GRUSF 6-K
Grown Rogue International Inc. (GRUSF)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
THE SECURITIES EXCHANGE ACT OF 1934
Date: May 17, 2021
Commission File No. 0-53646
Grown Rogue International Inc.
(formerly Novicius Corp.)
(Translation of Registrant’s name into English)
340 Richmond Street West
Toronto, Ontario, Canada M5V 1X2
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes ☐ No ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes ☐ No ☒
TABLE OF CONTENTS
1
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated May 17, 2021 | GROWN ROGUE INTERNATIONAL INC. | |
|---|---|---|
| (FORMERLY: NOVICIUS CORP.) | ||
| By: | /s/ Obie Strickler | |
| Name: | Obie Strickler | |
| Title: | President & Chief Executive Officer |
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Exhibit 1
Annual Information Form
GROWN ROGUE INTERNATIONAL INC.
For the year ended October 31, 2020
Dated as of March 15, 2021
Grown Rogue International Inc., and its subsidiaries,will derive substantially all of its revenues from the cannabis industry in certain states of the United States, which industry is illegalunder United States federal law. Grown Rogue International Inc. will be directly involved (through its licenced subsidiaries, affiliates,and managed entities) in the cannabis industry in the United States where local state laws permit such activities. Currently, its subsidiaries,affiliates, and managed entities are directly engaged in the cultivation, manufacture, possession, use, sale or distribution of cannabisin the medical and/or adult-use cannabis marketplaces in the States of Oregon and Michigan, as well as other states as the Company maydeem desirable or appropriate for its current and future operations.
The United States federal government regulatesdrugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule.Cannabis is classified as a Schedule I drug. Under United States federal law, a Schedule I drug or substance has a high potential forabuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision.The United States Food and Drug Administration has not approved cannabis as a safe and effective drug for any indication.
In the United States, cannabis is largely regulatedat the state level. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act, which makes cannabisuse and possession federally illegal. Although certain states authorize medical and/or adult-use cannabis production and distributionby licenced or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and anycannabis-related drug paraphernalia is illegal and any such acts are criminal acts under federal law. The Supremacy Clause of the UnitedStates Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and in case ofconflict between federal and state law, the federal law shall apply.
On January 4, 2018, former United States’Attorney General Jeff Sessions issued a memorandum to United States’ district attorneys which rescinded previous guidance from theUnited States Department of Justice specific to cannabis enforcement in the United States, including the Cole - ii - Memorandum (as definedherein). With the Cole Memorandum rescinded, United States’ federal prosecutors have been given discretion in determining whetherto prosecute cannabis related violations of United States federal law, including in jurisdictions in which the production, distributionand use of cannabis is permitted under state law.
There is no guarantee that state laws legalizingand regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limitthe applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the ControlledSubstances Act with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments therecan be no assurance), there is a risk that federal authorities may enforce current federal law. If the federal government begins to enforcefederal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state lawsare repealed or curtailed, Grown Rogue’s business, results of operations, financial condition and prospects would be materiallyand adversely affected. See the section entitled “Risk Factors” in this AIF for additional information on this risk.
In light of the political and regulatory uncertaintysurrounding the treatment of cannabis-related activities in the United States, including the rescission of the Cole Memorandum discussedabove, on February 8, 2018 the Canadian Securities Administrators published a staff notice (Staff Notice 51- 352) setting out the CanadianSecurities Administrator’s disclosure expectations for specific risks facing issuers with cannabis-related activities in the UnitedStates. Staff Notice 51-352 confirms that a disclosure-based approach remains appropriate for issuers with cannabis-related activitiesin the United States. Staff Notice 51-352 includes additional disclosure expectations that apply to all issuers with cannabis-relatedactivities in the United States, 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 Unites States cannabis industry.
Please see the table of concordance see thesection entitled “United States Regulatory Framework” in this AIF for further information on the material facts, risksand uncertainties related to issuers with cannabis-related activities in the United States.
TABLEOF CONTENTS
| ANNUAL INFORMATION FORM – Preliminary Notes | 1 |
|---|---|
| Forward-Looking INFORMATION | 1 |
| CORPORATE STRUCTURE | 2 |
| GENERAL DEVELOPMENT OF THE BUSINESS | 3 |
| DESCRIPTION OF THE BUSINESS | 18 |
| UNITED STATES Regulatory Framework | 24 |
| Risk Factors | 33 |
| DIVIDENDS and distributions | 43 |
| DESCRIPTION OF CAPITAL STRUCTURE | 43 |
| MARKET FOR SECURITIES | 48 |
| ESCROWED SECURITIES | 49 |
| DIRECTORS AND OFFICERS | 49 |
| LEGAL PROCEEDINGS and regulatory actions | 53 |
| INTERESTS OF MANAGEMENT IN MATERIAL TRANSACTIONS | 53 |
| TRANSFER AGENT AND REGISTRAR | 53 |
| MATERIAL CONTRACTS | 53 |
| Experts and INTERESTS OF EXPERTS | 54 |
| ADDITIONAL INFORMATION | 54 |
i
ANNUAL INFORMATION FORM – Preliminary Notes
This annual information form (“AIF”) of Grown Rogue International Inc. is presented on a consolidated basis with its subsidiaries: Grown Rogue Unlimited, LLC (“GRUnlimited”); Grown Rogue Gardens, LLC (“GR Gardens”); Grown Rogue Distribution, LLC (“GR Distribution”); GRU Properties, LLC (“GRU Properties”); GRIP, LLC (“GRIP”); GR Michigan, LLC (“GR Michigan”) and Idalia, LLC; (collectively, “Grown Rogue” or the “Company” and referred to individually as the context may require).
All references to “Common Shares” refer to the issued and outstanding common shares in the capital of Grown Rogue International Inc., as constituted as of the date of this AIF.
All references to “common units” refer to limited liability company common membership units in the capital of the subsidiaries, as specified by the context.
All references to “cannabis” used herein refers to any part of the plant Cannabis sativa L., growing or not, with a delta-9 tetrahydrocannabinol (“THC”) concentration of more than 0.3 percent.
All dollar amounts in this AIF are expressed in Canadian dollars unless otherwise indicated. All information in this AIF is as of October 31, 2020, unless otherwise indicated.
