree of risk. Below is a summary of material factors that make an investment in our securities
speculative or risky. Importantly, this summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk
factor summary, as well as other risks that we face, can be found under the heading “Item 1A—Risk Factors” below.
• We are in the early stages of our integration efforts following completion of the arrangement between Tilray and Aphria on April 30, 2021
(the “Arrangement”) and may experience challenges integrating Tilray and Aphria’s operations and fully achieving the expected benefits of
the Arrangement.
•
•
•
•
Risks related to the COVID-19 pandemic have and will continue to impact our operations and adversely adverse effect our business, results of
operations and financial condition.
Our business is dependent upon regulatory approvals and licenses, ongoing compliance and reporting obligations, and timely renewals.
Government regulation is evolving, and unfavorable changes could impact our ability to carry on our business as currently conducted and the
potential expansion of our business.
Our production and processing facilities are integral to our business and adverse changes or developments affecting our facilities may have an
adverse impact on our business.
• We face intense competition, and anticipate competition will increase, which could hurt our business.
• We may not be able to successfully develop new products or commercialize such products.
•
•
The long-term effect of the legalization of adult-use cannabis in Canada on the medical cannabis industry is unknown, and may negatively
impact our medical cannabis business.
United States regulations relating to hemp-derived CBD products are unclear and rapidly evolving, and changes may not develop in the
timeframe or manner most favorable to our business objectives.
3
• We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.
• We are subject to litigation, arbitration and demands, which could result in significant liability and costs, and impact our resources and
reputation.
• We are exposed to risks relating to the laws of various countries as a result of our international operations.
•
Our strategic alliances and other third-party business relationships may not achieve the intended beneficial impact and expose us to risks.
• We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or
significant customers reduce their purchases, our revenue could decline significantly.
•
Significant interruptions in our access to certain supply chains for key inputs such as raw materials, supplies, electricity, water and other
utilities may impair our operations.
• Management may not be able to successfully establish and maintain effective internal controls over financial reporting.
•
•
•
The price of our common stock in public markets has experienced and may continue to experience severe volatility and fluctuations.
The volatility of our stock and the stockholder base may hinder or prevent us from engaging in beneficial corporate initiatives.
The terms of our outstanding warrants may limit our ability to raise additional equity capital or pursue acquisitions, which may impact
funding of our ongoing operations and cause significant dilution to existing stockholders.
• We may not have the ability to raise the funds necessary to settle conversions of the convertible securities in cash or to repurchase the
convertible securities upon a fundamental change.
• We are subject to other risks generally applicable to our industry and the conduct of our business.
4
Item 1. Business.
Our Vision and Purpose
Our vision is to build the leading global cannabis-lifestyle consumer packaged goods company that is changing people’s lives for the better –
one person at a time – by inspiring and empowering the worldwide community to live their very best life by providing them with products that meet the
needs of their mind, body and soul and invoke a sense of wellbeing. We are a purpose-driven company that, each and every day, seeks to be the trusted
partner for our patients and consumers by providing them with a cultivated experience and health and wellbeing through high-quality, differentiated brands
and innovative products.
Today, we are a leading global cannabis and consumer packaged goods company, with operations in Canada, the United States, Europe,
Australia and Latin America, that is pioneering the future of medical, wellness and adult-use cannabis cultivation, processing and distribution. As a
purpose-driven organization, we continuously explore ways to deliver on our values and commitments to serve all our key stakeholders, including our
stockholders, and seek to implement sustainable business practices.
Our Commitments and Values
We are committed to changing people’s lives for the better by investing in our products, our people and our planet. In an emerging and
constantly evolving industry, our values unite us, informing and inspiring the way we work with our employees, patients, consumers and one another. The
following core values serve as our compass in our strategic direction and decisions:
•
•
•
•
We put people first. We are committed to significantly improving the lives of as many people as possible – whether it is meeting the needs of our
patients and consumers, building a best-in-class, diverse workforce that’s more representative of all people or giving back and supporting our
neighbors in the communities we call home. We are dedicated to helping people live their very best life.
We lead by example. We are passionate about pioneering the future of medical, wellness and adult-use cannabis and hemp cultivation, processing
and distribution in a responsible manner. As a leading global cannabis company, we are committed to helping to establish industry standards that
continue to support the health and wellbeing of our employees, our patients and consumers and the communities we call home.
We respect the earth. We are committed to ensuring that our actions and those of our employees have a positive impact on the environment around
us. We continue to identify and implement sustainable growing and business practices that provide efficiencies, cost reduction benefits, and lessen
our impact on the environment.
We take responsibility to heart. We believe it is our responsibility to ensure the safety of our employees, patients, consumers and the worldwide
community. To that end, we are committed to providing access to legal, safe, high-quality cannabis products and to keeping cannabis out of the
hands of youth. Our partnerships and programs reflect our ongoing commitment to the safety of our worldwide communities through education,
responsible use and meaningful corporate citizenship.
Our Company
Tilray, Inc. (“Tilray”, “we”, “us”, “our” or the “Company”) is a global pioneer in cannabis research, cultivation, production and distribution,
incorporated in the State of Delaware on January 24, 2018. On April 30, 2021, Tilray and Aphria completed the Arrangement. The business combination
brought together two highly complementary businesses to create a leading cannabis-focused consumer packaged goods company with one of the largest
global geographic footprints in the industry. With a focus on sustainability, our state-of-the-art greenhouses and cultivation operations, processing and
distribution facilities make us one of the world’s leading fully-integrated cannabis companies.
We were among the first companies to be permitted to cultivate and sell legal medical cannabis. Today, we supply high-quality medical
cannabis products to tens of thousands of patients in 20 countries spanning five continents through our global subsidiaries, and through agreements with
established pharmaceutical distributors.
We are a leader in the recreational adult-use market in Canada where we offer a broad-based portfolio of adult-use brands and products, and
continue to expand our portfolio to include new innovative cannabis products and formats. We maintain agreements to supply all Canadian provinces and
the Yukon and Northwest Territories with our adult-use products for sale through their established retail distribution systems. We believe that our
differentiated
5
portfolio of brands, which is designed to resonate with consumers in all categories, sets us apart from our competitors and is providing us with the ability to
establish a leading position in the adult-use market in Canada. Therefore, we are investing in brand building with our consumers, new product innovation,
insights, distribution, trade marketing and cannabis education to drive market share in the Canadian adult-use cannabis industry.
Through Fresh Hemp Foods Ltd. (“Manitoba Harvest”), we are also a leading hemp food manufacturer. Manitoba Harvest produces,
manufactures, markets and distributes a broad-based portfolio of hemp-based food products, which are sold in major retailers across the U.S. and Canada.
In November 2020, Aphria acquired SW Brewing Company, LLC (“SweetWater”), the 11th largest craft brewery in the United States according
to Brewers Association. Founded in 1997, SweetWater has broad consumer appeal and has established strong distribution across the United States. From
its state-of-the-art brewery in Atlanta, Georgia, SweetWater produces a balanced variety of year-round and seasonal specialty craft brews.
Following completion of the Arrangement, we reconstituted our senior management team with members from both Aphria and Tilray. The
experienced new leadership team provides a strong foundation to accelerate our growth and capitalize on the business combination’s many benefits. Our
management team is complemented by experienced operators, cannabis industry experts, PhD scientists, horticulturists, and extraction specialists, all of
whom apply the latest scientific knowledge and technology to deliver quality-controlled, rigorously tested cannabis products on a large scale.
Our Opportunity
With the closing of the Arrangement, we are now focused on executing our highest return priorities including business integration and
accelerating our global growth strategy. Tilray is poised to transform the industry with our highly scalable operational footprint, a curated portfolio of
diverse medical and adult-use cannabis brands and products, a multi-continent distribution network, and a robust capital structure to fund our global
expansion strategy.
The business combination provides, among others, the following financial and strategic benefits:
•
•
•
•
•
Strategic Footprint and Operational Scale. We believe that we possess the strategic footprint and operational scale necessary to compete
more effectively in today’s consolidating cannabis market with a strong, flexible balance sheet, strong cash balance, and access to capital,
which we believe gives us the ability to accelerate growth and deliver long-term sustainable value for stockholders.
Low-cost, State-of-the-Art Production & Leading Canadian Adult-Use Cannabis Producer. The demand for our products will be
supported by low-cost state-of-the-art cultivation, processing, and manufacturing facilities, and a complete portfolio of branded cannabis
2.0 products to strengthen our leadership position in Canada.
Positioned to Pursue an Accelerated International Growth Strategy. We are well-positioned to pursue international growth
opportunities with our strong medical cannabis brands, distribution network in Germany, and end-to-end European Union Good
Manufacturing Practices (“EU-GMP”) supply chain, which includes EU-GMP production facilities in Canada, Portugal and Germany.
Enhanced Consumer Packaged Goods Presence and Infrastructure in the U.S. In the United States, we maintain a strong consumer
packaged goods presence and infrastructure with two strategic businesses: SweetWater, a leading cannabis lifestyle branded craft brewer;
and Manitoba Harvest, a pioneer in branded hemp food and ingredient products. In the event of federal legalization in the U.S., we expect
to be well-positioned to compete in the U.S. cannabis market given our existing strong brands and distribution system in addition to our
track record of growth in consumer-packaged goods and cannabis products.
Substantial Synergies. The Company expects to deliver significant cost synergies within eighteen months of closing the Arrangement,
including cost synergies in the key areas of cultivation and production, cannabis and product purchasing, sales, and marketing, and
corporate expenses.
Our Strategy and Outlook
As a leading global cannabis company, we are setting the standard for brand development, product innovation and industrial scale cultivation
and automation for the production of cannabis grown in environmentally responsible
6
conditions. Our overall strategy is to leverage our scale, expertise and capabilities to drive market share, achieve industry-leading, profitable growth and
build sustainable, long-term shareholder value. In order to ensure long-term sustainable growth, we continue to focus on leveraging consumer insights,
drive category management leadership and assess growth opportunities, including the introduction of our product into new geographies, new innovation
and strategic partnerships. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our strong financial
position.
To achieve our vision of building the leading global cannabis-lifestyle consumer packaged goods company that is changing people’s lives for
the better – one person at a time – by inspiring and empowering the worldwide community to live their very best life, we will focus on the following
strategies:
•
•
•
•
•
Build global brands that lead, legitimize and define the future of cannabis. As the markets where cannabis is legal today continue to
grow and develop and as cannabis legalizes in more countries around the world, we see unique opportunities to introduce, market and
distribute our broad portfolio of differentiated brands, that will appeal to a diverse base of patients and consumers. We believe we are well
positioned to develop leading global brands and drive sustainable growth.
Develop innovative products and form factors that change the way the world consumes cannabis. We plan to continue to develop
innovative products and form factors that possess the most consumer demand and are truly differentiated from our competitors, while
optimizing our production capabilities. We will continue to invest in innovation in order to continue to provide our patients and
consumers with a differentiated portfolio of products that exceeds their expectations and meets their needs.
Grow and leverage our investment in craft beer and hemp-based food. We continue to grow the SweetWater brand by expanding our
distribution footprint into new territories and focusing on new product development and innovation that delights our consumers. We seek
to drive growth in our Manitoba Harvest brand and other hemp-based food and ingredients products by leveraging our consumer insights
and consumer marketing activities, new product development as well as educating the consumer on the benefits from hemp-based foods.
Expand the availability of pure, precise, and predictable medical cannabis products for patients around the world. Since 2014, we
have seen an increase in the demand for medical cannabis from both patients, doctors and governments in conjunction with a shift in the
medical community, which is increasingly recognizing medical cannabis as a viable option for the treatment of patients suffering from a
variety of health conditions. We are focused on driving accessibility to high-quality medical cannabis that is accessible to all and we are
well-positioned to do so on a global basis through our EU-GMP certified facilities in Canada, Portugal and Germany.
Leverage our operational scale providing low-cost, high quality production. We believe we have the operational scale necessary to
compete more effectively in today’s consolidating cannabis market. Our state-of-the-art facilities are among the lowest cost production
operations with the capabilities to produce a complete portfolio of form factors and products, including flower, pre-roll, capsules, vapes,
edibles and beverages. We also have a strong, flexible balance sheet, cash balance and access to capital, which we believe will give us
the ability to accelerate growth and deliver long-term sustainable value for our stockholders.
Reportable Segments
Our business is primarily organized around our product categories, each of which have very different target consumers, go-to-market strategies,
distribution networks and margins. This enables us to track and measure our success and build processes for repeatable success in each of these categories.
As a result, we have defined our operating segments on a product category basis, as this aligns with how our Chief Operating Decision Maker (“CODM”)
manages our business, including resource allocation and performance assessment. We report our operating results in five segments:
•
•
Cannabis business – Cultivation, production, distribution and sale of both medical and adult-use cannabis products
Distribution business – Purchase and resale of pharmaceutical and wellness products to customers
7
•
•
•
Beverage alcohol business – Production, distribution and sale of beverage alcohol products
Wellness business – Production, marketing and distribution of hemp-based food and other wellness products
Business under development – Operations in which we have not received final licensing or have not commenced commercial sales from
operations
Revenue in these five business segments, and the year over year comparison, is as follows:
(in thousands of United States dollars)
Cannabis business
Distribution business
Beverage alcohol business
Wellness business
Business under development
Total revenue
Excise taxes
Net revenue
Year Ended
May 31,
2021
264,334
277,300
29,661
5,794
—
577,089
(64,004)
513,085
$
$
$
% of
Total
revenue
46% $
48%
5%
1%
0%
100% $
(11%)
$
Year Ended
May 31,
2020
153,477
275,430
—
—
—
428,907
(23,581)
405,326
% of
Total
revenue
36% $
64%
0%
0%
0%
100% $
(5%)
$
Year Ended
May 31,
2019
67,592
119,427
—
—
—
187,019
(7,716)
179,303
Revenue from our cannabis operations from the following sales channel and the year over year comparison is as follows:
Revenue by cannabis sales channel
Cannabis revenue by market
Revenue from medical cannabis products
Revenue from adult-use cannabis products
Revenue from wholesale cannabis products
Revenue from international cannabis products
Total cannabis revenue by market
Excise taxes
Cannabis net revenue
Our Brands and Products
Year Ended
May 31,
2021
25,539
222,930
6,615
9,250
264,334
(62,942)
201,392
$
$
% of
Total
revenue
Year Ended
May 31,
2020
28,685
112,207
12,585
—
153,477
(23,581)
129,896
10% $
84%
3%
3%
100%
$
% of
Total
revenue
Year Ended
May 31,
2019
33,017
30,236
4,339
—
67,592
(7,716)
59,876
19% $
73%
8%
0%
100%
$
% of
Total
revenue
36%
64%
0%
0%
0%
100%
(4)%
% of
Total
revenue
49%
45%
6%
0%
100%
Our brand and product strategy centers on developing a broad portfolio of differentiated brands and products designed to appeal to diverse
groups of patients and consumers. Our brand and product activities are designed to comply with all local regulations and requirements, including applicable
labelling and marketing restrictions.
Our Medical Brands
We currently cultivate, produce, market and distribute medical cannabis products under the Tilray, Aphria and Broken Coast brands. We make
our products available to patients, physicians, clinics, pharmacies, governments, hospitals, and researchers, for commercial purposes, compassionate
access, and clinical research.
•
•
Tilray - The Tilray brand has been established as a global medical cannabis brand and is designed to appeal to prescribers and patients in the global
medical market by offering a wide range of high-quality, pharmaceutical-grade medical cannabis and cannabinoid-based products. We believe
patients choose the Tilray brand because we adopted rigorous quality standards and the brand is a trusted, scientific based brand known for its pure,
precise and predictable medical-grade products.
Aphria - Since 2014, the Aphria brand is a leading, trusted choice for Canadian patients seeking high quality pharmaceutical-grade medical
cannabis. Today, the Aphria brand continues to be a leading brand in Canada and, we will continue to leverage its market leadership as we develop
our medical cannabis markets internationally under the Aphria brand.
8
•
Broken Coast - Medical cannabis products under the Broken Coast brand are grown in small batches in single-strain rooms, with a commitment to
product quality in order to meet patient expectations.
We are committed to meeting the needs of our patients whether they are looking for more natural options for their medical needs, exploring
their options in wellness, or seeking alternatives in their lifestyle. Accessibility is a top priority for Tilray. We are committed to ensuring patients have
access to the medication they depend on through a strong supply chain and dedicated support through our dedicated patient care team. Our product lines
focus on active ingredients and standardized, well-defined preparation methods. We use formulations and delivery formats that are intended to allow for
consistent and measured dosing, and we test all our products for potency and purity. Each of our commercial products are developed with comprehensive
analysis and thorough documentation.
We take a scientific approach to our medical-use product development which we believe establishes credibility and trust in the medical
community. We produce products that are characterized by well-defined and reproducible cannabinoid and terpene content, formulated for stable
pharmacokinetic profiles, which are customizable in a variety of formulations. We continue to conduct extensive research and development activities and
develop and promote new products for medical use.
Our Adult-Use Brands
We believe that our portfolio of brands, developed for consumers across broad demographics and targeted segments, remains unmatched in the
industry. With a focus on brand building, innovation, loyalty and conversion, we seek to drive growth with our differentiated portfolio of brands and
products, both in sales and market share across categories. The Company is investing capital and resources to establish a leadership position in the adult-
use market in Canada. These investments are focused on brand building with consumers, product innovation, distribution, trade marketing and cannabis
education. Our strategy is to develop a brand focused portfolio that resonates with consumers in all category segments.
We are positioned to grow our adult-use brand portfolio to specifically meet the different consumer segments of the adult-use cannabis market.
We leverage our selection of strains to offer each consumer segment a different experience through its product and terpene profiles, while also focusing on
the value proposition for each of these segments as it relates to price, potency and product assortment. We also have a license agreement in place that
allows us to produce and distribute certain branded adult-use products in Canada, including Marley Natural™ and Grail™.
Each brand is unique to a specific consumer segment and designed to meet the needs of these targeted segments, as described below. Our
portfolio of brands and products and our marketing activities have been carefully curated and structured to enable us to develop and promote our brands
and product lines in an effective and compliant manner. We continue to develop additional brands and new products, such as edibles and beverages, with
more innovative products in our pipeline. Our brand portfolio is currently focused on:
B!NGO
The Batch
P’tite Pof
Dubon
ECONOMY BRANDS
B!NGO is like a nice cold beer on a summer’s day. Our products hit the spot and gives consumers that little something
that lets them enjoy the moment.
It’s the everyday companion that keeps it light and simple.
A no-frills cannabis value brand focused on delivering quality cannabis flower and pre-rolls at competitive prices. The
Batch categorizes its product offering by potency rather than cultivar, allowing us to offer quality cannabis at prices that
beat the illicit market.
VALUE BRANDS
Inspired by Québécois culture, casse-croûte signage and your local dépanneur. Straightforward, functional, bold,
charming and iconic. Our traditional blue and red with a modern twist.
“The good stuff”, a vibrantly Québécois cannabis brand and champion of inspired, creative living. Dubon offers master-
crafted cannabis cultivars as whole flower and pre-rolls, exclusively available in Québec.
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CORE BRANDS
Good Supply
Quality Bud, No B.S. Good Supply is brand that embraces the goodness of classic cannabis culture – it speaks your
language and reminds you of when you first fell in love with cannabis.
Solei Sungrown Cannabis
(“Solei”)
Solei is a brand designed to embrace the bright Moments in your day. Solei’s Moments-based products help to make
cannabis simple, approachable and welcoming.
Marley Natural
Chowie Wowie
Canaca
Crafted with deep respect for wellness and the positive potential of the herb.
An edibles’ brand bringing the ‘wow’ with perfectly crafted fusions of flavor offered in an array of reliably dosed
cannabis-infused chocolates and gummies in THC and CBD varieties.
A brand that proudly builds on its homegrown heritage with cannabis whole flower, pre-rolls, oil products and pure
cannabis vapes handcrafted by and for Canadian cannabis enthusiasts. Our plants are sourced in BC and expertly
cultivated in Ontario for homegrown, down-to-earth quality that’s enjoyed across Canada.
PREMIUM BRANDS
RIFF
RIFF is not your conventional cannabis brand. It is a brand by creatives for creatives. An unconventional brand, fueled by
creativity and collaboration
Broken Coast
West Coast, Naturally. Broken Coast relies on small batch growing techniques / craft approach with a reputation for its
high-quality flower, aroma, bud composition, and heavy trichome appearance that delivers an incredible experience.
Grail
Grail offers discerning connoisseurs a collection of sought-after cultivars and top-shelf products.
PREMIUM + BRANDS
Our Wellness Brands
Manitoba Harvest develops, manufactures, markets and distributes a diverse portfolio of hemp-based food and wellness products under various
brands, which include Manitoba Harvest, Hemp Hearts, Hemp Yeah!, Hemp Bliss, Just Hemp Foods, and Mighty Seed Hemp Co.
Our Beverage Alcohol Brands
SweetWater has created an award-winning lineup of year-round, seasonal and specialty beers under a portfolio of brands closely aligned with a
cannabis lifestyle, which include the flagship 420 alcoholic beverage offerings and its Oasis® hard seltzers. We believe the SweetWater product offerings,
including the 420 Strain series of products, resonate as a cannabis lifestyle brand. SweetWater’s various 420 strains of craft brews use plant-based terpenes
and natural hemp flavors that, when combined with select hops, emulate the flavors and aromas of popular cannabis strains to appeal to a loyal consumer
base.
Our Operations
Through the investment in building and scaling state-of-the-art facilities, we believe that we maintain one of the highest-quality, lowest cost
cannabis production operations in Canada, with the scale and distribution network that differentiates us from our competitors in the industry. We continue
to invest in the expansion of our global supply chain to address the unmet needs of patients around the world.
We currently maintain key international operations in Portugal, Germany, Italy, United Kingdom, Colombia and Argentina as well as strategic
relationships in Israel, Denmark and Poland. In establishing our international footprint, we sought to create operational hubs in those continents where we
identified the biggest opportunities for growth and designed our operations to ensure consistent, high-quality supply of cannabis products as well as a
distribution network. While these markets are still at various stages of development, and the regulatory environment
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around them is either newly formed or still being formed, we are uniquely positioned to bring the knowledge and expertise gained in Canada in order to
generate profitable growth in these geographies.
Distribution
Canadian Adult-use Market
Under the Canadian legislative regime, provincial, territorial and municipal governments have the authority to prescribe regulations regarding
retail and distribution of adult-use cannabis. As such, the distribution model for adult-use cannabis is prescribed by provincial regulations and differs from
province to province. Some provinces utilize government run retailers, while others utilize government-licensed private retailers, and some a combination
of the two. All of our adult-use sales are conducted according to the applicable provincial and territorial legislation and through applicable local agencies.
Through our subsidiaries, Aphria and High Park Holdings Ltd. (“High Park”), we maintain supply agreements for adult-use cannabis with all
the provinces and the Yukon Territory and the Northwest Territories in Canada, representing access to 99.8% of Canadians.
Aphria is party to a distribution agreement with Great North Distributors to provide sales force and wholesale/retail channel expertise required
to efficiently distribute Aphria’s products through each of the provincial/territorial cannabis control agencies. High Park engaged Kindred Partners Inc. as
its sales agent for its adult-use portfolio across all of Canada's provinces and territories, excluding Quebec, in order to leverage Kindred’s industry insights,
resources, best-in-class sales team and brand-building services to grow High Park's footprint across the country. We also engage Rose LifeSciences Ltd. as
our sale agent exclusively for the Province of Quebec, representing our entire brand portfolio.
Canadian Medical Market
In Canada, the medical distribution channel follows a direct to patient model and both Tilray and Aphria have online portals for patients to
effectively and efficiently manage the process of registering and ordering medical products.
International Medical Markets
We continue to evaluate the most efficient methods and strategic opportunities to distribute and sell our medical cannabis products to patients and
pharmacies around the world. Through our various subsidiaries and partnerships with distributors, our medical products are available to patients in 20
countries on 5 continents, which include the following international distribution channels:
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CC Pharma is a leading importer and distributor of EU-pharmaceuticals for the German market and throughout Europe and we plan to leverage its
distribution network in Germany and throughout Europe.
Our products are also distributed by multiple wholesalers and directly to pharmacies in Germany. As a result, we are able to fulfill prescriptions for
our medical cannabis products throughout Germany.
We import and distribute compliant medical cannabis products to other international markets, including Italy, Israel, France, Sweden, United
Kingdom, and Luxemburg.
In Argentina, ABP, S.A., distributes medical cannabis throughout Argentina under the Argentinian “Compassionate Use” national law, which
allows patients with refractory epilepsy, holding a medical prescription from a neurologist, to apply for special access to imported medical cannabis
products.
In November 2020, Aphria entered into a strategic relationship with ODI Pharma AB, which gives ODI the exclusive right to sell a defined set of
co-branded products in Poland over a five-year period. We will supply medical cannabis product to ODI, which will be processed into finished
product, co-branded under the Aphria and ODI brand names, and sold exclusively within the Polish market.
Wholesale
In Canada, we are authorized to sell wholesale bulk and finished cannabis products to other licensees under the Cannabis Regulations. The bulk
wholesale sales and distribution channel requires minimal selling, administrative,
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and fulfillment costs. Our focus on the right strain assortment, quality of flower, extraction capabilities and processing, enables us to drive wholesale
channel opportunities for revenue growth.
Recent changes in the Canadian market resulted in more competitors moving towards an asset light model through the rationalization of
cultivation facilities. As this transition occurs, the Company anticipates demand for its saleable flower to increase, providing new opportunities in the
wholesale channel.
We also intend to expand our capabilities outside of saleable flower, as our quality of extraction processes continue to grow into new categories
with the consumption of new cannabis 2.0 products. We plan to be selective in choosing partners, with the intent to secure supply agreements to further
optimize and drive efficiency within our supply chain and operations. While we intend to pursue wholesale sales channels as part of our growth strategies
in Canada, these sales will continue to be used to aid in balancing inventory levels.
Wellness Sales and Distribution
Our wellness sales consist of hemp seed and other hemp-based food products, which are sold to retailers, wholesalers, and direct to consumers.
We are a leading provider of hemp seeds and related food products that are sold in over 17,000 retail locations in the United States and Canada and
available globally in 19 countries.
Beverage Alcohol Sales and Distribution
In the U.S., our craft beer is distributed under a three-tier model utilized for beverage alcohol. Distribution points include approximately 29,000
off-premises retail locations ranging from independent bottle shops to national chains. SweetWater’s significant on-premises business allows consumers to
enjoy its varietals in more than 10,000 restaurants and bars. Further, in addition to its traditional distribution footprint, SweetWater 420 Extra Pale Ale and
Elevated HAZY IPA are served on all Delta Air Lines flights nationwide plus internationally totaling more than 50 countries across six continents which
have served to extend SweetWater’s brand reach on both a national and international level. The Company supplements this distribution with Delta Air
Lines through a kiosk in Atlanta’s Hartsfield-Jackson Airport and secured access to distribute through an on-premise location at the Denver International
Airport. SweetWater is also available in Canada through limited distribution within Ontario and Quebec.
Regulatory Environment
Canadian Medical and Adult-Use
Medical and adult-use cannabis in Canada is regulated under the federal Cannabis Act (Canada) (the “Cannabis Act”) and the Cannabis
Regulations (“CR”) promulgated under the Cannabis Act. Both the Cannabis Act and CR came into force in October 2018, superseding earlier legislation
that only permitted commercial distribution and home cultivation of medical cannabis. The following are the highlights of the current federal legislation:
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a federal license is required for companies to cultivate, process and sell cannabis for medical or non-medical purposes. Health Canada, a federal
government entity, is the oversight and regulatory body for cannabis licenses in Canada;
allows individuals to purchase, possess and cultivate limited amounts of cannabis for medical purposes and, for individuals over the age of 18
years, for adult-use recreational purposes;
enables the provinces and territories to regulate other aspects associated with recreational adult-use. In particular, each province or territory may
adopt its own laws governing the distribution, sale and consumption of cannabis and cannabis accessory products, and those laws may set lower
maximum permitted quantities for individuals and higher age requirements;
promotion, packaging and labelling of cannabis is strictly regulated. For example, promotion is largely restricted to the place of sale and age-gated
environments (i.e., environments with verification measures in place to restrict access to persons of legal age). Promotions that appeal to underage
individuals are prohibited;
since the current federal regime came into force on October 17, 2018, certain classes of cannabis, including dried cannabis and oils, have been
permitted for sale into the medical and adult-use markets;
following amendments to the CR that came into force on October 17, 2019 (often referred to as Cannabis 2.0 regulations), other non-combustible
form-factors, including edibles, topicals, and extracts (both ingested and inhaled), are permitted in the medical and adult-use markets;
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export is restricted to medical cannabis, cannabis for scientific purposes, and industrial hemp; and
sale of medical cannabis occurs on a direct-to-patient basis from a federally licensed provider, while sale of adult-use cannabis occurs through
retail-distribution models established by provincial and territorial governments.
All provincial and territorial governments have, to varying degrees, enacted regulatory regimes for the distribution and sale of recreational
adult-use cannabis within their jurisdiction, including minimum age requirements. The retail-distribution models for adult-use cannabis varies nationwide:
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Quebec, New Brunswick, Nova Scotia and Prince Edward Island adopted a government-run model for retail and distribution;
Ontario, British Columbia, Alberta, and Newfoundland and Labrador adopted a hybrid model with some aspects, including distribution and online
retail being government-run while allowing for private licensed retail stores;
Manitoba and Saskatchewan adopted a private model, with privately-run retail stores and online sales, with distribution in Manitoba managed by
the provincial government;
the three northern territories of Yukon, Northwest Territories and Nunavut adopted a model that mirrors their government-run liquor distribution
model.
United States Regulation of Hemp
Hemp products are subject to state and federal regulation in respect to the production, distribution and sale of products intended for human
ingestion or topical application. Hemp is categorized as Cannabis sativa L., a subspecies of the cannabis genus. Numerous unique, chemical compounds are
extractable from Hemp, including CBD. Hemp, as defined in the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”), is distinguishable from
marijuana, which also comes from the Cannabis sativa L. subspecies, by its absence of more than trace amounts (0.3% or less) of the psychoactive
compound THC.
The 2018 Farm Bill preserves the authority and jurisdiction of the Food and Drug Administration (the “FDA”), under the Food Drug &
Cosmetic Act (the “FD&C Act”), to regulate the manufacture, marketing, and sale of food, drugs, dietary supplements, and cosmetics, including products
that contain Hemp extracts and derivatives, such as CBD. As a result, the FD&C Act will continue to apply to Hemp-derived food, drugs, dietary
supplements, cosmetics, and devices introduced, or prepared for introduction, into interstate commerce. As a producer and marketer of Hemp-derived
products, the Company must comply with the FDA regulations applicable to manufacturing and marketing of certain products, including food, dietary
supplements, and cosmetics.
As a result of the 2018 Farm Bill, federal law dictates that CBD derived from Hemp is not a controlled substance; however, CBD derived from
Hemp may still be considered a controlled substance under applicable state law. Individual states take varying approaches to regulating the production and
sale of Hemp and Hemp-derived CBD. Some states explicitly authorize and regulate the production and sale of Hemp-derived CBD or otherwise provide
legal protection for authorized individuals to engage in commercial Hemp activities. Other states, however, maintain drug laws that do not distinguish
between marijuana and Hemp and/or Hemp-derived CBD which results in Hemp being classified as a controlled substance under certain state laws.
European Union Medical Use
While each country in the European Union (“EU”) has its own laws and regulations, many common practices are being adopted relative to the
developing and growing medical cannabis market. For example, to ensure quality and safe products for patients, many EU countries only permit the import
and sale of medical cannabis from EU-GMP certified manufacturers.
The EU requires adherence to EU-GMP standards for the manufacture of active substances and medicinal products, including cannabis
products. The EU system for certification of GMP allows a Competent Authority of any EU member state to conduct inspections of manufacturing sites
and, if the strict EU-GMP standards are met, to issue a certificate of EU-GMP compliance that is also accepted in other EU member countries.
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Craft Brewing in the United States
The alcoholic beverage industry in the United States is regulated by federal, state and local governments. These regulations govern the
production, sale and distribution of alcoholic beverages, including permitting, licensing, marketing and advertising. To operate its production facilities,
SweetWater must obtain and maintain numerous permits, licenses and approvals from various governmental agencies, including but not limited to, the
Alcohol and Tobacco Tax and Trade Bureau (the “TTB”), the FDA, state alcohol regulatory agencies and state and federal environmental agencies. Our
brewery operations are subject to audit and inspection by the TTB at any time.
In addition, the beer industry is subject to substantial federal and state excise taxes. Excise taxes may be increased in the future by the federal
government or any state government or both. In the past, increases in excise taxes on alcoholic beverages have been considered in connection with various
governmental budget-balancing or funding proposals.
Environmental Regulation
Our cannabis and brewing operations are subject to environmental regulations and local permitting requirements and agreements regarding,
among other things, air emissions, water discharges and the handling and disposal of hazardous wastes. While we have no reason to believe the operation
of our facilities violates any such regulation or requirement, if such a violation were to occur, or if environmental regulations were to become more
stringent in the future, we could be adversely affected.
Competitive Conditions
Cannabis Market
We continue to face intense competition from the illicit market as well as other companies, some of which may have longer operating histories
and more financial resources and manufacturing and marketing experience. With potential consolidation in the cannabis industry, we could face increased
competition by larger and better financed competitors.
Growers of cannabis and retailers operating in the illicit market continue to hold significant market share in Canada and are effectively
competitors to our business. Illicit market participants divert customers away through product offering, price point, anonymity and convenience.
Outdoor cultivation also significantly reduces the barrier to entry by reducing the start-up capital required for new entrants in the cannabis
industry. It may also ultimately lower prices as capital expenditure requirements related to growing outside are typically much lower than those associated
with indoor growing. Further, the licensed outdoor cultivation capacity is extremely large. While outdoor cultivation is almost exclusively extraction grade,
its presence in the market will have a negative effect on pricing of extraction grade wholesale cannabis.
As of July 2, 2021, Health Canada has issued approximately 700 active licenses to cannabis cultivators, processors and sellers. Health Canada
licenses are limited to individual properties. As such, if a licensed producer seeks to commence production at a new site, it must apply to Health Canada for
a new license. As of May 31, 2021, roughly 2,000 authorized retail cannabis stores have opened across Canada. As demand for legal cannabis increases and
the number of authorized retail distribution points increases, we believe new competitors are likely to enter the Canadian cannabis market. Nevertheless, we
believe our brand recognition combined with the quality, consistency, and variety of cannabis products we offer will allow us to maintain a prominent
position in the Canadian adult use and medical markets.
Competition is also based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing and
promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service.
Internationally, the capacity of cannabis companies to operate is limited to those countries which have legalized aspects of the cultivation,
distribution, sale or use of cannabis. We focused on developing assets in certain strategic international jurisdictions which maintain legalized aspects of the
cannabis business. With the combination of Tilray and Aphria, we possess operational hubs in continents with significant growth opportunities and the
production capability and distribution network to distribute such products throughout the region served by each hub.
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The barrier to entry for competitors in these jurisdictions is significantly influenced by the national regulatory landscape with respect to cannabis and the
economic climate subsisting in each region.
We expect more countries to pass regulation allowing for the use of medical and/or recreational cannabis. While expansion of the global
cannabis market will provide more opportunities to grow our international business, we also expect to experience increased global competition.
Craft Brewing Market
Through SweetWater, we compete in the craft brewing market, as well as in the much larger alcohol beverage market, which encompasses
domestic and imported beers, flavored alcohol beverages, spirits, wine, hard ciders and hard seltzers. With the proliferation of participants and offerings in
the wider alcohol beverage market and within the craft beer segment, we face significant competition. There have also been numerous acquisitions and
investments in craft brewers by larger breweries and private equity and other investors, which further intensified competition within the craft beer market.
While the craft beer market is highly competitive, we believe that we possess certain competitive advantages. Our unique portfolio combines an
award-winning lineup of craft beers with a unique portfolio of brands closely aligned with a cannabis lifestyle, and supported by a state-of-the-art brewery
and strong distribution across the United States. Additionally, as a domestic brewery, we maintain certain competitive advantages over imported beers, such
as lower transportation costs, a lack of import charges and superior product freshness.
Seasonality
SweetWater’s sales of craft beer generally reflect a degree of seasonality, with comparatively higher sales in the summer and the winter holiday
season. Typically, the demand for cannabis and hemp-based products is fairly consistent throughout the calendar year. In addition, CC Pharma’s revenue
tends to be higher in the summer months as patients increase their purchases of pharmaceutical products in order to have sufficient product on hand for
summer vacations. Moreover, the impact of COVID-19 on customer behavior and access to our products may cause temporary seasonal fluctuations or
changes to our businesses. Therefore, the results for any particular quarter may not be indicative of the results to be achieved for the full year.
Social and Environmental Initiatives
In an emerging and constantly evolving industry, our core values unite, inform and inspire the way we interact with employees, patients and
consumers. Our commitment to our people, the planet, product quality and innovation helps us create stronger, healthier communities everywhere we do
business. Our corporate social responsibility goes beyond our borders. We are committed to exporting our industry-leading knowledge and practices to our
global subsidiaries. For the communities we call home, we are vigilant of the impact we have and strive to be a positive contributor to their well-being.
Some of the Company’s initiatives in this regard are as follows:
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We offer compassionate pricing for eligible patients that require financial assistance.
We employ and continuously improve, sustainable growing and business practices to provide efficiencies, cost reduction benefits and lessen our
impact on the environment
Aphria’s Charter Agreement with Drug Free Kids Canada (a Canadian non-profit organization providing parents with evidence-based information
about youth and substance use while promoting frequent, balanced parent-youth discussions about drugs) and participation in the Global Cannabis
Partnership, reflect our ongoing commitment to the safety of our communities through education, responsible use, and meaningful responsible
corporate citizenship in our industry; and
Tilray Educates, originally launched as Aphria Educates, is a program aimed to educate Canadians on responsible and safe use of cannabis
products.
Employees and Human Capital Resources
As of May 31, 2021, we have approximately 2,100 employees worldwide. We consider relations with our employees to be good and have never
experienced work stoppages. Aside from Portugal, none of our employees are represented by labor unions or are subject to collective bargaining
agreements. As is common for most companies
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doing business in Portugal, we are subject to a government-mandated collective bargaining agreement which grants employees nominal additional benefits
beyond those required by the local labor code.
We are committed to establishing a leadership team and corporate culture that promotes inclusion and diversity as we continue to grow our
business and expand our footprint. Diversity and inclusion is a priority for our company, and we seek out talented people from a variety of backgrounds to
staff our teams in all our markets. Aligned with our mission and values, this strategy will shape our future as a leading employer.
Our vision and purpose unite, inform and inspire our employees to apply their talents to make a positive difference. We foster a collaborative
and dynamic work environment providing all employees with the opportunity to work cross-functionally and easily gain exposure to other team’s diverse
opinions and perspectives. We strive for every employee to reach their full potential and grow with Tilray.
Available Information
Our website address is www.tilray.com. We file or furnish annual, quarterly and current reports, proxy statements and other information with
the United States Securities and Exchange Commission (“SEC”). You may obtain a copy of any of these reports, free of charge, from the Investors section
of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site
that also contains these reports at: www.sec.gov. In addition, copies of our annual report are available, free of charge, on written request to us.
We have a Code of Conduct that applies to our Board of Directors (“Board”) and all of our officers and employees, including, without
limitation, our Chief Executive Officer and Chief Financial Officer. You can obtain a copy of our Code of Conduct, as well as our Corporate Governance
Guidelines and charters for each of the Board’s standing committees, from the Investors section of our website at: www.tilray.com. If we change or waive
any portion of the Code of Conduct that applies to any of our directors, executive officers or senior financial officers, we will disclose such information.
Information on our website is not incorporated by reference into this Form 10-K or any other report filed with the SEC.
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Item 1A. Risk Factors.
Risks Related to the Arrangement
We may experience difficulties integrating Tilray and Aphria’s operations and realizing the expected benefits of the Arrangement.
The success of the Arrangement will depend in part on our ability to realize the expected operational efficiencies and associated cost synergies and
anticipated business opportunities and growth prospects from combining Tilray and Aphria in an efficient and effective manner. We may not be able to
fully realize the operational efficiencies and associated cost synergies or leverage the potential business opportunities and growth prospects to the extent
anticipated or at all.
The Arrangement was completed on April 30, 2021, and we are in the early stages of our integration efforts. The integration of operations and
corporate and administrative infrastructures may require substantial resources and divert management attention. Challenges associated with the integration
may include those related to retaining and motivating executives and other key employees, blending corporate cultures, eliminating duplicative operations,
and making necessary modifications to internal control over financial reporting and other policies and procedures in accordance with applicable laws. Some
of these factors are outside our control, and any of them could delay or increase the cost of our integration efforts.
The integration process could take longer than anticipated and could result in the loss of key employees, the disruption of ongoing business,
increased tax costs, inefficiencies, and inconsistencies in standards, controls, information technology systems, policies and procedures, any of which could
adversely affect our ability to maintain relationships with employees, customers or other third parties, or our ability to achieve the anticipated benefits of
the transaction, and could harm our financial performance. If we are unable to successfully integrate certain aspects of the operations of Tilray and Aphria
or experience delays, we may incur unanticipated liabilities and expenses, and be unable to fully realize the potential benefit of the revenue growth,
synergies and other anticipated benefits resulting from the Arrangement, and our business, results of operations and financial condition could be adversely
affected.
We incurred, and may continue to incur, significant Arrangement-related costs and integration costs in connection with the Arrangement with Aphria.
We incurred, and may continue to incur, significant Arrangement-related costs and integration costs in connection with the Arrangement with
Aphria. We may incur additional costs to maintain employee morale and to retain key employees. Unanticipated costs may be incurred in the course of
integration, and management cannot ensure that the elimination of duplicative costs or the realization of other efficiencies will offset the transaction and
integration costs in the near term or at all.
Risks Related to COVID-19
Risks related to the COVID-19 pandemic have and may continue to impact our operations and adversely affect our business, results of operations and
financial condition.
On March 11, 2020, the World Health Organization declared the outbreak of the coronavirus, or COVID-19, a pandemic. The COVID-19 pandemic
continues to result in extended government-ordered measures affecting significant portions of the global economy, including in the United States, Canada,
Portugal, and Germany, where we conduct significant business. The public health crisis caused by COVID-19 and the actions taken and continuing to be
taken by governments, businesses and the public have adversely affected, and we expect will continue to adversely affect, our business, financial condition
and results of operations.
The full extent to which the COVID-19 pandemic may impact our business, including our operations and our financial condition, will depend on
future developments, which are highly uncertain and cannot be predicted at this time. These include the duration, severity and scope of the pandemic, the
development and availability of effective treatments and vaccines, and further action taken by governments and other third parties in response to the
pandemic. In particular, the effects of COVID-19 and government efforts to curtail COVID-19 could impede our production
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facilities, increase operating expenses, result in loss of sales, affect our supply chains, impact performance of contractual obligations and require additional
expenditures to be incurred.
In connection with the COVID-19 pandemic and to comply with mandates and guidance from governmental authorities, we continue to review and
update our operational procedures and safety protocols at our facilities. If such measures are not effective or governmental authorities implement further
restrictions, we may be required to take more extreme action, which could include a short or long-term closure of our facilities or reduction in workforce.
These measures may impair our production levels or cause us to close or severely limit production at one or more facilities. Further, our operations could be
adversely impacted if suppliers, contractors, customers and/or transportation carriers are restricted or prevented from conducting business activities. For
example, cannabis retail stores in certain Canadian markets may close voluntarily or be forced by local governments to close or modify their operations,
reducing our ability to distribute adult-use cannabis.
Consumer demand for our products, particularly our premium brand offerings, may also be impacted by the COVID-19 pandemic as a result of
reductions in consumers’ disposable income associated with layoffs, and work or pay limitations due to mandatory social distancing and lockdown
measures implemented by government authorities. Demand for medical products may be further impacted due to a decrease in patients visiting doctor’s
offices and clinics, and cancellation of elective procedures at hospitals. As demand for our products decreases, we may be required to record additional
asset impairments, including an impairment of the carrying value of our goodwill, along with other accounting charges.
The following is a summary of certain COVID-19 related operational impacts and associated risks:
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To date, we have been able to continue operations at all of our cannabis and hemp cultivation and production facilities, including our facilities
in Ontario, Manitoba, British Columbia and Portugal. In Ontario, Manitoba and British Columbia, production of our cannabis and hemp
products is designated as an essential service or otherwise permitted; however, there can be no assurance that such designations will remain in
effect. If any of these facilities are deemed non-essential or required to close for a significant period of time, our revenues and our results of
operations would be impacted. Similarly, while the U.S./Canadian border closure exempted the transport of food, which includes our hemp-
based food products, as an essential cross-border service, if the U.S.-Canadian border is closed to food transport, our general ability to
transport and receive certain raw materials, inputs and final products would be significantly impacted.
In Germany, we experienced disruption in the supply of pharmaceutical products to our German distributors, including CC Pharma, and
reduced demand due to a decrease in patients visiting doctors’ offices and clinics and the cancellation of elective medical procedures.
• While we have continued to operate our SweetWater brewery in Atlanta, we experienced some labor shortages, as well as a decline in demand
for draft beer products due to closures affecting the on-premise channel and reduced air travel impacting sales to Delta Airlines.
While the United States and certain other jurisdictions are starting to relax restrictions implemented in response to the COVID-19 pandemic, many
jurisdictions are still subject to more significant government mandated closures and other restrictions. Moreover, with the potential for new and more-
transmissible variants, the situation remains dynamic and subject to rapid and possibly material changes. Given the ongoing and dynamic nature and
significance of the COVID-19 pandemic and its impact globally, we are not able to enumerate all potential risks to our business. Any of the negative
impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our
business, results of operations or financial condition. Further, any of these negative impacts, alone or in combination with others, could exacerbate many of
the other risk factors outlined in this Part I, “Item 1A. Risk Factors”.
Risks Related to the Cannabis Business
Our business is dependent upon regulatory approvals and licenses, ongoing compliance and reporting obligations, and timely renewals.
Our ability to cultivate, process, and sell medical and adult-use cannabis, cannabis-derived extracts and derivative cannabis products in Canada is
dependent on maintaining the licenses issued to our operating subsidiaries
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by Health Canada under the Cannabis Regulations, or CR. These licenses allow us to produce cannabis in bulk and finished forms and to sell and distribute
such cannabis in Canada. They also allow us to export medical cannabis in bulk and finished form to and from specified jurisdictions around the world,
subject to obtaining, for each specific shipment, an export approval from Health Canada and an import approval (or no objection notice) from the
applicable regulatory authority in the country to or from which the export or import is being made. These CR licenses are valid for fixed periods and need
to be renewed at the end of such periods.
We are also required to obtain and maintain certain permits, licenses or other approvals from regulatory agencies in countries and markets outside
of Canada in which we operate or to which we export our product, including, in the case of certain countries, the ability to demonstrate compliance with
EU-GMP standards. We have received certification of compliance with EU-GMP standards for cultivation and production at Tilray Nanaimo and Tilray
Portugal, as well as Part II EU-GMP certification for Aphria One and Part I EU-GMP certification for ARA-Avanti Rx Analytics Inc.’s (“Avanti”)
approved facility. These GMP certified facilities are subject to extensive ongoing compliance reviews to ensure that we continue to maintain compliance
with current GMP standards. There can be no assurance that we will be able to continue to comply with these standards. Moreover, future governmental
actions in countries where we operate, or export products, may limit or altogether restrict the import and/or export of cannabis products.
Any future cannabis production facilities that we operate in Canada or elsewhere will also be subject to separate licensing requirements under the
CR or applicable local requirements. Although we believe that we will meet the requirements for future renewals of our existing licenses and obtain
requisite licenses for future facilities, there can be no assurance that existing licenses will be renewed or new licenses obtained on the same or similar terms
as our existing licenses, nor can there be any assurance that Health Canada will continue to issue import or export permits on the same terms or on the same
timeline, or that other countries will allow, or continue to allow, imports or exports. An agency’s denial of or delay in issuing or renewing a permit, license
or other approval, or revocation or substantial modification of an existing permit, license or approval, could restrict or prevent us from continuing the
affected operations, or limit the export and/or import of our cannabis products. In addition, the export and import of cannabis is subject to United Nations
treaties establishing country-by-country national estimates and our export and import permits are subject to these estimates which could limit the amount of
cannabis we can export to any particular country.
Further, our facilities are subject to ongoing inspections by the governing regulatory authority to monitor our compliance with their licensing
requirements. Our existing licenses and any new licenses that we may obtain in the future in Canada or other jurisdictions may be revoked or restricted in
the event that we are found not to be in compliance. Should we fail to comply with the applicable regulatory requirements or with conditions set out under
our licenses, should our licenses not be renewed when required, be renewed on different terms, or be revoked, we may not be able to continue producing or
distributing cannabis in Canada or other jurisdictions or to import or export cannabis products. In addition, we may be subject to enforcement proceedings
resulting from a failure to comply with applicable regulatory requirements in Canada or other jurisdictions, which could result in damage awards, the
suspension, withdrawal or non-renewal of our existing approvals or denial of future approvals, recall of products, the imposition of future operating
restrictions on our business or operations or the imposition of fines or other penalties.
Government regulation is evolving, and unfavorable changes could impact our ability to carry on our business as currently conducted and the potential
expansion of our business.
We operate in a highly regulated and rapidly evolving industry. The successful execution of our business objectives is contingent upon compliance
with all applicable laws and regulatory requirements in Canada (including the Cannabis Act and CR), Europe and other jurisdictions, and obtaining all
required regulatory approvals for the production, sale, import and export of our cannabis products. The laws, regulations and guidelines generally
applicable to the cannabis industry domestically and internationally may change in ways currently unforeseen. Any amendment to or replacement of
existing laws, regulations, guidelines or policies may cause adverse effects to our operations, financial condition, results of operations and prospects.
The federal legislative framework pertaining to the Canadian cannabis market is still very new. In addition, the governments of every Canadian
province and territory have implemented different regulatory regimes for the distribution and sale of cannabis for adult-use purposes within those
jurisdictions. There is no guarantee that the
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Canadian legislative framework regulating the cultivation, processing, distribution and sale of cannabis will not be amended or replaced or the current
legislation will create the growth opportunities we currently anticipate.
In the United States, despite cannabis having been legalized at the state level for medical use in many states and for adult-use in a number of states,
cannabis meeting the statutory definition of “marijuana” continues to be categorized as a Schedule I controlled substance under the federal Controlled
Substances Act, or the CSA, and subject to the Controlled Substances Import and Export Act, or the CSIEA. Hemp and marijuana both originate from the
Cannabis sativa plant and CBD is a constituent of both. “Marihuana” or “marijuana” is defined in the CSA as a Schedule I controlled substance whereas
“hemp” is essentially any parts of the Cannabis sativa plant that has not been determined to be marijuana. Pursuant to the 2018 Farm Bill, “hemp,” or
cannabis and cannabis derivatives containing no more than 0.3% of tetrahydrocannabinol, or THC, is now excluded from the statutory definition of
“marijuana” and, as such, is no longer a Schedule I controlled substance under the CSA. As a result, our activity in the United States is limited to (a) certain
corporate and administrative services, including accounting, legal and creative services, (b) supply of study drug for clinical trials under DEA and FDA
authorization, and (c) participation in the market for hemp and hemp-derived products containing CBD in compliance with the 2018 Farm Bill.
While the 2018 Farm Bill exempts hemp and hemp derived products from the CSA, the commercialization of hemp products in the United States is
subject to various laws, including the 2018 Farm Bill, the FD&C Act, the Dietary Supplement Health and Education Act, or (the “DSHEA”), applicable
state and/or local laws, and FDA regulations. See also Risk Factor “United States regulations relating to hemp-derived CBD products are unclear and
rapidly evolving, and changes may not develop in the timeframe or manner most favorable to our business objectives”.
Our ability to expand internationally is also contingent, in part, upon compliance with applicable regulatory requirements enacted by governmental
authorities and obtaining all requisite regulatory approvals. We cannot predict the impact of the compliance regime that governmental authorities may
implement to regulate the adult-use or medical cannabis industry. Similarly, we cannot predict how long it will take to secure all appropriate regulatory
approvals for our products, or the extent of testing and documentation that may be required by governmental authorities. The impact of the various
compliance regimes, any delays in obtaining, or failure to obtain regulatory approvals may significantly delay or impact the development of markets,
products and sales initiatives and could have a material adverse effect on our business, financial condition, results of operations and prospects.
As the commercial cannabis industry develops in Canada and other jurisdictions, we anticipate that regulations governing cannabis in Canada and
globally will continue to evolve. Further, Health Canada or the regulatory authorities in other countries in which we operate or to which we export our
cannabis products may change their administration or application of the applicable regulations or their compliance or enforcement procedures at any time.
There is no assurance that we will be able to comply or continue to comply with applicable regulations, which could impact our ability to continue to carry
on business as currently conducted and the potential expansion of our business.
We currently incur and will continue to incur ongoing costs and obligations related to regulatory compliance. A failure on our part to comply with
regulations may result in additional costs for corrective measures, penalties or restrictions on our business or operations. In addition, changes in regulations,
more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise
to material liabilities, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our production and processing facilities are integral to our business and adverse changes or developments affecting our facilities may have an adverse
impact on our business.
Our cultivation and processing facilities are integral to our business and the licenses issued by applicable regulatory authorities is specific to each
of these facilities. Adverse changes or developments affecting these facilities, including, but not limited to, disease or infestation of our crops, a fire, an
explosion, a power failure, a natural disaster, an epidemic, pandemic or other public health crisis, or a material failure of our security infrastructure, could
reduce or require us to entirely suspend operations at the affected facilities. See also Risk Factor “Risks related to COVID‑19”.
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A significant failure of our site security measures and other facility requirements, including failure to comply with applicable regulatory
requirements, could have an impact on our ability to continue operating under our facility licenses and our prospects of renewing our licenses, and could
also result in a suspension or revocation of these licenses.
We face intense competition, and anticipate competition will increase, which could hurt our business.
We face, and we expect to continue to face, intense competition from other Licensed Producers and other potential competitors, some of which
have longer operating histories and more financial resources than we have. In addition, we anticipate that the cannabis industry will continue to undergo
consolidation, creating larger companies with financial resources, manufacturing and marketing capabilities and product offerings that may be greater than
ours. As a result of this competition, we may be unable to maintain our operations or develop them as currently proposed, on terms we consider acceptable,
or at all.
Health Canada has issued hundreds of licenses for Licensed Producers. The number of licenses granted and the number of Licensed Producers
ultimately authorized by Health Canada could have an adverse impact on our ability to compete for market share in Canada. We expect to face additional
competition from new market entrants and may experience downward price pressure on our cannabis products as new entrants increase production. If the
number of users of cannabis in Canada increases, the demand for products will increase and the Company expects that competition will become more
intense, as current and future competitors begin to offer an increasing number of diversified products and pricing strategies.
Our commercial opportunity in the medical and adult-use markets could also be impacted if our competitors produce and commercialize products
that, among other things, are safer, more effective, more convenient or less expensive than the products that we may 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. To remain competitive, we intend to continue to invest in research and development, marketing and
sales and client support. We may not have sufficient resources to maintain research and development, marketing and sales and client support efforts on a
competitive basis.
In addition to the foregoing, the legal landscape for medical and adult-use cannabis is changing internationally. We maintain operations outside of
Canada, which may be affected as other countries develop, adopt and change their laws related to medical and 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 cannabis products on a global scale.
Competition from the illicit cannabis market could impact our ability to succeed.
We face competition from illegal market operators that are unlicensed and unregulated including illegal dispensaries and illicit market suppliers
selling cannabis and cannabis-based products. As these illegal market participants do not comply with the regulations governing the cannabis industry, their
operations may have significantly lower costs. The perpetuation of the illegal market for cannabis may have a material adverse effect on our business,
results of operations, as well as the perception of cannabis use. Furthermore, given the restrictions on regulated cannabis retail, including those related to
the COVID-19 pandemic, it is possible that legal cannabis consumers revert to the illicit market as a matter of convenience.
The cannabis industry and market are relatively new and evolving, which could impact our ability to succeed in this industry and market.
We are operating our business in a relatively new industry and market that is expanding globally, and our success depends on our ability to attract
and retain consumers and patients. There are many factors which could impact our ability to attract and retain consumers and patients, including but not
limited to brand awareness, our ability to continually produce desirable and effective cannabis products and the ability to bring new consumers and patients
into the category. The failure to acquire and retain consumers and patients could have a material adverse effect on our business, financial condition, results
of operations and prospects.
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To remain competitive, we will continue to innovate new products, build brand awareness and make significant investments in our business
strategy and production capacity. These investments include introducing new products into the markets in which we operate, adopting quality assurance
protocols and procedures, building our international presence and undertaking research and development. These activities may not promote our products as
effectively as intended, or at all, and we expect that our competitors will undertake similar investments to compete with us for market share. Competitive
conditions, consumer preferences, regulatory conditions, patient requirements, prescribing practices, and spending patterns in this industry and market are
relatively unknown and may have unique characteristics that differ from other existing industries and markets and that cause our efforts to further our
business to be unsuccessful or to have undesired consequences. As a result, we may not be successful in our efforts to attract and retain customers or to
develop new cannabis products and produce and distribute these products in time to be effectively commercialized, or these activities may require
significantly more resources than we currently anticipate in order to be successful.
Regulations constrain our ability to market and distribute our products in Canada.
In Canada, there are significant regulatory restrictions on the marketing, branding, product formats, product composition, packaging, and
distribution of adult-use cannabis products. For instance, the CR includes a requirement for health warnings on product packaging, the limited ability to use
logos and branding (only one brand name and one brand element per package), restrictions on packaging itself, and restrictions on types and avenues of
marketing. Cannabis 2.0 regulations, which govern the production and sale of new classes or forms of cannabis products (including vapes and edibles),
impose considerable restrictions on product composition, labeling, and packaging in addition to being subject to similar marketing restrictions as existing
form factors.
Further, each province and territory of Canada has the ability to separately regulate the distribution of cannabis within such province or territory
(including the legal age), and the rules and regulations adopted vary significantly. Additional marketing and product composition restrictions have been
imposed by some provinces and territories. Such federal and provincial restrictions may impair our ability to differentiate our products and develop our
adult-use brands. Some provinces and territories also impose significant restrictions on our ability to merchandise products; for example, some provinces
impose restrictions on investment in retailers or distributors as well as in our ability to negotiate for preferential retail space or in-store marketing. If we are
unable to effectively market our products and compete for market share, our sales and results of operations may be adversely affected.
The adult-use cannabis market in Canada is continuing to develop and may experience supply fluctuations which could result in decreases to prices
and revenues.
Since legalization in October 2018 of adult-use cannabis for recreational purposes in Canada, the market for adult-use cannabis is continuing to
develop, resulting in fluctuations in supply and demand. Licensed cannabis producers may not be able to produce enough cannabis to meet adult-use
demand. This may result in lower than expected sales and revenues and may result in increased competition for sales and sources of supply. This
competition may adversely affect our adult-use business and there is no guarantee that we will be able to supply or acquire the supply, on commercially
reasonable terms or at all, to meet the demand for adult-use cannabis.
Alternatively, we and other cannabis producers in Canada may produce more cannabis than is needed to satisfy the collective demand of the
Canadian medical and adult-use markets, and we may be unable to export that oversupply into other legal markets. As a result, the available supply of
cannabis could exceed demand, resulting in a significant decline in the market price for cannabis. If this were to occur, there is no assurance that we would
be able to generate sufficient revenue from the sale of medical and adult-use cannabis products to result in profitability and sufficient liquidity. Regulatory
restrictions or over supply conditions in our primary markets could result in inventory adjustments.
We may not be able to successfully develop new products or commercialize such products.
Cannabis 2.0 regulations, which came into effect on October 17, 2019 in Canada, permit Canadian Licensed Producers to develop new cannabis
form factors, including CBD and THC-infused drinks, edibles and non-flower products, such as vapes. We have and will continue to develop strategic
partnerships to participate in these new product market opportunities with partners who can provide complementary product development and support
capabilities.
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Strategic initiatives around new products involve significant investment of management time and resources in order to successfully execute and maintain,
for novel products that may not generate sufficient market demand. Additionally, there can be no guarantee that such new product offerings, even if
successfully developed, will have unit economics that generate an appropriate return on investment. The development of new products could result in
diversions of management attention, a strain on existing financial and other resources or a lack of product demand for our newly developed form factors,
any of which could have a material adverse effect on our business, results of operations and financial condition.
Our vape business is subject to uncertainty in the evolving vape market due to negative public sentiment and regulatory scrutiny.
Cannabis vape products in Canada are regulated under the Cannabis Act and the CR, as well as the Canada Consumer Product Safety Act. The CR
sets clear rules and standards for the manufacture, composition, packaging, and marketing of cannabis vape products. Health risks raised in Canada and the
United States associated with vaping and accompanying negative public sentiment may prompt Health Canada or individual provinces/territories to further
limit or defer industry’s ability to sell cannabis vape products and may also diminish consumer demand for such products. 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.
Vaping, electronic cigarettes and related products were recently developed and therefore the scientific community has not yet had a sufficient
period of time to study the long-term health effects of their use. Currently, there is no way of knowing whether these products are safe for their intended use
and the medical community is still studying these products’ health effects. If the scientific community were to determine conclusively that use of any or all
of these products poses long-term health risks, market demand for these products and their use could materially decline. Such a determination could also
lead to litigation and significant regulation.
Loss of demand for our vape products, product liability claims and increased regulation stemming from unfavorable scientific studies on cannabis
vaping products could have a material adverse effect on our business, results of operations and financial condition.
The long-term effect of the legalization of adult-use cannabis in Canada on the medical cannabis industry is unknown, and may negatively impact our
medical cannabis business.
According to recent Canadian government statistics, medicinal cannabis patient numbers continue to experience decline. A continued decrease in
the overall size of the medical cannabis market in Canada as a result of the legal adult-use market or other factors may reduce our medical sales and
revenue prospects in Canada. Factors that may influence demand for medical cannabis include the availability of product in each market, the price of
medical cannabis products in relation to similar adult-use cannabis products, and the ease with which each market can be accessed in the individual
provinces and territories of Canada. The impact of adult-use cannabis on the medical market is not yet fully understood as the market is still in a state of
flux. In addition, the impact of the new form factors, legalized in October 2019, on the medical vs adult-use market is not yet established.
The regulation of cannabis for medical purposes under the CR is expected to be reviewed in light of the adult-use market, which review is
scheduled to commence in October 2021. The effect on our business, and the medical cannabis market in general, of such a review is uncertain.
Research regarding the health effects of cannabis is in relatively early stages and subject to further study which could impact demand for cannabis
products.
Research and clinical trials on the potential benefits and the short-term and long-term effects of cannabis use on human health remains in relatively
early stages and there is limited standardization. As such, there are inherent risks associated with using cannabis and cannabis derivative products.
Moreover, future research and clinical trials may draw opposing conclusions to statements contained in articles, reports and studies we relied on or could
reach different or negative conclusions regarding the benefits, viability, safety, efficacy, dosing or other facts and perceptions related to cannabis, which
could adversely affect social acceptance of cannabis and the demand for our products.
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United States regulations relating to hemp-derived CBD products are unclear and rapidly evolving, and changes may not develop in the timeframe or
manner most favorable to our business objectives.
Our participation in the market for hemp-derived CBD products in the United States and elsewhere may require us to employ novel approaches to
existing regulatory pathways. Although the passage of the 2018 Farm Bill legalized the cultivation of hemp in the United States to produce products
containing CBD and other non-THC cannabinoids, it remains unclear how the FDA will regulate these products, and whether and when the FDA will
propose or implement new or additional regulations. While, to date, there are no laws or regulations enforced by the FDA which specifically address the
manufacturing, packaging, labeling, distribution, or sale of hemp or hemp-derived CBD products and the FDA has issued no formal regulations addressing
such matters, the FDA has issued various guidance documents and other statements reflecting its non-binding opinion on the regulation of such products.
The hemp plant and the cannabis/marijuana plant are both part of the same cannabis sativa genus/species of plant, except that hemp, by definition,
has less than 0.3% THC content, but the same plant with a higher THC content is cannabis/marijuana, which is legal under certain state laws, but which is
not legal under United States federal law. The similarities between these two can cause confusion, and our activities with legal hemp in the United States
may be incorrectly perceived as us being involved in federally illegal cannabis. The FDA has stated in guidance and other public statements that it is
prohibited to sell a food, beverage or dietary supplement to which THC or CBD has been added. While the FDA does not have a formal policy of
enforcement discretion with respect to any products with added CBD, the agency has stated that its primary focus for enforcement centers on products that
put the health and safety of consumers at risk, such as those claiming to prevent, diagnose, mitigate, treat, or cure diseases in the absence of requisite
approvals. While the agency’s enforcement to date has therefore focused on products containing CBD and that make drug-like claims, there is the risk that
the FDA could expand its enforcement activities and require us to alter our marketing for our hemp-derived CBD products or cease distributing them
altogether. The FDA could also issue new regulations that prohibit or limit the sale of hemp-derived CBD products. Such regulatory actions and associated
compliance costs may hinder our ability to successfully compete in the market for such products.
In addition, such products may be subject to regulation at the state or local levels. State and local authorities have issued their own restrictions on
the cultivation or sale of hemp or hemp-derived CBD. This includes laws that ban the cultivation or possession of hemp or any other plant of the cannabis
genus and derivatives thereof, such as CBD. State regulators may take enforcement action against food and dietary supplement products that contain CBD,
or enact new laws or regulations that prohibit or limit the sale of such products.
The regulation of hemp and CBD in the United States has been constantly evolving, with changes in federal and state laws and regulation occurring
on a frequent basis. Violations of applicable FDA and other laws could result in warning letters, significant fines, penalties, administrative sanctions,
injunctions, convictions or settlements arising from civil proceedings. Unforeseen regulatory obstacles or compliance costs may hinder our ability to
successfully compete in the market for such products.
Risks related to the Beverage Alcohol Business
Changes in consumer preferences or public attitudes about alcohol could decrease demand for our beverage alcohol products.
If general consumer trends lead to a decrease in the demand for SweetWater’s products or beer in general, including craft beer, our sales and results
of operations in the beverage alcohol segment may be adversely affected. There is no assurance that the craft brewing segment will experience growth in
future periods. If the markets for wine, spirits or flavored alcohol beverages continue to grow, this could draw consumers away from the beer industry in
general and our beverage alcohol products specifically.
Further, the alcoholic beverage industry is subject to public concern and political attention over alcohol-related social problems, including drunk
driving, underage drinking and health consequences from the misuse of alcohol. In reaction to these concerns, steps may be taken to restrict advertising, to
impose additional cautionary labeling or packaging requirements, or to increase excise or other taxes on beverage alcohol products. Any such developments
may have an adverse impact on the financial condition, operating results and cash flows for SweetWater.
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Developments affecting production at our brewery could negatively impact financial results for our beverage alcohol busines segment.
Adverse changes or developments affecting our brewery in Atlanta, including, fire, power failure, natural disaster, public health crisis, or a material
failure of our security infrastructure, could reduce or require us to entirely suspend operations. Additionally, due to many factors, including seasonality and
production schedules of our various craft beer products and packaging, actual production capacity may fluctuate throughout the year and may not reach full
working capacity. If we experience contraction in our sales and brewing volumes, the excess capacity and unabsorbed overhead may have an adverse effect
on gross margins, operating cash flows and overall financial performance of SweetWater.
SweetWater faces substantial competition in the beer industry and the broader market for alcoholic beverage products which could impact its business
and financial results.
The market for alcoholic beverage products within the United States is highly competitive due to the increasing number of domestic and
international beverage companies with similar pricing and target drinkers, the introduction and expansion of hard seltzers, gains in market share achieved
by domestic specialty beers and imported beers, and the acquisition of craft brewers by larger brewers. We anticipate competition among domestic craft
brewers will also remain strong as existing breweries build more capacity, expand geographically and add more products, flavors and styles. The continued
growth in the sales of hard seltzers, craft-brewed domestic beers and imported beers is expected to increase competition in the market for alcoholic
beverages within the United States and, as a result, prices and market share of SweetWater’s products may fluctuate and possibly decline.
The beer industry has seen continued consolidation among brewers in order to take advantage of cost savings opportunities for supplies,
distribution and operations. Due to the increased leverage that these combined operations have in distribution and sales and marketing expenses, the costs
to SweetWater of competing could increase. The potential also exists for these large competitors to increase their influence with their distributors, making it
difficult for smaller brewers to maintain their market presence or enter new markets. The increase in the number and availability of competing products and
brands, the costs to compete and potential decrease in distribution support and opportunities may adversely affect SweetWater’s business and financial
results.
SweetWater is dependent on distributors to deliver sustained growth.
In the United States, SweetWater sells its alcohol beverages to independent beer distributors for distribution to retailers and, ultimately, to
consumers. In order for SweetWater to deliver sustained growth and continue its national expansion, it will be required to maintain such relationships and
to enter into agreements with additional distributors. No assurance can be given that SweetWater will be able to maintain its current distribution network or
secure additional distributors on terms favorable to SweetWater. If SweetWater’s existing distribution agreements are terminated, it may not be able to
enter into new distribution agreements on substantially similar terms, which may result in an increase in the costs of distribution.
General Business Risks and Risks Related to Our Financial Condition and Operations
We have a limited operating history and a history of net losses, and we may not achieve or maintain profitability in the future.
We began operating in 2014 and have yet to generate a profit. We intend to continue to expend significant funds to explore potential opportunities
and complete strategic mergers and acquisitions, invest in research and development, expand our marketing and sales operations and meet the compliance
requirements as a public company.
Our efforts to grow our business may be more costly than we expect and we may not be able to increase our revenue enough to offset higher
operating expenses. We may incur significant losses in the future for a number of reasons, including as a result of unforeseen expenses, difficulties,
complications and delays, the other risks described herein and other unknown events. The amount of future net losses will depend, in part, on the growth of
our future expenses and our ability to generate revenue. 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 stockholders’
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equity and working capital. Because of the numerous risks and uncertainties associated with producing and selling cannabis and beverage alcohol products,
as outlined herein, we are unable to accurately predict when, or if, we will be able to achieve profitability. Even if we achieve profitability 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 stock
may significantly decrease and our ability to raise capital, expand our business or continue our operations may be impaired.
We are subject to litigation, arbitration and demands, which could result in significant liability and costs, and impact our resources and reputation.
Tilray has previously been named as a defendant in a class action relating to the prior merger of Privateer Holdings, Inc. with and into a wholly
owned subsidiary (referred to as the Downstream Merger), and a class action related to the drop in our stock price. In addition, legal proceedings covering a
wide range of matters are pending or threatened in various U.S. and foreign jurisdictions against the Company. The type of claims that may be raised in
these proceedings include product liability, unfair trade practices, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for
contribution and claims of competitors, shareholders or distributors. Litigation is subject to uncertainty and it is possible that there could be adverse
developments in pending or future cases.
We are also subject to other litigation and demands relating to business decisions, regulatory and industry changes, supply relationships, and our
business acquisition matters and related activities. Litigation may include claims for substantial compensatory or punitive damages or claims for
indeterminate amounts of damages. Tilray and its various subsidiaries are also involved from time to time in other reviews, investigations and proceedings
(both formal and informal) by governmental and self-regulatory agencies regarding our business. These matters could result in adverse judgments,
settlements, fines, penalties, injunctions or other relief.
We have incurred and may continue to incur substantial costs and expenses relating directly to these actions. Responding to such actions could
divert management’s attention away from our business operations and result in substantial costs. For more information on our pending legal proceedings,
see “Part I, Item 3. Legal Proceedings”.
We are exposed to risks relating to the laws of various countries as a result of our international operations.
We currently conduct operations in multiple countries and plan to expand these international operations. As a result of our operations, we are
exposed to various levels of political, economic, legal and other risks and uncertainties associated with operating in or exporting to these jurisdictions.
These risks and uncertainties include, but are not limited to, changes in the laws, regulations and policies governing the production, sale and use of our
products, political instability, instability at the United Nations level, 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.
Changes, if any, in the laws, regulations and policies relating to the advertising, production, sale and use of our 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 operations, in these
countries. As we explore novel business models, such as global co-branded products, cannabinoid clinics and cannabis retail, international regulations will
become increasingly challenging to manage. Specifically, our operations may be affected in varying degrees by government regulations with respect to, but
not limited to, restrictions on advertising, production, price controls, export 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.
Furthermore, there is no assurance that we will be able to secure the requisite import and export permits for the international distribution of our
products. Countries may also 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
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required to establish facilities in one or more countries in the EU (or elsewhere) where we wish to distribute our products in order to take advantage of the
favorable legislation offered to producers in these countries.
We face risks associated with our expansion into new markets outside of the current jurisdictions where we conduct business.
We plan in the future to expand our operations and business into jurisdictions outside of the jurisdictions where we currently carry on business.
There can be no assurance that any market for our products will develop in any such foreign jurisdiction. We may face new or unexpected risks or
significantly increase our exposure to one or more existing risk factors, including economic instability, new competition, changes in laws and regulations,
including the possibility that we could be in violation of these laws and regulations as a result of such changes, and the effects of competition. These factors
may limit our capability to successfully expand our operations in, or export our products to, to such jurisdictions.
We may be unable to sustain our revenue growth and development, and may be forced to adjust our operations accordingly.
Our revenue has grown in recent years. Our ability to sustain this growth will depend on a number of factors, many of which are beyond our
control, including, but not limited to, the availability of sufficient capital on suitable terms, changes in laws and regulations respecting the production and
distribution of cannabis products, competition from other Licensed Producers, the size of the illicit market, the size of the Canadian adult-use market, and
our ability to produce sufficient volumes of our cannabis-based products to meet demand. Regulatory changes, particularly in the primary jurisdictions
where we operate, may continue to attract new market entrants and could dilute our potential opportunity and early-mover advantage. In addition, we are
subject to a variety of business risks generally associated with developing companies. Future development and expansion could place significant strain on
our management personnel and likely will require us to recruit additional management personnel, and there is no assurance that we will be able to do so.
As part of the integration of Tilray and Aphria, we implemented certain employee lay-offs and facility closures. We may take additional cost-
control measures in the future that may impact our revenue growth and development, and could result in material charges and other impairment charges in
our statement of operations. In addition, please see Risk Factor “Risks related to the Arrangement”.
Failure to comply with anti-money laundering and anti-terrorist financing laws could disrupt our operations and involve significant costs.
We are subject to a variety of laws and regulations in the United States, Canada and elsewhere that prohibit money laundering, including the
Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) and the Money Laundering Control Act (United States), as amended, and the
rules and regulations thereunder and any related or similar rules, regulations or guidelines issued, administered or enforced by governmental authorities in
the United States, Canada or any other jurisdiction in which we have 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 in violation of money laundering statutes, such transactions may be viewed as proceeds of crime
under one or more of the statutes described above or any other applicable legislation, and any persons, including such United States-based investors, found
to be aiding and abetting us in such violations could be subject to liability. Any violations of these laws, or allegations of such violations, could disrupt our
operations, involve significant management distraction 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.
Failure to comply with anti-bribery laws of Canada, the United States and the other countries in which we conduct business, could subject us to
penalties and other adverse consequences.
We are subject to the Corruption of Foreign Public Officials Act (Canada) and the Foreign Corrupt Practices Act (United States), which generally
prohibit companies and their employees from engaging in bribery, kickbacks or
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making other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Such legislation requires companies and their
subsidiaries (including foreign subsidiaries) to maintain accurate books and records and internal controls. We are also subject to the anti-bribery laws of
other countries in which we conduct, or will conduct, business that apply similar prohibitions. While we have developed policies and procedures that
mandate compliance with these laws, employees or other agents may engage in unauthorized or prohibited conduct for which we may be held responsible.
If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a
material adverse effect on our business, financial condition and operations.
We are required to comply concurrently with all applicable laws in each jurisdiction where we operate or to which we export our products, and any
changes to such laws could adversely impact our business.
Various federal, state, provincial and local laws and regulations govern our business in the jurisdictions in which we operate or propose to operate,
and in which we export or propose to export our products. Such laws and regulations include those relating to health and safety, conduct of operations and
the production, management, transportation, storage and disposal of our products and of certain material used in our operations. In many cases, we must
concurrently comply with complex federal, provincial, state and/or local laws in multiple jurisdictions. These laws change frequently and may be difficult
to interpret and apply. Compliance with these laws and regulations requires the investment of significant financial and managerial resources, and a
determination that we are not in compliance with any of these laws and regulations could harm our brand image and business. Moreover, it is impossible
for us to predict the cost or effect of such laws, regulations or guidelines upon our future operations. Changes to these laws or regulations could negatively
affect our competitive position within our industry and the markets in which we operate, and there is no assurance that various levels of government in the
jurisdictions in which we operate will not pass legislation or regulation that adversely impacts our business.
Our strategic alliances and other third-party business relationships may not achieve the intended beneficial impact and expose us to risks.
We currently have, and may adjust the scope of, and may in the future enter into, strategic alliances with third parties that we believe will
complement or augment our existing business. Our ability to complete further strategic alliances is dependent upon, and may be limited by, among other
things, the availability of suitable candidates and capital. In addition, strategic alliances could present unforeseen integration obstacles or costs, may not
enhance our business or profitability 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 strategic alliances. We may become
dependent on our strategic partners and actions by such partners could harm our business. Future strategic alliances could result in the incurrence of debt,
impairment charges, costs and contingent liabilities, and there can be no assurance that future strategic alliances will achieve, or that our existing strategic
alliances will continue to achieve, the expected benefits to our business or that we will be able to consummate future strategic alliances on satisfactory
terms, or at all.
We may not be able to successfully identify and execute future acquisitions, dispositions or other equity transactions or to successfully manage the
impacts of such transactions on our operations.
Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing
business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring additional indebtedness; (iv)
the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; (v) an increase
in the scope and complexity of our operations; (vi) the loss or reduction of control over certain of our assets; and (vii) capital stock or cash to pay for the
acquisition.. Material acquisitions and strategic transactions have been and continue to be material to our business strategy. There can be no assurance that
we will find suitable opportunities for strategic transactions at acceptable prices, have sufficient capital resources to pursue such transactions, be successful
in negotiating required agreements, or successfully close transactions after signing such agreements. There is no guarantee that any acquisitions will be
accretive, or that past or future acquisitions will not result in additional impairments or write downs.
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The existence of one or more material liabilities of an acquired company that are unknown to us at the time of acquisition could result in our
incurring those liabilities. A strategic transaction may result in a significant change in the nature of our business, operations and strategy, and we may
encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into our operations.
We are subject to risks inherent in an agricultural business, including the risk of crop failure.
We grow cannabis, which is an agricultural process. As such, our business is subject to the risks inherent in the agricultural business, including
risks of crop failure presented by weather, insects, plant diseases and similar agricultural risks. Although we primarily grow our products indoors under
climate-controlled conditions, we also have certain outdoor cultivation capacity and there can be no assurance that natural elements, such as insects and
plant diseases, will not interrupt our production activities or have an adverse effect on our business.
We depend on significant customers for a substantial portion of our revenue. If we fail to retain or expand our customer relationships or significant
customers reduce their purchases, our revenue could decline significantly.
We derive a significant portion of revenue from the supply contracts we have with 12 Canadian provinces and territories for adult-use cannabis
products. There are many factors which could impact our contractual agreements with the provinces and territories, including but not limited to availability
of supply, product selection and the popularity of our products with retail customers. If our supply agreements with certain Canadian provinces and
territories are amended, terminated or otherwise altered, our sales and results of operations could be adversely affected, which could have a material
adverse effect on our business, financial condition, results of operations and prospects.
In addition, not all of our supply contracts with the Canadian provinces and territories contain purchase commitments or otherwise obligate the
provincial or territorial wholesaler to buy a minimum or fixed volume of cannabis products from us. The amount of cannabis that the provincial or
territorial wholesalers may purchase under the supply contracts may therefore vary from what we expect or planned for. As a result, our revenues could
fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of the provincial or territorial
wholesalers. In the future, these customers may decide to purchase less product from us than they have in the past, may alter purchasing patterns or return
inventory, or may decide not to continue to purchase our products, any of which could cause our revenue to decline materially and materially harm our
financial condition and results of operations. If we are unable to diversify our customer base, we will continue to be susceptible to risks associated with
customer concentration.
We may be unable to attract or retain key personnel, and we may be unable to attract, develop and retain additional employees required for our
development and future success.
Our success is largely dependent on the performance of our management team and certain employees and our continuing ability to attract, develop,
motivate and retain highly qualified and skilled employees. Qualified individuals are in high demand, and we may incur significant costs to attract and
retain them. The loss of the services of any key personnel, or an inability to attract other suitably qualified persons when needed, could prevent us from
executing on our business plan and strategy, and we may be unable to find adequate replacements on a timely basis, or at all.
Further, officers, directors, and certain key personnel at each of our facilities that are licensed by Health Canada are subject to the requirement to
obtain and maintain a security clearance from Health Canada under the CR. Moreover, under the CR, an individual with security clearance must be
physically present on site when other individuals are conducting activities with cannabis. Under the CR, a security clearance is valid for a limited time and
must be renewed before the expiry of a current security clearance. 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 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. 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 CR in a timely manner, or at all, we may not be able to conduct our operations at planned production
volume levels or at all.
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The CR also requires us to designate a qualified individual in charge who is responsible for supervising activities relating to the production of study
drugs for clinical trials, which individual must meet certain educational and security clearance requirements. If our current designated qualified person in
charge fails to maintain their security clearance, or leaves us and we are unable to find a suitable replacement who meets these requirements, we may no
longer be able to continue our clinical trial activities.
