Western Resources Corp. - Interim / Quarterly Report 2021

PLUS PRODUCTS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE QUARTER ENDED SEPTEMBER 30, 2021

The following Management’s Discussion and Analysis (“MD&A”) for Plus Products Inc. together with its wholly owned subsidiaries (the “Company” or “Plus Products” or “Plus”) is prepared as of December 29, 2021 and relates to the financial condition and results of operations for the three and nine months ended September 30, 2021. Past performance may not be indicative of future performance. This MD&A should be read in conjunction with the unaudited condensed interim consolidated financial statements (the “financial statements”) and related notes for the three and nine months ended September 30, 2021.

The Company’s financial statements and the notes thereto have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and are reported in U.S. dollars ($) unless otherwise stated.

The first, second, third and fourth quarters of the Company’s fiscal years are referred to as “Q1”, “Q2”, “Q3” and “Q4”, respectively. The three months ended September 30, 2021 and 2020 are also referred to as “Q3 2021” and “Q3 2020”, respectively.

SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF OPERATION

This MD&A should be read in conjunction with the interim financial statements and related notes for the three and nine months ended September 30, 2021, and 2020, which have been prepared in accordance with International Accounting Standard 34 - Interim Financial Reporting using accounting consistent with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS” or “GAAP”). As such, the interim financial statements do not contain all the disclosures required by IFRS for annual financial statements and should be read in conjunction with the Company’s audited consolidated financial statements for the years ended December 31, 2020 and 2019 (“consolidated financial statements”).

Statements are subject to the risks and uncertainties identified in the “Risk Factors”, “Forward-Looking Statements” sections of this document. The Company has included certain non-GAAP performance measures. For further information and detailed calculations of these measures, see the “Non-GAAP Measures” section of this document.

BUSINESS OVERVIEW

The Company was incorporated on March 29, 2018 under the laws of British Columbia. The Company’s head office is located at 1500 – 1055 West Georgia Street, Vancouver, BC V6E 4N7. On October 26, 2018, the Company completed an initial public offering whereby its subordinate voting shares became listed on the Canadian Securities Exchange (the “CSE”) under the symbol “PLUS” and then subsequently on the OTC Market Group (“OTCQB”) in the United States under the symbol “PLPRF”.

The Company, through its wholly owned subsidiary, Carberry, LLC (“Carberry”), operates as a branded cannabis products manufacturer with operations in the State of California. Its products consist of cannabis-infused edibles, which the Company sells to both the regulated medicinal and adult-use, or recreational, markets. Carberry holds an Annual License issued by the State of California Department of Public Health, Manufactured Cannabis Safety Branch pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act to extract and manufacture cannabis-infused products at its facility located in Adelanto, California. The Company’s products are infused with cannabis oil, which is sourced from licensed suppliers located in California. The Company has arrangements with licensed distributors to sell products under the PLUS[TM ] brand to over 350 licensed dispensaries and delivery service customers.

Under an arrangement with Plus Products California Cooperative, Inc. (“Plus Cooperative”), the Company provided capital and other resources to Plus Cooperative to support its manufacture and distribution of branded products for the medicinal cannabis market. In January 2018, Carberry commenced sales to both medicinal and adult-use recreational accounts. In January 2018, the Company acquired the assets of Plus Cooperative, which it then assigned to Carberry.

In April 2018, the Company’s subsidiary, Plus Products Holdings, Inc. (“Plus Nevada”), a Nevada corporation, concluded a merger transaction in which Plus Nevada was merged with and into Plus Products Holdings, Inc. (“Plus Delaware”), a Delaware corporation, with Plus Nevada as the surviving entity (the “Plus Merger”).

In July 2018, the Company entered into a securities exchange agreement (the “Securities Exchange Agreement”) with Plus Nevada, pursuant to which the Company acquired 100% ownership of Plus Nevada (the “Plus Nevada Acquisition”).

For accounting purposes, the Transaction was considered a reverse takeover whereby Plus Products was deemed to be the acquiree and Plus Nevada the acquirer with the net identifiable assets of Plus Products deemed to have been acquired by Plus Nevada, but Plus Products the continuing entity.

On October 26, 2018, the Company completed an initial public offering on the CSE. The Company issued 6,153,847 Subordinate Voting Shares, at CAD$3.25 each, raising gross proceeds of CAD$20,000,003 ($15,270,002). Fees were CAD$2,127,019 ($1,622,430) for a net raise of CAD$17,875,084 ($13,647,572). The agents on the public offering received warrants for 299,300 shares at CAD$3.25. The lead agent also received 80,000 shares valued at CAD$260,000 ($200,000).

On December 13, 2018, the Company acquired all the assets of California-based cannabis-infused baked goods brand GOOD CO-OP, INC. (“GOOD”). The Company issued 357,464 subordinate voting preferred shares of which 34,013 subordinate voting shares were issued to the shareholders and holders of simple agreements for future equity; 323,451 subordinate voting preferred shares were placed in escrow and were subject to an earn-out based upon achieving quarterly sales targets over 2019 and 2020. The value of the shares granted at the acquisition date was $122,233, while the shares subject to earn-out were valued as a contingent consideration of at $703,324. Total consideration paid by the Company was $930,557 including forgiving $105,000 advanced to GOOD prior to closing and $825,557 in subordinate voting preferred shares. On September 30, 2019, the Company determined the contingent criteria would not be met. The Company therefore reclassified the $703,324 contingent consideration in equity to contributed surplus in equity (both within reserves) and impaired the full fair-value of the related goodwill and licenses. Subsequent to period end the shares held in escrow relating to the contingent consideration were partially cancelled and partially repurposed for new RSU issuances.

On September 13, 2021, the Company secured protection from its creditors under the Companies’ Creditors Arrangement Act (“CCAA”) to provide time for the Company to restructure its business and financial affairs. The Company sought and obtained an Initial Order of the Supreme Court of British Colombia (the “Court”) with an appointed Monitor. On September 22, the Initial Order was extended until October 22, 2021. The Company is requesting extensions through December 17, 2021 and will consider additional extensions as necessary.

FINANCING

On February 28, 2019, the Company completed a private placement of 25,000 unsecured convertible note units (the “Note Units”) for C$25,000,000 at a price of C$1,000 per Note Unit. Each Note Unit is to be comprised of one C$1,000 principal amount unsecured convertible note (each, a “Convertible Note”) accruing interest at 8% per annum, payable semi-annually in arrears until maturity, and 77 common share purchase warrants of the Company (each, a “Warrant”). The Convertible Notes will have a maturity date of February 28, 2021. Each Convertible Note shall be convertible into common shares in the capital of the Company at a price of C$6.50 per share commencing

August 28, 2019. Each Warrant entitles the holder thereof to acquire one common share in the capital of the Company for an exercise price of C$8.00 per share until February 28, 2024. If exercised during the first 12 months after the Closing Date, the underlying shares shall be subject to a 365-day contractual hold from the Closing Date. The investment bankers (“agents”) received a cash commission on the sale of the Offering of C$1,268,350, plus C$98,750 as agents’ expenses, including legal fees. The agents also received 100,823 compensation warrants, each carrying the right to purchase one subordinate voting share in the capital of the Company at a price of C$8.00 per share until February 28, 2021.

On February 25, 2021, the Company extended and amended the terms of its Convertible Notes. Under the new terms of the amendment, the maturity date of the debentures was extended to February 28, 2024, and the coupon rate was increased from 8% to 12% per annum, effective February 28, 2021. As part of the amendment, each holder of a debenture was granted a conversion right to convert outstanding debentures pro rata up to a maximum amount of C$6,250,000 of the principal amount to be converted at a conversion rate of C$0.95, exercisable up to March 31, 2021. On March 31, 2021, the Company recorded the conversion of C$4,990,000 into 5,252,631 Subordinate shares. In consideration of the amendment, total aggregate consideration was 454 Warrants (each an “Extension Warrant”) for every C$1,000 principal amount issued. The Company granted 8,463,922 Extension Warrants shares.

SIGNIFICANT EVENTS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 2021

CALIFORNIA CANNABIS OPERATIONS

On February 16, 2021, the Company announced a strategic shift to expand its sales team, internalize all account management, and transition to a self-service distribution partner, Nabis, in the California adult-use market. To facilitate the shift, the Company is investing in its sales force and the Company will retain title to inventory held at Nabis up until sales are recorded to customers, whereas previously title was passed upon shipment of inventory to distributors. All inventory previously held at distributors was transferred to Nabis upon commencement of the agreement with Nabis.

SHARE BASED COMPENSATION

During the nine months ended September 30, 2021, the Board approved the cancellation (forfeiture by active employees) of 800,911 Subordinate Share purchase options that were originally subjected to vesting based on performance terms. The performance terms were not met.

Additional information regarding the Company can be found on the Company’s SEDAR profile or at www.plusproducts.com.

EVENTS AFTER THE REPORTING PERIOD

On December 17, 2021 the Company entered into an Acquisition Agreement (“the Agreement”) with Glass House Brands Inc. (“the Purchaser”) pursuant to which, the Purchaser will become the sole shareholder of the Company’s wholly owned subsidiaries and all business assets. Terms of the agreement include a payment of $32,951,894 that will be paid by the Purchaser by issuance of 20,005 unsecured convertible debentures notes with an aggregate face value C$20,504,851 equal to 100% of the principal value and accrued interest of the convertible debentures, issuance of 2,102,654 common shares in the capital of the Purchaser and restricted stock units in the capital of the Purchaser. Consideration is to be delivered on the closing date of the Agreement which is contingent on due diligence investigations by the Purchaser and approval by the majority shareholders of the convertible debentures. The deal is expected to close during the first quarter of 2022.

The Agreement includes a mutual termination and limited due diligence clause. The Agreement can be terminated by mutual agreement of both the Company and the Purchaser and is subject to approval by the Court in conjunction with the CCAA proceedings. The agreement includes a termination fee of C$600,000 that is payable by the Company if the Court approves an alternate transaction from the Agreement and such alternative transaction is completed.

Subsequent to the end of the period, the Company has filed for multiple stays of proceedings with the Court. The current period is extended through January 31, 2022.

GOING CONCERN OF OPERATIONS

These financial statements have been prepared using the going concern function which assumes the Company will continue in operation for the foreseeable future, will obtain additional financing as required, and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. The Company has C$20,005,000 in convertible debentures due February 28, 2024, which were recently amended on February 25, 2021. There is no assurance that the Company will be able to satisfy these debentures by maturity.

During September 2021, the Company secured protection from its creditors under the Companies’ Creditors Arrangement Act (“CCAA”) to restructure its business and financial affairs. While the Company works to exit the CCAA proceedings in a favorable position, there is no guarantee that the Company will be able to continue as a going concern.