Forward-Looking INFORMATION
This AIF contain forward looking statements and forward-looking information within the meaning of applicable Canadian securities laws (such forward looking statements and forward-looking information being collectively hereinafter referred to as “forward-looking statements”). Such forward-looking statements are based on expectations, estimates and projections as at the date of this AIF. Any statements that involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often but not always using phrases such as “expects”, “is expected”, “anticipates”, “plans”, “budget”, “scheduled”, “forecasts”, “estimates”, “believes” or “intends”, or variations of such words and phrases (including negative and grammatical variations), or stating that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements and are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements and information concerning: availability of financing, changes in domestic and international government regulation, general economic condition, general business conditions, limited time being devoted to business by directors, escalating professional fees, escalating transaction costs, completion of acquisitions and/or sales, competition, fluctuation in foreign exchange rates, competition, stock market volatility, unanticipated operating events and liabilities inherent in industry. Readers are cautioned that the foregoing list of important factors and assumptions is not exhaustive. Forward-looking statements are not guarantees of future performance and are inherently uncertain. Events or circumstances could cause the Company’s actual results to differ materially from those estimated or projected and expressed in, or implied by, these forward-looking statements.
1
Forward-looking statements are based on the beliefs of the Company’s management, as well as on assumptions, which such management believes to be reasonable based on information available at the time such statements were made. Certain forward-looking statements relating to medical and recreational marijuana, extracts, domestic and international markets and regulation, the general expectations of the Company related thereto, and the Company’s business and operations are based on estimates prepared by the Company using data from publicly available government sources, as well as from market-research and industry analysis and on assumptions based on data and knowledge of this industry that the Company believes to be reasonable. However, by their nature, forward-looking statements are based on assumptions and involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements are subject to a variety of risks, uncertainties and other factors which could cause actual results, performance or achievements to differ from those expressed or implied by the forward-looking statements, including, without limitation, related to the following: credit risk; liquidity risk; market risk; currency risk; interest risk; concentration risk; dependence on senior management; sufficiency of insurance; competition; general business risk and liability; risks related to the Canopy Option Agreement, regulation of the marijuana industry; regulatory risks; change in laws, regulations and guidelines; reliance on licence renewal; reliance on a single facility; limited operating history; factors which may prevent realization of growth targets; risks inherent in an agricultural business; vulnerability to rising energy costs; publicity or consumer perception; product liability; product recalls; reliance on key inputs; difficulties with forecasts; exchange restrictions on business; management of growth; litigation; dividends; limited market for securities; environmental and employee health and safety regulations, which are outlined in the section entitled “Risk Factors” in this AIF. In addition, the global financial and credit markets have experienced significant debt and equity market and commodity price volatility which could have a particularly significant, detrimental and unpredictable effect on forward-looking statements.
The list of risk factors set out in this AIF is not exhaustive of the factors that may affect any forward-looking statements of the Company. Actual results, performance or achievements could differ materially from those projected in the forward-looking statements as a result of the matters set out in this AIF generally and certain economic and business factors, some of which may be beyond the control of the Company. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements or the foregoing list of factors, whether as a result of new information or future events or otherwise, except as may be required under applicable securities laws. For all of these reasons, the Company’s securityholders should not place undue reliance on forward-looking statements.
CORPORATE STRUCTURE
Name, Address and Incorporation
Grown Rogue International Inc. was amalgamated under the Business Corporations Act (Ontario) on November 30, 2009 under the name “Eagleford Energy Inc.”. The Company filed articles of amendment effective August 25, 2014 and changed its name to “Eagleford Energy Corp.”. The Company filed articles of amendment effective February 1, 2016 and changed its name to “Intelligent Content Enterprises Inc.”, and consolidated its common shares on the basis of one new share for every ten old shares. The Company filed articles of amendment effective May 26, 2017 and changed its name from “Intelligent Content Enterprises Inc.” to “Novicius Corp.” and consolidated its common shares on the basis of one new share for every ten old shares. On November 1, 2018, in preparation for the Transaction (as defined herein), the Company completed a consolidation of its common shares on the basis of 1.4 pre-consolidated common shares for one post-consolidated common share and changed its name to its current name, “Grown Rogue International Inc.”.
As of the date of this AIF, the Company has 121,990,553 Common Shares issued and outstanding (not including convertible securities). The Company has no preferred shares outstanding.
The Company’s registered and head office is located at 340 Richmond Street West, Toronto, Ontario M5V 1X2.
The Common Shares trade under the trading symbol “GRIN” on the Canadian Securities Exchange (the “CSE”) and are quoted on the OTCQB Venture Market in the United States under the symbol “GRUSF”.
2
Inter-corporate Relationships
Set out below is the structure of the Company and its material subsidiaries, including the jurisdiction of incorporation of the applicable subsidiary owned, controlled or directed by the Company:
| Grown Rogue International Inc.<br><br> <br>(Ontario) | ||||
|---|---|---|---|---|
| Grown Rogue Unlimited, LLC<br><br> <br>(Oregon) | ||||
| Grown Rogue<br><br> Gardens, LLC<br><br> (Oregon) | Grown Rogue <br><br>Distribution, LLC <br><br>(Oregon) | Idalia, LLC <br><br>(Oregon) | GRIP, LLC<br><br> <br>(Oregon) | GR Michigan, LLC <br><br>(Michigan) |
| Notes: | ||||
| --- | ||||
| (1) | The Company holds 100% of the equity of Grown Rogue Unlimited, LLC. | |||
| --- | --- | |||
| (2) | Grown Rogue Unlimited, LLC holds 100% of the equity of: Grown Rogue Gardens, LLC, GRU Properties, LLC<br>and GRIP, LLC; approximately 89% of the equity of Grown Rogue Distribution, LLC, 87% of the equity of GR Michigan, LLC; and 60% of the<br>equity of Idalia, LLC. | |||
| --- | --- | |||
| (3) | In addition to the entities shown above, Grown Rogue Unlimited, LLC holds 100% of the equity of: GRU Properties,<br>LLC, an Oregon Limited Liability Company, which holds certain leases; and Grip, LLC an Oregon Limited Liability Company, which holds certain<br>intellectual property assets. | |||
| --- | --- | |||
| (4) | Grown Rogue Unlimited, LLC holds an option to acquire an 87% equity interest in Canopy Management, LLC,<br>a Michigan Limited Liability Company controlled by Obie Strickler, the Company’s Chief Executive Officer. Canopy Management, LLC<br>has an option to acquire a 60% equity interest in Golden Harvests, LLC a licenced operator with an approximately 80,000 sq. ft. cannabis<br>cultivation facility located in Bay City, Michigan. See “Events During the Financial Year Ended 2020 – Transaction withGolden Harvests, LLC” and “Risk Factors – Golden Harvests, LLC”. | |||
| --- | --- |
GENERAL DEVELOPMENT OF THE BUSINESS
General
The Company is a cannabis company with operations primarily in the states of Oregon and Michigan whose mission is to inspire consumers to “enhance experiences” through cannabis. The Company has combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight-based product categorization, to create innovative products thoughtfully curated from “seed to experience”. The Grown Rogue families of products include sun grown and indoor premium flower, and patented nitro sealed indoor and sun grown pre-rolls and jars.