Increased labor costs, potential organization of our workforce, employee strikes, and other labor-related disruption may adversely affect our
operations.
Outside Portugal, none of our employees are represented by a labor union or subject to a collective bargaining agreement. In Portugal, none of our
employees are represented by a labor union or subject to any workforce-initiated labor agreement. As with other companies carrying on business in
Portugal, we are subject to a government-mandated collective bargaining agreement, which grants employees nominal additional benefits beyond those
required by the local labor code. We cannot assure that our labor costs going forward will remain competitive based on various factors, such as: (i) our
workforce may organize in the future and labor agreements may be put in place that have significantly higher labor rates and company obligations; (ii) our
competitors may maintain significantly lower labor costs, thereby reducing or eliminating our comparative advantages vis-à-vis one or more of our
competitors or the larger industry; and (iii) our labor costs may increase in connection with our growth.
Significant interruptions in our access to certain supply chains for key inputs such as raw materials, supplies, electricity, water and other utilities may
impair our operations.
Our business is dependent on a number of key inputs and their related costs (certain of which are sourced in other countries and on different
continents), including raw materials, supplies and equipment related to our operations, as well as electricity, water and other utilities. We operate global
manufacturing facilities, and have dispersed suppliers and customers. Governments may regulate or restrict the flow of labor or products, and the
Company's operations, suppliers, customers and distribution channels could be severely impacted. While we have not experienced any material supply
chain disruptions, any significant future governmental-mandated or market-related interruption, price increase or negative change in the availability or
economics of the supply chain for key inputs and, in particular, rising or volatile energy costs could curtail or preclude our ability to continue production. In
addition, our operations would be significantly affected by a prolonged power outage.
Our ability to compete 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. See also
Risk Factor “Risks related to COVID-19”.
We may require third party supply of quality cannabis flower, which may adversely affect our costs and subject us to unreliable supply chains or
product quality.
Our business is highly dependent on the production and sale of acceptable and certifiable cannabis flower. Our operations may not produce
sufficient volumes of cannabis flower or particular cultivars (commonly referred to as “strains”) to meet consumer demand. It is also possible that our
cannabis flower production fails to meet our strict internal quality standards or external regulation specifications. This may require us to contract with third
parties to purchase cannabis flower. There is no guarantee we will be able to source cannabis flower at attractive prices or that any third party-sourced
product will meet our quality standards and all regulatory requirements. If we are unable to source sufficient cannabis flower for any of these reasons, our
sales goals may not be achieved or our costs may increase, or both may occur. An increasing reliance on third party cannabis flower supply could
materially impact our business reputation, financial condition and results of operations.
Fluctuations in cannabinoid prices relative to contracted prices with third party suppliers could negatively impact our earnings.
A portion of our results of operations and financial condition, as well as the selling prices for our products, are dependent upon cannabinoid supply
contracts. Production and pricing of cannabinoids are determined by constantly changing market forces of supply and demand over which we have limited
or no control. The market for cannabis
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biomass is particularly volatile compared to other commoditized markets due to the relatively nascent maturity of the industry in which we operate. The
lack of centralized data and large variations in product quality make it difficult to establish a “spot price” for cannabinoids and develop an effective price
hedging strategy. Accordingly, supply contracts with any term may prove to be costly in the future to the extent cannabinoid prices decrease dramatically or
at a faster rate than anticipated.
Our failure to successfully negotiate supply contracts that address such market vagaries could result in us being contractually obligated to purchase
products, some of which may be priced above then-current market prices, or interruption of the supply of inputs for the manufacturing of our products, all
of which could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.
We face risks associated with the transportation of our products to consumers in a safe and efficient manner.
We depend on fast, cost-effective, and efficient courier services to distribute our products to both wholesale and retail customers. Any prolonged
disruption of third-party transportation services could have a material adverse effect on our sales volumes or satisfaction with our services. Rising costs
associated with third-party transportation services used by us to ship our products may also adversely impact our profitability, and more generally our
business, financial condition and results of operations.
The security of our products during transportation to and from our facilities is of the utmost concern. A breach of security during transport or
delivery could result in the loss of high-value product and forfeiture of import and export approvals, since such approvals are shipment specific. Any failure
to take steps necessary to ensure the safekeeping of our cannabis products could also have an impact on our ability to continue supplying provinces and
territories, to continue operating under our existing licenses, to renew or receive amendments to our existing licenses or to obtain new licenses.
Our products may be subject to recalls for a variety of reasons, which could require us to expend significant management and capital resources.
Manufacturers and distributors of cannabis, hemp and beverage alcohol products are sometimes subject to the recall or return of their products for a
variety of reasons, including product defects, such as contamination, adulteration, unintended harmful side effects or interactions with other substances,
packaging safety, and inadequate or inaccurate labeling disclosure. Although we have detailed procedures in place for testing finished products, there can
be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or
lawsuits, whether frivolous or otherwise. If any of the products produced by us are recalled due to an alleged product defect or for any other reason, we
could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. As a result of any
such recall, we may lose a significant amount of sales and may not be able to replace those sales at an acceptable gross profit or at all. In addition, a product
recall may require significant management attention or damage our reputation and goodwill or that of our products or brands.
Additionally, product recalls may lead to increased scrutiny of our operations by Health Canada or other regulatory agencies, requiring further
management attention, increased compliance costs and potential legal fees, fines, penalties and other expenses. Any product recall affecting the cannabis
industry more broadly, whether or not involving us, could also lead consumers to lose confidence in the safety and security of cannabis products generally,
including products sold by us.
We may be subject to product liability claims or regulatory action. This risk 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 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 or injury. We may be subject to these types of claims due to allegations that our products
caused or contributed to injury or illness, failed to include adequate 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
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developing schizophrenia and other psychoses, symptoms for individuals with bipolar disorder, and other side effects. Furthermore, we are now offering an
expanded assortment of form factors, some of which may have additional adverse side effects, such as vaping products. See also Risk Factor “Our vape
business is subject to uncertainty in the evolving vape market due to negative public sentiment and regulatory scrutiny.” Previously unknown adverse
reactions resulting from human consumption of cannabis or beverage alcohol products alone or in combination with other medications or substances could
also occur.
In addition, the manufacture and sale of our products, like the manufacture and sale of any ingested product, involves a risk of injury to consumers
due to tampering by unauthorized third parties or product contamination. We have in the past recalled, and may again in the future have to recall, certain
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 customers and consumers generally. 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 adversely affect our
commercial arrangements with third parties.
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 pharmaceutical distributors, courier services, and government agencies, and may in the future rely on
other third parties, to distribute our products. 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. 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.
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 the cannabis distributed to consumers. The perception of the cannabis industry and cannabis products, currently and in the future, may be
significantly influenced by scientific research or findings, regulatory investigations, 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 consumption of cannabis products, including unexpected safety
or efficacy concerns arising with respect to cannabis products or the activities of industry participants. There can be no assurance that future scientific
research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any
particular cannabis product or will be consistent with earlier publicity. Adverse scientific research reports, findings and regulatory proceedings 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 our products. Further, adverse publicity reports or other
media attention regarding the safety, efficacy and quality of cannabis, or our products specifically, or associating the consumption of cannabis with illness
or other negative effects or events, could adversely affect us. This adverse publicity could arise even if the adverse effects associated with cannabis
products resulted from consumers’ failure to use such products legally, appropriately or as directed.
Certain events or developments in the cannabis industry more generally may impact our reputation.
Damage to our reputation can result from the actual or perceived occurrence of any number of events, including any negative publicity, whether
true or not. As a producer and distributor of cannabis, which is a controlled substance in Canada that has previously been commonly associated with
various other narcotics, violence and criminal activities, there is a risk that our business might attract negative publicity. There is also a risk that the actions
of other Licensed Producers or 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
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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 regards to our activities and the cannabis industry in general, whether true or not. 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, increased challenges in developing and maintaining community relations and present an impediment to our overall ability to advance our
business strategy and realize on our growth prospects. This could also impact our ability to attract and/or maintain business partners that are not primarily
engaged in the cannabis business, such as major food retailers.
Failure to comply with safety, health and environmental regulations applicable to our operations and industry may expose us to liability and impact
operations.
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 GMP
requires satisfying additional standards for the conduct of our operations and subjects us to ongoing compliance inspections in respect of these standards in
connection with our GMP certified facilities. 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 licenses to us or to certify our compliance with GMP standards. Exposure to these liabilities may
arise in connection with our existing operations, our historical operations and operations that we may undertake in the future. 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 and/or activities and our resulting financial position; however, we anticipate that capital expenditures and operating
expenses will increase in the future as a result of the implementation of new and increasingly stringent safety, health and environmental laws and
regulations. Further changes in safety, health and environmental laws and regulations, new information on existing safety, health and environmental
conditions or other events, including legal proceedings based upon such conditions or an inability to obtain necessary permits in relation thereto, may
require increased compliance expenditures by us.
We may become subject to liability and harm arising from fraudulent or illegal activity by our employees, contractors, consultants and others.
We are exposed to the risk that our employees, independent contractors, consultants, service providers and licensors may engage in fraudulent or
other illegal activity. Misconduct by these parties could include intentional undertakings of unauthorized activities, or reckless or negligent undertakings of
authorized activities, in each case on our behalf or in our service that violate: (i) government regulations, including Health Canada regulations; (ii)
manufacturing standards; (iii) healthcare laws and regulations; (iv) privacy laws and regulations; (v) laws that require the true, complete and accurate
reporting of financial information or data; (vi) United States federal laws banning the possession, sale or importation of cannabis into the United States and
prohibiting the financing of activities outside the United States that are unlawful under Canadian or other foreign laws or (vii) the terms of our agreements
with insurers. For example, we could be exposed to class action and other litigation, increased Health Canada inspections and related sanctions, the loss of
current GMP compliance certifications or the inability to obtain future GMP compliance certifications, lost sales and revenue or reputational damage as a
result of prohibited activities that are undertaken in the growing or production process of our products without our knowledge or permission and contrary to
our internal policies, procedures and operating requirements.
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We cannot always identify and prevent misconduct by our employees and other third parties, including service providers and licensors, and the
precautions taken by us to detect and prevent this activity may not be effective in controlling unknown, unanticipated or unmanaged risks or losses or in
protecting us from governmental investigations or other actions or lawsuits stemming from such misconduct. If any such actions are instituted against us,
and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the
imposition of civil, criminal or administrative penalties, damages, monetary fines and contractual damages, reputational harm, diminished profits and future
earnings or curtailment of our operations.
We may experience breaches of security at our facilities, which could result in product loss and liability.
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 the risk of theft of our products and other security breaches. A security breach at any one of our facilities could result in a significant loss of
available products, expose us to additional liability under applicable regulations and to potentially costly litigation or increase expenses relating to the
resolution and future prevention of similar thefts, any of which could have an adverse effect on our business, financial condition and results of operations.
We may be subject to risks related to our information technology systems, including service interruption, cyber-attacks and misappropriation of data,
which could disrupt operations and may result in financial losses and reputational damage.
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, theft, malware, ransomware and phishing attacks. We are increasingly reliant on Cloud-
based systems for economies of scale and our mobile workforce, which could result in increased attack vectors or other significant disruptions to our work
processes. Any of these and other events could result in IT system failures, delays or increases in capital expenses. 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. The failure of IT systems or a component of IT systems could, depending on the nature of any such failure, adversely impact our reputation and
results of operations.
There are a number of laws protecting the confidentiality of personal information and patient health information, and restricting the use and
disclosure of that protected information. In particular, the privacy rules under the Personal Information Protection and Electronics Documents Act
(Canada), or PIPEDA, the European Unions’ General Data Protection Regulation, or the GDPR, and similar laws in other jurisdictions, protect personal
information, including medical records of individuals. We collect and store personal information about our employees and customers 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 cyber-attack. 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 sanction, litigation and civil or criminal penalties, which could increase our liabilities and harm our reputation.
As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective
measures or to investigate and remediate any information security vulnerabilities. While we have implemented security resources to protect our data
security and information technology systems, such measures may not prevent such events. Significant disruption to our information technology system or
breaches of data security could have a material adverse effect on our business, financial condition and results of operations.
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We may be unable to expand our operations quickly enough to meet demand or successfully manage our operations beyond their current scale.
There can be no assurance that we will be able to (i) manage our expanding operations, including any acquisitions, effectively, (ii) sustain or
accelerate our growth or that such growth, if achieved, will result in profitable operations, (iii) attract and retain sufficient management personnel necessary
for continued growth or (iv) successfully make strategic investments or acquisitions. This challenge has been compounded with the launch of multiple new
form factors as a result of Cannabis 2.0. See also Risk Factor “We may not be able to successfully develop new products or commercialize such products.”
In addition, any future expansion will be subject to a number of up-front expenses, including those associated with obtaining regulatory approvals,
as well as additional ongoing expenses, including those associated with infrastructure, staff and regulatory compliance. The failure of our operating
infrastructure to support such expansion could result in operational failures and regulatory fines or sanctions.
Demand for cannabis-based products is dependent on a number of social, political and economic factors that are beyond our control. There is no
assurance that an increase in existing demand will occur, that we will benefit from any such demand increase or that our business will remain profitable
even in the event of such an increase in demand. If we are unable to achieve or sustain profitability, the market price of our stock could be negatively
affected.
The cannabis industry continues to face significant funding challenges, and we may not be able to secure adequate or reliable sources of funding,
which may impact our operations and potential expansion.
The continued development of our business will require significant additional financing, and there is no assurance that we will be able to obtain the
financing necessary to achieve our business objectives. Our ability to obtain additional financing will depend on investor demand, our performance and
reputation, market conditions, and other factors. Our inability to raise such capital could result in the delay or indefinite postponement of our current
business objectives or our inability to continue to operate our business. There can be no assurance that additional capital or other types of equity or debt
financing will be available if needed or that, if available, the terms of such financing will be favorable to us.
In addition, from time to time, we may enter into transactions to acquire assets or the capital stock or other equity interests of other entities. Our
continued growth may be financed, wholly or partially, with debt, which may increase our debt levels above industry standards.
Our existing and future debt agreements may contain covenant restrictions that limit our ability to operate our business and pursue beneficial
transactions.
Our existing debt agreements and future debt agreements may contain, covenant restrictions that limit our ability to operate our busines, including
restrictions on our ability to invest in our existing facilities, incur additional debt or issue guarantees, create additional liens, repurchase stock or make other
restricted payments. As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial
transactions, including to obtain additional financing and pursue business opportunities, may be restricted. Furthermore, our failure to comply with our debt
covenants could result in a default under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt and to enforce
security over our assets. If any of our debt is accelerated, we may not have sufficient funds available to repay it or be able to obtain new financing to
refinance the debt.
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
Our substantial consolidated indebtedness (refer to the consolidated financial statements included elsewhere in this Form 10-K) may increase our
vulnerability to any generally adverse economic and industry conditions. We and our subsidiaries may, subject to the limitations in the terms of our existing
and future indebtedness, incur additional debt, secure existing or future debt or recapitalize our debt. Our ability to make scheduled payments of the
principal of, to pay interest on or to refinance our current and future indebtedness, depends on our future performance, which is subject to economic,
financial, competitive and other factors beyond our control. Our business has not generated
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positive cash flow from operations. If this continues in the future, we may not have sufficient cash flows to service our debt and make necessary capital
expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or
obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our current and future indebtedness will depend
on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on
desirable terms, which could result in a default on our debt obligations.
Management may not be able to successfully establish and maintain effective internal controls over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Rules 13a-15(f) and
15d(f) under the Exchange Act, internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
our financial reporting and the preparation of financial statements for external purposes in accordance with United States Generally Accepted Accounting
Principles (“GAAP”). Due to the work around integration and modification to internal control over financial reporting and other policies and procedures,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Prior to the closing of the Arrangement, and as previously disclosed in legacy Tilray’s Annual 10-K for the year ended December 31, 2020, as filed
with the Securities and Exchange Commission (SEC) on February 19, 2021, the former Tilray management team identified material weaknesses in
components of internal controls as part of its assessment of the effectiveness of internal controls over financial reporting as of December 31, 2020. The
former Tilray management team subsequently undertook to implement remediation measures to address these material weaknesses in internal controls, as
described in Tilray’s Annual 10-K for the year ended December 31, 2020, and existing Tilray management plan to continue to implement additional
remediation measures going forward.
It is not expected that our disclosure controls and procedures and internal controls over financial reporting will prevent all error or fraud. A control
system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be
met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Due to inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements. The inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can
also be circumvented by individual acts of certain persons, by collusion of two or more people or by management override of the controls. Due to the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all.
We cannot guarantee that we will not have a material weakness in our internal controls in the future. If we experience any material weakness in our internal
controls in the future, our financial statements may contain misstatements and we could be required to restate our financial statements.
Conflicts of interest may arise between us and our directors and officers as a result of other business activities undertaken by such individuals.
We may be subject to various potential conflicts of interest because some of our directors and executive officers may be engaged in a range of
business activities. In addition, our directors and executive officers are permitted under their applicable agreements with us to devote time to their outside
business interests, so long as such activities do not materially or adversely interfere with their duties to us and subject to any contractual provisions
restricting such activities. These business interests could require the investment of significant time and attention by our executive officers and directors. In
some cases, our executive officers and directors, may have fiduciary obligations associated with business interests that interfere with their ability to devote
time to our business and affairs, which could adversely affect our operations. Please refer to the section titled “Transactions with Related Persons” in
Amendment No. 1 to our Annual 10-K, filed on Form 10-K/A with the SEC on April 28, 2021, for further information.
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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, 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. These perceptions relating to the
cannabis industry may interfere with our relationship with service providers, particularly in the financial services industry in the United States and
jurisdictions where cannabis is not legal.
Because a significant portion of our sales are generated in Canada and other countries outside the United States, fluctuations in foreign currency
exchange rates could harm our results of operations.
The reporting currency for our financial statements is the United States dollar. We derive a significant portion of our revenue and incur a significant
portion of our operating costs in Canada and Europe, as well as other countries outside the United States, including Australia. As a result, changes in the
exchange rate in these jurisdictions relative to the United States dollar, may have a significant, and potentially adverse, effect on our results of operations.
Our primary risk of loss regarding foreign currency exchange rate risk is caused by fluctuations in the exchange rates between the United States dollar
against the Canadian dollar and the Euro, although as we expand internationally, we will be subject to additional foreign currency exchange risks. Because
we recognize revenue in Canada in Canadian dollars and revenue in Europe in Euros, if either or both of these currencies weaken against the United States
dollar it would have a negative impact on our Canadian and/or European operating results upon the translation of those results into United States dollars for
the purposes of consolidation. In addition, a weakening of these foreign currencies against the United States dollar would make it more difficult for us to
meet our obligations under the convertible securities we have issued. We have not historically engaged in hedging transactions and do not currently
contemplate engaging in hedging transactions to mitigate foreign exchange risks. As we continue to recognize gains and losses in foreign currency
transactions, depending upon changes in future currency rates, such gains or losses could have a significant, and potentially adverse, effect on our results of
operations.
We may have exposure to greater than anticipated tax liabilities, which could harm our business.
Our income tax obligations are based on our corporate operating structure and third-party and intercompany arrangements, including the manner in
which we develop, value and use our intellectual property and the valuations of our intercompany transactions. The tax laws applicable to our international
business activities, including the laws of the United States, Canada and other jurisdictions, are subject to change and uncertain interpretation. The taxing
authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology, intercompany arrangements, or
transfer pricing, all of which could increase our worldwide effective tax rate and the amount of taxes that we pay and harm our business. Taxing authorities
may also determine that the manner in which we operate our business is not consistent with how we report our income, which could increase our effective
tax rate and the amount of taxes that we pay and could seriously harm our business. In addition, our future income taxes could fluctuate because of earnings
being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax
rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in tax laws, regulations or accounting principles.
We are subject to regular review and audit by federal, state, provincial and local tax authorities. Any adverse outcome from a review or audit could
seriously harm our business. In addition, determining our worldwide provision for income taxes and other tax liabilities requires significant judgment by
management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that the amounts recorded in our
financial statements are reasonable, the ultimate tax outcome relating to such amounts may differ for such period or periods and may seriously harm our
business. Furthermore, due to shifting economic and political conditions, tax policies, laws, or rates in various jurisdictions, we may be subject to
significant changes in ways that impair our financial results. Our results of operations and cash flows could be adversely affected by additional taxes
imposed on us prospectively or retroactively or additional taxes or penalties resulting from the failure to comply with any collection obligations or failure
to provide information for tax reporting purposes to various government agencies.
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We may not be able to utilize our net operating loss carryforwards which could result in greater than anticipated tax liabilities.
We have accumulated net operating loss carryforwards in the United States, Canada and other jurisdictions. Our ability to use our net operating
loss carryforwards is dependent upon our ability to generate taxable income in future periods. In addition, these net operating loss carryforwards could
expire unused or be subject to limitations which impact our ability to offset future income tax liabilities. U.S. federal net operating losses incurred in 2018
and in future years may be carried forward indefinitely. However, our Canadian net operating loss carry-forwards begin to expire in 2028, and limited
carryforward periods also exist in other jurisdictions. As a result, we may not be able realize the full benefit of our net operating loss carryforwards in
Canada and other jurisdictions, which could result in increased future tax liability to us. Further, our ability to utilize net operating loss carryforwards in
the United States and other jurisdictions could be limited from ownership changes in the current and/or prior periods.
Risks Related to our Intellectual Property
We may not be able to adequately protect our intellectual property.
As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance under the CSA, the benefit of certain federal laws
and protections that may be available to most businesses, such as federal trademark and patent protection, may not be available to us. As a result, our
intellectual property may not be adequately or sufficiently protected against the use or misappropriation by third parties under such U.S. laws. In addition,
since the regulatory framework of the cannabis industry is in a state of flux, we can provide no assurance that we will obtain protection for our intellectual
property, whether on a federal, state or local level.
We may be subject to risks related to the protection of our intellectual property rights and allegations that we are in violation of intellectual property
rights of third parties.
The ownership, licensing and protection of trademarks, patents and intellectual property rights are significant to the success of our business.
Unauthorized parties may attempt to replicate or otherwise obtain and use our products and technology. Policing and enforcing the unauthorized use of our
current or future trademarks, patents or other intellectual property rights now or in the future could be difficult, expensive, time consuming and
unpredictable. 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 unlicensed dispensaries and black-market participants, and the processes used to produce such
products. Moreover, we may not be successful in any infringement proceeding.
In addition, other parties may claim that our products, or those that we license from others, infringe on 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 licenses from third parties who allege that we have
infringed on their lawful rights. Such licenses 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, licenses or other rights with respect to intellectual property that we do not own.
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, which could adversely affect us.
We license certain intellectual property rights from third-party licensors, and the failure of the licensor to properly maintain or enforce their
intellectual property rights could have an adverse effect on us.
We are party to a number of licenses that give us rights to use third-party intellectual property that is useful to our business. Our success will
depend, in part, on the ability of the licensor to maintain and enforce its licensed intellectual property, in particular, those intellectual property rights to
which we have secured exclusive rights.
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Without protection for the intellectual property we have licensed, other companies might be able to offer substantially similar products for sale or utilize
substantially similar processes, which could have an adverse effect on us.
Any of our licensors may allege that we have breached our license agreement, whether with or without merit, and accordingly seek to terminate our
license. If successful, this could result in our loss of the right to use the licensed intellectual property, which could adversely affect our ability to
commercialize certain products or services and have a material adverse effect on us.
We may not realize the full benefit of the clinical trials or studies that we participate in if we are unable to secure ownership or the exclusive right to
use the resulting intellectual property on commercially reasonable terms.
Although we have participated in several clinical trials, we are not the sponsor of many of these trials and, as such, do not have full control over the
design, conduct and terms of the trials. In some cases, for instance, we are only the provider of a cannabis study drug for a trial that is designed and
initiated by an independent investigator within an academic institution. In such cases, we are often not able to acquire rights to all the intellectual property
generated by the trials. Although the terms of all clinical trial agreements entered into by us provide us with, at a minimum, ownership of intellectual
property relating directly to the study drug being trialed (e.g. intellectual property relating to use of the study drug), ownership of intellectual property that
does not relate directly to the study drug is often retained by the institution. As such, we are vulnerable to any dispute among the investigator, the institution
and us with respect to classification and therefore ownership of any particular piece of intellectual property generated during the trial. Such a dispute may
affect our ability to make full use of intellectual property generated by a clinical trial.
Where intellectual property generated by a trial is owned by the institution, we are often granted a right of first negotiation to obtain an exclusive
license to such intellectual property. If we exercise such a right, there is a risk that the parties will fail to come to an agreement on the license, in which case
such intellectual property may be licensed to other parties or commercialized by the institution.
We may not realize the full benefit of third-party licenses if the licensed material has less market appeal than expected or restrictions on packaging and
marketing hinder our ability to realize the value.
An integral part of our Canadian adult-use cannabis business strategy involves obtaining territorially exclusive licenses to produce products using
various brands and images. As a licensee of brand-based properties, we have no assurance that a particular brand or property will translate into a successful
adult-use cannabis product. Additionally, a successful brand may not continue to be successful or maintain a high level of sales. As well, the popularity of
licensed properties may not result in popular products or the success of the properties with the public. Promotion, packaging and labelling of adult-use
cannabis is strictly regulated. These restrictions may further hinder our ability to benefit from our licenses. Acquiring or renewing licenses may require the
payment of minimum guaranteed royalties that we consider to be too high to be profitable, which may result in losing current licenses or opportunities for
potential new licenses. If we are unable to acquire or maintain successful licenses on advantageous terms, or to derive sufficient revenue from sales of
licensed products, the profitability and success of our adult-use cannabis business may be adversely impacted.
Risks Related to Ownership of Our Securities
The price of our common stock in public markets has experienced and may continue to experience severe volatility and fluctuations.
The market price for our common stock, and the market price of stock of other companies operating in the cannabis industry, has been extremely
volatile. For example, between January 1, 2021 and March 31, 2021, the trading price of our common stock ranged between a low sales price of $8.26 and
a high sales price of $67 and included single day fluctuations as high as 100%. Additionally, during 2020, the trading price of our common stock ranged
between a low sales price of $2.43 and a high sales price of $22.95. The market price of our common stock may continue to 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 or other key
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personnel; (v) the release or expiration of lock-up or other transfer restrictions on our common stock; (vi) sales or perceived sales, or the expectation of
future sales, of our common stock; (vii) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by
or involving us or our competitors; (viii) news reports or social media relating to trends, concerns, technological or competitive developments, regulatory
changes and other related issues in the cannabis industry or our target markets; and (ix) the increase in the number of retail investors and their participation
in social media platforms targeted at speculative investing.
The volatility of our stock and the stockholder base may hinder or prevent us from engaging in beneficial corporate initiatives.
Our stockholder base is comprised of a large number of retail (or non-institutional) investors, which creates more volatility since stock changes
hands frequently. In accordance with our governing documents and applicable laws, there are a number of initiatives that require the approval of
stockholders at the annual or a special meeting. To hold a valid meeting, a quorum comprised of stockholders representing one-third of the voting power of
our outstanding shares of common stock is necessary. A record date is established to determine which stockholders are eligible to vote at the meeting,
which record date must be 30 – 60 days prior to the meeting. Since our stocks change hands frequently, there can be a significant turnover of stockholders
between the record date and the meeting date which makes it harder to get stockholders to vote. While we make every effort to engage retail investors, such
efforts can be expensive and the frequent turnover creates logistical issues. Further retail investors tend to be less likely to vote in comparison to
institutional investors. Failure to secure sufficient votes or to achieve the minimum quorum needed for a meeting to happen may impede our ability to
move forward with initiatives that are intended to grow the business and create stockholder value or prevent us from engaging in such initiatives at all. If
we find it necessary to delay or adjourn meetings or to seek approval again, it will be time consuming and we will incur additional costs. See also Risk
Factor “The inability to increase the authorized capital stock could impede our ability to pursue our strategic objectives, provide equity incentives to
engage key talent and negatively impact stockholder value”.
The terms of our outstanding warrants may limit our ability to raise additional equity capital or pursue acquisitions, which may impact funding of our
ongoing operations and cause significant dilution to existing stockholders.
On March 13, 2020, we entered into an underwriting agreement with Canaccord Genuity LLC relating to the issuance and sale of shares of our
common stock a price to the public of $4.76 per share and included warrants to purchase additional common stock at a price of $4.7599 per warrant. As of
May 31, 2021, 6,209,000 warrants remain outstanding and do not expire until March 13, 2025. The warrants contain a price protection, or anti-dilution
feature, pursuant to which, the exercise price of such warrants will be reduced to the consideration paid for, or the exercise price or conversion price of, as
the case may be, any newly issued securities issued at a discount to the original warrant exercise price of $5.95 per share. Therefore, the exercise price of
the warrants may end up being lower than $5.95 per share, which could result in incremental dilution to existing stockholders.
Additionally, so long as the warrants remain outstanding, we may only issue up to $20 million in aggregate gross proceeds under our at-the-market
offering program at prices less than the exercise price of the warrants, and in no event more than $6 million per quarter at prices below the exercise price of
the warrants, without triggering the warrant’s anti-dilution feature described in the paragraph immediately above. If our stock price were to remain below
the warrant exercise price of $5.95 per share for an extended time, we may be forced to lower the warrant exercise price at unfavorable terms in order to
fund our ongoing operations.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends, 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. If one or more of the securities or industry analysts who cover us downgrade our stock or publish
inaccurate or unfavorable research about our business, our stock price would likely decline. In addition, if our operating results fail to meet the forecast of
analysts, our stock 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 stock could decrease, which might cause our stock price and trading volume to decline.
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We may not have the ability to raise the funds necessary to settle conversions of the Convertible Securities in cash or to repurchase the Convertible
Securities upon a fundamental change.
We issued various securities convertible into shares of our common stock, or Convertible Securities. Holders of certain Convertible Securities have
the right to require us to repurchase their Convertible Securities upon the occurrence of a fundamental change. In addition, upon conversion, unless we
deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required
to make cash payments in respect of the Convertible Securities being converted. However, we may not have enough available cash or be able to obtain
financing at the time we are required to make repurchases of Convertible Securities surrendered. In addition, our ability to repurchase the Convertible
Securities or to pay cash upon conversions of the Convertible Securities may be limited by law, by regulatory authority or by agreements governing our
future indebtedness. Our failure to repurchase Convertible Securities at a time when the repurchase is required by the indenture or to pay any cash payable
on future conversions of the Convertible Securities as required by the indenture would constitute a default under the indenture. A default under the
indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of
the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and
repurchase the Convertible Securities or make cash payments upon conversions thereof.
The conditional conversion feature of the Convertible Securities, if triggered, may adversely affect our financial condition and operating results.
In the event a conditional conversion feature of the Convertible Securities is triggered, holders of Convertible Securities will be entitled to convert
the Convertible Securities at any time during specified periods at their option. If one or more holders elect to convert their Convertible Securities, unless we
elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional
share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
In addition, even if holders of Convertible Securities do not elect to convert their Convertible Securities, we could be required under applicable accounting
rules to reclassify all or a portion of the outstanding principal of the Convertible Securities as a current rather than long-term liability, which would result in
a material reduction of our net working capital.
Conversion of the Convertible Securities may dilute the ownership interest of our stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the Convertible Securities may dilute the ownership interests of our stockholders. Upon conversion of the
Convertible Securities, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of
our common stock. If we elect to settle our conversion obligation in shares of our common stock or a combination of cash and shares of our common stock,
any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In
addition, the existence of the Convertible Securities may encourage short selling by market participants because the conversion of the Convertible
Securities could be used to satisfy short positions, or anticipated conversion of the Convertible Securities into shares of our common stock could depress
the price of our common stock.
Certain provisions in the indentures governing the Convertible Securities may delay or prevent an otherwise beneficial takeover attempt of us.
Certain provisions in the indentures governing the Convertible Securities may make it more difficult or expensive for a third party to acquire us.
For example, we may be required to repurchase certain Convertible Securities for cash upon the occurrence of a fundamental change and, in certain
circumstances, to increase the relevant conversion rate for a holder that converts its Convertible Securities in connection with a make-whole fundamental
change. A takeover of us may trigger the requirement that we repurchase the Convertible Securities and/or increase the conversion rate, which could make
it more costly for a potential acquirer to engage in such takeover. Such additional costs may have the effect of delaying or preventing a takeover of us that
would otherwise be beneficial to investors.
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Our stockholders may be subject to dilution resulting from future offerings of common stock by us.
We may raise additional funds in the future by issuing common stock or equity-linked securities. Holders of our securities have no preemptive
rights in connection with such further issuances. Our board of directors has the discretion to determine if an issuance of our capital stock is warranted, the
price at which such issuance is to be effected and the other terms of any future issuance of capital stock. In addition, additional common stock will be
issued by us in connection with the exercise of options or grant of other equity awards granted by us. Such additional equity issuances could, depending on
the price at which such securities are issued, substantially dilute the interests of the holders of our existing securities.
Provisions in our corporate charter documents could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace
or remove our current board of directors.
Provisions in our corporate charter and our bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions
could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our
common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the
members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management
team. Among others, these provisions include the following:
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•
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Our board of directors is divided into three classes with staggered three-year terms which may delay or prevent a change of our management
or a change in control;
Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation,
death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;
Except in limited circumstances, our stockholders may not act by written consent or call special stockholders’ meetings; as a result, a holder,
or holders, controlling a majority of our capital stock would not be able to take certain actions other than at annual stockholders’ meetings or
special stockholders’ meetings called by the board of directors, the chairman of the board or our chief executive officer;
Our certificate of incorporation prohibits cumulative voting in the election of directors, which limits the ability of minority stockholders to
elect director candidates;
Stockholders must provide advance notice and additional disclosures in order to nominate individuals for election to the board of directors or
to propose matters that can be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock; the ability to issue undesignated
preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to acquire us.
The inability to increase the authorized capital stock could impede our ability to pursue our strategic objectives, provide equity incentives to engage key
talent and negatively impact stockholder value.
Pursuant to a Definitive Proxy Statement on Schedule 14A, filed with the SEC on June 25, 2021, a special meeting of the stockholders will be held
to address certain proposals, including a proposal to increase the authorized share capital from 743,33,333 to 990,000,000 shares. We believe a greater
number of authorized shares of common stock would provide us with flexibility to issue shares of common stock for any proper corporate purpose, which
could include strategic investments, strategic partnership arrangements, awards or grants under employee equity incentive plans, equity based financing to
support the execution of our business strategy, or other general purposes. The availability of additional authorized shares of common stock would enhance
the business and financial flexibility and allow us to execute any of these transactions in the future without the possible delays and significant expense of
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obtaining additional shareholder approval, unless otherwise required by our governing documents, or applicable laws or regulatory requirements.
If we are unsuccessful in securing stockholder approval to increase the authorized shares of capital stock, we may not be able to take timely
advantage of market conditions or favorable financing or acquisition opportunities that would help us grow and create value for stockholders. This could
impede our ability to pursue our strategic objectives and restrict the equity incentives available to attract, retain and motivate key talent, which could
negatively impact the value of our stock. See also Risk Factor “The volatility of our stock and the stockholder base may hinder or prevent us from
engaging in beneficial initiatives”.
Certain jurisdictions may take positions adverse to investments in cannabis companies or to the investors themselves.
Certain jurisdictions may prohibit or restrict its citizens or residents from investing in or transacting with companies involved in the cannabis
industry, even if such companies only conduct business in jurisdictions where cannabis is legal. For example, if an investor in the United Kingdom profits
from an investment in a cannabis producer or supplier, such investment may technically violate the United Kingdom Proceeds of Crime Act 2002. Similar
prohibitions or restrictions may apply in other jurisdictions where cannabis has not been legalized. In addition, such prohibitions and restriction may limit
the ability to receive dividends if such dividends were to be declared in the future. However, no dividends on our common stock have been paid to date and
we do not anticipate that, for the foreseeable future, we will pay cash dividends on our common stock.
As a result of an investment in our securities, you could be prevented from entering the United States or become subject to a lifetime ban on entry into
the United States.
United States Customs and Border Protection (“CBP”) has confirmed that border agents may seek to permanently ban any foreign visitor who
admits to working or investing in the cannabis industry, or admits to having used cannabis, even though adult-use cannabis is now legal in Canada. CBP
confirmed that investing even in publicly-traded cannabis companies is considered facilitation of illicit drug trade under CBP policy. This policy is limited
to citizens of foreign countries and not citizens of the United States. Therefore, as a result of an investment in our securities, if you are not a citizen of the
United States, you could be prevented from entering the United States or could become subject to a lifetime ban on entry into the United States.
General Risk Factors
We may not be able to maintain adequate insurance coverage, the premiums may not continue to be commercially justifiable, and coverage limitations
or exclusions may leave us exposed to uninsured liabilities.
We currently maintain insurance coverage, including product liability 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 all of the risks and hazards to which we are exposed, or the
coverage limits may not be sufficient to protect against the full amount of loss. In addition, no assurance can be given that such insurance will be adequate
to cover our liabilities, including potential product liability claims, or will be generally available in the future or, if available, that premiums will be
commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, we
may be exposed to material uninsured liabilities that could diminish our liquidity, profitability or solvency.
The financial reporting obligations of being a public company and maintaining a dual listing on the TSX and on NASDAQ requires significant
company resources and management attention.
We are subject to the public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance
practices, including those under the Sarbanes-Oxley Act, the Dodd-Frank Act, and the listing requirements of Nasdaq Global Select Market (“NASDAQ”)
and the Toronto Stock Exchange (“TSX”). We incur significant legal, accounting, reporting and other expenses in order to maintain a dual listing on both
the TSX and NASDAQ. Moreover, our listing on both the TSX and NASDAQ may increase price volatility due to various
43
factors, including the ability to buy or sell common shares, different market conditions in different capital markets and different trading volumes. In
addition, low trading volume may increase the price volatility of the common shares.
As a cannabis company, we may be subject to heightened scrutiny in Canada and the United States that could materially adversely impact the liquidity
of our shares of common stock.
Our existing operations in the United States, and any future operations, may become the subject of heightened scrutiny by regulators, stock
exchanges and other authorities in the United States and Canada.
Given the heightened risk profile associated with cannabis in the United States, the Canadian Depository for Securities Ltd., or CDS, may
implement procedures or protocols that would prohibit or significantly impair the ability of CDS to settle trades for companies that have cannabis
businesses or assets in the United States.
On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX
Group, the parent company of CDS, announced the signing of a Memorandum of Understanding (the “TMX MOU”) with Aequitas NEO Exchange Inc.,
the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange. The TMX MOU outlines the parties’ understanding of Canada’s regulatory
framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in
the United States. The TMX MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of
listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States. However, there
can be no assurances given that this approach to regulation will continue in the future. If such a ban were to be implemented, it could have a material
adverse effect on the ability of holders of the common stock to settle trades. In particular, the shares of common stock would become highly illiquid until an
alternative was implemented, and investors would have no ability to effect a trade of the common stock through the facilities of a stock exchange.
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 maintain 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 fail to
comply.
The long-term effect of United States tax reform or the recently enacted CARES Act could adversely affect our business and financial condition.
On December 22, 2017, the legislation commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Act”) was enacted, which contains
significant changes to United States tax law. The U.S. Tax Act requires complex computations to be performed that were not previously required by U.S.
tax law, significant judgments to be made in interpretation of the provisions of the U.S. Tax Act, significant estimates in calculations, and the preparation
and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies will
continue to interpret or issue guidance on how provisions of the U.S. Tax Act will be applied or otherwise administered. As future guidance is issued, we
may make adjustments to amounts that we have previously recorded that may materially impact our financial statements in the period in which the
adjustments are made. Additionally, further guidance may be forthcoming from the Financial Accounting Standards Board and SEC, as well as regulations,
interpretations and rulings from state tax agencies, which could result in additional impacts, possibly with retroactive effect. Any such changes or potential
additional impacts could adversely affect our business and financial condition.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic.
The CARES Act, among other things, permits net operating loss (NOL)
44
carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in
2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. Further it provides
for increased deductibility of interest expense in 2019 and 2020. We are currently evaluating the impact of the CARES Act, but we do not currently expect
that the NOL carryback provision or increased interest deductibility of the CARES Act to result in a material cash benefit to us.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters is located in New York, NY. The following outlines our principal cultivation, manufacturing and storage facilities by reporting
segment as of May 31, 2021:
Facility and Primary Use
Location
Reporting Segment
Owned/Leased
Square Footage
Canada:
Aphria One (Cannabis Cultivation and Processing)
Leamington, ON
Cannabis
Aphria Diamond (Cannabis Cultivation)
Broken Coast (Cannabis Cultivation and Processing)
Leamington, ON
Cannabis
Vancouver Island,
BC
Cannabis
Owned
Owned1
Owned
Avanti (EU-GMP Cannabis Processing and Lab)
Brampton, ON
Business Under Development Owned
Tilray North America Campus (EU-GMP Cannabis
Cultivation and Processing)
Nanaimo, BC
Cannabis
High Park Farms (Cannabis Cultivation and Processing) Enniskillen, ON
Cannabis
High Park Holdings (Cannabis 2.0 Processing)
Manitoba Harvest (Hemp Processing)
Manitoba Harvest (Hemp Processing)
London, ON
Winnipeg, MB
Cannabis
Wellness
St. Agathe, MB
Wellness
Owned
Leased2
Leased
Leased
Owned
1,400,000
1,500,000
47,000
18,000
60,000
626,000
134,000
15,000
35,000
United States:
Sweet Water Brewery (Craft Brewery)
Atlanta, GA
Beverage Alcohol
Leased3
25,000
International:
Tilray EU Campus and Cultivation Site (Cannabis
Cultivation and Processing)
Cantanhede,
Portugal
Cannabis
CC Pharma (Distribution Operations)
Densborn, Germany Distribution
Owned4
Owned
Aphria RX (Cannabis Cultivation)
Neumünster,
Germany
Business Under Development Owned
3,300,000
70,000
65,000
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ASG Pharma Ltd. (EU-GMP Cannabis Processing and
Lab
Malta
Business Under Development Leased
FL Group Srl (Distribution Operations)
Vado Ligure, Italy Business Under Development Leased
ABP (Distribution Operations)
Buenos Aires,
Argentina
Business Under Development Leased
8,700
4,700
10,000
1 Aphria Diamond is a 51% majority-owned subsidiary of Aphria, Inc. Aphria Diamond is a strategic venture with Double Diamond Farms.
2 On May 13, 2021, we announced our decision to close this facility in Enniskillen, ON. The facility is scheduled to cease operations in September 2021.
3 We maintain a right to purchase the leased SweetWater Brewery facility until November 25, 2023 for a fixed value and a right of last refusal to purchase
the property thereafter until November 25, 2030.
4 In Cantanhede, Portugal, we own one cultivation and manufacturing location used for medical cannabis and land adjacent to this facility for future
expansion.
We also lease space for other smaller offices in the United States, Canada, Europe and other parts of the world.
We believe our facilities and committed leased space are currently adequate to meet our needs. As we continue to expand our operations, we may
need to acquire or lease additional facilities or dispose of existing facilities.
Item 3. Legal Proceedings.
In the ordinary course of business, we are at times subject to various legal proceedings and disputes, including the proceedings specifically
discussed below. We assess our liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available.
Where it is probable that we will incur a loss and the amount of the loss can be reasonably estimated, we record a liability in our consolidated financial
statements. These legal reserves may be increased or decreased to reflect any relevant developments on a quarterly basis. Where a loss is not probable or
the amount of loss is not estimable, we do not accrue legal reserves. While the outcome of legal proceedings is inherently uncertain, based on information
currently available and available insurance coverage, our management believes that it has established appropriate legal reserves. Any incremental liabilities
arising from pending legal proceedings are not expected to have a material adverse effect on our consolidated financial position, consolidated results of
operations, or consolidated cash flows. However, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to our
consolidated financial position, consolidated results of operations, or consolidated cash flows.
Class Action Suits and Shareholder Derivative Suits – U.S. and Canada
Authentic Brands Group Related Class Action (New York, United States)
On May 4, 2020, Ganesh Kasilingam filed a lawsuit in the United States District Court for the Southern District of New York (“SDNY”),
against Tilray, Inc., Brendan Kennedy and Mark Castaneda, on behalf of himself and a putative class, seeking to recover damages for alleged violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Kasilingam litigation”). The complaint alleges that Tilray and the individual
defendants overstated the anticipated advantages of the Company’s revenue sharing agreement with Authentic Brands Group (“ABG”), announced on
January 15, 2019, and that the plaintiff suffered losses when Tilray’s stock price dropped after Tilray recognized an impairment with respect to the ABG
deal on March 2, 2020. On August 6, 2020, SDNY entered an order appointing Saul Kassin as Lead Plaintiff and The Rosen Law Firm, P.A. as Lead
Counsel. Lead Plaintiff filed an amended complaint on October 5, 2020, which asserts the same Sections 10(b) and 20(a) claims against the same
defendants on largely the same theory, and includes new allegations that Tilray’s reported inventory, cost of sales, and gross margins in its financial reports
during the class period were false and misleading because Tilray improperly recorded unsellable “trim” as inventory and understated the cost of sales for its
products. The defendants filed a motion to dismiss the Amended Complaint in its entirety on December 4, 2020. Plaintiff’s
46
opposition to the defendants’ Motion to Dismiss was filed on January 25, 2021, and the defendants’ reply was filed on February 24, 2021. The Motion to
Dismiss is now fully briefed and pending before the court.
Shareholder Derivative Lawsuits; Kasilingham Litigation (New York and Delaware)
On April 10, 2020, a shareholder derivative lawsuit was filed in the United States District Court for the Eastern District of New York
(“EDNY”) by Chad Gellner, Matthew Rufo, and Melvyn Klein, allegedly on behalf of Tilray, Inc., that piggy‐backs on the Kasilingam litigation referenced
above. It named the Tilray Board of Directors and Mark Castaneda as defendants. The lawsuit asserts that the Tilray Board of Directors failed to prevent
the alleged securities law violations asserted in the Kasilingam litigation. On May 29, 2020, a second shareholder derivative lawsuit was filed in SDNY by
Bo Hu asserting essentially the same claims, allegedly on behalf of Tilray, as the prior shareholder derivative action. And on June 16, 2020, the plaintiffs in
the Gellner derivative action voluntarily dismissed that lawsuit in the EDNY and re‐filed it in the SDNY. The plaintiffs in the two derivative actions in the
SDNY have agreed with nominal defendant Tilray and the individual defendants to consolidate the actions, and have submitted the stipulation to the court
for approval.
On June 5, 2020 a third shareholder derivative lawsuit was filed in the United States District Court for the District of Delaware (“DDE”) by Lee
Morgan, again alleging essentially the same claims, allegedly on behalf of Tilray, as the prior shareholder derivative actions. On November 3, 2020, DDE
entered a stipulated stay pending developments in the securities class action pending in the SDNY. On December 21, 2020, a fourth shareholder derivative
lawsuit was filed in the DDE by Donald Kisselbach, again alleging essentially the same claims, allegedly on behalf of Tilray, as the prior shareholder
derivative actions. On March 1, 2021, the court ordered the parties’ stipulation, consolidating the DDE derivative actions under the caption In re Tilray, Inc.
Consolidated Stockholder Litigation, and staying the consolidated action until the motion to dismiss the Kasilingam litigation is decided. The Company
and the individual defendants believe the claims are without merit, and intend to defend vigorously against them, but there can be no assurances as to the
outcome.
Tilray, Inc. Reorganization Litigation (Delaware, New York)
On February 27, 2020, Tilray stockholders Deborah Braun and Nader Noorian filed a class action and derivative complaint in the Delaware
Court of Chancery styled Braun v. Kennedy, C.A. No. 2020-0137-KSJM. On March 2, 2020, Tilray stockholders Catherine Bouvier, James Hawkins, and
Stephanie Hawkins filed a class action and derivative complaint in the Delaware Court of Chancery styled Bouvier v. Kennedy, C.A. No. 2020-0154-
KSJM.
On March 4, 2020, the Delaware Court of Chancery entered an order consolidating the two cases and designating the complaint in the
Braun/Noorian action as the operative complaint. The operative complaint asserts claims for breach of fiduciary duty against Brendan Kennedy, Christian
Groh, Michael Blue, and Privateer Evolution, LLC (the “Privateer Defendants”) for alleged breaches of fiduciary duty in their alleged capacities as Tilray’s
controlling stockholders and against Kennedy, Maryscott Greenwood, and Michael Auerbach for alleged breaches of fiduciary duties in their capacities as
directors and/or officers of Tilray in connection with the prior merger of Privateer Holdings, Inc. with and into a wholly owned subsidiary (the
“Downstream Merger”). The complaint alleges that the Privateer Defendants breached their fiduciary duties by causing Tilray to enter into the Downstream
Merger and Tilray’s Board to approve that Downstream Merger, and that Defendants Kennedy, Greenwood, and Auerbach breached their fiduciary duties
as directors by approving the Downstream Merger. Plaintiffs allege that the Downstream Merger gave the Privateer Defendants hundreds of millions of
dollars of tax savings without providing a corresponding benefit to Tilray and its minority stockholders and that the Downstream Merger unfairly
transferred and extended Kennedy, Blue, and Groh’s control over Tilray. On July 17, 2020, the plaintiffs filed an amended complaint asserting substantially
similar claims. On August 14, 2020, Tilray and the Privateer Defendants moved to dismiss the amended complaint. At the February 5, 2021 hearing on
Defendants’ Motions to Dismiss, the Plaintiffs agreed that their perpetuation of control claims are moot and stated that they intend to move for a fee award
in connection with those claims. On June 1, 2021, the Court denied Defendants’ Motions to Dismiss the Amended Complaint.
In re Aphria Inc. Securities Litigation (New York, United States)
On December 5, 2018, a putative securities class action was commenced in SDNY against a number of defendants including Aphria and certain
current and former officers and directors. The action claims that the defendants misrepresented the value of three cannabis-producing properties Aphria
acquired in Jamaica, Colombia,
47
and Argentina (the “LATAM Assets”). The action claims that Aphria artificially inflated the price of its publicly-traded stock by making false statements
about the LATAM Assets, and when the purported truth was revealed by a short-seller report and write-down, the stock price declined, harming investors.
On September 30, 2020, the Court denied the motion to dismiss the complaint as to Aphria, Vic Neufeld, and Carl Merton, and granted the
motion as to Cole Cacciavillani, John Cervini, Andrew DeFrancesco, and SOL Global Investments. On October 1, 2020, Plaintiffs moved for
reconsideration of the order dismissing DeFrancesco and SOL or, in the alternative, to amend their complaint. On October 14, 2020, Aphria, Neufeld, and
Merton moved for reconsideration of the order denying their motion to dismiss. Both motions for reconsideration are still pending.
On March 16, 2021, Aphria, Neufeld, and Merton held a mediation with Plaintiffs’ counsel. The mediation was unsuccessful, and the parties
have not engaged in further negotiations. The parties are currently awaiting the outcome of the motions for reconsideration from the Court, and discovery
has not yet commenced. It is too early to determine potential damages.
LATAM and Nuuvera Class Actions and Individual Actions (Canada)
On January 29, 2018, Aphria announced the acquisition of Nuuvera Inc. On July 17, 2018, Aphria announced a planned expansion into Latin
America and the Caribbean with the acquisition of LATAM Holdings Inc. The following class actions and four individual proceedings have been
commenced in Canada against Aphria and several current or former officers relating to the Nuuvera and LATAM transactions:
(i)
(ii)
(iii)
a proposed class action (the “Vecchio Action”) commenced in the Ontario Superior Court in February 2019 alleging statutory and common
law misrepresentations and oppression relating to the Nuuvera and LATAM transactions. The Vecchio Action names Aphria, Merton,
Neufeld, Cacciavillani, and 5 underwriters as defendants;
a proposed class action (the “Ranger Action”) commenced in the Quebec Superior Court in December 2018 alleging a breach of the Quebec
Civil Code, secondary market misrepresentation, and conspiracy relating to the Nuuvera and LATAM transactions. The Ranger Action
names Aphria, Merton, Neufeld, Cacciavillani, Cervini, Sol Global Investments Corp., and Andrew DeFrancesco as defendants. On
February 5, 2021, the Ranger Action was dismissed by the Quebec Superior Court due to a lack of jurisdiction;
four individual actions (the “Individual Actions”) commenced by Wan, Bergerson, Landry, and Profinsys in the Ontario Superior Court
alleging statutory and common law misrepresentations relating to the LATAM and Nuuvera transactions. The Individual Actions name
Aphria, Merton, Neufeld, and Cacciavillani as defendants.
In the Vecchio Action, a motion for certification and leave to proceed scheduled for the week of June 21, 2021 was delayed. It is anticipated
that there will be a motion on consent to certify and grant leave to proceed for the secondary market statutory misrepresentation claims against Aphria, Vic
Neufeld, and Cole Cacciavillani and that the Order would dismiss the claims of oppression and common law misrepresentation as well as all claims against
Carl Merton. The underwriters will be opposing the certification of the prospectus claim and this claim has been excluded from the proposed motion
settlement pending the disposition of this issue.
No steps have been taken in the Individual Actions since Aphria advised plaintiffs’ counsel that it will bring a motion to stay these claims
pending the certificate on and leave to proceed motions in the Vecchio Action if any further steps are taken to advance the claims.
Langevin Canada Class Action Regarding Alleged Mislabled Products (Alberta, Canada)
On June 16, 2020, Lisa Langevin commenced a purported class action against Tilray, Aphria, and Broken Coast Cannabis Ltd. (a subsidiary of
Aphria) in the Alberta Court of Queen’s Bench, on her behalf and on behalf of a proposed class of all medicinal and recreational users in Canada of the
defendants’ cannabis products who consumed the products before their expiry date. The plaintiff alleges that the defendants marketed medicinal and
recreational cannabis products in circumstances where the defendants misrepresented the amount of Tetrahydrocannabinol or Cannabidiol in certain of their
respective products. The plaintiff claims that as a result of the alleged mislabeling, the plaintiff and proposed class members did not receive and consume
the product that they believed they had purchased causing them loss, risk of injury and actual injury. The plaintiff seeks $500,000,000 in damages and
restitution and $5,000,000 in punitive damages plus interest and costs collectively from the defendants. On July 20, 2020, plaintiff
48
filed an Amended Statement of Claim, and on December 4, 2020 filed a Third Amended Statement of Claim. The application by the defendants to be
relieved from the obligation to file a Statement of Defense was argued before the case management justice on June 1, 2021, and a decision is under
reserve. We plan to vigorously defend against this action, but there can be no assurance as to the outcome.
Legal Proceedings Related to Contractual Obligation
420 Investments Ltd. Litigation
On February 21, 2020, 420 Investments Ltd., as Plaintiff (“420 Investments”), filed a lawsuit against Tilray, Inc. and High Park Shops Inc.
(“High Park”), as Defendants, in Calgary, Alberta in the Court of Queen’s Bench of Alberta. In August 2019, Tilray and High Park entered into an
Arrangement Agreement with 420 Investments and others (the “Agreement”). Pursuant to the Agreement, High Park was to acquire the securities of 420
Investments. In February 2020, Tilray and High Park gave notice of termination of the Agreement. 420 Investments alleges that the termination was
unlawful and without merit and further alleges that the Defendants had no legal basis to terminate. 420 Investments alleges that the Defendants did not
meet their contractual and good faith obligations under the Agreement. 420 Investment seeks damages in the stated amount of C$110 million, plus C$20
million in aggravated damages. The Tilray and High Park Statement of Defense and counterclaim were both filed on March 20, 2020. 420 Investment’s
Statement of Defense to our counterclaim was filed on April 20, 2020. No trial date has been set. The Company denies the Plaintiff’s allegations and
intends to vigorously defend this litigation matter, although there can be no assurance as to its outcome.
Settled or Resolved Legal Proceedings
Wyckoff Supply Agreement Arbitration; Settlement
On February 16, 2020, Wyckoff Farms (“Wyckoff”), a cannabinoid supplier to Tilray, emailed a demand for assurance of performance of the
March 20, 2019 Cannabinoid Supply Agreement (“Supply Agreement”). Wyckoff stated that it believes that Tilray has anticipatorily breached its
obligations under the Supply Agreement, which contemplated a five (5) year term, with an express minimum crop obligation during the first crop year for
2019-2020. Wyckoff demanded assurance that Tilray take delivery of and purchase at least 13,000 KG of product for the 2019/2020 crop year at a price of
$4,600 KG of product (total purchase price $59,800,000). Wyckoff also claimed that the minimum quantity purchase obligation continued for the
remaining crop years, which Tilray disputes. Tilray responded that it is within its rights under the Supply Agreement, that the contract’s only minimum
purchase obligation is for the 2019/2020 crop year, and also invoked the contractual force majeure provision in light of the impacts of FDA action related
to hemp-derived CBD, as well as the COVID-19 pandemic. On March 5, 2020, Wyckoff submitted the dispute to binding arbitration before the American
Arbitration Association (AAA) in Benton County Washington, to which Tilray responded with an Answer on March 26, 2020, disputing Wyckoff’s claims.
On April 29, 2021, the parties mutually agreed to settle this matter. Pursuant to a settlement agreement and release, Tilray (i) paid $20.0 million in cash and
$5.0 million in Class 2 Common Stock to Wyckoff on April 29, 2021, and (ii) agreed to pay either $15.0 million in Class 2 Common Stock or $20.0 million
in cash, depending on certain circumstances, to Wyckoff within nine months of the settlement date, in each case subject to certain upward adjustments
based on the trading price and resale registration status of the Class 2 Common Stock. The parties also agreed to, among other things, withdraw from the
arbitration proceeding and to release the other party from any and all claims arising out of or relating to the arbitration or the supply agreement. The
arbitration proceeding was dismissed on April 30, 2021.
Shareholder Business Combination Lawsuits Relating to Proxy Statement
On March 12, 2020, Tilray filed with the Securities and Exchange Commission and commenced the mailing of a definitive joint proxy
statement/circular (the “Proxy Statement/Circular”) with respect to the special meeting of Tilray stockholders originally scheduled to be held on April 16,
2021 pursuant to the Arrangement.
Between March 15, 2021 and April 6, 2021, seven lawsuits were filed by alleged stockholders of Tilray (collectively the “Complaints”):
(i)
Patricia Violini filed a claim on March 15, 2021 in the United States District Court for the Southern District of New York. The complaint
names Tilray, Inc. and each Director as a defendant and alleges that the disclosures in the Proxy Statement/Circular were materially false and
misleading under Section 14 of the
49
Securities Exchange Act. The claimant seeks to enjoin the parties from proceeding with the Arrangement, rescinding and setting aside the
Arrangement in the event of consummation or awarding rescissory damages, and directing the individual defendants to disseminate a proxy.
Alicia Barron-Archer filed a claim on March 23, 2021 in the United States District Court for the Southern District of New York with the
same defendants and similar claims and relief sought.
Arthur Reveles filed a claim on March 24, 2021 in the United States District Court for the Eastern District of New York with the same
defendants and similar claims and relief sought.
Steven Lees filed a claim on March 31, 2021 with the same defendants and similar claims and relief sought.
Stephanie Young filed a claim on April 2, 2021 in the United States District Court for the Southern District of New York with the same
defendants and similar claims and relief sought.
Charles Williams filed a claim on April 6, 2021 in the United States District Court for the Southern District of New York with the same
defendants and similar claims and relief sought.
Richard Lawrence filed a claim on April 6, 2021 in the United States District Court for the District of Delaware again with the same
defendants and similar claims and relief sought.
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Tilray and the other named defendants in the Complaints took the position that these lawsuits were without merit and that no supplemental disclosure was
required to the Proxy Statement/Circular under any applicable law, rule or regulation. However, solely to eliminate the burden and expense of litigation and
to avoid any possible disruption to the Arrangement that could result from further litigation, Tilray filed a Form 8-K dated April 8, 2021 providing
supplemental information to be read in conjunction with the Proxy Statement/Circular. On April 21, 2021, Alicia Barron-Archer voluntarily dismissed her
lawsuit. On April 22, 2021, Arthur Reveles voluntarily dismissed his lawsuit. On April 24, 2021, Patricia Violini voluntarily dismissed her lawsuit. On
April 30, 2021, Stephanie Young voluntarily dismissed her lawsuit. On May 3, 2021, Steven Lees voluntarily dismissed his lawsuit. On May 5, 2021,
Richard Lawrence voluntarily dismissed his lawsuit. On May 11, 2021, Charles Williams voluntarily dismissed his lawsuit.
Bill’s Nursery v. Tilray, Inc.
On April 8, 2021, Bill’s Nursery, Inc. (“BNI”), a Florida nursery and medical marijuana treatment clinic operator, and its owner, Stephen
Garrison, filed suit in Washington state court asserting claims against Tilray, Inc. (as successor to Privateer Evolution, LLC) for breach of contract, breach
of the implied duty of good faith, breach of fiduciary duty, and fraud, arising out of Tilray’s decision not to include the content of Tilray’s proprietary
standard operating procedures (“SOPs”) in the parties’ 2015 applications for a “Dispensing Organization” license in Florida. On May 28, 2021 a
Settlement Agreement and Release was signed to dismiss the lawsuit against Tilray, Inc. On June 7, 2021, Court signed the order dismissing this action.
Item 4. Mine Safety Disclosures.
Not applicable.
50
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the Nasdaq Global Select Market under the symbol “TLRY.”
PART II
Holders
As of July 27, 2021, there were approximately 364 holders of record of our common stock.
Dividends
We have not paid any cash dividends on our common stock to date. It is our current intention to not declare or pay any dividends for the
foreseeable future as we intend to utilize all available funds and any future earnings to support operations and to finance the growth and development of our
business. 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 results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash
dividends common stock is limited by the terms and cannot be paid without the consent of the lender, as well as any future debt or preferred securities.
The equity plan compensation information called for by Item 201(d) of Regulation S-K will be set forth under the heading “Equity Compensation
Plan Information” in the Company’s 2020 Proxy Statement.
Recent sales of unregistered securities; use of proceeds from registered securities.
Each issuance of common stock described below, unless otherwise noted, were exempt from registration under Section 4(2) of the Securities Act
1933 in transactions by an issuer not involving a public offering.
On May 11, 2021, the Company issued 94,558 shares of its common stock in connection with a price protection clause associated with the
settlement of the termination of a supply agreement with an unrelated third party. The issuance of the common stock described above was exempt from
registration under Section 4(a)(2) of the Securities Act 1933, as amended, as a transaction by an issuer not involving a public offering.
On May 12, 2021, the Company issued 507,739 shares of its common stock in connection with a price protection clause associated with the
renegotiation of the Aphria Diamond supply agreement. The issuance of the common stock described above was exempt from registration under Section
4(a)(2) of the Securities Act 1933, as amended, as a transaction by an issuer not involving a public offering.
51
Stock Performance Graph
The following graph compares the performance of our common stock to the Nasdaq Composite and the Horizons Marijuana Life Sciences Index
for the period from July 18, 2018 through May 31, 2021 in comparison to the indicated indexes. The results assume that $100, which was invested on July
18, 2018 in our common stock and each of the indicated indexes.
Tilray Inc.
Nasdaq Composite
Horizons Marijuana Life Sciences Index
July 18,
2018
$
$
$
100.00 $
100.00 $
100.00 $
2019
169.76 $
95.24 $
110.97 $
May 31,
2020
43.99 $
121.27 $
44.93 $
2021
74.45
175.70
62.28
This information under “Stock Performance Graph” is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference in any filing of Tilray under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended,
whether made before or after the date of this Annual Report on Form 10-K and irrespective of any general incorporation language in those filings.
Item 6. [Reserved]
52
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of our financial condition and results of operations together with the financial information
and the notes thereto included in Part II, Item 8 of this Form 10-K in this Annual Report for the fiscal year ended May 31, 2021 (“Annual Report”).
Amounts are presented in thousands of United States dollars, except for shares, warrants, per share data and per warrant data or as otherwise
noted. The Canadian dollar (“C$”) equivalents presented are derived using the average exchange rate during the reporting period. Amounts are
individually converted by multiplying the United States dollar to Canadian dollar rate to determine the Canadian dollar amount.
Company Overview
We are a leading global cannabis-lifestyle and consumer packaged goods company headquartered in Leamington and New York, with operations in
Canada, the United States, Europe, Australia, and Latin America that is changing people’s lives for the better – one person at a time – by inspiring and
empowering the worldwide community to live their very best life by providing them with products that meet the needs of their mind, body, and soul and
invoke a sense of wellbeing. Tilray’s mission is to be the trusted partner for its patients and consumers by providing them with a cultivated experience and
health and wellbeing through high-quality, differentiated brands and innovative products.
Our overall strategy is to leverage our scale, expertise and capabilities to drive market share in Canada and internationally, achieve industry-
leading, profitable growth and build sustainable, long-term shareholder value. In order to ensure the long-term sustainable growth of our Company, we
continue to focus on developing strong capabilities in consumer insights, drive category management leadership and assess growth opportunities with the
introduction of innovative new products. In addition, we are relentlessly focused on managing our cost of goods and expenses in order to maintain our
strong financial position.
Within Canada, we are focused on gaining market share in the Canadian cannabis industry by executing on our strategic priorities through entering
new product categories that possess the most consumer demand, while leveraging our expertise to develop brands that are truly differentiated from our
competitors and carefully curated to meet patient and consumer demand, investing in brand building and innovation activities and optimizing our
production to continue to be the high-quality, low-cost producer we are today.
Internationally, we are focused on business activities that provide a return on investment in the near term without being capital intensive. We intend
to continue to maximize the utilization of our existing assets and investments in connection with the development and execution of our international growth
plans, while leveraging our cannabis expertise and well-established medical brands. Through our well positioned cultivation facilities in Portugal and
Germany, we intend to fuel the demand for our EU GMP certified medical grade cannabis internationally. By building on this foundation, we strive to take
a leadership position in the international cannabis industry.
Within the U.S., we are focused on leading the craft beer segment, including growing our SweetWater brand by expanding our distribution
footprint, focusing on new product development and innovation and building brand awareness of, and equity in, our existing adult-use cannabis brands in
the U.S. ahead of federal legalization of cannabis by leveraging the SweetWater manufacturing and distribution infrastructure. Further complementing this
strategy, our Manitoba Harvest brand is a leading manufacturer of hemp-derived CBD and other cannabinoid products to promote the acceptance and
mainstream usage of cannabis and hemp-based products ahead of federal legalization.
Aphria – Tilray Business Combination
On December 15, 2020, Tilray entered into an Arrangement Agreement (as amended, the “Arrangement Agreement” with Aphria Inc. (“Aphria”),
pursuant to which Tilray acquired all of the issued and outstanding common shares of Aphria pursuant to a plan of arrangement (the “Plan of
Arrangement”) under the Business Corporations Act.
On April 30, 2021, upon consummation of the Arrangement, Aphria stockholders and Tilray stockholders owned approximately 61.2% and 38.8%,
respectively, of the post-closing outstanding Tilray common stock resulting
53
in the reverse acquisition of Tilray, whereby Tilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Accordingly, in this Form 10-
K, the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities of Tilray are recognized on the effective
date of the business combination transaction and measured at fair value. The operating results for the prior years are of those of Aphria.
As a result of the Arrangement, the sales of Aphria stock that previously traded under the ticker symbol “APHA” ceased trading and were delisted
from the Toronto Stock Exchange (“TSX”) on or about May 4, 2021. Our common stock shares commenced trading on the Nasdaq under the ticker symbol
“TLRY” on May 3, 2021. In conjunction with the reverse acquisition, the Company elected to adopt Aphria’s fiscal year end of June 1 to May 31. For the
year ending May 31, 2021, the Company’s financial information includes the financial results of Aphria for the 12-months ended May 31, 2021 and the
one-month operating results of Tilray, as follows:
Revenue
Net loss
Net loss per share - basic and diluted
2021
Years ended May 31,
2020
$
$
$
513,085 $
(336,014) $
(1.25) $
405,326 $
(100,833) $
(0.47) $
2019
179,303
(36,093)
(0.18)
The Coronavirus ("COVID-19") Pandemic, Its Impact on Us
Tilray continues to closely monitor and respond, where possible, to the ongoing COVID-19 pandemic. As the global situation continues to change
rapidly, ensuring the well-being of our employees remains one of our top priorities. The Company also remains committed to providing best in class care
and service to our valued patients and consumers – facilities continue to remain open and operational with heightened measures in place to protect the
health and safety of employees, vendors, partners and their families. The Company is committed to enhancing these measures and implementing other
necessary practices as the situation warrants.
COVID-19 impact on our Cannabis operations
Leamington, Brampton, Enniskillen and London, Ontario: Our Leamington facilities, Aphria One and Aphria Diamond, Brampton facility, Avanti,
London facility, High Park Processing Facility, and Enniskillen facility, High Park Farms, remain open and are currently considered essential businesses by
the Ontario government.
Duncan and Nanaimo, British Columbia: Our Duncan facility, Broken Coast, and our Nanaimo Facility, Tilray Canada, in British Columbia
("BC"), remain open and are currently considered essential businesses by the BC government.
Supply chain in Canada: Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and
minimize any sort of disruption. As of the date of this Annual Report, there do not appear to be any indications of challenges or material delays in our
supply chain; however, the Company has undertaken pre-emptive measures to ensure alternate supply sources in different continents.
Cantanhede and Esporão, Portugal: Our Cantanhede and Esporão facilities, Tilray European Union campus and cultivation site, remain open and
are considered essential services by the Portuguese government.
Supply chain in Portugal: Our supply chain team continues to work closely with our supply chain partners on a day-to-day basis to prevent and
minimize any sort of disruption.
COVID-19 impact on our SweetWater business
Our brewery located in Atlanta, Georgia has remained open during the COVID-19 global pandemic. During the COVID-19 pandemic, the federal,
state and local governments at various times imposed restrictions as a result of the pandemic, which include, among others, restricting people from
gathering in groups or interacting within a certain physical distance (i.e., social distancing), ordering businesses, particularly bars and restaurants, to close
or limit operations or people to stay at home, which have impacted the SweetWater business primarily driven by reductions
54
in sales and profit margin. The reduced profit margins are driven by a reduction in keg demand from the on-premises channel, which have higher profit
margins than products intended for off-premises consumption. We believe this change in SweetWater’s sales mix and demand may continue as long as the
COVID-19 pandemic continues.
COVID-19 impact on our medical and distribution businesses
Our medical distribution businesses located in Densborn, Germany and Buenos Aires, Argentina continue to remain open during the COVID-19
pandemic as they are considered essential services by their local governments. In addition, our Canadian medical cannabis business also continued to
operate. The sales and associated EBITDA for these businesses were negatively impacted by government-imposed restrictions, which included, among
others, orders for people to stay at home. This resulted in a general decrease in elective medical procedures and surgeries and in-person medical visits,
which in turn resulted in, the Company experiencing and may continue to experience decreases in revenue in its Canadian medical cannabis and global
distribution businesses. Declining new patient registrations in Canada driven by the decrease in medical visits continue to impact our medical cannabis
business. Limitations on elective medical procedures and lower frequency patient visits to physicians and pharmacies continue to impact our global
distribution businesses as doctors have less opportunity to write new prescriptions. Further, due to government-imposed restrictions, CC Pharma was not
able to source inventory from surrounding countries in sufficient quantities to support its sales demand, which also impacted its revenue.
Increasing COVID-19 case counts in Canada, Germany, Portugal and the United States
We continue to monitor infection rates and the measures taken by various governments to contain the infection and begin providing vaccinations.
As of the date of this Annual Report, we note an increase in infection rates with increasingly stronger measures being adopted in those countries in which
the Company operates predominately Germany and Portugal. Further, we note a decrease in infection rates, largely as a result of additional efforts to
vaccinate, after our year-end, in Canada and the United States.
In Canada, during fiscal 2021 and the last quarter of the fiscal year, individual provinces took increasingly stronger measures to slow infection
rates, including the temporary closure of retail outlets, including cannabis stores. Most provinces, however, allowed curbside pick-up or delivery replacing
in-person visits to cannabis stores.
In Germany, the duration of lockdown measures that were put in place continue to be extended and became more restrictive and, as a result, the
German population became less mobile with patients not visiting their physicians or engaging in elective surgeries.
In Portugal, the lockdown measures continue to be monitored with the country reaching various stages of reopening while maintaining partial
capacity in gathering places and limiting nonessential activities. The lockdown caused construction delays in our 3.3-hectare greenhouse expansion at our
Cantanhede facility and impacted the schedule of our first harvest by two-months.
In the United States, while lockdown measures have not been as stringent as in Canada and in Germany, certain state and local governments
significantly curtailed entertainment activities, including the consumption of alcohol at on-premises locations. The reduction of on-premises consumption
was fully been offset by an increase in off-premises consumption.
Depending on the length and severity of these measures to help curtail COVID-19, particularly during periods where defined “lock-downs” are in
effect, our revenues may be negatively impacted.
Protection of our employees
We took and continue to take, important steps to protect our employees during this period, including:
• Mandatory mask policy in all common and production areas;
•
Staggered work schedules, banning all non-essential contractors and closing our facility to guests, all to reduce flow of traffic into and out of
our facilities;
55
•
•
•
•
Staggered employee breaks, redesigned work stations and processes to minimize employee interaction and ensure appropriate social
distancing;
Installed thermal scanners at all facility employee entrances to monitor employee temperatures;
Enhanced sanitation of work areas, both in terms of breadth and depth of cleanings; and
Implemented mandatory 14-day quarantines for all workers returning from out of country visits.
Giving back to our communities
We are providing multiple programs to seniors and front-line healthcare workers in the local Leamington community to support them during this
period, including having:
• Made various donations to Erie Shores Community Hospital;
• Made a donation of excess personal protective equipment to Erie Shores Community Hospital;
•
•
Continued the Aphria Supports program, where employee volunteers operate a dedicated local phone number for seniors and front-line
healthcare workers to purchase and deliver groceries and other necessities during this difficult time; and,
Continued a 10% discount on medical products to compensate for the current economic climate.
Effects of COVID -19 on our Adult Use Revenue
This retail sales decline of November impacted the Company in late November / early December, as licensed producers sell to provincial boards
who, in turn, sell to retailers who then sell direct to consumers. This can represent a significant lag between sales from the Company and the related retail
sale. With the decline in the retail sales in January and February, which were forecasted for growth, the provincial boards took measures to lower their
inventory levels through a combination of slower replenishments and product returns.
These measures resulted in the Company receiving product returns of approximately $4,500. The Company was able to partially mitigate the
impact of these returns by finding alternative distribution channels to sell these products. We believe these returns were more substantial for the Company
than our competitors, as we continue to hold the largest market share in Alberta, which issued the largest returns as a response to the provincial lockdowns.
As the company experienced continued reduced sales levels in mid to late January, tied with the expected lifting of lockdown not occurring until
late June, we reacted quickly to preserve our operating profit and adjusted EBITDA. During the second half of the fiscal year, the Company modified
pricing on some of our products, implemented temporary four-day work weeks at our Canadian cannabis facilities, better managed headcount and reduced
planned operating spending. The Company believes these initiatives had a major role in reporting the level of positive adjusted EBITDA. During the last
six months of our fiscal year, despite widespread COVID-19 related lockdowns and absent adjustments for recent consolidation in the industry, the
Company maintained its leading position, as the top licensed producer in Canada, in terms of consumer sales across all brands for those provinces where
such information is available and published. The Company expects that the cannabis retail market will resume the previous trajectory of growth, once these
provincial restrictions are lifted and remain lifted.
Use of Non-GAAP Measures
Throughout this Annual Report on Form 10-K, we discuss non-GAAP financial measures, including reference to:
•
•
•
•
gross profit (excluding inventory valuation adjustments and purchase price allocation (“PPA”) step up),
cannabis gross profit and margin (excluding inventory valuation adjustments and PPA step-up),
beverage alcohol gross profit and margin (excluding inventory valuation adjustments and PPA step-up),
distribution gross profit and margin (excluding inventory valuation adjustments and PPA step-up),
56
•
•
•
•
wellness gross profit and margin (excluding inventory valuation adjustments and PPA step-up),
adjusted net income (loss),
free cash flow, and
adjusted EBITDA.
All these non-GAAP financial measures should be considered in addition, and not in lieu of, the financial measures calculated and presented in
accordance with accounting principles generally accepted in the United States of America, (“GAAP”). These measures, which may be different than
similarly titled measures used by other companies, are presented to help investors’ overall understanding of our financial performance and should not be
considered a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.
Business Acquisitions
Prior to the completion of the Arrangement, our consolidated financial statements were presented under International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board and in Canadian Dollars (C$). All prior periods have been recast and are
shown in this Annual Report in Form 10-K under GAAP and in United States Dollars ($). Accordingly, the assets and liabilities of Aphria are presented at
their historical carrying values and the assets and liabilities of Tilray are recognized on the effective date of the business combination and measured at fair
value. The operating results for the prior years are of those of Aphria.
Acquisition of Sweetwater
On November 25, 2020, the Company, through its wholly-owned subsidiary Four Twenty Corporation, completed the purchase of all the shares of
SW Brewing Company, LLC which is the holding company of 100% of the common shares of SweetWater, one of the largest independent craft brewers in
the U.S. The purchase price consisted of cash consideration of $255,543, share consideration of 8,232,810 shares, and additional cash consideration of up
to $66,000 contingent on SweetWater achieving specified EBITDA targets. The acquisition of SweetWater gave the Company an opportunity to build brand
awareness in the U.S. ahead of federal legalization, amongst other objectives.
The historical business acquisitions consummated by Tilray prior to the completion of the Arrangement are included in the net assets acquired upon
completion of the Arrangement.
57
Results of Operations
Our consolidated results, in millions except for per share data, are as follows:
Net revenue
Cost of goods sold
Gross profit
Operating expenses:
General and administrative
Selling
Amortization
Marketing and promotion
Research and development
Impairment
Transaction costs
Total operating expenses
Operating loss
Finance income (expense), net
Non-operating (expense) income, net
(Loss) income before income taxes
Income taxes (recovery)
Net (loss) income
2021
For the years ended May 31,
2020
2019
$
513,085
389,903
123,182
111,575
26,576
35,221
17,539
830
—
63,612
255,353
(132,171)
(27,977)
(184,838)
(344,986)
(8,972)
(336,014) $
$
405,326
309,273
96,053
93,789
18,975
15,138
15,266
1,916
50,679
4,299
200,062
(104,009)
(19,371)
14,195
(109,185)
(8,352)
(100,833) $
179,303
135,792
43,511
75,841
3,752
9,550
17,400
1,052
57,259
17,588
182,442
(138,931)
5,259
95,534
(38,138)
(2,045)
(36,093)
$
$
% Change
2021 vs. 2020
27%
26%
28%
2020 vs. 2019
126%
128%
121%
19%
40%
133%
15%
(57%)
(100%)
1,380%
28%
27%
44%
(1,402%)
216%
7%
233%
24%
406%
59%
(12%)
82%
(11%)
(76%)
10%
(25%)
(468%)
(85%)
186%
308%
179%
Fiscal 2021 reflects the impacts of COVID-19 on our results of operations. Refer to the discussion above on the effects of COVID-19 and discussion of our
results below for additional information.
Key Operating Metrics
We use the following key operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our
business, project our future performance, and make strategic decisions. Other companies, including companies in our industry, may calculate key operating
metrics with similar names differently which may reduce their usefulness as comparative measures.
Net cannabis revenue
Net beverage alcohol revenue
Distribution revenue
Wellness revenue
Cannabis cost of sales
Beverage alcohol cost of sales
Distribution cost of sales
Wellness cost of sales
Gross profit (excluding inventory valuation adjustments and step-up)
Cannabis gross margin (excluding inventory valuation adjustments and step-up)
Beverage gross margin (excluding inventory valuation adjustments and step-up)
Distribution gross margin (excluding inventory valuation adjustments and step-up
Wellness gross margin (excluding inventory valuation adjustments and step-up)
Adjusted EBITDA
Cash and cash equivalents
Working capital
2021
$
58
$
201,392
28,599
277,300
5,794
130,511
12,687
242,472
4,233
143,936
45.1%
58.6%
12.6%
26.9%
40,771
488,466
482,368
For the years ended May 31,
2020
2019
$
129,896
—
275,430
—
68,551
—
240,722
—
96,053
47.2%
—
12.6%
—
5,845
360,646
461,732
59,876
—
119,427
—
31,341
—
104,451
—
43,511
47.7%
—
12.5%
—
(23,780)
407,185
457,679
Segment Reporting
Our reporting segments revenue is primarily comprised of revenues from our cannabis, distribution, wellness, beverage alcohol operations and
business under development, as follows:
Cannabis business
Distribution business
Beverage alcohol business
Wellness business
Business under development
Our geographic revenue is, as follows:
North America
EMEA
Latin America
Total
Our geographic capital assets are, as follows:
North America
EMEA
Latin America
Total
Distribution revenue
For the year ended May 31,
2021
2020
2019
$
$
201,392
277,300
28,599
5,794
—
513,085
$
$
129,896
275,430
—
—
—
405,326
$
$
59,876
119,427
—
—
—
179,303
$
$
Change
2021 vs. 2020
71,496
1,870
28,599
5,794
—
107,759
55%
1%
0%
0%
0%
27%
Change
2020 vs. 2019
70,020
156,003
—
—
—
226,023
117%
131%
0%
0%
0%
126%
$
$
For the year ended May 31,
2021
2020
2019
$
$
229,120
279,062
4,903
513,085
$
$
129,663
271,291
4,372
405,326
$
$
59,629
116,578
3,096
179,303
$
$
Change
2021 vs. 2020
99,457
7,771
531
107,759
77%
3%
12%
27%
Change
2020 vs. 2019
70,034
154,713
1,276
226,023
117%
133%
41%
126%
$
$
For the year ended May 31,
2021
2020
$
$
504,575
140,838
5,285
650,698
$
$
371,823
44,348
4,535
420,706
$
$
Change
2021 vs. 2020
132,752
96,490
750
229,992
36%
218%
17%
55%
Revenue from Distribution operations for the year ended May 31, 2021 was $277,300 as compared to $275,430 in the prior year, representing a
slight increase of 1% on a year over year basis. Included in distribution revenue is $270,873 of revenue from CC Pharma, and $6,427 of revenue from other
distribution companies for the year ended May 31, 2021 versus $270,131 and $5,299 in the prior year. The slight increase in distribution revenue for the
year ended May 31, 2021 as compared to prior year was primarily the result of increases in the value of the Euro compared to the US dollar for the year
ended May 31, 2021 compared to May 31, 2020. This increase was partially offset by COVID-19 mandatory lockdowns, which resulted in insufficient
supply from other European Union countries, fewer workdays from lockdown periods, and limitations on elective medical procedures and lower frequency
in-person visits to physicians and pharmacies.