NON-GAAP MEASURES

Adjusted uncompressed weighted average shares outstanding and loss per share

The Company has additionally determined the adjusted uncompressed weighted average shares outstanding and loss per share. The Company believes these measures to be more representative of loss on a per share basis by adding compressed shares on an equivalent basis with compressed shares; however, these performance measures have no standardized meaning. As such, there are likely to be differences in the method of computation when compared to similar measures presented by other issuers. Management believes that, in addition to conventional measures prepared in accordance with GAAP, some investors use this information to evaluate the Company’s performance. Accordingly, they are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

	Three months ended	September 30,	Nine months ended	September 30,
	2021	2020	2021	2020
Net loss	$(3,436,270)	$(2,430,483)	$(8,646,056)	$(5,807,779)
Weighted Average
Uncompressed Outstanding
Shares	48,418,238	43,319,532	46,681,408	43,283,363
Loss per Uncompressed Share	$(0.07)	$(0.06)	$(0.19)	$(0.13)
Weighted Average Compressed
Outstanding Shares	64,712,911	49,056,135	56,447,893	39,254,970
Lossper Compressed share	$(0.05)	$(0.05)	$(0.15)	$(0.15)

SUMMARY FINANCIAL INFORMATION

The following selected financial information has been derived from, and is qualified in its entirety by, the financial statements of the Company for the three and nine months ended September 30, 2021, and 2020, and the notes thereto:

	Three months ended	September 30,	Nine months ended	Nine months ended	September 30,
	2021	2020		2021	2020
Income (Loss)	$	$		$	$
Gross Revenue	4,083,064	3,886,599		13,062,283	13,310,451
Net Revenue	3,205,860	3,650,028		10,581,973	12,715,331
Gross Profit	706,197	1,449,603		3,696,830	4,671,750
Operating expenses	3,357,152	2,933,037		9,673,959	9,579,413
Net loss	(3,436,270)	(2,430,483)	(8,646,056)		(5,807,779)
Lossper uncompressed share	(0.07)	(0.06)		(0.19)	(0.13)

Balance Sheet		September	30, 2021	December 31, 2020
			$		$
Current assets		10,772,236			16,280,224
Total assets		14,692,126			21,486,648
Total liabilities		16,108,144			21,436,666
Shareholders’ equity		(1,416,018)			49,982
Cash dividendsper share			-		-

OVERALL PERFORMANCE

Net revenue decreased 12% in the three months ended September 30, 2021, to $3.21M compared to $3.65M for the three months ended September 30, 2020. During the period, the Company launched new Dual Action Sleep products which were supported by an increase in discounts and promotions. Across existing products, the Company also increased the amount of spend on sampling and discounts to strengthen relationships with existing customers and attract new customers. Gross profit Q3 2021 decreased 51% versus Q3 2020 to $0.71M due to the increased discount and promotion rate, as well as one-time inventory reserve and distribution fee adjustments recorded during the period.

The loss from operations was $2.65M in Q3 2021, vs $1.48M in Q3 2020. In Q3 2021, the Company increased the amount spent on advertising and promotion efforts with customers, incurred additional professional and consulting fees to monitor the CCAA process which began during the quarter, as well as hiring additional consultants to support ongoing operations. The net loss in Q3 2021 was $3.44M ($0.07 loss per uncompressed share) vs $2.43M in Q3 2020 (loss per uncompressed share - $0.06) from additional interest and accretion expenses from the renegotiated convertible debt in 2021.

As of September 30, 2021, net working capital is $9.01M up from ($4.63M) at the end of 2020. Working capital at the end of 2020 was reduced from the due date of the convertible debt that was previously due in February 2021 and subsequently amended. The change was further driven by cash consumed from operations less capital expenditures. Shareholders’ equity is ($1.42M) at September 30, 2021, compared to $0.05M at the end of 2020, the decline due to the $3.05M loss and comprehensive loss in Q3 2021 and the impact of share-based compensation transactions.

The Company operates primarily in California, the largest state approved for adult recreational use in the overall United States cannabis market. Market size of the legal cannabis market is heavily dependent upon the state government’s ability to enforce regulations. As these enforcement activities continue to become more successful, this will increase the overall market opportunity for the Company. As of October 2019, the Company also operates in the Nevada cannabis market and manufacturers a hemp-CBD line which can be shipped to consumers and retailers throughout most of the U.S.

SUMMARY OF QUARTERLY RESULTS

The following table sets out selected quarterly financial information of the Company. This information is derived from unaudited interim financial statements prepared by management. These financial data are prepared in accordance with IFRS.

		Quarter Ending	Quarter Ending	Quarter Ending
2019		2020				2021
Dec 31 ($)	Mar 31 ($)	Jun 30 ($)	Sep 30 ($)	Dec 31 ($)	Mar 31 ($)	Jun 30 ($)	Sep 30 ($)
3,802,649	4,817,390	4,606,462	3,886,599	4,033,609	3,016,053	5,963,166	4,083,064
3,497,081	4,739,209	4,326,094	3,650,028	3,148,115	2,543,682	4,832,431	3,205,860
2,598,666	3,085,419	2,757,737	2,200,425	2,198,919	1,496,562	2,888,918	2,499,663
898,415	1,653,790	1,568,357	1,449,603	949,196	1,047,120	1,943,513	706,197
2,542,436	386,675	171,207	322,035	729,021	346,432	449,898	474,286
24,693	25,319	25,318	25,319	24,831	24,502	24,241	20,388
441,136	171,841	122,746	151,504	206,875	222,855	225,869	300,643
526,538	460,719	382,806	277,719	326,914	311,681	352,420	321,915
282,547	131,944	5,951	14,806	25,590	31,325	70,096	63,229
687,233	381,987	415,248	201,208	323,944	427,562	183,766	290,275
3,061	15,552	(1,517)	20,184	921	1,797	412	4,601
9,548	7,473	11,819	5,385	13,021	3,902	3,825	26,754
2,037,394	1,743,710	1,411,071	1,296,287	1,491,198	1,469,777	1,486,054	1,384,745
1,571,666	-	-	-	675,964	-	27,716	391,749
1,001,153	394,547	381,960	618,590	517,797	581,468	71,209	78,567
(8,228,990)	(2,065,977)	(1,358,252)	(1,483,434)	(3,386,880)	(2,374,181)	(951,993)	(2,650,955)
(1,575)	1,490	(23,165)	(1,014)	(19,147)	(86,984)	(12,877)	(19,083)
(121,260)	(43,807)	(42,673)	(40,436)	(34,387)	(25,289)	(19,273)	-
432,297	430,907	410,001	424,907	435,555	352,499	205,584	161,690
425,362	423,057	403,459	407,698	440,210	316,934	695,009	496,240
120,452	36,780	23,881	9,020	(11,618)	(3,318)	524	44,101
408,841	-	-	-	-	-	-	-
-	-	(12,900)	-	-	-	-	-
-	-	-	28,289	-	-	-	-
1,064,820	-	10,765	-	-	-	-	-
-	-	-	-	-	-	-	-
(10,557,927)	(2,914,404)	(2,127,620)	(2,311,898)	(4,197,493)	(2,928,023)	(1,820,960)	(3,333,903)
(551,875)	16,990	(1,681,718)	118,585	(549,016)	(20,027)	480,830	102,367
(10,006,052)	(2,931,394)	(445,902)	(2,430,483)	(3,648,477)	(2,907,996)	(2,301,790)	(3,436,270)
229,560	(1,480,125)	671,973	377,274	881,409	258,225	194,444	(382,524)
(10,235,612)	(1,451,269)	(1,117,875)	(2,807,757)	(4,529,886)	(3,166,221)	(2,496,234)	(3,053,746)
(0.23)	(0.07)	(0.01)	(0.06)	(0.08)	(0.07)	(0.05)	(0.07)
#	#	#	#	#	#	#	#
43,286,374	43,255,745	43,274,415	43,319,532	43,339,986	43,196,521	48,372,084	48,418,238

Quarter Ending

Net Revenue Total assets Total liabilities Net assets

2019		2020	2020			2021	2021
Dec 31 ($)	Mar 31 ($)	Jun 30 ($)	Sep 30 ($)	Dec 31 ($)	Mar 31 ($)	Jun 30 ($)	Sep 30 ($)
3,497,081	4,739,209	4,326,094	3,650,028	3,148,115	2,543,682	4,832,431	3,205,860
29,254,971	26,023,553	25,774,514	24,530,908	21,486,648	19,942,751	17,633,943	14,692,126
20,955,763	19,344,119	19,800,141	20,713,729	21,436,666	15,964,056	16,075,340	16,108,144
8,299,208	6,679,434	5,974,373	3,817,179	49,982	3,978,695	1,558,603	(1,416,018)

DISCUSSION OF QUARTERLY AND YTD HIGHLIGHTS

Revenue

The Company’s gross revenue increased to $4.08M in Q3 2021 compared to $3.89 M in Q3 2020, while net revenue decreased to $3.21M in Q3 2021 compared to $3.65M in Q3 2020. During Q1 2021 the Company completed a switch to a self-service distribution model and has internalized account management with a higher gross selling price comparing between periods. However, during Q3 2021 the Company increased its discounts and promotions to support the new Dual Action Sleep products and to support its existing products. The Company’s Nevada and hemp-derived CBD lines continue to generate sales and the Company maintains the marketing and promotion efforts in those markets.

On a YTD basis, the Company’s gross revenue decreased to $13.06M in YTD 2021 compared to $13.31M in YTD 2020, while net revenue decreased to $10.58M in YTD 2021 compared to $12.72M in YTD 2020. During YTD 2020, the California results included a switch to a full-service distributor, which benefited from a one-time transfer of inventory from its prior distributor. The YTD 2021 includes an increase in promotions and discounts and increased samples given to customers, all to support new products and maintain relationships with existing customers.

Gross Profit

Gross Profits decreased to $0.71M in Q3 2021 compared to $1.45M in Q3 2020 driven by increased discounts and promotions and one time inventory reserve and distribution fee adjustments. Gross profit margin declined to 22% in Q3 2021 from 39.7% in Q3 2020.

Gross Profits decreased to $3.70M in YTD 2021 compared to $4.67M in YTD 2020 driven by decreased sales volume year over year, the previously mentioned one-time adjustments and partially offset by the improved operating efficiencies in California. Gross profit margin declined to 34.9% in YTD 2021 from 36.7% in YTD 2020.

Advertising and Promotion

Advertising and promotions increased to $0.47M in Q3 2021 compared to $0.32M in Q3 2020 and increased to $1.27M in YTD 2021 compared to $0.88M in YTD 2020. During 2021, the Company expanded advertising and promotion efforts to support the launch of new products and the switch to the self-service distribution model across California.

Consulting Fees

Consulting fees were $0.30M in Q3 2021 vs. $0.15M in Q3 2020 and were $0.75M in YTD 2021 vs. $0.45M in

YTD 2020. During the quarterly and annual period, the Company hired additional consultants to help support ongoing operations and navigate the transition to a self-service distribution partner.