On October 31, 2018, Grown Rogue Unlimited LLC (“GR Unlimited”), Novicius Corp. (“Novicius”), Grown Rogue Canada Inc. (“Grown Rogue Canada”) and Novicius Acquisition Corp. (“Novicius AcquisitionCo”) entered into a definitive transaction agreement which set out the terms for the reverse take-over of Novicius by GR Unlimited and the related transactions, including the GR Acquisition described below (the “Transaction”). The Company began trading its Common Shares through the facilities of the CSE under the symbol “GRIN” on November 26, 2018.
As part of the Transaction, the Company changed its name from “Novicius Corp.” to “Grown Rogue International Inc.” and consolidated its existing common shares on the basis of one Common Share for each 1.4 existing Common Shares. The unitholders of GR Unlimited exchanged their equity membership interests in GR Unlimited for Common Shares of the Company on a one-for-one basis. The Transaction resulted in the Company becoming the owner of all of the equity membership interests in GR Unlimited. In connection with the Transaction, GR Unlimited, directly and through Grown Rogue Canada, raised approximately CAD$6.5 million through brokered and non-brokered private placements.
3
In the three year history summary below, references to “Grown Rogue” or the “Company” for the period prior to the completion of the Transaction, refer to GR Unlimited.
History of Grown Rogue Prior to Completionof the Transaction
Prior to the completion of the Transaction, the Company developed a technology-based platform, through its wholly owned subsidiary DoubleTap Daily Inc. (“DoubleTap”) creating a digital media asset. Upon completion of the Transaction, the Company divested itself of DoubleTap and its former business.
Grown Rogue was formed on October 31, 2016 under the name “Grown Rogue Unlimited, LLC” to establish a fully integrated, seed to experience cannabis brand delivering high quality, consistent product to cannabis users in the state of Oregon. Grown Rogue manages indoor and outdoor growing facilities in the Rogue Valley of Southern Oregon to take advantage of the unique microclimates inherent to each of the various farm locations that helps create varied flavor and product profiles while retaining the unique core characteristics consumers’ desire.
Grown Rogue, an Oregon cannabis management company, through its subsidiaries, Grown Rogue Gardens, LLC (“GR Gardens”) and Grown Rogue Distribution, LLC (“GR Distribution”), acquired four licences (three producer licences for its cultivation facilities held by GR Gardens and one wholesale licence held by GR Distribution) to do business in the Oregon recreational marijuana market. Grown Rogue, through GR Gardens and GR Distribution, has been a licence holder operating in the Oregon recreational marijuana market since July of 2017.
Events During the Financial Year Ended 2017
Promissory Note Offerings
On February 1, 2017, Grown Rogue issued an unsecured promissory note in the principal amount of US$50,000 with simple interest accruing at a rate of 12% per annum. The promissory note was subsequently assigned to Grown Rogue’s wholly owned subsidiary, GRU Properties, LLC. All required payments under the note have been made as of the date of this AIF.
On October 1, 2017, Grown Rogue issued a note payable in the principal amount of US$500,000 with simple interest accruing at a rate of 25% per annum. Effective December 15, 2017, the note was exchanged for a convertible promissory note in the principal amount of US$500,000 with simple interest accruing at a rate of 25% per annum.
Convertible Promissory Note Offerings
On February 1, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$100,000 with simple interest accruing at a rate of 15% per annum. Prior to the Transaction, the original principal amount of the note and all accrued and unpaid interest was converted into 557,151 common units.
On February 1, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$100,000 with simple interest accruing at a rate of 15% per annum. Prior to the Transaction, the original principal amount of the note and all accrued and unpaid interest was converted into 485,379 common units.
4
On June 1, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$637,775 to J. Obie Strickler, the Company’s current Chief Executive Officer, with simple interest accruing at a rate of 25% per annum. On June 1, 2018, the original principal amount of the note and all accrued and unpaid interest was converted into 4,350,823 common units.
On July 26, 2017, Grown Rogue’s wholly owned subsidiary, GRU Properties, issued an unsecured convertible promissory note in the principal amount of US$100,000 (“GRU Properties Note 1”), with simple interest accruing at a rate of 50% per annum for the first six months. GRU Properties Note 1 became due on February 1, 2018 and was extended by the holder for an additional six months. On January 31, 2018, US$50,000 of the principal was repaid, the remaining principal of US$50,000 was extended to August 1, 2018 and $25,000 of accrued and unpaid interest was converted into common units of GR Unlimited. On August 1, 2018, the holder accepted a new convertible promissory note of US$57,500 in exchange for the previous note in the amount of US$50,000 and US$7,500 of accrued interest. The new note had a maturity date of August 1, 2019 and interest of 12.5% per annum. Prior to the Transaction, the holder converted the note and accrued interest into common units, including the conversion of GRU Properties Note 2 (as defined below).
On July 27, 2017, Grown Rogue’s wholly owned subsidiary, GRU Properties issued an unsecured convertible promissory note in the principal amount of US$100,000 (“GRU Properties Note 2”), with simple interest accrued at 50% per annum for the first six months. GRU Properties Note 2 became due on February 2, 2018 and was extended by the holder for six months. On January 31, 2018, the note and unpaid interest of US$25,000 were converted into 89.8 common units of GR Unlimited. Prior to the Transaction, the holder converted US$50,000 of the principal balance of GRU Properties Note 1 and US$100,000 of the principal balance of GRU Properties Note 2, and accrued interest from both notes, into 462,500 common units.