The increase in distribution revenue the year ended May 31, 2020 versus the prior year was primarily driven by only owning CC Pharma for 5
months during the year ended May 31, 2019.
For the three months ended May 31, 2021, as compared to the same quarter prior year, revenue decreased from $73,955 to $66,792 primarily due to
difficulties in securing inventory from countries in the European Union that closed their borders due to COVID-19 lockdowns and limitations on elective
medical procedures and lower frequency in-person visits to physicians and pharmacies.
Beverage alcohol revenue
Revenue from our Beverage operations for the year ended May 31, 2021 was $28,599 from SweetWater which was acquired on November 25,
2020. SweetWater operates on-premise, wholesale, and specialty sales. Revenues
59
were negatively impacted from reduction in keg demand from the on-premises channel, which have higher profit margins than products intended for off-
premises consumption.
For the three months ended May 31, 2021, beverage alcohol revenue was $15,947, with no comparable amount as SweetWater was acquired during
the current fiscal year.
Wellness revenue
Included in Wellness revenue is $5,794 from Manitoba Harvest, for the year ended May 31, 2021. Manitoba Harvest was part of the assets
acquired in the Arrangement. There are no comparable revenues in the prior year being presented.
Cannabis revenue
Cannabis revenue by market
Revenue from medical cannabis products
Revenue from adult-use cannabis products
Revenue from wholesale cannabis products
Revenue from international cannabis products
Total cannabis revenue by market
Excise taxes
Total cannabis net revenue by market
$
$
Year ended May 31,
2021
2020
2019
$
$
$
25,539
222,930
6,615
9,250
264,334
(62,942)
201,392
28,685
112,207
12,585
—
153,477
(23,581)
129,896
33,017
30,236
4,339
—
67,592
(7,716)
59,876
$
$
$
Change
2021 vs. 2020
(3,146)
110,723
(5,970)
9,250
110,857
(39,361)
71,496
(11%)
99%
(47%)
—%
72%
Change
2020 vs. 2019
(4,332)
81,971
8,246
—
85,885
(15,865)
70,020
(13%)
271%
190%
—%
127%
$
$
During the year ended May 31, 2021, kilogram equivalents sold increased at a disproportionate rate as compared to the increase in revenue as a
result of the decrease in average selling price per gram. We expect continuous pressure on average selling price for at least the first half of the year.
During the year ended May 31, 2020, kilogram equivalents of cannabis sold increased as compared to the year ended May 31, 2019 as a result of
the continued growth of our adult-use market.
Revenue from medical cannabis products: Revenue from medical cannabis products for the year ended May 31, 2021 was $25,539 as compared
to $28,685 in the prior year, representing a decrease of (11%).
The decrease in revenue from medical cannabis sold during 2021 as compared to 2020 was related to a decrease in average gross retail selling price
to medical patients. The decline is a result of specific pricing programs offered to assist patients in need who have been negatively impacted by the
COVID-19 pandemic, along with other promotional programs.,
Revenue from adult-use cannabis products: Revenue from adult-use cannabis products for the year ended May 31, 2021 was $222,930 as
compared to $112,207 in the prior year, increase almost double the amount in the prior year, or 99% primarily due to increase in market share for the first
half of the year, which was offset by lowered replenishment rates and ordering by the provincial boards as a response to the lockdown measures and the
decline in the retail cannabis market. In the second half of the year our volumes were consistent with the first half of year, while the average gross selling
price to the adult-use market declined. The decrease is primarily related to consumer trends to large-format and price compression in the market, magnified
by consumer behavior during the lockdowns to a much heavier focus on price and potency.
60
Wholesale cannabis revenue: Revenue from wholesale cannabis products for the year ended May 31, 2021 was $6,615 as compared to $12,585 in
the prior year, representing a decrease of (47%). The Company continues to believe that wholesale cannabis revenue will remain subject to quarter-to-
quarter variability and is based on opportunistic sales.
International cannabis revenue: Revenue from international cannabis products for the year ended May 31, 2021 was $9,250 as compared to nil in
the prior year. The increase is largely due to our export of product to Israel, and one month of legacy Tilray’s larger international cannabis business.
61
Gross profit and gross margin
Our gross profit and gross margin for the years ended May 31, 2021, 2020 and 2019, is as follows, for our each of our operating segments:
Cannabis
2021
2020
2019
For the year ended May 31,
$
$
$
$
Revenue
Excise taxes
Net revenue
Cost of goods sold
Gross profit
Gross margin
Adjustments:
Inventory valuation adjustments
Purchase price accounting step-up
Adjusted gross profit (1)
Adjusted gross margin (1)
Distribution
Revenue
Excise taxes
Net revenue
Cost of goods sold
Gross profit
Gross margin
Adjustments:
Inventory valuation adjustments
Purchase price accounting step-up
Adjusted gross profit (1)
Adjusted gross margin (1)
Beverage alcohol
Revenue
Excise taxes
Net revenue
Cost of goods sold
Gross profit
Gross margin
Adjustments:
Inventory valuation adjustments
Purchase price accounting step-up
Adjusted gross profit (1)
Adjusted gross margin (1)
Wellness
Revenue
Excise taxes
Net revenue
Cost of goods sold
Gross profit
Gross margin
Adjustments:
Inventory valuation adjustments
Purchase price accounting step-up
Adjusted gross profit (1)
Adjusted gross margin (1)
$
264,334
(62,942)
201,392
130,511
70,881
35%
19,919
—
90,800
45%
$
277,300
—
277,300
242,472
34,828
$
153,477
(23,581)
129,896
68,551
61,345
47%
—
—
61,345
47%
$
275,430
—
275,430
240,722
34,708
$
67,592
(7,716)
59,876
31,341
28,535
48%
—
—
28,535
48%
$
119,427
—
119,427
104,451
14,976
Change
2021 vs. 2020
110,857
(39,361)
71,496
61,960
9,536
$
Change
2020 vs. 2019
85,885
(15,865)
70,020
37,210
32,810
(12%)
(1%)
19,919
—
29,455
(2%)
$
1,870
—
1,870
1,750
120
—
—
32,810
(0%)
156,003
—
156,003
136,271
19,732
13%
13%
13%
(0%)
0%
—
—
34,828
13%
$
29,661
(1,062)
28,599
12,687
15,912
56%
—
835
16,747
59%
$
5,794
—
5,794
4,233
1,561
27%
—
—
1,561
27%
—
—
34,708
13%
—
—
14,976
13%
$
—
—
—
—
—
0%
—
—
—
0%
$
—
—
—
—
—
0%
—
—
—
0%
$
—
—
—
—
—
0%
—
—
—
0%
$
—
—
—
—
—
0%
—
—
—
0%
—
—
120
(0%)
$
29,661
(1,062)
28,599
12,687
15,912
56%
—
—
15,912
59%
$
5,794
—
5,794
4,233
1,561
27%
—
—
1,561
27%
—
—
19,732
0%
—
—
—
—
—
0%
—
—
—
0%
—
—
—
—
—
0%
—
—
—
0%
(1) Gross profit (excluding inventory valuation adjustments) and gross margin percentage (excluding inventory valuation adjustments) are non-GAAP
financial measures. For information on how we define and calculate these non-GAAP financial measures, refer to “Non-GAAP Financial Measures”
62
Cannabis gross margin: Gross margin of 35% decreased in 2021 versus 2020 primarily due to an inventory write off of $19,919 from excess
inventory quantities of the combined cannabis operations. Adjusted gross margin of 45% decreased in 2021 versus 2020 primarily due to price
compressions during the COVID-19 lockdowns, offset by the Company’s improved cost structure.
Distribution gross margin: Gross margin of 13% remained consistent versus 2020.
Beverage alcohol gross margin: Gross margin of 56% is in line with our expectations. This is the first fiscal year in which we operated in this
segment. We note that COVID-19 disrupted our product sales mix, resulting in lower than traditional gross margins for SweetWater.
Wellness gross margin: Gross margin of 27% reflects one month of sales. We acquired the wellness business in the Aphria-Tilray business
combination.
Operating expenses
General and administrative
Selling
Amortization
Marketing and promotion
Research and development
Impairment
Transaction costs
For the year ended May 31,
2021
2020
2019
$
$
111,575
26,576
35,221
17,539
830
—
63,612
255,353
$
$
93,789
18,975
15,138
15,266
1,916
50,679
4,299
200,062
$
$
75,841
3,752
9,550
17,400
1,052
57,259
17,588
182,442
$
$
Change
2021 vs. 2020
Change
2020 vs. 2019
17,786
7,601
20,083
2,273
(1,086)
(50,679)
59,313
55,291
19% $
40%
133%
15%
(57%)
(100%)
1,380%
28% $
17,948
15,223
5,588
(2,134)
864
(6,580)
(13,289)
17,620
24%
406%
59%
(12%)
82%
(11%)
(76%)
10%
Operating expenses are comprised of general and administrative, share-based compensation, selling, amortization, marketing and promotion,
research and development, and transaction costs. These costs increased by $55,291 to $255,353 from $200,062 as compared to prior year. This was
primarily due to reporting two full quarters of operating expenses for SweetWater, including increased non-cash amortization charges associated with
definite life intangible assets acquired. The remaining increase is from transaction costs associated with the acquisition of SweetWater, the Arrangement,
other potential acquisitions and one-time litigation costs.
General and administrative costs
Executive compensation
Consulting fees
Office and general
Professional fees
Salaries and wages
Stock-based compensation
Insurance
Travel and accommodation
Rent
For the year ended May 31,
2021
2020
2019
$
$
8,645
6,633
19,503
5,146
37,126
17,351
12,257
2,711
2,203
111,575
$
$
6,777
9,272
12,351
4,918
28,252
18,079
9,370
2,798
1,972
93,789
$
$
$
4,402
4,928
12,486
8,916
14,842
21,951
4,050
2,356
1,910
75,841
Change
2021 vs. 2020
1,868
(2,639)
7,152
228
8,874
(728)
2,887
(87)
231
17,786
28% $
(28%)
58%
5%
31%
(4%)
31%
(3%)
12%
19%
Change
2020 vs. 2019
2,375
4,344
(135)
(3,998)
13,410
(3,872)
5,320
442
62
17,948
54%
88%
(1%)
(45%)
90%
(18%)
131%
19%
3%
24%
During the year ended May 31, 2021, the Company incurred higher salaries and wages, executive compensation, and insurance costs as a result of
increases to its executive and non-executive headcount, increases in annual compensation rates for cost of living and internal promotions and increases in
the basic per unit cost of insurance in the cannabis industry, all offset by lower consulting fees related to a reduction in the number of projects pursued by
the business that required an external resource. During the second half of 2021, as provincial lockdowns in Canada remained in force, the Company pro-
actively adjusted its cost structure to offset the impact of the decrease in demand,
63
including temporary four-day work weeks at our Canadian cannabis facilities, better managed headcount and reduce planned operating spending.
During the year ended May 31, 2020, the Company incurred higher salaries and wages, executive compensation, consulting and insurance costs for
the same reasons above plus the changeover of its executive employees all offset by lower professional fees and stock-based compensation as a result of a
one-time award to its new Chief Executive Officer in 2019.
For the three months ended May 31, 2021, general and administrative costs were $32,806 as compared to $24,912 for the same period in the prior
year which excluded the acquisitions of SweetWater and Tilray.
Share-based compensation
The Company recognized share-based compensation expense of $17,351 for the year ended May 31, 2021 compared to $18,079 for the same
period in the prior year. Stock options are valued using the Black-Scholes valuation model and represents a non-cash expense, restricted share units
(“RSUs”) are valued based on the graded vesting and the grant date fair value. The Company issued 2,370,862 RSUs in the year-ended May 31, 2021
compared to 137,033 DSUs and 2,159,643 RSUs in the same period of the prior year.
As part of the Arrangement, the Company’s Omnibus Long-Term Incentive Plan no longer includes a provision for DSUs. Also, as part of the
Arrangement, all outstanding DSUs were replaced with RSUs, under the same terms and conditions as originally granted.
Selling costs
For the year ended May 31, 2021, the Company incurred selling costs of $26,576 as compared to $18,975 in the prior year. These costs relate to
third-party distributor commissions, shipping costs, Health Canada cannabis fees, and patient acquisition and maintenance costs. Patient acquisition and
ongoing patient maintenance costs include funding to individual clinics to assist with additional costs incurred by clinics resulting from the education of
patients using the Company’s products.
For the year ended May 31, 2020, the Company incurred selling costs of $18,975 as compared to $3,752 in the prior year. The increase in 2020
versus 2019 is primarily due to increased sales volumes and related selling activities, including the addition of our acquired operations in distribution and
the legalization of adult-use cannabis in Canada.
For the three months ended May 31, 2021, the Company incurred selling costs of $ 8,525 or 6.5% of net revenue as opposed to $7,320 or 6.0% for
the same period in the prior year.
Amortization
The Company incurred non-production related amortization charges of $35,221 for the year ended May 31, 2021 compared to $15,138 and $9,550
in 2020 and 2019, respectively. The increase is largely associated with the amortization on the acquired definite life intangible assets from the SweetWater
acquisition.
Marketing and promotion cost
For the year ended May 31, 2021, the Company incurred marketing and promotion costs of $17,539, as compared to $15,266 in the prior year. The
current period costs are comprised of $12,147 of cannabis related marketing and promotion or 6.0% of net cannabis revenue, $593 of beverage alcohol
marketing and promotion or 2.1% of beverage alcohol net revenue, $600 of wellness products marketing and promotion or 10.3% of wellness revenue, and
$3,926 of distribution marketing and promotion or 1.4% of distribution revenue. The 2021 marketing and promotion costs included significant deferrals of
costs associated with the COVID-19 pandemic and reduced discretionary spending in the second half of fiscal 2021.
64
For the year ended May 31, 2020 the Company incurred marketing and promotion costs of $ 15,266 or 3.8% of net revenue as opposed to $ 17,400
or 9.7% for the same period in the prior year. The decrease in the overall spend for marketing and promotions was due to a one-time increase in spending in
2019 associated with the legalization of adult-use cannabis in Canada.
For the three months ended May 31, 2021, the Company incurred marketing and promotion costs of $5,103 or 3.6% of net revenue as opposed to
$2,874 or 2.5% for the same period in the prior year.
Research and development
Research and development costs of $830 were expensed during the year ended May 31, 2021 compared to $1,916 in the prior year. These relate to
external costs associated with the development of new products. Although the Company spends a significant amount on research and development, the
majority of these costs remain in costs of sales, as the Company does not reclassify research and development costs related to the cost of products
consumed in research and development activities.
For the year ended May 31, 2020 the Company incurred research and development costs of $1,916 as opposed to $1,052 in the prior year.
For the three months ended May 31, 2021, the Company incurred research and development costs of $358 as opposed to $430 for the same period
in the prior year.
Transaction costs
Transaction costs of $63,612 were expensed during the year ended May 31, 2021 compared to $4,299 in the prior year. Transaction costs largely
relate to costs associated with the Arrangement, the acquisition of SweetWater, non-cash shares issued as part of a legal settlement, with various other one-
time litigation costs, restructuring costs and potential acquisitions the Company has considered and abandoned, or is still considering.
Non-operating income (expense), net
Non-operating items
Foreign exchange (loss) gain
Loss on marketable securities
Gain (loss) on sale of capital assets
Gain from equity investees
Deferred gain on sale of intellectual property
Loss on promissory notes receivable
(Loss) gain on long-term investments
Unrealized (loss) gain on convertible debentures
Unrealized (loss) gain on convertible notes receivable
Legal settlement
Chane in fair value of warrant liability
Other non-operating items, net
imm – variance is immaterial and omitted
Year ended May 31,
2021
2020
2019
$
$
$
$
(22,347) $
—
1,523
(458)
—
—
(2,352)
(170,453)
—
—
1,234
8,015
(184,838) $
6,145
(252)
(8,075)
—
—
(9,698)
(24,295)
44,322
9,289
(3,241)
—
—
14,195
692
(135)
42
44,191
257
—
14,860
36,630
—
—
—
(1,003)
95,534
$
$
Change
2021 vs. 2020
(28,492)
252
9,598
(458)
—
9,698
21,943
(214,775)
(9,289)
3,241
1,234
8,015
(199,033)
(464%)
(100%)
(119%)
imm
imm
(100%)
(90%)
(485%)
(100%)
(100%)
imm
imm
(1,402%)
$
$
(19%)
(46%)
(85%)
9,649%
Change
2020 vs. 2019
5,453
(117)
(8,117)
(44,191)
(257)
(9,698)
(39,155)
7,692
9,289
(3,241)
—
1,003
(81,339)
imm
(100%)
(178%)
(4%)
(100%)
(100%)
—%
13%
41%
65
For the three months and year ended May 31, 2021, the Company recognized an unrealized gain (loss) on convertible debentures of $113,425 and
$(170,453), respectively, driven primarily by the increase in the Company’s share price and the increase in the trading price of the convertible debentures.
Furthermore, the Company recognized a gain (loss) of $1,239 and $(22,347), respectively, resulting from the changes in foreign exchange rates during the
period, largely associated with the strengthening of the Canadian dollar against the US dollar during the second half of fiscal 2021. The remaining other
losses relate to changes in fair value in the Company’s convertible notes receivable and long-term investments.
Adjusted net income reconciliation:
Net (loss) income
Unrealized loss (gain) on convertible debentures
Foreign exchange (loss) gain
Inventory valuation adjustment
Share-based compensation
Transaction costs
Adjusted net income (loss) (1)
Adjusted net income (loss) per share - basic (1)
Year ended May 31,
2021
(336,014) $
170,453
(22,347)
19,919
17,351
63,612
(87,026) $
(0.32) $
2020
(100,833) $
(44,322)
6,145
—
18,079
4,299
(116,632) $
(0.54) $
2019
(36,093) $
(36,630)
692
—
21,951
17,588
(32,492)
(0.16) $
$
$
$
Change
2021 vs. 2020
(235,181)
214,775
(28,492)
19,919
(728)
59,313
29,606
0.22
$
233%
(485%)
(464%)
100%
(4%)
1,380%
(25%)
40%
Change
2020 vs. 2019
(64,740)
(7,692)
5,453
—
(3,872)
(13,289)
(84,140)
179%
21%
788%
—%
(18%)
(76%)
895%
(38%)
(238%)
(1) Adjusted net income represents a non-GAAP financial measure that does not have any standardized meaning prescribed under GAAP and may not be
comparable to similar measures presented by other companies. Adjusted net income is calculated as net (loss) income plus (minus) the unrealized loss
(gain) on convertible debentures, a non-cash item, share-based compensation, foreign exchange (loss) gain, inventory valuation adjustment, all non-
cash items, and transaction costs, costs which will not necessarily continue in future periods depending on the frequency of additional M&A
considered by the Company. It represents a measure management uses in evaluating operating results.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that does not have any standardized meaning prescribed by GAAP and may not be
comparable to similar measures presented by other companies. The Company calculates adjusted EBITDA as net income (loss), plus (minus) income taxes
(recovery), plus (minus) finance (income) expense, net, plus (minus) non-operating (income) loss, net, plus amortization, plus share-based compensation,
plus impairment, plus transaction costs and certain one-time non-operating expenses, as determined by management, all as follows:
Adjusted EBITDA reconciliation:
Net (loss) income
Income taxes
Finance expense, net
Non-operating expense (income), net
Amortization
Share-based compensation
Impairment
Inventory valuation adjustments
Purchase price accounting step up
Facility start-up costs
Lease expense
Transaction costs
Adjusted EBITDA
Year ended May 31,
2021
(336,014) $
(8,972)
27,977
184,838
67,832
17,351
—
19,919
835
2,056
1,337
63,612
40,771
$
2020
(100,833)
(8,352)
19,371
(14,195)
35,669
18,079
50,679
—
—
—
1,128
4,299
5,845
$
$
2019
(36,093) $
(2,045)
(5,259)
(95,534)
17,210
21,951
57,259
—
—
—
1,143
17,588
(23,780) $
$
$
Change
2021 vs. 2020
Change
2020 vs. 2019
(235,181)
(620)
8,606
199,033
32,163
(728)
(50,679)
19,919
835
2,056
209
59,313
34,926
233% $
7%
44%
(1,402%)
90%
(4%)
(100%)
100%
100%
100%
19%
1,380%
598% $
(64,740)
(6,307)
24,630
81,339
18,459
(3,872)
(6,580)
—
—
—
(15)
(13,289)
29,625
179%
308%
(468)%
(85)%
107%
(18)%
(11)%
0%
0%
0%
(1)%
(76)%
(125)%
The Company’s adjusted EBITDA increased by $32,870 from $5,845 in the prior year.
66
Adjusted EBITDA should not be considered in isolation from, or as a substitute for, net loss. There are a number of limitations related to the use of
Adjusted EBITDA as compared to net loss, the closest comparable GAAP measure. Adjusted EBITDA excludes:
•
•
•
•
•
•
•
•
•
•
•
•
•
Non-cash inventory valuation adjustments;
Non-cash amortization and amortization expenses and, although these are non-cash charges, the assets being depreciated and amortized may
have to be replaced in the future;
Stock-based compensation expenses, which has been, and will continue to be for the foreseeable future, a significant recurring expense in
our business and an important part of our compensation strategy;
Non-cash impairment charges, as the charges are not expected to be a recurring business activity;
Non-cash loss from equity method investments;
Non-cash foreign exchange gains or losses, which accounts for the effect of both realized and unrealized foreign exchange transactions.
Unrealized gains or losses represent foreign exchange revaluation of foreign denominated monetary assets and liabilities;
Non-cash change in fair value of warrant liability;
Interest expense, finance income from ABG, and loss on disposal of property and equipment to reflect ongoing operating activities;
Costs incurred to start up new facilities;
Lease expense;
Other expenses (income), net includes acquisition related expenses, which vary significantly by transactions and are excluded to evaluate
ongoing operating results;
Amortization of purchase accounting step-up in inventory value included in costs of sales - product costs; and
Current and deferred income tax expenses and recoveries, which could be a significant recurring expense or recovery in our business in the
future and reduce or increase cash available to us.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”). A detailed discussion of our significant accounting policies can be found in Part II, Item 8, Note 3, “Summary of Significant Accounting
Policies”, and the impact and risks associated with our accounting policies are discussed throughout this Form 10‑K and in the Notes to the Consolidated
Financial Statements. We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present
results of operations related to (i) COVID-19 related judgments and estimates, (ii) revenue recognition, (iii) valuation of inventory, (iv) impairment of
goodwill and indefinite-lived intangible assets, (v) stock-based compensation, (vi) business combinations and goodwill, (vii) leases, and (viii) warrants.
These policies and estimates are considered critical because they had a material impact, or they have the potential to have a material impact, on our
consolidated financial statements and because they require us to make significant judgments, assumptions or estimates. We believe that the estimates,
judgments and assumptions made when accounting for the items described below were reasonable, based on information available at the time they were
made. Actual results could differ materially from these estimates.
(i)
Revenue recognition
Revenue is recognized when the control of the promised goods, through performance obligation, is transferred to the customer in an amount that
reflects the consideration we expect to be entitled to in exchange for the performance obligations. We generate substantially all our revenue from the sale of
our products through contracts with customers, relationships with wholesalers and distributors, and sales of product direct to consumers. Cannabis,
wellness and beverage alcohol products are sold through various distribution channels. Revenue is recognized when the control of the goods is transferred
to the customer, which occurs at a point in time, typically upon delivery to or receipt by the
67
customer, depending on shipping terms. In determining the transaction price for the sale of goods, we consider the effects of variable consideration. Some
contracts for the sale of goods may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or sales
allowances. In addition, we may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement.
These items give rise to variable consideration. We use historical evidence, current information and forecasts to estimate the variable consideration. The
requirements in ASC 606 on constraining estimates are applied to determine the amount of the variable consideration.
(ii)
Valuation of inventory
Refer to Part II, Item 8, Note 3, “Summary of Significant Accounting Policies” for further details on our inventory cost policy. At the end of each
reporting period, we perform an assessment of inventory and record inventory valuation adjustments for excess and obsolete inventories based on our
estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. A reserve is estimated to ensure
the inventory balance at the end of the year reflects our estimates of product we expect to sell in the next twelve months. Changes in the regulatory
structure, lack of retail distribution locations or lack of consumer demand could result in future inventory reserves.
(iii)
Impairment of goodwill and indefinite-lived intangible assets
Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that
impairment may have occurred. As part of the impairment evaluation, we may elect to perform an assessment of qualitative factors. If this qualitative
assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than
its carrying value, a quantitative impairment test to compare the fair value to the carrying value is performed. An impairment charge is recorded if the
carrying value exceeds the fair value. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and
requires the application of judgment, historical experience, and external and internal sources of information. We make estimates in determining the future
cash flows and discount rates in the quantitative impairment test to compare the fair value to the carrying value.
(iv)
Stock-based compensation
We measure and recognize compensation expenses for stock options and restricted stock units (“RSUs”) to employees, directors and consultants on
a straight-line basis over the vesting period based on their grant date fair values. We estimate the fair value of stock options on the date of grant using the
Black-Scholes option pricing model. The fair value of RSUs is based on the share price as at the date of grant. We estimate forfeitures at the time of grant
and revise these estimates in subsequent periods if actual forfeitures differ from those estimates.
Determining the estimated fair value at the grant date requires judgment in determining the appropriate valuation model and assumptions, including
the fair value of common shares on the grant date, risk-free rate, volatility rate, annual dividend yield and the expected term. Volatility is estimated by using
the historical volatility of the accounting acquirer and, other companies that we consider comparable and have trading and volatility history.
68
(v)
Business combinations and goodwill
We use judgment in applying the acquisition method of accounting for business combinations and estimates to value identifiable assets and
liabilities at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and
discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on
acquisition. Fair value is typically estimated using an income approach, which is based on the present value of future discounted cash flows. Significant
estimates in the discounted cash flow model include the discount rate, rate of future revenue growth and profitability of the acquired business and working
capital effects. The discount rate considers the relevant risk associated with the business-specific characteristics and the uncertainty related to the ability to
achieve projected cash flows. These estimates and the resulting valuations require significant judgment. Management engages third party experts to assist
in the valuation of material acquisitions.
(vi)
Leases
We record operating leases on our Consolidated Statement of Financial Position as right-of-use assets and recognize the related lease liabilities
equal to the fair value of the lease payments using our incremental borrowing rate when the implicit rate in the lease agreement is not readily available. As
most of our leases do not provide an implicit rate, the incremental borrowing rate is used based on the information available at commencement date in
determining the present value of lease payments. We derived our incremental borrowing rate by assessing rates in recent market transactions, as adjusted
for security interests and our credit quality.
(vii) Warrants
As part of the Arrangement, we inherited outstanding warrants. As a result, we adopted an accounting policy for warrants. Warrants are accounted
for in accordance with applicable accounting guidance provided in ASC Topic 815, Derivatives and Hedging – Contracts in Entity's Own Equity (“ASC
815”), as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Our warrants are classified as liabilities and
are recorded at fair value. The warrants are subject to remeasurement at each settlement date and at each balance sheet date and any change in fair value is
recognized as a component of change in fair value of warrant liability in the statements of net loss and comprehensive loss. Transaction costs allocated to
warrants that are presented as a liability are expensed immediately within transaction costs in the statements of net loss and comprehensive loss.
We estimate the fair value of the warrant liability using a Black-Scholes pricing model. We are required to make assumptions and estimates in
determining an appropriate risk-free interest rate, volatility, term, dividend yield, discount due to exercise restrictions, and the fair value of common stock.
Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.
New Standards and Interpretations Applicable Effective June 1, 2021
Refer to Part II, Item 8, Note 3, Significant Accounting Policies, of this Form 10-K for additional information on changes in accounting policies.
There have been no new standards or interpretations applicable to the Company during the period.
69
Liquidity and Capital Resources
The following table sets forth the major components of our statements of cash flows for the periods presented:
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Effect on cash of foreign currency translation
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
$
2021
For the year ended May 31,
2020
2019
(44,717) $
46,105
124,308
2,124
360,646
488,466
127,820
(100,627) $
(69,946)
130,606
(6,572)
407,185
360,646
(46,539)
(42,049)
(134,517)
547,185
(9,570)
46,136
407,185
361,049
The changes in net cash used in operating activities in 2021 compared to 2020 primarily related to increase in non-cash adjustments for losses on
convertible debentures from changes in fair value, unrealized foreign exchange losses due to unfavorable movement in our operating currencies against the
U.S. dollar, amortization from additional intangible assets acquired in the Aphria-Tilray business combination, as well as an increase in cash used for
transactions costs associated to the SweetWater and Aphria-Tilray business combinations. The positive effect of these non-cash adjustments was offset by
lower collections of accounts receivable and higher use of cash for prepayment of current assets.
The changes in net cash used in operating activities in 2020 compared to 2019 primarily related to increased inventory as a result of increased
licensed capacity at the Company’s facilities.
Cash flows from investing activities
Cash provided by investing activities in 2021 compared to 2020 increased primarily due to cash provided by the Company’s business acquisitions:
Aphria-Tilray and SweetWater. This increase was also positively impacted by lower amounts of cash used in the acquisition of capital assets.
The change in net cash used in investing activities in 2020 compared to 2019 decreased due to less capital allocation to facility expansion and
ceased passive cannabis investment activities.
Cash flows from financing activities
Cash provided by financing activities in 2021 compared to 2020 increased due to higher share capital issued, higher proceed from long term debt
offset by higher amounts paid to non-controlling shareholders.
The change in net cash provided by financing activities during 2020 relates to proceeds from equity offerings, as compared to 2019 in which we
also received proceeds from the issuance of our 5.25% Convertible Notes, (“APHA 24”). See Part II, Item 8, Note 19, “Convertible Debentures” of this
Annual Report for additional information.
70
Free cash flow
Free cash flow is a non-GAAP measure and it is comprised of two GAAP measures deducted from each other which are net cash flow used in
operating activities less investments in capital and intangible assets. Our free cash flow was, as follows:
Net cash used in operating activities
Less: investments in capital and intangible assets
Free cash flow
Cash resources and working capital requirements
2021
For the year ended May 31,
2020
(44,715) $
38,874
(83,589) $
(100,627) $
98,786
(199,413) $
$
$
2019
(42,049)
155,751
(197,800)
The Company constantly monitors and manages its cash flows to assess the liquidity necessary to fund operations. As of May 31, 2021, the
Company maintained $488,466 of cash and cash equivalents on hand, compared to $360,646 in cash and cash equivalents at May 31, 2020 or an increase of
$127,820 in the period. This increase is primarily as a result cash acquired in the Aphria-Tilray business combination.
Working capital provides funds for the Company to meet its operational and capital requirements. As of May 31, 2021, the Company maintained
working capital of $488,466. We primarily financed our operations through the issuance of common stock, sale of convertible notes and revenue generating
activities. While we believe we have sufficient cash to meet existing working capital requirements in the short term, we may need additional sources of
capital and/or financing, to meet our U.S. growth ambitions or expansion of our international operations.
Contractual obligations
We lease various facilities, under non-cancelable finance and operating leases, which expire at various dates through September 2040:
2022
2023
2024
2025
2026
Thereafter
Total minimum lease payments
Less: amounts of leases related to interest payments
Present value of minimum lease payments
Less: current accrued lease obligation
Obligation recognized
71
Year ending May 31,
Operating
leases
Finance
leases
7,824
4,272
3,925
3,023
2,964
4,102
26,110 $
(419)
25,691
(3,613)
22,078 $
2,404
7,183
2,061
2,122
2,186
39,586
55,542
(18,759)
36,783
(651)
36,132
$
$
Purchase and other commitments
The Company has payments for long-term debt, convertible debentures, ABG finance liability, material purchase commitments and constructions
commitments, as follows:
Long-term debt repayment
Convertible notes, principal and interest
ABG finance liability
Material purchase obligations
Construction commitments
Total
Total
$ 204,108
571,989
6,000
26,097
1,814
$ 810,008 $
2022
36,623
13,893
1,500
21,141
1,814
74,971 $
2025
2024
2023
69,925
1,438
95,181
13,893 284,803 259,400
1,500
1,500
1,500
93
854
4,009
—
—
—
89,327 $ 382,338 $ 262,431 $
2026
Thereafter
—
—
—
—
—
—
941
—
—
—
—
941 $
Except as disclosed elsewhere in this Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,
there have been no material changes with respect to the contractual obligations of the Company during the year-to-date period except for those related to
the Company’s acquisitions.
Off-Balance Sheet Financing
As of May 31, 2021, the Company has no off-balance sheet financing.
Contingencies
In the normal course of business, we may receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion
of management, any potential liabilities resulting from such claims would not have a material adverse effect on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; and, interest rate price.
(a)
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The maximum credit exposure at May 31, 2021, is the carrying amount of cash and cash equivalents, accounts receivable, prepaids and other
current assets, promissory notes receivable and convertible notes receivable. All cash and cash equivalents are placed with major financial institutions in
Canada, Australia, Portugal, Germany, Colombia, Argentina and the United States. To date, the Company has not experienced any losses on its cash
deposits. Accounts receivable are unsecured, and the Company does not require collateral from its customers.
(b)
Liquidity risk
As at May 31, 2021, the Company’s financial liabilities consist of bank indebtedness and accounts payable and accrued liabilities, which have
contractual maturity dates within one-year, long-term debt, and convertible debentures which have contractual maturities over the next five years.
The Company maintains a debt service charge covenant on certain loans secured by its Aphria One facilities that is measured at year-end only. The
Company maintains debt service charge and leverage covenants on certain loans secured by its Aphria Diamond facilities and 420 that are measured
quarterly. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate
being in breach of any of its financial covenants.
72
The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital
position at May 31, 2021, management regards liquidity risk to be low.
(c)
Currency rate risk
As at May 31, 2021, a portion of the Company’s financial assets and liabilities held in Canadian dollars and Euros consist of cash and cash
equivalents, convertible notes receivable, and long-term investments. The Company’s objective in managing its foreign currency risk is to minimize its net
exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in the functional currency. The Company is
exposed to currency rate risk in other comprehensive income, relating to foreign subsidiaries which operate in a foreign currency. The Company does not
currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not
significant at this point in time.
(d)
Interest rate price risk
The Company’s exposure to changes in interest rates relates primarily to the Company’s outstanding debt. The Company manages interest rate risk
by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the
sensitivity of the portfolio to the impact of interest rate fluctuations.
73
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Financial Position as of May 31, 2021 and 2020
Consolidated Statements of Loss and Comprehensive Loss for the Years ended May 31, 2021, 2020, and 2019
Consolidated Statements of Stockholders’ Equity for the Years ended May 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years ended May 31, 2021, 2020, and 2019
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
75
76
77
78
79
124
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes.
74
Tilray, Inc.
Consolidated Statements of Financial Position
(In thousands of U.S. dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventory
Prepaids and other current assets
Convertible notes receivable
Total current assets
Capital assets
Right-of-use assets
Intangible assets
Goodwill
Interest in equity investees
Long-term investments
Other assets
Total assets
Liabilities
Current liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Contingent consideration
Warrant liability
Current portion of lease liabilities
Current portion of long-term debt
Total current liabilities
Long - term liabilities
Lease liabilities
Long-term debt
Convertible debentures
Deferred tax liability
Other liabilities
Total liabilities
Commitments and contingencies (refer to Note 30)
Shareholders' equity
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Deficit
Total Tilray shareholders' equity
Non-controlling interests
Total shareholders' equity
Total liabilities and shareholders' equity
May 31,
2021
May 31,
2020
$
$
$
$
488,466 $
87,309
256,429
48,920
2,485
883,609
650,698
18,267
1,605,918
2,832,794
8,106
17,685
8,285
6,025,362 $
8,717 $
212,813
60,657
78,168
4,264
36,622
401,241
53,946
167,486
667,624
265,845
3,907
1,560,049
—
46
4,792,406
152,668
(486,050)
4,459,070
6,243
4,465,313
6,025,362 $
360,646
37,931
139,781
32,660
10,609
581,627
420,706
5,356
263,318
447,330
—
19,595
—
1,737,932
389
112,411
—
—
954
6,141
119,895
4,227
94,028
196,405
48,446
—
463,001
—
24
1,366,736
(5,434)
(113,352)
1,247,974
26,957
1,274,931
1,737,932
The accompanying notes are an integral part of these consolidated financial statements
75
Tilray, Inc.
Consolidated Statements of Loss and Comprehensive Loss
(In thousands of U.S. dollars, except share and per share amounts)
Net revenue
Cost of goods sold
Gross profit
Operating expenses:
General and administrative
Selling
Amortization
Marketing and promotion
Research and development
Impairment
Transaction costs
Total operating expenses
Operating loss
Finance income (expense), net
Non-operating (expense) income, net
(Loss) income before income taxes
Income taxes (recovery)
Net (loss) income
Total net income (loss) attributable to:
Shareholders of Tilray Inc.
Non-controlling interests
Other comprehensive (loss) income, net of tax
Foreign currency translation (loss) gain
Unrealized loss on convertible notes receivables
Total other comprehensive (loss) income, net of tax
Comprehensive (loss) income
Total comprehensive income (loss) attributable to:
Shareholders of Tilray Inc.
Non-controlling interests
Weighted average number of common shares - basic
Weighted average number of common shares - diluted
Earnings (Loss) per share - basic
Earnings (Loss) per share - diluted
2021
$
$
$
$
For the years ended May 31,
2020
2019
$
513,085
389,903
123,182
111,575
26,576
35,221
17,539
830
—
63,612
255,353
(132,171)
(27,977)
(184,838)
(344,986)
(8,972)
(336,014) $
(367,421)
31,407
156,649
(3,824)
152,825
(183,189)
$
405,326
309,273
96,053
93,789
18,975
15,138
15,266
1,916
50,679
4,299
200,062
(104,009)
(19,371)
14,195
(109,185)
(8,352)
(100,833) $
(102,540)
1,707
(858)
(5,476)
(6,334)
(107,167)
179,303
135,792
43,511
75,841
3,752
9,550
17,400
1,052
57,259
17,588
182,442
(138,931)
5,259
95,534
(38,138)
(2,045)
(36,093)
(25,037)
(11,056)
(90)
(2,570)
(2,660)
(38,753)
(214,596)
31,407
269,549,852
269,549,852
(1.25) $
(1.25) $
(108,874)
1,707
216,158,217
216,158,217
(0.47) $
(0.47) $
(27,697)
(11,056)
203,460,138
203,460,138
(0.18)
(0.18)
The accompanying notes are an integral part of these consolidated financial statements
76
Tilray, Inc.
Consolidated Statements of Changes in Equity
(In thousands of U.S. dollars, except share amounts)
Balance at May 31, 2018
Share issuance - June 2018 bought deal
Additional share issuance - Broken Coast
acquisition
Share issuance - LATAM acquisition
Share issuance - warrants exercised
Share issuance - options exercised
Share issuance - DSUs exercised
Income tax recovery on share issuance cost
Share-based payments
Elimination of CTA on disposal
Non-controlling interests
Comprehensive income (loss) for the period
Balance at May 31, 2019
Share issuance - January 2020 bought deal
Share issuance - debt settlement
Share issuance - options exercised
Share issuance - RSUs exercised
Share issuance - DSUs exercised
Share issuance - warrants exercised
Cancelled shares
Expired options
Expired warrants
Share-based payments
Nuuvera Malta acquisition
Non-controlling interests
Comprehensive income (loss) for the period
Balance at May 31, 2020
Share issuance - legal settlement
Share issuance - equity financing
Share issuance - SweetWater acquisition
Share issuance - contract settlement
Share issuance - Arrangement
Share issuance - options exercised
Share issuance - RSUs exercised
Share-based payments
Settlement of convertible notes receivable
Dividends paid to non-controlling interests
Comprehensive income (loss) for the period
Balance at May 31, 2021
Number of
common
shares
176,143,413
18,300,341
$
Common
stock
16,731
13,139,992
461,236
2,205,945
86,324
—
—
—
—
—
210,353,982
11,771,068
15,806,989
1,084,288
559,456
333,606
642,296
(419,050)
$
—
—
—
—
—
—
240,132,635
1,893,858
14,610,496
8,232,810
1,165,861
179,635,973
318,299
450,709
—
—
—
—
446,440,641
$
$
18
2
—
1
—
—
—
—
—
—
—
—
21
1
2
—
—
—
—
—
—
—
—
—
—
—
24
—
2
1
1
18
—
—
—
—
—
—
46
Additional
paid-in
capital
$
795,134
185,967
Accumulated
other
comprehensive
income (loss)
2,954
—
$
Retained
earnings
(deficit)
Non-
controlling
interests
Total
$
$
1,781
—
13,828
—
$
813,715
185,969
225
207,122
1,303
3,854
—
2,591
29,028
—
—
—
1,225,224
74,394
58,232
3,060
—
—
858
(459)
(11,924)
(728)
$
18,079
—
—
—
1,366,736
10,454
103,535
65,888
21,370
3,204,888
144
—
19,391
—
—
—
4,792,406
$
$
$
$
$
$
—
—
—
—
—
—
—
606
—
(2,660)
900
—
—
—
—
—
—
—
—
—
—
—
—
(6,334)
(5,434) $
—
—
—
—
—
—
—
—
5,277
—
152,825
152,668
$
—
—
—
—
—
—
—
(606)
—
(25,037)
(23,862) $
—
—
—
—
—
—
459
11,924
728
—
(61)
—
(102,540)
(113,352) $
—
—
—
—
—
—
—
—
(5,277)
—
(367,421)
(486,050) $
—
21,889
—
—
—
—
—
—
7,138
(11,056)
31,799
—
—
—
—
—
—
—
—
—
—
61
(6,610)
1,707
26,957
—
—
—
$
$
(40,266)
—
—
—
—
—
(11,855)
31,407
6,243
$
225
229,012
1,303
3,854
—
2,591
29,028
—
7,138
(38,753)
1,234,082
74,395
58,234
3,060
—
—
858
—
—
—
18,079
—
(6,610)
(107,167)
1,274,931
10,454
103,537
65,889
(18,895)
3,204,906
144
—
19,391
—
(11,855)
(183,189)
4,465,313
The accompanying notes are an integral part of these consolidated financial statements
77
Tilray, Inc.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars, except share amounts)
Cash used in operating activities:
Net (loss) income for the year
Adjustments for:
Deferred income tax recovery
Unrealized foreign exchange loss (gain)
Amortization
Loss (gain) on sale of capital assets
Impairment
Loss on promissory notes receivable
Transaction costs associated with business acquisitions
Other non-cash items
Stock-based compensation
Loss (gain) on long-term investments & equity investments
Loss (gain) on convertible debentures
Change in non-cash working capital
Net cash used in operating activities
Cash used in investing activities:
Proceeds from disposal of marketable securities
Investment in capital and intangible assets
Proceeds from disposal of capital and intangible assets
Promissory notes advances
Repayment of convertible notes receivable
Investment in long-term investments and equity investees
Proceeds from disposal of long-term investments and equity investees
Net cash acquired (paid) on business acquisitions
Net cash used in investing activities
Cash provided by (used in) financing activities:
Share capital issued, net of cash issuance costs
Proceeds from warrants and options exercised
Proceeds from convertible debentures
Repayment of convertible debentures
Proceeds from long-term debt
Repayment of long-term debt
Repayment of lease liabilities
Increase in bank indebtedness
Amounts paid to non-controlling interest
Net cash used in financing activities
Effect of foreign exchange on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplementary disclosure of cash flow information
Cash paid during the year:
Income taxes
2021
For the year ended May 31,
2020
2019
$
(336,014) $
(100,833) $
(24,873)
49,342
67,832
(1,523)
—
—
59,917
3,025
17,351
1,624
169,537
(50,935)
(44,717)
—
(38,874)
6,608
(2,419)
5,752
—
8,430
66,608
46,105
102,550
144
—
—
102,798
(64,559)
(1,058)
8,328
(23,895)
124,308
2,124
127,820
360,646
488,466 $
(13,305)
(451)
35,669
8,075
50,679
9,698
—
(90)
18,079
24,295
(53,611)
(78,832)
(100,627)
14,816
(98,786)
1,411
—
19,396
(451)
19,570
(25,902)
(69,946)
74,395
3,918
—
(812)
60,944
(8,114)
(126)
401
—
130,606
(6,572)
(46,539)
407,185
360,646 $
(36,093)
(5,833)
(194)
17,210
(42)
57,202
—
11,660
242
21,951
(59,051)
(36,630)
(12,471)
(42,049)
18,667
(155,751)
42
(14,746)
6,466
(54,724)
83,343
(17,814)
(134,517)
185,969
5,157
343,607
—
21,053
(8,601)
—
—
—
547,185
(9,570)
361,049
46,136
407,185
$
$
5,623 $
2,649 $
4,878
The accompanying notes are an integral part of these consolidated financial statements
78
Tilray, Inc.
Notes to the Consolidated Financial Statements
(In thousands of U.S. dollars, except share and per share amounts)
1.
Description of business
Tilray, Inc., a Delaware corporation, and its wholly owned subsidiaries (collectively “Tilray”, the “Company”, “we”, “us” or the “Successor”) is a
global medical cannabis research, cultivation, processing and distribution organization, and is one of the leading suppliers of adult-use cannabis in Canada.
The Company also markets and distributes food products from hemp seed, offering a broad range of natural and organic hemp-based food products and
ingredients that are sold through retailers and websites globally.
On April 30, 2021 Tilray acquired all of the issued and outstanding common shares of Aphria Inc. (“Aphria”), an international organization with a
focus on building a global cannabis-lifestyle consumer packaged goods company and involved in the manufacturing and distribution of beer and beer
derivative products in the United States, and in the distribution of (non-Cannabis) pharmaceutical products in Germany, pursuant to a plan of arrangement
(the “Arrangement”) under the Ontario Business Corporations Act.
Under the terms of the Arrangement, stockholders of Aphria received 0.8381 (the “Exchange Ratio”) of a share of Tilray common stock for each
Aphria share held. Tilray stockholders continued to hold their Tilray common stock, which remains outstanding. The Exchange Ratio resulted in Aphria
stockholders and Tilray stockholders owning 61.2% and 38.8%, respectively, of the post-closing outstanding Tilray common stock (on a fully diluted
basis), resulting in the reverse acquisition of Tilray under the acquisition method, whereby Aphria is deemed to be the acquiring entity from an accounting
perspective. Following the completion of the Arrangement, Tilray is the consolidated parent of Aphria and the resulting company operates under the Tilray
corporate name.
2.
Basis of preparation
The policies applied in these consolidated financial statements are prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
Based on the determination that Aphria was the accounting acquirer in the Arrangement, Aphria’s historical financial statements became the
historical financial statements of the Company. The acquired assets and liabilities of Tilray are included in the Company’s consolidated balance sheets as of
April 30, 2021 and the results of its operations and cash flows are included in the Company’s consolidated statement of income (loss) and comprehensive
income (loss) and cash flows for periods beginning after April 30, 2021. In conjunction with the reverse acquisition, the Company elected to adopt
Aphria’s fiscal year end of June 1 to May 31.
Prior to April 30, 2021 Aphria was a foreign private issuer reporting its financial statements under International Financial Reporting Standards
(“IFRS”) as issued by the International Accounting Standard Boards. These consolidated financial statements, for all periods, are presented in accordance
with GAAP.
These consolidated financial statements have been prepared on the going concern basis which assumes that the Company will continue in operation
for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due,
under the historical cost convention except for certain financial instruments that are measured at fair value, as detailed in the Company’s accounting
policies. For the fiscal year ended May 31, 2021 the Company reported a consolidated net loss of $336,014 and a consolidated net loss of $100,833 and
$36,093 for the years ending May 31, 2020 and May 31, 2019, respectively.
For the years ended May 31, 2021, 2020 and 2019, the Company had cash flows used in operating activities of $44,717, $100,627 and $42,049,
respectively. As of May 31, 2021 and 2020, the Company had working capital of $482,368 and $ 461,732 respectively.
79
Current management forecasts and related assumptions support the view that the Company can adequately manage the operational needs of the
business with the current cash on hand for the next twelve months from the date of issuance of these financial statements.
These financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the Company’s
financial position and results of operations.
Foreign currency
These consolidated financial statements are presented in U.S. dollars (“USD”), which is the Company’s reporting currency; however, the functional
currency of the entities in these financial statements are their respective local currencies, including Canadian dollar, USD, Euro, Australian dollar, and
Great Britain pound.
Foreign currency transactions are remeasured to the respective functional currencies of the Company’s entities at the exchange rates in effect on the
date of the transactions. Monetary assets and liabilities denominated in foreign currencies are remeasured to the functional currency at the foreign exchange
rate applicable at the statement of financial position date. Non-monetary items carried at historical cost denominated in foreign currencies are remeasured
to the functional currency at the date of the transactions. Non-monetary items carried at fair value denominated in foreign currencies are remeasured to the
functional currency at the date when the fair value was determined. Realized and unrealized exchange gains and losses are recognized through profit and
loss.
On consolidation, the assets and liabilities of foreign operations reported in their functional currencies are translated into USD, the Group’s presentation
currency, at period-end exchange rates. Income and expenses, and cash flows of foreign operations are translated into USD using average exchange rates. Exchange
differences resulting from translating foreign operations are recognized in other comprehensive income (loss) and accumulated in equity.
80
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary
beneficiary of a variable interest entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that
control commences until the date that control ceases. The following is a list of the Company’s operating subsidiaries:
Subsidiaries
Natura Naturals Inc.
Tilray, Inc.
Manitoba Harvest USA LLC
Tilray Canada, Ltd.
Dorada Ventures, Ltd.
FHF Holdings Ltd.
High Park Farms Ltd.
Tilray Deutschland GmbH
Pardal Holdings, Lda.
Tilray Portugal Unipessoal, Lda.
Tilray Australia New Zealand Pty. Ltd.
Tilray Ventures Ltd.
Manitoba Harvest Japan K.K.
High Park Holdings, Ltd.
Fresh Hemp Foods Ltd.
Natura Naturals Holdings Inc.
National Cannabinoid Clinics Pty Ltd.
Tilray Latin America SpA
Tilray Portugal II, Lda.
High Park Gardens Inc.
1197879 B.C. Ltd
High Park Shops Inc.
Privateer Evolution, LLC
Tilray France SAS
High Park Holdings B.V.
High Park Botanicals B.V.
Broken Coast Cannabis Ltd.
SweetWater Brewing Company, LLC
SweetWater Colorado Brewing Co.
ARA – Avanti Rx Analytics Inc.
FL Group S.r.l.
ABP, S.A.
Aphria Germany GmbH
Aphria RX GmbH
CC Pharma GmbH
CC Pharma Research and Development GmbH
Aphria Wellbeing GmbH
CC Pharma Luxemburg GmbH
ASG Pharma Ltd.
ColCanna S.A.S.
CC Pharma Nordic ApS
1974568 Ontario Ltd.
Jurisdiction of incorporation
Canada
United States
United States
Canada
Canada
Canada
Canada
Germany
Portugal
Portugal
Australia
Ireland
Japan
Canada
Canada
Canada
Australia
Chile
Portugal
Canada
Canada
Canada
United States
France
Netherlands
Netherlands
British Columbia, Canada
United States
United States
Ontario, Canada
Italy
Argentina
Germany
Germany
Germany
Germany
Germany
Luxemburg
Malta
Colombia
Denmark
Ontario, Canada
Ownership interest
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
90%
75%
51%
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are
eliminated to the extent of the Company’s interest in the entity.
81
A Variable Interest Entity (“VIE”) is a legal entity that does not have sufficient equity at risk to finance its activities without additional
subordinated financial support, is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations
through voting rights, or do not substantively participate in the gains and losses of the entity. Upon inception of a contractual agreement, the Company
performs an assessment to determine whether the arrangement contains a variable interest in a legal entity and whether that legal entity is a VIE. The
primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the
obligation to absorb losses or the right to receive benefits from the VIE entity that could potentially be significant to the VIE. Where the Company
concludes it is the primary beneficiary of a VIE, the Company consolidates the accounts of that VIE. When the Company is not the primary beneficiary, the
VIE is accounted for using the equity method and is included in equity method investments on the balance sheets. At May 31, 2021, 2020, and 2019, the
Company had no consolidated VIEs. Refer to Note 13 Interest in equity investees for the Company’s VIEs accounted for using the equity method.
The Company regularly reviews and reconsiders previous conclusions regarding whether it is the primary beneficiary of a VIE. The Company also
reviews and reconsiders previous conclusions regarding whether the Company holds a variable interest in a potential VIE, the status of an entity as a VIE,
and whether the Company is required to consolidate such a VIE in the financial statements when a change occurs.
The Company treats transactions that do not result in a loss of control as equity transactions and generally no gain or loss is recognized. A change
in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests
in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in
a separate reserve within equity attributable to the owners of the Company.
Equity method investments
In accordance with ASC 323, Investments – Equity Method and Joint Ventures, investments in entities over which the Company does not have a
controlling financial interest but has significant influence are accounted for using the equity method, with the Company’s share of earnings or losses
reported in earnings or losses from equity method investments on the statements of net loss and comprehensive loss. Equity method investments are
recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of
undistributed earnings or losses, and impairment, if any, until the date on which significant influence ceases.
If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any net advances, the group does not
recognize further losses, unless it has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee.
Unrealized gains on transactions between the Company and its equity-method investees are eliminated only to the extent of the Company’s interest
in these entities. Unrealized losses are also eliminated, except to the extent that the underlying asset is impaired.
3.
Significant accounting policies
The significant accounting policies used by the Company are as follows:
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments that are both readily convertible into known amounts of cash with
original maturities of three months or less. Cash and cash equivalents include amounts held in United States dollar, Canadian dollar, Euro, Australian
dollar, Great Britain pound, Colombian peso, Argentine peso, and corporate bonds, commercial paper, treasury bills and money market funds.
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Accounts receivable
The Company maintains an allowance for credit losses at an amount sufficient to absorb losses inherent in its accounts receivable portfolio as of
the reporting dates based on the projection of expected credit losses. The Company applies the aging method to estimate the allowance for expected credit
losses. The aging method is applied to accounts receivables at the business unit level to reflect shared risk characteristics, such as receivable type, customer
type and geographical location. The aging method assigns accounts receivables to a level of delinquency and applies loss rates to each class based on
historical loss experience. The Company also considers relevant qualitative and quantitative factors to assess whether historical loss experience should be
adjusted to better reflect the risk characteristics of the current classes and the expected future loss. This assessment incorporates all available information
relevant to considering the collectability of its current classes, including considering economic and business conditions, default trends, changes in its class
composition, among other internal and external factors. The expected credit loss estimates are adjusted for current conditions and reasonable supportable
forecasts.
As part of the Company’s analysis of expected credit losses, it may analyze contracts on an individual basis in situations where such accounts
receivables exhibit unique risk characteristics and are not expected to experience similar losses to the rest of their class.
Inventory
Inventory consists of our cannabis, wellness, beverage, and distribution inventory, as follows:
Cannabis inventory consists of our plants, dried cannabis, cannabis trim, cannabis derivatives such as oils, and vape products. Cannabis inventory
costs include pre-harvest, post-harvest, shipment and fulfillment, as well as costs related to accessories. Pre-harvest costs include labor and direct materials
to grow cannabis, which includes water, electricity, nutrients, integrated pest management, growing supplies and allocated overhead. Post-harvest costs
include costs associated with drying, trimming, blending, extracting, purifying, quality testing and allocated overhead. Shipment and fulfillment costs
include the costs of packaging, labelling, courier services, and allocated overhead.
Wellness inventory cost includes hemp seeds, packaging and co-packing. Seed costs include commodity cost paid to farmers, genetic seed cost to
provide and manage contracted farmers, hulling and processing costs, including labor and overhead. Packaging costs include packaging materials, labor
and overhead to run machinery. Co-packing cost are generally for products not manufactured by the Company directly and would include all costs to
produce the products.
Beverage inventory cost includes materials we incur to make and ship beer beverages. These costs include brewing materials, such as barley, hops
and various grains. Packaging materials such as glass bottles, aluminum cans, cardboard and paperboard are also included in the cost of our beverage
inventory. Additionally, our cost of goods sold include both direct and indirect labor, shipping and handling including freight costs, utilities, maintenance
costs, warehousing costs, purchasing and receiving costs, amortization, promotional packaging, and other manufacturing overheads
Distribution inventory includes costs related to procurement of pharmaceutical products for re-sale in entities’ respective markets.
Inventory is valued at the lower of cost and net realizable value, determined using weighted average cost. All direct and indirect costs related to
inventory are capitalized as they are incurred, and they are subsequently recorded in cost of goods sold on the statements of loss and comprehensive loss at
the time inventory is sold. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs
of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory and records write-downs
for excess and obsolete inventories based on the Company’s estimated forecast of product demand, production requirements, market conditions, regulatory
environment, and spoilage. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s
statements of financial position, statements of loss and comprehensive loss and statements of cash flows.
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Capital assets
Capital assets are recorded at cost, net of accumulated amortization and impairment, if any. Amortization for the properties included in our capital
assets is calculated using the following terms and methods:
Asset type
Land
Production facility
Equipment
Leasehold improvements
Construction in progress
Finance lease right-of-use assets
Depreciation method
Not depreciated
Straight-line
Straight-line
Straight-line
Not depreciated
Straight-line
Depreciation term (estimated useful life)
No term
20 – 30 years
3 – 25 years
Lesser of estimated useful life or lease term
No term
Lesser of the lease term and the useful life of the leased asset
The estimated residual values and useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being
accounted for on a prospective basis.
When assets are retired or disposed of, the cost and accumulated amortization are removed from the respective accounts and any related gain or
loss is recognized. Maintenance and repairs are charged to expenses as incurred. Significant expenditures, which extend the useful lives of assets or
increase productivity, are capitalized. When significant parts of one of our capital assets have different useful lives, they are accounted for as separate items
or components of capital assets.
Construction in progress includes construction progress payments, deposits, engineering costs and other costs directly related to the construction of
the facilities. Expenditures are capitalized during the construction period and construction in progress is transferred to the relevant class of capital assets
when the assets are available for use, at which point in time the amortization of the asset commences.
Intangible assets
Intangible assets include intangible assets acquired as part of business combinations, asset acquisitions and other business transactions. The
Company records intangible assets at cost, net of accumulated amortization and accumulated impairment losses, if any. Cost is measured based on the fair
values of cash consideration paid and equity interests issued. The cost of an intangible asset acquired is its acquisition date fair value.
Amortization of definite life intangible assets is calculated on a straight -line basis over the estimated useful lives of the assets using the following
terms:
Asset type
Customer relationships and distribution channel
Licences, permits & applications
Brands, intellectual property and trademarks
Non-compete agreements
Know how
Amortization term
14 – 16 years
90 months – indefinite
15 months – 25 years
Over term of non-compete
5 years
When there is no foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company,
an intangible asset is determined to have an indefinite-lived. Indefinite-lived intangible assets are not amortized but tested for impairment annually or more
frequently when indicators of impairment exist. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual
indefinite-lived intangible asset is impaired by the amount of the excess.
The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a
prospective basis.
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Impairment of long-lived assets
The Company reviews long-lived assets, including capital assets and definite life intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, assets are grouped and
tested at the lowest level for which identifiable independent cash flows are available (“asset group”). An impairment loss is recognized when the sum of
projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on
the difference between the fair value and the carrying value of the asset group. Fair value may be determined using a market approach or income approach.
The reversal of impairment losses is prohibited.
Business combinations and goodwill
The Company accounts for business combinations using the acquisition method in accordance with Accounting Standards Codification, ASC 805,
Business Combinations which requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective
fair values on the date of acquisition.
Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business
combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is
accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates, with the
corresponding gain or loss recognized in profit or loss.
Non-controlling interests in the acquiree are measured at fair value on acquisition date. Acquisition-related costs are recognized as expenses in the
periods in which the costs are incurred and the services are received (except for the costs to issue debt or equity securities which are recognized according
to specific requirements).
Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in
assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments
are determined.
Goodwill represents the excess of the consideration transferred for the acquisition of subsidiaries over the net of the acquisition-date amounts of the
identifiable assets acquired and the liabilities assumed. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Impairment of goodwill and indefinite-lived intangible assets
Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. A reporting unit is an operating segment, or a
business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management.
We operate in five operating segments which are our reporting units, and goodwill is allocated at the operating segment level. The Company reviews
goodwill and indefinite-lived intangible assets annually for impairment in the fourth quarter, or more frequently, if events or circumstances indicate that the
carrying amount of an asset may not be recoverable.
Leases
The Company determines if an arrangement is a lease at inception. The Company has operating and finance leases for facilities, office spaces,
production equipment and vehicles. Operating leases are included in right‐of‐use (“ROU”) assets and finance lease ROU assets are included in capital
assets in the statements of financial position. The lease liabilities are included in lease liabilities (current and non-current) in the statements of financial
position.
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ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to
make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which:
•
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ownership of the property transfers to the lessee by the end of the lease term;
the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise;
the lease is for a major part of the remaining economic life of the underlying asset;
the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease
payments equals or exceeds substantially all of the fair value; or
the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
The Company classifies a lease as an operating lease when it does not meet any one of these criteria.
The ROU asset is initially measured at cost, which is primarily comprised of the initial amount of the lease liability, plus initial direct costs and
lease payments at or before the commencement date, less any lease incentives received. All ROU assets are reviewed periodically for impairment.
The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that
rate cannot be readily determined, the incremental borrowing rate. The incremental borrowing rate is defined as the rate of interest that a lessee would have
to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Lease payments included in the measurement of the lease liability comprise:
•
•
•
•
•
fixed lease payments (including in-substance fixed payments), less any lease incentives;
variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;
the amount expected to be payable by the lessee under residual value guarantees;
the exercise of purchase options, if the lessee is reasonably certain to exercise the options; and
payments of penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.
For finance leases, lease expenses are the sum of interest on the lease obligations and amortization of the ROU assets. Finance lease ROU assets
are amortized based on the lesser of the lease term and the useful life of the leased asset according to the capital asset accounting policy. If ownership of the
ROU assets transfers to the Company at the end of the lease term or if the Company is reasonably certain to exercise a purchase option, amortization is
calculated using the estimated useful life of the leased asset.
For operating leases, the lease expenses are generally recognized on a straight-line basis over the lease term and recorded to general and
administrative expenses in the statements of loss and comprehensive loss.
The Company has elected to apply the practical expedient, for each class of underlying asset, to not separate non-lease components from the
associated lease components of the lessee’s contract and account for both components as a single lease component.
The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases (defined as leases with a lease term of 12
months or less that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise). Short-term leases include
real estate and vehicles and are not significant in comparison to the Company’s overall lease portfolio. For these leases, the Company recognizes the leases
as an operating expense on a straight-line basis over the term of the lease.
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Convertible notes receivable
Convertible notes receivables include various investments in which the Company has the right to convert the indenture into common stock shares
of the investee and are classified as available-for-sale and are recorded at fair value. Unrealized gains and losses during the year, net of the related tax
effect, are excluded from income and reflected in other comprehensive income (loss), and the cumulative effect is reported as a separate component of
shareholders’ equity until realized. The Company assesses its convertible notes receivables for impairment at each measurement date. Convertible notes
receivables are impaired when a decline in fair value is determined to be other-than-temporary. If the cost of an investment exceeds its fair value, the
Company evaluates, among other factors, general market conditions, credit quality of debt instrument issuers, and the duration and extent to which the fair
value is less than cost. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in the statements of loss and
comprehensive loss and a new cost basis for the investment is established. The Company also evaluates whether there is a plan to sell the security or it is
more likely than not that the Company will be required to sell the security before recovery. If neither of the conditions exist, then only the portion of the
impairment loss attributable to credit loss is recorded in the statements of net loss and the remaining amount is recorded in other comprehensive income
(loss).
Long-term investments
Long-term investments include investments in equity securities of entities over which the Company does not have a controlling financial interest or
significant influence and are accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments
for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company
performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity
investments is less than carrying values. Changes in value are recorded in non-operating income (loss).
Equity method investments
Investments in entities over which the Company does not have a controlling financial interest but has significant influence, are accounted for using
the equity method, with the Company’s share of losses reported in loss from equity method investments on the statements of loss and comprehensive loss.
Equity method investments are recorded at cost, plus the Company’s share of undistributed earnings or losses, and impairment, if any, within interest in
equity investees on the statements of financial position.
Convertible debentures
The Company accounts for its convertible debentures in accordance with ASC 470-20 Debt with Conversion and Other Options, which requires the
liability and equity components of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, to be
separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The initial proceeds from the sale of convertible notes are
allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonconvertible debt that
could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of
the notes as of the date of issuance. The resulting debt discount is amortized over the period during which the convertible notes are expected to be
outstanding as additional non-cash interest expenses.
Upon repurchase of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement consideration, inclusive of transaction
costs, amongst the liability and equity components of the instrument based on the fair value of the liability component immediately prior to repurchase. The
difference between the settlement consideration allocated to the liability component and the net carrying value of the liability component, including
unamortized debt issuance costs, would be recognized as gain (loss) on extinguishment of debt in the statements of loss and comprehensive loss. The
remaining settlement consideration allocated to the equity component would be recognized as a reduction of additional paid-in capital in the statements of
financial position.
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For convertible debentures with an embedded conversion feature that did not meet the equity scope exception from derivative accounting pursuant
to ASC 815-15, the Company elected the fair value option under ASC 825 Fair Value Measurements. When the fair value option is elected, the convertible
debenture is initially recognized at fair value on the statements of financial position and all subsequent changes in fair value, excluding the impact of the
change in fair value related to instrument-specific credit risk are recorded in non-operating income (loss). The changes in fair value related to instrument-
specific credit risk is recorded through other comprehensive income (loss). Transaction costs directly attributable to the issuance of the convertible
debenture is immediately expensed in the statements of loss and comprehensive loss.
Warrants
Warrants are accounted for in accordance with applicable accounting guidance provided in ASC 815 Derivatives and Hedging – Contracts in
Entity's Own Equity, as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Warrants classified as liabilities
are recorded at fair value and are remeasured at each reporting date until settlement. Changes in fair value is recognized as a component of change in fair
value of warrant liability in the statements of loss and comprehensive loss. Transaction costs allocated to warrants that are presented as a liability were
immediately expensed in the statements of loss and comprehensive loss. Warrants classified as equity instruments are initially recognized at fair value and
are not subsequently remeasured.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The carrying values of accounts receivable, prepaids and other current assets, bank indebtedness and accounts
payable and accrued liabilities approximate their fair values due to their short periods to maturity. The Company calculates the estimated fair value of
financial instruments, including convertible notes receivable, long-term investments, warrant liability, contingent consideration, and convertible debentures,
using quoted market prices when available. When quoted market prices are not available, fair value is determined based on valuation techniques using the
best information available and may include quoted market prices, market comparables, and discounted cash flow projections.
Income taxes
Income taxes are recognized in the consolidated statements of loss and comprehensive loss and are comprised of current and deferred taxes.
Current tax is recognized in connection with income for tax purposes, unrealized tax benefits and the recovery of tax paid in a prior period and measured
using enacted tax rates and laws applicable to the taxation period during which the income for tax purposes arose. Deferred tax assets and liabilities are
determined based on the differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. Management makes an assessment of the likelihood that a deferred tax asset
will be realized, and a valuation allowance is provided to the extent that it is more likely than not that all or a portion of a deferred tax asset will not be
realized.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the
relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. A change in the
recognition or measurement of an unrealized tax benefit is reflected in the period during which the change occurs.
Revenue
Revenue is recognized when the control of the promised goods, through performance obligation, is transferred to the customer in an amount that
reflects the consideration we expect to be entitled to in exchange for the performance obligations.
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Excise taxes remitted to tax authorities are government-imposed excise taxes on cannabis and beer. Excise taxes are recorded as a reduction of
sales in net revenue in the consolidated statements of operations and recognized as a current liability within accounts payable and other current liabilities on
the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority.
In addition, amounts disclosed as net revenue are net of excise taxes, sales tax, duty tax, allowances, discounts and rebates.
In determining the transaction price for the sale of goods, the Company considers the effects of variable consideration and the existence of
significant financing components, if any.
Some contracts for the sale of goods may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or
sales allowance. In addition, the Company may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory
movement. These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because
this method best predicts the amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current
information and forecasts to estimate the variable consideration. The Company reduces revenue and recognizes a contract liability equal to the amount
expected to be refunded to the customer in the form of a future rebate or credit for a retrospective price reduction, representing its obligation to return the
customer’s consideration. The estimate is updated at each reporting period date.
The Company may receive short-term advances from its customers. Using the practical expedient in ASC 606, the Company does not adjust the
promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period
between when the Company transfers a promised good to a customer and when the customer pays for that good or service will be one year or less. The
Company has not, nor expects to receive long-term advances from customers.
Cost of goods sold
Cost of goods sold represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw
materials, packaging, direct labor, overhead, shipping and handling, the amortization of manufacturing equipment and production facilities and tariffs.
Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. Cost of goods sold also
includes inventory valuation adjustments. The Company recognizes the cost of goods sold as the associated revenues are recognized.
General and administrative
General and administrative expenses are comprised primarily of (i) personnel related costs such as salaries, benefits, annual employee bonus
expense and stock-based ‘compensation costs for personnel in corporate, finance, legal, and other administrative positions; (ii) legal, accounting, consulting
and other professional fees; and (iii) corporate insurance and other facilities costs associated with our corporate and administrative locations.
Selling
Selling expenses are comprised direct selling costs which primarily consist of (i) commissions paid to our third-party workforce, (ii) patient
acquisition and maintenance fees, (iii) Health Canada’s cannabis fees and (iv) freight.
Marketing and promotion
Marketing and promotion expenses are comprised primarily of marketing and advertising expenses.
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Research and development
Research and development costs are expensed as incurred. Research and development are comprised primarily of costs for personnel, clinical study
costs, contracted research, consulting services, materials and supplies, milestones, an allocation of our occupancy costs and other expenses incurred to
sustain our overall research and development programs.
Stock-based compensation
The Company has an omnibus plan which includes issuances of stock options, restricted stock units (“RSUs”) and stock appreciation rights
(“SARs”) in place. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. The fair value
of RSUs is based on the share price as at date of grant and no SARs were issued to date. The share-based compensation expense is based on the fair value
of the stock-based awards at the grant date and the expense is recognized over the related service period following a straight-line vesting expense schedule.
The Company estimates forfeitures at the time of grant and revises these estimates in subsequent periods if actual forfeitures differ from those estimates.
Any revisions are recognized in the consolidated statements of loss and comprehensive loss such that the cumulative expense reflects the revised estimate.
For performance-based stock options and RSUs, the Company records compensation expense over the estimated service period adjusted for a
probability factor of achieving the performance-based milestones. At each reporting date, the Company assesses the probability factor and records
compensation expense accordingly, net of estimated forfeitures.
Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing reported net income (loss) by the weighted average number of common shares outstanding
during the year. Diluted earnings (loss) per share is computed by dividing reported net income (loss) by the sum of the weighted average number of
common shares and the number of dilutive potential common share equivalents outstanding during the period. Potential dilutive common share equivalents
consist of the incremental common shares issuable upon the exercise of vested share options, warrants, and RSUs and the incremental shares issuable upon
conversion of the convertible debentures and similar instruments.
In computing diluted earnings (loss) per share, common share equivalents are not considered in periods in which a net loss is reported, as the
inclusion of the common share equivalents would be anti-dilutive.
Critical accounting estimates and judgments
The preparation of the Company’s financial statements requires management to make judgments, estimates and assumptions that affect the
application of policies and reported amounts of assets, liabilities, revenues and expenses. These estimates and judgements are subject to change based on
experience and new information which could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting
future periods. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized prospectively.
Financial statement areas that require significant judgement are as follows:
Leases – The Company applies judgement in determining whether a contract contains a lease and if a lease is classified as an operating lease or a
finance lease. The Company determines the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option. That is, it considers all relevant factors that create an economic incentive for it to
exercise either the renewal or termination. After the commencement date, the Company reassesses the lease term if there is a significant event or change in
circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of
significant leasehold improvements or significant customization to the leased asset).
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Long-term investments and convertible notes receivable – The determination of fair value of the Company’s long-term investments and convertible
notes receivable at other than initial cost is subject to certain limitations. Financial information for private companies in which the Company has
investments may not be available and, even if available, that information may be limited and/or unreliable.
Use of the valuation approach described below may involve uncertainties and determinations based on the Company’s judgment and any value
estimated from these techniques may not be realized or realizable.
Company-specific information is considered when determining whether the fair value of a long-term investment or convertible notes receivable
should be adjusted upward or downward at the end of each reporting period. In addition to company-specific information, the Company will consider
trends in general market conditions and the share performance of comparable publicly traded companies when valuing long-term investments and
convertible notes receivable.
The fair value of long-term investments and convertible notes receivable may need to be adjusted if:
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There has been a significant subsequent equity financing provided by outside investors at a valuation different than the current value of the
investee company, in which case the fair value of the investment is set to the value at which that financing took place;
There have been significant corporate, political, or operating events affecting the investee company that, in management’s opinion, have a
material impact on the investee company’s prospects and therefore its fair value. In these circumstances, the adjustment to the fair value of the
investment will be based on management’s judgment and any value estimated may not be realized or realizable;
The investee company is placed into receivership or bankruptcy;
Based on financial information received from the investee company, it is apparent to the Company that the investee company is unlikely to be
able to continue as a going concern;
Important positive or negative management changes by the investee company that the Company’s management believes will have a positive
or negative impact on the investee company’s ability to achieve its objectives and build value for shareholders.
Adjustment to the fair value of a long-term investment and convertible notes receivable will be based upon management’s judgment and any value
estimated may not be realized or realizable. The resulting values for non-publicly traded investments may differ from values that would be realized if a
ready market existed.
Estimated useful lives, impairment considerations and amortization of capital and intangible assets – Amortization of capital and intangible assets
is dependent upon estimates of useful lives based on management’s judgment.
Goodwill and indefinite-lived intangible asset impairment testing require management to make estimates in the impairment testing model. On at
least an annual basis, the Company tests whether goodwill and indefinite-lived intangible assets are impaired. Impairment of definite long-lived assets is
influenced by judgment in defining a reporting unit and determining the indicators of impairment, and estimates used to measure impairment losses
The reporting unit’s fair value is determined using discounted future cash flow models, which incorporate assumptions regarding future events,
specifically future cash flows, growth rates and discount rates. The uncertainties of coronavirus’ (“COVID-19”) impact on the future cash flow estimates
are further described in Note 10 Business acquisitions and goodwill.
Stock-based compensation – The fair value of stock-based compensation expenses are estimated using the Black-Scholes option pricing model and
rely on a number of assumptions including the fair value of common shares on the grant date, risk-free rate, volatility rate, annual dividend yield, the
expected term, and the estimated rate of forfeiture of options granted. Volatility is estimated by using the historical volatility of the Company.
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Business combinations – Judgement is used in determining a) whether an acquisition is a business combination or an asset acquisition. We use
judgement in applying the acquisition method of accounting for business combinations and estimates to value identifiable assets and liabilities at the
acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and discount rates, among
other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value of assets
acquired and liabilities assumed is typically estimated using an income approach, which is based on the present value of future discounted cash flows.
Significant estimates in the discounted cash flow model include the discount rate, rate of future revenue growth and profitability of the acquired business
and working capital effects. The discount rate considers the relevant risk associated with the business-specific characteristics and the uncertainty related to
the ability to achieve projected cash flows. These estimates and the resulting valuations require significant judgment. Management engages third party
experts to assist in the valuation of material acquisitions.
Convertible debentures – The fair value of Convertible Debentures where the Company had elected the fair value option are determined using the
Black-Scholes option pricing model. Assumptions and estimates are made in determining an appropriate conversion price, volatility, dividend yield, and the
fair value of common stock. There is judgement in assessing what portion of the gain or loss, if any, relates to the change in the instrument-specific credit
risk.
Warrant liability – The fair value of the warrant liability is measured using a Black Scholes pricing model. Assumptions and estimates are made in
determining an appropriate risk-free interest rate, volatility, term, dividend yield, discount due to exercise restrictions, and the fair value of common stock.
Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.
New accounting pronouncements not yet adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”),
which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in
Topic 740 and also clarifies and amends existing guidance to improve consistent application. The standard is effective for annual reporting periods
beginning after December 15, 2021 and including interim periods within those fiscal years, which means that it will be effective for the Company in the
first quarter of our year beginning June 1, 2021. The Company is currently evaluating the effect of adopting this ASU on the Company’s financial
Statements. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments – Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures
(Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities
under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and
purchased options accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning June 1, 2021. The Company is currently
evaluating the effect of adopting this ASU.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”),
which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for convertible instruments and to provide financial
statement users with more meaningful information. ASU 2020-06 is effective for the Company beginning June 1, 2022. This update may be applied
retrospectively or on a modified retrospective basis with the cumulative effect recognized as an adjustment to the opening balance of retained earnings on
the date of adoption. The Company is currently evaluating the effect of adopting this ASU.
92
4.
Prepaids and other current assets
Prepaids and other current assets are comprised of:
Prepaid assets
Sales tax receivable
Prepaid corporate taxes
Other
May 31,
2021
May 31,
2020
$
$
31,012
9,331
—
8,577
48,920 $
13,760
8,464
4,670
5,766
32,660
Included within prepaid assets are insurance, deposits, advanced payments on contracts, and other prepayments that will result in future benefit.
5.
Inventory
Inventory is comprised of:
Plants
Dried cannabis
Cannabis trim
Cannabis derivatives
Cannabis vapes
Packaging and other inventory items
Wellness inventory
Beverage alcohol inventory
Distribution inventory
Total inventory
May 31, 2021
May 31, 2020
$
$
23,083 $
118,269
2,931
24,158
3,791
31,462
15,171
5,402
32,162
256,429 $
12,288
59,045
2,796
19,496
4,124
16,398
—
—
25,634
139,781
Inventory is written down for any obsolescence, spoilage and excess inventory or when the net realizable value of inventory is less than the
carrying value. During the year ended May 31, 2021, the Company recorded charges for inventory and inventory-related write downs as a component of
cost of sales. Cannabis products were written down by $19,919 for the year ended May 31, 2021 and there were no write downs for the years ended May
31, 2020 and 2019.
6.
Related party transactions
In the normal course of business, the Company enters into related party transactions with certain entities under common control and joint ventures
as detailed below.
Leafly Holdings, Inc. (“Leafly”)
The Company has an agreement with Leafly providing for data licensing activities. During the year ended May 31, 2021, 2020, and 2019
operational expenses were nil, respectively was recorded within general and administrative expenses in the statements of loss and comprehensive loss.
Docklight LLC (“Docklight”) royalty and management services
The Company pays Docklight a royalty fee pursuant to a brand licensing agreement which provides the Company with exclusive rights in Canada
for the use of certain adult-use brands. During the year ended May 31, 2021, 2020 and 2019 royalty fees of were $125, nil, and nil, respectively were
recorded within general and administrative expenses in the statements of loss and comprehensive loss.
93
Fluent and Cannfections
The Company has joint venture arrangements with a 50% ownership and voting interest in each of Fluent and Cannfections. Refer to Note 13 for
details over transactions with these entities for the year ended May 31, 2021, 2020 and 2019.
7.
Capital assets
Capital asset consisted of the following:
Land
Production
facility
Equipment
Leasehold
improvements
ROU
assets
under
finance
lease
Construction
in process
Total
capital
assets
$
$
$
$
$
$
$
57,755 $
24,047 $ 168,614 $
15,691
3,342
—
81,112
27,968
54
(5,339)
—
—
(34)
(2,561)
(11)
(2,117)
(505)
(2)
147,068
196,858
24,088
35,045
55,916
5,538
6,284
3,236
261
11,189
63,159
—
(513)
—
(5,237)
—
—
—
3,899
16,335
27,341
28,549 $ 346,510 $ 215,408 $
— $
—
—
—
— $
5,556 $
10,134
15,690
14,007
29,697 $
6,469 $
14,551
21,020
24,996
46,016 $
896 $
925
11,996
—
(89)
(345)
13,383
1,560
525
—
(192)
—
1,783
17,059 $
137 $
336
473
690
1,163 $
— $ 126,338 $ 377,650
95,515
75,557
—
—
(121,130)
—
(9,486)
(4,147)
—
(4,297)
(1,602)
—
1,476
—
(1,493)
457,889
76,492
—
179,729
46,151
35,519
36,079
25,773
—
—
(74,348)
—
(5,942)
—
—
(827)
(827)
—
11,254
60,646
34
85,322 $ 727,574
34,726 $
— $
—
—
—
— $
— $
—
—
—
— $
12,162
25,021
37,183
39,693
76,876
51,286 $
24,047 $ 163,058 $
24,088 $ 181,168 $ 126,048 $
28,549 $ 316,813 $ 169,392 $
759 $
12,910 $
15,896 $
— $ 126,338 $ 365,488
76,492 $ 420,706
— $
85,322 $ 650,698
34,726 $
Cost:
At May 31, 2019
Additions
Transfers
Disposals
Impairment
Effect of foreign exchange
At May 31, 2020
Business acquisition
Additions
Transfers
Disposals
ROU Amortization
Effect of foreign exchange
At May 31, 2021
Accumulated amortization:
At May 31, 2019
Amortization
At May 31, 2020
Amortization
At May 31, 2021
Net book value:
At May 31, 2019
At May 31, 2020
At May 31, 2021
8.