General and Administration

General and administration costs were $0.32M in Q3 2021 compared to $0.28M in Q3 2020 and were $0.99M in YTD 2021 compared to $1.12M in YTD 2020. The Company incurred relatively consistent expenses for insurance and other administrative costs, all offset by a decline in office rent as the Company adjusted to the COVID-19 pandemic during Q2 2020.

Provisions for Expected Credit Losses

Provisions for expected credit losses were $0.39M in Q3 2021 compared to $nil in Q3 2020 and were $0.42M in YTD 2021 compared to $nil in YTD 2020. The increase was driven by a Q3 2021 assessment on the royalty advance with TapRoot and a reduction in the amount deemed collectable.

Share-based Compensation

In Q3 2021, the Company expensed $0.08M compared to $0.62M in Q3 2020 in share-based compensation awards. During YTD 2021, the Company expensed $0.73M compared to $1.40M in YTD 2020. During both periods, the expenses related to vesting of share-based compensation awards and options to reward existing personnel and to attract additional management to help grow the Company.

Accretion Expense

The Company incurred non-cash accretion expense of $0.16M in Q3 2021 compared to $0.42M in Q3 2020 and recorded expense of $0.72M in YTD 2021 compared to $1.27M in YTD 2020. The change in expense was from the convertible debentures renegotiated in Q1 2021.

LIQUIDITY, FINANCING AND CAPITAL RESOURCES

The Company’s objective when managing its liquidity and capital resources is to generate enough cash to fund the Company’s operating and organic growth opportunities. The Company periodically evaluates the opportunity to raise additional funds through either the public or private placement of equity capital to strengthen its financial position and to provide enough working capital for growth and development of its business. The Company also evaluates equity capital and debt placement to finance the capital expenditures needed to expand its production capacity for future sales growth. Currently the Company feels there are adequate capital assets to supply its current growth targets and there are no significant additional capital expenditures required.

The Company raised $23.85M from the sale of convertible debentures and warrant exercises in 2019 and subsequently amended the maturity date of the principal and the interest rate on the debt during Q1 2021. In Q3 2021, cash from operations used $4.40M. The Company purchased manufacturing equipment for $0.15M and used $1.23M in equity transactions, lease and interest payments to support the business. The cash balance on hand decreased in 2021 by $5.79M to $5.79M.

The Company’s ability to continue as a going concern is dependent upon its ability in the future to achieve profitable operations, to restructure its convertible debentures, or obtain the necessary financing to meet its near and long term obligations such that it can repay its liabilities when they become due. Management plans to continue its efforts to consider additional external financing through the issuance of equity and debt to finance the operations, expansion, and capital expenditures of the Company; however, there can be no certainty that such funds will be available on a timely basis and on terms acceptable to the Company. These conditions indicate the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of assets and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern.

As of September 30, 2021, the Company had $5.79M cash and net working capital of $9.01M.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements.

TRANSACTIONS BETWEEN RELATED PARTIES

During the nine months ended September 30, 2021, the Company paid compensation to certain key management personnel (officers and directors) in the amount of $1,136,143 (nine months ended September 30, 2020 - $1,570,475) consisting of $824,240 salary and benefits and $311,903 of share-based compensation transactions during the period. During the nine months ended September 30, 2021, there was $nil share-based compensation recovery recorded by the Company (nine months ended September 30, 2020 - $526,822. The recovery related to forfeited stock options by related parties not included in the amounts above).

OUTSTANDING SHARE DATA

At the 2020 annual general and special meeting of the shareholders on June 15, 2020, the shareholders of the Company authorized the creation of a new Class B voting common share (the Subordinate B Shares as defined below). At a previous annual general and special meeting of the shareholders, the shareholders of the Company cancelled the historic and unused share classes including Class B preferred voting shares (comprising Series Seed preferred voting shares; Series Seed-1 preferred voting shares; Series A preferred voting shares; and Series B-1 preferred voting shares) and Class C preferred voting shares (comprising Series B-3 preferred voting shares; Series C-1 preferred voting share; and Series C-3 preferred voting shares).

The authorized share capital of the Company consists of the following:

An unlimited number of common voting shares (“Subordinate Shares”) without par value – non-redeemable and noncumulative (the listed shares).

An unlimited number of Class A common voting shares (“Proportionate Shares”) without par value –nonredeemable and noncumulative, and convertible at the option of the holder, at any time and subject to the restrictions set out in the Company’s Articles, into 100 Subordinate Shares for each Proportionate Share.

An unlimited number of Class B common voting shares (“Subordinate B Shares”) without par value – nonredeemable and noncumulative, and convertible at the option of the holder, at any time and subject to the restrictions set out in the Company’s Articles, into 1/200th of one Subordinate Share for each Class B Subordinate voting share.

As of the date of this MD&A, the Company has the following securities issued and outstanding:

			Number of Securities
Securities	Expiry Date	Exercise Price	Outstanding
Subordinate Voting Shares	N/A	N/A	39,616,905
Proportionate Voting Shares	N/A	N/A	86,759
Class B Subordinate Voting Shares	N/A	N/A	25,100,000
	July 2023 to
Options Proportionate Voting Shares	September 2028	C$35.39 -C$131.23	3,176
Options Subordinate Voting Shares	July, 2022	$0.27	150,000
	April 2029 to
Options Subordinate Voting Shares	September 2030	C$0.56 - C$4.59	1,489,216
RSU Subordinate Voting Shares	N/A	N/A	1,252,928
Warrants from Subordinated Debt	February, 2024	C$8.00	1,925,000
Warrants issued for services	September, 2024	C$4.32	318,471
Extension Warrant from Subordinated
Debt	February,2024	C$1.10	8,463,922
Total			78,406,377

FINANCIAL INSTRUMENTS

Classification of financial instruments

Financial Assets - Amortized Cost	As at September 30, 2021As at December 31, 2020	As at September 30, 2021As at December 31, 2020
	$	$
Cash	5,792,220	11,578,213
Trade receivables	1,623,992	1,932,986
Note Receivable	54,531	145,520
TapRootAdvances	417,897	781,033
Total	7,888,640	14,437,752

Financial Liabilities - Amortized Cost	As at September 30, 2021As at December 31,2020
	$	$
Accounts payable and accrued liabilities	1,463,407	1,304,848
Vehicle loans	115,939	137,439
Convertible debentures payable	14,044,414	19,331,949
Total	15,623,760	20,774,236

Fair value:

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
Level 3 – Inputs that are not based on observable market data.

The carrying value of Company’s financial assets and liabilities as at September 30, 2021, and December 31, 2020, approximate their fair value. During the nine months ended September 30, 2021, there were no transfers of amounts between levels (year ended December 31, 2020 – none).

FINANCIAL RISK MANAGEMENT

The Company is exposed in varying degrees to a variety of financial instrument related risks. The Board of Directors approves and monitors the risk management processes, inclusive of documented investment policies, counterparty limits, and controlling and reporting structures.

Credit risk:

Credit risk is the risk of loss associated with a counterparty’s inability to fulfill its payment obligations. The Company's credit risk is primarily attributable to cash and cash equivalents, trade receivables, deposits with suppliers, note receivable, and prepaid royalties with customers. Cash is held with reputable banks in the United States and Canada which are closely monitored by management. Collection and credit risk relating to trade receivables, deposits with suppliers, note receivables, and prepaid royalties is assessed by the Company’s management based on prior experience, an assessment of the current economic environment, credit worthiness of suppliers and counter parties, and an estimation of future outcomes and probabilities of at-risk amounts, as applicable.

During the nine months ended September 30, 2021 and for the year ended December 31, 2020 the Company recorded the following provision for expected credit losses (benefits):

	September 30, 2021	December31,2020
	$	$
Royalty advance (within prepaids and deposits)	395,097	137,072
Trade receivable	195,395	538,892
Total	590,492	675,964

The Company will evaluate future expected credit losses at each period end.

Liquidity risk:

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company has a planning and budgeting process in place to help determine the funds required to support the Company’s normal operating requirements on an ongoing basis. The Company ensures that there are sufficient funds to meet its short-term business requirements, taking into account its anticipated cash flows from operations, its holdings of cash and financial commitments.

Historically, the Company's primary source of funding has been private placements of equity and public offerings of equity and convertible debentures for cash. The Company’s access to financing is always uncertain. There can be no assurance of continued access to significant equity or debt funding.

The Company has C$20,005,000 in convertible debentures due February 28, 2024. There is no assurance that the Company will be able to raise additional capital to pay off these debentures or otherwise restructure these debentures prior to the due date. The Company has $124,367 in vehicle lease commitments and $550,642 in facility lease obligations due over the next five years. There is no assurance that the Company will have sufficient working capital to fulfill these lease obligations through their respective maturities.

Foreign exchange risk:

Foreign currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company does not have material foreign exchange risk as the majority of the financial instruments are denominated in the functional currency of the respective entity.

Interest rate risk:

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in interest rate. The Company pays interest on its convertible debenture at a fixed rate of 12% per annum. The Company does not have any material variable interest rates and is not exposed to any material interest rate risk on its cash and debt instruments.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the combined financial statements in accordance with IFRS requires the Company to make estimates and assumptions concerning the future. The Company’s management reviews these estimates and underlying assumptions on an ongoing basis, based on experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are adjusted for prospectively in the period in which the estimates are revised.

Estimates and assumptions where there is significant risk of material adjustments to assets and liabilities in future accounting periods include the valuation of inventory, the useful lives and the recoverability of the carrying value of property and equipment, the fair value measurements for financial instruments, the fair value measurement of share-based payments, and the recoverability and measurement of deferred tax assets.

Significant judgments

The preparation of financial statements in accordance with IFRS requires the Company to make judgments, apart from those involving estimates, in applying accounting policies. The most significant judgments in applying the Company’s financial statements include:

The assessment of the Company’s ability to continue as a going concern and whether there are events or conditions that may give rise to significant uncertainty; and
the classification of financial instruments.

New standard IFRS 16 “ Leases ”

In January 2016, the IASB published a new accounting standard, IFRS 16 - Leases ("IFRS 16"). This new standard replaces IAS 17 - Leases and the related interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting is not substantially changed. The Company has adopted IFRS 16 as the standard is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted for entities that have adopted IFRS 15. As a result of the adoption on January 1, 2019, the Company recognized right-of-use assets of $1.17M and a corresponding $1.31M lease liability and $0.14M reduction of retained earnings.

STANDARDS AND INTERPRETATIONS NOT YET ADOPTED

Certain pronouncements were issued by the International Accounting Standards Board (“IASB”) or the IFRS Interpretations Committee (“IFRIC”) that are mandatory for accounting periods after December 31, 2019. Pronouncements that are not applicable to the Company have been excluded from this note. Certain pronouncements were issued by the International Accounting Standards Board (“IASB”) or the IFRS Interpretations Committee (“IFRIC”) that are mandatory for accounting periods after December 31, 2019. Pronouncements that are not applicable to the Company have been excluded from this note.