On October 1, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$250,000 to J. Obie Strickler with simple interest accruing at a rate of 50% per annum. On March 31, 2018, the principal and all accrued and unpaid interest was converted into 1,644,188 common units.
On October 20, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$100,000 with simple interest accruing at a rate of 50% per annum. The principal amount of the promissory note was repaid off on December 1, 2018, and the remaining accrued interest of US$40,000 owing thereon was settled by a cash payment of US$30,000 in May of 2020.
On October 23, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$50,000 with simple interest accruing at a rate of 50% per annum. Prior to the Transaction, the holder converted the original principal amount of US$50,000 and all accrued and unpaid interest into 174,079 Common Shares.
On November 7, 2017, Grown Rogue issued a convertible promissory note in the principal amount of US$300,000 to Jacques Habra, a former officer of Grown Rogue, with simple interest accruing at a rate of 50%. Prior to the Transaction, the original principal amount of the note and all accrued and unpaid interest was converted into 1,585,714 common units.
On November 14, 2017, Grown Rogue entered into an agreement with certain purchasers to issue a series of notes in the aggregate principal amount of US$550,000, with substantially similar terms, including maturity, interest rates, and conversion terms. Approximately one-half of the principal and accrued but unpaid interest was paid by Grown Rogue on August 20, 2018. The remaining principal and any accrued but unpaid interest was paid on October 31, 2018.
On December 15, 2017, Grown Rogue issued an unsecured convertible promissory note in the principal amount of US$1,000,000, such note accruing simple interest at a rate of 25% per annum. Of the US$1,000,000 principal, US$500,000 was comprised of the exchange of the promissory note issued on October 1, 2017, described above. Prior to the Transaction, the original principal amount of the note and all accrued and unpaid interest was converted into 4,782,284 Common Shares.
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Asset Transfer from Canopy Wyoming
In January of 2017, Grown Rogue completed an asset transfer with Canopy Management, LLC (“Canopy Wyoming”), a Wyoming limited liability company that controlled facilities that operated as an Oregon medical cannabis producer under the Oregon Medical Marijuana Program. The acquisition with Canopy Wyoming was a related party transaction given that, at the time of the transaction, Mr. J. Obie Strickler was the majority owner and sole manager of Canopy Wyoming and the sole owner and manager of Grown Rogue. Under the terms of the asset transfer agreement (the “CanopyManagement Agreement”), Grown Rogue acquired the assets and related equipment for the Manzanita Glenn and Trail’s End facilities (as described below) and assumed the leases from Canopy Wyoming. Canopy Wyoming transferred title of assets which comprised approximately 50% of the assets of Canopy Wyoming at that time, by contributing equipment in the amount of $144,379 as a capital contribution in Grown Rogue. Canopy Wyoming had initially acquired the purchased assets for approximately US$125,000 in June 2016, which was the cost of development of the properties for cultivation. Grown Rogue, through its wholly owned subsidiary, GR Gardens, has retrofitted and converted the former Canopy Wyoming medicinal facilities into new licenced production facilities solely for the recreational market.
In addition, Canopy Wyoming sold finished product inventory to GR Gardens on May 1, 2017 payable to Canopy Wyoming in cash when such inventory was processed and sold into the Oregon recreational market. The amount GR Gardens agreed to pay Canopy Wyoming would be reflective of market prices of the product to retail locations (without additional margin for GR Gardens). All inventory previously owned by Canopy Wyoming has been liquidated and the amount owed to Canopy Wyoming was adjusted to reflect market price conditions at the time of sale by GR Gardens in the recreational market. Accordingly, the then current adjusted amount owed to Canopy Wyoming for the purchased inventory was US$180,799.
Cal-Green Transaction
On December 1, 2017, Grown Rogue entered into a technology licence agreement (the “Technology Licence Agreement”) with Cal-Green Farms Inc. (“Cal-Green”). Under the terms of the agreement, Cal-Green granted to Grown Rogue the exclusive licence to certain intellectual property in the field of development, breeding, cultivation, growing, harvesting, processing and commercializing cannabis, hemp and related plants and products known as the “Progenix” technology (the “Technology”). In exchange for the Technology, prior to the Transaction Grown Rogue issued 6,600,000 common units to Cal-Green which were distributed to the beneficial owners of Cal-Green on a pro-rata basis. This transaction was completed between arm’s-length parties.
The Transaction
On September 28, 2017, Novicius and Grown Rogue announced that the parties had entered into a non-binding letter of intent (the “Letter of Intent”) to effect a business combination of the parties. The Letter of Intent was superseded by the definitive agreement (the “Definitive Agreement”) dated October 31, 2018, providing for the terms and conditions on which the parties would consummate the Transaction.
Events During the Financial Year Ended 2018
Summary of the Transaction
On October 31, 2018, the Novicius, Grown Rogue, Grown Rogue Canada and Novicius AcquisitionCo entered into the Definitive Agreement which set out the terms for the reverse take-over of Novicius by Grown Rogue.
6
Grown Rogue Canada raised funds in connection with the Transaction by offering the Brokered Subscription Receipts (as defined herein) and subsequently amalgamated with Novicius AcquisitionCo on the closing of the Transaction.
The closing of the Transaction, which included the transactions and financings described below, was completed on November 15, 2018. On the closing date of the Transaction, Novicius acquired the business of Grown Rogue and the funds raised by Grown Rogue Canada.
GR Acquisition
In November of 2018, the securityholders of GR Unlimited entered into agreements with Novicius whereby Novicius acquired 100% of the total number of units, warrants and debentures of GR Unlimited (the “GR Acquisition Agreements”). Pursuant to the terms of the GR Acquisition Agreements, the unitholders of GR Unlimited agreed to exchange all of their common units for Common Shares of Grown Rogue International Inc., the entity resulting from the completion of the Transaction so that, after the completion of such exchange, the Company became the owner of 100% of the total number of units of GR Unlimited (the “GR Acquisition”). As such, the GR Acquisition resulted in a total of 60,746,202 common units being exchanged for 60,746,202 Common Shares at a deemed price of $0.44 per share. Similarly, the holders of warrants and convertible debentures of GR Unlimited exchanged such securities for warrants and convertible debentures, with substantially the same terms, of Grown Rogue on a one for one basis. The transaction was completed on November 15, 2018, which resulted in the Company becoming the 100% owner of GR Unlimited.