Leases
The Company has operating and finance leases for facilities, office spaces, production equipment and vehicles.
Leases have varying terms with remaining lease terms of up to approximately 20 years. Certain of our lease arrangements provide us with the
option to extend or to terminate the lease early.
94
The table below presents the lease-related assets and liabilities recorded on the balance sheet.
Classification on Balance Sheet
May 31, 2021
May 31, 2020
Assets
Operating lease, right-of- use assets
Finance lease, right-of-use assets
Total right-of-use asset
Liabilities
Current:
Operating lease liability
Finance lease liability
Non-current:
Operating lease liability
Finance lease liability
Total lease liabilities
Right of use assets
Capital assets
Accrued lease obligations - current
Accrued lease obligations - current
Accrued lease obligations - non-current
Accrued lease obligations - non-current
$
$
$
$
18,267 $
34,726
52,993 $
3,613 $
651
18,465
35,481
58,210 $
The table below presents certain information related to the lease costs for finance and operating leases.
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease cost
Total lease cost
May 31,
2021
May 31,
2020
$
$
806 $
765
1,374
2,945 $
5,356
—
5,356
954
—
4,227
—
5,181
—
—
1,128
1,128
The Company does not have short term lease expense or sublease income for the year ending May 31, 2021.
The table below presents supplemental cash flow information related to leases.
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
May 31,
2021
May 31,
2020
$
1,466 $
774
231
994
—
—
The following table presents the future undiscounted payment associated with lease liabilities as of May 31, 2021:
2022
2023
2024
2025
2026
Thereafter
Total minimum lease payments
Less: amounts of leases related to interest payments
Present value of minimum lease payments
Less: current accrued lease obligation
Obligation recognized
95
Year ending May 31,
Operating
leases
Finance
leases
7,824
4,272
3,925
3,023
2,964
4,102
26,110 $
(419)
25,691
(3,613)
22,078 $
2,404
7,183
2,061
2,122
2,186
39,586
55,542
(18,759)
36,783
(651)
36,132
$
$
9.
Intangible assets
Intangible assets are comprised of the following items:
Cost
At May 31, 2019
Additions
Impairment
Effect of foreign exchange
At May 31, 2020
Business acquisition
Effect of foreign exchange
At May 31, 2021
Accumulated amortization
At May 31, 2019
Amortization
At May 31, 2020
Amortization
At May 31, 2021
Net book value
At May 31, 2019
At May 31, 2020
At May 31, 2021
Customer
relationships
& distribution
channel
Licenses,
permits &
applications
Non-
compete
agreements
Intellectual
property,
trademarks, know
how &
brands
Total
intangible
assets
$
$
$
$
$
$
$
23,957 $
84
—
(269)
23,772
214,000
2,038
239,810 $
4,354 $
4,506
8,860
9,442
18,302 $
200,102 $
2,158
(14,445)
393
188,208
202,716
24,006
414,930 $
623 $
131
754
413
1,167 $
19,603 $
14,912 $
221,508 $
199,479 $
187,454 $
413,763 $
2,415 $
—
—
(10)
2,405
10,000
48
12,453 $
1,081 $
1,006
2,087
2,212
4,299 $
1,334 $
318 $
8,154 $
72,122 $
3,608 $
— $
(1,918) $
73,812 $
912,080 $
5,025 $
990,917 $
8,172 $
5,006 $
13,178 $
15,246 $
28,424 $
298,596
5,850
(14,445)
(1,804)
288,197
1,338,796
31,117
1,658,110
14,230
10,649
24,879
27,313
52,192
63,950 $
60,634 $
962,493 $
284,366
263,318
1,605,918
Included in Licences, permits & applications is $412,000 of indefinite-lived intangible assets (2020 - $186,000).
Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
2022
2023
2024
2025
2026
Thereafter
10.
Business Acquisitions
Reverse Acquisition
Years ending
May 31,
72,172
68,409
65,946
65,533
65,533
855,801
1,193,394
$
$
On December 15, 2020, Tilray entered into an Arrangement Agreement (as amended, the “Arrangement Agreement” with Aphria Inc. (“Aphria”),
or the “Aphria-Tilray business combination”, pursuant to which Tilray acquired all of the issued and outstanding common shares of Aphria pursuant to a
plan of arrangement (the “Plan of Arrangement”) under the Ontario Business Corporations Act (the “Arrangement”) with the primary objective to increase
its scalable operational footprint, expand its portfolio of diverse medical and adult-use cannabis brands and products, expand its multi-continent distribution
network, and gain a robust capital structure to fund a global expansion strategy. The transaction closed on April 30, 2021 (“Closing Date”).
96
The fair value of the purchase price is, as follows:
Number of Tilray common shares outstanding at acquisition date
Conversion ratio
Tilray common shares issued at closing
Market share price of Aphria converted stock units
Fair value of Tilray common stock transferred to Aphria shareholders
Consideration related to stock-based compensation (1)
Total fair value of consideration transferred
April 30, 2021
179,635,973
0.8381
214,337,159
14.62
3,133,609
71,297
3,204,906
$
$
(1)
On acquisition date there was consideration in the form of 1,207,010 restricted stock units and 4,782,132 stock options that had been issued before
the acquisition date to employees and non-employees of Tilray. The pre-combination fair value of these awards is $17,646 and $53,650,
respectively. The consideration will be reassessed and adjusted to fair value each quarter through General and Administration Expense in the
Statement of Loss and Comprehensive Loss.
The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be
subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes preliminary estimated fair value
of the assets acquired and the liabilities assumed at the effective acquisition date.
Assets
Cash and cash equivalents
Accounts receivable
Inventory
Prepaids and other current assets
Capital assets
Right-of-use assets, operating leases
Definite-lived intangible assets (estimated useful life)
Distribution channel (15 years)
Customer relationships (15 years)
Know how (5 years)
Brands (10 to 25 years)
Indefinite-lived intangible assets
Licenses
Goodwill
Other assets
Total assets
Liabilities
Accounts payable
Accrued expenses and other current liabilities
Accrued lease obligations
Warrant liability
Deferred tax liability
Convertible notes
Other liabilities
Total liabilities
Net assets acquired
97
April 30, 2021
375,673
28,054
76,547
8,960
136,637
12,606
404,000
59,000
115,000
301,000
200,000
2,221,613
22,879
3,961,969
62,292
85,120
21,962
79,402
236,391
267,862
4,034
757,063
3,204,906
$
$
In connection with the reverse acquisition, the Company incurred transaction costs of $42,000. The goodwill of $2,221,613 is primarily related to
factors such as synergies and market share and reportable under the Company’s Cannabis and Wellness segment is as follows on a preliminary basis:
Goodwill related to Tilray
Cannabis
Wellness
Total
2,144,143
77,470
2,221,613
Goodwill is not deductible for tax purposes. The financial results of Tilray are included in the Company’s financial statements since acquisition
date. The Consolidated Statements of Loss and Comprehensive Loss include net revenue of $13,018 and net income of $645.
Supplemental pro forma information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the reverse acquisition as if the reverse acquisition had occurred
as of June 1, 2019. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that
actually would have been achieved had the transactions been consummated as of that time.
Revenue
Net loss
Net loss per share - basic and diluted
Years ended May 31,
2021
2020
$
$
$
692,270 $
(795,251) $
(1.77) $
624,950
(649,276)
(1.71)
The above pro forma revenue and net loss include adjustments directly attributable to the business combination and related primarily non-recurring
transaction costs of $37,000, increase in intangible assets amortization expense of $28,000 and decrease in interest expense associated with Tilray’s
convertible senior notes of 5,000
Acquisition of SW Brewing Company, LLC
On November 25, 2020, the Company, through its wholly-owned subsidiary Four Twenty Corporation, completed the purchase of all the shares of
SW Brewing Company, LLC which is the holding company of 100% of the common shares of SweetWater. The purchase price consisted of cash
consideration of $255,543, share consideration of 8,232,810 shares, and additional cash consideration of up to $66,000 contingent on SweetWater
achieving specified EBITDA targets. The fair value of the shares on the date the Company closed the acquisition was $65,889, the fair value of the
contingent consideration on the date the Company closed the acquisition was $58,959.
98
The Company is in the process of assessing the fair value of the net assets acquired and, as a result, the fair value of the net assets acquired may be
subject to adjustments pending completion of final valuations and post-closing adjustments. The table below summarizes preliminary estimated fair value
of the assets acquired and the liabilities assumed at the effective acquisition date.
Consideration
Cash
Shares
Contingent consideration
Total consideration
Net assets acquired
Current assets
Cash and cash equivalents
Accounts receivable
Prepaids and other current assets
Inventory
Long-term assets
Capital assets
Customer relationships
Intellectual property, trademarks & brands
Non-compete agreements
Goodwill
Total assets
Current liabilities
Accounts payable and accrued liabilities
Current portion of lease liabilities
Long-term liabilities
Lease liabilities
Total liabilities
Total net assets acquired
Amount
$
$
255,543
65,889
58,959
380,391
6,988
3,810
528
4,815
43,093
155,000
92,000
10,000
100,202
416,436
5,289
434
30,322
36,045
380,391
The contingent consideration from the acquisition of SweetWater is a fair value measurement and as such is carried at fair value. The fair value has
been determined by discounting future expected cash outflows at a discount rate of 5%. The inputs into the future expected cash outflows are level 3 on the
fair value hierarchy and are subject to volatility and uncertainty, which could significantly affect the fair value of the contingent consideration in future
periods. As at May 31, 2021, the fair value of the contingent consideration was $60,657, expected to be paid in December 2023. The goodwill of $102,202
is primarily related to factors such as synergies and market opportunities and reportable under the Company’s Beverage Alcohol segment.
Supplemental pro forma information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition of SW Brewing Company, LLC as if the
transaction had occurred as of June 1, 2019. This pro forma information is presented for informational purposes only and is not necessarily indicative of the
results of operations that actually would have been achieved had the transactions been consummated as of that time.
Revenue
Net loss
Net loss per share - basic and diluted
Years ended May 31,
2021
2020
$
$
$
542,000 $
(328,000) $
(0.73) $
470,000
(80,000)
(0.37)
99
11.
Goodwill
The goodwill recognized is as a result of expected synergies from combining operations through business acquisitions and none of the goodwill is
deductible for income tax purposes.
Goodwill is comprised of:
Broken Coast Cannabis Ltd.
Nuuvera Corp.
LATAM Holdings Inc.
CC Pharma GmbH
SweetWater
Tilray
Tilray
Effect of foreign exchange
Segment
Cannabis business
Business under development
Business under development
Distribution business
Beverage alcohol business
Cannabis business
Wellness business
May 31,
2021
May 31,
2020
105,963
273,606
63,239
4,458
100,202
2,144,143
77,470
63,713
2,832,794 $
105,963
273,606
63,239
4,458
—
—
—
64
447,330
$
During the year ended May 31, 2021, the Company completed its annual goodwill impairment assessment of the fair value of the Company’s
reporting units compared to their carrying amount. For the year ended May 31, 2021 there were no impairment charges recognized. For the year ended May
31, 2020, the Company recorded the following impairment charges:
$3,581 (C$4,800) on CannInvest Africa Ltd. and Verve Dynamics Incorporated (Pty) Ltd., the Company used a discount rate of 38.5%;
$3,730 (C$5,000) on ABP, S.A., the Company used a discount rate of 23.3%;
$14,301 (C$19,171) on Marigold Projects Jamaica Limited (“Marigold”), the Company used a discount rate of 38.5%; and
$29,067 (C$35,000) on ColCanna S.A.S., the Company used a discount rate of 40.0%.
12.
Convertible notes receivable
During the year ended May 31, 2021, the Company did not purchase any convertible notes (2020 - $nil). The unrealized loss on convertible notes
receivable recognized in other comprehensive income amounts to $3,824 and $5,476 for the years ended May 31, 2021 and 2020 respectively.
During the year ended May 31, 2021, and 2020 the Company received total proceeds of $1,251,and $nil respectively from sales of available-for-
sale securities and gain (loss) of $5,277, and $nil respectively was reclassified out of accumulated other comprehensive income into earnings.
The fair value was determined using the Black-Scholes option pricing model using the following assumptions: the risk-free rate of 1.25%; expected
life of the convertible note; volatility of 70% based on comparable companies; forfeiture rate of nil; dividend yield of nil; and, the exercise price of the
respective conversion feature.
Convertible notes receivable is comprised of the following investments:
HydRx Farms Ltd. (d/b/a Scientus Pharma)
10330698 Canada Ltd. (d/b/a Starbuds)
High Tide Inc.
Total convertible notes receivable
Deduct - current portion
Total convertible notes receivable, non current portion
May 31, 2021
May 31, 2020
— $
828
1,657
2,485
(2,485)
— $
4,352
3,429
2,828
10,609
(10,609)
—
$
$
100
HydRx Farms Ltd. (d/b/a Scientus Pharma)
On August 14, 2017, Aphria purchased C$11,500 in secured convertible debentures of Scientus Pharma (“SP”). The convertible debentures bore
interest at 8%, paid semi-annually, matured in two years and included the right to convert the debentures into common shares of SP at C$2.75 per common
share at any time before maturity. During the year ended May 31, 2021, the Company settled the note receivable for $4,032 (C$5,000).
10330698 Canada Ltd. (d/b/a Starbuds)
On December 28, 2018, Aphria purchased C$5,000 in secured convertible debentures of Starbuds. The convertible debentures bear interest at 8.5%
per annum accruing daily due until maturity on December 28, 2020. The debentures are secured against the assets of Starbuds. The debentures and any
accrued and unpaid interest are convertible into common shares for C$0.50 per common share and matured on December 28, 2020. Starbuds is currently in
default under the convertible debentures.
As at May 31, 2021, the fair value of the Company’s secured convertible debentures was $828 (C$1,000) (May 31, 2020 - $3,429 (C$4,728)),
which includes $385 (C$465) (May 31, 2020 - $157 (C$216)) of accrued interest. The remaining change resulted in a fair value gain (loss) recognized in
other comprehensive income.
High Tide Inc.
On April 10, 2019, Aphria purchased C$4,500 in unsecured convertible debentures of High Tide Inc. (“High Tide”). The convertible debentures
bear interest at 10% per annum, payable annually up front in common shares of High Tide based on the 10-day volume weighted average price (the
“Debentures”). The Debentures matured on April 10, 2021. In addition to the Debentures, the Company received 6,000,000 warrants in High Tide as part of
the purchase of the unsecured convertible debentures (Note 13). Upon maturity, the Company agreed to extend the maturity date on C$2,000 of the
convertible notes. The extended notes bear interest at 9% per annum and are due on April 21, 2023.
13.
Interest in equity investees
The Company acquired the following equity method investments as a results of the Arrangement on April 30, 2021:
Plain Vanilla Research Limited Partnership (“Fluent”)
A joint venture with Anheuser-Busch InBev (“AB InBev”) to research and develop non- alcohol beverages containing cannabis. Under the terms of
the arrangement, the Company and AB InBev each have 50% ownership and 50% voting interest in the Plain Vanilla Research Limited Partnership
(“Fluent”), headquartered in Canada. The Company has determined that Fluent is a VIE, but the Company is not the primary beneficiary as the Company
does not have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. Accordingly, the Company does
not consolidate the financial statements of Fluent and accounts for this investment using the equity method of accounting. At May 31, 2021 the maximum
exposure to loss is limited to the Company’s equity investment in the joint venture.
Cannfections Group Inc. (“Cannfections”)
A joint venture with Cannfections Group Inc. (“Cannfections”) to develop and manufacture confectionary cannabis products. Under the terms of
the arrangement, the Company and Cannfections each have 50% ownership and 50% voting interest. During the year ended May 31, 2021 the Company
made no contributions to the joint venture.
101
The Company’s ownership interests in its equity method investments as of May 31, 2021 is as follows:
Investment in Fluent
Investment in Cannfections
Total equity method investments
14.
Long-term investments
Long-term investments are comprised of the following items:
Equity investments measured at fair value
Equity investments under measurement alternative
Total other investments
Carrying
value
May 31,
2021
Loss from
equity method
investments
year ended
May 31,
2021
3,906 $
4,200
8,106 $
(416)
(42)
(458)
Approximate
ownership %
50%
50%
$
$
Fair value
May 31, 2021
Fair value
May 31, 2020
12,185
5,500
17,685
19,595
—
19,595
The Company’s equity investments at fair value consist of publicly traded shares, equity interest in non-traded companies and warrants held by the
Company. The Company’s equity investments under measurement alternative include equity investments without readily determinable fair values. For the
year ended May 31, 2021 the Company received proceeds of $8,430 on the sale of investments (2020-$19,570, 2019-$83,343) and recognized $1,567 in
unrealized losses due to the change in fair value of investments (2020-$23,057, 2019-$8,122).
15.
Income taxes and deferred income taxes
Loss before income taxes includes the following components:
United States
Canada
Other countries
The (recoveries) expense for income taxes consists of:
Current:
United States
Canada
Other countries
Deferred:
United States
Canada
Other countries
Income tax benefits, net
2021
For the year ended May 31,
2020
2019
$
$
(7,814)
(323,964)
(13,208)
(344,986)
—
(88,930)
(20,255)
(109,185)
—
(30,733)
(7,405)
(38,138)
2021
For the year ended May 31,
2020
2019
$
$
$
$
$
—
15,227
697
15,924
1,517
(30,111)
3,698
(24,896)
(8,972)
—
5,294
375
5,669
—
(9,226)
(4,795)
(14,021)
(8,352)
—
3,296
407
3,703
—
(3,281)
(2,467)
(5,748)
(2,045)
102
A reconciliation of income taxes at the statutory rate with the reported taxes is as follows:
Loss before net income taxes:
$
Income tax benefits at statutory rate
Tax impact of foreign operations
Foreign exchange and other
Non-deductible expenses
Non-deductible (taxable) losses
Changes in enacted rates
Change in fair value of warrant liability
Stock based and other compensation
Change in valuation allowance
Non deductible dividend
Non deductible impairment
Effect of transaction
2021
For the year ended May 31,
2020
2019
(344,986)
(72,408)
(19,016)
1,011
(1,347)
45,230
135
(259)
2,902
46,007
(755)
—
(10,472)
(109,185)
(22,929)
(6,310)
(63)
2,474
2,152
—
—
4,105
1,066
—
11,153
—
(38,138)
(8,009)
(2,504)
(491)
5,731
(11,724)
—
—
14,655
297
—
—
—
Income tax benefits, net
$
(8,972)
(8,352)
(2,045)
The following table summarizes the components of deferred tax:
Deferred assets
Operating loss carryforwards - United States
Operating loss carryforwards - Canada
Operating loss carryforwards - Other Countries
Capital loss carryforwards
Intangible assets
Property and equipment
Currently nondeductible interest
Partnership interests
Deferred financing costs
Investment tax credits and related pool balance
Other
Total Deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities
Property and equipment
Intangible assets
Convertible Senior Notes Due 2023
Total deferred tax liabilities
Net deferred tax liability
2021
May 31,
2020
2019
$
$
57,320
152,382
7,801
1,350
86,541
17,107
9,491
34,108
4,237
526
26,716
397,579
(265,940)
131,639
(15,997)
(376,228)
(4,977)
(397,202)
(265,563)
—
20,512
9,037
1,854
—
—
—
—
5,022
—
1,704
38,129
(4,583)
33,546
(8,356)
(69,580)
(4,056)
(81,992)
(48,446)
—
9,535
5,079
7,028
—
—
—
—
—
—
1,101
22,743
(4,583)
18,160
(1,995)
(73,454)
(4,739)
(80,188)
(62,028)
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted and signed into law in the U.S. The CARES
Act, among other things, permits U.S. net operating loss ("NOL") carryovers and carrybacks to offset 100% of U.S. taxable income for taxable years
beginning before 2021. The CARES Act also contains modifications on the limitation of business interest for tax years beginning in 2019 and 2020. The
modifications to Section 163(j) increase the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted taxable
income. The CARES Act results in increasing the allowable interest expense and NOL carryover deductions in 2020.
103
The Tax Cuts and Jobs Act (2017 Tax Act) was enacted on December 22, 2017 and reduced the U.S. statutory federal corporate tax rate from 35%
to 21%. The Tax Act also contains additional provisions that are effective for the company in 2018, including a new tax on Global Intangible Low-Taxed
Income (“GILTI”). Under GAAP, we are allowed to make an accounting policy choice to either (i) treat taxes due on future U.S. inclusions in taxable
income related to GILTI as a current-period expense when incurred (the "period cost method"); or (ii) factor in such amounts into the measurement of our
deferred taxes (the "deferred method"). The Company has made a policy decision to record GILTI tax as a current-period expense when incurred.
Deferred income taxes have not been recorded on the basis differences for investments in consolidated subsidiaries as these basis differences are
indefinitely reinvested or will reverse in a non-taxable manner. Quantification of the deferred income tax liability, if any, associated with indefinitely
reinvested basis differences is not practicable. Deferred income taxes have been recorded on the basis differences for investments in nonconsolidated
entities.
At May 31, 2021, the Company had United States net operating loss carry-forwards of approximately $224,795 that can be carried forward
indefinitely and generally limited in annual use to 80% of the current year taxable income starting 2021. The Company has Canadian net operating loss
carry-forwards of approximately $510,456 that can be carried forward 20 years and begin to expire in 2028. Management believes that it is more-likely-
than-not that the benefit from certain United States and foreign net operating loss carry-forwards will not be realized. In recognition of this risk, the
Company has provided a valuation allowance on the deferred tax assets relating to these carry-forwards. The net change in the total valuation allowance
was an increase of $261,357 and $0 for the years ended May 31, 2021 and 2020, respectively.
The Company recognizes the financial statement impact of a tax position only after determining that the relevant tax authority would more-likely-
than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial
statements is the largest impact that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The total amount of gross unrecognized tax benefits (“GUTB”) was $0, $0, and $0 as of May 31, 2021, 2020 and 2019 respectively. There is a
reasonable possibility that the Company’s unrecognized tax benefits will change within twelve months due to audit settlements or the expiration of statute
of limitations, but the Company does not expect the change to be material to the financial statements.
The Company recognizes interest and, if applicable, penalties for any uncertain tax positions. Interest and penalties are recorded as a component of
income tax expenses. In the years ended May 31, 2021, 2020 and 2019, the Company recorded approximately $0, $0 and $0, respectively, of interest and
penalty expenses related to uncertain tax positions. As of May 31, 2021, and 2020, the Company had a cumulative balance of accrued interest and penalties
on unrecognized tax positions of $0 and $0, respectively.
The Company and its subsidiaries are subject to United States federal income tax as well as the income tax of multiple state and foreign
jurisdictions. The Company is not currently under audit in any jurisdiction for any period. Major jurisdictions where there are wholly owned subsidiaries of
Tilray, Inc. which require income tax filings include the Canada, Portugal, Germany, and Australia. The earliest periods open for review by local taxing
authorities are fiscal years 2016 for Canada, 2017 for Portugal, 2016 for Germany, 2017 for Australia, and 2018 for United States.
16.
Bank indebtedness
The Company secured an operating line of credit in the amount of C$1,000 which bears interest at the lender’s prime rate plus 75 basis points. As
at May 31, 2021, the Company has not drawn on the line of credit. The operating line of credit is secured by a first charge on the property at 265 Talbot St.
West, Leamington, Ontario and a first ranking position on a general security agreement.
The Company’s subsidiary, CC Pharma, has two operating lines of credit for €5,000 and €3,500 each, which bear interest at Euro Over Night Index
Average plus 1.79% and Euro Interbank Offered Rate plus 3.682% respectively.
104
As at May 31, 2021, a total of €7,000 ($8,717) was drawn down from the available credit of €8,500. The operating lines of credit are secured by a first
charge on the inventory held by CC Pharma.
The Company’s subsidiary, Four Twenty Corporation (“420”), has a revolving credit facility of $20,000 which bears interest at EURIBOR plus an
applicable margin. As at May 31, 2021, the Company has not drawn any amount on the revolving line of credit. The revolving credit facility is secured by
all of 420 and SweetWater’s assets and includes a corporate guarantee by the Company.
17.
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities comprised of:
Trade payables
Accrued liabilities
Accrued payroll and employment related taxes
Income taxes payable
Accrued interest
Accrued legal settlement
Other accruals
May 31,
2021
May 31,
2020
$
$
57,706 $
112,594
19,390
14,764
148
—
8,211
212,813 $
41,159
48,105
—
4,651
—
18,496
—
112,411
As part of the reverse acquisition, (refer to Note 10 Business acquisitions and goodwill), the Company acquired a trademark and license agreement
with Authentic Brands Group (“ABG”) for the use of the Prince trademark (“ABG Prince Agreement”). Under the ABG Prince Agreement, the Company
pays a royalty on actual product sales in addition to a guaranteed minimum royalty payment of $375 on a quarterly basis until the maturity date of
December 31, 2025.
105
18.
Long-term debt
The following table sets forth the net carrying amount of long-term debt instruments:
Credit facility - C$80,000 - Canadian prime interest rate plus an
applicable margin, 3-year term, with a 10-year amortization,
repayable in blended monthly payments, due in November 2022
Term loan - C$25,000 - Canadian 5-year bond interest rate plus 2.73%
with a minimum 4.50%, 5-year term, with a 15-year amortization,
repayable in blended monthly payments, due in July 2023
Term loan - C$25,000 - 3.95%, compounded monthly, 5-year term
with a 15-year amortization, repayable in equal monthly instalments
of $188 including interest, due in April 2022
Term loan - C$1,250 - 3.99%, 5-year term, with a 10-year
amortization, repayable in equal monthly instalments of $13
including interest, due in July 2021
Mortgage payable - C$3,750 - 3.95%, 5-year term, with a 20-year
amortization, repayable in equal monthly instalments of $23
including interest, due in July 2021
Vendor take-back mortgage - C$2,850 - 6.75%, 5-year term, repayable
in equal monthly instalments of $56 including interest, due in June
2021
Term loan ‐ €5,000 ‐ Euro Interbank Offered Rate + 1.79%, 5‐year
term, repayable in quarterly instalments of €250 plus interest, due in
December 2023
Term loan ‐ €5,000 ‐ Euro Interbank Offered Rate + 2.68%, 5‐year
term, repayable in quarterly instalments of €250 plus interest, due in
December 2023
Term loan ‐ €1,500 ‐ Euro Interbank Offered Rate + 2.00%, 5‐year
term, repayable in quarterly instalments of €98 including interest,
due in April 2025
Term loan ‐ €1,500 ‐ Euro Interbank Offered Rate + 2.00%, 5‐year
term, repayable in quarterly instalments of €98 including interest,
due in June 2025
Term loan - $100,000 - EUROBIR rate plus an applicable margin,
3-year term, repayable in quarterly instalments beginning March 31,
2021 of $7,500 in its first twelve months and $10,000 in each of the
next two years, due in
March 2024
Deduct - unamortized financing fees
- principal portion included in current liabilities
May 31,
2021
May 31,
2020
$
62,964 $
58,026
14,335
13,231
17,117
15,939
587
2,562
92
3,356
3,356
1,831
1,831
602
2,349
508
4,163
4,163
1,665
—
98,138
206,169
(2,061)
(36,622)
167,486 $
—
100,646
(477)
(6,141)
94,028
$
The credit facility of C$80,000 ($66,278) was entered into on November 29, 2019 by 51% owned subsidiary Aphria Diamond and is secured by a
first charge on the property at 620 County Road 14, Leamington, Ontario, owned by Aphria Diamond, and a guarantee from Aphria Inc.
The term loan of C$25,000 ($20,712) was entered into on July 27, 2018 and is secured by a first charge on the property at 223, 231, 239, 265, 269, 271 and
275 Talbot Street West, Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender. The effective
interest rate during the year was 4.68%.
106
The term loan of C$25,000 ($20,712) was entered into on May 9, 2017 and is secured by a first charge on the property at 265 Talbot Street West,
Leamington Ontario, a first position on a general security agreement, and an assignment of fire insurance to the lender.
The term loan of C$1,250 ($1,036) and mortgage payable of C$3,750 ($3,108) were entered into on July 22, 2016 and are secured by a first charge
on the property at 265 Talbot Street West, Leamington, Ontario and a first position on a general security agreement.
The vendor take-back mortgage payable of C$2,850 ($2,361) was entered into on June 30, 2016 in conjunction with the acquisition of the property
at 265 Talbot Street West. The mortgage is secured by a second charge on the property at 265 Talbot Street West, Leamington, Ontario. The mortgage was
repaid in full and the security deemed released in June 2021.
During the year ended May 31, 2021, the Company entered into a term loan for €1,500 ($2,210) through wholly owned subsidiary CC Pharma. The
term loans for €9,500 ($13,955) are held through wholly-owned subsidiary CC Pharma. These term loans are secured against the distribution inventory
held by CC Pharma.
During the year ended May 31, 2021, the Company, entered into a secured credit agreement for term loan of $100,000 through wholly owned
subsidiary Four Twenty Corporation (“420”). The Company drew the full amount of the term loan. 420 provided all of its and SweetWater’s assets as
security for the loan and Aphria Inc. provided a corporate guarantee.
As at May 31, 2021, the Company was in compliance with all the long-term debt covenants.
19.
Convertible debentures
The following table sets forth the net carrying amount of the convertible debentures:
5.25% Convertible Notes ("APHA 24")
5.00% Convertible Notes ("TLRY 23")
Total convertible debentures
APHA 24
Opening balance
Debt settlement
Fair value adjustment
May 31,
2021
May 31,
2020
399,444 $
268,180
667,624 $
196,405
—
196,405
May 31,
2021
May 31,
2020
196,405 $
—
203,039
399,444 $
305,626
(66,127)
(43,094)
196,405
$
$
$
$
The unsecured convertible debentures were entered into in April 2019, in the principal amount of $350,000, are due in five years from issuance.
The APHA 24 bears interest at a rate of 5.25% per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The APHA 24 matures
on June 1, 2024, unless earlier converted. The APHA 24 is an unsecured obligation and ranks senior in right of payment to all indebtedness that is
expressly subordinated in right of payment to it. The APHA 24 will rank equal in right of payment with all liabilities that are not subordinated. The APHA
24 is effectively junior to any secured indebtedness to the extent of the value of the assets securing such indebtedness.
Holders of the APHA 24 may convert all or any portion of their Notes, in multiples of $1 principal amount, at their option at any time between
December 1, 2023 to the maturity date. The initial conversion rate for the APHA 24 will be 89.31162364 shares of common stock, par value $0.0001 per
share, of Tilray, Inc. per $1,000 principal amount
107
of Notes, which will be settled in cash, common shares of Aphria or a combination thereof, at Tilray’s election. This is equivalent to an initial conversion
price of approximately $11.20 per common share, subject to adjustments in certain events. In addition, holders of the APHA 24 may convert all or any
portion of their Notes, in multiples of $1 principal amount, at their option at any time preceding December 1, 2023, if:
(a)
(b)
(c)
(d)
the last reported sales price of the common shares for at least 20 trading days during a period of 30 consecutive trading days immediately
preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day;
during the five-business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per
$1 principal amount of the APHA 24 for each trading day of the measurement period is less than 98% of the product of the last reported
sale price of the Company’s common shares and the conversion rate on each such trading day;
the Company calls any or all of the APHA 24 for redemption or;
upon occurrence of specified corporate event.
The Company may not redeem the APHA 24 prior to June 6, 2022, except upon the occurrence of certain changes in tax laws. On or after June 6,
2022, the Company may redeem for cash all or part of the Notes, at its option, if the last reported sale price of the Company’s common shares has been at
least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period ending on and including trading
day immediately preceding the date on which the Company provides notice of redemption. The redemption of the APHA 24 will be equal to 100% of the
principal amount plus accrued and unpaid interest to, but excluding, the redemption date.
The Company elected the fair value option under ASC 825 Fair Value Measurements for the APHA 24. The APHA 24 was initially recognized at
fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to instrument-specific credit
risk are recorded in non-operating income. The changes in fair value related to instrument-specific credit risk is recorded through other comprehensive
income (loss).
The overall change in fair value of the APHA 24 during the year ended May 31, 2021 was an increase of $170,453 with a foreign exchange impact
of $32,586 (2020 – decrease of $43,094 and $nil), which included contractual interest of $13,600 (2020 - $17,979). As at May 31, 2021, there was
$259,400 principal outstanding (2020 - $259,400).
TLRY 23
Opening balance
Principal amount issued
Unamortized discount
Net carrying amount
May 31,
2021
—
277,856
(9,676)
268,180
$
$
As part of the reverse acquisition (refer to Note 10 Business acquisitions and goodwill), the Company acquired convertible notes with a fair value
of $277,857.
The TLRY 23 bears interest at a rate of 5.00% per annum, payable semi-annually in arrears on April 1 and October 1 of each year. Additional
interest may accrue on the TLRY 23 in specified circumstances. The TLRY 23 will mature on October 1, 2023, unless earlier repurchased, redeemed or
converted. There are no principal payments required over the five-year term of the TLRY 23, except in the case of redemption or events of defaults.
The TLRY 23 is the Company’s general unsecured obligations and ranks senior in right of payment to all of the Company’s indebtedness that is
expressly subordinated in right of payment to the notes; equal in right of payment with any of the Company’s unsecured indebtedness that is not so
subordinated; effectively junior in right of payment
108
to any of Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and
other liabilities (including trade payables but excluding intercompany obligations) of the Company’s current or future subsidiaries.
The Indenture includes customary covenants and sets forth certain events of default after which the convertible notes may be declared immediately
due and payable, including certain types of bankruptcy or insolvency involving the Company. To the extent the Company so elects, the sole remedy for an
event of default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture will, for the first 365 days after
such event of default, consist exclusively of the right to receive additional interest on the notes. Upon conversion, the Company will pay or deliver, as the
case may be, cash, shares of our common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election (the “cash
conversion option”). The initial conversion rate for the convertible notes is 5.9735 shares of common stock per one thousand dollar principal amount of
notes, which is equivalent to an initial conversion price of approximately $167.41 per share of common stock, which represents approximately 1,659,737
shares of common stock, based on the $277,856 aggregate principal amount of convertible notes outstanding as of May 31, 2021 (2020 - $nil). Throughout
the term of the TLRY 23, the conversion rate may be adjusted upon the occurrence of certain events.
Prior to the close of business on the business day immediately preceding April 1, 2023, the TLRY 23 will be convertible only under the specified
circumstances. On or after April 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may convert all or
any portion of their TLRY 23, in multiples of $1 principal amount, at the option of the holder regardless of the aforementioned circumstances.
The Company may from time to time seek to retire or purchase its TLRY 23, in open market purchases, privately negotiated transactions or
otherwise. Such purchases or exchanges, if any, will depend on prevailing market conditions, the company's liquidity requirements, contractual restrictions
and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
As of May 31, 2021, the TLRY 23 is not yet convertible. The convertible notes will become convertible upon the satisfaction of the above
circumstances. The remaining unamortized debt discount related to the convertible notes as of May 31, 2021 will be accreted over the remaining term of
the TLRY 23, which is approximately 28 months.
As at May 31, 2021, the Company was in compliance with all the covenants set forth under the Indenture.
During the year ended May 31, 2021, the Company recognized total interest expense of $1,585 (2020 – $nil), which included contractual interest
coupon of $1,158 (2020 - $nil) and amortization of the discount of $427 (2020 - $nil).
20. Warrants
The warrant details of the Company are as follows:
Type of warrant
Warrant
Warrant
Warrant
Classification
Equity
Equity
Liability
Expiry
date
September 26, 2021
January 30, 2022
March 17, 2025
Number of
warrants
166,000 $
5,828,651
6,209,000
12,203,651 $
Weighted
average
price
3.14
9.26
5.95
7.41
As part of the Arrangement, Aphria’s 2016 Warrants (the 200,000 warrants issued by Aphria expiring September 26, 2021) were exchanged for
166,000 Replacement Warrants (warrants to purchase Tilray shares pursuant to the Plan of Arrangement), expiring September 26, 2021.
109
As part of the Arrangement, Aphria’s all 2020 Warrants (the 7,022,472 warrants issued by Aphria expiring January 30, 2022), ceased to represent a
warrant to acquire Aphria shares and instead represent a right to receive 5,828,651 Tilray shares in accordance with their term.
As part of the Arrangement, all outstanding Tilray Warrants which expire on March 17, 2025 remain outstanding without change to any of their
terms. The warrants contain anti-dilution price protection features, which adjust the exercise price of the warrants if the Company subsequently issues
common stock at a price lower than the exercise price of the warrants. In the event additional warrants or convertible debt are issued with a lower and/or
variable exercise price, the exercise price of the warrants will be adjusted accordingly. There were no triggering events during the year ended May 31,
2021. These warrants are classified as liabilities as they are to be settled in registered shares, and the registration statement is required to be active, unless
such shares may be subject to an applicable exemption from registration requirements. The holders, at their sole discretion, may elect to affect a cashless
exercise, and be issued exempt securities in accordance with Section 3(a)(9) of the 1933 Act. In the event the Company does not maintain an effective
registration statement, the Company may be required to pay a daily cash penalty equal to 1% of the number of shares of common stock due to be issued
multiplied by any trading price of the common stock between the exercise date and the share delivery date, as selected by the holder. Alternatively, the
Company may deliver registered common stock purchased by the Company in the open market. The Company may also be required to pay cash if it does
not have sufficient authorized shares to deliver to the holders upon exercise.
Outstanding, beginning of the year
Exercised during the year
Issued during the year
Cancelled during the year
Expired during the year
Outstanding, end of the year
May 31, 2021
May 31, 2020
Number of
warrants
5,994,651 $
—
6,209,000
—
—
12,203,651 $
Weighted
average
price
8.91
—
5.95
—
—
7.41
Number of
warrants
1,903,024 $
(636,089)
5,828,652
—
(1,100,936)
5,994,651 $
Weighted
average
price
12.01
1.47
9.08
—
19.46
8.91
The Company estimated the fair value of the warrant liability at May 31, 2021 at $12.59 per warrant using the Black Scholes pricing model (Level
3) with the following weighted-average assumptions:
Risk-free interest rate
Expected volatility
Expected term
Expected dividend yield
Strike price
Fair value of common stock
0.90%
70%
4.3 years
—%
5.95
16.67
$
$
Expected volatility is based on both historical and implied volatility of the Company’s common stock.
21.
Stock-based compensation
For the year ended May 31, 2021, the total stock-based compensation expense was $17,351 (2020 - $18,079 and 2019 - $21,951). The Company
operates multiple stock-based award plans as follows:
Tilray 2018 Equity Incentive Plan and Original Plan
The 2018 Equity Incentive Plan (EIP) authorizes the award of stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”)
to employees, including officers, non-employee directors and consultants and the employees and consultants of our affiliates. Shares subject to awards
granted under the EIP that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, do not reduce the number of
shares available for issuance under the EIP. Additionally, shares become available for future grant under the EIP if they were issued under the EIP and if the
Company repurchases them or they are forfeited. This includes shares used to pay the
110
exercise price of an award or to satisfy the tax withholding obligations related to an award. The maximum number of shares of common stock subject to
stock awards granted under the EIP or otherwise during any one calendar year to any non-employee director, taken together with any cash fees paid by the
Company to such non-employee director during such calendar year for service on the Board of Directors, will not exceed five hundred thousand dollars in
total value, calculating the value of any such stock awards based on the grant date fair value of such stock awards for financial reporting purposes, or, with
respect to the calendar year in which a nonemployee director is first appointed or elected to our Board of Directors, one million dollars.
Stock options represent the right to purchase shares of our common stock on the date of exercise at a stated exercise price. The exercise price of a
stock option generally must be at least equal to the fair market value of our shares of common stock on the date of grant. The Company’s compensation
committee may provide for stock options to be exercised only as they vest or to be immediately exercisable with any shares issued on exercise being
subject to the Company’s right of repurchase that lapses as the shares vest. The maximum term of stock options granted under the EIP is ten years.
RSUs represent a right to receive common stock or their cash equivalent for each RSU that vests, which vesting may be based on time or
achievement of performance conditions. Unless otherwise determined by our compensation committee at the time of grant, vesting will cease on the date
the participant no longer provides services to the Company and unvested shares will be forfeited. If an RSU has not been forfeited, then on the date
specified in the RSUs, the Company will deliver to the holder a number of whole shares of common stock, cash or a combination of shares of our common
stock and cash. Additionally, dividend equivalents may be credited in respect of shares covered by the RSUs. Any additional shares covered by the RSU
credited by reason of such dividend equivalents will be subject to all of the same terms and conditions of the underlying RSU agreement to which they
relate. The RSUs generally vest over a 3-or-4 year period. The fair value of RSUs are based on the share price as at date of grant.
SARs provide for a payment, or payments, in cash or shares of common stock to the holder based upon the difference between the fair market
value of shares of our common stock on the date of exercise and the stated exercise price. The maximum term of SARs granted under the EIP is ten years.
No SARs were issued to date.
The EIP permits the grant of performance-based stock and cash awards. The performance goals may be based on company-wide performance or
performance of one or more business units, divisions, affiliates or business segments and may be either absolute or relative to the performance of one or
more comparable companies or the performance of one or more relevant indices. The length of any performance period, the performance goals to be
achieved during the performance period, and the measure of whether and to what degree such performance goals have been attained will be conclusively
determined by the Board of Directors.
As of April 30, 2021, 9,806,851 shares of common stock had been reserved for issuance under the EIP. The number of shares of common stock
reserved for issuance under the 2018 EIP will automatically increase on January 1 of each calendar year, for a period of not more than ten years, starting on
January 1, 2019 and ending on and including January 1, 2027, in an amount equal to 4% of the total number of shares of our common stock outstanding on
December 31 of the prior calendar year, or a lesser number of shares determined by our Board of Directors. The shares reserved include only the
outstanding shares related to stock options and RSUs and excludes stock options outstanding under the Original Plan.
Certain employees and other service providers of the Company participate in the equity-based compensation plan of Privateer Holdings, Inc (the
“Original Plan”) under the terms and valuation method detailed below. The expected life of the stock options represented the period of time stock options
were expected to be outstanding and was estimated considering vesting terms and employees’ historical exercise and post-vesting employment termination
behavior. Expected volatility was based on historical volatilities of public companies operating in a similar industry to Privateer Holdings. The risk-free
rate is based on the United States Treasury yield curve in effect at the time of grant. The expected dividend yield was determined based on the stock
option’s exercise price and expected annual dividend rate at the time of grant.
111
No stock options were granted under the EIP during the year ended May 31, 2021. For the year ended May 31, 2020 and 2019, the fair value of
each stock option granted is estimated on grant date using the Black-Scholes option pricing model using the following assumptions: risk-free rate for 2020
– 2.10% and 2019 – 2.92% on the date of grant; expected life for 2020 – 8.97 years and 2019 – 5.79 years; volatility for 2020 – 61.33% and 2019 – 58.54%
based on comparable companies; dividend yield for 2020 and 2019 of $nil; and, the exercise price of the respective option. The expected life of the award
is estimated using the simplified method since the Company does not have adequate historical exercise data to estimate the expected term.
Stock-based activity under the EIP and Original Plan for the year ended May 31, 2021 is as follows:
EIP Time-based stock option activity
Balance May 1,
Granted
Exercised
Forfeited
Cancelled
Balance May 31,
Original plan time-based stock option activity
Balance May 1,
Exercised
Forfeited
Cancelled
Balance May 31,
Time-based RSU activity
Balance May 1,
Granted
Vested
Forfeited
Cancelled
Balance May 31,
Predecessor Plan - Aphria
Stock
Options
3,182,547 $
—
(1,665)
(188)
(468)
3,180,226 $
Stock
Options
946,948
(29,403)
—
—
917,545 $
Weighted-
average
exercise
price
Weighted-
average
remaining
contractual
term (years)
14.19
—
7.76
7.76
65.20
14.19
Weighted-
average
exercise
price
Weighted-
average
remaining
contractual
term (years)
3.99
4.71
—
—
3.97
Aggregate
intrinsic value
30,331,823
—
—
—
—
25,171,187
1.7 $
—
—
—
—
1.3 $
Aggregate
intrinsic value
2
—
—
—
1.7 $
13,777,571
—
—
—
11,885,699
Time-based
RSUs
1,285,134 $
198,521
(112,508)
(165,904)
—
1,205,243 $
Weighted-average
grant-date
fair value
per share
Weighted-average
remaining
contractual
term (years)
15.70
7.76
12.99
11.97
—
15.16
—
—
—
—
—
— $
Aggregate
intrinsic value
—
—
—
—
—
20,091,286
Prior to the reverse acquisition (Note 10), Aphria had established the Aphria Omnibus Incentive Plan (the “Predecessor Plan”). Following
stockholder approval of the EIP, no new awards have been granted under the Predecessor Plan. In connection with the reverse acquisition Aphria stock
options, Aphria RSUs and DSUs issued under the Predecessor Plan were exchanged for options, RSUs under the EIP. As a result of the modification, all
grantees were affected, and the Company recognized nil incremental compensation cost.
112
The fair value of each stock option granted under the Predecessor Plan is estimated on grant date using the Black-Scholes option pricing model
using the following assumptions: risk-free rate of 0.39% (2020 – 1.20 – 1.56% and 2019 – 1.66 – 2.38%) on the date of grant; expected life of 5 years
(2020 - 5 years and 2019 – 3 - 5 years); volatility of 70% (2020 and 2019 – 70%) based on comparable companies; forfeiture rate of 35% (2020 – 20% and
2019 – 0%); dividend yield of $nil (2020 and 2019 – $nil); and, the exercise price of the respective option. The expected life of the award is estimated
using the simplified method since the Company does not have adequate historical exercise data to estimate the expected term.
Stock option, RSU and DSU activity for the Company under the Predecessor Plan is as follows:
Time-based stock option activity
Outstanding, beginning of the year
Exercised during the year
Granted during the year
Forfeited during the year
Expired during the year
Outstanding, end of the year
Vested and exercisable, end of the year
Weighted
average
exercise
price
May 31, 2021
Weighted
average
grant
date fair
value
Weighted
average
remaining
contractual
term (years)
12.04 $
8.70 $
5.88 $
14.06 $
18.72 $
12.48 $
13.53 $
6.24
4.38
2.18
7.46
8.80
6.51
7.16
2.9
N/A
N/A
N/A
N/A
2.4
2.2
Aggregate
Intrinsic
Amount
(32,781)
N/A
N/A
N/A
N/A
10,472
5,797
Number of
options
4,484,051 $
(1,073,986)
41,500
(884,320)
(68,060)
2,499,185 $
1,846,090 $
During the year ended May 31, 2021, the Company issued 41,500 stock options at an exercise price of $5.88 per share, exercisable for 5 years to
officers of the Company. The weighted-average grant date fair values of time-based stock options granted during the year ended May 31, 2021 was $2.18
per share (2020 - $3.54 and 2019 - $7.32). The total intrinsic values of these stock options exercised during the year ended May 31, 2021 was $4,679,758
(2020 - $4,869,447 and 2019 - $28,025,979). The total fair value of time-based stock options vested during the year ended May 31, 2021 was $3,054,257
(2020 - $9,592,767 and 2019 - $14,983,131).
As of May 31, 2021, the total remaining unrecognized compensation expenses related to non-vested time-based stock options amounted to
$3,058,733 (2020 - $8,209,817 and 2019 - $17,110,533), which will be amortized over the weighted-average remaining requisite service period of
approximately 1.06 years (2020 – 1.53 years and 2019 – 1.52 years).
Performance-based stock option activity
Outstanding, beginning of the year
Exercised during the year
Granted during the year
Forfeited during the year
Expired during the year
Outstanding, end of the year
Vested and exercisable, end of the year
Weighted
average
exercise
price
May 31, 2021
Weighted
average
grant
date fair
value
Weighted
average
remaining
contractual
term (years)
8.11 $
5.15 $
—
10.23 $
—
—
—
3.80
2.38
—
4.81
—
—
—
0.6
N/A
N/A
N/A
N/A
—
—
Aggregate
Intrinsic
Amount
(1,347)
N/A
N/A
N/A
N/A
—
—
Number of
options
398,400 $
(166,000) $
—
(232,400) $
—
—
—
113
The weighted-average grant date fair values of performance-based stock options granted during the year ended May 31, 2021 was $N/A per share
(2020 - $N/A and 2019 - $N/A). The total intrinsic values of these stock options exercised during the year ended May 31, 2021 was $746,743 (2020 -
$326,033 and 2019 - $1,864,100). The total fair value of performance-based stock options vested during the year ended May 31, 2021 was $395,138 (2020
- $222,721 and 2019 - $461,188).
As of May 31, 2021, the total remaining unrecognized compensation expenses related to non-vested performance-based stock options amounted to
$N/A (2020 - $1,074,701 and 2019 - $1,206,415), which will be amortized over the weighted-average remaining requisite service period of approximately
N/A years (2020 – 0.58 years and 2019 – 0.76 years).
Time-based and Performance-based RSU activity
As of May 31, 2021, the total remaining unrecognized compensation expenses related to non-vested time-based RSUs amounted to $16,273,457
(2020 - $10,240,001 and 2019 - $1,392,478), which will be amortized over the weighted-average remaining requisite service period of approximately 1.03
years (2020 – 1.44 years and 2019 – 0.54 years). The total intrinsic values of the time-based RSUs exercised during the year ended May 31, 2021 was
$10,905,991 (2020 - $5,123,883 and 2019 - $775,962). The total fair value of time-based RSUs vested during the year ended May 31, 2021 was $8,777,963
(2020 - $4,507,883 and 2019 - $2,044,952).
May 31, 2021
Weighted
average
grant -
date fair
value per
share
Performance-
based
RSUs
Weighted
average
grant -
date fair
value per
share
7.71
6.24
(6.83)
(6.68)
6.88
19,335 $
—
—
(19,335) $
—
6.01
—
—
(6.01)
—
Time- based
RSUs
1,588,743 $
2,370,862 $
(1,006,222) $
(158,411) $
2,794,972 $
Foreign
currency
translation
(loss) gain
Unrealized
loss on
convertible
notes
receivables
$
$
110 $
(90)
606
626
(858)
(232)
—
156,649
156,417 $
2,844 $
(2,570)
—
274
(5,476)
(5,202)
5,277
(3,824)
(3,749) $
Total
2,954
(2,660)
606
900
(6,334)
(5,434)
5,277
152,825
152,668
Non-vested, beginning of the year
Granted during the year
Vested during the year
Forfeited during the year
Non-vested, end of the year
22.
Accumulated other comprehensive loss
Accumulated other comprehensive loss includes the following components:
Balance May 31, 2018
Other comprehensive income (loss)
Elimination of CTA on disposal of equity investee
Balance May 31, 2019
Other comprehensive income (loss)
Balance May 31, 2020
Settlement of convertible notes receivable
Other comprehensive income (loss)
Balance May 31, 2021
114
23.
Non-controlling interests
The following tables summarise the information relating to the Company’s subsidiaries, CC Pharma Nordic ApS, Aphria Diamond, Marigold
Projects Jamaica Limited (“Marigold”), and ColCanna S.A.S. before intercompany eliminations.
Non-controlling interests as at May 31, 2021:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Non-controlling interests as at May 31, 2020:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Non-controlling interests for the year ended May 31, 2021:
Revenue
Total expenses (recovery)
Net (loss) income
Other comprehensive (loss) income
Net comprehensive income
Non-controlling interests for the year ended May 31, 2020:
CC Pharma
Nordic ApS
Aphria
Diamond
Marigold
ColCanna
S.A.S.
May 31,
2021
$
919 $
103
(956)
(406)
(340)
19,531 $
153,696
(28,511)
(69,332)
75,384
— $
—
—
—
—
315 $
146,587
(62)
(6,606)
140,234
20,765
300,386
(29,529)
(76,344)
215,278
Aphria
Diamond
Marigold
ColCanna
S.A.S.
May 31,
2020
$
25,957 $
156,251
(11,337)
(128,031)
42,840
— $
—
—
—
—
547 $
83,857
(274)
(24,471)
59,659
26,504
240,108
(11,611)
(152,502)
102,499
CC Pharma
Nordic ApS
Aphria
Diamond
Marigold
ColCanna
S.A.S.
$
827 $
(958)
(131)
—
(131)
131,381 $
(67,030)
64,351
—
64,351
— $
—
—
—
—
— $
(923)
(923)
— $
(923)
May 31,
2021
132,208
(68,911)
63,297
—
63,297
Revenue
Total expenses (recovery)
Net (loss) income
Other comprehensive (loss) income
Net comprehensive loss
$
Aphria
Diamond
Marigold
ColCanna
S.A.S.
May 31,
2020
24,142 $
(25,141)
(999)
—
(999)
40 $
4,995
5,035
—
5,035
— $
19,447
19,447
— $
19,447
24,182
(699)
23,483
—
23,483
115
Non-controlling interests for the year ended May 31, 2019:
Revenue
Total expenses (recovery)
Net (loss) income
Other comprehensive (loss) income
Net comprehensive loss
24.
Net revenue
Net revenue is comprised of:
Cannabis revenue
Cannabis excise taxes
Net cannabis revenue
Beverage alcohol revenue
Beverage alcohol excise taxes
Net beverage alcohol revenue
Distribution revenue
Wellness revenue
25.
Cost of goods sold
Cost of goods sold is comprised of:
Cannabis costs
Beverage alcohol costs
Distribution costs
Wellness costs
Aphria
Diamond
CannInvest
Africa Ltd.
Verve
Dynamics
Nuuvera
Malta
Ltd.
Marigold
ColCanna
S.A.S.
May 31,
2019
$
— $
(21,273) $
(21,273)
—
(21,273)
— $
(8) $
(8)
—
(8)
— $
(634)
(634)
—
(634)
174 $
(791)
(617)
—
(617)
— $
(572)
(572)
—
(572)
— $
(942)
(942)
—
(942)
174
(24,220)
(24,046)
(24,046)
2021
For the year ended May 31,
2020
2019
264,334
(62,942)
201,392
29,661
(1,062)
28,599
277,300
5,794
513,085 $
153,477
(23,581)
129,896
—
—
—
275,430
—
405,326 $
67,592
(7,716)
59,876
—
—
—
119,427
—
179,303
2021
For the year ended May 31,
2020
2019
130,511
12,687
242,472
4,233
389,903 $
68,551
—
240,722
—
309,273 $
31,341
—
104,451
—
135,792
$
$
$
$
116
26.
General and administrative expenses
General and administrative expenses are comprised of the following items:
Executive compensation
Consulting fees
Office and general
Professional fees
Salaries and wages
Stock-based compensation
Insurance
Travel and accommodation
Rent
27.
Finance income (expense), net
Finance income (expense), net is comprised of:
Interest income
Interest expense
28.
Non-operating (expense) income
Non-operating (expense) income is comprised of:
Foreign exchange (loss) gain
Loss on marketable securities
Gain (loss) on sale of capital assets
(Loss) gain from equity investees
Deferred gain on sale of intellectual property
Loss on promissory notes receivable
(Loss) gain on long-term investments
Unrealized (loss) gain on convertible debentures
Realized gain on settlement of convertible debentures
Legal settlement
Unrealized loss on financial liabilities
Change in fair value of warrant liability
Other non-operating items, net
2021
For the year ended May 31,
2020
2019
8,645 $
6,633
19,503
5,146
37,126
17,351
12,257
2,711
2,203
111,575 $
6,777 $
9,272
12,351
4,918
28,252
18,079
9,370
2,798
1,972
93,789 $
4,402
4,928
12,486
8,916
14,842
21,951
4,050
2,356
1,910
75,841
2021
For the year ended May 31,
2020
2019
2,926 $
(30,903)
(27,977) $
6,273 $
(25,644)
(19,371) $
11,138
(5,879)
5,259
2021
For the year ended May 31,
2020
2019
(22,347) $
—
1,523
(458)
—
—
(2,352)
(170,453)
—
—
—
1,234
8,015
(184,838) $
6,145 $
(252)
(8,075)
—
—
(9,698)
(24,295)
44,322
9,289
(3,241)
—
—
—
14,195 $
692
(135)
42
44,191
257
—
14,860
36,630
—
—
(1,003)
—
—
95,534
$
$
$
$
$
$
117
29.
Change in non-cash working capital
Change in non-cash working capital is comprised of:
Decrease (increase) in:
Accounts receivable
Prepaids and other current assets
Inventory
Increase (decrease) in:
Accounts payable and accrued liabilities
Deferred revenue
30.
Commitments and contingencies
Purchase and other commitments
2021
For the year ended May 31,
2020
2019
$
$
(23,512) $
(6,772)
(35,286)
14,501
134
(50,935) $
(25,593) $
(10,899)
(89,660)
47,335
(15)
(78,832) $
9,421
4,322
(26,069)
(8,984)
8,839
(12,471)
The Company has payments on long-term debt (refer to Note 18 Long-term debt), convertible notes (refer to Note 19 Convertible Debentures),
ABG finance liability (refer to Note 17 Accounts payable and accrued liabilities) material purchase commitments and construction commitments as
follows:
Long-term debt repayment
Convertible notes, principal and interest
ABG finance liability
Material purchase obligations
Construction commitments
Total
Legal proceedings
Total
$ 204,108
571,989
6,000
26,097
1,814
$ 810,008 $
2022
36,623
13,893
1,500
21,141
1,814
74,971 $
2025
2024
2023
69,925
1,438
95,181
13,893 284,803 259,400
1,500
1,500
1,500
93
854
4,009
—
—
—
89,327 $ 382,338 $ 262,431 $
2026
Thereafter
—
—
—
—
—
—
941
—
—
—
—
941 $
From time to time, the Company and/or its subsidiaries may become defendants in legal actions arising out of the ordinary course and conduct of
its business. As of May 31, 2021, in the opinion of management, no claims meet the criteria to record a loss contingency.
31.
Financial risk management and financial instruments
Financial instruments
The Company has classified its financial instruments as described in Note 3 Significant accounting policies.
The carrying values of accounts receivable, bank indebtedness and accounts payable and accrued liabilities approximate their fair values due to
their short periods to maturity.
The Company’s long-term debt of $20,358 (2020 - $19,398) is subject to fixed interest rates. The Company’s long-term debt is valued based on
discounting the future cash outflows associated with the long-term debt. The discount rate is based on the incremental premium above market rates for
Government of Canada securities of similar duration. In each period thereafter, the incremental premium is held constant while the Government of Canada
security is based on the then current market value to derive the discount rate.
118
Fair value hierarchy
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the
measurements. Cash and cash equivalents are Level 1. The hierarchy is summarized as follows:
Level 1
Level 2
Quoted prices (unadjusted) in active markets for identical assets and liabilities
Inputs that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market
data
Level 3
Inputs for assets and liabilities not based upon observable market data
The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of May
31, 2021 and 2020 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
Financial assets
Cash and cash equivalents
Convertible notes receivable
Long-term investments
Financial liabilities
Warrant liability
Contingent consideration
APHA 24 Convertible debenture
Total recurring fair value measurements
Financial assets
Cash and cash equivalents
Convertible notes receivable
Long-term investments
Financial liabilities
APHA 24 Convertible debenture
Total recurring fair value measures
Level 1
Level 2
Level 3
488,466 $
—
9,251
—
—
—
497,717 $
— $
2,485
2,934
—
—
—
5,419 $
— $
—
—
(78,168)
(60,657)
(399,444)
(538,269) $
Level 1
Level 2
Level 3
May 31,
2021
488,466
2,485
12,185
(78,168)
(60,657)
(399,444)
(35,133)
May 31,
2020
360,646 $
—
11,244
— $
10,609
8,351
— $
—
—
360,646
10,609
19,595
—
371,890 $
—
18,960 $
(196,405)
(196,405) $
(196,405)
194,445
$
$
$
$
The Company’s financial assets and liabilities required to be measured on a recurring basis are its equity investments measured at fair value, debt
securities classified as available-for-sale, acquisition-related contingent consideration, and warrant liability.
Convertible notes receivable and long-term investments recorded at fair value: The estimated fair value is determined using quoted market prices,
broker or dealer quotations or discounted cash flows and is classified as Level 2.
Warrant liability: The warrants associated with the warrant liability are classified as Level 3 derivatives. Consequently, the estimated fair value of
the warrant liability is determined using the Black Scholes pricing model. Until the warrants are exercised, expire, or other facts and circumstances lead the
warrant liability to be reclassified to stockholders’ equity, the warrant liability (which relates to warrants to purchase shares of common stock) is marked-
to-market each reporting period with the change in fair value recorded in change in fair value of warrant liability. Any significant adjustments to the
unobservable inputs disclosed in the table below would have a direct impact on the fair value of the warrant liability.
119
APHA 24: This instrument is held at fair value. The estimated fair value is determined using the Black Scholes option pricing model and is
classified as Level 3.
Contingent consideration: The contingent consideration from the acquisition of SweetWater is determined by discounting future expected cash
outflows at a discount rate of 5%. The inputs into the future expected cash outflows are classified as Level 3.
The opening balances of assets and liabilities categorized within Level 3 of the fair value hierarchy measured at fair value on a recurring basis are
reconciled to the closing balances as follows:
Closing balance May 31, 2020
Additions
Disposals
Unrealized gain (loss) on fair value
Closing balance May 31, 2021
APHA 24
Convertible
debenture
$
$
(196,405) $
—
—
(203,039)
(399,444) $
Warrant
liability
Contingent
consideration
— $
(79,402)
—
1,234
(78,168) $
— $
(58,959)
—
(1,698)
(60,657) $
Total
(196,405)
(138,361)
—
(203,503)
(538,269)
The unrealized gain (loss) on fair value for the Convertible Debenture and the warrant liability is recognized in non-operating income (loss) using
the following inputs:
Financial asset / financial liability
APHA Convertible debentures
Warrant liability
Contingent consideration
Valuation
technique
Black-Scholes
Black-Scholes
Discounted cash
flows
Significant
unobservable
input
Volatility,
expected life
Volatility,
expected life
Discount rate,
achievement
Inputs
70%
3 years
70%
4 years
5%
100%
Items measured at fair value on a non-recurring basis
The Company's prepayments and other current assets, long lived assets, including property and equipment, goodwill and intangible assets are
measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
Financial risk management
The Company has exposure to the following risks from its use of financial instruments: credit; liquidity; currency rate; interest rate price; equity
price risk; and capital management risk.
(a)
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual
obligations. The maximum credit exposure at May 31, 2021, is the carrying amount of cash and cash equivalents, accounts receivable, prepaids and other
current assets, promissory notes receivable and convertible notes receivable. All cash and cash equivalents are placed with major financial institutions in
Canada, Australia, Portugal, Germany, Colombia, Argentina and the United States. To date, the Company has not experienced any losses on its cash
deposits. Accounts receivable are unsecured, and the Company does not require collateral from its customers.
The Company evaluates the collectability of its accounts receivable and maintains an allowance for credit losses at an amount sufficient to absorb
losses inherent in the existing accounts receivable portfolio as of the reporting dates based on the estimate of expected net credit losses.
120
Trade receivables included an allowance for doubtful accounts of $4,571 at May 31, 2021 (2020-$2,313), and is comprised of the following aged
receivables:
Trade receivables
Total
0-30 days
31-60 days
61-90 days
90+ days
$
87,309
70,997
82%
8,253
9%
1,051
1%
7,008
8%
Due to the uncertainties associated with COVID-19, the Company may be unable to accurately predict the creditworthiness of its counterparties
and their ability to meet their obligations. This may result in unforeseen additional credit losses.
(b)
Liquidity risk
As at May 31, 2021, the Company’s financial liabilities consist of bank indebtedness and accounts payable and accrued liabilities, which have
contractual maturity dates within one-year, long-term debt, and convertible debentures which have contractual maturities over the next five years.
The Company maintains a debt service charge covenant on certain loans secured by its Aphria One facilities that is measured at year-end only. The
Company maintains debt service charge and leverage covenants on certain loans secured by its Aphria Diamond facilities and 420 that are measured
quarterly. The Company believes that it has sufficient operating room with respect to its financial covenants for the next fiscal year and does not anticipate
being in breach of any of its financial covenants.
The Company manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Company’s working capital
position at May 31, 2021, management regards liquidity risk to be low.
(c)
Currency rate risk
As at May 31, 2021, a portion of the Company’s financial assets and liabilities held in Canadian dollars and Euros consist of cash and cash
equivalents, convertible notes receivable, and long-term investments. The Company’s objective in managing its foreign currency risk is to minimize its net
exposure to foreign currency cash flows by transacting, to the greatest extent possible, with third parties in the functional currency. The Company is
exposed to currency rate risk in other comprehensive income, relating to foreign subsidiaries which operate in a foreign currency. The Company does not
currently use foreign exchange contracts to hedge its exposure of its foreign currency cash flows as management has determined that this risk is not
significant at this point in time.
(d)
Interest rate price risk
The Company’s exposure to changes in interest rates relates primarily to the Company’s outstanding debt. The Company manages interest rate risk
by restricting the type of investments and varying the terms of maturity and issuers of marketable securities. Varying the terms to maturity reduces the
sensitivity of the portfolio to the impact of interest rate fluctuations.
(e)
Equity price risks
As of May 31, 2021, the Company held long-term equity investments at fair value and equity investments under the measurement alternative.
These investment in equities were acquired as part of our strategic transactions. Accordingly, the changes in fair values of investment in equities measured
at fair value or under the measurement alternative are recognized through gain (loss) on long-term investment in the statements of net loss and
comprehensive loss. Based on the fair value of investment in equities held as of May 31, 2021, a hypothetical decrease of 10% in the prices for these
companies would reduce the fair values of the investments and result in unrealized loss recorded in gain (loss) on long-term investment by $1,769.
121
Similarly, based on the fair value of our warrant liability as of May 31, 2021, a hypothetical increase of 10% in the price for our common stock
would increase the change in fair value of warrant liability and result in unrealized gain recorded in non-operating income by $9,800.
(f)
Capital management
The Company’s objectives when managing its capital are to safeguard its ability to continue as a going concern, to meet its capital expenditures for
its continued operations, and to maintain a flexible capital structure which optimizes the cost of capital within a framework of acceptable risk. The
Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To
maintain or adjust its capital structure, the Company may issue new shares, issue new debt, or acquire or dispose of assets. The Company is not subject to
externally imposed capital requirements.
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company,
is reasonable. There have been no changes to the Company’s capital management approach in the year. The Company considers its cash and cash
equivalents and marketable securities as capital.
32.
Segment reporting
Information reported to the Chief Operating Decision Maker (“CODM”) for the purpose of resource allocation and assessment of segment
performance focuses on the nature of the operations. The Company operates in five segments. 1) cannabis operations, which encompasses the production,
distribution and sale of both medical and adult-use cannabis, 2) beverage alcohol operations, which encompasses cultivation, distribution and sale of
beverage alcohol products, 3) distribution operations, which encompasses the purchase and resale of pharmaceuticals products to customers, 4) wellness
products, which encompasses hemp foods and cannabidiol (“CBD”) products and 5) businesses under development which encompass operations in which
the Company has not received final licensing or has not commenced commercial sales from operations. Factors considered in determining the operating
segments include the Company’s business activities, the management structure directly accountable to the CODM, availability of discrete financial
information and strategic priorities within the organizational structure. Operating segments have not been aggregated and no asset information is provided
for the segments because the Company’s CODM does not receive asset information by segment on a regular basis.
Segment net revenue from external customers:
Cannabis business
Distribution business
Beverage alcohol business
Wellness business
Business under development
Total net revenue
Channels of Cannabis revenue were as follows:
Revenue from medical cannabis products
Revenue from adult-use cannabis products
Revenue from wholesale cannabis products
Revenue from international cannabis products
Less excise tax
Total net cannabis revenue
2021
For the year ended May 31,
2020
2019
$
201,392
277,300
28,599
5,794
—
513,085 $
$
129,896
275,430
—
—
—
405,326 $
59,876
119,427
—
—
—
179,303
2021
For the year ended May 31,
2020
2019
25,539 $
222,930
6,615
9,250
(62,942)
201,392 $
28,685 $
112,207
12,585
—
(23,581)
129,896 $
33,017
30,236
4,339
—
(7,716)
59,876
$
$
$
$
122
Geographic net revenue:
North America
EMEA
Latin America
Total net revenue
Geographic capital assets:
North America
EMEA
Latin America
Total capital assets
2021
For the year ended May 31,
2020
2019
$
$
229,120 $
279,062
4,903
513,085 $
129,663 $
271,291
4,372
405,326 $
59,629
116,578
3,096
179,303
May 31, 2021
May 31, 2020
504,575 $
140,838
5,285
650,698 $
371,823
44,348
4,535
420,706
$
Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues. For the years
ended May 31, 2021, 2020, and 2019 there were no major customers representing greater than 10% of our annual revenues.
33.
Quarterly financial data (unaudited)
The following table contains selected quarterly data for 2021 and 2020. information should be read in conjunction with the Company’s financial
statements and related notes included elsewhere in this report. The Company believes that the following information reflects all normal recurring
adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
Net revenue
Gross profit
Net income (loss)
Net income (loss) attributable to Tilray shareholders
Earnings (loss) per share - basic
Earnings (loss) per share - fully diluted
Net revenue
Gross profit
Net income (loss)
Net income (loss) attributable to Tilray shareholders
Earnings (loss) per share - basic
Income (loss) per share - fully diluted
$
$
August 31,
2020
For the three months ended
November 30,
2020
February 28,
2021
May 31,
2021
117,490 $
34,945
(21,744)
(32,958)
(0.09)
(0.09)
129,459
35,283
(89,249)
(100,811)
(0.37)
(0.37)
123,900
30,456
(258,626)
(280,856)
(0.97)
(0.97)
142,236
22,498
33,605
47,204
0.18
0.18
August 31,
2019
For the three months ended
November 30,
2019
February 29,
2020
May 31,
2020
94,078 $
20,555
1,435
1,564
0.01
0.01
89,967 $
21,812
(6,265)
(5,996)
(0.03)
(0.03)
107,739 $
25,879
(11,699)
(11,003)
(0.05)
(0.05)
113,542
27,807
(84,306)
(87,105)
(0.39)
(0.39)
123
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tilray, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Tilray, Inc. and its subsidiaries (together, the Company) as of May 31,
2021 and 2020, and the related consolidated statements of loss and comprehensive loss, changes in equity and cash flows for each of the three years in the
period ended May 31, 2021, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the
Company's internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
May 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended May 31, 2021 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of May 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Controls over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight
Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective
internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has excluded SweetWater Brewery LLC and Tilray, Inc.
from its assessment of internal control over financial reporting as of May 31, 2021, because the entities were acquired by the Company in purchase
business combinations during 2021. We have also excluded SweetWater Brewery LLC and Tilray, Inc. from our audit of internal control over financial
reporting. SweetWater Brewery LLC and Tilray, Inc. are wholly-owned subsidiaries whose total assets and total revenues excluded from management’s
assessment and our audit of internal control over financial reporting represent 0.4% and 9.7% of total assets, respectively and 5.6% and 3.7% of total
revenues, respectively, of the related consolidated financial statement amounts as of and for the year ended May 31, 2021.
124
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that
were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to
the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit
matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment Assessment of Goodwill and Indefinite-lived Intangible Assets for the Business under development Reporting Unit
As described in Notes 3, 9 and 11 to the consolidated financial statements, the Company’s consolidated goodwill and indefinite-lived intangible assets
balances were $2,832.8 million and $412.0 million respectively at May 31, 2021. The goodwill associated with the Business under development reporting
unit was $336.8 million at May 31, 2021. Management conducts an impairment assessment annually in the fourth quarter, or more frequently if events or
changes in circumstances indicate that the carrying value of goodwill or indefinite-lived intangibles may not be recoverable. Impairment is recognized by
comparing the fair value of the reporting unit to its carrying value. Fair value amounts are estimated by management using a discounted cash flow model.
Management’s cash flow models included significant judgements and assumptions relating to future cash flows, growth rates and discount rates.
The principal considerations for our determination that performing procedures relating to the impairment assessment of goodwill and indefinite-lived
intangible assets for the Business under development reporting unit is a critical audit matter are (i) the significant judgement required by management when
developing the estimate of the fair value of the reporting unit; and (ii) a high degree of auditor judgement, subjectivity and effort in performing procedures
to evaluate management’s significant assumptions, including future cash flows, growth rates and discount rates.
Addressing the matter involved performing procedures and evaluating audit evidence, in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill and indefinite-lived intangible
assets impairment assessment over the determination of the fair value of the Business under development reporting unit. These procedures also included,
among others, (i) testing management’s process for developing the fair value estimates of the Business under development reporting unit; (ii) evaluating the
appropriateness of the underlying discounted cash flow models; (iii) testing the completeness and accuracy of underlying data used in the models; and (iv)
evaluating the reasonableness of the significant assumptions used by management, including the future cash flows, growth rates and discount rates.
Evaluating management’s significant assumptions related to future cash flows, growth rates and the discount rates involved evaluating whether the
assumptions used by management were reasonable considering (i) the current and
125
past performance of the reporting unit; (ii) the consistency with external market and industry data; (iii) sensitivities over significant inputs and assumptions;
and (iv) whether these assumptions were consistent with evidence obtained in other areas of the audit.
Fair value measurement of intangible assets acquired and valuation of contingent consideration related to the acquisition of SweetWater Brewery LLC
As described in Notes 3 and 10 to the consolidated financial statements, the Company completed the acquisition of SweetWater Brewery LLC
(“SweetWater”) for net consideration of $380.4 million in 2021, which resulted in a preliminary estimate of fair value of $257.0 million of intangible assets
being recorded. Included in consideration is contingent consideration of $59.0 million, which is contingent on SweetWater achieving specified EBITDA
targets. The Company accounts for business combinations using the acquisition method which requires recognition of assets acquired and liabilities
assumed at their respective fair values at the date of acquisition. Contingent consideration is measured at its acquisition-date fair value and included as
consideration transferred in a business combination. Management applied significant judgment in estimating the fair value of intangible assets acquired and
the acquisition-date fair value of contingent consideration, which involved the use of significant estimates and assumptions with respect to the cash flow
projections, the rate of future revenue growth, profitability of the acquired business and the discount rate, among other factors.
The principal considerations for our determination that performing procedures relating to the fair value measurement of intangible assets acquired and
valuation of contingent consideration related to the acquisition of SweetWater is a critical audit matter are (i) the significant judgment by management,
including the use of specialists, when estimating the fair value of the intangible assets acquired; (ii) the high degree of auditor judgment and subjectivity in
performing procedures relating to the fair value measurement of intangible assets acquired and the acquisition-date fair value of the contingent
consideration; (iii) significant audit effort in evaluating the reasonableness of significant assumptions relating to the estimate, such as the cash flow
projections, the rate of future revenue growth, profitability of the acquired business and the discount rate; and (iv) the audit effort involved the use of
professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over
management’s valuation of the intangible assets and the contingent consideration including controls over development of the cash flow projections, rate of
future revenue growth, profitability of the acquired business, and the discount rate assumptions utilized in the valuation of the intangible assets and
contingent consideration. These procedures also included, among others, (i) reading the purchase agreement; and (ii) testing management’s process for
estimating the fair value of the intangible assets acquired and determining the acquisition-date fair value of the contingent consideration. Testing
management’s process included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of data provided by
management, and evaluating the reasonableness of significant assumptions related to the cash flow projections, the rate of future revenue growth,
profitability of the acquired business, and the discount rate for the intangible assets and the contingent consideration. Evaluating the reasonableness of the
rate of future revenue growth and the profitability of the acquired business, involved considering the past performance of the acquired businesses and
market comparable results as well as economic and industry forecasts. The discount rate was evaluated by considering the cost of capital of comparable
businesses and other industry factors. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the
Company’s valuation models and the reasonability of the discount rate.
Fair value measurement of intangible assets acquired related to the reverse acquisition of Tilray, Inc.
As described in Notes 1, 3 and 10 to the consolidated financial statements, the Company entered into a plan of arrangement in 2021 with Aphria Inc.
pursuant to which the Company acquired all of the issued and outstanding common shares of Aphria Inc. The terms of the plan of arrangement resulted in a
reverse acquisition whereby Aphria was determined to be the acquiring entity from an accounting perspective. The Company accounts for business
combinations using the acquisition method which requires recognition of assets acquired and liabilities
126
assumed at their respective fair values at the date of acquisition. The total fair value of consideration transferred was $3,204.9 million, which resulted in a
preliminary estimate of fair value of $1,079.0 million of intangible assets being recorded. Management applied significant judgment in the preliminary
estimate of fair value of the intangible assets acquired, which involved the use of significant estimates and assumptions with respect to the cash flow
projections, the rate of future revenue growth, profitability of the acquired business and the discount rate, among other factors.
The principal considerations for our determination that performing procedures relating to the preliminary estimate of fair value of intangible assets acquired
in the reverse acquisition of Tilray, Inc. is a critical audit matter are (i) the significant judgment by management, including the use of specialists, when
estimating the fair value of intangible assets; (ii) the high degree of auditor judgment and subjectivity in performing procedures relating to the fair value
measurement of intangible assets acquired; (iii) significant audit effort in evaluating the reasonableness of significant assumptions relating to the estimate,
such as the cash flow projections, rate of future revenue growth, profitability of the acquired business and the discount rate; and (iv) the audit effort
involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to the acquisition accounting, including controls over
management’s valuation of the intangible assets and controls over the development of the cash flow projections, rate of future revenue growth, profitability
of the acquired business and the discount rate assumptions utilized in the valuation of the intangible assets. These procedures also included, among others,
(i) reading the purchase agreement; and (ii) testing management’s process for estimating the fair value of the intangible assets acquired. Testing
management’s process included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of data provided by
management, and evaluating the reasonableness of significant assumptions related to the cash flow projections, rate of future revenue growth, profitability
of the acquired business and the discount rate. Evaluating the reasonableness of the rate of future revenue growth and the profitability of the acquired
business involved considering the past performance of the acquired businesses and market comparable results as well as economic and industry forecasts.
The discount rate was evaluated by considering the cost of capital of comparable businesses and other industry factors. Professionals with specialized skill
and knowledge were used to assist in the evaluation of the appropriateness of the Company’s valuation models and the reasonableness of the discount rate.
/s/PricewaterhouseCoopers LLP
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
July 28, 2021
We have served as the Company's auditor since 2017.
127
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) to ensure that
material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other
members of senior management and the Board.
Our management, with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on this evaluation, as of the end of the period covered by this Annual Report on Form 10-K,
our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that the
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and
reported within the time periods specified in the SEC rules and forms, and (2) accumulated and communicated to management, including our principal
executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States. Internal control over financial reporting includes policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company's
assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with the authorization of
management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the financial statements.
It is important to understand that there are inherent limitations on effectiveness of internal controls as stated within COSO. Internal controls, no
matter how well designed and operated, may not prevent or detect misstatements and can only provide reasonable assurance to management and the Board
of Directors regarding achievement of an entity’s objectives. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
These inherent limitations include the following:
•
•
•
•
Judgments in decision-making can be faulty, and control and process breakdowns can occur because of simple errors or mistakes;
Controls can be circumvented by individuals, acting alone or in collusion with each other, or by management override;
The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions; and
Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial
128
reporting as of May 31, 2021, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control - Integrated Framework (2013) issued. Based on this evaluation, our management concluded that our internal control over financial
reporting was effective as of May 31, 2021.
The effectiveness of the Company’s internal control over financial reporting as of May 31, 2021 has been audited by PricewaterhouseCoopers LLP,
an independent registered public accounting firm, as stated in their report which accompanies the consolidated financial statements.
In the second quarter of our fiscal year ended May 31, 2021, we completed the acquisition of SweetWater. As a result of the acquisition,
Sweetwater became a wholly-owned subsidiary of Aphria Inc. Based on the timing of the acquisition, the relatively low percentage that SweetWater’s
financial information represents on our consolidated financial information included in this report, and other factors, management, with the participation of
our Chief Executive Officer and Chief Financial Officer, has limited the evaluation of internal controls over our financial reporting to exclude controls,
policies and procedures and internal controls over financial reporting of SweetWater.
In the fourth quarter of our fiscal year ended May 31, 2021, we completed the Aphria-Tilray acquisition. The Arrangement was structured as a
reverse acquisition pursuant to which Tilray is the legal acquirer and Aphria is the acquirer for accounting purposes. Accordingly, in this Annual Report in
Form 10-K, the assets and liabilities of Aphria are presented at their historical carrying values and the assets and liabilities of Tilray are recognized on the
effective date of the acquisition and measured at fair value. The operating results for the prior years are of those of Aphria.
In light of the “reverse acquisition” nature of the acquisition, the timing of the Arrangement, the relatively low percentage that legacy Tilray's
financial information represents on our consolidated financial information included in this report, and other factors, we determined that it was impracticable
to provide a report on our internal control over financial reporting of all of our consolidated entities as of the end of our fiscal year ended May 31, 2021.
Therefore, we have limited the scope of our management’s assessment of the effectiveness of our internal control over financial reporting in this report to
legacy Aphria and have excluded legacy Tilray. We believe this limitation of scope of our management’s assessment of the effectiveness of our internal
control over financial reporting in this report is appropriate for several reasons, including the following:
•
•
•
•
•
•
the "reverse acquisition" nature of the Arrangement, which resulted in Aphria, being considered the accounting acquirer under GAAP;
the fact that legacy Aphria’s historical results of operations replaced legacy Tilray's historical results of operations for all periods prior to the
Arrangement;
the timing of the Arrangement, which occurred after the close of business for April 30, 2021, and therefore, did not give us sufficient time to
fully incorporate the internal control over financial reporting of legacy Tilray into our internal control over financial reporting;
the financial information of legacy Tilray included in this report, which as a result after the close of business for April 30, 2021 reflects one
month of financial information for legacy Tilray;
the fact that our principal executive officer was the principal executive officer of legacy Aphria and not legacy Tilray; and
the internal control over financial reporting environment that existed after the Arrangement largely represents the internal control over
financial reporting environment of legacy Aphria.