FORWARD-LOOKING STATEMENTS

This MD&A includes certain forward-looking statements that are based upon current expectations which involve risks and uncertainties associated with the Company’s business and the economic environment in which the business operates. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements, which are often, but not always, identified by the use of words such as “seek”, “anticipate”, “budget”, “plan”, “continue”, “estimate”, “expect”, “forecast”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and similar words or phrases (including negative variations) suggesting future outcomes or statements regarding an outlook. The forward- looking statements are not historical facts but reflect the Company’s current expectations regarding future results or events. Forward- looking statements contained in this MD&A are subject to several risks and uncertainties that could cause actual results or events to differ materially from current expectations. These risks and uncertainties include, but are not limited to, those described under the headings “Financial Risk Management” and “Risk Factors” in this MD&A. Specifically, this MD&A includes, but is not limited to, forward-looking statements regarding: the Company’s goal of creating shareholder value; ability to fund future operating costs, and timing for future research and development of the Company’s current and future technologies, including the costs and potential impact of complying with existing and proposed laws and environmental regulations; management’s outlook regarding generation of revenues; sensitivity analysis on financial instruments that may vary from amounts disclosed; prices and price volatility of the Company’s products; and general business and economic conditions.

Readers are cautioned that the above factors are not exhaustive. Although the Company has attempted to identify important factors that could cause actual events and results to differ materially from those described in the forwardlooking information, there may be other factors that cause events or results to differ from those intended, anticipated or estimated.

Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information.

The Company believes the expectations reflected in the forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and readers are cautioned not to place undue reliance on forward-looking information contained in this MD&A.

The forward-looking information contained in this MD&A is provided as of the date hereof and the Company undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as otherwise required by law. All the forward-looking information contained in this MD&A is expressly qualified by this cautionary statement.

RISK FACTORS

Investing in the Company involves significant risks. An investor should carefully consider the risks described below. The risks and uncertainties described below are those that the Company currently believes to be material, but they are not the only ones that the Company faces. If any of the following risks, or any other risks and uncertainties that the Company has not yet identified or that the Company currently consider not to be material, occur or become material risks, the Company’s business, prospects, financial condition, results of operations and cash flows could be materially and adversely affected. In that event, the market price of the Company could decline, and an investor could lose part or all of such investor’s investment.

Risks Related to Public Health Crises, Epidemics and Pandemics

The duration and severity of the current COVID-19 pandemic may significantly impact or exacerbate some of the other risks set forth below. Risks that may be further impacted by the COVID-19 pandemic relate to the Company’s operations and expansion, including the Company’s ability to grow its brand and sales and to maintain production levels in the event that the Company’s employees are restricted from accessing our facilities for a significant period of time; to the Company’s ability to access capital and the level of borrowing costs; the Company’s ability service obligations under its debt securities and other debt or lease obligations; and the Company’s ability to comply with the covenants contained in the agreements that govern the Company’s existing indebtedness.

The transmission of COVID-19 and efforts to contain its spread have resulted in international, national and local border closings, travel restrictions, significant disruptions to business operations, supply chains and customer activity and demand (across all sectors), service cancellations, reductions and other changes, and quarantines, as well as considerable general concern and uncertainty.

The impacts of the COVID-19 pandemic that may impact the Company include: a decrease in demand for the products; a reduction in production levels; increased costs resulting from the Company’s efforts to mitigate the impact of the COVID-19 pandemic on operations; a deterioration of worldwide credit and financial markets that could limit the Company’s ability to obtain external financing to fund the Company’s capital expenditures or its operations; and a disruption to the Company’s distribution channels or supply chains. A material adverse effect on the Company’s employees, customers, suppliers and/or distributors could have a material adverse effect on the Company.

The overall severity and duration of COVID-19-related adverse impacts on the Company’s business will depend on future developments which cannot currently be predicted, including directives of government and public health authorities, the speed at which our suppliers and distributors can return to full production, the status of labor availability and the ability to staff our operations and facilities. Even after the COVID-19 outbreak has subsided, we may continue to experience material adverse impacts to our businesses as a result of its global economic impact, including any related recession.

As of September 30, 2021, the Company had not experienced material adverse impacts directly related to COVID19.

Risks Related to the Company

The Company has limited operating history, a history of losses and the Company cannot assure profitability.

As the Company has yet to generate profits, it is extremely difficult to make accurate predictions and forecasts of its finances. This is compounded by the fact the Company operates in the cannabis industry, which is rapidly transforming. There is no guarantee that the Company’s products or services will continue to be attractive to existing and potential consumers.

The Company has undergone numerous corporate restructurings containing provisions that could disadvantage the Company.

The Company (including without limitation Plus Cooperative, Plus Delaware, Plus Nevada, Plus Products Services LLC and Plus Wonders LLC) has undergone numerous restructurings, including the acquisition by Plus Delaware of the assets of Plus Collective, the Plus Merger between Plus Delaware and Plus Nevada, and the Securities Exchange Agreement between Plus Nevada and the Company, and, as a result of such activities, the former members of Plus Collective and the current and/or former shareholders of the Company may assert claims against the Company in connection with these restructurings based on the Company’s failure to comply with all applicable requirements.

Uncertainty about the Company’s ability to continue as a going concern.

The Company may seek additional capital, as well as consider possible mergers, acquisitions, joint ventures, partnerships and other business arrangements intended to expand its product offerings in the cannabis industry and grow its revenue. The Company’s ability to continue as a going concern is dependent upon its ability in the future to grow its revenue and achieve profitable operations and, in the meantime, to obtain the necessary financing to meet its obligations and repay its liabilities when they become due. External financing, predominantly by the issuance of equity and debt, will be sought to finance the operations of the Company; however, there can be no certainty that such funds will be available at terms acceptable to the Company. These conditions indicate the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern.

Uncertainty about the Company’s ability to: (i) refinance, restructure or payoff the convertible debt by February 28, 2024; or (ii) fulfill existing lease obligations

The Company has C$20,005,000 in convertible debentures due February 28, 2024. There is no assurance that the Company will be able to redeem these debentures via its cash flows, raise additional capital to pay off these debentures or otherwise restructure these debentures prior to the due date. The convertible debt is convertible into equity at CS$0.95 per share. There is also no assurance that the public share price of the Company’s stock listed on the CSE will be at a price where debtholders would be interested in converting their debt over to equity. The Company has $124,367 in vehicle lease commitments and $550,642 in facility leases commitments due over the next five years. There is no assurance that the Company will have sufficient working capital to fulfill these lease obligations through their respective maturities.

The Company has negative operating cash flow for the nine months ended September 30, 2021 and the year ended December 31, 2020.

The Company had negative operating cash flow for the nine months ended September 30, 2021, and the year ended December 31, 2020. To the extent that the Company has negative operating cash flow in future periods, it may need to allocate a portion of its cash reserves to fund such negative cash flow. The Company may also be required to raise additional funds through the issuance of equity or debt securities. There can be no assurance that the Company will be able to generate a positive cash flow from its operations, that additional capital or other types of financing will be available when needed or that these financings will be on terms favorable to the Company.

The Company’s actual financial position and results of operations may differ materially from the expectations of the Company’s management.

The Company’s actual financial position and results of operations may differ materially from management’s expectations. As a result, the Company’s revenue, net income and cash flow may differ materially from the Company’s projected revenue, net income and cash flow. The process for estimating the Company’s revenue, net

income and cash flow requires the use of judgment in determining the appropriate assumptions and estimates. These estimates and assumptions may be revised as additional information becomes available and as additional analyses are performed. In addition, the assumptions used in planning may not prove to be accurate, and other factors may affect the Company’s financial condition or results of operations.

Reliance on a Single Production Facility in California

The Company’s facility located in Adelanto, California is currently the Company's only licensed facility under MMRSA and the license is specific to the Adelanto Facility. Adverse changes or developments affecting the Adelanto Facility, including but not limited to a breach of security, could have a material and adverse effect on the Company's business, financial condition and prospects. Any breach of the security measures and other facility requirements, including any failure to comply with recommendations or requirements arising from inspections by California regulators also have an impact on the Company's ability to continue operating under the Adelanto License, the prospect of renewing the Adelanto License or of obtaining additional licenses. The Company’s operations and financial performance may be adversely affected if it is unable to keep up with maintenance requirements. Certain contemplated site expansions and renovations may require approval from California regulators in order to continue. There is no guarantee that any contemplated expansion and/or renovation will be approved, which could adversely affect the business, financial condition and results of operations of the Company.

The Company is a holding company.

The Company is a holding company and essentially all of its assets are the capital stock of its subsidiaries. As a result, investors in the Company are subject to the risks attributable to its subsidiaries. As a holding company, the Company conducts substantially all of its business through its subsidiaries, which generate or are expected to generate substantially all of its revenues. Consequently, the Company’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and the distribution of those earnings to the Company. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Company.

There are factors which may prevent the Company from realizing its growth targets.

The Company’s growth strategy contemplates expansion of its current manufacturing operations and distribution capabilities. There is a risk that the expansion of manufacturing operations will not be achieved on time, on budget, or at all, as it can be adversely affected by a variety of factors, including some that are discussed elsewhere in these “Risk Factors” and the following:

delays in obtaining, or conditions imposed by, regulatory approvals;
facility design errors;
breakdown, aging or failure of equipment or processes;
contractor or operator errors and delays;
delays in securing necessary facilities and equipment;
operational inefficiencies;
labor disputes, disruptions or declines in productivity; inability to attract enough qualified workers; disruption in the supply of energy and utilities; and
major incidents and/or catastrophic events such as fires, explosions, storms or an outbreak of a public health crisis including epidemics, pandemics or outbreaks of new infectious diseases or viruses, as well as

related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and services or goods.

Additionally, there is a risk that the Company’s distribution arrangements with third parties will fail to meet the Company’s targeted growth. Additionally, such third party distributors may lack the financial resources and operational skills to honor the terms of their agreements with the Company.

The Company’s products.

As a relatively new industry, there are not many established players in the recreational cannabis industry whose business model the Company can follow or build on the success of. Similarly, there is no information about comparable companies available for potential investors to review in making a decision about whether to invest in the Company.

Shareholders and investors should further consider, among other factors, the Company’s prospects for success in light of the risks and uncertainties encountered by companies that, like the Company, are in their early stages. For example, unanticipated expenses and problems or technical difficulties may occur and they may result in material delays in the operation of the Company’s business. The Company may not successfully address these risks and uncertainties or successfully implement its operating strategies. If the Company fails to do so, it could materially harm the Company’s business to the point of having to cease operations and could impair the value of the Common Shares to the point investors may lose their entire investment.