Although the GR Acquisition resulted in GR Unlimited becoming a wholly-owned subsidiary of the Company, the GR Acquisition constituted a reverse take-over of the Company in as much as the former unitholders of GR Unlimited own a majority of the outstanding shares of the Company.
Non-Brokered Offering of Subscription Receiptsby Grown Rogue
As part of the Transaction, GR Unlimited completed a non-brokered private placement of subscription receipts (the “GRU Subscription Receipts”) on August 14, September 6, September 11 and October 9, 2018 for gross proceeds of $1,659,250 with each GRU Subscription Receipt being sold for $0.44. Under its terms, each GRU Subscription Receipt was automatically converted and immediately cancelled, without any further action by the holder of such GRU Subscription Receipt, and for no additional consideration, into one unit of GR Unlimited (the “GR Units”) upon the satisfaction of certain conditions. Each GR Unit consists of one common unit and one GR Unlimited purchase warrant (the “GRWarrants”). Each GR Warrant being exercisable into one common unit of GR Unlimited at an exercise price of $0.55 per unit for 24 months.
On November 15, 2018 and the GRU Subscription Receipts were converted into 3,771,023 common units and 3,771,023 GR Warrants. The common units and GR Warrants issued upon conversion of the GRU Subscription Receipts were exchanged on a one for one basis for Common Shares and RTO Warrants (as defined below), respectively, pursuant the GR Acquisition Agreements.
The offering of GRU Subscription Receipts resulted in net proceeds of $1,601,176, after deducting the fees and expenses of the agent.
Offering of Convertible Debentures by GrownRogue
As part of the Transaction, GR Unlimited completed a private placement of convertible debentures (the “Debentures”) on August 14, 2018 for gross proceeds of $1,500,000. A rate of interest of 2% per quarter from the date of issuance of the Debentures was payable quarterly in arrears on the last day of March, June, September and December of each year. The Debentures matured on August 14, 2020. The Debentures were convertible into common units of Grown Rogue at a price of $0.44 per unit and the Debentures are secured by a general security agreement granting a security interest in all of Grown Rogue’s and its subsidiaries’ property and assets.
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The Debentures were exchanged for debentures of the Company, on substantially the same terms, upon the completion of the GR Acquisition (the “RTO Debentures”). The principal amount outstanding together with any unpaid interest is convertible, in part or whole, into Company Shares, at the option of the debenture holders at the conversion price of $0.44 per share (the “Conversion Price”). If at any time the RTO Debentures are outstanding, the Company issues securities at a price lower than the Conversion Price, then the Company will adjust the Conversion Price down to that same price. See “Events During the Financial Year Ended 2020 – Amendment of Convertible Debentures andWarrant Cancellation”.
As part of GR Unlimited’s Debenture offering, Grown Rogue Canada offered GRC Warrants (as defined below) to the purchasers of the Debentures at a purchase price of $0.0001 per warrant. The purchasers of the Debentures subscribed for 3,409,091 GRC Warrants (as defined below). The GRC Warrants (as defined below) were exchanged for RTO Warrants (as defined below) pursuant to the Amalgamation. If at any time the Debentures are outstanding, the Company issues warrants at price lower than the exercise price of the RTO Warrants (as defined below), then the Company will adjust the exercise price of the RTO Warrant’s held by the holders of the Debentures to that same exercise price.
The offering of Debentures resulted in net proceeds of $1,395,000, after deducting the fees and expenses of the agent. The net proceeds of this financing were used by GR Unlimited for its warehouse buildout in Oregon, working capital purposes and preparation for its California expansion. See “Events During the FinancialYear Ended 2018 – GRD Cali, LLC”.
Offering of Option by Grown Rogue
On October 30, 2018, Grown Rogue issued an option for $649,079 to purchase 1,475,179 common units and warrants to purchase 1,675,179 common units for an exercise price of $0.55 per common unit. Prior to the Transaction, the option was exercised and the underlying securities were exchanged for 1,475,179 Common Shares and 1,675,179 RTO Warrants with an exercise price of $0.55 per share. At the time of issuance, the RTO Warrants expired two years following the date of the Transaction, however the expiry date was subsequently automatically extended for an additional three years in accordance with the terms and conditions of the certificates evidencing the RTO Warrants. The Company has the right to accelerate the expiry date of the RTO Warrants during the extended term if the Common Shares close at or above $0.70 per share for a period of twenty (20) consecutive trading days on the CSE. The Company is entitled to accelerate the expiry of the RTO Warrants during the extended term to that date that is not less than 45 days from the date of delivery of a notice to the holder announcing the exercise of the acceleration right.
Brokered Offering of Subscription Receiptsby Grown Rogue Canada
Grown Rogue Canada, a related entity of Grown Rogue, completed a brokered private placement of subscription receipts (the “Brokered Subscription Receipts”) for $0.44 per Brokered Subscription Receipt on July 5, August 14, September 19 and October 30, 2018 for gross proceeds of $2,725,323. Under its terms, each Brokered Subscription Receipt was automatically converted and immediately cancelled, without any further action by the holder of such Brokered Subscription Receipt, and for no additional consideration, into one unit of Grown Rogue Canada (the “GRC Units”) upon the satisfaction of certain conditions. The Brokered Subscription Receipts were issued pursuant to the terms of a subscription receipt agreement (the “Subscription Receipt Agreement”) dated July 5, 2018 between Grown Rogue Canada, M Partners Inc., as lead agent, and Capital Transfer Agency, ULC, as subscription receipt agent (the “Escrow Agent”). Each GRC Unit consisted of one share in the capital of Grown Rogue Canada (the “GRC Shares”) and one Grown Rogue Canada common share purchase warrant (the “GRC Warrants”). Each GRC Warrant was exercisable into one GRC Share at an exercise price of $0.55 per GRC Share for 24 months.