Accordingly, we believe that management’s assessment of the effectiveness of internal control over financial reporting of legacy Aphria is more
relevant and meaningful than an assessment of the effectiveness of the internal control over financial reporting of legacy Tilray, the legal acquirer.
SweetWater and legacy Tilray’s total assets, excluding goodwill and intangibles totaled 0.4% and 9.7% of total consolidated assets as of May 31, 2021
respectively. The balances of goodwill and intangibles would be considered in the scope of legacy Aphria’s consolidation and business combination
controls, and therefore included in management’s report on internal control over financial reporting. SweetWater and Legacy Tilray’s total revenue
represented approximately 5.6% and 3.7% of our consolidated total revenue reflected in our consolidated financial statements for the year ended May 31,
2021 respectively.
129
Item 9B. Other Information.
None.
130
This Part III incorporates certain information by reference from the definitive proxy statement to be filed in connection with our 2021 Annual
Meeting of Stockholders (the “2021 Proxy Statement”). We will file the Proxy Statement with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the year ended May 31, 2021. If our Proxy Statement is not filed within 120 days of May 31, 2021,
the omitted information will be included in an amendment to this Annual Report on Form 10‑K filed not later than the end of such 120-day period.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
(1)
(2)
(3)
The information required by this Item concerning our executive officers and our directors and nominees for director, including information with
respect to our audit committee and audit committee financial expert, may be found under the section entitled “Proposal No. 1 Election of
Directors,” “Information Regarding the Board of Directors and Corporate Governance,” and “Executive Officers” appearing in the 2021 Proxy
Statement. Such information is incorporated herein by reference.
The information required by this Item concerning our code of ethics may be found under the section entitled “Information Regarding the Board of
Directors and Corporate Governance” appearing in the 2021 Proxy Statement. Such information is incorporated herein by reference.
The information required by this Item concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 may be found in the
section entitled “Delinquent Section 16(a) Reports” appearing in the 2021 Proxy Statement. Such information is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item may be found under the sections entitled “Director Compensation”, “Executive Compensation” and “Equity
Compensation Plan Information” appearing in the 2021 Proxy Statement. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
(1)
(2)
The information required by this Item with respect to security ownership of certain beneficial owners and management may be found under the
section entitled “Security Ownership of Certain Beneficial Owners and Management” appearing in the 2021 Proxy Statement. Such information is
incorporated herein by reference.
The information required by this Item with respect to securities authorized for issuance under our equity compensation plans may be found under
the sections entitled “Equity Compensation Plan Information” appearing in the 2021 Proxy Statement. Such information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
(1)
(2)
The information required by this Item concerning related party transactions may be found under the section entitled “Transactions with Related
Persons” appearing in the 2021 Proxy Statement. Such information is incorporated herein by reference.
The information required by this Item concerning director independence may be found under the sections entitled “Information Regarding the
Board of Directors and Corporate Governance—Independence of the Board of Directors” and “Information Regarding the Board of Directors and
Corporate Governance—Information Regarding Committees of the Board of Directors” appearing in the 2021 Proxy Statement. Such information
is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item may be found under the section entitled “Proposal No. 3 - Ratification of Appointment of Independent
Registered Public Accounting Firm” appearing in the 2021 Proxy Statement. Such information is incorporated herein by reference.
131
Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed as part of this report:
PART IV
(1)
(2)
(3)
Financial Statements and Report of Independent Registered Public Accounting Firm
Financial Statement Schedules
Financial Statement Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in
the financial statements or notes thereto.
Exhibits are incorporated herein by reference or are filed with this report as indicated below (numbered in accordance with Item 601 of
Regulation S-K).
(b)
Exhibits
The exhibits listed below on the Exhibit Index are filed herewith or are incorporated by reference to exhibits previously filed with the SEC.
Exhibit Index
Description of Document
Exhibit No.
2.1*
Arrangement Agreement among the Registrant and High Park Gardens Inc. and
Natura Naturals Holdings Inc. dated January 21, 2019
2.2*
2.3*
2.4
Agreement and Plan of Merger and Reorganization, among the Registrant, Down
River Merger Sub, LLC, Privateer Holdings, Inc. and Michael Blue as the
Stockholder Representative, dated September 9, 2019
Arrangement Agreement between the Registrant and Aphria Inc., dated
December 15, 2020
Amendment No.1 to Arrangement Agreement between the Registrant and Aphria
Inc., dated February 19, 2021
3.1
Amended and Restated Certificate of Incorporation, as currently in effect
Schedule
Form
8-K
8-K
8-K
8-K
8-K
3.2
Certificate of Retirement of Class 1 Common Stock
8-A/A
3.3
Amended and Restated Bylaws, as currently in effect
4.1
4.2
Indenture dated as of April 23, 2019, between Aphria Inc. and GLAS Trust
Company LLC, relating to Aphria Inc.’s 5.25% Convertible Senior Notes due
2024
First Supplemental Indenture dated as of April 30, 2021, among Aphria Inc., the
Registrant and GLAS Trust Company LLC.
4.3
Description of Securities of the Registrant
4.4
Form of Pre-Funded Warrant
8-K
8-K
8-K
10-K
8-K
132
File
Incorporate by Reference
Number Exhibit
001-
38594
2.1
Filing Date
1/25/2019
File
Herewith
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
2.1
9/10/2019
2.1
2.1
3.1
3.1
3.4
4.1
4.2
4.3
4.1
12/21/2020
2/22/2021
12/17/2019
10/1/2020
4/16/2021
5/4/2021
5/4/2021
2/19/2021
03/17/2020
Exhibit No.
4.5
Form of Warrant
Description of Document
Schedule
Form
8-K
10.1+
Amended and Restated 2018 Equity Incentive Plan
10.2+
10.3+
Form of Stock Option Agreement, Notice of Exercise and Stock Option Grant
Notice under the Amended and Restated 2018 Equity Incentive Plan
Form of Restricted Stock Unit Award Agreement under the Amended and
Restated 2018 Equity Incentive Plan
10.4+
Privateer Holdings Inc. 2011 Equity Incentive Plan as amended
Forms of Notice of Stock Option Grant, Stock Option Agreement and Exercise
Notice and Restricted Stock Purchase Agreement for Privateer Holdings Inc.
2011 Equity Incentive Plan
Form of Indemnity Agreement by and between the Registrant and its directors
and officers
Employment Agreement by and between the Registrant and Brendan Kennedy
dated May 30, 2018
Resignation Letter and Release by and between Tilray and Brendan Kennedy
dated December 15, 2020
Credit Facility Agreement between Lafitte Ventures, Ltd. and Privateer Holdings,
Inc., dated January 1, 2016
Clarification of Credit Facility Agreement between Lafitte Ventures, Ltd. and
Privateer Holdings, Inc., dated March 5, 2018
Construction Facility Agreement between Privateer Holdings, Inc. and Bouchard
Ventures, Ltd., dated November 1, 2017
Product and Trademark License Terms & Conditions, between Docklight LLC,
and High Park Holdings Ltd, dated December 17, 2018
First Amendment to Product and Trademark Licensing Agreement between
Docklight Brands, Inc., successor to Docklight, LLC, and High Park Holdings
Ltd, dated December 3, 2020
Board Services Agreement by and between the Registrant and Michael Auerbach
dated June 1, 2018
Board Services Agreement by and between the Registrant and Rebekah Dopp
dated June 1, 2018
Board Services Agreement by and between the Registrant and Christine St. Clare
dated June 1, 2018
10.5+
10.6
10.7+
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
Payment Agreement by and between the Registrant and ABG Intermediate
Holdings 2, LLC dated January 14, 2019
10-K
133
File
Herewith
File
Incorporate by Reference
Number Exhibit
001-
38594
4.2
Filing Date
03/17/2020
10.2
7/9/2018
10.3
7/9/2018
10.4
7/9/2018
99.1
12/19/2019
99.2
12/19/2019
10.1
8/10/2020
10.6
6/20/2018
5.02
12/21/2020
10.9
6/20/2018
10.10
6/20/2018
10.11
6/20/2018
10.11
2/19/2021
10.12
2/19/2021
10.14
7/9/2018
10.15
7/9/2018
10.17
7/9/2018
10.18
3/2/2020
333-
225741
333-
225741
333-
225741
333-
235581
333-
235581
001-
38594
333-
225741
001-
38594
333-
225741
333-
225741
333-
225741
001-
38594
001-
38594
333-
225741
333-
225741
333-
225741
001-
38594
S-1
S-1
S-1
S-8
S-8
8-K
S-1
8-K
S-1
S-1
S-1
10-K
10-K
S-1
S-1
S-1
Exhibit No.
10.18†
Amended and Restated Profit Participation Agreement by and between the
Registrant and ABG Intermediate Holdings 2, LLC dated January 24, 2020
Description of Document
Schedule
Form
10-K
File
Incorporate by Reference
Number Exhibit
10.19
001-
38594
Filing Date
3/2/2020
File
Herewith
10.19
10.20
10.21+
10.22+
10.23+
10.24+
10.25+
10.26+
10.27+
10.28+
10.29+
10.30+
10.31*
10.32*
10.33*
10.34*
Sales Agreement, dated as of September 10, 2019, by and between the Registrant
and Cowen and Company, LLC
8-K
First Amendment to Payment Agreement by and between the Registrant and
ABG Intermediate Holdings 2, LLC dated January 24, 2020
Employment Agreement by and between the Registrant and Andrew Pucher, Jr.
dated November 8, 2018
10-K
10-K
Separation Agreement and Complete Release by and between the Registrant and
Andrew Pucher, dated February 8, 2021
8-K
Employment Agreement by and between the Registrant and Jon Levin, dated
January 13, 2020
Amendment to Employment Agreement by and between Jon Levin and the
Registrant dated September 21, 2020
10-K
10-Q
Separation Agreement and Complete Release dated as of April 29, 2021, by and
between Jon Levin and the Registrant
8-K
Employment Agreement by and between the Registrant and Michael Kruteck,
dated January 20, 2020
10-K
Separation Agreement and Complete Release dated as of April 30, 2021, by and
between Michael Kruteck and the Registrant
8-K
Employment Agreement by and between the Registrant and Kathryn Dickson,
dated November 20, 2019
10-Q
S-1
8-K
10-K
8-K
Employment Agreement by and between the Registrant and Edward Wood
Pastorius, Jr. dated May 30, 2018
Separation Agreement and Complete Release by and between the Registrant and
Edward Wood Pastorius, Jr., dated October 21, 2020
Credit Agreement, dated as of February 28, 2020, between High Park Holdings,
Ltd. and Bridging Finance Inc.
First Amendment, dated as of June 5, 2020, to loan facility letter agreement dated
as of February 28, 2020, among Bridging Finance Inc., as agent for and on behalf
of any of the funds managed or co-managed by Bridging Finance Inc., and High
Park Holdings Ltd.
Guarantee by and among the Registrant and certain guarantors named therein and
Bridging Finance Inc., dated February 28, 2020.
U.S. Pledge and Security Agreement, by and among the Registrant, Manitoba
Harvest USA LLC and Bridging Finance Inc., dated February 28, 2020.
134
1.1
9/10/2019
10.21
3/2/2020
10.22
3/2/2020
10.1
2/12/2021
10.23
3/2/2020
10.1
11/9/2020
10.3
5/4/2021
10.24
3/2/2020
10.2
5/4/2021
10.5
5/11/2020
10.8
6/20/2018
10.1
10/27/2020
10.25
3/2/2020
10.1
6/11/2020
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
001-
38594
333-
225741
001-
38594
001-
38594
001-
38594
10-K
10-K
001-
38594
001-
38594
10.26
3/2/2020
10.27
3/2/2020
Exhibit No.
10.35*
Canadian Security Agreement, by and among High Park Holdings, Ltd., each of
the obligors named therein, and Bridging Finance Inc., dated February 28, 2020.
Description of Document
Schedule
Form
10-K
File
Incorporate by Reference
Number Exhibit
10.28
001-
38594
Filing Date
3/2/2020
File
Herewith
10.36
10.37
Support Agreement by and between the Registrant and Aphria Inc., dated
December 15, 2020
Support Agreement by and between the Registrant and Aphria Inc., dated
December 15, 2020
10.38+
Retention Agreements, by and between the Registrant and each of Michael
Kruteck and Jon Levin
8-K
8-K
8-K
10.1
12/21/2020
10.2
12/21/2020
10.3
12/21/2020
001-
38594
001-
38594
001-
38594
10.39
10.40
10.41
21.1
23.1
31.1
31.2
32.1
101
Common Share Purchase Warrant Agreement, between Aphria Inc. and
Computershare Trust Company of Canada, dated January 30, 2020
Credit Agreement between 1974568 Ontario Limited, as borrower, certain of its
subsidiaries as guarantors, Aphria Inc., as guarantor, and Bank of Montreal, as
administrative agent, and Bank of Montreal, ATB Financial and Farm Credit
Canada, as lenders, dated November 29, 2019
Agreement of Merger and Acquisition, among Aphria Inc., Project Golf Merger
Sub, LLC, SW Brewing Company, LLC, SWBC Craft Holdings LP, SWBC Craft
Management, LLC, SWBC Blocker Seller, LP, and Chilly Water, LLC, dated
November 4, 2020
Subsidiaries of Registrant
Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-
14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-
14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The following financial statements from the Company's Annual Report on Form
10-K for the year ended May 31, 2021, formatted in Inline XBRL: (i)
Consolidated Statements of Financial Position, (ii) Consolidated Statements of
Loss and Comprehensive Loss, (iii) Consolidated Statements of Changes in
Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to
Consolidated Financial Statements, tagged as blocks of text and including
detailed tags.
135
X
X
X
X
X
X
X
X
Exhibit No.
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
Description of Document
Schedule
Form
Incorporate by Reference
Number Exhibit
File
Filing Date
File
Herewith
+
*
†
Indicates management contract or compensatory plan.
Schedules and certain other information have been omitted pursuant to Item 601(b)(2) of Regulations S-K. The registrant will furnish copies of any
such schedules to the Securities and Exchange Commission upon request.
Registrant has omitted portions of the referenced exhibit pursuant to a request for confidential treatment under Rule 406 promulgated under the
Securities Act.
Item 16. Form 10-K Summary.
None.
136
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: July 28, 2021
Tilray, Inc.
By:
/s/ Irwin D. Simon
Irwin D. Simon
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
Name
Title
/s/ Irwin D. Simon
Irwin D. Simon
/s/ Carl Merton
Carl Merton
/s/ Renah Persofsky
Renah Perofsky
/s/ Jodi Butts
Jodi Butts
/s/ David Clanachan
David Clanachan
/s/ Brendan Kennedy
Brendan Kennedy
/s/ John M. Herhalt
John M. Herhalt
/s/ David Hopkinson
David Hopkinson
/s/ Tom Looney
Tom Looney
/s/ Walter Robb
Walter Robb
Chief Executive Officer and Chairman
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
137
Date
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
July 28, 2021
Exhibit 10.39
APHRIA INC.
- and -
COMPUTERSHARE TRUST COMPANY OF CANADA
COMMON SHARE PURCHASE WARRANT INDENTURE
Providing for the Issue of
up to 7,022,472 Common Share Purchase Warrants
January 30, 2020
TABLE OF CONTENTS
ARTICLE 1 INTERPRETATION
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
1.10
Definitions
Words Importing the Singular
Interpretation not Affected by Headings
Day not a Business Day
Time of the Essence
Governing Law
Meaning of “outstanding” for Certain Purposes
Currency
Termination
Calculations
ARTICLE 2 APPOINTMENT OF WARRANT AGENT
2.1
Appointment of Warrant Agent
ARTICLE 3 ISSUE OF WARRANTS
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
3.17
3.18
3.19
Issue of Warrants
Form and Terms of Warrants
Signing of Warrant Certificates
Authentication or Certification by the Warrant Agent
Warrantholder not a Shareholder, etc.
Issue in Substitution for Lost Warrant Certificates
Warrants to Rank Pari Passu
Registration and Transfer of Warrants
Registers Open for Inspection
Exchange of Warrant Certificates
Ownership of Warrants
Book-Based System Warrants
Adjustment of Exchange Basis
Rules Regarding Calculation of Adjustment of Exchange Basis
Postponement of Subscription
Notice of Adjustment
No Action after Notice
Optional Purchases by the Company
Protection of Warrant Agent
ARTICLE 4 EXERCISE OF WARRANTS
4.1
4.2
4.3
4.4
4.5
4.6
Method of Exercise of Warrants
No Fractional Warrant Shares
Effect of Exercise of Warrants
Cancellation of Warrants
Subscription for less than Entitlement
Expiration of Warrant
iii
Page
2
2
7
7
7
7
7
7
7
7
8
8
8
8
8
8
9
9
10
10
11
11
12
12
12
12
14
18
20
20
20
21
21
22
22
23
23
24
24
24
TABLE OF CONTENTS
(continued)
4.7
Restrictions Related to U.S. Securities Laws
ARTICLE 5 COVENANTS
5.1
5.2
5.3
5.4
5.5
General Covenants of the Company
Cannabis Compliance
Securities Qualification Requirements
Warrant Agent’s Remuneration and Expenses
Performance of Covenants by Warrant Agent
ARTICLE 6 ENFORCEMENT
6.1
6.2
Suits by Warrantholders
Limitation of Liability
ARTICLE 7 MEETINGS OF WARRANTHOLDERS
Right to Convene Meetings
Notice
Chairman
Quorum
Power to Adjourn
Show of Hands
Poll and Voting
Regulations
Company, Warrant Agent and Counsel may be Represented
Powers Exercisable by Extraordinary Resolution
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11 Meaning of “Extraordinary Resolution”
7.12
7.13 Minutes
7.14
7.15
7.16
Powers Cumulative
Instruments in Writing
Binding Effect of Resolutions
Holdings by the Company or Subsidiaries of the Company Disregarded
ARTICLE 8 SUPPLEMENTAL INDENTURES AND SUCCESSOR COMPANIES
8.1
8.2
Provision for Supplemental Indentures for Certain Purposes
Successor Companies
ARTICLE 9 CONCERNING THE WARRANT AGENT
9.1
9.2
9.3
9.4
9.5
9.6
9.7
Indenture Legislation
Rights and Duties of Warrant Agent
Evidence, Experts and Advisers
Securities, Documents and Monies Held by Warrant Agent
Actions by Warrant Agent to Protect Interests
Warrant Agent not Required to Give Security
Protection of Warrant Agent
iv
Page
24
25
25
26
28
29
29
30
30
30
30
30
30
31
31
31
31
32
32
32
33
34
34
35
35
35
35
36
36
37
37
37
37
38
40
40
40
40
TABLE OF CONTENTS
(continued)
Replacement of Warrant Agent
9.8
Conflict of Interest
9.9
9.10
Acceptance of Duties and Obligations
9.11 Warrant Agent not to be Appointed Receiver
Authorization to Carry on Business
9.12
Securities Exchange Commission Certification
9.13
ARTICLE 10 GENERAL
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Notice to the Company and the Warrant Agent
Notice to the Warrantholders
Privacy
Third Party Interests
Discretion of Directors
Satisfaction and Discharge of Indenture
Provisions of Indenture and Warrants for the Sole Benefit of Parties and Warrantholders
Ownership of Warrants
Indenture to Prevail
Assignment
Counterparts and Formal Date
Force Majeure
Severability
Rights of Rescission and Withdrawal for Holders
SCHEDULE A FORM OF WARRANT CERTIFICATE
SCHEDULE B FORM OF DECLARATION FOR REMOVAL OF LEGEND
SCHEDULE C FORM OF U.S. WARRANTHOLDER CERTIFICATION UPON EXERCISE OF WARRANTS
Page
42
43
43
43
44
44
44
44
45
46
46
46
47
47
47
47
47
48
48
48
48
v
B E T W E N:
APHRIA INC.
a corporation continued under the laws of Ontario (hereinafter called
the “Company”)
COMPUTERSHARE TRUST COMPANY OF CANADA
a trust company continued under the laws of Canada and registered to carry on business in the
Province of Ontario
A N D
(hereinafter called the “Warrant Agent”)
RECITALS
WHEREAS:
THIS WARRANT
INDENTURE
dated as of January
30, 2020
A.
B.
C.
D.
E.
The Company is proposing to issue up to a maximum of 7,022,472 Warrants pursuant to this Indenture, which are
issuable in connection with an offering of 14,044,94 Units of the Company (the “Offering”) by way of a
prospectus supplement to the (final) short form base shelf prospectus of the Company dated as of November 22,
2019 filed in each of the provinces and territories of Canada.
Each whole Warrant entitles the holder thereof to purchase, subject to adjustment in certain events, one Warrant
Share at a price of $9.26 at any time prior to 5:00 p.m. (Toronto time) on January 30, 2022, subject to earlier expiry
in accordance with this Indenture;
For such purpose the Company deems it necessary to create and issue Warrants and Warrant Certificates to be
constituted and issued in the manner hereinafter set forth;
The Company is duly authorized to create and issue the Warrants to be issued as herein provided;
All things necessary have been done and performed by the Company to make the Warrants, when Authenticated or
certified by the Warrant Agent and issued as provided in this Indenture, legal, valid and binding upon and
obligations of the Company that are entitled to the benefits of and subject to the terms of this Indenture;
F.
The foregoing recitals are made as statements of fact by the Company and not by the Warrant Agent;
G.
The Warrant Agent has agreed to enter into this Indenture and to hold all rights, interests and benefits contained
herein for and on behalf of those persons who become holders of Warrants issued pursuant to this Indenture from
time to time;
NOW THEREFORE THIS INDENTURE WITNESSES that for good and
valuable consideration mutually given and received, the receipt and sufficiency of which are hereby acknowledged, it is
hereby agreed and declared as follows:
1.1
Definitions
ARTICLE 1
INTERPRETATION
In this Indenture, unless there is something in the subject matter or context inconsistent therewith:
“Applicable Legislation” means the provisions of the statutes of Canada and its provinces and the regulations under those
statutes relating to warrant indentures and/or the rights, duties or obligations of issuers and warrant agents under warrant
indentures as are from time to time in force and applicable to this Indenture;
“Approved Bank” has the meaning ascribed to that term in Section 9.4;
“Authenticated” means with respect to the issuance of an Uncertificated Warrant, that all Internal Procedures
required to be completed by the Warrant Agent have been so completed such that the particulars of such Uncertificated
Warrant are entered in the register of Warrantholders, and “Authenticate”, “Authenticating” and “Authentication” have
the appropriate correlative meanings;
“Beneficial Owner” means a person that has a beneficial interest in a Warrant;
“Book-Based System” means the book-based securities system administered by CDS in accordance with its operating
rules and procedures in force from time to time;
“Business Day” means a day that is not a Saturday, Sunday, or a day on which banks are closed or which is a civic or
statutory holiday in the City of Toronto, Ontario;
“Cannabis Permits” means all permits or licences of any nature held by the Corporation or any subsidiary of the
Corporation, as of the date of this Indenture or thereafter, under Canadian federal, provincial and territorial law, and
regulations made thereunder, that are necessary to lawfully conduct or maintain, directly or indirectly, its cannabis-related
activities and interests;
“Capital Reorganization” has the meaning ascribed to that term in subsection 3.13(4); “CDS” means CDS
Clearing and Depository Services Inc. and its successors in interest; “CDS Participant” means a person
recognized by CDS as a participant;
- 2 -
“Common Shares” means the common shares in the capital of the Company;
“Common Share Reorganization” has the meaning ascribed to that term in subsection 3.13(1);
“Company” means Aphria Inc., a corporation continued under the laws of Ontario, and its lawful successors from
time to time;
“Company’s Auditors” means the chartered (professional) accountant or firm of chartered (professional) accountants duly
appointed as auditor or auditors of the Company from time to time;
“Confirmation” means that CDS shall deliver to the Warrant Agent confirmation of its intention to exercise Warrants in a
manner acceptable to the Warrant Agent, including by electronic means through the Book-Based System;
“counsel” means a barrister and solicitor or lawyer or a firm of barristers and solicitors or lawyers (who may be counsel to
the Company), in both cases acceptable to the Warrant Agent;
“Current Market Price” means, at any date, the volume weighted average price per share at which the Common Shares
have traded:
(i)
(ii)
(iii)
on the TSX;
if the Common Shares are not listed on the TSX, on any stock exchange upon which the Common Shares are
listed as may be selected for this purpose by the board of directors of the Company, acting reasonably; or
if the Common Shares are not listed on any stock exchange, on any over-the-counter market on which the
Common Shares are trading, as may be selected for this purpose by the board of directors of the Company, acting
reasonably;
during the 10 consecutive trading days ending the third trading day before such date and the weighted average price shall
be determined by dividing the aggregate sale price of all Common Shares sold in board lots on the exchange or
market, as the case may be, during the 10 consecutive trading days by the number of Common Shares sold or, if not
traded on any recognized exchange or market, as determined by the directors of the Company, acting reasonably;
“director” means a member of the board of directors of the Company for the time being, and unless otherwise specified
herein, reference to “action by the board of directors” means action by the board of directors of the Company as a board
or, whenever duly empowered, action by a committee of the board;
“Exchange Basis” means, at any time, the number of Warrant Shares or other classes of shares or securities which a
Warrantholder is entitled to receive upon the exercise of the rights attached to the Warrants pursuant to the terms of this
Indenture, as the number may be adjusted pursuant to Section 3.13 hereof, such number being equal to one Warrant Share
per Warrant as of the date hereof;
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“Exercise Date” with respect to any Warrant means the date on which such Warrant is duly surrendered for exercise in
accordance with the provisions of Article 4 hereof;
“Exercise Price” means $9.26 for each Warrant Share, subject to adjustment in accordance with the provisions of this
Indenture;
“extraordinary resolution” has the meaning ascribed to that term in sections 7.11 and 7.14;
“Governmental Authority” or “Governmental Authorities” means any of the governments of Canada, the United States
of America, any other nation or any political subdivision thereof, whether provincial, state, territorial or local, and any
agency, authority, instrumentality, regulatory body, court, central bank, fiscal or monetary authority or other authority
regulating financial institutions, and any other entity exercising executive, legislative, judicial, taxing, regulatory or
administrative powers or functions of or pertaining to government;
“Internal Procedures” means in respect of the making of any one or more entries to, changes in or deletions of any one or
more entries in the register of Warrantholders at any time (including without limitation, original issuance or registration of
transfer of ownership) the minimum number of the Warrant Agent’s internal procedures customary at such time for the
entry, change or deletion made to be complete under the operating procedures followed at the time by the Warrant Agent;
“NCI” has the meaning ascribed to that term in subsection 3.12(1);
“Offering” the public offering in Canada by the Company of up to an aggregate of 14,044,944 Units;
“person” means an individual, a corporation, a partnership, a syndicate, a trustee or any unincorporated organization and
words importing persons that are intended to have a similarly extended meaning;
“Purchaser” means a purchaser of Units;
“Regulation D” means Regulation D as promulgated under the U.S. Securities Act; “Regulation S” means
Regulation S as promulgated under the U.S. Securities Act; “Rights Offering” has the meaning ascribed to
that term in subsection 3.13(2); “Rights Offering Price” has the meaning ascribed to that term in subsection
3.14(9); “Rule 144A” means Rule 144A as promulgated under the U.S. Securities Act; “SEC” means the
United States Securities and Exchange Commission;
“Securities Laws” means, collectively, the applicable securities laws of each of the provinces of Canada, the United States
and each of the states of the United States, as applicable, and the respective regulations made and forms prescribed
thereunder together with all applicable published rules, policy statements, notices and blanket orders and rulings of the
securities
- 4 -
commissions or similar regulatory authorities in each of the provinces of Canada;
“shareholder” means an owner of record of one or more Common Shares or shares of any other class or series of the
Company;
“Special Distribution” has the meaning ascribed to that term in subsection 3.13(3);
“Subsidiary” means a corporation, a majority of the outstanding voting shares of which are owned, directly or indirectly,
by the Company or by one or more subsidiaries of the Company and, as used in this definition, “voting shares” means
shares of a class or classes ordinarily entitled to vote for the election of the majority of the directors of a corporation
irrespective of whether or not shares of any other class or classes shall have or might have the right to vote for directors by
reason of the happening of any contingency;
“successor company” has the meaning ascribed to that term in section 8.2;
“this Indenture”, “herein”, “hereby” and similar expressions mean or refer to this common share purchase warrant
indenture and any indenture, deed or instrument supplemental or ancillary hereto; and the expressions “Article”,
“section”, “subsection” or “paragraph” followed by a number or letter mean and refer to the specified Article, section,
subsection or paragraph of this Indenture;
“Time of Expiry” means 5:00 p.m. (Toronto time) on January 30, 2022, or 5:00 p.m. (Toronto time) on such earlier date as
may be established by the in accordance with the terms of this Indenture;
“trading day” means a day on which the TSX (or such other exchange on which the Common Shares are listed and which
forms the primary trading market for such shares) is open for trading, and if the Common Shares are not listed on a stock
exchange, a day on which an over-the- counter market where such shares are traded is open for business;
“transaction instruction” means a written order signed by the holder or CDS, entitled to request that one or more actions
be taken, or such other form as may be reasonably acceptable to the Warrant Agent, requesting one or more such actions to
be taken in respect of an Uncertificated Warrant;
“Transfer Agent” means the transfer agent or agents for the time being for the Common Shares; “TSX” means the Toronto
Stock Exchange;
“U.S. Person” means a U.S. Person as that term is defined in Rule 902(k) of Regulation S;
“U.S. Securities Act” means the United States Securities Act of 1933, as amended and the rules and regulations
promulgated thereunder;
“U.S. Warrantholder” means any (a) Warrantholder that (i) is a U.S. Person, (ii) is in the United States, (iii)
received an offer to acquire Warrants while in the United States, or (iv) was in the United States at the time such
Warrantholder's buy order was made or such Warrantholder
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executed or delivered its purchase order for the Warrants or (b) person who acquired Warrants on behalf of, or for the
account or benefit of, any U.S. Person or any person in the United States;
“Uncertificated Warrant” means any Warrant which is issued under the Book-Based System; “Unit Share” means a
Common Share comprising part of each Unit;
“United States” means the United States as that term is defined in Rule 902(l) of Regulation S;
“Units” means the units of the Company, each Unit being comprised of one Unit Share and one- half of one Warrant;
“Warrant Agent” means Computershare Trust Company of Canada, a trust company existing under the laws of Canada, or
any lawful successor thereto including through the operation of section 9.8;
“Warrant Certificates” means the certificates representing Warrants substantially in the form attached as Schedule A
hereto or such other form as may be approved by the Company and the Warrant Agent;
“Warrant Shares” means the Common Shares or other securities or property issuable upon the exercise of the Warrants as
a result of any adjustment to the subscription rights pursuant to Section 3.13 hereof;
“Warrantholders” or “holders” means the persons whose names are entered for the time being in the register maintained
pursuant to section 3.8;
“Warrantholders’ Request” means an instrument, signed in one or more counterparts by Warrantholders representing, in
the aggregate, at least 25% of the aggregate number of Warrants then outstanding, which requests the Warrant Agent or the
Company to take some action or proceeding specified therein;
“Warrants” means the common share purchase warrants of the Company issued and Authenticated hereunder as
Uncertificated Warrants or to be issued and countersigned in the form of Warrant Certificates, in either case, entitling
the holders thereof to purchase Warrant Shares on the basis of one Warrant Share for each whole Warrant upon payment of
the Exercise Price at any time prior to the Time of Expiry; provided that in each case the number and/or class of shares or
securities receivable on the exercise of the Warrants may be subject to increase or decrease or change in accordance with
the terms and provisions hereof; and
“written direction of the Company”, “written request of the Company”, “written consent of the Company” and
“certificate of the Company” and any other document required to be signed by the Company, means, respectively, a
written direction, request, consent, certificate or other document signed in the name of the Company by any executive
officer or director and may consist of one or more instruments so executed.
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1.2
Words Importing the Singular
Unless elsewhere otherwise expressly provided, or unless the context otherwise requires, words
importing the singular include the plural and vice versa and words importing the masculine gender include the feminine
and neuter genders.
1.3
Interpretation not Affected by Headings
The division of this Indenture into Articles, sections, subsections and paragraphs, the provision of a table
of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or
interpretation of this Indenture.
1.4
Day not a Business Day
If any day on or before which any action is required or permitted to be taken hereunder is not a Business
Day, then such action shall be required or permitted to be taken on or before the requisite time on the next succeeding day
that is a Business Day.
1.5
Time of the Essence
Time shall be of the essence in all respects of this Indenture and the Warrants issued hereunder.
1.6
Governing Law
This Indenture and the Warrants issued hereunder shall be construed and enforced in accordance with the
laws of the Province of Ontario and the federal laws of Canada applicable therein and shall be treated in all respects as
Ontario contracts.
1.7
Meaning of “outstanding” for Certain Purposes
Every Warrant Authenticated or certified by the Warrant Agent hereunder shall be deemed to be
outstanding until it shall be cancelled or delivered to the Warrant Agent for cancellation, exercised pursuant to section 4.1
or until the Time of Expiry; provided that where a new Warrant Certificate has been issued pursuant to section 3.6 hereof to
replace one which is lost, mutilated, stolen or destroyed, the Warrants represented by only one of such Warrant Certificates
shall be counted for the purpose of determining the aggregate number of Warrants outstanding.
1.8
Currency
Unless otherwise stated, all dollar amounts referred to in this Indenture are in Canadian dollars.
1.9
Termination
This Indenture shall continue in full force and effect until the earlier of: (a) the Time of Expiry; and (b)
the date that no Warrants are outstanding hereunder; provided that this Indenture shall continue in effect thereafter, if
applicable, until the Company and the Warrant
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Agent have fulfilled all of their respective obligations under this Indenture.
1.10
Calculations
All calculations called for hereunder including, without limitation, calculations of Current Market Price
shall be as determined by the Company or, at the Warrantholders Request, such firm of independent chartered accountants
as may be selected by the directors of the Company, acting reasonably, and in good faith in their sole discretion for these
purposes. Such calculations made in good faith and, absent manifest error, shall be final and binding on holders and the
Warrant Agent. The Company will provide a schedule of its calculations to the holders and the Warrant Agent. The Warrant
Agent shall be entitled to rely conclusively on the accuracy of such calculations without independent verification.
ARTICLE 2
APPOINTMENT OF WARRANT AGENT
2.1
Appointment of Warrant Agent
The Company hereby appoints the Warrant Agent as the warrant agent and registrar for the Warrants and
the Warrant Agent hereby accepts such appointment and agrees to enter into this Indenture and to hold all rights, interests
and benefits contained herein for and on behalf of those persons who become holders of Warrants issued pursuant to this
Indenture from time to time.
3.1
Issue of Warrants
ARTICLE 3
ISSUE OF WARRANTS
(1)
A maximum of 7,022,472 Warrants are hereby created and authorized to be issued
hereunder entitling the registered holders thereof to acquire an aggregate of 7,022,472 Warrant Shares (subject to
adjustment in accordance with Section 3.13) at the Exercise Price upon the terms and conditions herein set forth.
Uncertificated Warrants shall be Authenticated by the Warrant Agent and deposited in CDS and Warrant Certificates
evidencing the Warrants, if any, shall be executed by the Company, certified by or on behalf of the Warrant Agent and
delivered by the Warrant Agent to the Company, as applicable, in accordance with a written direction of the Company, all
in accordance with sections 3.3 and 3.4. Subject to adjustment in accordance with the provisions of this Indenture, each of
the Warrants issued hereunder shall entitle the holder thereof to receive from the Company, upon payment of the Exercise
Price, the number of Warrant Shares equal to the Exchange Basis in effect on the Exercise Date.
3.2
Form and Terms of Warrants
(1)
The Warrants may be issued in either certificated or uncertificated form. The Warrant
Certificates shall be substantially in the form attached as Schedule A hereto and dated as of the date of issue, subject to the
provisions of this Indenture, with such additions, variations and changes as may be required or permitted by the terms of
this Indenture, and to give effect to any Warrants not being issued as Uncertificated Warrants, and which may from time to time
be agreed upon
- 8 -
by the Warrant Agent and the Company, and shall have such distinguishing letters and numbers as the Company may, with the
approval of the Warrant Agent, prescribe. Except as hereinafter provided in this Article 3, all Warrants shall, save as to
denominations, be of like tenor and effect. The Warrant Certificates may be engraved, printed, lithographed, photocopied or be
partially in one form or another, as the Company may determine. No change in the form of the Warrant Certificate shall be required by
reason of any adjustment made pursuant to this Article 3 in the number and/or class of securities or type of securities or other
property that may be acquired pursuant to the exercise of Warrants.
(2)
Each Warrant authorized to be issued hereunder shall entitle the registered holder thereof to
acquire (subject to sections 3.13, 3.14 and 3.15) upon due exercise and upon the transaction instruction or due execution
of the exercise form endorsed on the Warrant Certificate, as applicable, or other instrument of exercise in such form as the
Warrant Agent and/or the Company may from time to time prescribe and upon payment of the Exercise Price, one
Warrant Share or such other kind and amount of shares or securities or property, calculated pursuant to the provisions of
sections 3.13 and 3.14, as the case may be, at any time after the date of issuance of such Warrants and prior to the Time of
Expiry, in accordance with the provisions of this Indenture.
(3)
Fractional Warrants shall not be issued or otherwise provided for and shall be disregarded
for all purposes and no cash amount will be payable in lieu thereof. If the exercise of any Warrant would result in a
fraction of a Common Share being issued to any person, any such fraction shall be rounded down to the next whole
number of Common Shares and no cash amount will be payable in lieu thereof.
3.3
Signing of Warrant Certificates
Warrant Certificates shall be signed by any one of the directors or executive officers of the Company and
may, but need not be under the corporate seal of the Company or a reproduction thereof. The signature of any such director
or officer may be mechanically reproduced in facsimile or other electronic format and Warrant Certificates bearing such
facsimile or other electronic format signatures shall be binding upon the Company as if they had been manually signed by
such director or officer. Notwithstanding that the person whose manual or electronic signature appears on any Warrant
Certificate as a director or executive officer may no longer hold office at the date of issue of the Warrant Certificate or at
the date of certification or delivery thereof, any Warrant Certificate signed as aforesaid shall, subject to section 3.4, be valid
and binding upon the Company and the registered holder thereof will be entitled to the benefits of this Indenture.
3.4
Authentication or Certification by the Warrant Agent
(1)
No Warrant Certificate shall be issued or, if issued, shall be valid for any purpose or entitle
the registered holder to the benefit hereof or thereof until it has been certified by manual signature by or on behalf of the
Warrant Agent and such certification by the Warrant Agent shall be conclusive evidence as against the Company that the
Warrant so certified has been duly issued hereunder and the holder is entitled to the benefits hereof.
(2)
No NCI deposit in the Book-Based System shall be made or, if made, shall be valid for any
purposes or entitle the holder to the benefits hereof and thereof until it has been Authenticated by the Warrant Agent and
such Authentication shall be conclusive evidence as
- 9 -
against the Company that the NCI deposit so made has been duly issued hereunder and that the holder is entitled to the
benefits hereof and thereof.
(3)
The certification of the Warrant Agent on the Warrant Certificates issued hereunder, or the
Authentication of the Warrant Agent of the NCI deposit in the Book-Based System made hereunder, as applicable, shall
not be construed as a representation or warranty by the Warrant Agent as to the validity of this Indenture or the Warrant
Certificates (except the due certification thereof) or the NCI deposit (except the due Authentication thereof) as applicable,
and the Warrant Agent shall in no respect be liable or answerable for the use made of the Warrant Certificate or NCI
deposit, as applicable, or any of them or of the consideration therefor except as otherwise specified herein.
(4)
The register shall be final and conclusive evidence as to all matters relating to
Uncertificated Warrants with respect to which this Indenture requires the Warrant Agent to maintain records or accounts.
In case of differences between the register at any time and any other time, the register at the later time shall be controlling,
absent manifest error and such Uncertificated Warrants are binding on the Company.
3.5
Warrantholder not a Shareholder, etc.
Nothing in this Indenture or the holding of a Warrant evidenced by a Warrant Certificate shall be
construed as conferring upon a Warrantholder any right or interest whatsoever as a shareholder, including but not limited
to the right to vote at, to receive notice of, or to attend meetings of shareholders or any other proceedings of the Company,
nor entitle the holder to any right or interest in respect thereof except as herein and in the Warrants expressly provided.
3.6
Issue in Substitution for Lost Warrant Certificates
(1)
If any Warrant Certificates issued and certified under this Indenture shall become mutilated
or be lost, destroyed or stolen, the Company, subject to applicable law, and subsection 3.6(2), shall issue and thereupon
the Warrant Agent shall certify and deliver a new Warrant Certificate of like denomination, date and tenor as the one
mutilated, lost, destroyed or stolen in exchange for, in place of and upon cancellation of such mutilated Warrant
Certificate, or in lieu of and in substitution for such lost, destroyed or stolen Warrant Certificate, and the substituted
Warrant Certificate shall be substantially in the form set out in Schedule A hereto and Warrants evidenced by it will entitle
the holder thereof to the benefits hereof and shall rank equally in accordance with its terms with all other Warrant
Certificates issued or to be issued hereunder.
(2)
The applicant for the issue of a new Warrant Certificate pursuant to this section 3.6 shall
bear the reasonable cost of the issue thereof and in the case of mutilation shall, as a condition precedent to the issue
thereof, deliver to the Warrant Agent the mutilated Warrant Certificate, and in the case of loss, destruction or theft shall,
as a condition precedent to the issue thereof, furnish to the Company and to the Warrant Agent such evidence of ownership and
of the loss, destruction or theft of the Warrant Certificate so lost, destroyed or stolen as shall be satisfactory to the Company and to
the Warrant Agent in their sole discretion and such applicant may be required to furnish an indemnity and surety bond in amount and
form satisfactory to the Company and the Warrant Agent in their sole discretion and shall pay the reasonable charges of the Company
and the Warrant Agent
- 10 -
in connection therewith.
3.7
Warrants to Rank Pari Passu
All Warrants shall rank pari passu with all other Warrants, whatever may be the actual date of issue of
the Warrants.
3.8
Registration and Transfer of Warrants
(1)
The Warrant Agent will create and keep at the principal office of the Warrant Agent in the
City of Toronto, Ontario:
(a)
(b)
a register of holders in which shall be entered in alphabetical order the names and addresses of the holders
of Warrants and particulars of the Warrants held by them and the Warrant Agent shall be entitled to rely on
such register in connection with the exchange, transfer or exercise of any Warrant(s) pursuant to the terms
of this Indenture or the terms thereof; and
a register of transfers in which all transfers of Warrants and the date and other particulars of each such
transfer shall be entered.
(2)
No transfer of any Warrant will be valid unless entered on the register of transfers referred
to in subsection 3.8(1), and, in the case of a Warrant Certificate, upon surrender to the Warrant Agent of the Warrant
Certificate evidencing such Warrant, and a duly completed and executed transfer form endorsed on the Warrant Certificate
executed by the registered holder or his executors, administrators or other legal representatives or his attorney duly
appointed by an instrument in writing in form and execution satisfactory to the Warrant Agent, if applicable, and, upon
compliance with such requirements and such other reasonable requirements as the Warrant Agent may prescribe, such
transfer will be recorded on the register of transfers by the Warrant Agent.
(3)
In the case of a Warrant Certificate, the transferee of any Warrant will, after surrender to the
Warrant Agent of the Warrant Certificate evidencing such Warrant as required by subsection 3.8(2) and upon compliance
with all other conditions in respect thereof required by this Indenture or by law, be entitled to be entered on the register of
holders referred to in subsection 3.8(1) as the owner of such Warrant free from all equities or rights of set-off or
counterclaim between the Company and the transferor or any previous holder of such Warrant, except in respect of
equities or rights of which the Company is required to take notice by statute or by order of a court of competent
jurisdiction.
(4)
The Company will be entitled, and may direct the Warrant Agent, to refuse to recognize any
transfer, or enter the name of any transferee, of any Warrant on the registers referred to in subsection 3.8(1), if such
transfer would constitute a violation of the Securities Laws of any applicable jurisdiction or the rules, regulations or policies
of any regulatory authority having jurisdiction. The Warrant Agent is entitled to assume compliance with all applicable Securities
Laws unless otherwise notified in writing by the Company. No duty shall rest with the Warrant Agent to determine compliance of the
transferee or transferor of any Warrant with applicable Securities Laws.
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3.9
Registers Open for Inspection
The registers referred to in subsection 3.8(1) shall be open at all reasonable times during business hours
on a Business Day for inspection by the Company or any Warrantholder. The Warrant Agent shall, from time to time when
requested to do so in writing by the Company and upon payment of its reasonable fees, furnish the Company with a list of
the names and addresses of holders of Warrants entered in the register of holders kept by the Warrant Agent and showing
the number of Warrants held by each such holder.
3.10
Exchange of Warrant Certificates
(1)
Warrant Certificates may, upon compliance with the reasonable requirements of the Warrant
Agent, be exchanged for Warrant Certificates in any other authorized denomination representing in the aggregate an equal
number of Warrants as the number of Warrants represented by the Warrant Certificates being exchanged. The Company
shall sign and the Warrant Agent shall certify, in accordance with sections 3.3 and 3.4, all Warrant Certificates necessary
to carry out the exchanges contemplated herein.
(2)
Warrant Certificates may be exchanged only at the principal office of the Warrant Agent in
the City of Toronto, Ontario or at any other place that is designated by the Company with the approval of the Warrant
Agent. Any Warrant Certificates tendered for exchange shall be surrendered to the Warrant Agent and cancelled.
(3)
Except as otherwise herein provided, the Warrant Agent may charge Warrantholders
requesting an exchange a reasonable sum for each Warrant Certificate issued; and payment of such charges and
reimbursement of the Warrant Agent or the Company for any and all taxes or governmental or other charges required to be
paid shall be made by the party requesting such exchange as a condition precedent to such exchange.
3.11
Ownership of Warrants
The Company and the Warrant Agent and their respective agents may deem and treat the registered
holder of any Warrant as the absolute owner of the Warrant represented thereby for all purposes and the Company and
the Warrant Agent and their respective agents shall not be affected by any notice or knowledge to the contrary except as
required by statute or order of a court of competent jurisdiction. The holder of any Warrant shall be entitled to the rights
evidenced by that Warrant free from all equities or rights of set-off or counterclaim between the Company and the original
or any intermediate holder thereof and all persons may act accordingly and the receipt by any holder of the Warrant
Shares or monies obtainable pursuant to the exercise of the Warrant shall be a good discharge to the Company and
the Warrant Agent for the same and neither the Company nor the Warrant Agent shall be bound to inquire into the title of
any holder.
3.12
Book-Based System Warrants
(1)
Except as described above or as may be directed by the Company, registration of interests in
and transfers of Warrants shall be made only through the Book-Based System. Other than as may be directed by the
Company, the Warrants will be evidenced by a non-certificated inventory (“NCI”) deposit though the Book-Based System
for an amount representing the
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aggregate number of such Warrants outstanding from time to time.
(2)
Transfers of beneficial ownership in any Warrant represented by an NCI deposit will be
effected only (i) with respect to the interest of a CDS Participant, through records maintained by CDS or its nominee for
such Warrants, and (ii) with respect to the interest of any person other than a CDS Participant, through records maintained
by CDS Participants.
(3)
The rights of Beneficial Owners who hold security entitlements in respect of Warrants
through the Book-Based System shall be limited to those established by applicable law and agreements between CDS
and CDS Participants and between such CDS Participants and Beneficial Owners who hold security entitlements in
respect of Warrants through the Book- Based System and must be exercised through a CDS Participant in accordance with
the rules and procedures of CDS.
(4)
If any of the following events occurs:
(a)
(b)
(c)
(d)
CDS or the Company has notified the Warrant Agent that (A) CDS is unwilling or unable to continue as
depository or (B) CDS ceases to be a clearing agency in good standing under applicable laws and, in either
case, the Company is unable to locate a qualified successor depository within 90 days of delivery of such
notice;
the Company has determined, in its sole discretion, to terminate the Book-Based System in respect of such
Uncertificated Warrants and has communicated such determination to the Warrant Agent in writing;
the Company or CDS is required by applicable law to take the action contemplated in this subsection; or
the Book-Based System administered by CDS ceases to exist,
then one or more definitive fully registered Warrant Certificates shall be executed by the Company and certified and
delivered by the Warrant Agent to CDS in exchange for the Uncertificated Warrants form held by CDS.
Fully registered Warrant Certificates issued and exchanged pursuant to this subsection shall be registered in such
names and in such denominations as CDS shall instruct the Warrant Agent, provided that the aggregate number of Warrants
represented by such Warrant Certificates shall be equal to the aggregate number of Uncertificated Warrants so exchanged.
Upon exchange of Uncertificated Warrants for one or more Warrant Certificates in definitive form, such Uncertificated
Warrants shall be cancelled by the Warrant Agent.
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(5)
Notwithstanding anything in this Indenture
in terms of an NCI deposit, neither the
Company nor the Warrant Agent nor any agent thereof shall have any responsibility or liability for:
(a)
(b)
(c)
the records maintained by CDS relating to any ownership interests or any other interests in the Warrants or
the depository system maintained by CDS, or payments made on account of any ownership interest or any
other interest of any person in any Warrant represented by any NCI deposit (other than CDS or its
nominee);
maintaining, supervising or reviewing any records of CDS or any CDS Participant relating to any such
interest; or
any advice or representation made or given by CDS or those contained in this Indenture that relate to the
rules and regulations of CDS or any action to be taken by CDS on its own direction or at the direction of
any CDS Participant.
(6)
Notwithstanding any provisions made in this Indenture with respect to expiry dates,
payment dates or other acts that may be required to be done in connection with this Indenture, may be altered due to the
internal procedures and processes with respect to cut-off times of CDS. It is understood and agreed to by the parties hereto
that the Warrant Agent shall have no responsibility in connection with any cut-off time imposed by CDS.
3.13
Adjustment of Exchange Basis
events and in the manner provided as follows:
Subject to section 3.14, the Exchange Basis shall be subject to adjustment from time to time in the
(1)
Company shall:
If and whenever, at any time after the date hereof and prior to the Time of Expiry, the
(i)
(ii)
(iii)
issue Common Shares or securities exchangeable for or convertible into Common Shares to all
or substantially all the holders of the Common Shares as a stock dividend or other distribution
(other than a distribution of Warrant Shares upon exercise of the Warrants or pursuant to the
exercise, conversion or exchange of securities of the Company outstanding as of the date
hereof), or
subdivide, redivide or change its then outstanding Common Shares into a greater number of
Common Shares, or
reduce, combine or consolidate its then outstanding Common Shares into a lesser number of
Common Shares,
(any of such events in these paragraphs (i), (ii) or (iii) being called a “Common Share Reorganization”), then the
Exchange Basis in effect on the effective date of such subdivision, redivision or change, or reduction, combination or
consolidation, or on the record date of such stock dividend or other distribution, as the case may be, shall be adjusted
by multiplying the
- 14 -
Exchange Basis in effect immediately prior to such effective or record date by a fraction:
(a)
the numerator of which shall be the total number of Common Shares outstanding on such date
immediately after giving effect to such Common Share Reorganization (including, in the case where
securities exercisable, exchangeable for or convertible into Common Shares are distributed, the number of
Common Shares that would have been outstanding had such securities been exercised, or exchanged for or
converted into Common Shares on such record date, assuming in any case where such securities are not
then convertible, exercisable or exchangeable but subsequently become so, that they were convertible,
exercisable or exchangeable on the record date on the basis upon which they first become convertible,
exercisable or exchangeable), and
(b)
the denominator of which shall be the total number of Common Shares outstanding on such date before
giving effect to such Common Share Reorganization.
The resulting product, adjusted to the nearest 1/100th, shall thereafter be the Exchange Basis until further
adjusted as provided in this Article 3.
Any Common Shares owned by or held for the account of the Company or any of its Subsidiaries or a partnership
in which the Company is directly or indirectly a party to will be deemed not to be outstanding for the purpose of
any computation. To the extent that any adjustment in the Exchange Basis occurs pursuant to this subsection
3.13(1) as a result of the fixing by the Company of a record date for the distribution of securities exchangeable or
exercisable for or convertible into Common Shares and the Common Share Reorganization does not occur or any
conversion, exercise or exchange rights are not fully converted, exercised or exchanged, the Exchange Basis shall
be readjusted immediately after the expiry of any relevant exchange or conversion right or the termination of the
Common Share Reorganization, as the case may be, to the Exchange Basis that would then be in effect, based
upon the number of Common Shares actually issued and remaining issuable after such expiry and shall be further
readjusted in such manner upon the expiry of any further such right.
(2)
If and whenever, at any time after the date hereof and prior to the Time of Expiry, the
Company shall fix a record date for the distribution to all or substantially all of the holders of its outstanding Common
Shares of rights, options or warrants entitling them, for a period expiring not more than 45 days after such record date, to
subscribe for or purchase Common Shares, or securities exchangeable or exercisable for or convertible into Common
Shares, at a price per share to the holder (or at an exchange, exercise or conversion price per share) of less than 95% of the
Current Market Price on such record date (any of such events being called a “Rights Offering”), then the Exchange Basis
shall be adjusted effective immediately after such record date for the Rights Offering by multiplying the Exchange Basis
in effect immediately prior to such record date by a fraction:
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(a)
the numerator of which shall be the number of Common Shares which would be outstanding after giving
effect to the Rights Offering (assuming the exercise of all of the rights, options or warrants under the Rights
Offering and assuming the exchange, exercise or conversion into Common Shares of all exchangeable,
exercisable or convertible securities issued upon exercise of such rights, options or warrants, if any), and
(b)
the denominator of which shall be the aggregate of:
(i)
the total number of Common Shares outstanding as of the record date for the Rights Offering,
and
(ii)
a number of Common Shares determined by dividing
(A)
by
(B)
the amount equal to the aggregate consideration payable on the exercise of all of the
rights, options and warrants under the Rights Offering plus the aggregate consideration,
if any, payable on the exchange, exercise or conversion of the exchangeable or
convertible securities issued upon exercise of such rights, options or warrants
(assuming the exercise of all rights, options and warrants under the Rights Offering and
assuming the exchange or conversion of all exchangeable or convertible securities
issued upon exercise of such rights, options and warrants);
the Current Market Price as of the record date for the Rights Offering.
The resulting product, adjusted to the nearest 1/100th, shall thereafter be the Exchange Basis until further adjusted as
provided in this Article 3. Any Common Shares owned by or held for the account of the Company or any of its Subsidiaries
or a partnership in which the Company is directly or indirectly a party to will be deemed not to be outstanding for the
purpose of any computation. If, at the date of expiry of the rights, options or warrants subject to the Rights Offering, less
than all the rights, options or warrants have been exercised, then the Exchange Basis shall be readjusted effective
immediately after the date of expiry to the Exchange Basis which would have been in effect on the date of expiry if only
the rights, options or warrants issued had been those exercised. If at the date of expiry of the rights of exchange, exercise or
conversion of any securities issued pursuant to the Rights Offering less than all of such securities have been exchanged or
exercised for, or converted into, Common Shares, then the Exchange Basis shall be readjusted effective immediately after
the date of such expiry to the Exchange Basis which would have been in effect on the date of expiry if only the
exchangeable, exercisable or convertible securities issued had been those securities actually exchanged or exercised for or
converted into Common Shares.
(3)
If and whenever, at any time after the date hereof and prior to the Time of Expiry, the
Company shall fix a record date for the issuance or distribution to all or substantially
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all the holders of its outstanding Common Shares of:
(i)
(ii)
(iii)
(iv)
shares of the Company of any class other than Common Shares; or
rights, options or warrants to acquire Common Shares or securities exchangeable or
exercisable for or convertible into Common Shares; or
evidences of indebtedness; or
cash, securities or any property or other assets,
and if such issuance or distribution does not constitute a Common Share Reorganization or a Rights Offering (any of such
non-excluded events being herein called a “Special Distribution”), the Exchange Basis shall be adjusted effective
immediately after the record date for the Special Distribution by multiplying the Exchange Basis in effect on such record
date by a fraction:
(a)
the numerator of which shall be the number of Common Shares outstanding on such record date
multiplied by the Current Market Price on such record date, and
(b)
the denominator of which shall be:
(A)
less
(B)
the product of the number of Common Shares outstanding on such record date and the
Current Market Price on such record date,
the fair market value, as determined by action by the board of directors acting
reasonably and in good faith (whose determination shall, absent manifest error, be
conclusive), to the holders of the Common Shares of the shares, rights, options,
warrants, evidences of indebtedness or property or other assets issued or distributed in
the Special Distribution,
provided that no such adjustment shall be made if the result of such adjustment would be to decrease the Exchange Basis in
effect immediately before such record date. The resulting product, adjusted to the nearest 1/100th, shall thereafter be the
Exchange Basis until further adjusted as provided in this Article 3. Any shares owned by or held for the account of the
Company or its Subsidiaries or a partnership of which the Company is directly or indirectly a party to shall be deemed not
to be outstanding for the purpose of any such computation.
(4)
If and whenever, at any time after the date hereof and prior to the Time of Expiry,
there shall be a reclassification of the Common Shares at any time outstanding or change or other event pursuant to which
the Common Shares are changed or exchanged into or for other shares or into or for other securities and/or property
(including cash) (other than a Common Share Reorganization), or a consolidation, amalgamation, plan of arrangement or
merger of the Company with or into any other corporation or other entity (other than a consolidation, amalgamation, plan of
arrangement or merger which does not result in any reclassification of the outstanding Common Shares or a change or exchange of
the Common Shares into or for other shares or
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into or for other securities and/or property (including cash)), or a transfer (other than to a Subsidiary) of the undertaking or assets of
the Company as an entirety or substantially as an entirety to another corporation or other entity (any of such events being herein called
a “Capital Reorganization”), any Warrantholder who thereafter shall exercise his right to receive Warrant Shares pursuant to
Warrant(s) shall be entitled to receive, and shall accept in lieu of the number of Warrant Shares to which such holder was theretofore
entitled upon such exercise, the kind and amount of shares, other securities and/or other property (including cash) resulting
from the Capital Reorganization which such holder would have been entitled to receive as a result of such Capital Reorganization if,
on the effective date or record date thereof, as the case may be, the Warrantholder had been the registered holder of the
number of Warrant Shares to which such holder was theretofore entitled upon exercise. If appropriate, adjustments shall be made as a
result of any such Capital Reorganization in the application of the provisions set forth in this Article 3 with respect to the rights and
interests thereafter of Warrantholders to the end that the provisions set forth in this Article 3 shall thereafter correspondingly be made
applicable as nearly as may reasonably be in relation to any shares, other securities and/or other property (including cash) thereafter
deliverable upon the exercise of any Warrant. Any such adjustment shall be made by and set forth in an indenture supplemental
hereto approved by the directors and by the Warrant Agent and entered into pursuant to the provisions of this Indenture and shall for
all purposes be conclusively deemed to be an appropriate adjustment.
(5)
Any adjustment to the Exchange Basis as set forth herein (except resulting from a Capital
Reorganization) shall also include a corresponding adjustment to the Exercise Price which shall be calculated by
multiplying the Exercise Price by a fraction: (a) the numerator of which shall be the Exchange Basis prior to the
adjustment, and (b) the denominator of which shall be the Exchange Basis after the adjustment.
3.14
Rules Regarding Calculation of Adjustment of Exchange Basis For the purposes
of section 3.13:
(1)
The adjustments provided for in section 3.13 shall be cumulative and such adjustments shall
be made successively whenever an event referred to in section 3.13 shall occur, subject to the following subsections of this
section 3.14.
(2)
No adjustment in the: (a) Exchange Basis shall be required unless such adjustment would
result in a change of at least 0.01 of a Warrant Share based on the prevailing Exchange Basis; or (b) Exercise Price shall
be required unless such adjustment would result in a change of at least 1%, provided that any adjustments which, except
for the provisions of this subsection, would otherwise have been required to be made, shall be carried forward and taken
into account in any subsequent adjustment.
(3)
No adjustment in the Exchange Basis shall be made in respect of any event described in
section 3.13, other than the events referred to in paragraphs (ii) and (iii) of subsection (1) thereof, if Warrantholders are
entitled to participate in such event on the same terms, mutatis mutandis, as if Warrantholders had exercised their Warrants
prior to or on the effective date or record date of such event, any such participation being subject to regulatory approval.
(4)
No adjustment in the Exchange Basis shall be made pursuant to section 3.13 in respect of
the issue from time to time of Warrant Shares purchasable on exercise of the Warrants or pursuant to the exercise,
conversion or exchange of securities of the Company outstanding as
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of the date hereof.
(5)
The Company shall from time to time immediately after the occurrence of any event which
requires an adjustment or readjustment as provided in section 3.13, deliver a certificate of the Company to the Warrant
Agent specifying the nature of the event requiring the same and the amount of the adjustment or readjustment necessitated
thereby and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based,
which certificate shall be supported by a certificate of the Company's Auditors verifying such calculation. The Warrant
Agent shall rely, and shall be protected in so doing, upon the certificate of the Company or of the Company's Auditor and
any other document filed by the Company pursuant to this section 3.13 for all purposes.
(6)
If a dispute shall at any time arise with respect to adjustments provided for in section 3.13,
such dispute shall, absent manifest error, be conclusively determined by the Company’s Auditors, or if they are unable or
unwilling to act, by such other firm of independent chartered accountants as may be selected by the directors and any
further determination, absent manifest error, shall be binding upon the Company, the Warrant Agent and the
Warrantholders
(7)
If the Company shall set a record date to determine the holders of the Common Shares for
the purpose of entitling them to receive any dividend or distribution or any subscription or purchase rights and shall,
thereafter and before the distribution to such shareholders of any such dividend, distribution, or subscription or purchase
rights, legally abandon its plan to pay or deliver such dividend, distribution, or subscription or purchase rights, then no
adjustment in the Exchange Basis shall be required by reason of the setting of such record date.
(8)
In the absence of a resolution of the directors fixing a record date for a Rights Offering or
Special Distribution, the Company shall be deemed to have fixed as the record date therefor the date on which the Rights
Offering or Special Distribution is effected.
(9)
If the purchase price provided for in any Rights Offering (the “Rights Offering Price”) is
decreased, the Exchange Basis shall forthwith be changed so as to increase the Exchange Basis to such Exchange Basis as
would have been obtained had the adjustment to the Exchange Basis made pursuant to subsection 3.13(2) upon the
issuance of such Rights Offering been made upon the basis of the Rights Offering Price as so decreased, provided that the
provisions of this subsection shall not apply to any decrease in the Rights Offering Price resulting from provisions in any
such Rights Offering designed to prevent dilution if the event giving rise to such decrease in the Rights Offering Price
itself requires an adjustment to the Exchange Basis pursuant to the provisions of section 3.13.
(10)
As a condition precedent to the taking of any action that would require any adjustment in
any of the subscription rights pursuant to any of the Warrants, including the Exchange Basis, the Company shall take any
corporate action which may, in the opinion of counsel, be necessary in order that the Company have unissued and reserved
in its authorized capital and may validly and legally issue as fully paid and non-assessable all the shares or other securities
that all the holders of such Warrants are entitled to receive on the exercise of all the subscription rights attaching thereto in
accordance with the provisions thereof.
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(11)
The Warrant Agent shall be entitled to act and rely on any adjustment calculations by the
Company or the Company’s Auditors.
3.15
Postponement of Subscription
In any case where the application of section 3.13 results in an increase in the number of Common Shares
that are issuable upon exercise of the Warrants taking effect immediately after the record date for a specific event, if any
Warrant is exercised after that record date and prior to completion of such specific event, the Company may postpone the
issuance to the Warrantholder of the Warrant Shares to which he is entitled by reason of such adjustment, but such Warrant
Shares shall be so issued and delivered to that holder upon completion of that event, with the number of such Warrant
Shares calculated on the basis of the number of Warrant Shares on the date that the Warrant was exercised, adjusted for
completion of that event and the Company shall deliver to the person or persons in whose name or names the Warrant
Shares are to be issued an appropriate instrument evidencing the right of such person or persons to receive such Warrant
Shares and the right to receive any dividends or other distributions which, but for the provisions of this section 3.15,
such person or persons would have been entitled to receive in respect of such Warrant Shares from and after the date that
the Warrant was exercised in respect thereof.
3.16
Notice of Adjustment
(1)
At least 14 days prior to the effective date or record date, as the case may be, of any event
which requires or might require adjustment pursuant to section 3.13, the Company shall:
(a)
(b)
(2)
file with the Warrant Agent a certificate of the Company specifying the particulars of such event
(including the record date or the effective date for such event) and, if determinable, the required adjustment
and the computation of such adjustment; and
give notice to the Warrantholders of the particulars of such event (including the record date or the effective
date for such event) and, if determinable, the required adjustment.
In case any adjustment for which a notice in subsection 3.16(1) has been given is not then
determinable, the Company shall promptly after such adjustment is determinable:
(a)
(b)
(3)
file with the Warrant Agent a computation of such adjustment; and
give notice to the Warrantholders of the adjustment.
The Warrant Agent may, absent manifest error, act and rely upon certificates and other
documents filed by the Company pursuant to this section 3.16 for all purposes of the adjustment.
3.17
No Action after Notice
The Company covenants with the Warrant Agent that it will not take any other corporate action which
might deprive a Warrantholder of the opportunity of exercising the rights of acquisition pursuant thereto during the period
of 10 days after the giving of the notice set forth
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in subsection 3.16(1) and paragraph (b) of subsection 3.16(2).
3.18
Optional Purchases by the Company
Subject to applicable law and prior approval of the TSX, if required, the Company may from time to time
purchase on any stock exchange (if then listed), in the open market, by private agreement or otherwise any of the Warrants.
Any such purchase shall be made at the lowest price or prices at which, in the opinion of the board of directors of the
Company, such Warrants are then obtainable, plus reasonable costs of purchase, and may be made in such manner, from
such persons, and on such other terms as the Company in its sole discretion may determine. The Warrant Certificates
representing the Warrants purchased pursuant to this section 3.18 shall forthwith be delivered to and cancelled by the
Warrant Agent.
3.19
Protection of Warrant Agent
Subject to Article 9, the Warrant Agent shall not:
(a)
(b)
(c)
(d)
at any time be under any duty or responsibility to any registered holder of Warrants to determine whether
any facts exist that may require any adjustment contemplated by this Article 3, nor to verify the nature and
extent of any such adjustment when made or the method employed in making the same;
be accountable with respect to the validity or value or the kind or amount of any Warrant Shares that may
at any time be issued or delivered upon the exercise of the Warrants;
be responsible for any failure of the Company to make any cash payment upon the surrender of any
Warrants for the purpose of the exercise of such rights or to comply with any of the covenants contained in
this Article 3; or
incur any liability or responsibility whatsoever or be in any way responsible for the consequence of any
breach on the part of the Company of any of the representations, warranties or covenants of the Company
or any acts or deeds of the agents or servants of the Company.
- 21 -
4.1
Method of Exercise of Warrants
ARTICLE 4
EXERCISE OF WARRANTS
(1)
The registered holder of any Warrant may exercise the rights thereby conferred on him to
acquire all or any part of the Warrant Shares to which such Warrant entitles the holder, by surrendering the Warrant
Certificate representing such Warrants to the Warrant Agent at any time prior to the Time of Expiry at its principal office
in the City of Toronto, Ontario (or at such additional place or places as may be decided by the Company from time to time
with the approval of the Warrant Agent), with a duly completed and executed exercise form of the registered holder or his
executors, administrators or other legal representative or his attorney duly appointed by an instrument in writing in the
form and manner satisfactory to the Warrant Agent, substantially in the form endorsed on the Warrant Certificate
specifying the number of Warrant Shares subscribed for together with a certified cheque, bank draft or money order in
lawful money of Canada, payable to or to the order of the Company in an amount equal to the Exercise Price multiplied
by the number of Warrant Shares subscribed for. A Warrant Certificate with the duly completed and executed exercise
form and payment of the Exercise Price shall be deemed to be surrendered only upon personal delivery thereof to or, if
sent by mail or other means of transmission, upon actual receipt thereof by the Warrant Agent.
(2)
Any exercise form referred to in subsection 4.1(1) shall be signed by the Warrantholder, or
his executors, or administrators or other legal representative or his attorney duly appointed by an instrument in writing in
the form and manner satisfactory to the Warrant Agent, shall specify the person(s) in whose name such Warrant Shares are
to be issued, the address(es) of such person(s) and the number of Warrant Shares to be issued to each person, if more than
one is so specified. If any of the Warrant Shares subscribed for are to be issued to
(a) person(s) other than the Warrantholder, the signatures set out in the exercise form referred to in subsection 4.1(1) shall
be guaranteed by a Canadian Schedule I chartered bank or a medallion signature guarantee from a member of a recognized
Signature Medallion Guarantee Program and (b) the Warrantholder shall pay to the Company or the Warrant Agent all
applicable transfer or similar taxes and the Company shall not be required to issue or deliver certificates evidencing
Warrant Shares unless or until such Warrantholder shall have paid to the Company or the Warrant Agent on behalf of the
Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has
been paid or that no tax is due.
(3)
If, at the time of exercise of the Warrants, in accordance with the provisions of subsections
4.1(1) or (4), there are any trading restrictions on the Warrant Shares pursuant to Securities Laws or stock exchange
requirements, the Company shall, on the advice of counsel, endorse any certificates or book-entry positions representing
the Warrant Shares to such effect. The Warrant Agent is entitled to assume compliance with all Securities Laws unless
otherwise notified in writing by the Company.
(4)
A Beneficial Owner who desires to exercise his Uncertificated Warrants, must do so by
causing a CDS Participant to deliver to CDS (at its office in the City of Toronto), on behalf of the Beneficial Owner
at any time prior to the Time of Expiry, a written notice of the
- 22 -
Beneficial Owner’s intention to exercise Warrants (the “Exercise Notice”). Forthwith upon receipt by CDS of such
notice, as well as payment for the Exercise Price, CDS shall deliver to the Warrant Agent confirmation of its intention to exercise
Warrants (the “Confirmation”) in a manner acceptable to the Warrant Agent, including by electronic means through the Book- Based
System. CDS will initiate the exercise by way of the Confirmation and forward the aggregate Exercise Price electronically to the
Warrant Agent and the Warrant Agent will execute the exercise by issuing to CDS through the Book-Based System the Warrant
Shares to which the exercising Beneficial Owner is entitled pursuant to the exercise. Any expense associated with the preparation and
delivery of Exercise Notices will be for the account of the Beneficial Owner exercising the Warrants.
By causing a CDS Participant to deliver notice to CDS, a Beneficial Owner shall be deemed to have irrevocably
surrendered his Warrants so exercised and appointed such CDS Participant to act as his or her exclusive settlement agent
with respect to the exercise and the receipt of Warrant Shares in connection with the obligations arising from such exercise.
Any notice which CDS determines to be incomplete, not in proper form or not duly executed shall for all purposes be void
and of no effect and the exercise to which it relates shall be considered for all purposes not to have been exercised thereby.
A failure by a CDS Participant to exercise or to give effect to the settlement thereof in accordance with the Beneficial
Owner’s instructions will not give rise to any obligations or liability on the part of the Company or Warrant Agent to the
CDS Participant or the Beneficial Owner.
4.2
No Fractional Warrant Shares
Under no circumstances shall the Company be obliged to issue any fractional Warrant Shares or any cash
or other consideration in lieu thereof upon the exercise of one or more Warrants. To the extent that the holder of one or
more Warrants would otherwise have been entitled to receive on the exercise or partial exercise thereof a fraction of a
Warrant Share, that holder may exercise that right in respect of the fraction only in combination with another Warrant or
Warrants that in the aggregate entitle the holder to purchase a whole number of Warrant Shares; otherwise fractional
Warrant Shares shall be rounded down to the nearest whole number of Warrant Shares without compensation therefor.
4.3
Effect of Exercise of Warrants
(1)
Upon compliance by the Warrantholder with the provisions of section 4.1, the Warrant
Shares subscribed for shall be deemed to have been issued and the person to whom such Warrant Shares are to be
issued shall be deemed to have become the holder of record of such Warrant Shares on the Exercise Date unless the
transfer registers of the Company for the Common Shares shall be closed on such date, in which case the Warrant Shares
subscribed for shall be deemed to have been issued and such person shall be deemed to have become the holder of
record of such Warrant Shares on the date on which such transfer registers are reopened.
(2)
Within three Business Days following the due exercise of a Warrant pursuant to section 4.1
and forthwith after the Time of Expiry, the Warrant Agent shall deliver to the Company a notice setting forth the
particulars of all Warrants exercised, if any, and the persons in whose names the Warrant Shares are to be issued (as
applicable) and the addresses of such holders of the Warrant Shares.
- 23 -
(3)
Within five Business Days of the due exercise of a Warrant pursuant to section 4.1, the
Company shall cause the Transfer Agent to issue, within such five Business Day period, to CDS through the Book-Based
System the Warrant Shares to which the exercising Warrantholder is entitled pursuant to the exercise or mail to the person
in whose name the Warrant Shares so subscribed for are to be issued, as specified in the exercise form completed on the
Warrant Certificate, at the address specified in such exercise form, a certificate or certificates for the Warrant Shares to
which the Warrantholder is entitled and, if applicable, shall cause the Warrant Agent to mail a Warrant Certificate
representing any Warrants not then exercised.
4.4
Cancellation of Warrants
All Warrants surrendered to the Warrant Agent pursuant to sections 3.6, 3.8(2), 3.10, 3.18 or 4.1 shall be
cancelled by the Warrant Agent and the Warrant Agent shall record the cancellation of such Warrants on the register of
holders maintained by the Warrant Agent pursuant to subsection 3.8(1). The Warrant Agent shall, if required by the
Company, furnish the Company with a certificate identifying the Warrants so cancelled. All Warrants that have been duly
cancelled shall be without further force or effect whatsoever.
4.5
Subscription for less than Entitlement
The holder of any Warrant may subscribe for and purchase a whole number of Warrant Shares that is less
than the number that the holder is entitled to purchase pursuant to a surrendered Warrant. In such event, the holder thereof
shall be entitled to receive a new Warrant Certificate, if applicable, in respect of the balance of Warrants that were not then
exercised.
4.6
Expiration of Warrant
After the Time of Expiry, all rights under any Warrant in respect of which the right of subscription and
purchase herein and therein provided for shall not theretofore have been exercised shall wholly cease and terminate and
such Warrant shall be void and of no effect.
4.7
Restrictions Related to U.S. Securities Laws
(1)
The Warrants may not be exercised except in compliance with section 4.7(2). The Warrant
Agent shall be entitled to rely upon the registered address of the Warrantholder as set forth in such Warrantholder’s
register for the purchase of Units in determining whether the address is in the United States or the Warrantholder is a U.S.
Person.
(2)
Certificate:
Upon an request by any holder seeking to exercise any Warrants represented by a Warrant
(a)
A registration statement covering the issuance of the Warrant Shares under the
U.S. Securities Act must be effective at the time of such exercise (the Company agrees to take all commercially reasonable
actions to evidence such effectiveness to the Warrant Agent upon request); or
(b)
Such holder shall provide to the Company either:
- 24 -
(i)
(ii)
(iii)
a written certification that such holder (i) at the time of exercise of the Warrants is not in the
United States; (ii) is not a U.S. Person and is not exercising the Warrants on behalf of a U.S.
Person or person in the United States; (iii) did not execute or deliver the exercise form for the
Warrants in the United States; and (iv) has in all other aspects complied with the terms of
Regulation S (which written certification shall be deemed delivered by checking Box 1 in the
Exercise Form attached to the Warrant, as provided for in Schedule A hereof);
a written certification that the holder is an “accredited investor” as defined in Rule 501(a) of
Regulation D and has delivered to the Company and the Company’s transfer agent a completed
and executed U.S. Warrantholder Letter in substantially the form attached to this Warrant
Indenture as Schedule “C”; or
a written opinion of counsel of recognized standing in form and substance satisfactory to the
Company and the Warrant Agent to the effect that an exemption from the registration
requirements of the U.S. Securities Act is available for the issuance of the Warrant Shares
issuable on exercise of the Warrants.
(3)
No Warrant Shares will be registered or delivered to an address in the United States unless
the holder of Warrants complies with the requirements of paragraph (a) or (b) of this subsection 4.7(2).
5.1
General Covenants of the Company
ARTICLE 5
COVENANTS
Agent and the Warrantholders that:
The Company represents, warrants and covenants with the Warrant Agent for the benefit of the Warrant
(1)
The Company will at all times, so long as any Warrants remain outstanding, maintain its
existence, unless otherwise inconsistent with the fiduciary duties of the board of directors of the Company.
(2)
The Company is duly authorized to create and issue the Warrants to be issued hereunder and
the Warrants, when issued, Authenticated and certified, as applicable, will be legal, valid, binding and enforceable
obligations of the Company.
(3)
For so long as the Company is a reporting issuer or equivalent in Canada, it will make all
requisite filings under applicable Canadian Securities Laws including those necessary to remain a reporting issuer not in
default in each of the provinces and other jurisdictions where it is or becomes a reporting issuer provided that the Company shall not
be required to comply with this Section following the completion of, and this Section shall not be construed as limiting or restricting
the Company
- 25 -
to agree to, a merger, amalgamation, arrangement, business combination, take-over bid or like transaction even if the consideration
being offered are not securities that are so listed and posted for trading that would result in the Company ceasing to be a reporting
issuer.
(4)
Subject to section 3.13, the Company will allot and reserve and keep available a sufficient
number of Warrant Shares for issuance upon the exercise of Warrants issued by the Company.
(5)
The Company will cause the Warrant Shares from time to time subscribed for pursuant to
the Warrants issued by the Company hereunder, in the manner herein provided, to be duly issued in accordance with the
Warrants and the terms hereof.
(6)
The Company will cause any certificates representing the Warrant Shares from time to time
to be acquired, pursuant to the Warrants in the manner herein provided, to be duly issued and delivered in accordance with
the Warrants and the terms hereof.
(7)
All Warrant Shares that shall be issued by the Company upon exercise of the rights
provided for herein shall be issued as fully paid and non-assessable Common Shares.
(8)
The Company will perform and carry out all of the acts or things to be done by it as
provided in this Indenture.
(9)
The Company will use its commercially reasonable efforts to cause the Warrant Agent to
keep open the register of Warrantholders during the Warrant Agent’s regular business hours and will not take any action
or omit to take any action which would have the effect of preventing the Warrantholders from receiving any of the
Warrant Shares issuable upon exercise of the Warrants.
(10)
The Company will promptly notify the Warrant Agent and the Warrantholders in writing of
any default under the terms of this Indenture which remains unrectified for more than 5 days following its occurrence.
5.2
Cannabis Compliance
(1)
To the extent that the Company currently has cannabis-related activities or interests, the
Company represents, warrants and agrees that, in addition to any other representation and warranty in this Indenture:
(a)
(b)
its Cannabis Permits are in good standing and it has all permits and licences required by any Canadian or
other applicable Governmental Authority that are necessary to lawfully conduct or maintain, directly or
indirectly, its cannabis- related activities and interests;
it does not have or hold cannabis or cannabis-related operations or interests in the United States of
America (including, without limiting the generality of the foregoing, royalty entitlements or investments in
a cannabis business), or sell or distribute cannabis into the United States of America; and
- 26 -
(c)
(2)
it does not have or hold cannabis or cannabis-related operations or interests in any other country (including,
without limiting the generality of the foregoing, royalty entitlements or investments in a cannabis
business) where the production, distribution or possession of cannabis is prohibited as a matter of the law
of the applicable country.
To the extent that the Company has cannabis-related activities or interests now or in the
future, the Company covenants and agrees that, in addition to any other covenant or obligation in this Indenture, it shall:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
upon the reasonable request of the Warrant Agent, promptly provide to the Warrant Agent any (i) existing
Cannabis Permits; and, (ii) other permits and licences required by any other applicable Governmental
Authority that it currently holds;
obtain any applicable Cannabis Permits that are required to undertake such cannabis related activities;
at all times keep and maintain in good standing its Cannabis Permits, and shall notify the Warrant Agent of
any breach of this requirement immediately upon obtaining knowledge thereof;
ensure at all times that it continues to have all permits and licences required by any Canadian or other
applicable Governmental Authority that are necessary to lawfully conduct or maintain, directly or
indirectly, its cannabis-related activities and interests;
notify the Warrant Agent immediately of, and provide it with a copy of, any and all correspondence and
notices that could reasonably be expected to result in a loss of, or a penalty or other sanction under, any
Cannabis Permit or applicable law;
deliver to the Warrant Agent, (i) at any reasonable time upon demand by the Warrant Agent; and, (ii) in
any event, immediately upon the breach of any representation, warranty or covenant contained in this
Article, an Officer’s Certificate as to the knowledge of such officer(s) of the Company’s compliance or
non-compliance with this Section, in each case attaching evidence of the current status of all Cannabis
Permits;
meet all record keeping and reporting requirements set out by all applicable Governmental Authorities,
including but not limited to, keeping records of all cannabis-related activities and inventories, as well as
filing ongoing reports; which, at a minimum, must include, among other things, the total amounts (i)
produced; (ii) released for sale; (iii) received from other licensed producers; (iv) sold or transferred to registered
clients, other licensed producers and licensed dealers; or, (v) otherwise retailed, with the associated revenues;
deliver to the Warrant Agent, (i) at any reasonable time upon demand by the Warrant Agent; and, (ii) at a
minimum annually, an Officer’s Certificate attaching
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(i)
(j)
(k)
(l)
and certifying to the aggregate records described in Section 5.2(2)(g) above, for the preceding twelve (12)
months;
carry on and conduct its activities in accordance with all applicable laws and regulations of all
Governmental Authorities in all material respects;
meet all listing requirements for each stock exchange upon which it is listed relating to compliance with
applicable law in all jurisdictions in which the Company has interests;
in no event, acquire or hold cannabis or cannabis-related operations or interests in the United States of
America (including, without limiting the generality of the foregoing, royalty entitlements or investments in
a cannabis business), or sell or distribute cannabis into the United States of America, so long as the
production, distribution or possession of cannabis remains prohibited as a matter of any applicable federal,
territorial or state laws of the United States of America or is prohibited as a matter of any applicable
United States of America Governmental Authority; and,
in no event, acquire or hold cannabis or cannabis-related operations or interests in any other country
(including, without limiting the generality of the foregoing, royalty entitlements or investments in a
cannabis business) if the production, distribution or possession of cannabis is prohibited as a matter of the
law of the applicable country.