The Company expects to commit significant resources and capital to develop and market existing products and new products and services. These products are relatively untested, and the Company cannot assure shareholders and investors that it will achieve market acceptance for these products, or other new products and services that the Company may offer in the future. Moreover, these and other new products and services may be subject to significant competition with offerings by new and existing competitors in the business. In addition, new products and services may pose a variety of challenges and require the Company to attract additional qualified employees.

The failure to successfully develop and market these new products and services could seriously harm the Company’s business, financial condition and results of operations.

If the Company is unable to develop and market new products, it may not be able to keep pace with market developments.

The cannabis industry is in its early stages and it is likely that the Company and its competitors will seek to introduce new products in the future. In attempting to keep pace with any new market developments, the Company will need to expend significant amounts of capital in order to successfully develop and generate revenues from, new products. The Company may not be successful in developing new products, bringing such products to market or gaining market acceptance for its products, which together with capital expenditures made in relation to such product development, may have a material adverse effect on the Company’s business, financial condition and results of operations.

There is no assurance that the Company will retain any relevant licenses nor obtain new licenses or approvals that may be required for the Company’s business and future plans.

The Company’s ability to operate its business in California is dependent on the ability of the Company to retain its licenses from the State of California Department of Public Health Manufactured Cannabis Safety Branch. Licenses, once issued, are subject to ongoing compliance and reporting requirements. Failure to comply with the requirements would have a material adverse impact on the business, financial condition and operating results of the Company. There is also no assurance of new licenses or approvals from the State of California Department of Public Health Manufactured Cannabis Safety Branch.

The Company cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing, documentation and periodic reporting that may be required by governmental authorities. Any delays in obtaining, or failure to obtain or retain the necessary regulatory approvals will significantly delay the development of the Company’s markets and products and could have a material adverse effect on the business, results of operations and financial condition of the Company. Should any state in which the Company considers a license important not grant, extend or renew such license or should it renew such license on different terms, or should it decide to grant more than the anticipated number of licenses, the business, financial condition and results of the operation of the Company could be materially adversely affected.

There is no assurance that the Company will recoup losses associated with the termination of its distribution arrangement with Calyx.

Following the December 9, 2019 termination of its distribution agreement with Calyx Brands, Inc. (“Calyx”), the Company and Calyx entered into a Settlement Agreement and Release which provides, in part, for Calyx to remit its remaining obligations to the Company under the distribution agreement. As of September 30, 2021, the Company estimates that the total unpaid amount equals approximately USD$1.88M, and none of it remains recoverable after assignment of Accounts Receivable from prior sales of Plus products. Calyx is currently in default of the Settlement Agreement for failure to timely pay sums due to the Company. Calyx’s ongoing failure to make remittances to the Company pursuant to the terms of the Settlement Agreement could have a material adverse effect on the Company’s business, financial condition and results of operations.

There is no assurance that the Company will retain its Product Manufacturing and Distribution Agreement with TapRoot.

The Company entered into a Product Manufacturing and Distribution Agreement (“TapRoot Agreement”) with TapRoot Holdings NV, LLC (“TapRoot”). The TapRoot Agreement gives Plus access to TapRoot’s rights to engage in cultivation, production and distribution of medical and adult-use marijuana-infused products in the State of Nevada. Any disruption or cessation of its arrangement with TapRoot could adversely impact the timing and volume of the Company’s sales in Nevada.

The Company may be subject to product recalls for product defects self-imposed or imposed by regulators.

Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of the Company’s products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Although the Company has detailed procedures in place for testing its 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. Additionally, if one of the Company significant brands were subject to recall, the image of that brand and the Company could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for the Company’s products and could have a material adverse effect on the results of operations and financial condition of the Company. Additionally, product recalls may lead to increased scrutiny of the Company’s operations regulatory agencies, requiring further management attention and potential legal fees and other expenses.

Product Liability

As a manufacturer and distributor of products designed to be ingested by humans, the Company faces an inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of the Company’s products involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of the Company’s products alone or in combination with other among others, that the Company’s products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect the Company’s reputation with its clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition of the Company.

There can be no assurances that the Company will be able to obtain or 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 enough insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of the Company’s potential products. As of the current date, the Company has a small amount of insurance coverage for product liabilities.

The Company expects to incur significant ongoing costs and obligations related to its investment in infrastructure, growth, regulatory compliance and operations.

The Company expects to incur significant ongoing costs and obligations related to its investment in infrastructure and growth and for regulatory compliance, which could have a material adverse impact on the Company’s results of operations, financial condition and cash flows. In addition, future changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company. The Company’s efforts to grow its business may be costlier than the Company expects, and the Company may not be able to increase its revenue enough to offset its higher operating expenses. The Company may incur significant losses in the future for a number of reasons, and unforeseen expenses, difficulties, complications and delays, and other unknown events. If the Company is unable to achieve and sustain profitability, the market price of the Subordinate Voting Shares may significantly decrease.

The Company may be subject to additional regulatory burden resulting from its public listing on the CSE.

The Company is working with its legal, accounting and financial advisors to identify those areas in which changes should be made to the Company’s financial management control systems to manage its obligations as a public company listed on the CSE. These areas include corporate governance, corporate controls, disclosure controls and procedures and financial reporting and accounting systems. The Company has made, and will continue to make, changes in these and other areas, including the Company’s internal controls over financial reporting. However, the Company cannot assure holders of Company’s shares that these and other measures that the Company might take will be enough to satisfy the Company’s obligations as a public company listed on the CSE on a timely basis. In addition, compliance with reporting and other requirements applicable to public companies listed on the CSE will create additional costs for the Company and will require the time and attention of management. The Company cannot predict the amount of the additional costs that the Company might incur, the timing of such costs or the impact that management’s attention to these matters will have on the Company’s business.

There is no assurance that the Company will turn a profit or generate immediate revenues.

There is no assurance as to whether the Company will be profitable, earn revenues, or pay dividends. The Company

has incurred and anticipates that it will continue to incur substantial expenses relating to the development and operation of its business.

The payment and amount of any future dividends will depend upon, among other things, the Company’s results of operations, cash flow, financial condition, and operating and capital requirements. There is no assurance that future dividends will be paid, and, if dividends are paid, there is no assurance with respect to the amount of any such dividends.

The Company may not be able to effectively manage its growth and operations, which could materially and adversely affect its business.

If the Company implements it business plan as intended, it may in the future experience rapid growth and development in a relatively short period of time. The management of this growth will require, among other things, continued development of the Company’s financial and management controls and management information systems, stringent control of costs, the ability to attract and retain qualified management personnel and the training of new personnel. The Company intends to utilize outsourced resources, and hire additional personnel, to manage its expected growth and expansion. Failure to successfully manage its possible growth and development could have a material adverse effect on the Company’s business and the value of the equity.

The Company may be unable to adequately protect its proprietary and intellectual property rights, particularly in the U.S.

The Company’s ability to compete may depend on the superiority, uniqueness and value of any intellectual property and technology that it may develop. To the extent the Company can do so, to protect any proprietary rights of the Company, the Company intends to rely on a combination of patent, trademark, copyright and trade secret laws, confidentiality agreements with its employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of any of the Company’s intellectual property:

the market for the Company’s products and services may depend to a significant extent upon the goodwill associated with its trademarks and trade names, and its ability to register certain of its intellectual property under U.S. federal and state law is impaired by the illegality of cannabis under U.S. federal law;
patents in the cannabis industry involve complex legal and scientific questions and patent protection may not be available for some or any products; the Company’s applications for trademarks and copyrights relating to its business may not be granted and, if granted, may be challenged or invalidated;
issued patents, trademarks and registered copyrights may not provide the Company with competitive advantages; the Company’s efforts to protect its intellectual property rights may not be effective in preventing misappropriation of any its products or intellectual property;
the Company’s efforts may not prevent the development and design by others of products or marketing strategies similar to or competitive with, or superior to those the Company develops;
another party may assert a blocking patent and the Company would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in its products; or
the expiration of patent or other intellectual property protections for any assets owned by the Company could result in significant competition, potentially at any time and without notice, resulting in a significant reduction in sales. The effect of the loss of these protections on the Company and its financial results will depend, among other things, upon the nature of the market and the position of the Company’s products in

the market from time to time, the growth of the market, the complexities and economics of manufacturing a competitive product and regulatory approval requirements but the impact could be material and adverse.

The Company may be forced to litigate to defend its intellectual property rights, or to defend against claims by third parties against the Company relating to intellectual property rights.

The Company may be forced to litigate to enforce or defend its intellectual property rights, to protect its trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract its management from focusing on operating the Company’s business. The existence and/or outcome of any such litigation could harm the Company’s business. Further, because the content of much of the Company’s intellectual property concerns cannabis and other activities that are not legal in some state jurisdictions or under federal law, the Company may face additional difficulties in defending its intellectual property rights.

The Company may become subject to litigation, including for possible product liability claims, which may have a material adverse effect on the Company’s reputation, business, results from operations, and financial condition.

The Company may be named as a defendant in a lawsuit or regulatory action. The Company may also incur uninsured losses for liabilities which arise in the ordinary course of business, or which are unforeseen, including, but not limited to, employment liability and business loss claims. Any such losses could have a material adverse effect on the Company’s business, results of operations, sales, cash flow or financial condition.

The Company faces competition from other companies where it conducts business or expands its business operations that may have higher capitalization, more experienced management or may be more mature as a business.

An increase in the companies competing in this industry could limit the ability of the Company to expand its operations. Current and new competitors may have better capitalization, a longer operating history, more expertise and able to develop higher quality equipment or products, at the same or a lower cost. The Company cannot provide assurances that it will be able to compete successfully against current and future competitors. Competitive pressures faced by the Company could have a material adverse effect on its business, operating results and financial condition.

If the Company is unable to attract and retain key personnel, it may not be able to compete effectively in the cannabis market.

The Company’s success has depended and continues to depend upon its ability to attract and retain key management, including the Company’s CEO, Chairman and technical experts. The Company will attempt to enhance its management and technical expertise by continuing to recruit qualified individuals who possess desired skills and experience in certain targeted areas. The Company’s inability to retain employees and attract and retain sufficient additional employees or engineering and technical support resources could have a material adverse effect on the Company’s business, results of operations, sales, cash flow or financial condition. Shortages in qualified personnel or the loss of key personnel could adversely affect the financial condition of the Company, results of operations of the business and could limit the Company’s ability to develop and market its cannabis-related products. The loss of any of the Company’s senior management or key employees could materially adversely affect the Company’s ability to execute the Company’s business plan and strategy, and the Company may not be able to find adequate replacements on a timely basis, or at all. The Company does not maintain key person life insurance policies on any of the Company’s employees.

The Company’s directors, officers and employees may be considered inadmissible to enter the United States.