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On November 15, 2018 and the Brokered Subscription Receipts were converted into 6,193,917 GRC Shares and 6,193,917 GRC Warrants. The GRC Shares and GRC Warrants issued upon conversion of the Brokered Subscription Receipts were immediately exchanged, without additional consideration, for Common Shares and RTO Warrants (as defined below), respectively, on completion of the Amalgamation (see below). Each RTO Warrant was exercisable into one Common Share at an exercise price of $0.55 per Common Share for 24 months. The RTO Warrants expired on November 15, 2020.
M Partners Inc. and PI Financial Corp. (the “Agents”) offered the Brokered Subscription Receipts to prospective purchasers on a reasonable best efforts agency private placement basis and, in connection therewith, Grown Rogue Canada, Grown Rogue, Novicius and the Agents entered into an agency agreement (the “AgencyAgreement”) pursuant to which the Agents received an aggregate cash commission equal to 7% of the gross proceeds of the offering, less a $10,000 work fee which has already been paid to the Agent, subject to certain exceptions mentioned below (the “Agent’sFee”). In addition, the Agents received on closing a number of broker warrants (the “GRC Broker Warrant” and together with the Agent’s Fee, the “Agent’s Compensation”) equal to 7% of the number of Brokered Subscription Receipts issued under the offering subject to certain reductions in respect of purchasers on a president’s list (“President’sList”) submitted by the Company to the Agents. Each GRC Broker Warrant entitled the holder thereof to subscribe, at the offering price of $0.44, for one GRC Unit for 24 months following the closing. The Agent received on closing an aggregate cash fee of 3.5% of the gross proceeds raised from investors on the President’s List and a number of GRC Broker Warrants equal to 3.5% of the number of Subscription Receipts sold to investors on the President’s List, in lieu of the Agent’s Compensation.
Pursuant to the Agency Agreement, the Agents’ also received an aggregate cash commission of 3.5% of the gross proceeds of the GRU Subscription Receipts offering, and GRC Broker Warrants equal to 3.5% of the number of GRU Subscription Receipts sold to investors. Pursuant to the Agency Agreement, the Agents’ also received an aggregate cash commission of 7% of the gross proceeds of the offering of Debentures and GR Broker Warrants equal to 7% of the number of common units convertible under the Debentures.
The net proceeds from the offering of Brokered Subscription Receipts (together with accrued interest) was $2,585,667 after deducting the applicable Agent’s Fee and expenses of the Agent and the Escrow Agent, and was released to Grown Rogue Canada upon satisfaction of the escrow release conditions which occurred on November 15, 2018.
Amalgamation between Grown Rogue Canadaand Novicius AcquisitionCo
Pursuant to the terms of the Definitive Agreement, the Novcius acquired all of the issued and outstanding shares of Grown Rogue Canada by way of a three-cornered amalgamation, resulting in the formation of Grown Rogue Canada Corp. (“Amalco”) (the “Amalgamation”). As a result of the Amalgamation, all of the shares of Grown Rogue Canada (the “GRC Shares”) and Novicius AcquisitionCo (“Novicius AcquisitionCoShares”) were exchanged into an equal amount of Common Shares. Out of 7,133,707 Common Shares issued under the Amalgamation: 6,193,917 shares were issued for the benefit of the purchasers of the Brokered Subscription Receipts, 839,790 shares were issued to Debt Conversion participants and 100,000 were issued for services to a director of Grown Rogue Canada. All Common Shares under the Amalgamation were issued at a deemed price of $0.44 per share. In consideration of the issue by the Company of the Common Shares to the former shareholders of Grown Rogue Canada, Amalco issued to the Resulting Issuer one common share of Amalco for each Common Share issued to the shareholders of Grown Rogue Canada. The Company also received one share of Amalco in exchange for each issued and outstanding share of Novicius AcquisitionCo held by the Company. As a result of the Amalgamation, Amalco became a wholly-owned subsidiary of the Company. The GRC Warrants were exchanged, without additional consideration or action, for the same number of common share purchase warrants of the Company (the “RTO Warrants”). In addition, the GRC Broker Warrants were exchanged, without additional consideration or action, for the same number of broker warrants of the Company (the “RTO Broker Warrants”). In addition, the Novicius AcquisitionCo Warrants were exchanged for the same number of RTO Warrants. Each RTO Warrant is exercisable into one Common Share at an exercise price of $0.55 per Common Share for 24 months. Each RTO Broker Warrant being exercisable into one Common Share and one RTO Warrant at an exercise price of $0.44 per unit for 24 months.
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In accordance with debt settlement agreements between the Issuer and certain of its arm’s length and non-arm’s length creditors, the parties agreed to assign an aggregate of $369,508 in indebtedness owing to the Issuer to Novicius AcquisitionCo. The debt was subsequently converted (the “Debt Conversion”) into 839,790 units of Novicius AcquisitionCo at $0.44 per unit (the “Debt Conversion Units”). Each Debt Conversion Unit was comprised of one common share of Novicius AcquisitionCo (a “Debt Conversion Share”) and one Novicius AcquisitionCo purchase warrant (“Novicius AcquisitionCo Warrants”). Each Novicius AcquisitionCo Warrant being exercisable into one common share at an exercise price of $0.55 per share for 24 months. In accordance with the Definitive Agreement, the Debt Conversion Shares were exchanged for 839,790 Common Shares at the time of the Amalgamation, and the 839,790 Novicius AcquisitionCo Warrants were exchanged, without additional consideration or action, for the same number of RTO Warrants.
GRD Cali, LLC
On December 5, 2018, Grown Rogue announced that it had entered into a strategic partnership pursuant to which the Company would have the use of a 16,000 square foot building in the heart of California’s cannabis growers’ region, Humboldt County, California as part of its multi-state expansion into California. Grown Rogue established GRD Cali, LLC (“GRD Cali”) for its California operations and has received licensing approval from the City of Eureka. GRD Cali was sold in 2019 for a purchase price of US$85,000. See “Sale of Former California Subsidiary” below.
Partnership with Chocolatier
On December 10, 2018, Grown Rogue announced that it had entered into a partnership with Jeff Shepherd with respect to THC and CBD infused chocolate products under the Company’s GRAM and Grown Rogue brands. As of the date of this AIF, the THC and CBD infused chocolate products are not an integral part of Grown Rogue’s business.