(3)
The Company acknowledges and agrees that notwithstanding any other provision of this
Indenture, any default of any provision of this Section will result in the right of the Warrant Agent, at its sole discretion,
to resign as Warrant Agent effective immediately, and the Company hereby acknowledges such right of the Warrant Agent
to immediately resign. For greater certainty, no cure period or advance notice is required to be given by the Warrant Agent
before the Warrant Agent may exercise such discretion.
(4)
The Company acknowledges and agrees, in addition to any other provision herein relating
to the resignation or replacement of the Warrant Agent, that the Warrant Agent may resign as Warrant Agent and be
discharged from all further duties and liabilities hereunder, without notice, if the Warrant Agent reasonably determines that
(i) the Company has become unable to continue to lawfully operate any part of its cannabis or cannabis-related business or
to own or maintain, directly or indirectly, its cannabis or cannabis-related investments or operations; or (ii) as a result of
the Company’s cannabis-related activities, the Warrant Agent would be materially prejudiced by continuing to act as
Warrant Agent hereunder.
(5)
The Company shall cause all of its subsidiaries to comply with the provisions of this
Section as if such subsidiaries were expressly referred to in such provisions in replacement of references to the Company,
mutatis mutandis.
5.3
Securities Qualification Requirements
If, in the opinion of counsel, any instrument is required to be filed with, or any
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permission, order or ruling is required to be obtained from, any securities regulatory authority or any other step is required
under any federal or provincial law of Canada before the Warrant Shares may be issued or delivered to a Warrantholder, the
Company covenants that it will use its commercially reasonable efforts to file such instrument, obtain such permission,
order or ruling or take all such other actions, at its expense, as is required or appropriate in the circumstances.
5.4
Warrant Agent’s Remuneration and Expenses
The Company covenants that it will pay to the Warrant Agent from time to time reasonable remuneration
for its services hereunder and will pay or reimburse the Warrant Agent upon its request for all reasonable expenses and
disbursements of the Warrant Agent in the administration or execution of the duties and obligations hereby created
(including the reasonable compensation and the disbursements of its counsel and all other advisers, experts, accountants
and assistants not regularly in its employ) both before any default hereunder and thereafter until all duties of the Warrant
Agent hereunder shall be finally and fully performed. Any amount owing hereunder and remaining unpaid after 30 days
from the invoice date will bear interest at the then current rate charged by the Warrant Agent against unpaid invoices and
shall be payable upon demand. This Section shall survive the resignation or removal of the Warrant Agent and/or the
termination of this Indenture.
5.5
(a)
Performance of Covenants by Warrant Agent Subject to
section 9.7, if the Company shall:
fail to perform any of its covenants contained in this Indenture, excluding its covenants under section 5.2,
and the Company has not rectified such failure within 10 Business Days after receiving written notice
from the Warrant Agent of such failure; or
(b)
fail to perform any of its covenants under section 5.2 of this Indenture,
the Warrant Agent may notify the Warrantholders of such failure on the part of the Company or may itself perform any of
the said covenants capable of being performed by it, but shall be under no obligation to perform said covenants. All
reasonable sums expended or disbursed by the Warrant Agent in so doing shall be repayable as provided in section 5.4. No
such performance, expenditure or advance by the Warrant Agent shall be deemed to relieve the Company of any default
hereunder or of its continuing obligations under the covenants herein contained.
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ARTICLE 6
ENFORCEMENT
6.1
Suits by Warrantholders
Subject to section 7.10, all or any of the rights conferred upon a Warrantholder by the terms of the
Warrants held by him and/or this Indenture may be enforced by such Warrantholder by appropriate legal proceedings but
without prejudice to the right that is hereby conferred upon the Warrant Agent to proceed in its own name to enforce each
and all of the provisions herein contained for the benefit of the holders of the Warrants from time to time outstanding. The
Warrant Agent shall also have the power at any time and from time to time to institute and to maintain such suits and
proceedings as it may reasonably be advised shall be necessary or advisable to preserve and protect its interests and the
interests of the Warrantholders.
6.2
Limitation of Liability
The obligations hereunder (including without limitation under subsection 9.7(5)) are not personally
binding upon, nor shall resort hereunder be had to, the private property of any of the past, present or future directors or
shareholders of the Company or any of the past, present or future officers, employees or agents of the Company, and only
the property of the Company (or any successor person) shall be bound in respect hereof.
7.1
Right to Convene Meetings
ARTICLE 7
MEETINGS OF WARRANTHOLDERS
The Warrant Agent may at any time and from time to time, and shall on receipt of a written request of the
Company or of a Warrantholders’ Request, convene a meeting of the Warrantholders provided that the Warrant Agent has
been provided with sufficient funds and is indemnified to its reasonable satisfaction by the Company or by the
Warrantholders signing such Warrantholders’ Request against the costs, charges, expenses and liabilities that may be
incurred in connection with the calling and holding of such meeting. If within 15 Business Days after the receipt of a
written request of the Company or a Warrantholders’ Request, and receipt of funding and indemnity given as aforesaid, the
Warrant Agent fails to give the requisite notice specified in section 7.2 to convene a meeting, the Company or such
Warrantholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Toronto,
Ontario or at such other place as may be approved or determined by the Warrant Agent.
7.2
Notice
At least 21 days’ prior notice of any meeting of Warrantholders shall be given to the Warrantholders at
the expense of the Company in the manner provided for in section 10.2 and a copy of such notice shall be delivered to
the Warrant Agent unless the meeting has been called by it, and to the Company unless the meeting has been called by it.
Such notice shall state the date, time and place of the meeting, the general nature of the business to be transacted and shall
contain such information as is reasonably necessary to enable the Warrantholders to make a
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reasoned decision on the matter, but it shall not be necessary for any such notice to set out the terms of any resolution to be
proposed or any of the provisions of this Article 7. The notice convening any such meeting may be signed by an
appropriate officer of the Warrant Agent or of the Company or the person designated by such Warrantholders, as the case
may be.
7.3
Chairman
The Warrant Agent may nominate in writing an individual (who need not be a Warrantholder) to be
chairman of the meeting and if no individual is so nominated, or if the individual so nominated is not present within 15
minutes after the time fixed for the holding of the meeting, the Warrantholders present in person or by proxy shall appoint
an individual present to be chairman of the meeting. The chairman of the meeting need not be a Warrantholder.
7.4
Quorum
Subject to the provisions of section 7.11, at any meeting of the Warrantholders a quorum shall consist of
two Warrantholders present in person or represented by proxy and representing at least 20% of the aggregate number of
Warrants then outstanding. If a quorum of the Warrantholders shall not be present within one-half hour from the time fixed
for holding any meeting, the meeting, if summoned by the Warrantholders or on a Warrantholders’ Request, shall be
dissolved; but in any other case the meeting shall be adjourned to the same day in the next week (unless such day is not a
Business Day in which case it shall be adjourned to the next following Business Day) at the same time and place to the
extent possible and, subject to the provisions of section 7.11, no notice of the adjournment need be given. Any business
may be brought before or dealt with at an adjourned meeting that might have been dealt with at the original meeting in
accordance with the notice calling the same. At the adjourned meeting the Warrantholders present in person or represented
by proxy shall form a quorum and may transact the business for which the meeting was originally convened,
notwithstanding that they may not represent at least 20% of the aggregate number of Warrants then unexercised and
outstanding. No business shall be transacted at any meeting, except an adjourned meeting as described above, unless a
quorum is present at the commencement of business.
7.5
Power to Adjourn
The chairman of any meeting at which a quorum of the Warrantholders is present may, with the consent
of the meeting, adjourn any such meeting, and no notice of such adjournment need be given except such notice, if any, as
the meeting may prescribe.
7.6
Show of Hands
Every question submitted to a meeting shall be decided in the first place by a majority of the votes given
on a show of hands except that votes on an extraordinary resolution shall be given in the manner hereinafter provided. At
any such meeting, unless a poll is duly demanded as herein provided, a declaration by the chairman that a resolution has
been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be
conclusive evidence of the fact.
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7.7
Poll and Voting
On every extraordinary resolution, and when demanded by the chairman or by one or more of the
Warrantholders acting in person or by proxy on any other question submitted to a meeting and after a vote by show of
hands, a poll shall be taken in such manner as the chairman shall direct. Questions other than those required to be
determined by extraordinary resolution shall be decided by a majority of the votes cast on the poll. On a show of hands,
every person who is present and entitled to vote, whether as a Warrantholder or as proxy for one or more absent
Warrantholders, or both, shall have one vote. On a poll, each Warrantholder present in person or represented by a proxy
duly appointed by instrument in writing shall be entitled to one vote in respect of each whole Warrant then held by him. A
proxy need not be a Warrantholder. The chairman of any meeting shall be entitled, both on a show of hands and on a poll,
to vote in respect of the Warrants, if any, held or represented by him.
7.8
Regulations
Subject to the provisions of this Indenture, the Warrant Agent or the Company with the approval of the
Warrant Agent may from time to time make and from time to time vary such regulations as it shall consider necessary or
appropriate:
(a)
(b)
(c)
(d)
for the deposit of instruments appointing proxies at such place and time as the Warrant Agent, the
Company or the Warrantholders convening the meeting, as the case may be, may in the notice convening
the meeting direct;
for the deposit of instruments appointing proxies at some approved place other than the place at which the
meeting is to be held and enabling particulars of such instruments appointing proxies to be mailed or
forwarded via facsimile before the meeting to the Company or to the Warrant Agent at the place where the
same is to be held and for the voting of proxies so deposited as though the instruments themselves were
produced at the meeting;
for the form of instrument appointing a proxy and the manner in which the form of proxy may be
executed; and
generally for the calling of meetings of Warrantholders and the conduct of business thereat including
setting a record date for Warrantholders entitled to receive notice of or to vote at such meeting.
Any regulations so made shall be binding and effective and the votes given in accordance therewith shall
be valid and shall be counted. Save as such regulations may provide, the only persons who shall be recognized at any
meeting as a Warrantholder, or be entitled to vote or be present at the meeting in respect thereof (subject to section 7.9),
shall be Warrantholders or persons holding proxies of Warrantholders.
7.9
Company, Warrant Agent and Counsel may be Represented
The Company, the Warrantholders and the Warrant Agent, by their respective
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directors, officers and employees and the counsel for each of the Company, the Warrantholders and the Warrant Agent
may attend any meeting of the Warrantholders and speak thereat but shall not be entitled to vote unless in their capacities as
Warrantholders or proxies therefor.
7.10
Powers Exercisable by Extraordinary Resolution
In addition to all other powers conferred upon them by any other provisions of this Indenture or by law,
the Warrantholders at a meeting shall have the power, subject to the TSX’s approval, exercisable from time to time by
extraordinary resolution:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
to agree to any modification, alteration, compromise or arrangement of the rights of Warrantholders and/or
the Warrant Agent in its capacity as warrant agent hereunder (subject to the Warrant Agent’s approval) or
on behalf of the Warrantholders against the Company, whether such rights arise under this Indenture or the
Warrants or otherwise;
to amend, modify or repeal any extraordinary resolution previously passed or sanctioned by the
Warrantholders;
to direct or authorize the Warrant Agent (subject to the Warrant Agent receiving funding and indemnity to
its satisfaction) to enforce any of the covenants on the part of the Company contained in this Indenture or
the Warrants or to enforce any of the rights of the Warrantholders in any manner specified in such
extraordinary resolution or to refrain from enforcing any such covenant or right;
to waive, authorize and direct the Warrant Agent to waive any default on the part of the Company in
complying with any provisions of this Indenture or the Warrants either unconditionally or upon any
conditions specified in such extraordinary resolution;
to restrain any Warrantholder from taking or instituting any suit, action or proceeding against the
Company for the enforcement of any of the covenants on the part of the Company contained in this
Indenture or the Warrants or to enforce any of the rights of the Warrantholders;
to direct any Warrantholder who, as such, has brought any suit, action or proceeding to stay or discontinue
or otherwise deal with any such suit, action or proceeding, upon payment of the costs, charges and
expenses reasonably and properly incurred by such Warrantholder in connection therewith;
to assent to any change in or omission from the provisions contained in this Indenture or any ancillary or
supplemental instrument which may be agreed to by the Company, and to authorize the Warrant Agent to
concur in and execute any ancillary or supplemental indenture embodying the change or omission;
with the consent of the Company, such consent not to be unreasonably withheld, to remove the Warrant
Agent or its successor in office and to appoint a new warrant agent or warrant agents to take the place of
the Warrant Agent so removed; and
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(i)
to assent to any compromise or arrangement with any creditor or creditors or any class or classes of
creditors, whether secured or otherwise, and with holders of any shares or other securities of the Company.
7.11
Meaning of “Extraordinary Resolution”
(1)
The expression “extraordinary resolution” when used in this Indenture means, subject as
hereinafter in this section 7.11 and in section 7.14 provided, a resolution proposed at a meeting of Warrantholders duly
convened for that purpose and held in accordance with the provisions of this Article 7 at which there are present in person
or by proxy at least two Warrantholders representing at least 20% of the aggregate number of all the then outstanding
Warrants and passed by the affirmative votes of Warrantholders representing not less than 66⅔% of the aggregate
number of all the then outstanding Warrants represented at the meeting and voted on the poll for such resolution.
(2)
If, at any meeting called for the purpose of passing an extraordinary resolution,
Warrantholders representing at least 20% of the aggregate number of all the then outstanding Warrants are not present in
person or by proxy within one-half hour after the time appointed for the meeting, then the meeting, if convened by
Warrantholders or on a Warrantholders’ Request, shall be dissolved; but in any other case it shall stand adjourned to such
day, being not less than 10 Business Days later, and to such place and time as may be appointed by the chairman. Not less
than three Business Days prior notice shall be given of the time and place of such adjourned meeting provided by press
release of the Company. Such notice shall state that at the adjourned meeting the Warrantholders present in person or
represented by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was
originally called or any other particulars. At the adjourned meeting the Warrantholders present in person or represented by
proxy shall form a quorum and may transact the business for which the meeting was originally convened and a resolution
proposed at such adjourned meeting and passed by the requisite vote as provided in subsection 7.11(1) shall be an
extraordinary resolution within the meaning of this Indenture notwithstanding that Warrantholders representing at least
20% of all the then outstanding Warrants are not present in person or represented by proxy at such adjourned meeting.
(3)
Votes on an extraordinary resolution shall always be given on a poll and no demand for a
poll on an extraordinary resolution shall be necessary.
7.12
Powers Cumulative
It is hereby declared and agreed that any one or more of the powers or any combination of the powers in
this Indenture stated to be exercisable by the Warrantholders by extraordinary resolution or otherwise may be exercised
from time to time and the exercise of any one or more of such powers or any combination of powers from time to time shall
not be deemed to exhaust the right of the Warrantholders to exercise such powers or combination of powers then or
thereafter from time to time.
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7.13
Minutes
Minutes of all resolutions and proceedings at every meeting of Warrantholders as aforesaid shall be made
and duly entered in books to be provided for that purpose by the Company and any minutes as aforesaid, if signed by the
chairman of the meeting at which resolutions were passed or proceedings had, or by the chairman of the next succeeding
meeting of the Warrantholders, shall be prima facie evidence of the matters therein stated and, until the contrary is proved,
every meeting, in respect of the proceedings of which minutes shall have been made, shall be deemed to have been duly
convened and held, and all resolutions passed thereat or proceedings taken, to have been duly passed and taken.
7.14
Instruments in Writing
All actions that may be taken and all powers that may be exercised by the Warrantholders at a meeting
held as provided in this Article 7 also may be taken and exercised by Warrantholders representing a majority, or in the
case of an extraordinary resolution at least 66⅔%, of the aggregate number of all the then outstanding Warrants by an
instrument in writing signed in one or more counterparts by such Warrantholders in person or by attorney duly appointed in
writing, and the expression “extraordinary resolution” when used in this Indenture shall include an instrument so signed.
7.15
Binding Effect of Resolutions
Every resolution and every extraordinary resolution passed in accordance with the provisions of this
Article 7 at a meeting of Warrantholders shall be binding upon all Warrantholders, whether present at or absent from such
meeting, and every instrument in writing signed by Warrantholders in accordance with section 7.14 shall be binding upon
all the Warrantholders, whether signatories thereto or not, and each and every Warrantholder and the Warrant Agent
(subject to the provisions for indemnity herein contained) shall be bound to give effect accordingly to every such resolution
and instrument in writing.
7.16
Holdings by the Company or Subsidiaries of the Company Disregarded
In determining whether Warrantholders are present at a meeting of Warrantholders for the purpose of
determining a quorum or have concurred in any consent, waiver, extraordinary resolution, Warrantholders’ Request or other
action under this Indenture, Warrants owned legally or beneficially by the Company or its Subsidiaries or in partnership of
which the Company is directly or indirectly a party to shall be disregarded. The Company shall provide, upon the written
request of the Warrant Agent, a certificate as to the registration particulars of any Warrants held by the Company or its
Subsidiaries or in partnership of which the Company is directly or indirectly a party.
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ARTICLE 8
SUPPLEMENTAL INDENTURES AND SUCCESSOR COMPANIES
8.1
Provision for Supplemental Indentures for Certain Purposes
From time to time the Company and the Warrant Agent may, subject to the provisions hereof and the
TSX’s approval, and they shall, when so required hereby, execute and deliver by their proper officers, indentures or
instruments supplemental hereto, which thereafter shall form part hereof, for any one or more or all of the following
purposes:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
providing for the issuance of additional Warrants hereunder and any consequential amendments hereto as
may be required by the Warrant Agent, relying on the advice of counsel;
setting forth or giving effect to adjustments in the application of Article 3;
adding to the provisions hereof such additional covenants and enforcement provisions as, in the opinion of
counsel are necessary or advisable, provided that the same are not in the opinion of the Warrant Agent,
relying on the advice of counsel, prejudicial to the interests of the Warrantholders as a group;
giving effect to any extraordinary resolution passed as provided in Article 7;
making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect
to matters or questions arising hereunder provided that such provisions are not, in the opinion of the
Warrant Agent, relying on the advice of counsel, prejudicial to the interests of the Warrantholders as a
group;
adding to or amending the provisions hereof in respect of the transfer of Warrants, making provision for the
exchange of Warrants and making any modification in the form of the Warrant Certificate that does not
affect the substance thereof;
amending any of the provisions of this Indenture or relieving the Company from any of the obligations,
conditions or restrictions herein contained, provided that no such amendment or relief shall be or become
operative or effective if, in the opinion of the Warrant Agent, relying on the advice of counsel, such
amendment or relief impairs any of the rights of the Warrantholders as a group or of the Warrant Agent,
and provided further that the Warrant Agent may in its sole discretion decline to enter into any
supplemental indenture that in its opinion may not afford adequate protection to the Warrant Agent when
the same shall become operative;
providing added protection or benefit to the Company or the Warrantholders (as a group); and
for any other purpose not inconsistent with the terms of this Indenture, including the correction or
rectification of any ambiguities, defective or inconsistent provisions, errors, mistakes or clerical
omissions herein, provided that, in the
- 36 -
opinion of the Warrant Agent, relying on the advice of counsel, the rights of the Warrant Agent and the
Warrantholders as a group are in no way prejudiced thereby.
8.2
Successor Companies
In the case of the amalgamation, consolidation, arrangement, merger or transfer of the undertaking or
assets of the Company as an entirety or substantially as an entirety to another person (a “successor company”), the
successor company resulting from the amalgamation, consolidation, arrangement, merger or transfer (if not the Company)
shall be bound by the provisions hereof and all obligations for the due and punctual performance and observance of each
and every covenant and obligation contained in this Indenture to be performed by the Company and the successor company
shall by supplemental indenture satisfactory in form and substance to the Warrant Agent and executed and delivered by the
successor company to the Warrant Agent, expressly assume those obligations.
9.1
Indenture Legislation
ARTICLE 9
CONCERNING THE WARRANT AGENT
(1)
If and to the extent that any provision of this Indenture limits, qualifies or conflicts with a
mandatory requirement of Applicable Legislation, such mandatory requirement shall prevail.
(2)
The Company and the Warrant Agent agree that each will at all times in relation to this
Indenture and any action to be taken hereunder observe and comply with and be entitled to the benefit of Applicable
Legislation.
9.2
Rights and Duties of Warrant Agent
(1)
The Warrant Agent accepts the duties and responsibilities under this Indenture, solely as
custodian, bailee and agent. No trust is intended to be, or is or will be, created hereby and the Warrant Agent shall owe no
duties hereunder as a trustee.
(2)
In the exercise of the rights and duties prescribed or conferred by the terms of this
Indenture, the Warrant Agent shall act honestly and in good faith and shall exercise the degree of care, diligence and skill
that a reasonably prudent warrant agent would exercise in comparable circumstances. No provision of this Indenture shall
be construed to relieve the Warrant Agent from liability for its own gross negligence, wilful misconduct, bad faith or
fraud.
(3)
The Warrant Agent shall not be bound to do or take any act, action or proceeding for the
enforcement of any of the obligations of the Company under this Indenture unless and until it shall have received a
Warrantholders’ Request specifying the act, action or proceeding that the Warrant Agent is requested to take. The
obligation of the Warrant Agent to commence or continue any act, action or proceeding for the purpose of enforcing any
rights of the Warrant Agent or the Warrantholders hereunder shall be conditional upon the Warrantholders furnishing,
when required by notice in writing by the Warrant Agent, sufficient funds to commence or continue such act, action or
proceeding and an indemnity reasonably satisfactory to the Warrant Agent and
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its counsel to protect and hold harmless the Warrant Agent, its officers, directors, employees, agents, successors and assigns against
the costs, charges and expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of
the provisions contained in this Indenture shall require the Warrant Agent to expend or risk its own funds or otherwise incur financial
liability in the performance of any of its duties or in the exercise of any of its rights or powers unless indemnified and funded as
aforesaid.
(4)
The Warrant Agent may, before commencing any act, action or proceeding, or at any time
during the continuance thereof require the Warrantholders at whose instance it is acting to deposit with the Warrant Agent
the Warrants held by them, for which Warrants the Warrant Agent shall issue receipts.
(5)
Every provision of this Indenture that, by its terms, relieves the Warrant Agent of liability or
entitles it to rely upon any evidence submitted to it is subject to the provisions of Applicable Legislation, this section 9.2
and section 9.3.
(6)
The Warrant Agent shall not be bound to give any notice or do or take any act, action or
proceeding by virtue of the powers conferred on it hereunder unless and until it shall have been required to do so under
the terms hereof; nor shall the Warrant Agent be required to take notice of any default hereunder, unless and until notified
in writing of such default, which notice shall specifically set out the default desired to be brought to the attention of the
Warrant Agent and in the absence of such notice the Warrant Agent may for all purposes of this Indenture conclusively
assume that no default has occurred or been made in the performance or observance of the representations, warranties and
covenants, agreements or conditions herein contained. Any such notice shall in no way limit any discretion herein given to
the Warrant Agent to determine whether or not the Warrant Agent shall take action with respect to any default.
(7)
In this Indenture, whenever confirmations or instructions are required to be given to the
Warrant Agent, in order to be valid, such confirmations and instructions shall be in writing.
9.3
Evidence, Experts and Advisers
(1)
In addition to the reports, certificates, opinions and other evidence required by this
Indenture, the Company shall furnish to the Warrant Agent such additional evidence of compliance with any provision
hereof and in such form as may be prescribed by Applicable Legislation or as the Warrant Agent may reasonably require
by written notice to the Company.
(2)
In the exercise of its rights and duties hereunder, the Warrant Agent may, if it is acting in
good faith, act and rely absolutely as to the truth of the statements and the accuracy of the opinions expressed therein,
upon statutory declarations, opinions, reports, written requests, consents, or orders of the Company, certificates of the
Company or other evidence furnished to the Warrant Agent pursuant to any provision hereof or of Applicable Legislation
or pursuant to a request of the Warrant Agent. The Warrant Agent shall be under no responsibility in respect of the
validity of this Indenture or the execution and delivery hereof by or on behalf of the
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Company or in respect of the validity or the execution of any Warrant Certificate by the Company and issued hereunder,
nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Indenture or in
any such Warrant Certificate; nor shall it by any act hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any securities to be issued upon the right to acquire provided for in this Indenture and/or in
any Warrant or as to whether any securities will when issued be duly authorized or be validly issued and fully paid and
non-assessable.
(3)
Whenever Applicable Legislation requires that evidence referred to in subsection 9.3(1) be
in the form of a statutory declaration, the Warrant Agent may accept the statutory declaration in lieu of a certificate of the
Company required by any provision hereof. Any such statutory declaration may be made by one or more of the directors
or officers of the Company and may be relied upon by the Warrant Agent in good faith without further inquiry.
(4)
Proof of the execution of an instrument in writing, including a Warrantholders’ Request, by
any Warrantholder may be made by a certificate of a notary public or other person with similar powers that the person
signing such instrument acknowledged to him the execution thereof, or by an affidavit of a witness to such execution or in
any other manner which the Warrant Agent may consider adequate and in respect of a corporate Warrantholder, shall
include a certificate of incumbency of such Warrantholder together with a certified resolution authorizing the person who
signs such instrument to sign such instrument.
(5)
The Warrant Agent may act and rely and shall be protected in acting and relying upon any
resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, letter, or other paper
document believed by it to be genuine and to have been signed, sent or presented by or on behalf of the proper party or
parties. The Warrant Agent has sole discretion and shall be protected in acting and relying upon any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent, order, letter or other paper document received
in facsimile or e-mail form.
(6)
The Warrant Agent may employ or retain such counsel, accountants, engineers, appraisers
or other experts or advisers as it may reasonably require for the purpose of determining and discharging its duties
hereunder and may pay reasonable remuneration for all services so performed by any of them, without taxation of costs of
any counsel and shall not be responsible for any misconduct on the part of any of them who has been selected with due
care by the Warrant Agent. Any reasonable remuneration paid by the Warrant Agent shall be paid by the Company in
accordance with section 5.4.
(7)
The Warrant Agent may act and rely and shall be protected in acting and relying in good
faith on the opinion or advice of or information obtained from any counsel, accountant, appraiser, engineer or other expert
or advisor, whether retained or employed by the Company or the Warrant Agent, in relation to any matter arising in
fulfilling its duties and obligations hereof.
(8)
The Warrant Agent may, as a condition precedent to any action to be taken by it under this
Indenture, require such opinions, statutory declarations, reports, certificates or other evidence as it, acting reasonably,
considers necessary or advisable in the circumstances.
- 39 -
(9)
duties and obligations.
The Warrant Agent is not required to expend or place its own funds at risk in executing its
9.4
Securities, Documents and Monies Held by Warrant Agent
Any securities, documents of title, monies or other instruments that may at any time be held by the
Warrant Agent subject to the duties and obligations hereof, for the benefit of the Company, may be placed in the deposit
vaults of the Warrant Agent or of any Schedule I Canadian chartered bank for safekeeping with any such bank (an
“Approved Bank”). All interest or other income received from the Warrant Agent in respect of such deposits and
investments shall, subject to section 5.4, belong to the Company and shall be paid to the Company upon discharge of this
Indenture. All amounts held by the Warrant Agent pursuant to this Agreement shall be held by the Warrant Agent for the
Company and the delivery of the funds to the Warrant Agent shall not give rise to a debtor-creditor or other similar
relationship. The amounts held by the Warrant Agent are at the sole risk of the Company and, without limiting the
generality of the foregoing, but subject to Section 9.2(2), the Warrant Agent shall have no responsibility or liability for
any diminution of the funds which may result from any deposit made with an Approved Bank pursuant to this section,
including any losses resulting from a default by the Approved Bank or other credit losses (whether or not resulting from
such a default). The parties hereto acknowledge and agree that the Warrant Agent will have acted prudently in depositing
the funds at any Approved Bank, and that the Warrant Agent is not required to make further inquiries in respect of any such
bank. The Warrant Agent may hold cash balances constituting part or all such monies and need not invest same. The
Warrant Agent shall not be liable to account for any profit to any parties to this Indenture or to any other person or entity.
9.5
Actions by Warrant Agent to Protect Interests
Subject to the provisions of this Indenture and Applicable Legislation, the Warrant Agent shall have the
power to institute and to maintain such actions and proceedings as it may consider necessary or expedient to preserve,
protect or enforce its interests and the interests of the Warrantholders.
9.6
Warrant Agent not Required to Give Security
The Warrant Agent shall not be required to give any bond or security in respect of the execution of the
duties and obligations of this Indenture or otherwise.
9.7
Protection of Warrant Agent
expressly declared and agreed as follows:
By way of supplement to the provisions of any law for the time being relating to warrant agents, it is
(1)
The Warrant Agent shall not be liable for or by reason of any representations, statements of
fact or recitals in this Indenture or in the Warrants (except the representation contained in section 9.9 or in the certificate
of the Warrant Agent on the Warrants) or be required to verify the same and all such statements of fact or recitals are and
shall be deemed to
- 40 -
be made by the Company (except the representation contained in section 9.9 or in the certificate of the Warrant Agent on
the Warrants).
(2)
Nothing herein contained shall impose any obligation on the Warrant Agent to see to or to
require evidence of the registration or filing (or renewal thereof) of this Indenture or any instrument ancillary or
supplemental hereto.
(3)
execution hereof.
The Warrant Agent shall not be bound to give notice to any person or persons of the
(4)
The Warrant Agent shall not incur any liability or responsibility whatsoever or be in any
way responsible for the consequence of any breach on the part of the Company of any of the covenants or warranties
herein contained or of any acts of any directors, officers, employees, agents or servants of the Company.
(5)
Without limiting any protection or indemnity of the Warrant Agent under any other
provision hereof, or otherwise at law, the Company hereby agrees to indemnify and hold harmless the Warrant Agent, its
affiliates and their directors, officers, agents and employees from and against any and all liabilities, losses, damages,
penalties, claims, actions, suits, costs, expenses and disbursements, including reasonable legal or advisor fees and
disbursements, of whatever kind and nature which may at any time be imposed on, incurred by or asserted against the
Warrant Agent in connection with the performance of its duties and obligations hereunder, other than such liabilities,
losses, damages, penalties, claims, actions, suits, costs, expenses and disbursements arising by reason of the gross
negligence, wilful misconduct, bad faith or fraud of the Warrant Agent. This provision shall survive the resignation or
removal of the Warrant Agent, or the termination of this Indenture. The Warrant Agent shall not be under any obligation
to prosecute or defend any action or suit in respect of this Indenture which, in the opinion of its counsel, may involve it in
expense or liability, unless the Company shall, so often as required, furnish the Warrant Agent with satisfactory indemnity
and funding against such expense or liability.
(6)
If any of the funds provided to the Warrant Agent hereunder are received by it in the form
of an uncertified cheque or bank draft, the Warrant Agent shall delay the release of such funds and the related Warrant
Shares until such uncertified cheque has cleared the financial institution upon which the same is drawn.
(7)
The forwarding of a cheque or the sending of funds by wire transfer by the Warrant Agent
will satisfy and discharge the liability of any amounts due to the extent of the sum represented thereby unless such cheque
is not honoured on presentation, provided that in the event of the non-receipt of such cheque by the payee, or the loss or
destruction thereof, the Warrant Agent, upon being furnished with reasonable evidence of such non-receipt, loss or
destruction and indemnity reasonably satisfactory to it, will issue to such payee a replacement cheque for the amount of
such cheque.
(8)
The Warrant Agent shall retain the right not to act and shall not be liable for refusing to act
if, due to a lack of information or for any other reason whatsoever, the Warrant Agent, in its sole judgement, determines
that such act might cause it to be in non-compliance
- 41 -
with any applicable anti-money laundering or anti-terrorist legislation, regulation or guideline. Further, should the Warrant
Agent, in its sole judgement, determine at any time that its acting under this Warrant Indenture has resulted in its being in
non-compliance with any applicable anti-money laundering or anti-terrorist legislation, regulation or guideline, then it
shall have the right to resign on 10 days’ written notice to the Company provided: (i) that the Warrant Agent’s written
notice shall describe the circumstances of such non-compliance; and (ii) that if such circumstances are rectified to the
Warrant Agent’s satisfaction within such 10-day period, then such resignation shall not be effective.
(9)
The Warrant Agent shall not be liable for any error in judgment or for any act done or step
taken or omitted by it in good faith or for any mistake, in fact or law, or for anything which it may do or refrain from
doing in connection herewith except arising out of its own gross negligence, bad faith, willful misconduct or fraud.
(10)
Notwithstanding the foregoing, or any other provision of this Indenture, any liability of the
Warrant Agent shall be limited, in the aggregate, to the amount of annual retainer fees paid by the Company to the Warrant
Agent under this Indenture in the 24 months immediately prior to the Warrant Agent receiving the first notice of the claim.
Notwithstanding any other provision of this Indenture, and whether such losses or damages are foreseeable or
unforeseeable, the Warrant Agent shall not be liable under any circumstances whatsoever for any (a) breach by any
other party of Securities Laws or other rule of any securities regulatory authority, (b) lost profits or (c) special, indirect,
incidental, consequential, exemplary, aggravated or punitive losses or damages.
9.8
Replacement of Warrant Agent
(1)
The Warrant Agent may resign its appointment and be discharged from all further duties and
liabilities hereunder by giving to the Company not less than 60 days prior notice in writing or such shorter prior notice as
the Company may accept as sufficient. The Warrantholders by extraordinary resolution shall have the power at any time to
remove the existing Warrant Agent and to appoint a new Warrant Agent. In the event of the Warrant Agent resigning or
being removed as aforesaid or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming
incapable of acting hereunder, the Company shall forthwith appoint a new Warrant Agent unless a new Warrant Agent has
already been appointed by the Warrantholders; failing such appointment by the Company, the retiring Warrant Agent or
any Warrantholder may apply to a judge of the Province of Ontario at the Company’s expense, on such notice as such
judge may direct, for the appointment of a new Warrant Agent; but any new Warrant Agent so appointed by the Company
or by the Court shall be subject to removal as aforesaid by the Warrantholders. Any new Warrant Agent appointed under
any provision of this section 9.8 shall be a corporation authorized to carry on the business of a transfer agent or a trust
company in the Province of Ontario and, if required by Applicable Legislation of any other province, in such other
province. On any such appointment the new Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as Warrant Agent without any further assurance, conveyance,
act or deed; but there shall be immediately executed, at the expense of the Company, all such conveyances or other
instruments as may, in the opinion of counsel, be necessary or advisable for the purpose of assuring the same to the new
Warrant
- 42 -
Agent, provided that any resignation or removal of the Warrant Agent and appointment of a successor Warrant Agent shall not
become effective until the successor Warrant Agent shall have executed an appropriate instrument accepting such appointment and, at
the request of the Company, the predecessor Warrant Agent, upon payment of its outstanding remuneration and expenses, shall
execute and deliver to the successor Warrant Agent an appropriate instrument transferring to such successor Warrant Agent all rights
and powers of the Warrant Agent hereunder and all securities, documents of title and other instruments and all monies and properties
held by the Warrant Agent hereunder.
(2)
Upon the appointment of a successor Warrant Agent, the Company shall promptly notify the
Warrantholders thereof in the manner provided for in section 10.1.
(3)
Any corporation into or with which the Warrant Agent may be merged or consolidated or
amalgamated, or to which all or substantially all of the corporate trust business is sold or any corporation succeeding to
the stock transfer business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without any
further act on its part or of any of the parties hereto, provided that such corporation would be eligible for appointment as a
new Warrant Agent under subsection 9.8(1).
(4)
Any Warrants Authenticated or certified but not delivered by a predecessor Warrant Agent
may be Authenticated or certified by the new or successor Warrant Agent in the name of the predecessor or the new or
successor Warrant Agent.
9.9
Conflict of Interest
(1)
The Warrant Agent represents to the Company that at the time of execution and delivery
hereof no material conflict of interest exists which it is aware of in the Warrant Agent’s role hereunder and agrees that in
the event of a material conflict of interest arising which it becomes aware of hereafter it will, within 90 days after
ascertaining that it has such a material conflict of interest, either eliminate the same or resign its appointment hereunder. If
any such material conflict of interest exists or hereafter shall exist, the validity and enforceability of this Indenture and the
Warrants shall not be affected in any manner whatsoever by reason thereof.
(2)
Subject to subsection 9.9(1), the Warrant Agent, in its personal or any other capacity, may
buy, lend upon and deal in securities of the Company and generally may contract and enter into financial transactions with
the Company or any Subsidiary without being liable to account for any profit made thereby.
9.10
Acceptance of Duties and Obligations
The Warrant Agent hereby accepts the duties and obligations in this Indenture declared and provided for
and agrees to perform the same upon the terms and conditions herein set forth and agrees to hold all rights, interests and
benefits contained herein on behalf of those persons who become holders of Warrants from time to time issued under this
Indenture.
9.11
Warrant Agent not to be Appointed Receiver
receiver and manager or liquidator of all or any part of the assets or
The Warrant Agent and any person related to the Warrant Agent shall not be appointed a receiver or
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undertaking of the Company or any Subsidiary or any partnership of which the Company is directly or indirectly
involved.
9.12
Authorization to Carry on Business
agent and warrant agent under Applicable Legislation in the Province of Ontario.
The Warrant Agent represents to the Company that it is registered to carry on the business of a transfer
9.13
Securities Exchange Commission Certification
The Company represents and warrants that it is filing with the U.S. Securities and Exchange Commission
(“SEC”) as a Foreign Private Issuer (as such term is defined in the Securities Exchange Act of 1934) and has delivered to
the Warrant Agent an Officers’ Certificate certifying such “reporting issuer” status and other information as the Warrant
Agent has requested, including, but not limited to, the Central Index Key that has been assigned for filing purposes. Should
the Company cease to file as a Foreign Private Issuer, the Company covenants to deliver to the Warrant Agent an
Officers’ Certificate (in a form provided by the Warrant Agent certifying a change in “reporting issuer” status and such
other information as the Warrant Agent may require at such given time. The Company understands that the Warrant Agent
is relying upon the foregoing representation, warranty and covenant in order to meet certain SEC obligations with respect
to those clients who are filing with the SEC.
10.1
Notice to the Company and the Warrant Agent
ARTICLE 10
GENERAL
(1)
Unless herein otherwise expressly provided, any notice to be given hereunder to the
Company or the Warrant Agent shall be deemed to be validly given if delivered, if sent by registered letter, postage
prepaid or if transmitted by facsimile or email to the following addresses or facsimile numbers:
(a)
If to the Company, to:
APHRIA INC.
1 Adelaide Street East, Suite 2310 Toronto,
Ontario M5C 2V9
- 44 -
(b)
If to the Warrant Agent, to:
COMPUTERSHARE TRUST COMPANY OF CANADA
100 University Avenue, 8th Floor, Toronto,
Ontario M5J 2Y1
Attention:
Corporate Trust
Facsimile:
981-9777
Email:
Manager,
416-
corporatetrust.toronto@computershare.com
and any notice given in accordance with the foregoing shall be deemed to have been received on the date of delivery if that
date is a Business Day or, if mailed, on the fifth Business Day following the date of the postmark on such notice or, if
transmitted by facsimile or email, on the next Business Day following the date of transmission.
(2)
The Company or the Warrant Agent, as the case may be, may from time to time notify the
other in the manner provided in subsection 10.1(1) of a change of address which, from the effective date of such notice
and until changed by like notice, shall be the address of the Company or the Warrant Agent, as the case may be, for all
purposes of this Indenture. A copy of any notice of change of address given pursuant to this subsection 10.1(2) shall be
available for inspection at the principal office of the Warrant Agent in the City of Toronto, Ontario by Warrantholders
during normal business hours.
(3)
If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving
postal employees, any notice to be given to the Warrant Agent or to the Company hereunder could reasonably be
considered unlikely to reach its destination, the notice shall be valid and effective only if it is delivered to an officer of the
party to which it is addressed or if it is delivered to that party at the appropriate address provided in subsection 10.1(1) by
facsimile, email or other means of prepaid, transmitted or recorded communication and any notice delivered in
accordance with the foregoing shall be deemed to have been received on the date of delivery to the officer or if delivered
by facsimile, email or other means of prepaid, transmitted, recorded communication on the first Business Day following
the date of the sending of the notice by the person giving the notice.
10.2
Notice to the Warrantholders
(1)
Any notice to the Warrantholders under the provisions of this Indenture shall be deemed to
be validly given if the notice is sent by prepaid mail or, if delivered by hand, to the holders at their addresses appearing in
the register of holders or if otherwise given in the manner specified herein. Any notice so delivered shall be deemed to
have been received on the date of delivery if that date is a Business Day or the Business Day following the date of
delivery if such date is not a Business Day or on the third Business Day if delivered by mail. All notices may be given to
whichever one of the Warrantholders (if more than one) is named first in the appropriate register hereinbefore mentioned,
and any notice so given shall be sufficient notice to all Warrantholders and any other persons (if any) interested in such
Warrants. Accidental error or omission in giving notice or accidental failure to mail notice to any Warrantholder will not
invalidate
- 45 -
any action or proceeding founded thereon.
(2)
If, by reason of strike, lockout or other work stoppage, actual or threatened, involving postal
employees, any notice to be given to the Warrantholders could reasonably be considered unlikely to reach its destination,
the notice may be given in a news release disseminated through a newswire service, filed on SEDAR and posted on the
Company’s website; provided that in the case of a notice convening a meeting of the holders of Warrants, the Warrant
Agent may require such additional publications of that notice, in Toronto, Ontario or in other cities or both, as it may
deem necessary for the reasonable notification of the holders of Warrants or to comply with any applicable requirement of
law or any stock exchange. Any notice so given shall be deemed to have been given on the day on which it has been
published in all of the cities in which publication was required.
10.3
Privacy
Despite any other provision of this Indenture, no party hereto shall take or direct any action that would
contravene, or cause the other to contravene, applicable federal and/or provincial legislation that addresses the protection of
individuals’ personal information (collectively, “Privacy Laws”). The Company shall, prior to transferring or causing to be
transferred personal information to the Warrant Agent, obtain and retain required consents of the relevant individuals to the
collection, use and disclosure of their personal information, or shall have determined that such consents either have
previously been given upon which the parties can rely or are not required under the Privacy Laws. The Warrant Agent shall
use commercially reasonable efforts to ensure that its services hereunder comply with Privacy Laws. The Company
acknowledges and agrees that the Warrant Agent may receive collect, use and disclose personal information provided to it
or acquired by it in the course of its acting as agent hereunder for the purposes described above and, generally, in the
manner and on the terms described in its privacy code, which the Warrant Agent shall make available on its website,
www.computershare.com, or upon request, including revisions thereto. The Warrant Agent may transfer personal
information to other companies in or outside of Canada that provide data processing and storage or other support in order to
facilitate the services it provides.
10.4
Third Party Interests
The Company represents to the Warrant Agent that any account to be opened by, or interest to be held by
the Warrant Agent in connection with this Indenture, for or to the credit of such party, either (i) is not intended to be used
by or on behalf of any third party; or (ii) is intended to be used by or on behalf of a third party, in which case such party
hereto agrees to complete and execute forthwith a declaration in the Warrant Agent prescribed form as to the particulars of
such third party.
10.5
Discretion of Directors
so made will be conclusive.
Any matter provided herein to be determined by the directors in their sole discretion and determination
- 46 -
10.6
Satisfaction and Discharge of Indenture
Upon the earlier of the Time of Expiry or the date by which there shall have been delivered to the
Warrant Agent for exercise or cancellation in accordance with the provisions hereof all Warrants theretofore Authenticated
or certified hereunder, this Indenture, except to the extent that Warrant Shares and any certificates therefor have not been
issued and delivered hereunder or the Company has not performed any of its obligations hereunder, shall cease to be of
further effect in respect of the Company, and the Warrant Agent, on written demand of and at the cost and expense of the
Company, and upon delivery to the Warrant Agent of a certificate of the Company stating that all conditions precedent to
the satisfaction and discharge of this Indenture have been complied with and upon payment to the Warrant Agent of the
expenses, fees and other remuneration payable to the Warrant Agent, shall execute proper instruments acknowledging
satisfaction of and discharging this Indenture. Notwithstanding the foregoing, the indemnities provided to the Warrant
Agent by the Corporation hereunder shall remain in full force and effect and survive the termination of this Indenture.
10.7
Provisions of Indenture and Warrants for the Sole Benefit of Parties and Warrantholders
Nothing in this Indenture or the Warrant Certificates, expressed or implied, shall give or be construed to
give to any person other than the parties hereto and the holders from time to time of the Warrants any legal or equitable
right, remedy or claim under this Indenture, or under any covenant or provision therein contained, all such covenants and
provisions being for the sole benefit of the parties hereto and the Warrantholders.
10.8
Ownership of Warrants
The Company and the Warrant Agent may deem and treat the Warrantholders as the absolute owner thereof for all
purposes, and the Company and the Warrant Agent shall not be affected by any notice or knowledge to the contrary except
where the Company or the Warrant Agent is required to take notice by statute or by order of a court of competent
jurisdiction. The receipt of any such Warrantholder of the Warrant Shares which may be acquired pursuant thereto shall be a
good discharge to the Company and the Warrant Agent for the same and neither the Company nor the Warrant Agent shall
be bound to inquire into the title of any such holder except where the Company or the Warrant Agent is required to take
notice by statute or by order of a court of competent jurisdiction.
10.9
Indenture to Prevail
the Warrant Certificate, the terms of this Indenture will prevail.
To the extent of any discrepancy or inconsistency between the terms and conditions of this Indenture and
10.10
Assignment
Except as provided in subsection 9.8(3), this Indenture nor any benefits or burdens under this Indenture
shall be assignable by the Company or the Warrant Agent without the prior written consent of the other party, such consent
not to be unreasonably withheld. Subject to the
- 47 -
foregoing, this Indenture shall enure to the benefit of and be binding upon the Company and the Warrant Agent and
their respective successors (including any successor by reason of amalgamation) and permitted assigns.
10.11
Counterparts and Formal Date
This Indenture may be simultaneously executed in several counterparts and by electronic means, each of
which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same
instrument and notwithstanding their date of execution shall be deemed to bear the date set out at the top of the first page of
this Indenture.
10.12
Force Majeure
No party shall be liable to the other, or held in breach of this Indenture, if prevented, hindered, or delayed
in the performance or observance of any provision contained herein by reason of act of God, riots, terrorism, acts of war,
epidemics, governmental action or judicial order, earthquakes, or any other similar causes (including, but not limited to,
mechanical, electronic or communication interruptions, disruptions or failures). Performance times under this Indenture
shall be extended for a period of time equivalent to the time lost because of any delay that is excusable under this Section.
10.13
Severability
If, in any jurisdiction, any provision of this Indenture or its application to any party or circumstance is restricted,
prohibited or unenforceable, such provision will, as to such jurisdiction, be ineffective only to the extent of such restriction,
prohibition or unenforceability without invalidating the remaining provisions of this Indenture and without affecting the
validity or enforceability of such provision in any other jurisdiction or without affecting its application to other parties or
circumstances.
10.14
Rights of Rescission and Withdrawal for Holders
Should a Warrantholder exercise any legal, statutory, contractual or other right of withdrawal or rescission that
may be available to it, and the Warrantholder’s funds which were paid on exercise have already been released to the
Company by the Warrant Agent, the Warrant Agent shall not be responsible for ensuring the exercise is cancelled and a
refund is paid back to the Warrantholder. In such cases, the Warrantholder shall seek a refund directly from the Company
and subsequently, the Company, upon surrender to the Company or the Warrant Agent of any underlying Warrant Shares or
other securities that may have been issued, or such other procedure as agreed to by the parties hereto, shall instruct the
Warrant Agent in writing, to cancel the exercise transaction and any such underlying Warrant Shares or other securities on
the register, which may have already been issued upon the Warrant exercise. In the event that any payment is received from
the Company by virtue of the holder being a shareholder for such Warrants that were subsequently rescinded, such payment
must be returned to the Company by such Warrantholder. The Warrant Agent shall not be under any duty or obligation to
take any steps to ensure or enforce the return of the funds pursuant to this section, nor shall the Warrant Agent be in any
other way responsible in the event that any payment is not delivered or received pursuant to this section.
- 48 -
Notwithstanding the foregoing, in the event that the Company provides the refund to the Warrant Agent for distribution to
the Warrantholder, the Warrant Agent shall return such funds to the Warrantholder as soon as reasonably practicable, and
in so doing, the Warrant Agent shall incur no liability with respect to the delivery or non-delivery of any such funds.
(Signature page follows)
- 49 -
proper officers in that behalf.
IN WITNESS WHEREOF the parties hereto have executed this Indenture under the hands of their
APHRIA INC.
Per:
“Carl Merton”
Authorized Signing Officer
COMPUTERSHARE TRUST COMPANY OF CANADA
Per:
“Neil Scott”
Authorized Signing Officer
Per:
“Danny Snider”
Authorized Signing Officer
[Warrant Indenture between Aphria Inc. and Computershare Trust Company of Canada]
SCHEDULE A
FORM OF WARRANT CERTIFICATE
WARRANTS TO PURCHASE COMMON SHARES OF APHRIA
INC.
(a corporation continued pursuant to the laws of Ontario)
Representing
Warrants to
purchase Common Shares
Warrant Certificate Number:
CUSIP No. 03765K146 ISIN No.
CA03765K1460
THIS CERTIFIES that, for value received, the registered holder hereof,
(the “holder”) is entitled, at any time at or before 5:00 p.m. (Toronto time) on January
30, 2022 (the “Expiry Time”), to acquire, subject to adjustment in certain events, the number of common shares
(“Common Shares”) of Aphria Inc. (the “Company”) specified above, as presently constituted, by surrendering to
Computershare Trust Company of Canada (the “Warrant Agent”) at its principal office in Toronto, Ontario, this Warrant
Certificate with the duly completed and executed Exercise Form endorsed on the back of this Warrant Certificate, and
accompanied by payment of $9.26 per Common Share (subject to adjustment in certain events) (the “Warrant Exercise
Price”) by certified cheque, bank draft or money order in lawful money of Canada payable to, or to the order of, the
Company at par at the above-mentioned office of the Warrant Agent.
The holder of this Warrant Certificate may purchase less than the number of Common Shares which he is entitled
to purchase on the exercise of the Warrants represented by this Warrant Certificate, in which event a new Warrant
Certificate representing the Warrants not then exercised will be issued to the holder.
The Warrants evidenced hereby are exercisable on or before the Expiry Time, after which time the Warrants
evidenced hereby shall be deemed to be void and of no further force or effect.
This Warrant Certificate represents Warrants of the Company issued or issuable under the provisions of a warrant
indenture (which indenture together with all other instruments supplemental or ancillary thereto is herein referred to as the
“Warrant Indenture”) dated as of January 30, 2020, between the Company and the Warrant Agent, as may be amended
from time to time, which contains particulars of the rights of the holders of the Warrants and the Company and of the
Warrant Agent in respect thereof and the terms and conditions upon which the Warrants are issued and held, all to the same
effect as if the provisions of the Warrant Indenture were herein set forth, to all of which the holder of this Warrant
Certificate by acceptance hereof assents. Unless otherwise defined herein, all capitalized terms shall have the meanings
ascribed to them in the Warrant Indenture. A copy of the Warrant Indenture will be available for inspection at the principal
office of the Company in the City of Toronto, Ontario. In the event of any conflict between the provisions contained in
this Warrant Certificate and the
A-1
provisions of the Warrant Indenture, the provisions of the Warrant Indenture shall prevail.
Upon acceptance hereof, the holder hereof hereby expressly waives the right to receive any fractional Common
Shares upon the exercise hereof in full or in part and further waives the right to receive any cash or other consideration in
lieu thereof. The Warrants represented by this Warrant Certificate shall be deemed to have been surrendered, and payment
by certified cheque, bank draft or money order shall be deemed to have been made only upon personal delivery thereof or,
if sent by post or other means of transmission, upon actual receipt thereof by the Warrant Agent at its office in the City of
Toronto, Ontario.
Upon due exercise of the Warrants represented by this Warrant Certificate and payment of the Warrant Exercise
Price, the Company shall cause to be issued to the person(s) in whose name(s) the Common Shares so subscribed for
(provided that if the Common Shares are to be issued to a person other than the registered holder of this Warrant
Certificate, the holder’s signature on the Exercise Form herein shall be guaranteed by a Schedule I Canadian chartered
bank, or by a medallion signature guarantee from a member of a recognized Signature Medallion Guarantee Program and
the holder shall pay to the Company or the Warrant Agent all applicable transfer or similar taxes and the Company shall not
be required to issue or deliver certificates evidencing the Common Shares unless or until the holder shall have paid the
Company or the Warrant Agent the amount of such tax (or shall have satisfied the Company that such tax has been paid
or that no tax is due)) are to be issued, the number of Common Shares to be issued to such person(s) and such person(s)
shall become a holder in respect of such Common Shares with effect from the date of such exercise, and upon due
surrender of this Warrant Certificate and all other documentation required, the Warrant Agent shall cause the issuance of a
certificate(s) representing such Common Shares to be issued within five Business Days after the exercise of the Warrants
(or portion thereof) represented hereby.
The holder acknowledges that the Warrants represented by this Warrant Certificate and the Common Shares
issuable upon exercise hereof may be offered, sold or otherwise transferred only in compliance with all applicable
securities laws.
No transfer of any Warrant will be valid unless entered on the register of transfers, upon surrender to the Warrant
Agent of the Warrant Certificate evidencing such Warrant, duly endorsed by, or accompanied by a transfer form or other
written instrument of transfer in form satisfactory to the Warrant Agent executed by the registered holder or his executors,
administrators or other legal representatives or his or their attorney duly appointed by an instrument in writing in form and
execution satisfactory to the Warrant Agent. Subject to the provisions of the Warrant Indenture and upon compliance with
the reasonable requirements of the Warrant Agent, Warrant Certificates may be exchanged for Warrant Certificates
representing in the aggregate an equal number of Warrants. The Company and the Warrant Agent may treat the registered
holder of this Warrant Certificate for all purposes as the absolute owner hereof. The holding of the Warrants represented by
this Warrant Certificate shall not constitute the holder hereof a holder of Common Shares nor entitle him to any right or
interest in respect thereof except as herein and in the Warrant Indenture expressly provided.
A-2
The Warrant Indenture provides for adjustment in the number of Common Shares to be delivered upon exercise of
the right of purchase hereby granted and to the Warrant Exercise Price in certain events therein set forth.
The Warrant Indenture contains provisions making binding upon all holders of Warrants outstanding thereunder
resolutions passed at meetings of such holders held in accordance with such provisions and instruments in writing signed
by the Warrantholders holding a specified percentage of the then outstanding Warrants.
The Warrants and the Warrant Indenture shall be governed by and performed, construed and enforced in
accordance with the laws of the Province of Ontario and the federal laws of Canada applicable therein and shall be treated
in all respects as Ontario contracts. Time shall be of the essence hereof and of the Warrant Indenture.
The Company may from time to time at any time prior to the Expiry Time purchase any of the Warrants by
private agreement or otherwise.
This Warrant Certificate shall not be valid for any purpose until it has been certified by or on behalf of the Warrant
Agent for the time being under the Warrant Indenture.
All dollar amounts herein are expressed in the lawful money of Canada.
IN WITNESS WHEREOF the Company has caused this Warrant Certificate to be signed by its duly authorized
officer as of this day of
, 20 .
APHRIA INC.
By:
Authorized Signing Officer
Certified this day of
COMPUTERSHARE TRUST COMPANY OF CANADA
Authorized Signing Officer
By:
A-3
TO:
APHRIA INC.
EXERCISE FORM
AND TO: COMPUTERSHARE TRUST COMPANY OF CANADA
100 University Avenue, 8th Floor, Toronto,
Ontario M5J 2Y1
The undersigned holder of the within Warrants hereby irrevocably exercises the right of such holder to be issued and
hereby subscribes for
Common Shares of Aphria Inc. (the
“Company”) at the Warrant Exercise Price referred to in the attached Warrant Certificate on the terms and conditions set
forth in such certificate and the Warrant Indenture and encloses herewith a certified cheque, bank draft or money order in
lawful money of Canada payable to, or to the order of, the Company at par in payment in full of the subscription price of
the Common Shares hereby subscribed for.
Unless otherwise defined herein, all capitalized terms shall have the meanings ascribed to them in the warrant indenture
between the Company and Computershare Trust Company of Canada dated January 30, 2020 (the “Warrant Indenture”).
(Please check the ONE box applicable):
•☐
1.
The undersigned certifies that it (i) is not in the United States and is not a “U.S. Person”, within the
meaning of Regulation S under the United States Securities Act of 1933, as amended (the “U.S.
Securities Act”),
(ii) is not exercising this Warrant for the account or benefit of any U.S. Person, (iii) did not execute
or deliver this Exercise Form within the United States and (iv) has in all other aspects complied
with the terms of Regulation S under the U.S. Securities Act.
•☐
3.
The undersigned holder is an “accredited investor” as defined in Rule 501(a) of Regulation D and
has delivered to the Company and the Company’s transfer agent a completed and executed U.S.
Warrantholder Letter in substantially the form attached to this Warrant Indenture as Schedule “C”
•☐
4.
The undersigned is (a) present in the United States, (b) a U.S. Person, (c) a person exercising the
Warrants for the account or benefit of a U.S. Person or a person in the United States, (d) executing
or delivering this exercise form in the United States, or (e) requesting delivery in the United States
of the Warrant Shares, and the undersigned is delivering a written opinion of a United States
legal counsel or evidence reasonably satisfactory to the Company to the effect the Common
Shares to be
delivered upon exercise hereof are either (i) exempt from the registration requirements of the
U.S. Securities Act and applicable state securities
A-4
laws, or (ii) have been registered under the U.S. Securities Act.
The undersigned holder understands that unless Box 4 pursuant to 4(ii) above is checked, the certificate representing the
Common Shares will be issued in definitive physical certificated or book-entry form and bear a legend restricting transfer
without registration under the U.S. Securities Act and applicable state securities laws unless an exemption from registration
is available (as described in the Warrant Indenture and the subscription documents). Holders are encouraged to consult with
the Company in advance to determine that the legal opinion tendered in connection with the exercise will be satisfactory in
form and substance to the Company. “U.S. Person” and “United States” are as defined under Regulation S under the U.S.
Securities Act.
The undersigned hereby acknowledges that the undersigned is aware that the Common Shares received on exercise may be
subject to restrictions on resale under applicable securities legislation. The undersigned hereby further acknowledges that
the Company will rely upon the confirmations, acknowledgements and agreements set forth herein, and agrees to notify the
Company promptly in writing if any of the representations or warranties herein ceases to be accurate or complete.
The undersigned hereby directs that the said Common Shares be issued as follows:
NAME(S) IN FULL
ADDRESS(ES)
NUMBER OF COMMON SHARES
(Please print. If securities are issued to a person other than the registered Warrantholder, the holder must pay to the Warrant Agent all applicable taxes and the
signature of the holder must be guaranteed by a Schedule I Canadian chartered bank, or by a medallion signature guarantee from a member of a recognized
Signature Medallion Guarantee Program).
DATED this day of , .
Signature of Warrantholder
Signature Guarantee
Print name
Address
☐
NOTES
Please check this box if the securities are to be delivered at the office where these Warrants are surrendered, failing which the securities will be
mailed.
A-5
1.
Certificates will not be registered or delivered to an address in the United States unless Box 2, 3 or 4 above is checked.
TO:
APHRIA INC. (the “Company”)
TRANSFER FORM
AND TO:
COMPUTERSHARE TRUST COMPANY OF CANADA
100 University Avenue, 8th Floor, Toronto,
Ontario M5J 2Y1
FOR VALUE RECEIVED, the undersigned transferor hereby sells, assigns and transfers unto
(Transferee)
(Address)
(Social Insurance Number)
of the Warrants registered in the name of the undersigned transferor represented by the
Warrant Certificate.
DATED this day of , .
Signature of Warrantholder
Signature Guarantee
Print name
Address
NOTES:
1.
2.
The signature to this transfer must correspond with the name as recorded on the Warrants in every particular without alteration or enlargement or any
change whatever. The signature of the person executing this transfer must be guaranteed by a Schedule I Canadian chartered bank, or by a medallion
signature guarantee from a member of a recognized Signature Medallion Guarantee Program.
Warrants shall only be transferable in accordance with the Warrant Indenture between Aphria Inc. (the “Company”) and Computershare Trust
Company of Canada (the “Warrant Agent”) dated as of January 30, 2020, applicable laws and the rules and policies of any applicable stock
exchange. Without limiting the foregoing, if the Warrant
A-6
Certificate bears a legend restricting the transfer of the Warrants except pursuant to an exemption from registration under the United States
Securities Act of 1933, as amended (the “U.S. Securities Act”), and applicable state securities laws, this Transfer Form must be accompanied by a
properly completed and executed declaration for removal of legend in the form attached as Schedule B to the Warrant Indenture or if Warrants are
transferred in compliance pursuant to an exemption from the registration requirements of the U.S. Securities Act, an opinion of counsel of
recognized standing, reasonably satisfactory to the Company and the Warrant Agent, to the effect that such legend is no longer required under
applicable requirements of the U.S. Securities Act or state securities laws, together with such other documents or instruments as the Company or the
Warrant Agent may require.
A-7
FORM OF DECLARATION FOR REMOVAL OF LEGEND
SCHEDULE B
TO:
APHRIA INC.
AND TO:
COMPUTERSHARE TRUST COMPANY OF CANADA
100 University Avenue, 8th Floor, Toronto,
Ontario M5J 2Y1
represented
Aphria Inc. (the
by
The undersigned (a) acknowledges that the sale
of
“Company”)
certificate
to which this declaration relates is being
number
made in reliance on Rule 904 of Regulation S (“Regulation S”) under the United States Securities Act of 1933, as
amended (the “U.S. Securities Act”) and (b) certifies that (1) it is not an affiliate (as defined in Rule 405 under the U.S.
Securities Act) of the Company, other than a director or officer who is an affiliate solely by virtue of holding such position,
(2) the offer of such securities was not made to a person in the United States and either (A) at the time the buy order was
originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believe that
the buyer was outside the United States, or (B) the transaction was executed on or through the facilities of the TSX or
another “designated offshore securities market” and neither the seller nor any person acting on its behalf knows that the
transaction has been prearranged with a buyer in the United States, (3) neither the seller nor any affiliate of the seller nor
any person acting on any of their behalf has engaged or will engage in any directed selling efforts in the United States in
connection with the offer and sale of such securities, (4) the sale is bona fide and not for the purpose of “washing off” the
resale restrictions imposed because the securities are “restricted securities” (as such term is defined in Rule 144(a)
(3) under the U.S. Securities Act), (5) the seller does not intend to replace the securities sold in reliance on Rule 904 of the
U.S. Securities Act with fungible unrestricted securities, and (6) the sale was not a transaction, or part of a series of
transactions which, although in technical compliance with Regulation S, is part of a plan or scheme to evade the
registration provisions of the U.S. Securities Act. Terms used herein have the meanings given to them by Regulation S.
Dated: By:
Name:
Title:
B-1
Affirmation by Seller's Broker-Dealer
(Required for sales pursuant to Section (b)(2)(B) above)
(the "Seller") with regard to the sale, for such
We have read the foregoing representations of our customer,
Seller's account, of
common shares (the "Shares") of the Company. We have executed sales of the Shares
pursuant to Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "U.S. Securities
Act"), on behalf of the Seller. In that connection, we hereby represent to you as follows:
1.
2.
3.
4.
no offer to sell the Shares was made to a person in the United States;
the sale of the Shares was executed in, on or through the facilities of the Toronto Stock Exchange, the TSX
Venture Exchange, the Canadian Securities Exchange or another designated offshore securities market (as defined
in Rule 902(b) of Regulation S under the U.S. Securities Act), and, to the best of our knowledge, the sale was not
pre-arranged with a buyer in the United States;
no "directed selling efforts" were made in the United States by the undersigned, any affiliate of the undersigned,
or any person acting on behalf of the undersigned; and
we have done no more than execute the order or orders to sell the Shares as agent for the Seller and will receive
no more than the usual and customary broker's commission that would be received by a person executing such
transaction as agent.
For purposes of these representations: "affiliate" means a person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with, the undersigned; "directed selling efforts"
means any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning
the market in the United States for the Shares (including, but not be limited to, the solicitation of offers to purchase the
Shares from persons in the United States); and "United States" means the United States of America, its territories or
possessions, any State of the United States, and the District of Columbia.
Legal counsel to the Company shall be entitled to rely upon the representations, warranties and covenants contained herein
to the same extent as if this affirmation had been addressed to them.
Name of Firm
Authorized Officer
By:
DATED
, 20
LEGAL_32678627.2
B-2
FORM OF U.S. WARRANTHOLDER CERTIFICATION UPON EXERCISE OF WARRANTS
SCHEDULE C
Aphria Inc.
1 Adelaide Street East, Suite 2310 Toronto,
Ontario M5C 2V9
- and to -
Computershare Trust Company of Canada 100
University Avenue, 8th Floor,
Toronto, Ontario M5J 2Y1 as
Warrant Agent
Dear Sirs:
The undersigned is delivering this letter in connection with the purchase of common shares (the "Common Shares") of
Aphria Inc., a corporation existing under the laws of the Province of Ontario (the "Company") upon the exercise of
warrants of the Company ("Warrants"), issued under the warrant indenture, dated as of January 30, 2020 between the
Company and Computershare Trust Company of Canada (which indenture together with all other instruments supplemental
or ancillary thereto is herein referred to as the "Warrant Indenture"). Any capitalized term in this letter that is not
otherwise defined herein, shall have the meaning ascribed thereto in the Warrant Indenture.
The undersigned hereby represents and warrants to the Company that the undersigned, and each beneficial owner (each a
"Beneficial Owner"), if any, on whose behalf the undersigned is exercising such Warrants, satisfies one or more of the
following categories of accredited investor (please write "W/H" for the undersigned holder, and "B/O" for each
beneficial owner, if any, on each line that applies):
(a)
Any bank as defined in Section 3(a)(2) of the U.S. Securities Act of 1933, as amended (the "U.S. Securities
Act") or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the U.S. Securities
Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to Section 15 of
the U.S. Securities Exchange Act of 1934 or any insurance company as defined in Section 2(a)(13) of the U.S.
Securities Act; any investment company registered under the U.S. Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that Act; any Small Business Investment Company
licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the U.S. Small Business
Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the benefit of its employees if such plan has total assets in
excess of US$5,000,000; any employee benefit plan within the meaning of the U.S. Employee Retirement Income
Security Act of 1974 if the investment decision is made by a plan
C-1
fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance
company, or registered investment adviser, or if the employee benefit plan has total assets in excess of
US$5,000,000, or, if a self-directed plan, with investment decisions made solely by persons that are "accredited
investors," as such term is defined in Rule 501(a) of Regulation D of the U.S. Securities Act;
Any private business development company as defined in Section 202(a)(22) of the U.S. Investment
Advisers Act of 1940;
Any organization described in Section 501(c)(3) of the U.S. Internal Revenue Code, Corporation,
Massachusetts or similar business trust, limited liability company or partnership, not formed for the
specific purpose of acquiring the securities offered, with total assets in excess of US$5,000,000;
Any trust with total assets in excess of US$5,000,000, not formed for the specific purpose of
acquiring the securities offered, whose purchase is directed by a sophisticated person (being defined as a
person who has such knowledge and experience in financial and business matters that he or she is capable
of evaluating the merits and risks of the prospective investment);
Any director, executive officer or general partner of the Company;
A natural person whose individual net worth, or joint net worth with that person's spouse, at the time of
his or her purchase exceeds US$1,000,000 (for the purposes of calculating net worth: (i) the person's
primary residence shall not be included as an asset; (ii) indebtedness that is secured by the person's
primary residence, up to the estimated fair market value of the primary residence at the time of the sale and
purchase of securities contemplated by the accompanying Warrant exercise form, shall not be included as a
liability (except that if the amount of such indebtedness outstanding at the time of the sale and purchase of
securities contemplated by the accompanying Warrant exercise form exceeds the amount outstanding 60
days before such time, other than as a result of the acquisition of the primary residence, the amount of such
excess shall be included as a liability); and (iii) indebtedness that is secured by the person's primary
residence in excess of the estimated fair market value of the primary residence shall be included as a
liability);
Any natural person who had an individual income in excess of US$200,000 in each of the two most
recent years or joint income with that person's spouse in excess of US$300,000 in each of those years and
has a reasonable expectation of reaching the same income level in the current year; or
Any entity in which each of the equity owners meets the requirements of one of the above
categories (if this alternative is checked, you must identify each equity owner and provide statements
signed by each demonstrating how each qualifies as an accredited investor).
(b)
(c)
(d)
(e)
(f)
(g)
(h)
The undersigned further represents and warrants to the Company that:
C-2
1.
2.
3.
4.
the undersigned has such knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of an investment in the Common Shares, and the undersigned is able to bear the
economic risk of loss of his or her entire investment;
the undersigned is: (i) purchasing the Common Shares for his or her own account or for the account of one or
more Accredited Investors with respect to which the undersigned is exercising sole investment discretion, and not
on behalf of any other person; (ii) is purchasing the Common Shares for investment purposes only and not with a
view to resale, distribution or other disposition in violation of United States federal or state securities laws; and
(iii) in the case of the purchase by the undersigned of the Common Shares as agent or trustee for a Beneficial
Owner, the undersigned holder has due and proper authority to act as agent or trustee for and on behalf of
each such Beneficial Owner in connection with the transactions contemplated hereby; provided that: (x) if the
undersigned holder, or any Beneficial Owner, is a corporation, a limited liability company or a partnership,
syndicate, trust or other form of unincorporated organization, the undersigned holder or each such Beneficial
Owner was not incorporated or created solely, nor is it being used primarily, to permit purchases without a
prospectus or registration statement under applicable law; and (y) each Beneficial Owner, if any, is an Accredited
Investor;
the undersigned has not exercised the Warrants as a result of any form of general solicitation or general
advertising, including advertisements, articles, notices or other communications published in any newspaper,
magazine or similar media or broadcast over radio, television, the Internet or other form of telecommunications,
or any seminar or meeting whose attendees have been invited by general solicitation or general advertising;
the funds representing the purchase price for the Common Shares, which will be advanced by the undersigned to
the Company, will not represent proceeds of crime for the purposes of the United States Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the
"PATRIOT Act"), and the undersigned acknowledges that the Company may in the future be required by law to
disclose the undersigned's name and other information relating to this exercise form and the undersigned's
subscription hereunder, on a confidential basis, pursuant to the PATRIOT Act. No portion of the purchase price
to be provided by the undersigned (i) has been or will be derived from or related to any activity that is deemed
criminal under the laws of the United States of America, or any other jurisdiction, or (ii) is being tendered on
behalf of a person or entity who has not been identified to or by the undersigned, and the undersigned shall
promptly notify the Company if the undersigned discovers that any of such representations ceases to be true and
provide the Company with appropriate information in connection therewith;
The undersigned also acknowledges and agrees that:
5.
the Company has provided to the undersigned the opportunity to ask questions and receive answers concerning
the terms and conditions of the offering, and the undersigned has had access to such information concerning the
Company as he or she has considered necessary or appropriate in connection with his or her investment decision
to acquire the Common Shares;
C-3
6.
if the undersigned decides to offer, sell or otherwise transfer any of the Common Shares, the undersigned must
not, and will not, offer, sell or otherwise transfer any of such Common Shares directly or indirectly, unless:
(a)
(b)
(c)
(d)
the sale is to the Company;
the sale is made outside the United States in a transaction meeting the requirements Regulation S under
the U.S. Securities Act and in compliance with applicable local laws and regulations;
the sale is made pursuant to the exemption from the registration requirements under the U.S. Securities
Act provided by Rule 144 thereunder, if available, and in accordance with any applicable state securities or
"blue sky" laws; or
the Common Shares are sold in another transaction that does not require registration under the U.S.
Securities Act or any applicable state laws and regulations governing the offer and sale of securities, and it
has prior to such sale furnished to the Company an opinion of counsel reasonably satisfactory to the
Company;
the Common Shares are "restricted securities" (as defined in Rule 144(a)(3) under the
U.S. Securities Act) and that the U.S. Securities Act and the rules of the United States Securities and Exchange
Commission provide in substance that the undersigned may dispose of the Common Shares only pursuant to an
effective registration statement under the U.S. Securities Act or an exemption or exclusion therefrom;
the Company has no obligation to register any of the Common Shares or to take any other action so as to permit
sales pursuant to the U.S. Securities Act (including Rule 144 thereunder);
the certificates representing the Common Shares as well as all certificates issued in exchange for or in substitution
of therefor, until such time as is no longer required under the applicable requirements of the U.S. Securities
Act and applicable state securities laws, will bear, on the face of such certificate, restrictive legend substantially
in the form set forth in Section 2.20(2) of the Warrant Indenture; provided that if the Common Shares are being
sold outside the United States in compliance with the requirements of Rule 904 of Regulation S, such restrictive
legend may be removed by providing a declaration to the registrar and transfer agent of the Company, substantially in
the form annexed to the Warrant Indenture as Schedule "B" thereto (or in such other form as the Company may prescribe
from time to time) and, if requested by the Company or transfer agent, an opinion of counsel, of recognized standing, in
form and substance satisfactory to the Company to the effect that the transfer is in compliance with Rule 904; and provided,
further, that, if any Common Shares are being sold otherwise than in accordance with Regulation S and other than to the
Company, the legend may be removed by delivery to the registrar and transfer agent and the Company of an opinion of
counsel, of recognized standing reasonably satisfactory to the Company, that such legend is no longer required under
applicable requirements of the U.S. Securities Act or state securities laws;
7.
8.
9.
10.
the financial statements of the Company have been prepared in accordance with International Financial Reporting
Standards as issued by the International Accounting
C-4
11.
12.
13.
Standards Board, which differ in some respects from United States generally accepted accounting principles and,
thus, may not be comparable to financial statements of United States companies;
there may be material tax consequences to the undersigned of an acquisition or disposition of the Common
Shares, and the Company gives no opinion and makes no representation with respect to the tax consequences to
the undersigned under United States, state, local or foreign tax law of the undersigned's acquisition or disposition
of such securities; in particular, no determination has been made whether the Company will be a "passive foreign
investment company" (commonly known as a "PFIC") within the meaning of Section 1297 of the United States
Internal Revenue Code;
it consents to the Company making a notation on its records or giving instructions to any transfer agent of the
Company in order to implement the restrictions on transfer set forth and described in the Warrant Exercise Form
attached to the Warrant Indenture; and
it acknowledges and consents to the fact that the Company is collecting personal information (as that term is
defined under applicable privacy legislation, including, without limitation, the Personal Information Protection
and Electronic Documents Act (Canada) and any other applicable similar, replacement or supplemental provincial
or federal legislation or laws in effect from time to time) of the undersigned for the purpose of facilitating the
subscription for the Common Shares hereunder. The undersigned acknowledges and consents to the Company
retaining such personal information for as long as permitted or required by law or business practices and agrees
and acknowledges that the Company may use and disclose such personal information: (a) for internal use with
respect to managing the relationships between and contractual obligations of the Company and the undersigned;
(b) for use and disclosure for income tax-related purposes, including without limitation, where required by law
disclosure to Canada Revenue Agency; (c) disclosure to professional advisers of the Company in connection with
the performance of their professional services; (d) disclosure to securities regulatory authorities and other
regulatory bodies with jurisdiction with respect to reports of trade or similar regulatory filings; (e) disclosure to a
governmental or other authority to which the disclosure is required by court order or subpoena compelling such
disclosure and where there is no reasonable alternative to such disclosure; (f) disclosure to any person where
such disclosure is necessary for legitimate business reasons and is made with your prior written consent; (g) disclosure to a
court determining the rights of the parties under this Agreement; and (h) for use and disclosure as otherwise required or
permitted by law.
We acknowledge that you will rely upon our confirmations, acknowledgements and agreements set forth herein, and we
agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate or complete.
DATED , 20 .
Name of U.S. Warrantholder (please print)
X
C-5
Signature of individual (if U.S. Warrantholder is an
individual)
X
Authorized signatory (if U.S. Warrantholder is not an
individual)
Name of authorized signatory (please print)
Official capacity of authorized signatory (please print)
C-6
Exhibit 10.40
Execution Version
1974568 ONTARIO LIMITED O/A APHRIA DIAMOND
as Borrower
- and -
APHRIA INC.
the “Parent” or “Limited Guarantor”
-and-
EACH OF THE SUBSIDIARIES OF THE BORROWER IDENTIFIED ON THE SIGNATURE PAGES HERETO AS
GUARANTORS,
AND EACH ADDITIONAL SUBSIDIARY OF THE BORROWER PARTY HERETO FROM TIME TO TIME AS A
GUARANTOR
collectively as Guarantors
- and -
BANK OF MONTREAL
AND THE ADDITIONAL LENDERS FROM TIME TO TIME PARTY TO THIS AGREEMENT
as Lenders
- and -
BANK OF MONTREAL
as Administrative Agent
-and-
BANK OF MONTREAL
as Sole Arranger and Sole Book Runner
CREDIT AGREEMENT
November 29, 2019
TABLE OF CONTENTS
ARTICLE I - INTERPRETATION
Definitions
Accounting Principles
Currency References
References to Statutes
Extended Meanings
Joint and Several Obligations
Exhibits and Schedules
ARTICLE II – FACILITY A (TERM FACILITY)
Establishment of Facility A
Purpose
Non-Revolving Nature
Repayment
Availment Options
Interest and Fees
Voluntary Cancellation; Voluntary Repayments
ARTICLE III - GENERAL CONDITIONS
Matters Relating to Interest
Notice Periods
Minimum Amounts, Multiples and Procedures re Draws, Conversions and Repayments
Place of Advances, Repayments
Evidence of Obligations (Noteless Advances)
Determination of Equivalent Amounts
Purchase of Bankers' Acceptances and BA Equivalent Notes
Provisions Regarding Bankers' Acceptances
Provisions regarding BA Equivalent Notes
No Repayment of Certain Availment Options
Illegality
Anti-Money Laundering
Terrorist Lists
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
Representations and Warranties
Survival of Representations and Warranties
ARTICLE V - COVENANTS
Positive Covenants
Negative Covenants
Financial Covenants
Reporting Requirements
Anti-Money Laundering
Terrorist Lists
1.01
1.02
1.03
1.04
1.05
1.06
1.07
2.01
2.02
2.03
2.04
2.05
2.06
2.07
3.01
3.02
3.03
3.04
3.05
3.06
3.07
3.08
3.09
3.10
3.11
3.12
3.13
4.01
4.02
5.01
5.02
5.03
5.04
5.05
5.06
Page
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ARTICLE VI - SECURITY
Security to be Provided by the Credit Parties and Limited Recourse Guarantors
Security to be Provided by Others
General Provisions re Security; Registration
Opinions re Security
After-Acquired Property, Further Assurances
Insurance by Agent
Insurance Proceeds
Discharge of Certain Security
ARTICLE VII - CONDITIONS PRECEDENT
Conditions Precedent to First Advance
Conditions Precedent to all Advances
ARTICLE VIII - DEFAULT AND REMEDIES
Events of Default
Acceleration; Additional Interest
Acceleration of Certain Contingent Obligations
Combining Accounts, Set-Off
Appropriation of Monies
No Further Advances
Remedies Cumulative
Performance of Covenants by Agent
ARTICLE IX - THE AGENT AND THE LENDERS
Lenders' Decisions
Security
Application of Proceeds of Realization
Payments by Agent
Protection of Agent
Duties of Agent
Lenders' Obligations Several; No Partnership
Sharing of Information
Acknowledgement by Borrower
Amendments to ARTICLE IX
Deliveries, etc
Agency Fees
Non-Funding Lender
6.01
6.02
6.03
6.04
6.05
6.06
6.07
6.08
7.01
7.02
8.01
8.02
8.03
8.04
8.05
8.06
8.07
8.08
9.01
9.02
9.03
9.04
9.05
9.06
9.07
9.08
9.09
9.10
9.11
9.12
9.13
ARTICLE X - GUARANTEE
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10
10.11
Guarantee
Nature of Guarantee
Liability Not Lessened or Limited
Agent not Bound to Exhaust Recourse
Enforcement
Guarantee in Addition to Other Security
Reinstatement
Waiver of Notice, etc
Subrogation Rights
Postponement and Subordination of Claims
Advances After Certain Events
ii.
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59
59
59
60
63
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72
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75
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iii.