A traveler to the United States may be considered an “illicit trafficker” under U.S. law and therefore could be considered inadmissible if they are involved in the cannabis industry. There have been reports since 2018 of business travelers working in the cannabis industry who have been denied entry and, in some cases, received lifetime bans from the United States. The Company’s business and investments are located in the United States and while the majority of the Company’s directors, officers and employees are currently resident and located in the United States, if any of the Company’s directors, officers and employees are determined to be inadmissible to enter the United States, this could have a negative impact on the Company’s ability to operate in the United States. In addition, the perception that involvement in the cannabis industry could lead to inadmissibility to the United States could make it more difficult for the Company to continue to retain and engage qualified directors, officers and employees in the future.

Dependence on key inputs, suppliers and skilled labor.

The cannabis business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company.

The ability of the Company to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, parts and components. This could have an adverse effect on the financial results of the Company.

The Company is reliant on third-party suppliers to develop and manufacture its products. Due to the uncertain regulatory landscape for regulating cannabis in the United States, the Company’s third party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the operations of the Company. Loss of these suppliers, manufacturers and contractors may have a material adverse effect on the business and operational results of the Company.

Failure to successfully integrate acquired businesses, its products and other assets into the Company, or if integrated, failure to further the Company’s business strategy, may result in the Company’s inability to realize any benefit from such acquisition.

The Company expects to grow by acquiring businesses. The consummation and integration of any acquired business, product or other assets into the Company may be complex and time consuming and, if such businesses and assets are not successfully integrated, the Company may not achieve the anticipated benefits, cost-savings or growth opportunities. Furthermore, these acquisitions and other arrangements, even if successfully integrated, may fail to further the Company’s business strategy as anticipated, expose the Company to increased competition or other challenges with respect to the Company’s products or geographic markets, and expose the Company to additional liabilities associated with an acquired business, technology or other asset or arrangement.

When the Company acquires cannabis businesses, it may obtain the rights to applications for licenses as well as licenses; however, the procurement of such applications for licenses and licenses generally will be subject to governmental and regulatory approval. There are no guarantees that the Company will successfully consummate such acquisitions, and even if the Company consummates such acquisitions, the procurement of applications for

licenses may never result in the grant of a license by any state or local governmental or regulatory agency and the transfer of any rights to licenses may never be approved by the applicable state and/or local governmental or regulatory agency.

The size of the Company’s target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.

Because the cannabis industry is in an early stage with uncertain boundaries, there is a lack of information about comparable companies available for potential investors to review in deciding about whether to invest in the Company and, few, if any, established companies whose business model the Company can follow or upon whose success the Company can build. Accordingly, investors will have to rely on their own estimates in deciding about whether to invest in the Company. There can be no assurance that the Company’s estimates are accurate or that the market size is sufficiently large for its business to grow as projected, which may negatively impact its financial results. The Company regularly purchases and follows market research.

The Company’s industry is experiencing rapid growth and consolidation that may cause the Company to lose key relationships and intensify competition.

The cannabis industry and businesses ancillary to and directly involved with cannabis businesses are undergoing rapid growth and substantial change, which has resulted in an increase in competitors, consolidation and formation of strategic relationships. Acquisitions or other consolidating transactions could harm the Company in a number of ways, including by losing strategic partners if they are acquired by or enter into relationships with a competitor, losing customers, revenue and market share, or forcing the Company to expend greater resources to meet new or additional competitive threats, all of which could harm the Company’s operating results. As competitors enter the market and become increasingly sophisticated, competition in the Company’s industry may intensify and place downward pressure on retail prices for its products and services, which could negatively impact its profitability. The Company continues to sell shares for cash to fund operations, capital expansion, mergers and acquisitions that will dilute the current shareholders.

There is no guarantee that the Company will be able to achieve its business objectives. The continued development of the Company will require additional financing. The failure to raise such capital could result in the delay or indefinite postponement of current business objectives or the Company going out of business. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, the terms of such financing will be favorable to the Company.

If additional funds are raised through issuances of equity or convertible debt securities, existing shareholders could suffer significant dilution, and any new equity securities issued could have rights, preferences and privileges superior to those of holders of Subordinate Voting Shares. The Company’s articles permit the issuance of an unlimited number of Subordinate Voting Shares, and shareholders will have no pre-emptive rights in connection with such further issuance. The directors of the Company have discretion to determine the price and the terms of issue of further issuances. Moreover, additional Subordinate Voting Shares will be issued by the Company on conversion of Proportionate Voting Shares, on the exercise of options under the Stock Option and Incentive Plan and upon the exercise of outstanding warrants. In addition, from time to time, the Company may enter into transactions to acquire assets or the shares of other companies. These transactions may be financed wholly or partially with debt, which may temporarily increase the Company’s debt levels above industry standards. Any debt financing secured in the future could involve restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. The Company may require additional financing to fund its operations to the point where it is generating positive cash flows. Negative cash flow may restrict the Company’s ability to pursue its business objectives.

The Company currently has insurance coverage; however, because the Company operates within the cannabis industry, there are additional difficulties and complexities associated with such insurance coverage.

The Company’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.

Although the Company intends to continue to maintain insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance will not cover all the potential risks associated with its operations. the Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in the operations of the Company is not generally available on acceptable terms. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.

The Company believes that it and its subsidiaries currently have insurance coverage with respect to directors and officers, workers’ compensation, general liability, fire and other similar policies customarily obtained for businesses to the extent commercially appropriate; however, because the Company is engaged in and operates within the cannabis industry, there are exclusions and additional difficulties and complexities associated with such insurance coverage that could cause the Company to suffer uninsured losses, which could adversely affect the Company’s business, results of operations, and profitability. There is no assurance that the Company will be able to fully utilize such insurance coverage, if necessary.

The Company could be liable for fraudulent or illegal activity by its employees, contractors and consultants resulting in significant financial losses to claims against the Company.

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violate government regulations. It is not always possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Company’s business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company will be reliant on information technology systems and may be subject to damaging cyberattacks.

The Company has entered into agreements with third parties for hardware, software, telecommunications and other information technology (“IT”) services in connection with its operations. The Company’s operations depend, in part, on how well it and its suppliers 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 and theft. The Company’s operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could

result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations.

The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

The Company’s officers and directors may be engaged in a range of business activities resulting in conflicts of interest.

Although certain officers and board members of the Company are expected to be bound by anticircumvention agreements limiting their ability to enter into competing and/or conflicting ventures or businesses, the Company may be subject to various potential conflicts of interest because some of its officers and directors (and consequently, some of the officers and directors of the Company and Plus Nevada) may be engaged in a range of business activities. In addition, the Company’s executive officers and directors may devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to the Company. In some cases, the Company’s executive officers and directors may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to the Company’s business and affairs and that could adversely affect the Company’s operations. These business interests could require significant time and attention of the Company’s executive officers and directors.

In addition, the Company may also become involved in other transactions which conflict with the interests of its directors and the officers who may from time to time deal with persons, firms, institutions or companies with which the Company may be dealing, or which may be seeking investments similar to those desired by it. The interests of these persons could conflict with those of the Company. In addition, from time to time, these persons may be competing with the Company for available investment opportunities. Conflicts of interest, if any, will be subject to the procedures and remedies provided under applicable laws. In particular, if such a conflict of interest arises at a meeting of the Company’s directors, a director who has such a conflict will abstain from voting for or against the approval of such participation or such terms. In accordance with applicable laws, the directors of the Company are required to act honestly, in good faith and in the best interests of the Company.

In certain circumstances, the Company’s reputation could be damaged.

The Company believes the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis distributed to such consumers. Consumer perception of the Company's products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. 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 product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for the Company's products and the business, results of operations, financial condition of the Company.

Adverse publicity reports or other media attention regarding the safety and quality of cannabis in general, or the Company's products specifically, or associating the consumption of cannabis with illness or other negative effects

or events, could have such a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed. Although the Company believes that it takes care in protecting its image and reputation, the Company does not ultimately have direct control over how it is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to the Company’s overall ability to advance its business, thereby having a material adverse impact on the financial condition and results of operations of the Company.

Risks inherent in an agricultural business

The Company’s business involves the growing of recreational cannabis, an agricultural product. Such business will be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although all such growing is expected to be completed indoors under climate controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on any such future production.

Energy costs

The Company’s cannabis cultivation and production operations will consume considerable energy, which will make it vulnerable to rising energy costs. Accordingly, rising or volatile energy costs may, in the future, adversely impact the business of the Company and its ability to operate profitably.

Environmental laws and employee health and safety regulations

The Company’s operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non‐hazardous materials and wastes, and employee health and safety. The Company incurs ongoing costs and obligations related to compliance with environmental and employee health and safety matters. Failure to obtain an environmental compliance approval under applicable regulations or otherwise comply with environmental and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions on the Company’s manufacturing operations. In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Company’s operations or give rise to material liabilities, which could have a material adverse effect on the Company’s business, results of operations and financial condition.

Unknown environmental risks

There can be no assurance that the Company will not encounter hazardous conditions at the site of the real estate used to operate its businesses, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Company may be suspended. If the Company receives notice of a hazardous condition, it may be required to correct the condition prior to continuing construction or operations. The presence of other hazardous conditions will likely delay construction or operations and may require significant expenditure of the Company’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Company.

No guarantee on the use of available funds by the Company.

The Company cannot specify with certainty the particular uses of available funds. Management has broad discretion in the application of available funds. Accordingly, a shareholder of the Company will have to rely upon the judgment of management with respect to the use of available funds, with only limited information concerning management’s specific intentions. The Company’s management may spend a portion or all the available funds in ways that the Company’s shareholders might not desire, that might not yield a favorable return and that might not

increase the value of a purchaser’s investment. The failure by management to apply these funds effectively could harm the Company’s business. Pending use of such funds, the Company might invest the proceeds in a manner that does not produce income or that loses value.

Currency Fluctuations.

The Company’s revenues and expenses are expected to be primarily denominated in U.S. dollars, and therefore may be exposed to significant currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material adverse effect on the Company’s business, financial condition and operating results. The Company may, in the future, establish a program to hedge a portion of its foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements. However, even if the Company develops a hedging program, there can be no assurance that it will effectively mitigate currency risks.

Failure to comply with anti-bribery laws.

The Company is subject to the Corruption of Foreign Public Officials Act (Canada) (“CFPOA”) and the United States Foreign Corrupt Practices Act (“FCPA”), which generally prohibit companies and company employees from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. The CFPOA and the FCPA also require companies to maintain accurate books and records and internal controls, including at foreign controlled subsidiaries. In addition, the Company may become subject to other antibribery laws of any nations in which it conducts business that apply similar prohibitions as the CFPOA and FCPA (e.g. the Organization for Economic Co-operation and Development Anti-Bribery Convention). The Company’s employees or other agents may, without the Company’s knowledge and despite the Company’s efforts, engage in prohibited conduct under the Company’s policies and procedures and the CFPOA, the FCPA or other anti-bribery laws to which the Company may be subject for which the Company may be held responsible. If the Company’s employees or other agents are found to have engaged in such practices, the Company could suffer severe penalties and other consequences that may have a material adverse effect on the Company’s business, financial condition and results of operations.