Events During the Financial Year Ended 2019
Blue Zebra Option Agreement
On January 15, 2019, the Company announced the signing of a memorandum of understanding to expand its brand and products into Michigan, through a strategic partnership with established local cannabis operators and investors. The Company entered into binding agreement (the “Blue Zebra Option Agreement”) with Blue Zebra Community LLC (“Blue Zebra”), pursuant to which the Company had the option to acquire operational control of certain cannabis related assets in Michigan pending municipal and state regulatory approval. The Blue Zebra Option Agreement was subsequently terminated and superseded by the Blue Zebra Termination Agreement, see “Blue Zebra Termination Agreement” below for further details.
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Non-Brokered Offering of Convertible Debentures
On May 7, 2019, Grown Rogue completing a non-brokered private placement of secured convertible debentures (the “Convertible Debentures”) with an aggregate principal amount of $1,500,000. The Convertible Debentures bear interest at a rate of 2% per calendar quarter and mature on August 10, 2020. The Convertible Debentures are convertible into Common Shares at a conversion price that is the lesser of: (i) $0.44 per Common Share, or (ii) the lowest price for which securities of the Company are issued while such Convertible Debentures remain outstanding (the “Conversion Price”). If, within 90 days of the issuance of the Convertible Debentures, the Company fails to complete an offering of securities for gross proceeds of at least $1,000,000, then the Conversion Price shall be reduced to $0.30 per Common Share. On closing, the Company issued to the purchasers of the Convertible Debentures 3,409,091 common share purchase warrants (the “CD Warrants”). The CD Warrants are exercisable for a period of two (2) years from issuance into Common Shares at an exercise price equal to the lesser of (i) $0.55 per Common Share; or (ii) the lowest price for which warrants of the Company are issued while such CD Warrants remain outstanding. If, during the term of the CD Warrants, the Company issues warrants with an exercise price below $0.55 per Common Share (the “Other Warrants”), the Company will issue to the purchasers, on the same terms and conditions of the Other Warrants, additional warrants to equal the number of CD Warrants that would have been issued if the reduced offering price was used to calculate the number of CD Warrants issued. The principal use of funds was for continued expansion investment in the Michigan assets, namely one cultivation center, and two retail dispensaries
- including a midtown Detroit location. Additional funds were dedicated to go-to-market strategies in California featuring Grown Rogue branded products and wholesale products.
OTCQB Venture Market Listing
On May 14, 2019, the Company announced that its Common Shares commenced trading on the OTCQB Venture Market under the symbol “GRUSF”.
Inferno Gardens Transaction
On June 7, 2019, Grown Rogue announced that it had entered into a binding letter of intent (the “Inferno Gardens LOI”) to expand further into Michigan through a strategic acquisition and partnership with Inferno Gardens Inc. (“Inferno Gardens”), an experienced cannabis operator in Muskegon whose assets include the local approval for one retail dispensary and a 24,000 square foot indoor manufacturing facility that will include both cultivation and processing when fully constructed. The Inferno Gardens LOI lapsed on August 31, 2019 in accordance with the terms of the Inferno Gardens LOI and the transactions contemplated thereby were ultimately not consummated as proposed.
Receipt of Full Patent from the United StatesPatent and Trademark Office
On July 22, 2019, Grown Rogue announced that the United States Patent and Trademark Office (“USPTO”) awarded the Company with a patent for its innovative “Certified Fresh” Nitrogen Sealed Pre-Rolls. The Nitrogen Sealing Process eliminates oxygen through nitrogen injection which preserves the freshness of the dried cannabis flower.
Blue Zebra Termination Agreement
On August 2, 2019, Grown Rogue announced the termination of the Blue Zebra Option Agreement. In connection with the termination, Grown Rogue and Blue Zebra entered into a termination agreement (the “Blue Zebra Termination Agreement”), pursuant to which Grown Rogue issued to Blue Zebra 2,148,117 common share purchase warrants with an exercise price of $0.44 per share (the “Blue Zebra Warrants”). The Blue Zebra Warrants expire on June 28, 2023. Grown Rogue will have the right to accelerate the expiry date of 25% of the Blue Zebra Warrants during the term if the shares of Grown Rogue close at or above $1.00 per share for a period of twenty (20) consecutive days. An additional 25% of the Blue Zebra Warrants will accelerate if the shares of Grown Rogue close at or above $1.50 per share for a period of twenty (20) consecutive days, and the remainder of the Blue Zebra Warrants will accelerate if the shares of the Grown Rogue close at or above $2.00 per share for a period of twenty (20) consecutive days. Further, Grown Rogue had granted to Blue Zebra a pre-emptive right to maintain ownership of up to 5% of Grown Rogue’s Common Shares, which right has expired as of the date of this AIF. The Blue Zebra Warrants vest 40% on the issuance date with the remaining Blue Zebra Warrants vesting upon certain events relating to the activities of Helios Holdings, LLC in the Michigan cannabis industry. As of the date of this AIF, 40% of the Blue Zebra Warrants have vested in accordance with the terms and subject to the conditions of the Blue Zebra Termination Agreement.
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Issuance of Securities for Services
On October 2, 2019, Grown Rogue announced the issuance of an aggregate of 754,000 Common Shares to certain directors, officers and consultants of the Company as compensation for services previously provided to the Company.
On November 14, 2019, Grown Rogue announced the issuance of an aggregate of 1,058,750 Common Shares to certain directors, officers and consultants of the Company as compensation for services previously provided to the Company.
Events During the Financial Year Ended 2020
Non-Brokered Offering of Units
On February 10, 2020, Grown Rogue announced that it had completed the first tranche of a non-brokered private placement offering through the issuance of 5,000,000 units at a price of $0.10 per unit for gross proceeds of $500,000. Each unit issued in connection therewith being comprised of one Common Share in the capital of the Company and one common share purchase warrant, each warrant entitling the holder thereof to acquire one Common Share at a price equal to 25% premium of the unit price until February 10, 2022. The Company has the right to accelerate the expiry of the warrants to thirty (30) days following written notice to the holder if the shares close at or above $0.25 per share for a period of ten (10) consecutive trading days on the CSE. The second tranche was completed on May 15, 2020, whereby the Company issued 10,000,000 units of the Company at a price of $0.10 per unit for total gross proceeds of $1,000,000.