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85
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85
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86
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11.01
11.02
CBA Model Provisions Incorporated by Reference
Inconsistencies with CBA Model Provisions
ARTICLE XI - CBA MODEL PROVISIONS
ARTICLE XII - GENERAL
Waivers
Expenses; Debit Authorization
General Indemnity
Environmental Indemnity
Survival of Certain Obligations despite Termination of Agreement
Interest on Unpaid Costs and Expenses
Notice
Severability
Further Assurances
Time of the Essence
Promotion and Marketing
Entire Agreement; Waivers and Amendments to be in Writing
Inconsistencies with Security
Confidentiality
Governing Law
Execution and Counterparts
Binding Effect
-Lenders and Lenders' Commitments
-Draw Request
-Rollover Notice
-Conversion Notice
-Repayment Notice
-Compliance Certificate
-Form of BA Equivalent Note
-CBA Model Provisions
-Agreement and Acknowledgement to be bound – New Guarantor/Limited Recourse Guarantor
12.01
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
12.10
12.11
12.12
12.13
12.14
12.15
12.16
12.17
Exhibits
"A"
"B"
"C"
"D"
"E"
"F"
"G"
"H"
"I"
Schedules
4.01(b)
4.01(h)
4.01(i)
4.01(j)
4.01(k)
4.01(l)
4.01(m)
4.01(o)
4.01(p)
4.01(q)
4.01(r)
4.01(s)
-Corporate Information
-Material Permits
-Cannabis Investments
-Specific Permitted Liens
-Owned Properties
-Material Leased Properties
-Intellectual Property
-Material Agreements
-Labour Agreements
-Environmental Matters
-Litigation
-Pension Plans and Multi-employer Plans
This Agreement dated as of November 29, 2019 is made among:
CREDIT AGREEMENT
1974568 Ontario Limited
(as Borrower)
- and -
Aphria Inc. (the “Parent” or “Limited Guarantor”)
-and-
Each of the Subsidiaries of the Borrower identified in the signature pages hereto as Guarantors
and each other Subsidiary of the Borrower as may
become a party hereto as Guarantor from time to time pursuant to the terms hereof
collectively as Guarantors
- and -
BANK OF MONTREAL
AND THE ADDITIONAL LENDERS FROM TIME TO TIME PARTY TO THIS AGREEMENT
(as Lenders)
- and -
BANK OF MONTREAL
as Administrative Agent
-and-
BANK OF MONTREAL
as Sole Arranger and Sole Book Runner
For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each party,
the parties agree as follows:
1.01
Definitions
ARTICLE I - INTERPRETATION
In this Agreement, the words and phrases set out in the CBA Model Provisions (as hereinafter defined) shall
have the respective meanings set forth therein (subject to Section
12.01
hereof). In addition, the following words and phrases shall have the respective meanings set forth below:
“Acceleration Date" means the earlier of: (i) the occurrence of an Insolvency Event in respect of any Credit Party or
Limited Recourse Guarantor; and (ii) the delivery by the Agent to the Borrower of a written notice that the Obligations
are immediately due and payable, following the occurrence and during the continuation of an Event of Default other
than an Insolvency Event.
2.
“Acceptable Appraisal” means an up-to-date appraisal (completed within six months of the Closing Date) in respect
of the Project Property by an appraiser acceptable to the Agent in form and substance satisfactory to the Lenders
which confirms the following approaches to value: fair market value, cost to complete approach and comparable
transaction approach and alternate use value on a hypothetical best use facility basis; together with a transmittal
letter from such appraiser addressed to the Agent which permits the Agent and the Lenders to rely thereon.
"Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or
indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a
Person, or (b) the acquisition of in excess of fifty percent (50%) of the Equity Interests of any Person or otherwise
causing any Person to become a Subsidiary of the Borrower
"Advance" means an extension of credit by one or more of the Lenders to the Borrower pursuant to this Agreement,
including for greater certainty an extension of credit in the form of a Loan, a Bankers' Acceptance or a BA Equivalent
Loan but for greater certainty does not include a Conversion or Rollover.
"Affiliate" is defined in the CBA Model Provisions.
“Agency Fee Agreement” means an agency fee agreement dated the date hereof between the Borrower and the
Agent, respecting the payment of certain fees and other amounts to the Agent for its own account, as the same may
be amended, restated, replaced, supplemented or otherwise modified from time to time.
"Agent" means BMO in its capacity as the administrative agent hereunder, and its successors in such capacity.
"Agreement" means this credit agreement (including the exhibits and schedules) as it may be further amended,
supplemented, replaced or restated from time to time.
"AML Legislation" is defined in Section 5.05(a).
"Annual Business Plan" means a business plan in respect of the Companies for a Fiscal Year, disclosing all
assumptions made in the formulation thereof, which shall include a detailed budget and projections on a quarterly
basis in respect of profits, losses, revenue, expenses, cash flow, balance sheet items, Capital Expenditures, and
compliance with all financial covenants in Section 5.03 herein, all in detail satisfactory to the Agent and the Lenders
acting reasonably.
"Annual Excess Cash Flow" means, in respect of any Fiscal Year and in respect of any Person, consolidated
EBITDA for such period of such Person less, without duplication,
interest and scheduled principal payments in respect of Total Funded Debt for such period, and any
(a)
voluntary or mandatory principal prepayments made in cash of Total Funded Debt, (b) Cash Taxes for such period,
(c) Unfunded Capital Expenditures for such period, and (d) any cash expenses paid during such period to the
extent previously deducted in computing net income in a prior period or which will be deducted in computing net
income in a subsequent period.
"Applicable Law" is defined in the CBA Model Provisions.
“Applicable Margin” in respect of any Availment Option, the percentage in the column relating to such Availment
Option in the following table which corresponds to the Total Funded Debt to EBITDA Ratio in the first column which
shall be determined on a quarterly basis (subject to the exception below contained in this definition) based on the
Borrower’s quarterly consolidated
financial statements for the prior Fiscal Quarter:
Level
Total Funded Debt to EBITDA
Prime Rate Advances
Ratio
<1.00:1
≥ 1.00 to < 1.50:1
≥ 1.50:1 to < 2.00:1
≥ 2.0:1 to < 2.50:1
≥ 2.50:1
I
II
III
IV
V
provided that:
1.00%
1.25%
1.50%
1.75%
2.00%
3.
B/A
and B/A Equivalent Loan
2.25%
2.50%
2.75%
3.00%
3.25%
(a)
(b)
(c)
(d)
(e)
the above rates per annum applicable to any Advance are, expressed on the basis of a year of 365 days or
366 days, as the case may be;
for the period from the Closing Date until the delivery by the Borrower of its financial statements in respect of
the first Fiscal Quarter which includes the Conversion Date and the corresponding Compliance Certificate,
the Applicable Margin shall be the rate applicable to Level V in the table set forth above;
subject to paragraph (b) above, changes in the Applicable Margin shall be effective on the date that the
financial statements and Compliance Certificates required by Sections 5.04(a) and 5.04(c) are required to
be delivered to the Agent, based upon the Total Funded Debt to EBITDA Ratio as of the end of the most
recent Fiscal Quarter included in such financial statements so delivered, and shall remain in effect until the
date immediately preceding the next required date of delivery of such financial statements and certificates
indicating another such change;
if for any rolling period the Borrower’s EBITDA is zero, or if the Borrower fails to deliver any of the financial
statements and Compliance Certificates as required in accordance with Sections 5.04(a) and 5.04(c) without
the consent of the Agent, the Applicable Margin shall be deemed to be the rate applicable to Level V in the
table set forth above, from the date that such financial statements and Compliance Certificates were due,
until such financial statements and Compliance Certificates are delivered (or the date the same reflect
a positive EBITDA, as applicable); and
with respect to Bankers’ Acceptances outstanding on the effective date of any such change in the Applicable
Margin, changes in the Applicable Margin shall become applicable thereto upon the next rollover or
conversion thereof after such change.
“Approved Jurisdiction” means a country in which it is legal in all political subdivisions therein (including for
greater certainty on a federal, state and municipal basis) to undertake any Cannabis Activities provided that, with
respect to the Companies only, in each case (i) such country has been approved in writing by the Required Lenders
in their discretion and (ii) if required by the Agent, the ability to undertake Cannabis Activities to the extent permitted
by Applicable Law therein is confirmed by a legal opinion provided by the Borrower's counsel in such jurisdiction, in
form and substance satisfactory to the Agent. The Required Lenders may in their discretion from time to time (i) upon
receipt of a written request by the Borrower, designate any jurisdiction an Approved Jurisdiction provided that the
above criteria are satisfied; and (ii) revoke the designation
4.
of any jurisdiction as an Approved Jurisdiction by written notice to the Borrower if such criteria are not satisfied.
Canada is the sole Approved Jurisdiction with respect to the Companies as at the date of this Agreement.
"Associate" has the meaning ascribed thereto in the Business Corporations Act
(Ontario).
"Availment Option" means a method of borrowing which is available to the Borrower as provided herein.
"BA Equivalent Loan" means an Advance in Canadian Dollars made by a Non-BA Lender to the Borrower in
respect of which the Borrower has issued a BA Equivalent Note.
"BA Equivalent Note" means a promissory note payable by the Borrower to a Non-BA Lender in the form of Exhibit
"G" attached hereto.
"BA Lender" means a Lender identified in Exhibit "A" attached hereto as a Lender which will accept Bankers'
Acceptances hereunder.
"Bankers' Acceptance" or “B/A” means a bill of exchange or a blank non-interest bearing depository bill as defined
in the Depository Bills and Notes Act (Canada) drawn by the Borrower and accepted by a BA Lender in respect of
which the Borrower becomes obligated to pay the face amount thereof to the holder (which may be a third party or
such BA Lender) upon maturity.
"BIA" means the Bankruptcy and Insolvency Act (Canada).
"BMO" means the Bank of Montreal and its successors and permitted assigns.
“Borrower” means 1974568 Ontario Limited, a corporation subsisting under the laws of the Province of Ontario.
“Borrower Year-end Financial Statements” in respect of any Fiscal Year means the annual reviewed financial
statements of the Borrower prepared in accordance with GAAP, in each case, in respect of such Fiscal Year.
“Business” means the business conducted by the Companies, being the business of cultivating Cannabis products
in Approved Jurisdictions and all other ancillary activities related to the foregoing.
"Business Day" means any day on which the Agent is open for over-the-counter business in Toronto, Ontario,
excluding Saturday, Sunday and any other day that is a statutory holiday in Toronto, Ontario.
"Canadian Dollars", "Dollars" and "CDN$" each means the lawful currency of Canada.
"Canadian Prime Rate" means the greater of the following: (i) the rate of interest announced from time to time by
the Agent as its reference rate then in effect for determining rates of interest on Canadian Dollar loans to its
customers in Canada and designated as its prime rate; and (ii) the thirty (30) day CDOR Rate plus one percent
(1.0%) per annum.
"Canadian Prime Rate Loan" means a loan made by a Lender to the Borrower in Canadian Dollars in respect of
which interest is determined by reference to the Canadian Prime Rate.
“Cannabis” means:
(a)
any plant or seed, whether live or dead, from any species or subspecies of genus Cannabis, including
Cannabis sativa, Cannabis indica and Cannabis ruderalis, Marijuana
5.
and Industrial Hemp and any part, whether live or dead, of the plant or seed thereof, including any stalk,
branch, root, leaf, flower, or trichome;
any material obtained, extracted, isolated, or purified from the plant or seed or the parts contemplated by
clause (a) of this definition, including any oil, cannabinoid, terpene, genetic material or any combination
thereof;
any organism engineered to biosynthetically produce the material contemplated by clause (b) of this
definition, including any micro-organism engineered for such purpose;
any biologically or chemically synthesized version of the material contemplated by clause (b) of this
definition or any analog thereof, including any product made by any organism contemplated by clause (c) of
this definition; and
any other meaning ascribed to the term “cannabis” under Applicable Law, including the Cannabis Act, the
Controlled Drugs and Substances Act (Canada).
(b)
(c)
(d)
(e)
“Cannabis Act” means the Cannabis Act, SC 2018, c. 16, as amended or replaced from time to time.
“Cannabis Activities” means any activities (including advertising or promotional activities) relating to or in
connection with the possession, exportation, importation, cultivation, production, processing, purchase, distribution
or sale of Cannabis or Cannabis products, whether such activities are for medical, scientific, recreational or any
other purpose.
“Cannabis Authorizations” means, at any time, all Authorizations necessary for the conduct of Cannabis Activities
by any Credit Party. For avoidance of doubt, each of the Health Canada Licences necessary for the conduct of
Cannabis Activities by any Credit Party shall constitute a Cannabis Authorization.
“Cannabis Laws” means Applicable Laws with respect to Cannabis Activities (other than Applicable Laws of
general application), including without limitation the Cannabis Act, the Cannabis Regulations and the Controlled
Drugs and Substances Act (Canada).
“Cannabis Regulations” means the regulations made from time to time under the Cannabis Act, the Controlled
Drugs and Substances Act (Canada) and any other statute in an Approved Jurisdiction with respect to Cannabis
Activities.
"Capital Expenditures" means expenditures made directly or indirectly which are considered to be in respect of the
acquisition or leasing of capital assets in accordance with GAAP, including the acquisition or improvement of Land,
plant, machinery or equipment, whether fixed or removable, but excluding (i) the portion of any expenditure for
acquired equipment attributable to any trade-in which is made simultaneously with the purchase of the acquired
equipment, (ii) expenditures made in connection with the replacement, repair or restoration of buildings, fixtures or
equipment to the extent reimbursed or financed from insurance or expropriation proceeds, and (iii) capital lease
payments.
“Capital Lease" means a lease of assets which in accordance with GAAP is required to be capitalized on the
balance sheet of the lessee.
“Cash Equivalents” means (i) securities issued or fully guaranteed by the government of Canada, any province or
territory of Canada, or any agency or instrumentality of any thereof, (ii) term deposits, certificates of deposit or
bankers’ acceptances of any Lender, or any bank that is not a Lender but is referred to in either Schedule I, II or III of
the Bank Act (Canada) the short-
6.
term debt or deposits of which have been rated at least A-1 or the equivalent thereof by Standard & Poor’s
Financial Services, LLC or at least P-1 or the equivalent thereof by Moody’s Investors Service, Inc. or which have
been rated at least R-1 or the equivalent thereof by DBRS Limited, and (iii) commercial paper rated at least R1(mid)
by DBRS Limited, in each case provided for in clause (i), (ii) and (iii) above, maturing within one hundred and eighty
(180) days after the date of acquisition.
"Cash Taxes" in respect of any fiscal period means all amounts actually paid in cash by the Companies in such fiscal
period in respect of income and capital Taxes (whether relating to such fiscal period or any other fiscal period).
"CBA Model Provisions" means the model credit agreement provisions attached hereto as Exhibit "H", which have
been revised under the direction of the Canadian Bankers' Association Secondary Loan Market Specialist Group
from provisions prepared by The Loan Syndications and Trading Association, Inc.
"CDOR Rate" means on any day the annual rate of interest which is the rate determined as being the arithmetic
mean of the quotations of all institutions listed in respect of the rate for Canadian Dollar denominated bankers'
acceptances for the relevant period displayed and identified as such on the "Reuters Screen CDOR Page" (as
defined in the International Swap Dealer Association, Inc. definitions, as modified and amended from time to time) as
of 10:00 A.M. Toronto, Ontario local time on such day and, if such day is not a Business Day, then on the immediately
preceding Business Day (as adjusted by the Agent after 10:00 A.M. Toronto, Ontario local time to reflect any error in
a posted rate of interest or in the posted average annual rate of interest with notice of such adjustment in reasonable
detail evidencing the basis for such determination being concurrently provided to the Borrower); provided that if such
rates are not available on the Reuters Screen CDOR Page on any particular day, then the CDOR Rate on that day
shall be the average of the rates applicable to Canadian Dollar bankers' acceptances for the relevant period quoted
for customers in Canada by the Agent as of 10:00 A.M. Toronto, Ontario local time on such day; or if such day is
not a Business Day, then on the immediately preceding Business Day; and provided further that the CDOR Rate
shall not be less than zero.
"Change of Control" means (a) the ownership, directly or indirectly, beneficially or of record, by any Person or group
of Persons acting jointly or otherwise in concert, of Equity Interests representing a majority of the aggregate ordinary
voting power represented by the issued and outstanding Equity Interests of the Parent, (b) the Parent ceases to
Control the Borrower, (c) the Parent together with 2609733 Ontario Limited ceases to hold beneficially and of record
one hundred percent (100%) of the aggregate ordinary voting power represented by the issued and outstanding
Equity Interests of the Borrower, (d) the ownership, directly or indirectly, beneficially or of record, by any Person or
group of Persons other than the Borrower of one hundred percent (100%) of the Equity Interests of each Subsidiary
of the Borrower, (e) the occupation of a majority of the seats (other than vacant seats) on the board of directors of
any Credit Party by Persons who were neither (i) nominated by the board of directors of the Parent nor (ii) appointed
by directors so nominated, and (f) Control of 2609733 Ontario Limited by any Person or group of Persons other than
any of the existing direct and indirect shareholders of 2609733 Ontario Limited as at the Closing Date.
“Closing Date” means the date on which all conditions precedent listed in Section 7.01 have been satisfied or
waived by the Lenders, as confirmed by the Agent to the Borrower in writing.
“Collateral” means all property, assets and undertaking of the Credit Parties, the Limited Recourse Guarantors, or
any other Person encumbered by the Security, and all proceeds of the foregoing.
7.
"Commitment" means, in respect of any Lender, such Lender's commitment to make Advances to the Borrower
under Facility A.
“Companies” means the Borrower and all of its Subsidiaries from time to time; and
“Company” means any of them as the context requires.
"Compliance Certificate" means a certificate delivered by a Senior Officer of the Borrower to the Agent in the form
of Exhibit "F".
“Constating Documents” means, with respect to any Person, as applicable:
(a)
(b)
(c)
its certificate and/or articles of incorporation, association, amalgamation or continuance, memorandum of
association, charter, declaration of trust, trust deed, partnership agreement, limited liability company
agreement or other similar document;
its by-laws; and
all unanimous shareholder agreements and any amendments thereto, other shareholder agreements and
any amendments thereto, voting trust agreements and similar arrangements applicable to the Person’s
Equity Interests;
all as in effect from time to time.
"Control" is defined in the CBA Model Provisions.
"Conversion" means the substitution of one Availment Option for another, and does not constitute a fresh or new
Advance.
"Conversion Date" means November 30, 2020 or such later date as may be mutually agreed to in writing by all of
the Lenders and the Borrower; provided that as of the date of any extension of the then applicable Conversion Date,
the Lenders shall be satisfied that no Default, Event of Default or Material Adverse Change shall have occurred and
be continuing and the Borrower shall be in compliance with all terms and conditions herein, including all financial
covenants which will apply after such date, and the Borrower shall have provided a certificate to the Agent on behalf
of the Lenders confirming such compliance.
"Conversion Notice" means a notice substantially in the form of Exhibit "D" given by the Borrower to the Agent for
the purposes of requesting a Conversion.
"Copyrights" means all rights, title and interests (and all related IP Ancillary Rights) arising under any requirement of
law in copyrights and all mask work, database and design rights, whether or not registered or published, all
registrations and recordations thereof and all applications in connection therewith.
"Credit Parties" means the Companies and the Limited Guarantor and "Credit Party" means any of them as the
context requires.
"Currency Hedge Agreements" means agreements for the purpose of hedging currency risk, including a currency
exchange agreement or a foreign exchange forward contract.
“Debt Service Deficiency Agreement” is defined in Section 6.01(d). "Default" is defined in
the CBA Model Provisions.
“Defined Benefit Pension Plan” means any Pension Plan which contains a “defined benefit provision” as defined
in subsection 147.1(1) of the Income Tax Act (Canada).
8.
"Distribution" means any amount paid, directly or indirectly, to or on behalf of the employees, directors, officers,
shareholders, partners or unitholders of any of the Companies, or to any Related Party thereto, including for greater
certainty amount paid by way of salary, bonus, commission, management fees, directors' fees, dividends, redemption
of shares, distribution of profits, Investments or otherwise, and whether payments are made to such Persons in their
capacity as shareholders, partners, unitholders, directors, officers, employees, owners or creditors of any of the
Companies or otherwise, or any other direct or indirect payment in respect of the earnings or capital of any of the
Companies; provided however that the payment of salaries, bonuses and commissions from time to time to the
officers and employees of the Companies, the payment of directors' fees to the directors of the Companies, in each
case in the ordinary course of business and at reasonable levels, and the repayment of the shareholder loan with the
proceeds of the Advance on the Closing Date as contemplated in Section 2.02 shall not be considered Distributions.
"Domain Name" means all right, title and interest (and all related IP Ancillary Rights) in an internet domain name.
"Draw Request" means a notice in the form of Exhibit "B" given by the Borrower to the Agent for the purpose of
requesting an Advance.
“EBITDA” means, for any period, and any Person, an amount equal to net income of such Person for such period
minus, to the extent included in computing such net income (but without duplication):
(a)
(b)
any non-cash income and gains (including unrealized mark-to-market gains under Hedge Arrangements,
fair valuation of financial instruments fair value credit adjustments on biological assets, non- cash income
and gains from minority interests), except to the extent that such income or gains will inevitably result in
future cash receipts;
any cash expenses and losses to the extent previously deducted in a prior period as a non-cash expense or
loss under clause (g) below; and
(c)
any extraordinary or non-recurring income and gains unless approved by the Required Lenders;
plus, to the extent deducted from such net income (but without duplication):
(d)
(e)
(f)
(g)
(h)
(i)
Interest Expense;
all Taxes on income for such period, whether current or deferred and net of any incentive or similar tax
credits;
the collective depreciation, depletion, impairment and amortization expense for such period;
all non-cash stock based compensation;
any extraordinary or non-recurring charges, expenses or losses approved by the Required Lenders; and
all transaction costs incurred in connection with the establishment of Facility A including all fees, costs and
expenses payable on or before the Closing Date to the Agent and the Lenders, legal counsel for the Agent
and the Companies and consultants retained by the Agent.
9.
provided that in respect of each entity which has become a Subsidiary of the Borrower in such fiscal period, EBITDA
shall be determined as if such entity had been a Subsidiary during the entire fiscal period; and in respect of each
entity which has ceased to be a Company in such fiscal period, EBITDA shall be determined as if such entity had not
been a Company during the entire fiscal period.
"Equity Interest" means any share, interest, participation or other right to participate in the voting or equity
ownership of a corporation and any equivalent ownership interest in any Person that is not a corporation, including
any partnership or membership interest, and any warrant, option or other right which is exchangeable or convertible
into any of the foregoing.
"Equivalent Amount" means, in relation to an amount in one currency, the amount in another currency that could be
purchased by the amount in the first currency, determined by reference to the applicable Exchange Rate at the time
of such determination.
"Event of Default" is defined in Section 8.01.
"Exchange Rate" means, in connection with the amount of any currency which is to be converted into another
currency pursuant to this Agreement for any reason, the applicable rate of exchange for such conversion established
by the Bank of Canada on the Business Day of such conversion (or on such other Business Day as may be specified
herein); provided however that if a rate of exchange in respect of any currency is not published by the Bank of
Canada, the rate of exchange for that currency shall be determined by the Agent in accordance with its usual
practice.
"Facility A" is defined in Section 2.01. "Facility A Limit" is
defined in Section 2.01.
"First-Ranking Security Interest" in respect of any Collateral means a Lien in such Collateral which is registered
where necessary or desirable to record and perfect the charges contained therein (to the extent that such charges
are capable of perfection under Applicable Law) and which ranks in priority to all other Liens in such Collateral
except for any Permitted Liens which may have priority in accordance with Applicable Law.
"Fiscal Quarter" means a fiscal quarter of the Borrower and the Parent as the context requires ending on the last
days of May, August, November, and February in each year.
"Fiscal Year" means a fiscal year of the Borrower or the Parent as the context requires ending on the last day of May
in each year.
“Fixed Charges” means in respect of any period, the aggregate, without duplication, of:
(i) consolidated Interest Expense of the Borrower during such period; plus (ii) all scheduled principal payments on
consolidated Total Funded Debt due (paid or accrued during such period) by the Borrower during such period except
the portion of any final payment due in respect of such Total Funded Debt which constitutes a “balloon payment” and
any amount paid in connection with the exercise of an option to purchase equipment under a Capital Lease; plus (iii)
all payments made by the Borrower during such period in respect of Capital Lease Obligations; provided that for
Fiscal Quarters ending within 12 months of the Conversion Date, Fixed Charges shall include a principal component
for any period during which the Borrower was not required to make principal payments under this Agreement based
upon the Borrower’s principal payment obligations accruing due for subsequent financial periods. For example, if the
Conversion Date occurs at the end of a Fiscal Quarter, the calculation of Fixed Charges for that Fiscal Quarter shall
include a principal component equal to the scheduled principal payments required under this Agreement for the
following four Fiscal Quarters. The projected component will reduce as time
10.
passes so that, using the above example, at the end of the third Fiscal Quarter following the Conversion Date, Fixed
Charges for that Fiscal Quarter shall include three Fiscal Quarters of actual principal payments and one Fiscal
Quarter of projected principal payments.
“Fixed Charge Coverage Ratio” means, as of the last day of any Fiscal Quarter and for the four rolling Fiscal
Quarter period then ended, calculated on a consolidated basis, the ratio of: (a) consolidated EBITDA for the
Borrower less the aggregate amount of consolidated Unfunded Capital Expenditures, Cash Taxes and cash
Distributions made by the Borrower in respect of Equity Interests in the Borrower during such period, to (b) Fixed
Charges.
“Former Lender” is defined in the definition of Hedging Obligations.
“Funded Debt” in respect of any Person means all obligations of such Person and its Subsidiaries which are
considered to constitute debt in accordance with GAAP, including, without duplication (i) indebtedness for borrowed
money, (ii) interest-bearing liabilities to the extent interest is due and not yet paid, (iii) obligations secured by
Purchase-Money Security Interests, (iv) obligations under Capital Leases, (v) capitalized interest, (vi) obligations
under Hedging Agreements (solely to the extent such obligations have become due and payable), (vii) the redemption
price of any securities issued by such Person which are redeemable at the option of the holder, (viii) any vendor take
back obligations, and (ix) such Person’s contingent liability under Guarantees given in respect of obligations of other
Persons of the nature described in clauses (i) through (viii) above; but excluding accounts payable, short term non-
interest bearing liabilities, future or deferred income taxes (both current and long-term), Subordinated Debt (provided
the holder of such indebtedness pursuant to the terms of an Intercreditor Agreement may not receive any payments
on account of principal or interest thereon prior to the Termination Date), and prepaid or deferred revenue.
"Funded Debt Service" means, in respect of any fiscal period, without duplication: (i) the aggregate amount of
Interest paid or payable in respect of the Funded Debt of a Person on a consolidated basis in respect of such fiscal
period (but for greater certainty, excluding any Interest which is capitalized and not paid or payable during such fiscal
period); plus (ii) the aggregate amount of scheduled principal payments and scheduled Capital Lease payments paid
or payable in respect of the Funded Debt of such Person on a consolidated basis in respect of such fiscal period,
except the portion of any final payment due in respect of such Funded Debt which constitutes a "balloon payment"
and any amount paid in connection with the exercise of an option to purchase equipment under a Capital Lease.
"GAAP" means generally accepted accounting principles in effect in Canada from time to time as set forth in the
opinions and pronouncements of the relevant Canadian public and private accounting boards and institutes which
are applicable to the relevant Person and the circumstances as of the date of determination, consistently applied
including, without limitation, International Financial Reporting Standards adopted by the Accounting Standards
Board of the Chartered Professional Accountants of Canada (which have been adopted by the Credit Parties).
"Governmental Authority" is defined in the CBA Model Provisions, and for greater certainty includes Health
Canada.
"Guarantee" means any agreement by which any Person assumes, guarantees, endorses, contingently agrees to
purchase or provide funds for the payment of, or otherwise becomes liable upon, the obligation of any other Person,
or agrees to maintain the net worth or working capital or other financial condition of any other Person or otherwise
assures any creditor of such Person against loss, and shall include any contingent liability under any letter of credit
or similar document or instrument, excluding endorsement of cheques and drafts for deposit or collection in the
ordinary course of business.
11.
"Guarantors" means collectively (i) each Subsidiary of the Borrower on the date hereof, and (ii) each other Person
who becomes a Subsidiary of the Borrower on and after the date hereof and is required by the Agent and each of the
Lenders from time to time to become a Guarantor pursuant to Section 6.02(c) hereof; and "Guarantor" means any of
them as the context requires. As of the Closing Date the Borrower has no Subsidiaries.
"Hazardous Materials" means any contaminant, pollutant, waste or substance that is likely to cause immediately or
at some future time harm or degradation to the surrounding environment or risk to human health; and without
restricting the generality of the foregoing, including any pollutant, contaminant, waste, hazardous waste or dangerous
goods that is regulated by any Requirements of Environmental Law or that is designated, classified, listed or defined
as hazardous, toxic, radioactive or dangerous or as a contaminant, pollutant or waste by any Requirements of
Environmental Law.
“Health Canada Licence” means, the licence issued by Health Canada in respect of the Project and identified as
licence #LIC-KX10UDSC08-2019 issued to the Borrower pursuant to the Cannabis Act and authorizing a minimum
cultivation class for operations by the Borrower at the Project on the Project Property, and any other licence issued
by Health Canada to any of the Companies in respect of its Cannabis Activities.
"Hedging Agreements" means Interest Rate Hedging Agreements and Currency Hedge Agreements.
"Hedging Obligations" means all obligations of the Borrower to (i) the Lenders or an Affiliate of a Lender pursuant to
or arising in connection with Hedging Agreements made between the Borrower and any Lenders or any Affiliate of a
Lender and (ii) any Person which was a Lender or an Affiliate of a Lender at the time of entering into a Hedging
Agreement, but which is no longer a Lender (a “Former Lender”).
"Indemnitees" means the Lenders, the Agent and their respective successors and permitted assigns hereunder, any
agent of any of them (specifically including a receiver or receiver-manager) and the respective officers, directors and
employees of the foregoing.
“Industrial Hemp” has the meaning ascribed to such term or the term "hemp" (i) under the Applicable Law of
any Approved Jurisdiction, including the Industrial Hemp Regulations (Canada) issued under the Cannabis Act; or
(ii) under the Agricultural Marketing Act of 1946 (United States).
"Insolvency Event" means, in respect of any Person:
(a)
(b)
such Person ceases to carry on its business; or commits an act of bankruptcy or becomes insolvent (as
such terms are used in the BIA); or makes an assignment for the benefit of creditors, files a petition in
bankruptcy, makes a proposal or commences a proceeding under Insolvency Legislation; or petitions or
applies to any tribunal for, or consents to, the appointment of any receiver, trustee or similar liquidator in
respect of all or a substantial part of its property; or admits the material allegations of a petition or
application filed with respect to it in any proceeding commenced in respect of
it under Insolvency
Legislation; or takes any corporate action for the purpose of effecting any of the foregoing; or
any proceeding or filing is commenced against such Person seeking to have an order for relief entered
against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding-up,
reorganization, arrangement, adjustment or composition of it or its debts under any Insolvency Legislation,
or seeking appointment of a receiver, trustee,
12.
custodian or other similar official for it or any substantial part of its property; unless (i) such Person is
diligently defending such proceeding in good faith and on reasonable grounds as determined by the
Required Lenders acting reasonably; and (ii) such proceeding does not, in the reasonable opinion of the
Required Lenders, materially adversely affect the ability of such Person to carry on its business and to
perform and satisfy all of its obligations.
"Insolvency Legislation" means legislation in any applicable jurisdiction relating to reorganization, arrangement,
compromise or re-adjustment of debt in insolvent circumstances, dissolution or winding-up, or any similar legislation,
and specifically includes for greater certainty the BIA, the Companies' Creditors Arrangement Act (Canada), and the
Winding-Up and Restructuring Act (Canada).
"Intellectual Property" means all rights, title and interests in intellectual property and all IP Ancillary Rights relating
thereto, including all Copyrights, Patents, Trademarks, Domain Names, Trade Secrets, industrial designs, integrated
circuit topographies, plant breeders' rights and rights under IP Licenses.
“Intercreditor Agreements” means any intercreditor, subordination or postponement agreement (including without
limitation the Parent Subordination Agreement), that may be entered into from time to time which provides for the
terms of subordination, ranking or priority and related customary intercreditor provisions of any other Funded Debt in
relation to any of the Obligations and Security, which shall be in form and substance satisfactory to the Agent, acting
reasonably.
"Interest" means interest on loans, stamping fees in respect of bankers' acceptances, the difference between the
proceeds received by the issuers of bankers' acceptances and the amounts payable upon the maturity thereof,
issuance fees in respect of letters of credit, and any other charges or fees in connection with the extension of credit
which are determined by reference to the amount of credit extended, plus standby fees in respect of the unutilized
portion of any credit facility; but for greater certainty "Interest" shall not include capitalized interest (for greater
certainty, being interest which is accrued but not paid), agency fees, arrangement fees, structuring fees, fees
relating to the granting of consents, waivers, amendments, extensions or restructurings, the reimbursement of costs
and expenses, and any similar amounts which may be charged from time to time in connection with the
establishment, administration or enforcement of Facility A.
“Interest Expense” means, in respect of any Person and in respect of any period, without duplication, the interest
expense of such Person on Funded Debt (including that attributable to the interest component of payments under
Capital Leases) including all commissions, discounts, and other fees paid or accrued during such period and all
charges paid or accrued during such period with respect to letters of credit and letters of guarantee, all as
determined in accordance with GAAP.
"Interest Rate Hedging Agreements" means agreements for the purpose of hedging interest rate risk, including
interest rate exchange agreements (commonly known as "interest rate swaps") and forward rate agreements; and for
greater certainty, including interest rate exchange agreements (commonly known as "cross-currency swaps").
"Interim Financial Statements" in respect of any Fiscal Quarter means (i) in the case of the Borrower, the unaudited
financial statements of the Borrower on a consolidated basis, and (ii) in the case of the Parent, the unaudited
financial statements of the Parent on a consolidated basis, and in each case the management prepared interim
operating statements of the other Companies (in the case of the Borrower’s Interim Financial Statements) or the
other Credit Parties (in the case of the Parent’s Interim Financial Statements), in each case in respect of such Fiscal
Quarter
13.
(and also on a year-to-date basis in respect of such Fiscal Quarter and all previous Fiscal Quarters in the same
Fiscal Year), including (in the case of the Parent’s Interim Financial Statements) any management's discussion and
analysis with respect thereto.
"Investment" means: (i) an investment made or held by a Person, directly or indirectly, in another Person (whether
such investment was made by the first-mentioned Person in such other Person or was acquired from a third party);
(ii) a contribution of capital; (iii) the acquisition or holding of common or preferred shares, debt obligations,
partnership interests and interests in joint ventures; and (iv) the acquisition of all or substantially all of the assets
used in connection with a business; provided however that if a transaction would constitute a "Capital Expenditure"
as defined herein and would also constitute an "Investment" as defined herein, it shall be deemed to constitute an
Investment and not a Capital Expenditure.
"IP Ancillary Rights" means, with respect to an item of Intellectual Property all foreign counterparts to, and all
divisionals, reversions, continuations, continuations-in-part, reissues, re-examinations, renewals and extensions of,
such Intellectual Property and all income, royalties, proceeds and liabilities at any time due or payable or asserted
under or with respect to any of the foregoing or otherwise with respect to such Intellectual Property, including all rights
to sue or recover at law or in equity for any past, present or future infringement, misappropriation, dilution, violation
or other impairment thereof, and, includes in each case, all rights to obtain any other IP Ancillary Right.
"IP License" means all contractual obligations (and all related IP Ancillary Rights), whether written or oral, granting
any right, title and interest in any Intellectual Property.
"Land" means real property (including a leasehold interest in land) and all buildings, improvements, fixtures and
plant situated thereon.
"Landlord Agreement" means an agreement in form and substance satisfactory to the Agent given by the landlord
of a Material Leased Property in favour of the Agent, which shall include the following provisions (except to the
extent otherwise agreed by the Agent in its discretion): such landlord consents to the granting of a security interest
in the lease by the Company which is a tenant thereunder in favour of the Agent, agrees to give written notice to
the Agent in respect of a default and a reasonable opportunity to cure any default before terminating the lease, and
agrees to waive (or subordinate and defer the enforcement of) its rights and remedies and any security it may hold in
respect of any assets owned by such Company located on such Material Leased Property or affixed to such Material
Leased Property which the tenant is entitled to remove under Applicable Law or pursuant to the terms of the lease.
“Legal Reservations” means (i) the principle that equitable remedies may be granted or refused at the discretion
of a court and the limitation of enforcement by laws relating to insolvency, reorganisation and other laws generally
affecting the rights of creditors, (ii) the time barring of claims under the Limitation Act, 2002 (Ontario), as amended, or
equivalent or analogous legislation of any other applicable jurisdiction, (ii) the possibility that an undertaking to
assume liability for or indemnify a person against non-payment of Taxes may be void, (iv) defences of set-off or
counterclaim, (v) similar principles, rights, defences or requirements under the laws of any applicable jurisdiction and
(vi) any other matters which are set out as qualifications or reservations as to matters of law of general application
accepted by the Required Lenders in any of the legal opinions delivered to the Lenders pursuant hereto.
“Lenders" means the lenders identified in Exhibit "A" attached hereto and any other Persons which may from time to
time become lenders pursuant to this Agreement; and their respective successors and permitted assigns; and
"Lender" means any of them as the context requires.
14.
"Lender-Related Distress Event" means, with respect to any Lender or any Person that directly or indirectly
Controls such Lender (such Lender and each such Person being individually referred to in this definition as a
"distressed person"), (i) the commencement of a voluntary or involuntary proceeding with respect to such
distressed person under any Insolvency Legislation, (ii) the appointment of a custodian, conservator, receiver or
similar official in respect of such distressed person or any substantial part of its assets,
(iii) a forced liquidation, merger, sale or other change of Control of such distressed person supported in whole or in
part by Guarantees or other support (including, without limitation, the nationalization or assumption of ownership or
operating control of such distressed person by any Governmental Authority), or (iv) such distressed person makes a
general assignment for the benefit of its creditors or is otherwise adjudicated as, or determined by any Governmental
Authority having regulatory authority over such distressed person or its assets to be, insolvent, bankrupt, or deficient
in meeting any capital adequacy or liquidity standard of any such Governmental Authority.
"Lending Office" in respect of any Lender means the office of such Lender designated by it from time to time as the
office from which it will make Advances hereunder.
"Lien" means: (i) a lien, charge, mortgage, pledge, security interest or conditional sale agreement; (ii) an
assignment, lease, consignment, trust or deemed trust that secures payment or performance of an obligation; (iii) a
garnishment; (iv) any other encumbrance of any kind; and (v) any commitment or agreement to enter into or grant
any of the foregoing.
“Limited Guarantor” means the Parent.
“Limited Recourse Guarantee” is defined in Section 6.01(c).
“Limited Recourse Guarantors” means each shareholder of the Borrower (other than the Parent) from time to time.
On the date hereof 2609733 Ontario Limited is the sole Limited Recourse Guarantor.
"Loan" means a Canadian Prime Rate Loan.
"Loan Documents" means this Agreement, the Security, the Agency Fee Agreement, the Parent Subordination
Agreement and other agreements or letters entered into between the Borrower and the Agent in respect of fees
payable to the Agent or the Lenders, any promissory notes issued by the Borrower to the Agent or the Lenders
hereunder, any Intercreditor Agreements, all Hedging Agreements with a Lender or Affiliate of a Lender, all Service
Agreements, and all other agreements, and instruments required or contemplated herein to be provided by the Credit
Parties and other Persons in favour of the Agent or any of the Lenders and all amendments, restatements,
supplements or other modifications thereto.
"Marijuana" has the meaning ascribed to such term under the Applicable Law in any Approved Jurisdiction.
"Material Adverse Change" means any change or event which: (i) constitutes a material adverse change in the
business, operations, condition (financial or otherwise) or properties of the Parent or the Borrower on a consolidated
basis; (ii) materially impairs the ability of the Parent or the Companies (taken as a whole) to timely and fully perform
their respective obligations under the Loan Documents; (iii) materially impairs the validity or enforceability of any of
the Loan Documents; (iv) materially impairs the ability of the Agent or the Lenders to enforce their rights and
remedies under the Loan Documents; or
15.
(v) impairs the priority of any of the Security.
"Material Agreement" means an agreement made between a Company and another Person which (i) is, in the
reasonable opinion of the Agent, material to the ownership, management and operation of the Business, including
the Project and the Project Property, or (ii) if terminated would result, or would have a reasonable likelihood of
resulting, in a Default, an Event of Default or a Material Adverse Change, specifically including, the Supply
Agreement, and as at the date of this Agreement, each other agreement listed in Schedule 4.01(o).
"Material Leased Properties" means all Land leased by the Companies as tenants from time to time which if
terminated would result, or would reasonably be expected to result, in an Event of Default or Material Adverse
Change, specifically including as at the date of this Agreement the Land described in Schedule 4.01(l) attached
hereto.
"Material Leases" means the leases relating to the Material Leased Properties.
"Material Permit" means a licence, permit, approval, registration or qualification granted to or held by a Company
which if terminated would impair the ability of the Company to carry on the Business in the ordinary course, or
would result, or would reasonably be expected to result, in an Event of Default or Material Adverse Change;
specifically including, the Health Canada Licences and as of the date of this Agreement each other licence, permit,
approval, registration or qualification listed in Schedule 4.01(h).
"Maturity Date" means the date which is three (3) years after the date of this Agreement.
“Minimum Equity Contribution” means a minimum equity injection in the Borrower by the Parent and other
shareholders of the Borrower in an aggregate amount of not less than Twenty Million Dollars ($20,000,000) as shown
on the balance sheet of the Borrower as at the Closing Date.
“Minimum Liquidity” means in respect of the Parent, unrestricted cash and Cash Equivalents held by the Parent
less all current liabilities of the Parent determined in accordance with GAAP.
"Minor Title Defects" in respect of any parcel of Land means encroachments, restrictions, easements, rights-of-way,
servitudes and defects or irregularities in the title to such Land which are of a minor nature and, in the case of Land
material to the operation of the Business of the Companies taken as a whole, which, in the aggregate, will not
materially impair the use of such Land for the purposes for which such Land is held by the owner thereof; it is
acknowledged that the Project Property is material to the operation of the Business of the Companies taken as a
whole.
“Multi-employer Plan” means a multi-employer pension plan within the meaning of the Pension Benefits Act
(Ontario) or the pension benefits standards legislation of another province or jurisdiction in Canada and to which any
Company is required to contribute pursuant to a collective agreement, participation agreement, any other agreement
or statute or municipal by-law and which is not maintained or administered by such Company or its Affiliates.
"Non-BA Lender" means a Lender identified in Exhibit "A" attached hereto as a Lender which will make BA
Equivalent Loans instead of accepting Bankers' Acceptances hereunder.
"Non-Funding Lender" means any Lender (i) that has failed to fund any payment or Advance required to be made
by it hereunder or to purchase all participations required to be purchased by it hereunder and under the Loan
Documents, or (ii) that has given oral or written notice to the Borrower, the Agent or any other Lender, or has
otherwise publicly announced, that it believes
16.
that it may be unable to fund advances under one or more credit agreements to which it is a party, or (iii) with respect
to which one or more Lender-Related Distress Events has occurred, or (iv) with respect to which the Agent believes,
acting reasonably, that such Lender has defaulted or may default in fulfilling its obligations (whether as an agent or
lender) under one or more other credit agreements to which it is a party, or (v) with respect to which the Agent
believes, acting reasonably, that there is a reasonable chance that such Lender will fail to fund any payment or
Advance required to be made hereunder.
"Obligations" means, at any time and without duplication: (i) all direct and indirect, contingent and absolute
indebtedness, obligations and liabilities of the Credit Parties to the Agent and the Lenders (or if the context
requires, to any Lender) under or in connection with this Agreement and the Loan Documents (specifically
including for greater certainty all Guarantees provided hereunder) at such time, specifically including the Outstanding
Advances, all accrued and unpaid Interest thereon, and all fees, expenses and other amounts payable pursuant to
this Agreement and the Loan Documents; plus (ii) the Hedging Obligations (if any) at such time; plus (iii) any
obligations under Service Agreements at such time; provided that if otherwise specified or required by the context,
"Obligations" shall mean any portion of the foregoing.
“Other Connection Taxes” means, with respect to the Lender, Taxes imposed as a result of a present or former
connection between the Lender and the jurisdiction imposing such Tax (other than connections arising from such
recipient having executed, delivered, become a party to, performed its obligations under, received payments under,
received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan
Document, or sold or assigned an interest in any Advance or Loan Document).
“Outstanding Advances" means, at any time, the aggregate of all obligations of the Borrower to the Lenders (or if
the context requires, to any Lender) in respect of all Advances made under Facility A which have not been repaid or
satisfied at such time, determined as follows: (i) in the case of Canadian Prime Rate Loans, the principal amount
thereof; and (ii) in the case of Bankers' Acceptances, BA Equivalent Notes, the face amount thereof.
"Owned Properties" means all Land owned by the Companies from time to time, including but not limited to the
Project Property and any Land described in Schedule 4.01(k) attached hereto.
"Parent" means Aphria Inc. or any successor thereto including by way of amalgamation.
“Parent Subordinated Debt” means the unsecured indebtedness issued by the Borrower to the Parent in the
principal amount of no less than Ninety-Eight Million Eight Hundred Thousand Dollars ($98,800,000), provided that
such indebtedness is subject to the Parent Subordination Agreement.
“Parent Subordination Agreement” means the Intercreditor Agreement to be entered into by the Parent in favour of
the Agent and the Lender on the Closing Date in form and substance satisfactory to the Lenders, as the same may
be amended, restated, supplemented or replaced from time to time, pursuant to which the Parent agrees to
subordinate and postpone the Parent Subordinated Debt to the Obligations and Security, which Intercreditor
Agreement shall expressly permit the servicing of such Subordinated Debt only after the Conversion Date and in
such case on account of interest on a monthly basis and principal on an annual basis subject to the prior Repayment
required to be made pursuant to Section 2.04(c)(iv) (Annual Excess Cash Flow Sweep), and provided that
immediately before and immediately after such Distribution, the Borrower shall be in pro forma compliance with the
financial covenants in Section 5.03 and the Borrower shall have delivered a pro forma Compliance Certificate
evidencing such compliance.
17.
"Parent Year-end Audited Financial Statements" in respect of any Fiscal Year means the audited consolidated
financial statements of the Parent and the internally prepared financial statements of each of the other Credit Parties,
in each case in respect of such Fiscal Year, including (in respect to the Parent audited consolidated financial
statements) management’s discussion and analysis with respect thereto, from an accounting firm that is nationally
recognized or major regional firm of chartered professional accountants.
"Patents" means all rights, title and interests (and all related IP Ancillary Rights) arising under any requirement of
law in or relating to patents and applications therefor.
"Pension Plan" means each pension or superannuation plan that is a “registered pension plan” as defined in
subsection 248(1) of the Income Tax Act (Canada) required to be registered under Canadian federal or provincial law
that is maintained or contributed to by the Borrower for its employees or former employees, but does not include the
Canada Pension Plan or the Quebec Pension Plan as maintained by the Government of Canada or the Province of
Quebec, respectively or a Multi-employer Plan.
"Permitted Acquisition" means an Investment that is either an acquisition of Equity Interests in a Person (referred
to herein as a "share purchase"), or an acquisition of assets of a Person not in the ordinary course of business
(referred to herein as an "asset purchase"), in either case if all of the following criteria are satisfied (except to the
extent otherwise agreed in writing by the Required Lenders in their discretion):
(a)
(b)
(c)
(d)
(e)
(f)
(g)
the Required Lenders acting reasonably shall have provided their prior written consent to such Acquisition
after conducting such due diligence they may consider appropriate in the circumstances (for greater
certainty, specifically including in respect of financial matters, the corporate and capital structure of such
Person, key management, and business, environmental, regulatory, tax and legal matters, and the Borrower
shall provide all information requested by the Required Lenders in connection with such due diligence at
least fifteen (15) days prior to the proposed completion of such Acquisition);
such Person is engaged in a business similar to or vertically integrated with the Business conducted by the
Borrower;
no portion of Facility A shall be used, directly or indirectly, in connection with the financing of the acquisition
unless approved by the written consent of all of the Lenders in their discretion;
if the acquisition involves a hostile or unsolicited take-over, it must be approved by all Lenders in their
discretion;
in the case of a share purchase, upon the completion of such acquisition (i) all Funded Debt (except Funded
Debt which will constitute Permitted Funded Debt hereunder) of such Person shall be repaid and all Liens
(except Liens which will constitute Permitted Liens hereunder) affecting the assets of such Person shall be
released and discharged, in each case within thirty (30) days of the acquisition;
in the case of a share purchase, the Subsidiary acquired shall be a wholly owned Subsidiary of the Borrower
and shall provide a Guarantee and all other Security required herein to be provided in accordance with
the requirements of Section
7.01 (including registrations, searches, legal opinions and ancillary documentation);
in the case of an asset purchase, (i) upon the completion of such transaction, all Funded Debt (except
Funded Debt which will constitute Permitted Funded Debt hereunder)
18.
secured by the acquired assets shall be repaid within thirty (30) days following the completion of the
acquisition; (ii) within thirty (30) days following the completion of such transaction, all Liens (except Liens
which will constitute Permitted Liens hereunder) affecting such assets shall be released and discharged; (iii)
within thirty (30) days following completion of such transaction, all Security required herein to be provided
to the Agent in respect of such assets (including registrations, searches, legal opinions and ancillary
documentation) shall be provided; and (iv) the asset purchase shall not involve the assumption of any
material environmental liabilities, and all representations and warranties contained herein with respect to
environmental matters shall be true and correct both immediately before and immediately after such
acquisition in all material respects; and if, as a result of the acquisition, any Company will acquire ownership
of any Real Property, the Borrower shall have provided an environmental questionnaire in form and
substance satisfactory to the Agent in respect of such Real Property which evidences such material
compliance with all such representations and warranties;
in the case of a share purchase, the acquired asset will only be located in an Approved Jurisdiction and
used or useful in a business which is the same as or related, ancillary or complimentary to the Business
carried on by the Companies;
in the case of a share purchase, if the target of a share purchase carries on any Cannabis Activities, the
entity which will carry on the acquired business will own assets and carry on business only in one or more
Approved Jurisdictions and the right to acquire Equity Interests shall be not exercisable until the earlier of: (i)
the Cannabis Activities in which the target proposes to engage are legal at all required levels of government
in the jurisdiction(s) in which the target is or proposes to operate, and (ii) the applicable Company has
received approval to exercise such right from any stock;
the Borrower shall deliver a Compliance Certificate evidencing that it is in compliance in all material respects
with all covenants and confirming the representations and warranties under this Agreement including the
requirements in this definition of Permitted Acquisition and will remain in compliance in all material respects
after giving effect to such acquisition; and no Default or Event of Default shall have occurred and be
continuing or would result from the completion of such acquisition;
if the Borrower proposes to incur Subordinated Debt to finance all or any portion of such acquisition, the
terms and conditions of such Subordinated Debt shall be satisfactory to the Required Lenders, and the
holder(s) of such Subordinated Debt shall enter into a Intercreditor Agreement with the Agent containing
terms and conditions contemplated in the definition of "Subordinated Debt" herein; and
if any such transaction would constitute both a Permitted Acquisition and a Capital Expenditure, it shall be
deemed to constitute a Permitted Acquisition and not a Capital Expenditure.
(h)
(i)
(j)
(k)
(l)
"Permitted Funded Debt" means, without duplication: (i) the Obligations; (ii) indebtedness of any Company to
another Company; (iii) Subordinated Debt; (iv) the Parent Subordinated Debt provided that the same constitutes
Subordinated Debt, is unsecured, and is subject to the Parent Subordination Agreement; (v) Funded Debt of the
Companies secured by Permitted Liens; (vi) obligations under any Guarantees which are considered to constitute
Funded Debt, but only to the extent such Guarantees are permitted pursuant to this Agreement; (vii) Funded Debt in
respect of corporate credit cards programs established by a financial institution other than BMO in an aggregate
outstanding amount not to exceed Fifty Thousand Dollars ($50,000) (or equivalent in foreign currency), (viii)
unsecured Funded Debt not referred to elsewhere in this definition in an aggregate outstanding amount not to exceed
Two Million Dollars ($2,000,000); and (ix) any other Funded Debt consented to in writing by the Lenders.
19.
"Permitted Liens" means:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Statutory Liens (i) in respect of any amount which is not at the time overdue or (ii) in respect of any amount
which may be past due but the quantum or validity of which is being diligently contested in good faith by
appropriate proceedings and in respect of which any right of seizure or sale is stayed pending resolution of
the dispute or (iii) that in the aggregate, not including those included in (i) or (ii) do not exceed $250,000 and
in respect of which reserves (if any are required by GAAP) have been established to the extent required in
accordance with GAAP;
Liens or rights of distress reserved in or exercisable under any lease of Land for rent and, in the case of
Land material to the operation of the Business of the Companies taken as a whole, not at the time overdue
or for compliance with the terms of such lease not at the time in default; and security deposits given in the
ordinary course under leases of Land not in excess of six (6) months' rent; it is acknowledged that the
Project Property is material to the operation of the Business of the Companies taken as a whole;
any obligations or duties affecting any Land due to any public utility or to any municipality or government, or
to any statutory or public authority, with respect to any franchise, grant, licence or permit in good standing
and any defects in title to structures or other facilities arising solely from the fact that such structures or
facilities are constructed or installed on Land under government permits, leases or other grants in good
standing; and if the Land subject thereto is material to the operation of the Business of the Companies taken
as a whole, which obligations, duties and defects in the aggregate do not materially impair the use of such
property, structures or facilities for the purpose for which they are held; it is acknowledged that the Project
Property is material to the operation of the Business of the Companies taken as a whole;
Liens incurred or deposits of cash made or pledged to secure obligations under workers' compensation
legislation or similar legislation, or in connection with contracts, bids, tenders or expropriation proceedings,
surety or appeal bonds, costs of litigation when required by law, public and statutory obligations, and
warehousemen's, storers', repairers', carriers' and other similar Liens and deposits;
security given to a public utility or any municipality or government or to any statutory or public authority to
secure obligations incurred to such utility, municipality, government or other authority in the ordinary course
of business and (i) not at the time overdue or (ii) which are past due, but the quantum or validity of
such obligations is being diligently contested in good faith by appropriate proceedings and in respect of
which any right of seizure or sale is stayed pending resolution of the dispute or (iii) that, in the aggregate,
not including those referred to in (i) and (ii) do not exceed $250,000 and in respect of which reserves (if any
are required by GAAP) have been established to the extent required in accordance with GAAP;
Liens and privileges arising out of judgments or awards (i) which are satisfied before they are executed upon
and which do not constitute an Event of Default under Section 8.01(n) or (ii) in respect of which (A) an
appeal or proceeding for review has been commenced; (B) a stay of execution pending such appeal or
proceedings for review has been obtained; and (C) reserves (if any are required by GAAP) have been
established to the extent required in accordance with GAAP;
Liens for taxes, customs duties, local improvement charges, levies, rates and assessments (i) not yet due or
(ii) or which are past due but the quantum or validity of which is being contested diligently and in good faith
by the Borrower by appropriate
20.
proceedings and in respect of which any right of seizure or sale is stayed pending resolution of the dispute
or (iii) that in the aggregate, not including those in (i) and (ii) for which a final assessment has not been
received which do not exceed $250,000 and in respect of which reserves (if any are required by GAAP)
have been established to the extent required in accordance with GAAP;
undetermined or inchoate Liens, charges and privileges incidental to current construction or current
operations and statutory liens, charges, adverse claims, security interests or encumbrances of any nature
whatsoever claimed or held by any Governmental Authority, provided the same are not of such nature as to
create a Material Adverse Change or adversely affect in any material way the operations of the Business of
the Companies taken as a whole;
any Lien arising in connection with the construction or improvement of any Land or arising out of the
furnishing of materials or supplies therefor, provided that such Lien secures moneys (i) not at the time
overdue or (ii) which are past due, but the quantum or validity thereof is being contested diligently and in
good faith by appropriate proceedings and in respect of which any right of seizure or sale is stayed pending
resolution of the dispute or (iii) that in aggregate, not including those referred to in (i) and (ii) do not exceed
$250,000, and in respect of which a Lien has not been registered against title to such Land and in respect of
which reserves (if any are required by GAAP) have been established to the extent required in accordance
with GAAP;
common law rights of set-off, off-set or combinations of account, civil law rights of compensation or
contractual rights of set-off, off-set or recourse to account balances incurred in the ordinary course (i) relating
to the establishment of depository relations with a financial institution permitted hereunder and not given in
connection with the issuance of Funded Debt, (ii) relating to pooled deposit or sweep accounts or cash
pooling arrangements (including with respect to any joint and several liability provisions in relation thereto)
permitted hereunder to permit satisfaction of overdraft or similar obligations incurred in the ordinary
course of business of the Borrower and any Subsidiary, (iii) relating to debit card or other payment services
permitted hereunder or (iv) relating to purchase orders and other agreements (other than Funded Debt)
entered into with customers in the ordinary course of business;
licences, easements, rights-of-way and rights in the nature of easements (including licences, easements,
rights-of-way and rights in the nature of easements for sidewalks, public ways, sewers, drains, gas, steam
and water mains or electric light and power, or telephone and telegraph conduits, poles, wires and cables)
and zoning, land use and building restrictions, by-laws, regulations and ordinances of federal, provincial,
municipal and other Governmental Authorities that, in the opinion of the Required Lenders, will not materially
impair the use of the affected Land for the purpose for which it is used by that Person;
the right reserved to or vested in any Government Authority by the terms of any lease, licence, franchise,
grant or permit or by any statutory provision to terminate any such lease, licence, franchise, grant or permit,
or to require annual or other payments as a condition to the continuance thereof;
the Lien resulting from the deposit of cash or securities in connection with contracts, tenders or expropriation
proceedings, or to secure workers’ compensation, unemployment insurance, surety or appeal bonds, costs
of litigation when required by law, liens and claims incidental
to current construction, mechanics’,
warehousemen’s, carriers’ and
(h)
(i)
(j)
(k)
(l)
(m)
other similar liens, and public, statutory and other like obligations incurred in the ordinary course, up to a
maximum aggregate amount deposited at any time of $500,000 for all Companies;
Liens solely on any cash earnest money deposits made in connection with any letter of intent or purchase
agreement permitted hereunder;
21.
Minor Title Defects;
Permitted Purchase-Money Security Interests;
the Specific Permitted Liens; and
the Security
(n)
(o)
(p)
(q)
(r)
provided that the use of the term "Permitted Liens" to describe the foregoing Liens shall mean that such
Liens are permitted to exist (whether in priority to or subsequent in priority to the Security, as determined by
Applicable Law); and for greater certainty such Liens shall not be entitled to priority over the Security by
virtue of being described in this Agreement as "Permitted Liens".
"Permitted Purchase-Money Security Interests" means Purchase-Money Security Interests incurred or assumed
in compliance with the provisions of this Agreement in connection with the purchase, leasing or acquisition of capital
equipment in the ordinary course of business, provided that the aggregate amount of the Companies’ liability
thereunder is not at any time greater than Three Million Five Hundred Thousand Dollars ($3,500,000).
"Person" is defined in the CBA Model Provisions.
“PPSA” shall mean the Personal Property Security Act (Ontario); provided that if by reason of mandatory provisions
of law, the perfection, the effect of perfection or non- perfection or the priority of the Liens of the Agent in any
Collateral or any other matter relating to Collateral is governed by the Personal Property Security Act as in effect in a
jurisdiction other than Ontario or the Civil Code of Quebec, the term “PPSA” shall mean such other legislation as in
effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection
or non-perfection or priority or other matter.
"Proceeds of Realization", in respect of the Security or any portion thereof, means all amounts received by the
Agent and any Lender under the Security in connection with:
(a)
(b)
(c)
any realization thereof, whether occurring as a result of enforcement or otherwise;
any sale, expropriation, loss or damage or other disposition of any Property subject to the Security or any
portion thereof (other than a disposition of Property made pursuant to Section 5.02(c); and
the dissolution, liquidation, bankruptcy or winding-up of any Credit Party or any other distribution of its
assets to creditors;
and all other amounts which are expressly deemed to constitute "Proceeds of Realization" in this Agreement.
“Project” means the greenhouse located on the Project Property to be used
processing.
for cannabis cultivation and
22.
“Project Property” means the Lands municipally known as 620 Essex County Road 14, Leamington, Ontario and
legally described as:
PIN 75086-0239 LT
1STLY; PART OF LOT 6, CONCESSION 8 MERSEA, PARTS 1, 3, 5, 7, 8 AND 9 PLAN 12R26840 SAVE
AND EXCEPT PARTS 1, 2 AND 3 PLAN 12R27357; S/T RESERVATIONS IN R1198184 AND R1198185;
T/W R1198185 2NDLY;PT N1/2 LT 6 CON 8 MERSEA PT 1, 2, 3 12R1420 S/T R1394739; SUBJECT TO AN
EASEMENT OVER PARTS 3 AND 8 PLAN 12R26840 AS IN MS36159; SUBJECT TO AN EASEMENT IN
GROSS AS IN CE746822; MUNICIPALITY OF LEAMINGTON
“Project Property Lending Value” means, in respect of the single Advance under Facility A, the lending value
attributed by the Lenders in their discretion to the Project Property immediately before such Advance, taking into
consideration costs incurred and an Acceptable Appraisal on an "as completed" basis.
“Property” means, with respect to any Person, any or all of its present and future undertaking, property and assets,
whether tangible or intangible, and includes rights under contracts and permits and all Owned Properties.
"Proportionate Share" in respect of any Lender means:
(a)
(b)
in the context of such Lender's obligation to make Advances under Facility A, such Lender's Commitment to
make Advances under Facility A divided by the aggregate amount of all Lenders' Commitments to make
Advances under Facility A;
subject to Section 9.03, in the context of any Lender's entitlement to receive payments of principal, interest
or fees in respect of Facility A, the Outstanding Advances due to such Lender under Facility A divided by the
aggregate amount of the Outstanding Advances due to all Lenders under Facility A; and
(c)
in any other context, such Lender's Commitment divided by the aggregate of all Lenders' Commitments.
"Purchase-Money Security Interest" means (i) a Capital Lease; or (ii) a Lien on any property or asset which is
created, issued or assumed to secure the unpaid purchase price thereof, provided that such Lien is restricted to such
property or asset (including all additions thereto, replacements thereof, insurance thereon and proceeds thereof) and
secures an amount not in excess of the purchase price thereof (including any costs of shipping, assembly,
installation, insurance, freight and transfer taxes) and any interest and fees payable in respect thereof.
"Real Property" means the Owned Properties and the Material Leased Properties and “Real Property” means any
one of them.
"Related Party" is defined in the CBA Model Provisions.
"Repayment" means a repayment by the Borrower on account of the Outstanding Advances.
"Repayment Notice" means a notice delivered by the Borrower to the Agent committing it to make a Repayment, in
the form of Exhibit "E".
"Required Lenders" means, (i) at any time prior to the occurrence of an Event of Default which is continuing, any
two (2) or more Lenders which have issued Commitments hereunder representing two-thirds (2/3) or more of the
aggregate amount of all Lenders' Commitments; and
23.
(ii) at any time after the occurrence of an Event of Default which is continuing, any two (2) or more Lenders which
have Outstanding Advances representing two-thirds (2/3) or more of the total amount of the Outstanding Advances
under Facility A; provided however that if at any time there are only two (2) Lenders under this Agreement,
"Required Lenders" shall mean both such Lenders, and if at any time there is only one (1) Lender under this
Agreement, "Required Lenders" shall mean such Lender.
"Requirements of Environmental Law" means: (i) obligations under common law; (ii) requirements having the force
of law imposed by or pursuant to statutes, regulations and by-laws whether presently or hereafter in force; (iii)
requirements announced by a Governmental Authority as having immediate effect (provided that at the time of
making such announcement the government also states its intention of enacting legislation to confirm such
requirements retroactively); (iv) all directives, policies and guidelines issued or relied upon by any Governmental
Authority to the extent such directives policies or guidelines have the force of law; (v) all permits, licenses,
certificates and approvals from Governmental Authorities which are required in connection with air emissions,
discharges to surface or groundwater, noise emissions, solid or liquid waste disposal, the use, generation, storage,
transportation or disposal of Hazardous Materials; and (vi) all requirements imposed under any clean-up,
compliance or other order made pursuant to any of the foregoing, in each and every case relating to environmental,
health or safety matters including all such obligations and requirements which relate to (A) solid, gaseous or liquid
waste generation, handling, treatment, storage, disposal or transportation of Hazardous Materials and (B) exposure
to Hazardous Materials.
“Responsible Person” means, with respect to any Credit Party holding a Health Canada License, its person
designated as such for the purposes of the Cannabis Act and the Cannabis Regulations.
"Rollover" means the renewal of an Availment Option upon its maturity in the same form.
"Rollover Notice" means a notice substantially in the form of Exhibit "C" given by the Borrower to the Agent for the
purpose of requesting a Rollover.
“Sale-Leaseback” means an arrangement, transaction or series of arrangements or transactions under which title to
any real property, tangible personal property or fixture is transferred by a Company (a “transferor”) to another Person
which leases or otherwise grants the right to use such property to the transferor (or nominee of the transferor) and,
whether or not in connection therewith, the transferor also acquires a right or is subject to an obligation to acquire
such property or a material portion thereof, and regardless of the accounting treatment of such arrangement,
transaction or series of arrangements or transactions.
“Sanction(s)” means any international economic sanction administered or enforced by the United States
Government (including without limitation, OFAC and the U.S. Department of State), Canada, the United Nations
Security Council, the European Union, Her Majesty’s Treasury or other relevant sanctions authority.
“Sanctioned Entity” means (a) a country or a government of a country, (b) an agency of the government of a country,
(c) an organization directly or indirectly controlled by a country or its government, or (d) a Person resident in or
determined to be resident in a country, in each case, that is subject to a country sanctions program administered and
enforced by OFAC, the US Department of State or any equivalent agency or body in Canada.
“Sanctioned Person” means a person named on the list of Specially Designated Nationals maintained by OFAC.
24.
"Security" means all Guarantees, security agreements, mortgages, debentures and other documents required to be
provided to the Agent or the Lenders pursuant to ARTICLE VI and all other agreements required or contemplated
herein to be delivered by the Credit Parties and other Persons to the Agent for the benefit of the Lenders from time to
time as security for the payment and performance of the Obligations, and the security interests, assignments and
Liens constituted by the foregoing.
"Senior Officer" means the President, Chief Financial Officer, Chief Executive Officer or corporate Secretary of the
Borrower.
"Service Agreements" means all agreements from time to time made between any Company and BMO or any of its
Affiliates (specifically including Harris N.A.) in respect of cash management, payroll, corporate credit cards or other
banking services.
“Shareholders’ Agreement” means the Unanimous Shareholders Agreement dated February 16th, 2018 among the
Parent, 2609733 Ontario Limited, Chris Mastronardi Benji Mastronardi, and the Borrower.
"Shareholders' Equity" means, in respect of any period, the consolidated shareholders' equity of the Parent for such
period determined in accordance with GAAP.
"Solvent" means, with respect to any Credit Party as of the date of determination, (i) the aggregate property of such
Credit Party is sufficient, if disposed of at a fairly conducted sale under legal process, to enable payment of all its
obligations, due and accruing due;
(ii) such Credit Party is able to meet its obligations as they generally become due; and
(iii)
such Credit Party has not ceased paying its current obligations in the ordinary course of business as they
generally become due; for purposes of this definition, the amount of any contingent obligation at such time shall be
computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount
that can reasonably be expected to become an actual or matured liability.
"Specific Permitted Liens" means the Liens described in Schedule 4.01(j) as such Liens may be amended or
replaced from time to time on substantially similar terms and conditions, provided that the principal amount of the
indebtedness secured by each such Lien shall not be increased.
"Statutory Lien" means a Lien in respect of any Property a Credit Party created by or arising pursuant to any
applicable legislation in favour of any Person (such as but not limited to a Governmental Authority), including, without
limitation, a Lien for the purpose of securing such Credit Party's obligation to deduct and remit employee source
deductions and goods and services tax pursuant to the Income Tax Act (Canada), the Excise Tax Act (Canada), the
Canada Pension Plan (Canada), the Employment Insurance Act (Canada) and any legislation in any jurisdiction
similar to or enacted in replacement of the foregoing from time to time.
"Subordinated Debt" means indebtedness of any Company to any Person which the Lenders in their sole discretion
have consented to in writing and in respect of which the holder thereof has entered into a Intercreditor Agreement in
favour of the Agent in form and substance satisfactory to the Agent and registered in all places where necessary or
desirable to protect the priority of the Security, which shall provide (among other things) that: (i) the maturity date of
such indebtedness is later than the Maturity Date; (ii) the holder of such indebtedness may not receive any payments
on account of principal or interest thereon (except to the extent, if any, expressly permitted therein); (iii) any security
held in respect of such indebtedness is subordinated to the Security; (iv) the holder of such indebtedness may not
take any enforcement action in respect of any such security (except to the extent, if any, otherwise expressly provided
therein) without the prior
25.
written consent of the Agent; and (v) any enforcement action taken by the holder of such indebtedness will not
interfere with the enforcement action (if any) being taken by the Agent in respect of the Security.
“Subsidiaries” means the business entities which are controlled by another business entity (as used herein,
"business entity" includes a corporation, company, partnership, limited partnership, trust or joint venture); and for
greater certainty includes a Subsidiary of a Subsidiary; and “Subsidiary” means any of them as the context requires.
“Supply Agreement” means the amended and restated wholesale cannabis supply agreement between the Parent
as purchaser and the Borrower as supplier dated November 26, 2019.
“Tangible Net Worth” means in respect of any Person at any time, the excess of its total assets over its total
liabilities; provided that the determination of such total assets shall exclude: (a) all goodwill, organizational expenses,
research and development expenses, trademarks, trade mark applications, trade names, copyrights, patents, patent
applications, licenses and rights in any thereof, and other similar intangibles; (b) all prepaid expenses, deferred
charges or unamortized debt discount and expense; (c) all reserves carried and not deducted from consolidated
assets; (d) any write-up in the book value of any capital asset resulting from a revaluation thereof; (e) prior to the
Conversion Date, the Parent Subordinated Debt provided the same constitutes Permitted Funded Debt; and (f) any
items not included in clauses (a) through (f) of this definition which are treated as intangibles under GAAP. For clarity,
“Tangible Net Worth” will include biological assets at book value, inventory (including fair value components), and
minority interests.
"Taxes" is defined in the CBA Model Provisions.
“Termination Date” means the date on which (i) all Obligations due and owing under the Loan Documents have been
paid in full, other than contingent claims for which no unsatisfied demand for payment has been made, (ii) all
Commitments have been cancelled or lapsed and (iii) all Hedging Agreements (if any) have been terminated and all
amounts due and owing thereunder (if any) have been paid in full or cash collateral is provided in respect thereof.
"Total Funded Debt" means, in respect of any Person at any time, its Funded Debt at such time, specifically
including for greater certainty the Outstanding Advances owing by it at such time.
“Total Funded Debt to EBITDA Ratio" means, for any period, the ratio of (i) Total Funded Debt of the Companies at
the end of such period to (ii) consolidated EBITDA of the Companies for such period.
"Trade Secrets" means all right, title and interest (and all related IP Ancillary Rights) arising under any requirement
of law in or relating to trade secrets.
"Trademarks" means all right, title and interest (and all related IP Ancillary Rights) in trademarks, trade names,
corporate names, company names, business names, fictitious business names, trade styles, service marks, logos
and other source or business identifiers and, in each case, all goodwill associated therewith, all registrations and
recordations thereof and all applications in connection therewith.
“Unfunded Capital Expenditures” means Capital Expenditures made by the Companies, which is (are): (i)
financed by operating cash flow net of proceeds from Dispositions permitted hereunder, (ii) not financed under
Capital Leases, (iii) not financed with the proceeds of Facility A, (iv) not financed with the proceeds of other
Permitted Funded Debt incurred substantially to fund such Capital Expenditures, and (v) not financed with new
equity.
26.
1.02
Accounting Principles
Except as otherwise provided herein, (i) each financial term in this Agreement shall be interpreted in accordance with
GAAP in effect on the date of such interpretation; and (ii) where the character or amount of any asset or liability or item of
revenue or expense is required to be determined, or any consolidation or other computation is required to be made for the
purpose of this Agreement, such determination or calculation shall be made in accordance with GAAP in effect on the date of
such determination. Notwithstanding the foregoing, if after the date of this Agreement there is an accounting change under
GAAP (referred to herein as an "accounting change"), and if any financial ratio or amount determined pursuant to Section
5.02(w) would be materially different as a result of such accounting change, such financial ratio or amount shall be
determined without regard to such accounting change and for the information of the Lenders the Parent shall also deliver to
the Lenders a reconciliation in form and substance satisfactory to the Lenders.
1.03
Currency References
All amounts referred to in this Agreement are in Canadian Dollars unless otherwise noted.
1.04
References to Statutes
Whenever in this Agreement reference is made to a statute or regulations made pursuant to a statute, such
reference shall, unless otherwise specified, be deemed to include all amendments to such statute or regulations from time
to time and all statutes or regulations which may come into effect from time to time substantially in replacement for the
said statutes or regulations.
1.05
Extended Meanings
Terms defined in the singular have the same meaning when used in the plural, and vice- versa. When used in the
context of a general statement followed by a reference to one or more specific items or matters, the term "including" shall
mean "including, without limitation", and the term "includes" shall mean "includes, without limitation". Any reference herein
to any action to be taken or decision to be made by the Agent or the Lenders (or the Required Lenders, as the case may be)
in their "sole discretion" shall mean that such sole discretion is absolute and unfettered.
1.06
Joint and Several Obligations
All obligations under ARTICLE X which are stated to be obligations of the Guarantors or any one or more of them
shall, to the extent permitted by Applicable Law, be joint and several obligations of each of the Guarantors.
1.07
Exhibits and Schedules
The following exhibits and schedules are attached to this Agreement and incorporated herein by reference:
27.
Exhibits
"A"
"B"
"C"
"D"
"E"
"F"
"G"
"H"
“I”
Schedules
4.01(b)
4.01(h)
4.01(i)
4.01(j)
4.01(k)
4.01(l)
4.01(m)
4.01(o)
4.01(p)
4.01(q)
4.01(r)
4.01(s)
- Lenders and Lenders' Commitments
- Draw Request
- Rollover Notice
- Conversion Notice
- Repayment Notice
- Compliance Certificate
- Form of BA Equivalent Note
- CBA Model Provisions
- Agreement and Acknowledgement to be bound – New Guarantor
- Corporate Information
- Material Permits
- Cannabis Investments
- Specific Permitted Liens
- Owned Properties
- Material Leased Properties
Intellectual Property
-
- Material Agreements
- Labour Agreements
- Environmental Matters
- Litigation
- Pension Plans and Multi-employer Plans
2.01
Establishment of Facility A
ARTICLE II– FACILITY A (TERM FACILITY)
Subject to the terms and conditions in this Agreement, the Lenders hereby establish, on a several and not joint or
joint and several basis, in favour of the Borrower, a committed, non- revolving credit facility referred to as “Facility A”, in the
maximum aggregate principal amount of Eighty Million Dollars ($80,000,000) (the “Facility A Limit”). Each Lender’s
commitment in respect of Facility A shall be limited to the maximum principal amount indicated opposite such Lender's name
in Exhibit "A" under the heading "Facility A Commitments". Each Advance by a Lender under Facility A shall be made by such
Lender in its Proportionate Share of Facility A.
Any undrawn amount under Facility A on the Closing Date shall be cancelled and the Lender’s Commitments in
respect of such unused portion shall be reduced in accordance with their Proportionate Share.
2.02
Purpose
Subject to the terms hereof, Advances under Facility A shall be used by the Borrower by way of a single Advance on
the Closing Date as follows: (i) not less than Fifty Million Dollars ($50,000,000) shall be used by the Borrower to refinance
Funded Debt owed to the Parent by the Borrower on the Closing Date in respect of the Project and the Project Properties
(which for clarity, is in addition to the Parent Subordinated Debt), but provided that the balance of the remainder of the
Facility A availability is sufficient to pay such remaining Project Costs, and (ii) the balance of Facility A shall be used by the
Borrower to refinance greenhouse retrofit costs and specific Capital Expenditures in respect of the
28.
Project, to pay closing and transactional costs on the Closing Date and for working capital of the Borrower.
2.03
Non-Revolving Nature
Facility A shall be a non-revolving facility, and any Repayment under Facility A may not be reborrowed.
2.04
Repayment
(a)
(b)
(c)
Notwithstanding all other provisions in this Section 2.04 the Obligations under Facility A shall become due
and payable by the Borrower on the earliest of: (i) the Acceleration Date; and (ii) the Maturity Date.
Without limiting (a) above, the Borrower shall make a Repayment under Facility A on the last Business Day
of each Fiscal Quarter commencing on the last Business Day in the first full Fiscal Quarter following the
Conversion Date. Principal instalments shall be calculated on the Outstanding Advances under Facility A on
the Conversion Date assuming an amortization of one hundred and twenty (120) months.
In addition to all other Repayments required pursuant to Section 2.04 (a) and (b) above, the following
Repayments shall be required:
(i)
(ii)
(iii)
(iv)
If any Company receives proceeds from a policy of insurance in respect of any Collateral, the
Borrower shall make a Repayment to the Agent in an amount equal to the portion of such proceeds
not permitted to be retained by such Company as provided in Section 6.07, within three (3) Business
Days after receipt thereof.
If any Company receives proceeds (net of transaction expenses) from the raising of capital by way of
equity or Funded Debt (excluding Permitted Funded Debt), the Borrower shall make a Repayment to
the Agent in an amount equal to one hundred percent (100%) of such net proceeds, within three
(3) Business Days after receipt thereof.
If any Company receives proceeds (net of transaction expenses, applicable taxes and usual
adjustments) from a transaction involving the sale or other disposition of Property not in the ordinary
course of business permitted under this Agreement, then the Borrower shall within three (3) Business
Days of such receipt, make a Repayment to the Agent in an amount equal to one hundred percent
(100%) of such net proceeds to the extent such net proceeds are not used to purchase similar assets
with similar value within such one hundred and eighty (180) days period. Notwithstanding the
foregoing however, the first One Million Dollars ($1,000,000) of net proceeds under this clause (iii)
in the aggregate in any Fiscal Year shall not be required to be applied as a Repayment.
The Borrower shall make a Repayment to the Agent within one hundred and twenty (120) days after
the end of each Fiscal Year of the Borrower, commencing with the Fiscal Year ending May 31, 2021,
in an amount equal to fifty percent (50%) the of Annual Excess Cash Flow if the Borrower’s Total
Funded Debt to EBITDA Ratio is greater than 2.00:1 in respect of such Fiscal Year, unless such
Repayment with the prior written consent of the Lenders is waived in respect of any Fiscal Year.
29.
(d)
The net proceeds required to be applied as a Repayment pursuant to paragraph (c) above shall be applied
firstly against the Borrower’s obligations to make scheduled Repayments under Facility A, in reverse
chronological order (including for clarity, the balloon payment payable on the Maturity Date) until paid in
full.
2.05
Availment Options
(a)
Subject to the restrictions contained in this Agreement (and in particular, Sections 3.02 and 3.03) the
Borrower may receive Advances under Facility A by any one (1) or more of the following Availment Options
(or any combination thereof):
(i)
(ii)
(iii)
Canadian Prime Rate Loans;
Bankers' Acceptances, each having a maturity between twenty-eight (28) and one hundred and
eighty-two (182) days (inclusive), subject to availability; or
BA Equivalent Loans from Non-BA Lenders with a maturity between twenty-eight (28) and one
hundred and eighty-two (182) days (inclusive), subject to availability;
(b)
Bankers' Acceptances and BA Equivalent Loans will not be issued which in the opinion of the Lenders
could result in the Facility A Limit being exceeded at any time. The Outstanding Advances under Facility A
in the form of any above Availment Option may be converted into another form of Availment Option, subject
to and in accordance with the terms and conditions of this Agreement (but for greater certainty, Bankers'
Acceptances and BA Equivalent Loans may not be converted into another Availment Option prior to the
maturity thereof).
2.06
Interest and Fees
In respect of Advances made under Facility A, the Borrower agrees to pay the following:
(a)
(b)
(c)
interest on Canadian Prime Rate Loans at the Canadian Prime Rate plus the Applicable Margin per
annum, payable monthly in arrears on the last day of each and every month and on the Maturity Date;
in respect of each Bankers' Acceptance, a stamping fee equal to the Applicable Margin, multiplied by the
face amount of the Bankers' Acceptance with the product thereof further multiplied by the number of days
to maturity of the Bankers' Acceptance and divided by three hundred and sixty-five (365) or three hundred
and sixty-six (366), payable at the time of acceptance; and
in respect of each BA Equivalent Note, a stamping fee equal to the Applicable Margin, multiplied by the
face amount of the BA Equivalent Note with the product thereof further multiplied by the number of days to
maturity of the BA Equivalent Note and divided by three hundred and sixty-five (365) or three hundred and
sixty-six (366), payable at the time of acceptance.
Except as otherwise provided in this Agreement, such payments shall be made to the Agent for the account of the Lenders;
and the Agent shall promptly remit to each Lender its Proportionate Share of each such payment.
2.07
Voluntary Cancellation; Voluntary Repayments
Upon delivery of an executed Repayment Notice to the Agent not less than one (1) Business Day and not more than
three (3) Business Days prior to making a Repayment, the Borrower may make
Repayments on account of the Outstanding Advances under Facility A from time to time in a minimum amount of Five
Hundred Thousand Dollars ($500,000) and multiples of One Hundred Thousand Dollars ($100,000) without payment of any
penalty or fee; provided the Borrower shall at its own expense also concurrently unwind Hedge Agreements to the extent
necessary (if any) such that the aggregate notional amount of all outstanding Hedge Agreements does not exceed the
Outstanding Advances under Facility A at such time; and further provided that Bankers' Acceptances and BA Equivalent
Loans may not be repaid prior to the maturity thereof. Each such Repayment under Facility A shall be applied against the
scheduled Repayments payable under Facility A in reverse chronological order.