Conflict of interest.

Certain of the Company’s directors and officers are also directors and officers of other companies. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Company’s interests. In accordance with the Business Corporations Act (British Columbia) (“BCBCA”), directors who have a material interest in any person who is a party to a material contract or a proposed material contract are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the contract.

General economic and political risks

The Company may be affected by possible political or economic instability. The risks include, but are not limited to, terrorism, military repression, extreme fluctuations in currency exchange rates, high rates of inflation or unemployment, consumer trends and spending and an outbreak of a public health crisis including epidemics, pandemics or outbreaks of new infectious diseases or viruses, as well as related events that can result in volatility and disruption to global supply chains, operations, mobility of people, patterns of consumption and services or goods. Changes in medicine and agricultural development or investment policies or shifts in political attitude in certain countries may adversely affect the Company’s business. Operations may be affected in varying degrees by government regulations with respect to restrictions on production, distribution, price controls, export controls, income taxes, expropriation of property, maintenance of assets, environmental legislation, land use, land claims of local people and water use. The effect of these factors cannot be accurately predicted.

The Company is a Canadian company and shareholder protections differ from shareholder protections in the United States and elsewhere

The Company is organized and exists under the laws of British Columbia, Canada and, accordingly, is governed by the BCBCA. The BCBCA differs in certain material respects from laws generally applicable to United States corporations and shareholders, including the provisions relating to interested directors, mergers and similar arrangements, takeovers, shareholders’ suits, indemnification of directors and inspection of corporation records.

Risks Related to the United States Regulatory System

The Company operates in a new industry which is highly regulated, highly competitive and evolving rapidly. As such, new risks may emerge, and management may not be able to predict all such risks or be able to predict how such risks may result in actual results differing from the results contained in any forward-looking statements.

The Company incurs ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions of operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company and, therefore, on the Company’s prospective returns. Further, the Company may be subject to a variety of claims and lawsuits. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business. The litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements also could occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.

The industry is subject to extensive controls and regulations, which may significantly affect the financial condition of market participants. The marketability of any product may be affected by numerous factors that are beyond the control of the Company and which cannot be predicted, such as changes to government regulations, including those relating to taxes and other government levies which may be imposed. Changes in government levies, including taxes, could reduce the Company’s earnings and could make future capital investments or the Company’s operations uneconomic. The industry is also subject to numerous legal challenges, which may significantly affect the financial condition of market participants and which cannot be reliably predicted.

Some of the Company’s planned business activities, while believed to be compliant with applicable certain U.S. state and local law, are illegal under United States federal law.

While the Company’s business activities are compliant with applicable state and local law, such activities remain illegal under United States federal law. The Company is involved in the cannabis industry in the U.S. where local and state laws permit such activities or provide limited defenses to criminal prosecutions.

Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical marijuana under the Access to Cannabis for Medical Purposes Regulations, investors are cautioned that in the United States, marijuana is largely regulated at the state level. Although certain states and territories of the U.S. authorize medical or recreational cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts under federal law under any and all circumstances under the U.S. Controlled Substances Act. An investor’s contribution to and involvement in such activities may

result in federal civil and/or criminal prosecution, including forfeiture of his, her or its entire investment.

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including but not limited to disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of marijuana licenses in the United States, the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares.

In addition, it is difficult to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

In addition, since the possession and use of cannabis and any related drug paraphernalia is illegal under U.S. federal law, the Company may be deemed to be aiding and abetting illegal activities through the contracts it has entered into and the products that it intends to provide. The Company intends to lease real estate, provide material supply agreement, and provide intellectual property to a licensed “marijuana producer” and “marijuana processor” in Washington State. As a result, U.S. law enforcement authorities, in their attempt to regulate the illegal use of cannabis and any related drug paraphernalia, may seek to bring an action or actions against the Company, including, but not limited to, aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” As a result of such an action, the Company may be forced to cease operations and its investors could lose their entire investment. Such an action would have a material negative effect on our business and operations.

The enforcement of relevant laws is a significant risk.

Thirty-three of the states in the U.S. and the District of Columbia have enacted comprehensive legislation to regulate the sale and use of medical cannabis. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule 1 controlled substance under the Controlled Substances Act. As such, cannabis-related practices or activities, including without limitation, the cultivation, manufacture, importation, possession, use or distribution of cannabis, are illegal under U.S. federal law. Strict compliance with state laws with respect to cannabis will neither absolve the Company of liability under U.S. federal law, nor will it provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may adversely affect the Company’s operations and financial performance.

Because of the conflicting views between state legislatures and the federal government of the U.S. regarding cannabis, cannabis-related operations and investments in cannabis businesses in the U.S. are subject to inconsistent legislation, regulation, and enforcement. Unless and until the U.S. Congress amends the Controlled Substances Act with respect to cannabis or the Drug Enforcement Agency reschedules or de-schedules cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law, which would adversely affect the Company’s operations in the U.S. along with any future investments of the Company in the U.S. As a result of the tension between state and federal law, there are a number of risks associated with the Company’s operations and potential future investments in the U.S. For the reasons set forth above, the Company’s existing interests in the U.S. cannabis market may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities in Canada. It has been reported by certain publications in Canada that the Canadian Depository for Securities Limited may implement policies that would see its subsidiary, CDS Clearing and Depository Services Inc. (“CDS”), refuse to settle trades for cannabis issuers that have cannabis-related operations and/or investments in the United States.

CDS is Canada’s central securities depository, clearing and settlement hub settling trades in the Canadian equity, fixed income and money markets. The TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.

On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“TMX MOU”) with 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 guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Subordinate Voting Shares to make and settle trades. In particular, the Subordinate Voting Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of the Subordinate Voting Shares through the facilities of a stock exchange.

The Company’s activities and operations in the U.S. are, and will continue to be, subject to evolving regulation by governmental authorities. The Company will be directly engaged in the medical and recreational cannabis industry in the California, where local state law permits such activities.

The Company’s cannabis operations are exclusively focused in California and Nevada, states that have legalized the recreational use of cannabis. A small portion of the Company’s operations are direct to consumer CBD (noncannabis) sales nationwide. Over half of the U.S. states have enacted legislation to legalize and regulate the sale and use of medical cannabis. However, the U.S. federal government has not enacted similar legislation. As such, the cultivation, manufacture, distribution, sale and use of cannabis remains illegal under U.S. federal law.

Further, on January 4, 2018, former U.S. Attorney General Jeff Sessions formally rescinded the standing U.S. Department of Justice (“DOJ”) federal policy guidance governing enforcement of marijuana laws, as set forth in a series of memos and guidance from 2009-2014, principally the Cole Memorandum. The Cole Memorandum generally directed U.S. Attorneys not to enforce the federal marijuana laws against actors who are compliant with state laws, provided enumerated enforcement priorities were not implicated. The rescission of this memo and other Obama-era prosecutorial guidance did not create a change in federal law as the Cole Memorandums were never legally binding; however, the revocation removed the DOJ’s guidance to U.S. Attorneys that state-regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or recreational marijuana, even if state law sanctioned such sale and disbursement. Although the rescission of the above memorandums does not necessarily indicate that marijuana industry prosecutions are now affirmatively a priority for the DOJ, there can be no assurance that the federal government will not enforce such laws in the future.

Additionally, there can be no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. It is also important to note that local and city ordinances may strictly limit and/or restrict the distribution of cannabis in a manner that could make it extremely difficult or impossible to transact business in the cannabis industry. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing state laws are repealed or curtailed, the Company’s current and future operations along with any future investments in such businesses would

be materially and adversely affected. Federal actions against any individual or entity engaged in the marijuana industry or a substantial repeal of marijuana related legislation could adversely affect the Company, its business and its potential investments.

In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018 the Canadian Securities Administrators published a Staff Notice 51-352 setting out the Canadian Securities Administrators’ disclosure expectations for specific risks facing issuers with cannabis-related activities in the U.S. Staff Notice 51-352 confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related activities. Staff Notice 51-352 includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry. The Company views this staff notice favorably, as it provides increased transparency and greater certainty regarding the views of its exchange and its regulator of existing operations and strategic business plan as well as the Company’s ability to pursue future investment and opportunities in the U.S.

The concepts of “medical cannabis” and “retail cannabis” do not exist under U.S. federal law because the U.S. Controlled Substances Act classifies “marijuana” as a Schedule I drug. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the U.S., and a lack of accepted safety for the use of the drug under medical supervision. As such, cannabis-related practices or activities, including without limitation, the manufacture, importation, possession, use or distribution of cannabis remain illegal under U.S. federal law. Although the Company’s activities are compliant with applicable U.S. state and local law, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may adversely affect the Company’s operations and financial performance.

Violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the U.S. federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licenses in the U.S., the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

There is still uncertainty surrounding the Trump Administration and Attorney General Barr and their influence and policies in opposition to the cannabis industry.

Many factors could cause the Company’s actual results, performances and achievements to differ materially from those expressed or implied by the forward-looking statements and forward-looking information, including without limitation, the following factors:

The Company operates in the cannabis sector in the U.S., where cannabis is federally illegal;
The activities of the Company are subject to evolving regulation that is subject to changes by governmental authorities in Canada and the U.S.;
Third parties with which the Company does business, including banks and other financial intermediaries, may perceive that they are exposed to legal and reputational risk because of the Company’s cannabis business activities;

The Company’s ability to repatriate returns generated from investments in the U.S. may be limited by antimoney laundering laws;
Under Section 280E of the Internal Revenue Code , normal business expenses incurred in the business of selling marijuana and its derivatives are not deductible in calculating income tax liability. Therefore, the Company will be precluded from claiming certain deductions otherwise available to non-marijuana businesses. As a result, an otherwise profitable business may in fact operate at a loss after taking into account its income tax expenses. There is no certainty that the Company will not be subject to 280E in the future, and accordingly, there is no certainty that the impact that 280E has on the Company’s margins will ever be reduced;
Federal prohibitions result in marijuana businesses being potentially restricted from accessing the U.S. federal banking system, and the Company and its subsidiaries may have difficulty depositing funds in federally insured and licensed banking institutions. This may lead to further related issues, such as the potential that a bank will freeze the Company’s accounts and risks associated with uninsured deposit accounts. There is no certainty that the Company will be able to maintain its existing accounts or obtain new accounts in the future; and
Although the TMX MOU confirms that there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, there can be no guarantee that this approach to regulation will continue in the future.

The Company’s investments and operations in the United States may be subject to heightened scrutiny.

For the reasons set forth above, the Company’s existing investments and operations in the United States, and any future investments or operations, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction. Although the TMX MOU has confirmed that there is currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the United States, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Subordinate Voting Shares to make and settle trades. In particular, the Subordinate Voting Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of the Subordinate Voting Shares through the facilities of a stock exchange.

Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in the U.S. or elsewhere. A negative shift in the public’s perception of cannabis in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand, should it decide to do so. The Company’s inability to expand its operations into other jurisdictions may have a material adverse effect on the Company’s business, financial condition and results of operations.

Unlike in Canada, which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the Access to Cannabis for Medical Purposes Regulations , investors are cautioned that in the U.S., cannabis is largely regulated at the state level. Notwithstanding the permissive regulatory environment of medical and recreational cannabis at the state level in certain states, cannabis continues to be categorized as a controlled substance under the Controlled Substances Act in the U.S. and as such, may be in violation of federal law in the U.S.

As previously stated, the United States Congress has passed the Leahy Amendment each of the last four years to prevent the federal government from using congressionally appropriated funds to enforce federal marijuana laws against regulated medical marijuana actors operating in compliance with state and local law. The 2018 Consolidated Appropriations Act was passed by Congress on March 23, 2018 and included the re-authorization of

the Leahy Amendment. It will continue in effect until September 30, 2018, the last day of fiscal year 2018.

American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals comply with state medical cannabis laws. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the Controlled Substances Act, any individual or business—even those that have fully complied with state law—could be prosecuted for violations of federal law. If Congress restores funding, for example by declining to include the Leahy Amendment in the 2019 budget resolution, or by failing to pass necessary budget legislation and causing another government shutdown, the federal government will have the authority to prosecute individuals for violations of the law before it lacked funding under the five-year statute of limitations applicable to non-capital Controlled Substances Act violations. Additionally, it is important to note that the appropriations protections only apply to medical cannabis operations and provide no protection against businesses operating in compliance with a state’s recreational cannabis laws.

As previously stated, violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licenses in the U.S., the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity or the market price of its publicly traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined.

Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the public’s perception of medical or recreational cannabis in the United States or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize medical and/or recreational cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations.

Regulatory scrutiny of the Company’s industry may negatively impact its ability to raise additional capital.

The Company’s business activities rely on newly established and/or developing laws and regulations in Washington State. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Company’s profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the U.S. Food and Drug Administration, Securities and Exchange Commission, the DOJ, the Financial Industry Regulatory Advisory or other federal, Washington State or other applicable state or nongovernmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or nonmedical purposes in the United States. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the Company’s industry may adversely affect the business and operations of the Company, including without limitation, the costs to remain compliant with applicable laws and the impairment of its ability to raise additional capital, which could reduce, delay or eliminate any return on investment in the Company.

Nature of the Business Model

The primary business of the Company (through one or more operating companies owned by the Company) is intended to be the manufacturing and distribution of cannabis edibles. Because the production and sale of recreational cannabis remain illegal under federal law, it is possible that the Company may be forced to cease activities. The U.S. federal government, through both the Drug Enforcement Agency (“DEA”) and Internal Revenue Service (“IRS”), has the right to actively investigate, audit and shut-down marijuana growing facilities, processors and retailers. The U.S. federal government may also attempt to seize the Company’s property. Any action taken by the DEA and/or the IRS to interfere with, seize, or shut down a tenant’s operations will have an adverse effect on the Company’s business, operating results and financial condition.

The Company may have difficulty accessing the service of banks and processing credit card payments in the future, which may make it difficult for the Company to operate.

In February 2014, the Financial Crimes Enforcement Network (“FinCEN”) bureau of the U.S. Treasury Department issued guidance (which is not law) with respect to financial institutions providing banking services to cannabis business, including burdensome due diligence expectations and reporting requirements. This guidance does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the DOJ, FinCEN or other federal regulators. Thus, most banks and other financial institutions do not appear to be comfortable providing banking services to cannabis-related businesses, or relying on this guidance, which can be amended or revoked at anytime.

In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the United States and may have to operate the Company’s U.S. business on an all-cash basis. The inability or limitation in the Company’s ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned. The Company is actively pursuing alternatives that ensure its operations will continue to be compliant with the FinCEN guidance and existing disclosures around cash management and reporting to the IRS once it moves from development into production.

U.S. Federal trademark and patent protection may not be available for the intellectual property of the Company due to the current classification of cannabis as a Schedule I controlled substance.

As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the Controlled Substances Act, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to the Company. As a result, the Company’s intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Company can provide no assurance that it will ever obtain any protection of its intellectual property, whether on a federal, state or local level.

The Company’s contracts may not be legally enforceable in the United States.

Because the Company’s contracts involve cannabis and other activities that are not legal under U.S. federal law and in some jurisdictions, the Company may face difficulties in enforcing its contracts in U.S. federal and certain state courts.

Due to the classification of cannabis as a Schedule I controlled substance under the Controlled Substances Act, banks and other financial institutions which service the cannabis industry are at risk of violating certain financial laws, including anti-money laundering statutes.

Because the manufacture, distribution, and dispensation of cannabis remains illegal under the Controlled Substances Act, banks and other financial institutions providing services to cannabis-related businesses risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the U.S. Bank Secrecy Act. These statutes can impose criminal liability for engaging in certain financial and monetary transactions with the proceeds of a “specified unlawful activity” such as distributing controlled substances which are illegal under federal law, including cannabis, and for failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the Controlled Substances Act. The Company may also be exposed to the foregoing risks.

In the event that any of the Company’s investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends in the foreseeable future, in the event that a determination was made that any such investments in the United States could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

Risks Related to the Company’s Securities

It may be difficult, if not impossible, for U.S. holders of the Subordinate Voting Shares to resell them over the CSE.

It has recently come to management’s attention that all major securities clearing firms in the U.S. have ceased participating in transactions related securities of Canadian public companies involved in the medical marijuana industry. This appears to be because marijuana continues to be listed as a controlled substance under U.S. federal law, with the result that marijuana-related practices or activities, including the cultivation, possession or distribution of marijuana, are illegal under U.S. federal law. However, management understands that the action by U.S. securities clearing firms also extends to securities of companies that carry on business operations entirely outside the U.S. Accordingly, U.S. residents who acquire the Subordinate Voting Shares as “restricted securities” (including any Subordinate Voting Shares pursuant to the conversion of Proportionate Voting Shares or the exercise of Options or Warrants) may find it difficult – if not impossible – to resell such shares over the facilities of any Canadian stock exchange on which the shares may then be listed. It remains unclear what impact, if any, this and any future actions among market participants in the U.S. will have on the ability of U.S. residents to resell any Subordinate Voting Shares of the Company that they may acquire in open market transactions.

The market price for the Company’s shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control.

The market price for the Company’s shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the Company’s control, including the following:

actual or anticipated fluctuations in the Company’s quarterly results of operations;
recommendations by securities research analysts;
changes in the economic performance or market valuations of companies in the industry in which the Company operates;
addition or departure of the Company’s executive officers and other key personnel;
release or expiration of lock-up or other transfer restrictions on outstanding Subordinate Voting Shares;
sales or perceived sales of additional Subordinate Voting Shares;

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or the Company’s competitors;
operating and share price performance of other companies that investors deem comparable to us; fluctuations to the costs of vital production materials and services;
changes in global financial markets and global economies and general market conditions, such as interest rates and pharmaceutical product price volatility;
operating and share price performance of other companies that investors deem comparable to the Company or from a lack of market comparable companies;
news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in the Company’s industry or target markets; and
regulatory changes in the industry.

Financial markets have recently experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Subordinate Voting Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which might result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil continue, the Company’s operations could be adversely affected, and the trading price of the Subordinate Voting Shares might be materially adversely affected.

The Company is subject to uncertainty regarding legal and regulatory status and changes.

Achievement of the Company’s business objectives is also contingent, in part, upon compliance with other regulatory requirements enacted by governmental authorities and obtaining other required regulatory approvals. The regulatory regime applicable to the cannabis business in Canada and the US is currently undergoing significant proposed changes and the Company cannot predict the impact of the regime on its business once the structure of the regime is finalized. Similarly, the Company cannot predict the timeline required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failing to obtain, required regulatory approvals may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on the business, results of operations and financial condition of the Company. The Company will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions on the Company’s operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.

The Company does not anticipate paying cash dividends.

The Company’s current policy is to retain earnings to finance the development and enhancement of its products and to otherwise reinvest in the Company. Therefore, the Company does not anticipate paying cash dividends on the Company’s shares in the foreseeable future. The Company’s dividend policy will be reviewed from time to time by the Company’s board in the context of its earnings, financial condition and other relevant factors. Until the time that the Company pays dividends, which the Company might never do, Company shareholders will not be able to receive a return on their Subordinate Voting Shares unless they sell them.

Future sales of Subordinate Voting Shares by existing shareholders could reduce the market price of the Subordinate Voting Shares.

Sales of a substantial number of Subordinate Voting Shares in the public market could occur at any time. These

sales, or the market perception that the holders of many Subordinate Voting Shares intend to sell Subordinate Voting Shares, could reduce the market price of the Subordinate Voting Shares. Additional Subordinate Voting Shares may be available for sale into the public market, subject to applicable securities laws, which could reduce the market price for Subordinate Voting Shares. Holders of options or warrants will have an immediate income inclusion for tax purposes when they exercise their options or warrants (that is, tax is not deferred until they sell the underlying Subordinate Voting Shares). As a result, these holders may need to sell Subordinate Voting Shares purchased on the exercise of Options, Warrants or Agents’ Warrants in the same year that they exercise their options. This might result in a greater number of Subordinate Voting Shares being sold in the public market, and fewer long-term holds of Subordinate Voting Shares by the Company’s management and employees.

The regulated nature of the Company’s business may impede or discourage a takeover, which could reduce the market price of the Company’s securities.

The Company requires and holds various government licenses to operate its business, which would not necessarily continue to apply to an acquiror of the Company’s business following a change of control. These licensing requirements could impede a merger, amalgamation, takeover or other business combination involving the Company or discourage a potential acquirer from making a tender offer for Subordinate Voting Shares, which, under certain circumstances, could reduce the market price of the Company’s securities.

Th ere is no assurance the Company will continue to meet the listing standards of the CSE

If the Company fails to comply with the listing standards of the CSE and the CSE delists the Subordinate Voting Shares, the Company and its security holders could face significant material adverse consequences, including:

a limited availability of market quotations for the delisted Subordinate Voting Shares;
reduced liquidity for such Subordinate Voting Shares;
a determination that such Subordinate Voting Shares are “penny stock,” which would require brokers trading in such Subordinate Voting Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for such Subordinate Voting Shares;
• a limited amount of news about the Company and analyst coverage of it; and
a decreased ability for the Company to issue additional securities or obtain additional equity or debt financing in the future.

The Company cannot assure that a market will exist or continue to develop or be sustained for its securities. If a market does not continue to develop or is not sustained, it may be difficult for investors to sell securities at an attractive price or at all. The Company cannot predict the prices at which its securities will trade.