3.01
Matters Relating to Interest
ARTICLE III- GENERAL CONDITIONS
30.
(a)
(b)
(c)
Unless otherwise indicated, interest on any outstanding principal amount shall be calculated daily and
shall be payable monthly in arrears on the last day of each and every month and on the Maturity Date. If
the last day of a month is not a Business Day, the interest payment due on such day shall be made on the
next Business Day, and interest shall continue to accrue on the said principal amount and shall also be
paid on such next Business Day. Interest shall accrue from and including the day upon which an Advance
is made or is deemed to have been made, and ending on but excluding the day on which such Advance is
repaid or satisfied. Any change in the Canadian Prime Rate shall cause an immediate adjustment of the
interest rate applicable to Canadian Prime Rate Loans without the necessity of any notice to the Borrower.
Unless otherwise stated, in this Agreement if reference is made to a rate of interest, fee or other amount
"per annum" or a similar expression is used, such interest, fee or other amount shall be calculated on the
basis of a year of three hundred and sixty-five (365) or three hundred and sixty-six (366) days, as the case
may be. If the amount of any interest, fee or other amount is determined or expressed on the basis of a
period of less than one year of three hundred and sixty-five (365) or three hundred and sixty-six (366) days,
as the case may be, the equivalent yearly rate is equal to the rate so determined or expressed, divided by
the number of days in the said period, and multiplied by the actual number of days in that calendar year.
Interest and fees shall be calculated on the basis of a calendar year unless otherwise specified. All
calculations of interest and fees under the Loan Documents shall be made on the basis of the nominal
rates described in this Agreement and not on the basis of effective yearly rates or on any other basis that
gives effect to the principle of deemed reinvestment. The Credit Parties acknowledge that there is a
material difference between the stated nominal rates and effective yearly rates taking into account
reinvestment, and that they are capable of making the calculations required to determine effective yearly
rates.
Notwithstanding any other provisions of this Agreement, if the amount of any interest, premium, fees or
other monies or any rate of interest stipulated for, taken, reserved or extracted under the Loan Documents
would otherwise contravene the provisions of Section 347 of the Criminal Code (Canada), Section 8 of the
Interest Act (Canada) or any successor or similar legislation, or would exceed the amounts which any
Lender is legally entitled to charge and receive under any law to which such compensation is subject, then
such amount or rate of interest shall be reduced to such maximum amount as would not contravene such
provision; and to the extent that any excess has been charged or received such Lender shall apply such
excess against the Outstanding Advances and refund any further excess amount.
31.
(d)
If interest or fees are not paid on the date due, the principal amount shall continue to bear interest at the
rate that is applicable to the particular type of Advance determined from time to time in accordance
herewith, subject to this Section 3.01(d), both before and after maturity, default and judgment, and overdue
interest shall bear interest at the same rate, compounded monthly, and be payable on demand. Effective
upon the occurrence of any Event of Default and for so long as any Event of Default shall be continuing,
the interest rates, stamping fees, issuance fees otherwise payable hereunder shall automatically,
immediately and without notice by the Agent to the Borrower be increased by two percent (2%) per
annum (such increased rate, the "Default Rate"), to compensate the Agent and the Lenders for the
additional risk, and all outstanding Obligations, including unpaid interest, stamping fees and issuance fees,
shall continue to accrue interest from the date of such Event of Default at the Default Rate applicable to
such Obligations. For greater certainty, the Default Rate shall apply whether or not the Agent declares all
Obligations of the Borrower or any one or more of them to be immediately due and payable and whether or
not the Agent takes any enforcement action or seeks to avail itself of any remedies hereunder.
3.02
Notice Periods
(a)
(b)
(c)
(d)
The Borrower shall provide two (2) Business Days' prior written notice to the Agent before 11:00 a.m.
Toronto time in respect of any Advance, Rollover, Conversion or Repayment; other than a Conversion to a
Canadian Prime Rate Loan which shall only require one (1) Business Day’s prior written notice to the Agent
before 11:00 am Toronto time.
Notice of any Advance, Rollover, Conversion or voluntary Repayment referred to in paragraph (a) above
shall be given in the form of a Draw Request, Rollover Notice, Conversion Notice or Repayment Notice, as
the case may be, attached hereto as Exhibits. All such notices shall be given to the Agent at its address
set out in Section 12.07.
If notice is not provided as contemplated herein with respect to the maturity of a Bankers' Acceptance or
BA Equivalent Loan, the Agent may convert the Bankers' Acceptance or BA Equivalent Loan upon its
maturity into a Canadian Prime Rate Loan.
Any Conversion from one form of a Canadian Prime Rate Loan to Bankers’ Acceptances or a BA
Equivalent Loan to another shall be subject to satisfaction of all of the terms and conditions applicable to
the form of the new Availment Option as herein provided.
3.03
Minimum Amounts, Multiples and Procedures re Draws, Conversions and Repayments
(a)
(b)
(c)
Subject to paragraph (a) each request by the Borrower for an Advance or Conversion in the form of a
Canadian Prime Rate Loan shall be in a minimum amount of Five Hundred Thousand Dollars ($500,000)
and a multiple of One Hundred Thousand Dollars ($100,000).
Each request by the Borrower for an Advance by way of Bankers' Acceptances and BA Equivalent Notes
shall be for an aggregate face amount of Bankers' Acceptances and BA Equivalent Notes of not less than
Five Million Dollars ($5,000,000) and in a multiple of One Hundred Thousand Dollars ($100,000) and in
such amount as will result in the face amount of each Bankers' Acceptance or BA Equivalent Note issued
by a Lender being in a multiple of One Hundred Thousand Dollars ($100,000).
Upon receipt of a Draw Request under Facility A, the Agent shall promptly notify each Lender under Facility
A of the contents thereof and such Lender's Proportionate Share of the Advance. Such Draw Request shall
not thereafter be revocable.
32.
(d)
(e)
(f)
Each Advance shall be made by the applicable Lenders to the Agent at its address referred to in Section
12.07 or such other address as the Agent may designate by notice in writing to the Lenders from time to
time. Each Lender shall make available its Proportionate Share of each said Advance to the Agent. Unless
any condition of the Advance has not been satisfied or waived and the Agent has made that determination,
the Agent shall make the funds so received from the Lenders available to the Borrower by 2:00 p.m.
(Toronto time) on the requested date of the Advance. No Lender shall be responsible for any other Lender's
obligation to make available its Proportionate Share of the said Advance.
The Borrower agrees to deliver in favour of each Lender such other agreements and documentation as
such Lender may reasonably require (not inconsistent with this Agreement) in respect of such Lender's
requirements for the acceptance of Bankers' Acceptances or the issuance of BA Equivalent Notes.
All payments of principal, interest and other amounts made by the Borrower to the Agent in respect of the
Outstanding Advances under Facility A shall be paid by the Agent to the respective Lenders, each in
accordance with its Proportionate Share thereof.
3.04
Place of Advances, Repayments
(a)
(b)
(c)
Advances by any Lender to the Borrower shall be made by such Lender to the Agent from such Lender's
Lending Office in Canada. All payments of principal, interest and other amounts to be made by the
Borrower pursuant to this Agreement shall be made to the Agent at its address noted in Section 12.07 or
to such other address in Canada as the Agent may direct in writing from time to time. All such payments
received by the Agent on a Business Day before 2:00 p.m. (Toronto time) shall be treated as having been
received by the Agent on that day; and payments made after such time on a Business Day shall be treated
as having been received by the Agent on the next Business Day.
Whenever any payment shall be due on a day which is not a Business Day, the date for payment thereof
shall be extended to the next succeeding Business Day. Interest shall continue to accrue and be payable
thereon as provided herein, until the date on which such payment is received by the Agent.
The Borrower hereby irrevocably authorizes the Agent to debit any account maintained by the Borrower
with the Agent from time to time in order to pay any amount of principal, interest, fees, expenses or other
amounts payable by the Borrower pursuant to this Agreement.
3.05
Evidence of Obligations (Noteless Advances)
The Agent shall open and maintain, in accordance with its usual practice, accounts evidencing the Obligations; and
the information entered in such accounts shall constitute prima facie evidence of the Obligations absent manifest error. The
Agent may, but shall not be obliged to, request the Borrower to execute and deliver promissory notes from time to time as
additional evidence of the Obligations, in form and substance satisfactory to the Agent acting reasonably.
3.06
Determination of Equivalent Amounts
Whenever it is necessary or desirable at any time to determine the Equivalent Amount in Canadian Dollars of an
amount expressed any other currency, or vice-versa, the Equivalent Amount shall be determined by reference to the
Exchange Rate on the date of such determination.
3.07
Purchase of Bankers' Acceptances and BA Equivalent Notes
(a)
In connection with the issuance by the Borrower of a Bankers' Acceptance or BA Equivalent Note, the
amount payable by the purchaser thereof to the Borrower shall be determined in accordance with the
following formula:
33.
F
1 + (D x T/365)
where:
F
D
T
means the face amount of such Bankers' Acceptance or BA Equivalent Note,
means the discount rate applicable under paragraph (b), (c) or (d), as the case may be, below, and
means the number of days to maturity of such Bankers' Acceptance or BA Equivalent Note,
with the amount as so calculated being rounded up or down to the fifth decimal place and with 0.000005 being
rounded up.
(b)
(c)
(d)
(e)
Each BA Lender which is a bank listed in Schedule I of the Bank Act (Canada) agrees to purchase those
Bankers' Acceptances which it has accepted at a discount from the face amount thereof equal to the
CDOR Rate for the relevant period in effect on the issuance date thereof; provided however that if BMO is
the only BA Lender under Facility A, the discount rate shall be the applicable discount rate established by
BMO on the issuance date thereof.
Each BA Lender which is a bank listed in Schedule II or Schedule III of the Bank Act (Canada) agrees to
purchase those Bankers' Acceptances which it has accepted at a discount from the face amount thereof
equal to the CDOR Rate for the relevant period in effect on the issuance date thereof plus a premium
determined by such BA Lender not in excess of one-tenth of one percent (0.10%) per annum.
Each Non-BA Lender agrees to purchase BA Equivalent Notes issued by it hereunder at a discount from
the face amount thereof equal to the CDOR Rate for the relevant period in effect on the issuance date
thereof.
The discount applicable to each Bankers' Acceptances and BA Equivalent Note shall be determined on the
basis of a year of three hundred and sixty-five (365) days.
3.08
Provisions Regarding Bankers' Acceptances
The following provisions are applicable to Bankers' Acceptances issued by the Borrower and accepted by any BA
Lender hereunder:
Payment of Bankers' Acceptances
(a)
Subject to the next sentence, the Borrower agrees to provide for each Bankers' Acceptance by payment of
the face amount thereof to the Agent on behalf of the BA Lender on the maturity of the Bankers' Acceptance
or, prior to such maturity, on the Acceleration Date; and the Agent shall remit the said amount to such BA
Lender and such BA Lender shall in turn remit such amount to the holder of the Bankers' Acceptance. If the
Borrower does not provide for the payment of the Bankers' Acceptance accordingly,
34.
any amount not so paid shall be immediately subject to Conversion to a Canadian Prime Rate Loan under
Facility A. The Borrower agrees not to claim any days of grace for the payment at maturity of any Bankers'
Acceptance. The Borrower hereby waives any defences to payment which might otherwise exist if for any
reason a Bankers' Acceptance is held by the BA Lender for its own account at maturity.
Availability of Bankers' Acceptances
(b)
If at any time and from time to time the Agent determines, acting reasonably, that there no longer exists a
market for Bankers' Acceptances for the term requested by the Borrower, or at all, the Agent shall so
advise the Borrower, and in such event the BA Lenders shall not be obliged to accept and the Borrower
shall not be entitled to issue Bankers' Acceptances.
Power of Attorney
(c)
The Borrower hereby appoints each BA Lender as its true and lawful attorney to complete and issue
Bankers' Acceptances on behalf of the Borrower in accordance with written (including electronic
transmittal) transmitted instructions provided by the Borrower to the Agent on behalf of such BA Lender, and
the Borrower hereby ratifies all that its said attorney may do by virtue thereof. The Borrower agrees to
indemnify and hold harmless the Agent and the BA Lenders and their respective directors, officers and
employees from and against any charges, complaints, costs, damages, expenses, losses or liabilities of
any kind or nature which they may incur, sustain or suffer, arising from or by reason of acting, or failing to
act, as the case may be, in reliance upon this power of attorney, except to the extent caused by the gross
negligence or wilful misconduct (including wilful breach of this Agreement) of the Agent or the BA Lender or
their respective directors, officers and employees. The Borrower hereby agrees that each Bankers'
Acceptance completed and issued and accepted in accordance with this Section by a BA Lender on behalf
of the Borrower is a valid, binding and negotiable instrument of the Borrower as drawer and endorser. The
Borrower agrees that each BA Lender's accounts and records will constitute prima facie evidence of the
execution and delivery by the Borrower of Bankers' Acceptances. This power of attorney shall continue in
force until written notice of revocation has been served upon the Agent by the Borrower at the Agent's
address set out in Section 12.07.
3.09
Provisions regarding BA Equivalent Notes
Each Non-BA Lender will not accept Bankers' Acceptances hereunder, and shall instead from time to time make BA
Equivalent Loans to the Borrower. Each BA Equivalent Loan shall be evidenced by a non-interest bearing promissory note
payable by the Borrower to the Non-BA Lender substantially in the form of Exhibit "G" attached hereto, which will be
purchased by the Non-BA Lender. Each BA Equivalent Note shall be negotiable by the Non-BA Lender without notice to or
the consent of the Borrower, and the holder thereof shall be entitled to enforce such BA Equivalent Note against the Borrower
free of any equities, defences or rights of set-off that may exist between the Borrower and the Non-BA Lender. In this
Agreement, all references to a BA Equivalent Note shall mean the loan evidenced thereby if required by the context; and all
references to the "issuance" of a BA Equivalent Note by a Non-BA Lender and similar expressions shall mean the making of
a BA Equivalent Loan by the Non-BA Lender which is evidenced by a BA Equivalent Note. The following provisions are
applicable to each BA Equivalent Loan made by a Non-BA Lender to the Borrower hereunder:
Payment of BA Equivalent Notes
(a)
Subject to the next sentence, the Borrower agrees to provide for each BA Equivalent Note by payment of
the face amount thereof to the Agent on behalf of the Non-BA
35.
Lender on the maturity of the BA Equivalent Note or, prior to such maturity, on the Acceleration Date; and
the Agent shall remit the said amount to such Non-BA Lender and such Non-BA Lender shall in turn remit
such amount to the holder of the BA Equivalent Note. If the Borrower does not provide for the payment of
the BA Equivalent Note accordingly, any amount not so paid shall be immediately subject to Conversion to
a Canadian Prime Rate Loan under Facility A. The Borrower agrees not to claim any days of grace for the
payment at maturity of any BA Equivalent Note. The Borrower hereby waives any defences to payment
which might otherwise exist if for any reason a BA Equivalent Note is held by the Non-BA Lender for its
own account at maturity.
Availability of BA Equivalent Loans
(b)
The Non-BA Lender shall have no obligation to make BA Equivalent Loans during any period in which the
BA Lenders' obligation to issue Bankers' Acceptances is suspended pursuant to Section 3.5 of the CBA
Model Provisions.
Power of Attorney
(c)
The Borrower hereby appoints the Non-BA Lender as its true and lawful attorney to complete BA Equivalent
Notes on behalf of the Borrower in accordance with written (including electronic transmission) transmitted
instructions delivered by the Borrower to the Agent, and the Borrower hereby ratifies all that its said
attorney may do by virtue thereof. The Borrower agrees to indemnify and hold harmless the Agent and the
Non-BA Lender and their respective directors, officers and employees from and against any charges,
complaints, costs, damages, expenses, losses or liabilities of any kind or nature which they may incur,
sustain or suffer, arising from or by reason of acting, or failing to act, as the case may be, in reliance
upon this power of attorney except to the extent caused by the gross negligence or wilful misconduct
(including wilful breach of this Agreement) of the Agent or the Non-BA Lender or their respective directors,
officers and employees. The Borrower hereby agrees that each BA Equivalent Note completed by the Non-
BA Lender on behalf of the Borrower is a valid, binding and negotiable instrument of the Borrower as
drawer and endorser. The Borrower agrees that the Non-BA Lender's accounts and records will constitute
prima facie evidence of the execution and delivery by the Borrower of BA Equivalent Notes. This power of
attorney shall continue in force until written notice of revocation has been served upon the Agent on behalf
of the Non-BA Lender by the Borrower at the Agent's address provided in Section 12.07.
3.10
No Repayment of Certain Availment Options
The Borrower acknowledge that Bankers' Acceptances and BA Equivalent Loans may not be repaid prior to the
maturity thereof. If prior to the maturity of such Availment Option the Agent receives any funds from the Borrower or any other
Person which are intended to be applied as a Repayment thereof, the Agent may retain such funds without any obligation to
invest such funds or pay interest thereon, and shall apply such funds against such Availment Option on the scheduled
maturity date thereof.
Notwithstanding the foregoing, if for any reason a Bankers' Acceptance or BA Equivalent Loans is repaid or
converted to another Availment Option prior to the scheduled maturity date thereof (whether as a result of acceleration or
otherwise), the Borrower agrees to pay to the Agent upon demand all losses, damages, costs and expenses which the Agent
or any Lender incurs as a result of such Repayment or Conversion prior to the said scheduled maturity date. Such losses,
damages, costs and expenses shall include any and all breakage costs (such breakage costs to be determined in accordance
with the Agent's standard procedures for a commercial borrower). A certificate as to such losses, damages, costs or
expenses setting forth the calculations therefor will be prima facie evidence of such losses, damages, costs or expenses and
be binding on the Borrower except for manifest error.
36.
3.11
Illegality
The obligation of any Lender to make Advances hereunder shall be suspended if and for so long as it is unlawful or
impossible for such Lender to maintain Facility A or make Advances hereunder as a result of the adoption of any applicable
law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by such Lender with any request or directive (whether or not having the force of law, but
if not having the force of law, compliance therewith is generally regarded by banks as mandatory) of any such Governmental
Authority, central bank or comparable agency.
3.12
Anti-Money Laundering
The Borrower acknowledges that pursuant to AML Legislation the Agent and the Lenders may be required to obtain,
verify and record information regarding the Credit Parties, Limited Recourse Guarantors and their respective directors,
authorized signing officers, direct or indirect shareholders, partners or other persons in control of the Companies and the
transactions contemplated hereby. The Borrower shall promptly provide or cause to be provided all such information, including
any supporting documentation and other evidence, as may be requested by the Agent or any Lender, or any prospective
assignee or participant of a Lender or the Agent, in order to comply with any applicable AML Legislation, whether now or
hereafter in existence. If the Agent has ascertained the identity of any Credit Party or Limited Recourse Guarantor, or any
authorized signatories of any Credit Party or Limited Recourse Guarantor, for the purposes of applicable AML Legislation,
then the Agent shall:
(a)
(b)
be deemed to have done so as an agent for each Lender, and this Agreement shall constitute a "written
agreement" in such regard between each Lender and the Agent within the meaning of applicable AML
Legislation; and
provide each Lender with copies of all information obtained in such regard without any representation or
warranty as to its accuracy or completeness.
Notwithstanding the foregoing each Lender acknowledges and agrees that the Agent has no obligation to ascertain the
identity of any Credit Party or Limited Recourse Guarantor, or any authorized signatories of any Credit Party or Limited
Recourse Guarantor, on behalf of such Lender or to confirm the completeness or accuracy of any information that the
Agent obtains from any Credit Party or Limited Recourse Guarantor, or any such authorized signatory, in doing so.
3.13
Terrorist Lists
Each Credit Party is and will remain in compliance in all material respects with all Canadian economic sanctions laws
and implementing regulations under the Proceeds of Crime {Money Laundering) and Terrorist Financing Act (Canada), the
Criminal Code (Canada), the United Nations Act (Canada) and all similar applicable anti-money laundering and counter-
terrorism financing provisions and regulations issued pursuant to any of the foregoing. No Credit Party (i) is a Person
designated by the Canadian government on any list set out in the United Nations Al-Qaida and Taliban Regulations, the
Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism or the Criminal Code (collectively,
the "Terrorist Lists") with which a Canadian Person cannot deal with or otherwise engage in business transactions, (iii) is a
Person who is otherwise the target of Canadian economic sanctions laws or (iv) is controlled by (including without limitation by
virtue of such Person being a director or owning voting shares or interests), or acts, directly or indirectly, for or on behalf of,
any Person or entity on a Terrorist List or a foreign government that is the target of Canadian economic sanctions prohibitions
such that the entry into, or performance under, this Agreement or any other Loan Document would be prohibited under
Applicable Law.
4.01
Representations and Warranties
ARTICLE IV- REPRESENTATIONS AND WARRANTIES
The Parent (where specifically mentioned and the context permits) hereby represents and warrants with respect to
itself and the Borrower hereby represents and warrants with respect to itself and (where mentioned) each other Company
and/or each of its Subsidiaries, as the case may be, in each case to the Agent and the Lenders as follows:
37.
(a)
(b)
(c)
(d)
(e)
Status – The Parent and each Company has been duly incorporated (or amalgamated) and organized or
formed, as the case may be, and is validly subsisting under the laws of its jurisdiction of incorporation or
formation, as the case may be and is up-to-date in respect of all material corporate and analogous filings,
save where the failure to do so has not constituted and would not reasonably be expected to constitute a
Material Adverse Change. Each Company is qualified to do business (including the Business) and is in
good standing in each jurisdiction where that is necessary or appropriate, save where the failure to be so
qualified or be in good standing has not constituted and would not reasonably be expected to constitute a
Material Adverse Change.
Information – Schedule 4.01(b) attached hereto, or as updated from time to time by each Compliance
Certificate contains a list of all Credit Parties as at the date of this Agreement, or as of the most recently
delivered Compliance Certificate as applicable, and the following information: the present and all prior
names of each Credit Party, including the names of all predecessors, jurisdiction of incorporation or
formation, present governing jurisdiction, jurisdiction in which its registered office and principal place of
business is located; in respect of each Company, each jurisdiction where it has assets or carries on
business other than the jurisdictions outside of Canada where property and assets not exceeding One
Million Dollars ($1,000,000) (calculated on a net book value basis) in the aggregate at any time of the
Companies collectively are located; bank accounts of each Company (referencing financial institutions
where held); in respect of the Companies, the number and classes of the issued and outstanding shares or
other Equity Interests and a list of its shareholders (including all Limited Recourse Guarantors), partners or
members, as applicable, including the number and class of shares (or proportionate membership or
partnership interest) held by each.
Solvency – Each of the Parent and the Borrower (each on a consolidated basis) is Solvent.
No Pending Changes – No Person has any agreement or option or any right or privilege (whether by law,
pre-emptive or contractual) capable of becoming an agreement, including convertible securities, warrants
or convertible obligations of any nature out of the ordinary course of business, or for the purchase,
subscription, allotment or issuance of any debt or Equity Interests of any Company.
No Conflicting Agreements – Neither the execution and delivery of the Security, nor compliance with the
terms, provisions and conditions of this Agreement or the Security or any other Loan Document will conflict
with, result in a breach of, or constitute a default under the Constating Documents of any Credit Party or
any agreement to which it is a party or is otherwise bound, save where such conflict, breach or default has
not constituted and would not reasonably be expected to constitute a Material Adverse Change, and does
not require the consent or approval of any Person, other than those which have been obtained and save,
where the failure to obtain such consent or approval has not constituted and would not reasonably be
expected to constitute a Material Adverse Change.
38.
(f)
(g)
(i)
(j)
(k)
No Conflict with Constating Documents – There are no provisions in the Constating Documents of the
Parent or any Company including in any unanimous shareholder agreement affecting it which restrict or
limit its powers to borrow money, issue debt obligations, guarantee the payment or performance of the
obligations of others, or otherwise encumber all or any of its Property to secure the payment of its
Obligations, including without limitation the Project and the Project Property, now owned or subsequently
acquired.
Loan Documents – The Borrower has the corporate capacity, power, right and authority to borrow from the
Lenders, and each Credit Party has the corporate capacity, power, right and authority to perform its
obligations under this Agreement and the other Loan Documents to which it is a party and provide the
Security required to be provided by it hereunder; and each Guarantor has the corporate capacity, power,
right and authority to guarantee payment to the Agent and the Lenders of the Borrower's Obligations and
provide the Security required to be provided by it hereunder. The execution and delivery of the Loan
Documents by the Credit Parties and the performance of their respective obligations therein have been
duly authorized by all necessary corporate action. This Agreement and the other Loan Documents
constitute legal, valid and binding obligations of the Credit Parties, enforceable against them in accordance
with the terms and provisions thereof, subject to bankruptcy, insolvency and other similar laws affecting
the rights of creditors generally and to general principles of equity.
(h)
Conduct of Business; Material Permits – Each Company is in compliance with all Applicable
Laws (other than Cannabis Laws which are covered by paragraph below) of each jurisdiction in which it
carries on business and is duly licensed, registered and qualified to do business and is in good standing in
each jurisdiction in which the nature of the business (including the Business) conducted by it or the Real
Property owned or leased by it make such qualification necessary, except to where the failure to comply
with any such Applicable Laws or hold any such licence, registration or qualification would not constitute a
Material Adverse Change. Attached hereto as Schedule 4.01(h), as updated from time to time by each
Compliance Certificate, is a true and complete list of all Material Permits, including with respect to the
Business, and all Material Permits of the Companies are valid and subsisting and in good standing.
Cannabis Laws - Each of the Parent and each Company is in compliance with all Cannabis Laws
applicable to it, its property or its business including, in the case of the Companies, the Business. Specifically,
but without limitation, neither the Parent nor any Company (i) conducts any Cannabis Activities, or (ii)
holds an Investment in any Person who conducts any Cannabis Activities, in each case other than in an
Approved Jurisdiction where such Cannabis Activities would not violate or result in a breach of any applicable
Cannabis Law. Schedule 4.01(i) attached hereto, or as updated from time to time by each Compliance
Certificate, sets out all such Investments of the Companies, and all Approved Jurisdictions of the Credit
Parties.
Ownership of Assets; Specific Permitted Liens – Each Company owns, and possesses its Property free and
clear of any and all Liens except for Permitted Liens. No Company has any commitment or obligation
(contingent or otherwise) to grant any Liens except for Permitted Liens. Schedule 4.01(j) attached hereto, or
as updated from time to time by each Compliance Certificate, contains a true and complete list of the Specific
Permitted Liens.
Owned Properties – The Companies do not own any Real Property other than the real property listed in
Schedule 4.01(k) attached hereto or as updated from time to time by each Compliance Certificate. Each
Company is the beneficial and registered owner of
39.
(l)
(m)
(n)
(o)
(p)
(q)
the applicable Owned Property as identified as owned by it in Schedule 4.01(k) attached hereto or as
updated from time to time by each Compliance Certificate.
Material Leased Properties – The Companies do not lease any Material Leased Properties other than the
Material Leased Properties listed in Schedule 4.01(l).
Intellectual Property – Each Company possesses or has the right to use all Intellectual Property material to
the conduct of its business, including the Business. Schedule 4.01(m) attached hereto or as updated from
time to time by each Compliance Certificate is a list of all such material Intellectual Property held by the
Companies as at the Closing Date or as at the most current Compliance Certificate as applicable, including a
description of the nature of such rights. No Person has asserted any written claim in respect of the validity of
such material Intellectual Property or the Companies’ rights therein, and the Companies are not aware of any
valid basis for the assertion of any such claims. To the knowledge of the Companies, the conduct and
operations of the businesses of each Company do not infringe, misappropriate, dilute or violate any
Intellectual Property rights held by any other Person.
Insurance – The Companies have obtained insurance which satisfies all requirements set out in Section
5.01(i) herein.
Material Agreements – Each Material Agreement to which any Company is a party is in good standing and in
full force and effect; and none of the Companies, or, to the knowledge of the Companies, any of the other
parties thereto, is in material breach of any of the terms or conditions contained therein. Schedule 4.01(o)
attached hereto or as updated from time to time by each Compliance Certificate, is a true and complete list of
all Material Agreements to which the Companies are a party as at the Closing Date or as at the most current
Compliance Certificate as applicable.
Labour Agreements – Schedule 4.01(p) attached hereto or as updated from time to time by each Compliance
Certificate contains a true and complete list, as of the Closing Date or as of the most current Compliance
Certificate, as applicable, of all contracts with labour unions and employee associations to which the
Companies are a party, and the Companies are not aware of any attempts to organize or establish any other
labour union or employee association.
Environmental Laws – Except to the extent disclosed in Schedule 4.01(q) attached hereto or disclosed in the
environmental reports and questionnaires delivered to the Agent prior to the date hereof or as updated from
time to time by each Compliance Certificate:
(i)
(ii)
(iii)
each Company and its business, operations, assets, equipment, property, leaseholds and other
facilities are, to the best of the knowledge and belief of the Companies, in compliance in all respects
with all Requirements of Environmental Law, save for non-compliance that does not constitute and
would not reasonably be expected to constitute a Material Adverse Change;
each Company holds all Material Permits, licenses, certificates and approvals from Governmental
Authorities which are required in connection with the Requirements of Environmental Law, save for
those the absence of which that does not constitute and would not reasonably be expected to
constitute a Material Adverse Change;
to the best of the knowledge and belief of the Companies there has been no material emission, spill,
release, or discharge into or upon the air, soils (or any improvements located thereon), surface water
or groundwater or the sewer, septic
40.
(iv)
(v)
(vi)
system or waste treatment, storage or disposal system servicing the premises, of any Hazardous
Materials at or from any of the Real Properties;
as of the Closing Date, or as of the most current Compliance Certificate as applicable, no
complaint, order, directive, claim, citation, or notice from any Governmental Authority or any other
Person has been received by any Company with respect to any of the Real Properties in respect of
air emissions, spills, releases, or discharges to soils or improvements located thereon, surface
water, groundwater or the sewer, septic system or waste treatment, storage or disposal systems
servicing any of the Properties, noise emissions, solid or liquid waste disposal, the use, generation,
storage, transportation, or disposal of Hazardous Materials or other Requirements of Environmental
Law affecting the Real Properties that constitutes or would reasonably be expected to constitute a
Material Adverse Change;
as of the Closing Date, or as of the most current Compliance Certificate, as applicable, there are no
legal or administrative proceedings, investigations or claims now pending, or to each Companies’
knowledge, threatened, with respect to the presence on or under, or the discharge, emission, spill,
radiation or disposal into or upon any of the Properties, the atmosphere, or any watercourse or body
of water, of any Hazardous Material that constitutes or would reasonably be expected to constitute a
Material Adverse Change; nor are there any material matters under discussion between any
Company and any Governmental Authority relating thereto; and to the knowledge of the Companies
there is no valid basis for any such proceedings, investigations or claims; and
the Companies have no indebtedness, obligation or liability, absolute or contingent, matured or not
matured, with respect to the storage, treatment, cleanup or disposal of any Hazardous Materials,
including without limitation any such indebtedness, obligation, or liability under any Requirements of
Environmental Law regarding such storage, treatment, cleanup or disposal that constitutes or would
reasonably be expected to constitute a Material Adverse Change.
(r)
(s)
No Litigation – There are no actions, suits or proceedings pending, or to the knowledge of the Credit Parties,
threatened in writing, against any Credit Party in any court, or arbitration proceeding, or before or by any
Governmental Authority except: (i) litigation disclosed in Schedule 4.01(r) attached hereto or as updated from
time to time by each Compliance Certificate; (ii) litigation which has been provided for in the financial
statements of such Credit Party or (iii) litigation in which the amount claimed against the Credit Parties do not
in the case of the Companies collectively exceed One Million Dollars ($1,000,000) in the aggregate, or Ten
Million Dollars ($10,000,000) in the aggregate, in the case of the Parent. Except as disclosed by the Borrower
to the Agent, to the knowledge of the Credit Parties there are no investigations by any Governmental
Authority with respect to the conduct of any Credit Party’s business, including the Business.
Pension Plans and Multi-employer Plans – Schedule 4.01(s) attached hereto or as updated from time to time
by each Compliance Certificate, contains (i) a true and complete list of all Pension Plans established by the
Companies as of the Closing Date, or most current Compliance Certificate as applicable, and (ii) a true and
complete list of all Multi-employer Plans contributed to by, or under which, any Company has any liability as
of the Closing Date, or most current Compliance Certificate, as applicable; no Pension Plan or Multi-employer
Plan listed therein is a Defined Benefit Pension Plan. No steps
41.
have been taken to terminate any such Pension Plan (in whole or in part), no contribution failure has
occurred with respect to any such Pension Plan or Multi-employer Plan sufficient to give rise to a Lien under
any applicable laws of any jurisdiction, and no condition exists and no event or transaction has occurred with
respect to any such Pension Plan or Multi-employer Plan which might result in the incurrence by any
Company of any material liability, fine or penalty. Each such Pension Plan is in compliance in all material
aspects with all Applicable Law. All contributions (including employee contributions made by authorized
payroll deductions or other withholdings) required to be made to the appropriate funding agency in
accordance with all applicable laws and the terms of such Pension Plan have been made in accordance with
all Applicable Law and the terms of such Pension Plan. To the extent applicable, all liabilities under such
Pension Plan are funded, on a going concern and solvency basis, in accordance with the terms of the
respective Pension Plans, the requirements of applicable pension benefits laws and of applicable regulatory
authorities and the most recent actuarial report filed with respect to the Pension Plan. No event has occurred
and no conditions exist with respect to any such Pension Plan that has resulted or could reasonably be
expected to result in such Pension Plan having its registration revoked or refused for the purposes of any
Applicable Law or being placed under the administration of any relevant pension benefits regulatory authority
or being required to pay any Taxes or penalties under any Applicable Law. The sole obligation of any
Company with respect to such Multi-employer Plan is to make contributions in accordance with the applicable
labour agreement providing for participation in such Multi-employer Plan and the Companies have no liability
with respect to any costs, expenses, benefits or investments associated with the maintenance or
administration of such Multi- employer Plan, including any liability relating to any past or future withdrawals
from or the termination or wind-up of such Multi-employer Plan. All contributions (including employee
contributions made by authorized payroll deductions or other withholdings) required to be made by any
Company to the appropriate funding agency in accordance with all applicable laws, applicable labour
agreements, and the terms of such Multi-employer Plan have been made in accordance with all Applicable
Law, applicable labour agreements and the terms of such Multi-employer Plan.
(t)
Financial Statements – The most recent Borrower Year-end Financial Statements, Parent Year-end Financial
Statements and Interim Financial Statements delivered to the Agent and the Lenders have been prepared in
accordance with GAAP (except in the case of the Interim Financial Statements, subject to normal year-end
adjustments and the absence of footnotes) on a basis which is consistent with the previous fiscal period,
and present fairly in all material respects the financial position of the Parent or Borrower, as the case may be,
and their financial performance and cash flows for the periods then ended in each case, subject to normal
year-end adjustments) and include statements of:
(i)
(ii)
(iii)
(iv)
(v)
the assets and liabilities and financial condition of the Parent or Borrower as applicable on a
consolidated basis as at the dates therein specified;
the net comprehensive income (loss) of the Parent or Borrower as applicable on a consolidated
basis during the periods covered thereby;
the cash flows of the Parent or Borrower as applicable on a consolidated basis during the periods
covered thereby;
in the case of the Parent Year-end Financial Statements, the changes in equity of the Parent on a
consolidated basis; and
in the case of the Borrower Year-end Financial Statements, the changes in financial position of the
Borrower on a consolidated basis;
42.
(u)
(v)
(w)
and since the dates of the said Borrower Year-end Financial Statements and Interim Financial Statements,
as the case may be, no liabilities have been incurred by the Borrower on a consolidated basis, except for
liabilities incurred in the ordinary course of business and liabilities permitted to be incurred pursuant to this
Agreement and no Material Adverse Change has occurred.
Financial and Other Information – Taken as a whole, all factual information provided by or in respect of the
Credit Parties to the Agent and the Lenders (including any exhibit or report furnished by the Credit Parties
pursuant to this Agreement), was true, correct and complete in all material respects when provided, does not
contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the
statement contained therein not materially misleading in the circumstances in which it was made. The Annual
Business Plan and all projections, including forecasts, budgets, pro formas provided to the Lenders, or any of
them, were prepared in good faith based on assumptions which at the time made were believed to be
reasonable, and the projections included therein were believed at the time made to be reasonable estimates
of the prospects of the Businesses referred to therein.
No Guarantees – No Guarantees have been granted by any Company, except for (i) Guarantees which
comprise part of the Security and (ii) Guarantees in respect of Permitted Funded Debt incurred by any other
Company.
Taxes – Each Company has duly and timely filed all tax returns required to be filed by it, and has paid all
Taxes which are due and payable by it except for (x) returns in respect of Taxes that, do not exceed Two
Hundred and Fifty Thousand Dollars ($250,000) in aggregate and (y) Taxes (i) that are not yet delinquent, (ii)
for which instalments have been paid based on reasonable estimates pending final assessments, (iii) if past
due, the validity of which is being contested diligently and in good faith by appropriate proceedings and (if
required by GAAP) for which reserves have been established to the extent required in accordance with GAAP
or (iv) that, in aggregate, not including those referred to in (i), (ii) and (iii), do not exceed Two Hundred and
Fifty Thousand Dollars ($250,000) in the aggregate or which could not reasonably be expected to result in a
Material Adverse Change. Each Company has also paid all other Taxes, charges, penalties and interest due
and payable under or in respect of all assessments and re-assessments of which it has received written notice
except for (b) Taxes (i) that are not yet delinquent, (ii) for which instalments have been paid based on
reasonable estimates pending final assessments, (iii) if past due, the validity of which is being contested
diligently and in good faith by appropriate proceedings and (if required by GAAP) for which reserves have
been established to the extent required in accordance with GAAP or (iv) that, not including those referred to
in (i), (ii) and (iii), do not exceed Two Hundred and Fifty Thousand Dollars ($250,000) in the aggregate or
which could not reasonably be expected to result in a Material Adverse Change. There are no actions, suits,
proceedings, investigations or claims pending, or to the knowledge of the Companies, threatened, against
any Company in respect of Taxes, governmental charges or assessments except for any such actions, suits,
proceedings, investigations or claims which are being contested diligently and in good faith and (if required by
GAAP) in respect of which reserves have been established to the extent required in accordance with GAAP.
43.
(x)
(y)
(z)
(aa)
(bb)
Statutory Liens – Except for those (a) being contested diligently and in good faith by appropriate
proceedings and (if required by GAAP) for which reserves have been established to the extent required in
accordance with GAAP or (b) those, in the aggregate, that do not exceed Two Hundred and Fifty Thousand
Dollars ($250,000), each Company has remitted on a timely basis all amounts required to have been withheld
and remitted (including withholdings from employee wages and salaries relating to income tax, employment
insurance and Canada Pension Plan contributions), goods and services tax and all other amounts which if not
paid when due could result in the creation of a Statutory Lien against any of its Property, except for Permitted
Liens.
No Default, etc. – No Default, Event of Default or Material Adverse Change has occurred and is continuing.
Related Party Transactions – The Companies are not party to any contract, commitment or transaction
(including by way of loan) with any Affiliate, Associate, or Person of which it is an Associate, that is not a
Company which contains any terms which are not commercially reasonable.
No Broker Fees – No broker’s or finder’s fee or commission will be payable with respect hereto or to any of
the transactions contemplated hereby as a result of any actions by it; and each Company hereby agrees to
indemnify the Agent and the Lenders harmless from, any claim, demand or liability for any such broker’s or
finder’s fees alleged to have been incurred in connection herewith or therewith and any expenses (including
reasonable legal fees) arising in connection with any such claim, demand or liability.
Cannabis Authorizations – No Credit Party has violated or failed to obtain any Cannabis Authorization
necessary to (i) the ownership of any of its Property or the conduct of its business, including the Business, or
(ii) to make or hold any Investment in any Person who conducts Cannabis Activities. All Cannabis
Authorizations necessary as aforesaid:
(i)
(ii)
(iii)
have been duly obtained, taken, given or made;
are valid and in full force and effect, and
are free from conditions or requirements that have not been met or complied with where the failure to
so satisfy would allow for the material modification or revocation thereof.
Each Credit Party is in compliance in all material respects with all Cannabis Authorizations necessary as
aforesaid held by, or in favour of, such Credit Party.
Specifically, but without limitation, no Credit Party conducts or has conducted any Cannabis Activities in a
building or facility for which an applicable Cannabis Authorization necessary as aforesaid was not in full
force and effect at the time in question, including without limitation, the Project. No Credit Party has received
any notice from any Governmental Authority regarding any actual or alleged material violation of, or any
failure on the part of the material requirement of any Cannabis Authorization necessary as aforesaid that
has not been remedied, (ii) no Credit Party has received any written notice from any interest of any Credit
Party in any of the Cannabis Authorizations necessary as aforesaid that has not been remedied, (iii) no
Credit Party knows of any reason why any Cannabis Authorization should be suspended, cancelled or
revoked or of any factor that would in any way prejudice the continuance or renewal of any Cannabis
Authorization necessary as aforesaid, and (iv) all Taxes, assessments, maintenance fees and other
amounts required to maintain the Cannabis Authorizations necessary as aforesaid have been paid in full.
44.
(cc)
Anti-Terrorism Law – No Credit Party and to the knowledge of the Credit Parties, no Limited Recourse
Guarantor (i) is a Person designated by the Canadian government on any list set out in the United Nations Al-
Qaida and Taliban Regulations, the Regulations Implementing the United Nations Resolutions on the
Suppression of Terrorism or the Criminal Code (Canada) (collectively, the "Terrorist Lists") with which a
Canadian Person cannot deal with or otherwise engage in business transactions, (ii) is a Person who is
otherwise a target of Canadian economic sanctions laws or (iii) is Controlled by (including without limitation by
virtue of such Person being a director or owning voting shares or interests), or acts, directly or indirectly, for or
on behalf of, any Person or entity on a Terrorist List or a foreign government that is a target of Canadian
economic sanctions prohibitions such that the entry into, or performance under, this Agreement or any other
Loan Document would be prohibited under Canadian law.
(dd)
Sanctions Laws – No Credit Party and to the knowledge of the Credit Parties, no Affiliate of a Credit Party
acting or benefiting in any direct capacity in connection with the Advances is any of the following (a
“Restricted Person”): (i) a Person that is listed in the annex to, or is otherwise subject to the provisions of,
Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001 (the “Executive Order”); (ii)
a Person that is named as a “specially designated national and blocked person” on the most current list
published by OFAC at its official website or any replacement website or other replacement official publication
of such list or similarly named by any similar foreign governmental authority; (iii) a Person that is owned 50
percent or more by any Person described in this Section 4.01(dd); (iv) any other Person with which any Credit
Party is prohibited from dealing under any Sanctions laws applicable to such an Obligor; or (v) a Person that
derives more than 10% of its annual revenue from investments in or transactions with any Person described
in this Section 4.01(dd)(i), (ii), (iii) or (iv). Further, none of the proceeds from the Advances shall be used to
finance or facilitate, directly or indirectly, any transaction with, investment in, or any dealing for the benefit of,
any Restricted Person.
Survival of Representations and Warranties
4.02
Each Credit Party acknowledges that the Agent and the Lenders are relying upon the foregoing representations and
warranties in connection with the establishment of Facility A, the making of Advances thereunder from time to time and the
entering into of any Hedging Agreements with the Borrower from time to time. For greater certainty, each of the
representations set out in Section 4.01 shall be true and correct and shall be deemed to be given on the occurrence of the
making of each Advance, and on each day any Advance is outstanding, in each case by reference to the facts and
circumstances existing on the date of such Advance or issuance (except where expressly given as of a specified date, in
which case the representations shall be true and correct as of such date). Notwithstanding any investigations which may be
made by the Agent or the Lenders, the said representations and warranties shall survive the execution and delivery of this
Agreement until full and final payment and satisfaction of the Obligations.
5.01
Positive Covenants
ARTICLE V - COVENANTS
Until the Termination Date, the Parent (in respect of itself where specifically mentioned) and the Borrower hereby
covenant and agree with the Agent and the Lenders that it will, and (where specifically mentioned) the Borrower will cause
each other Company to:
45.
(a)
(b)
Prompt Payment – in the case of the Borrower, pay all principal, interest and other amounts due hereunder
at the times and in the manner specified herein;
Preservation of Existence – except for corporate or analogous changes made in compliance with the
requirements of Section 6.01(n). herein, each of the Credit Parties shall maintain its corporate existence in
good standing, continue to carry on its business, including the Business, preserve its rights, powers,
licences, privileges, exercise any rights of renewal or extensions of the Health Canada Licence and any
other Material Permits, maintain all qualifications to carry on business, in each case, do so where the
failure to be so qualified constitutes or would reasonably be expected to constitute a Material Adverse
Change (it being acknowledged that the failure to maintain any Health Canada Licence that is required to
carry on its business shall constitute a Material Adverse Change), carry on and conduct its business in a
proper and efficient manner so as to protect its Property and income and not materially change the nature
of its business;
(c)
Cannabis Authorizations. - the Borrower shall:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
deliver to the Agent a copy of each Cannabis Authorization upon the request of the Agent;
be and remain the sole legal and beneficial owner of all Cannabis Authorizations;
maintain as valid and in full force and effect each Cannabis Authorization, and, here applicable,
procure the renewal thereof prior to its expiration;
comply in all material respects with the terms and conditions of each Cannabis Authorization and do
all material things required of a holder thereof by applicable Cannabis Law with due diligence and in
a reasonable manner, enforce the material rights granted to it under and in connection with each
Cannabis Authorization;
not dispose of or abandon any material right, title or interest in any Cannabis Authorization;
apply for and obtain each future Cannabis Authorization at or before such time as it shall be required
by Applicable Law; and
timely pay all Taxes, assessments, maintenance fees and other amounts required to be paid to
maintain the Cannabis Authorizations.
(d)
Compliance with Laws – (A) Comply with Applicable Law (specifically including, for greater certainty,
Requirements of Environmental Law), but excluding Cannabis Laws, where the failure to do so constitutes
or would reasonably be expected to constitute a Material Adverse Change, (B) comply with all Cannabis
Laws and (C) use the proceeds of all Advances hereunder for legal and proper purposes. Without limiting
the generality of the foregoing the Borrower shall and shall cause each of the other Companies to:
(i)
manage and operate its business in all material respects in accordance with all Applicable Laws,
other than Cannabis Laws, where the failure to do so constitutes or would reasonably be expected to
constitute a Material Adverse Change;
46.
(ii)
(iii)
(iv)
(v)
manage and operate its business in all material respects in compliance with Cannabis Laws;
engage in Cannabis-Related Activities only to the extent that such Cannabis-Related Activities are
(A) in an Approved Jurisdiction, and
(B) in compliance with all Applicable Laws, including Cannabis Laws, in such Approved Jurisdiction
(including, without limitation on a federal, state, provincial, territorial and municipal basis);
ensure that all activities of the Companies relating to the cultivation, production and processing of
Cannabis and Cannabis-related products occur solely in facilities licensed by Governmental
Authorities in Approved Jurisdictions; and
ensure that all activities of the Companies relating to the sale of Cannabis and Cannabis related
products occur solely in facilities licensed by Governmental Authorities in Approved Jurisdictions or
between entities licensed by Governmental Authorities in Approved Jurisdictions and counterparties
satisfactory to the Required Lenders.
Payment of Taxes, etc. – pay when due all rents, Taxes, rates, levies, assessments and governmental
charges, fees and dues lawfully levied, assessed or imposed in respect of its Property which are material to
the conduct of its business, except for rents, Taxes, rates, levies, assessments and governmental
charges, fees or dues in respect of which (a) instalments have been paid based on reasonable estimates
pending final assessments, (b) an appeal or review proceeding has been commenced, a stay of execution
pending such appeal or review proceeding has been obtained and (if required by GAAP) reserves have
been established to the extent required in accordance with GAAP or (c) that, in aggregate, not including
those referred to in (a) and (b), do not exceed Two Hundred and Fifty Thousand Dollars ($250,000), and
the amounts in question do not in the aggregate materially detract from the ability of the Companies to
carry on their businesses and to perform and satisfy all of their respective obligations hereunder;
Maintain Records – maintain adequate books, accounts and records in accordance with GAAP;
Maintenance of Assets – keep its Property in good repair and working condition in accordance with
standard industry practice;
Inspection – permit the Agent and the Lenders and their respective employees and agents annually (upon
reasonable prior notice during normal business hours and in a manner which does not materially interfere
with its operations and subject to the rights of the occupants/tenants of the Owned Properties) to enter
upon and inspect its properties, assets, books and records from time to time and make copies of and
abstracts from such books and records, and discuss its affairs, finances and accounts with any of its
officers, directors, accountants and auditors; provided that, nothing in this subsection shall restrict the
ability of the Agent’s officers, employees, consultants or other authorized representatives to make such
visits, inspections, and examinations upon the occurrence and continuance of a Default or an Event of
Default;
Insurance – obtain and maintain, from sound and reputable insurance companies liability insurance, all-
risks property insurance on a replacement cost basis (less a reasonable deductible not to exceed amounts
customary in the industry for similar businesses and properties) and builders' risk (or "course of
construction") insurance in respect of any
(e)
(f)
(g)
(h)
(i)
(j)
(k)
47.
construction relating to the Property, use commercially reasonable efforts to obtain crop and business
interruption insurance, to the extent it is available at commercially reasonable rates, and obtain and
maintain product recall and liability insurance coverage in an amount of not less than Ten Million Dollars
($10,000,000), and insurance in respect of such other risks as are customary in the industry for similar
businesses and properties (and having regard to the availability of insurance coverage in the market); all of
which policies of insurance shall be in such amounts as are customary in the industry for similar
businesses and properties; and the Companies shall cause the interest of the Agent to be noted on
property insurance policies as first mortgagee and loss payee (which policies shall include the standard
mortgage clause approved by the Insurance Bureau of Canada (or an equivalent clause in other applicable
jurisdictions)) and as an additional insured under liability insurance policies; and the Borrower shall provide
the Agent with certificates of insurance and certified copies of such policies from time to time upon request;
Perform Obligations – fulfill all covenants and obligations required to be performed by it under those Loan
Documents to which it is a party;
Notice of Certain Events – provide prompt notice to the Agent of: (i) the occurrence of any Default or Event
of Default; (ii) the incorrectness in any material respect of any representation or warranty in this Agreement
and any material changes to the information contained in the Schedules attached hereto;
(iii) any Material Adverse Change; (iv) any litigation not provided for in the Borrower Year-end Financial
Statements or Parent Year-end Financial Statements in which the amount claimed against any one or
more of the Companies is greater than One Million Dollars ($1,000,000) individually or in the aggregate or
against the Parent is greater than Ten Million Dollars ($10,000,000) in the aggregate; (vi) any notice of
default, termination or suspension received by any Company in respect of Funded Debt in excess of One
Million Dollars ($1,000,000) in the aggregate or received by the Parent in respect of Funded Debt in excess
of Ten Million Dollars ($10,000,000) in the aggregate or in respect of any Material Agreement or Material
Permit; (vii) the adoption by any Credit Party of any material accounting change promptly thereafter; (viii)
the issuance of any management letter to the Parent by its auditor; (ix) a proposed change of name of any
Credit Party or Limited Recourse Guarantor, which notice shall be given at least thirty (30) days prior to
such change becoming effective; (x) the entering into by any Company of a contract with a labour union or
employee associations or the expiration of any such contract; (xi) any Material Agreements or Material
Permits entered into or obtained after the date of this Agreement; (xii) the acquisition, creation or existence
of any new Subsidiary of the Borrower after the date hereof; (xiii) receipt of notice from any Governmental
Authority of any of the following in connection with the Companies or the Property if the consequences
thereof constitute or would reasonably be expected to constitute a Material Adverse Change or would
result in a liability of a Company in excess of Two Million Dollars ($2,000,000): (A) any liability for response
or corrective action, natural resource damage or other harm pursuant to any Requirements of
Environmental Law, (B) any environmental claim, (C) any violation of an Requirements of Environmental
Law or release, threatened release or disposal of a Hazardous Material at or on the Property contrary to
the Requirements of Environmental Law; (xiv) promptly after receipt or knowledge thereof a copy of (i) any
material document, letter or notice from Health Canada or other Governmental Authority to a Credit Party
(it being understood that any warning shall be material), (ii) any written notice, investigation,
correspondence or other proceedings or actions which could reasonably be expected to adversely affect
any Cannabis Authorization, including any such notice, investigation, correspondence or proceedings
involving Health Canada, and (xvi) any changes in the identity of a Responsible Person, together with
satisfactory evidence of security clearances for such
48.
(l)
(m)
(n)
Responsible Person under the Cannabis Act or the Cannabis Regulations, and any rejection notice for new
or renewal security clearance applications for each Responsible Person;
Bank Accounts and Service Agreements – in the case of each of the Companies, maintain all of its bank
accounts with BMO or an Affiliate of BMO and maintain all cash management, payroll, corporate credit
cards (other than corporate credit card programs permitted pursuant
the
definition of Permitted Funded Debt) and other banking services with BMO or an Affiliate of BMO;
to paragraph (vii) of
Use of Advances – utilize the proceeds of all Advances in accordance with Section 2.02 for the business
purposes of the Companies; and not permit such proceeds to be used, directly or indirectly, by any other
Person or for any other purpose;
Environmental Information – if requested by the Agent from time to time upon the instructions of the
Required Lenders (provided, however, if such requests are made by the Agent more frequently than
annually, than such additional requests shall be at the cost and expense of the Agent unless the Credit
Parties are in default at the time such additional requests are made): (i) provide the Agent with an
environmental questionnaire in the Agent's standard form completed by a knowledgeable officer of the
Parent in respect of any Owned Property or Material Leased Property; and (ii) if the information contained
therein is inconsistent in any material respect with the representations in Section 4.01(q) herein, provide the
Agent with a Phase I (and Phase 2 if applicable) environmental report in respect of such Owned Property
or Material Leased Property as applicable, and promptly take all such action as may be required to comply
in all material respects with all recommendations contained therein; provided that such prompt action to
comply with such recommendations shall not be required as long as (A) such recommendations are being
diligently contested by such Company in good faith and on reasonable grounds and (B) (x) there is
then no Event of Default which is continuing, (y) a Governmental Authority with jurisdiction does not require
immediate remediation to protect the public and (z) the Companies are in compliance in all Requirements
of Environmental Law, save for non-compliance that does not constitute and would not reasonably be
expected to constitute a Material Adverse Change; provided, however, if circumstances change so that the
value of the subject Real Property is materially impaired or there is an imminent threat to the health or
safety of human beings or any Governmental Authority with jurisdiction requires immediate remediation,
then the Companies shall immediately commence such remediation;
(o)
Further Assurances – provide the Agent and the Lenders with such further information, financial data,
documentation and other assurances as they may reasonably require from time to time in order to ensure
ongoing compliance with the terms of this Agreement.
5.02
Negative Covenants
Until the Termination Date, the Borrower hereby covenants and agrees with the Agent and the Lenders that it will not,
and will ensure that each other Company does not, and (where specifically mentioned) the Parent covenants and agrees with
the Agent and the Lenders that it will not, in each case, without the prior written consent of the Required Lenders (or if
required pursuant to Section 9.01, all Lenders acting unanimously), which consent may be withheld in their sole discretion
unless otherwise expressly provided herein:
(a)
Funded Debt – create, incur or assume any Funded Debt, except Permitted Funded Debt;
(b)
(c)
Liens – grant or suffer to exist any Lien in respect of any of its Property, except Permitted Liens;
Disposition of Assets – directly or indirectly sell, transfer, assign, lease or otherwise dispose of any of its
Property (including, without limitation, Intellectual Property) or rights or interests in its Property or agree to
do so, except that:
49.
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
each Company may sell inventory and obsolete or redundant equipment in the ordinary course of
business;
each Company may sell or transfer assets to any other Company, provided that the transferee has
provided all Security required to be provided by it hereunder;
each Company may enter into leases and licences, including Intellectual Property licences, with other
Persons in the ordinary course of business;
each Company may dispose, abandon, surrender or terminate immaterial rights or interests which are
effected in the ordinary course of business or otherwise in accordance with prudent industry practice;
each Company may dispose of damaged or destroyed materials or inventory that is spoiled or
otherwise not marketable;
each Company may dispose of cash in transactions permitted by this Agreement;
each Company may dispose of Cash Equivalents for cash or other Cash Equivalents;
each Company may dispose and/or terminate leases, subleases, licenses or sublicenses (including
the provision of software under an open source license), which (1) are in accordance with prudent
industry practice,
(2) do not materially interfere with the conduct of the Business of the Companies or (3) relate to
closed facilities or closed storage or distribution centers or the discontinuation of any product line;
each Company may permit (1) the expiration of any option agreement in respect of real or personal
property and (2) any surrender or waiver of contractual rights or the settlement, release or surrender
of contractual rights or other litigation claims in accordance with prudent industry practice;
each Company may sell or otherwise dispose of assets for cash (not including sales or disposition
referred to in (i) through (xii) inclusive above) from time to time, provided that the fair market value of
the assets which are the subject of such dispositions in the aggregate (in one or a series of related
transactions) does not exceed One Million Dollars ($1,000,000) per annum, unless the proceeds from
such dispositions are used to purchase replacement or other capital assets within one hundred and
eighty (180) days of receipt by such Company of such proceeds; and for greater certainty the
Borrower shall be required to make a Repayment in connection with each such disposition to the
extent required pursuant to Section 2.04(c)(iii); and
(xi)
such other dispositions as may be consented to by the Required Lenders from time to time;
50.
provided that, notwithstanding the foregoing, the Companies may not sell, transfer, assign, lease or
otherwise dispose of the Project, the Project Property, any Material Permits or Material Contracts.
(d)
Financial Assistance – make loans to or acquire Funded Debt of any other Person, guarantee, provide an
indemnity in respect of, endorse or otherwise become liable for any debts, liabilities or obligations of any
other Person, or give other financial assistance of any kind to any Person, except for:
(i)
(ii)
(iii)
Guarantees and indemnities which comprise part of the Security;
Guarantees in respect of Funded Debt incurred by any Company to the extent such Funded Debt is
permitted by paragraph (iv) of the definition of Permitted Funded Debt; and
financial assistance by way of extending trade credit to its customers in the ordinary course of
business.
(e)
Investments – make or acquire any Investments, except that the following Investments may be made or
acquired if both immediately before and immediately after each such Investment no Default or Event of
Default has occurred and is continuing:
(i)
(ii)
(iii)
(iv)
Permitted Acquisitions;
Investments in a Company;
Investments in cash or Cash Equivalents maintained with a Lender; and
other Investments that do not otherwise constitute an Investment under clauses (i) or (iii) above, up to
a maximum of Five Hundred Thousand Dollars ($500,000) per annum.
(f)
Distributions – authorize, declare or pay, or agree to pay, directly or indirectly any Distributions other than
so long as no Default or Event of Default is continuing or would be caused thereby:
(i)
(ii)
(iii)
Distributions by a Company to another Company provided such Company to whom such Distribution
is made has delivered Security to the Agent as required hereunder;
a Company may service Subordinated Debt after the Conversion Date on account of interest on a
monthly basis and principal on an annual basis after the Repayment required to be made pursuant to
Section 2.04(c)(iv) (Annual Excess Cash Flow Sweep), so long as such repayment is expressly
permitted in any related Intercreditor Agreement and further provided that immediately before and
immediately after such Distribution, the Borrower shall be in pro forma compliance with the financial
covenants in Section 5.03 and the Borrower shall have delivered a pro forma Compliance Certificate
evidencing such compliance; and
such additional Distributions after the Conversion Date provided that immediately before and
immediately after such Distribution, the Borrower shall be in pro forma compliance with
the
financial covenants in Section 5.03 and the Borrower shall have delivered a pro forma Compliance
Certificate evidencing such compliance;
51.
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
Certain Activities and Investments – in the case of the Credit Parties, directly or indirectly own assets or
carry on business in any jurisdiction which is not an Approved Jurisdiction;
Corporate Changes – in the case of the Companies, not materially change the nature of its business or
enter into any transaction whereby all or a substantial portion of its Property would become the Property of
any other Person, whether by way of reconstruction, reorganization, recapitalization, consolidation,
amalgamation, merger, transfer, sale or otherwise, without the prior written consent of the Required
Lenders; except that any of the foregoing transactions may take place among the Companies (and no other
Persons) in each case if prior written notice is given to the Agent, a Material Adverse Change or other
Event of Default will not occur as a result, and the Companies concurrently provide any additional or
replacement Security as the Required Lenders may reasonably require;
Defined Benefit Pension Plans – establish, assume or otherwise become a party to or liable under any
Defined Benefit Pension Plan.
Fiscal Year – change its Fiscal Year (which for greater certainty presently ends on May 31 in each year),
except (a) in the case of the Companies, with the prior written consent of the Required Lenders, or prior
written notice to the Lenders to the extent its Fiscal Year is being changed to that of the Parent; and (b) in
the case of the Parent, prior written notice to the Lenders;
Auditors – change its auditors from its current audit firm to a firm that is not a nationally recognized auditing
firm, except (a) in the case of the Companies, with the prior written consent of the Required Lenders; and
(b) in the case of the Parent, prior written notice to the Lenders;
Dealing with Related Parties – enter into any contract, carry out any transaction or otherwise have dealings
with any Affiliate, Associate, or Person of which it is an Associate except (a) pursuant to and in accordance
with the Material Agreements listed in Schedule 4.01(o) and (b) on terms that are commercially reasonable
and no less favourable to it than it would obtain on an arm’s length basis.
Hedging – in the case of the Companies, enter into or be a party to any Hedging Agreement except for the
purposes of prudent management of its interest rate and currency exposure in the ordinary course of
business and not for speculative purposes, and further provided that it shall not enter into any Hedging
Agreements with any Person except for a Lender or any Affiliate of the Lender;
Material Agreements – modify or amend any of the Material Agreements or any of the terms thereof in any
manner that would constitute or would reasonably be expected to constitute a Material Adverse Change or
terminate, suspend or cancel any Material Agreement if doing so would constitute or would reasonably be
expected to constitute a Material Adverse Change without entering into a replacement agreement (which
shall include an interim replacement agreement) that provides the applicable Company with rights, benefits
and value substantially similar to and on the terms and conditions not materially less favourable than those
contained in the Material Agreement being replaced (with such replacement agreement being deemed to
be a Material Agreement); notwithstanding the foregoing, the Supply Agreement shall not be modified,
amended, terminated, suspended or cancelled without the prior written consent of the Lenders, which
consent shall be in their sole and absolute discretion;
52.
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
Environmental Law – receive any complaint, order, directive, claim, citation, or notice from any
Governmental Authority with respect to any of the Real Properties in respect of air emissions, spills,
releases, or discharges to soils or improvements located thereon, surface water, groundwater or the sewer,
septic system or waste treatment, storage or disposal systems servicing any of the Properties, noise
emissions, solid or liquid waste disposal, the use, generation, storage, transportation, or disposal of
Hazardous Materials or other Requirements of Environmental Law affecting
the Properties which
constitutes or would reasonably be expected to constitute a Material Adverse Change without providing
notice in accordance with Section 5.01(k);
Use of Advances – use the proceeds of any Advance for any purposes other than those expressly
contemplated in this Agreement; and without limiting the generality of the foregoing, the proceeds of any
Advance will not be used, directly or indirectly, to lend, contribute or otherwise make available such
proceeds, directly or indirectly, to fund any operations in, finance any investments, business or activities in,
or make any payments to, a Sanctioned Person or a Sanctioned Entity if such funding, financing or paying
would result in a violation of Sanctions by any Person (including any Person participating in such Advance,
whether as underwriter, advisor, investor or otherwise), or in any other manner that would result in a
violation of Sanctions by any Person. The Agent and the Lenders in their sole and unfettered discretion
may refuse to make any Advance or delay, block or refuse to process any transaction which they believe
on reasonable grounds may result in a contravention of the foregoing covenant;
No Sale-Leasebacks – enter into, transact or have outstanding any Sale- Leasebacks, unless the Property
subject thereto is permitted to be disposed of pursuant to Section 5.02(c);
No Changes of Jurisdiction / Location – (i) change its jurisdiction of incorporation or formation without the
prior written consent of the Agent, nor (ii) permit its chief executive office, registered or head office, or other
location at which it keeps, maintains or stores assets in excess of Two Hundred and Fifty Thousand
Dollars ($250,000) in value (calculated on a net book value basis) to be other than the locations specified
on Schedule 4.01(k) as of the date of this Agreement (except for goods in transit, goods with repairers,
product out for sterilization and goods that are normally used in more than one jurisdiction if the latter goods
are equipment or are inventory leased or held for lease by it), without providing the Agent with ten (10)
days prior written notice of the change and promptly taking other steps, if any, as the Agent reasonably
requests to maintain the Security and the other Loan Documents so that the Lenders’ position is not
adversely affected;
Repayment of Subordinated Debt – repay in full or in part any Subordinated Debt except as expressly
permitted in any related Intercreditor Agreement unless the Termination Date has occurred;
Carry on Business – neither the Parent nor the Borrower nor any other Company shall cease to carry on
its business, including in the case of the Borrower, the Business;
Acquisitions – directly or indirectly make any Acquisition or make any purchase of assets out of the
ordinary course of business other than Permitted Acquisitions;
Anti-Money Laundering and Anti-Terrorism Finance Laws; Foreign Corrupt Practices Act; Sanctions Laws;
Restricted Person – neither the Parent, nor the Borrower, nor any other Company will (i) engage in or
conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or
otherwise violates any applicable anti-
53.
terrorism law, anti-corruption law, anti- money laundering law or sanctions law or (ii) cause or permit any of
the funds that are used to repay the Obligations to be derived from any unlawful activity with the result that
the Agent, any Lender or any Credit Party would be in violation of any Applicable Law or (iii) use any part of
the proceeds of the Advances, directly or indirectly, for any conduct that would violate any OFAC Sanctions
Programs. Notwithstanding anything in this Agreement, nothing in this Agreement shall require any Credit
Party or the Limited Recourse Guarantor, any of their Subsidiaries, or any director, officer, employee,
agent or Affiliate of any Credit Party, the Limited Recourse Guarantor or any of their Subsidiaries that is
registered or incorporated under the laws of Canada or of a province to commit an act or omission that
contravenes the Foreign Extraterritorial Measures (United States) Order, 1992.; and
(w)
Cannabis Activity – neither the Parent, nor the Borrower, nor any other Company will, engage in any
Cannabis Activities or make an Investment in any Person who engages in Cannabis Activities, other than in
an Approved Jurisdiction in accordance with applicable Cannabis Laws.
5.03
Financial Covenants
(a)
(b)
(c)
(d)
The Borrower agrees to maintain at all times, on a consolidated basis, the financial ratios and amounts
listed below:
(i)
Maintain a ratio of Total Funded Debt to Tangible Net Worth ratio of not more than 1.00:1.00 at all
times during the period from the Closing Date to the Conversion Date;
(ii)
(iii)
Maintain a Fixed Charge Coverage ratio of not less than 1.25:1 after the Conversion Date;
Maintain a Total Funded Debt to EBITDA ratio of not more than 2.75:1 after the Conversion Date;
The Parent agrees to maintain at all times a Minimum Liquidity of not less than Twenty Two Million Dollars
($22,000,000);
For the purposes of the calculation of the financial covenants unless otherwise provided herein all such
calculations shall be tested quarterly at the end of each Fiscal Quarter and determined on a trailing 12
month basis, in accordance with GAAP, provided that for the purposes of the Fixed Charge Coverage Ratio
and Total Funded Debt to EBITDA Ratio to be maintained following the Conversion Date, EBITDA will be
annualized on the most recent quarterly actuals commencing at the Conversion Date and then on a twelve
month trailing basis once achieved with four Fiscal Quarters and debt service will be initially calculated
based on the pro forma interest paid and scheduled principal payments on Total Funded Debt over the next
12 month period then on a twelve month trailing basis once achieved.
For the purposes of the calculation of the Fixed Charge Coverage Ratio, in the event the Borrower fails to
comply with the requirements of Section 5.03(a)(ii) as of the last day of any Fiscal Quarter, the Parent may
inject additional capital by way of Equity Interests or Subordinated Debt (provided that the maturity date of
such indebtedness is later than the Maturity Date and the holder of such indebtedness may not receive any
payments on account of principal or interest) (each an “Equity Contribution”) and such Equity
Contribution shall be included by the Borrower in the calculation of EBITDA solely for the purpose of
determining compliance with such Fixed Charge Coverage Ratio as at such Fiscal Quarter end provided
that:
54.
(i)
(ii)
(iii)
(iv)
(v)
notice of the Parent’s intent to make an Equity Contribution shall be delivered to the Agent by the
Borrower or the Parent no later than the day on which the Interim Financial Statements (or Borrower
Year-end Financial Statements in the case of a breach as at the last day of the fourth Fiscal Quarter,
as applicable) are required to be delivered for the applicable Fiscal Quarter in accordance with
Sections 5.04(a) and 5.04(c),
such Equity Contribution shall be made no later than 10 Business Days after the day on which the
Interim Financial Statements or Borrower Year- end Financial Statements, as applicable, are required
to be delivered in accordance with Sections 5.04(a) and 5.04(c);
notwithstanding Section 2.04(c)(iii), the Borrower shall make a Repayment in an amount equal to
one hundred percent (100%) of the proceeds from the Equity Contribution, within three (3)
Business Days of receipt thereof;
the amount of the Equity Contribution shall be limited to the amount necessary to cure the
covenant breach; and
such Equity Contribution will not result in a reduction of Total Funded Debt when determining the
Applicable Margin;
and further provided that following the Conversion Date, an Equity Contribution may not be exercised in
consecutive Fiscal Quarters and there shall be no more than four (4) Equity Contributions permitted for the
remainder of the term of Facility A.
5.04
Reporting Requirements
The Borrower shall deliver or cause to be delivered (by email in accordance with Section 12.07) to the Agent the
following financial and other information at the times indicated below:
(a)
(b)
(c)
the annual Borrower Year-end Financial Statements and its Subsidiaries on a consolidated basis by the
ninetieth (90th) day after the end of each Fiscal Year commencing with the Fiscal Year ending May 31,
2020, prepared in accordance with GAAP, accompanied by a Compliance Certificate certified by a Senior
Officer in the form of Exhibit "F" attached hereto and accompanied by an analysis of any material variances
between actual results for such Fiscal Year and the projections contained in the most recent Annual
Business Plan presented to the Agent and the Lenders;
as soon as available and in any event not later than sixty (60) days following the commencement of each
Fiscal Year, the Annual Business Plan for such Fiscal Year;
the Interim Financial Statements of the Borrower and its Subsidiaries on a consolidated basis by the forty-
fifth (45th) day after the end of each Fiscal Quarter (other than the fourth Fiscal Quarter in each Fiscal Year
which shall be delivered by the ninetieth (90th) day after the end of the fourth Fiscal Quarter), together with
a Compliance Certificate certified by a Senior Officer of the Borrower in the form of Exhibit "F" attached a
accompanied by an analysis of any material variances between actual results to date and the projections
contained in the most recent Annual Business Plan presented to the Agent and the Lenders;
(d)
the annual Parent Year-end Financial Statements on a consolidated basis by the one hundred and
twentieth (120th) day after the end of each Fiscal Year of the Parent (or by
55.
the time period within which the Parent is required to file the Parent Year-end Financial Statements by the
relevant securities authorities governing the exchange on which the Parent is listed), commencing with the
Fiscal Year ending May 31, 2020, prepared in accordance with GAAP, together with the auditor’s report,
and accompanied by a compliance certificate certified by a Senior Officer of the Parent which shall
evidence compliance with the Minimum Liquidity covenant set out in Section 5.03 herein and the
calculation thereof;
the Interim Financial Statements of the Parent and its Subsidiaries on a consolidated basis by the time
period with which the Parent is required to file its Interim Financial Statements with the applicable securities
authorities governing the exchange on which the Parent is listed after the end of each Fiscal Quarter (other
than the fourth Fiscal Quarter in each Fiscal Year which shall be delivered by the at the time of the annual
audited financial statements pursuant to (d) above, accompanied by a compliance certificate certified by a
Senior Officer of the Parent which shall evidence compliance with the Minimum Liquidity covenant set out
in Section 5.03 herein and the calculation thereof;
within ten (10) Business Days of receipt, a copy of any Health Canada inspection/audit reports for a twelve
(12) month period following the issuance of a Health Canada License with cultivation standard for the
Borrower;
such additional information and documents as the Agent or the Lenders may reasonably require from time
to time, not inconsistent with the terms of this Agreement, to ensure the ongoing compliance by the
Borrower with the terms and conditions of this Agreement, in form reasonably acceptable to the Agent and
the Lenders.
as soon as available and in any event within forty-five (45) days after the last day of each of its Fiscal
Quarters, if any of the information disclosed in Schedule 4.01(r) attached hereto is no longer accurate, an
officer's certificate of the Parent attaching copies of the revised Schedule required to ensure that such
information remains accurate as of the last day of such Fiscal Quarter;
such additional information and documents as the Agent or the Lenders may reasonably require from time
to time, not inconsistent with the terms of this Agreement, to ensure the ongoing compliance by the
Borrower with the terms and conditions of this Agreement, in form reasonably acceptable to the Agent and
the Lenders.
(e)
(f)
(g)
(h)
(i)
5.05
Anti-Money Laundering
(a)
The Credit Parties acknowledge that, pursuant to the Proceeds of Crime (Money Laundering) and Terrorist
Financing Act (Canada) and other applicable anti- money laundering, anti-terrorist financing, government
sanction and "know your client" laws, whether within Canada or elsewhere (collectively, including any
guidelines or orders thereunder, "AML Legislation"), the Agent and the Lenders may be required to obtain,
verify and record information regarding the Credit Parties and their respective directors, authorized signing
officers, direct or indirect shareholders, partners or other persons in control of the Credit Parties and the
transactions contemplated hereby. The Credit Parties shall promptly provide all such information, including
any supporting documentation and other evidence, as may be reasonably requested by the Agent or any
Lender, or any prospective assignee or participant of a Lender or the Agent, to the extent the same is
required in order to comply with any applicable AML Legislation, whether now or hereafter in existence.
56.
(b)
If the Agent has ascertained the identity of any Credit Party, or any authorized signatories of any Credit
Party, for the purposes of applicable AML Legislation, then the Agent shall:
(i)
be deemed to have done so as an agent for each Lender, and this Agreement shall constitute a
"written agreement" in such regard between each Lender and the Agent within the meaning of
applicable AML Legislation; and
(ii)
provide each Lender with copies of all information obtained in such regard without any representation
or warranty as to its accuracy or completeness.
Notwithstanding the preceding sentence and except as may otherwise be agreed in writing, each of the
Lenders agrees that the Agent has no obligation to certain the identity of any Credit Party, or any authorized
signatories of any Credit Party, on behalf of any Lender or to confirm the completeness or accuracy of any
information that the Agent obtains from any Credit Party, or any such authorized signatory, in doing so.
5.06
Terrorist Lists
The Credit Parties shall ensure that each Credit Party is and will remain in compliance in all material respects with all
Canadian economic sanctions laws and implementing regulations under the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act (Canada), the Criminal Code (Canada), the United Nations Act (Canada) and all similar applicable
anti-money laundering and counter-terrorism financing provisions and regulations issued pursuant to any of the foregoing. No
Credit Party (i) is a Person designated by the Canadian government on any list set out in the United Nations Al-Qaida and
Taliban Regulations, the Regulations Implementing the United Nations Resolutions on the Suppression of Terrorism or the
Criminal Code (collectively, the "Terrorist Lists") with which a Canadian Person cannot deal with or otherwise engage in
business transactions, (iii) is a Person who is otherwise a target of Canadian economic sanctions laws or (iv) is Controlled by
(including without limitation by virtue of such Person being a director or owning voting shares or interests), or acts, directly or
indirectly, for or on behalf of, any Person or entity on a Terrorist List or a foreign government that is a target of Canadian
economic sanctions prohibitions such that the entry into, or performance under, this Agreement or any other Loan Document
would be prohibited under Canadian law.
6.01
Security to be Provided by the Credit Parties and Limited Recourse Guarantors
ARTICLE VI - SECURITY
Each of the Credit Parties agree to provide (or cause to be provided) the security to be provided by it listed below in
favour of the Agent for the benefit of the Agent and the Lenders, in each case in form and substance satisfactory to the Agent,
as continuing security for the payment of the Obligations and the payment and performance of all other present and future,
direct and indirect, indebtedness and obligations of the Borrower to the Agent and the Lenders, specifically including the
Obligations arising under or in respect of this Agreement, the Hedging Agreements and the other Loan Documents:
(a)
(b)
(c)
an unlimited Guarantee from each present and future Subsidiary of the Borrower in respect of all present
and future, direct and indirect, Obligations of the Borrower to the Agent and the Lenders;
a Guarantee from the Parent in respect of the present and future, direct and indirect, Obligations of the
Borrower to the Agent and the Lenders, limited to a maximum amount of Ninety Million Dollars
($90,000,000);
a Guarantee from each of the Limited Recourse Guarantors in respect of all present and future, direct and
indirect, Obligations of the Borrower to the Agent and the Lenders, limited in recourse to the Equity
Interests of such Limited Recourse Guarantor in the Borrower pledged by the Limited Recourse Guarantor
pursuant to the Security (“Limited Recourse Guarantee”);
57.
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
a debt service deficiency agreement by the Parent in favour of the Agent for the benefit of the Lenders
pursuant to which the Parent agrees to make Equity Contributions in such amount necessary to enable the
Borrower to comply with the Fixed Charge Coverage Ratio, in accordance with Section 5.03 hereof (“Debt
Service Deficiency Agreement”);
the Parent Subordination Agreement;
a general security agreement, debenture, movable hypothec or similar form of security from each Company
creating a First-Ranking Security Interest including in respect of all of its present and future Property of the
Companies made subject thereto, specifically including all shares, partnership interests and other Equity
Interests held by such Company in the capital of any other Company;
a debenture or collateral mortgage from each Company creating a First-Ranking Security Interest in respect
of each of the Owned Properties, including but not limited to a debenture or collateral mortgage from the
Borrower in the amount of One Hundred Million Dollars ($100,000,000) on the Project Property, together
with a satisfactory title opinion or title insurance at the request of the Lenders in their sole and absolute
discretion;
at the request of the Lenders, debentures, collateral mortgages or other forms of security required by the
Agent in order to create a First-Ranking Security Interest in respect of any or all Material Leased
Properties;
specific assignments by each of the Companies of all rights and benefits arising under any Material
Agreement (including the Supply Agreement), accompanied by an agreement from the other contracting
party (including the Parent) thereto (each a “Consent”), in form and substance satisfactory to the Lenders,
acting reasonably; provided that the Companies shall only be required to use commercially reasonable
efforts to obtain any Consent (other than the Consent of a Related Party which shall be required to be
obtained) after the Closing Date at the request of the Lenders, acting reasonably, and if the Companies are
not able to obtain a Consent in respect of any Material Agreement, such Material Agreement will become a
Restricted Asset (as such term is defined in the security agreement delivered by the Companies pursuant
to Section 7.01(c));
security agreements creating an assignment and First-Ranking Security Interest in respect of its rights to
and interest in Intellectual Property, together with any necessary consents from other Persons which may
be required in connection with the granting of such assignment and security interest in any Intellectual
Property considered by the Lenders to be material;
a first ranking pledge of all Equity Interests held in any Company, including by each shareholder of the
Borrower (including the Parent and each Limited Recourse Guarantor), the delivery of any certificates
representing the Equity Interest with endorsements executed in blank and the taking of other steps that the
Agent requires to control the Equity Interest and perfect the Security relating to the Equity Interest;
assignments of the interest of each Company in all policies of insurance held by it which requirement shall
be satisfied if the Agent's interest as first mortgagee and loss payee is recorded on such policies and a
certificate of insurance in respect of all liability insurance naming the Agent as additional insured and all
property insurance on a replacement cost basis naming the Agent as additional insured and first loss
payee and first mortgagee (and including Insurance Bureau of Canada standard mortgage clause);
58.
(m)
(n)
environmental checklists and indemnities by the Companies for each of its Owned Properties and Material
Leased Properties at the request of the Lenders in their sole and absolute discretion;
such other security as may be reasonably required by the Agent and the Lenders from time to time, not
inconsistent with the provisions of this Agreement.
6.02
Security to be Provided by Others
(a)
(b)
(c)
The Borrower shall cause each holder of indebtedness which is intended to constitute Subordinated Debt
to provide a subordination and postponement agreement in favour of the Agent, in form and substance
satisfactory to the Agent. The provision of such subordination and postponement agreements shall
constitute a condition precedent to the Closing Date Advance, and the absence of any required such
subordination and postponement agreement shall constitute an Event of Default.
To the extent requested by the Agent from time to time, the Borrower agree to use commercially
reasonable efforts to obtain Landlord Agreements in respect of the Material Leased Properties.
If at any time (i) any of the Companies own, establishes or acquires a Subsidiary, directly or indirectly, or
(ii) any Person becomes a shareholder (the “New Shareholder”) of the Borrower, the Companies or the
Borrower, as applicable, shall within thirty (30) days cause that Subsidiary or New Shareholder to become
a Guarantor or Limited Recourse Guarantor respectively, in the case of the Subsidiary, adopt this
Agreement by delivering an agreement in the form of Exhibit I
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