In connection with the non-brokered private placement of units, Grown Rogue provided Plant Based Investment Corp. (formerly, Cannabis Growth Opportunity Corporation) (“PBIC”) with a pre-emptive right to participate in future offerings of Grown Rogue securities in order to maintain its percentage of ownership at the time of such offering.
In addition, Grown Rogue agreed to nominate one person recommended by PBIC for election as a director of the Company at future meetings of the Company’s shareholder where directors are to be elected and the ability, while PBIC does not have its nominee on the Company’s board, to appoint a board observer. In addition, PBIC and Grown Rogue entered into subscription agreements to exchange approximately $1,500,000 worth of each other’s shares (the “Share Swap”). Under the terms of the Share Swap, Grown Rogue received 2,362,204 common shares of PBIC at a price of $0.635 per share, and PBIC received 15,000,000 Common Shares at a price of $0.10 per share. As part of the Share Swap, each of PBIC and Grown Rogue signed a voting and resale agreement (the “Cannabis Growth Voting and Resale Agreement”) providing that each party will be required to vote the shares acquired under the Share Swap as recommended by the other party and will be restricted from trading the shares for a period of 18 months.
Transaction with Golden Harvests, LLC
GR Michigan entered into an option to purchase controlling interest agreement (the “Original Golden Harvests Option Agreement”) dated February 6, 2020, with David Pleitner and Allan Pleitner (collectively, the “Golden Harvests Optionors”), pursuant to which the Golden Harvests Optionors granted to GR Michigan the option to acquire 60% of the outstanding membership interests of Golden Harvests, LLC (“GoldenHarvests”). Golden Harvests is a Michigan limited liability company and licenced operator with an approximately 80,000 sq. ft. cannabis cultivation facility located in Bay City, Michigan. GR Michigan also entered into an exclusive management services agreement with Golden Harvests on such date to provide consulting services to it for a variety of business functions primarily focused on cultivation, sales, branding and marketing, and compliance.
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Subsequently, the transaction as initially contemplated by the Original Golden Harvests Option Agreement was restructured with the aim of expediting the regulatory approvals needed to complete the indirect acquisition by the Company of a 60% equity interest in Golden Harvests. To this end, on February 4, 2021, the parties to the Original Golden Harvests Option Agreement entered into an agreement terminating such agreement. On the same date, the Golden Harvests Optionors and Canopy Management, LLC (“Canopy Management”), a Michigan registered company controlled by Obie Strickler, the Company’s Chief Executive Officer, entered into an option to purchase controlling interest agreement (the “Golden HarvestsOption Agreement”), pursuant to which the Golden Harvests Optionors granted to Canopy Management an option (the “GoldenHarvests Purchase Option”) to acquire 60% of the outstanding membership interests of Golden Harvests at any time prior to February 4, 2023. Also, on February 4, 2021, Mr. Strickler and GR Unlimited entered into an option agreement (the “Canopy Purchase OptionAgreement”), pursuant to which Mr. Strickler granted to GR Unlimited an option (the “Canopy Purchase Option”) to acquire 87% of the outstanding membership interests in Canopy Management at any time prior to February 4, 2023.
In consideration for the Canopy Purchase Option and the purchase of the membership interest in Canopy Management, upon any exercise of the Canopy Purchase Option pursuant to the terms of the Canopy Purchase Option Agreement, GR Unlimited, will pay to Strickler all amounts payable by Canopy Management to the Golden Harvests Optionors under the Golden Harvests Option Agreement when and as such amounts are due and payable.
Under the terms of the Golden Harvests Option Agreement, in order to exercise the Golden Harvests Purchase Option, Canopy Management must provide to the Golden Harvests Optionors, prior to February 4, 2023, the following consideration:
| (a) | On or before February 6, 2021, Canopy Management will (i) pay to Golden Harvests Optionors $200,000, and<br>(ii) cause to be issued to the Golden Harvests Optionors 200,000 shares of common stock of Grown Rogue free and clear of any liens or<br>encumbrances (other than any restrictions under applicable federal, state, or provincial securities laws). |
|---|---|
| (b) | On or before February 6, 2021, Canopy Management will (i) pay to Golden Harvests Optionors an additional<br>$260,000 (this payment and the payment described in 3(a)(i) above are each referred to in this Agreement as an “Installment Payment”),<br>and (ii) cause to be issued to Golden Harvests Optionors an additional 200,000 Common Shares of Grown Rogue (together with the shares<br>described in (a)(ii) above, the “Installment Shares”) free and clear of any liens or encumbrances (other than any restrictions<br>under applicable federal, state, or provincial securities laws). |
| --- | --- |
| (c) | Canopy Management may, in its sole discretion, extend the due date for the Installment Payment and Installment<br>Shares due by up to six months provided that, in consideration for such extension, Canopy Management pays to Golden Harvests Optionors<br>an additional 200,000 Common Shares of Grown Rogue to be issued to Golden Harvests Optionors (free and clear of any liens or encumbrances<br>(other than any restrictions under applicable federal, state, or provincial securities laws)), on or promptly following the original due<br>date. |
| --- | --- |
| (d) | Canopy Management may, in its sole discretion, extend the due date of up to 50% of the Installment Payment<br>due under (a) above by up to 12 months, provided that, in consideration for such extension, Canopy Management shall pay to Golden Harvests<br>Optionors $2,000 per month until the earlier of 12 months or the amount extended under (d) has been paid in full. |
| --- | --- |
| (e) | If February 6, 2021, occurs after Canopy Management has exercised the Golden Harvests Purchase Option,<br>then the membership interest purchase agreement to be entered into amongst the parties in respect of the option exercise contemplated<br>in the Golden Harvests Option Agreement will include Canopy Management’s obligation to pay the remaining Installment Payment(s)<br>and to cause to be issued any remaining Installment Shares. |
| --- | --- |
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As of February 6, 2021, the amount of US$460,000 remained payable, plus the issuance of 200,000 Common Shares of the Company, of which US$100,000 was paid and 200,000 Common Shares of the Company were issued to the Golden Harvests Optionors. Of the remaining US$360,000 that is outstanding under the Golden Harvests Option Agreement: (i) US$260,000 is due on August 6, 2021, along with the issuance of an additional 200,000 Common Shares of the Company to the Golden Harvests Optionors; (ii) US$100,000 is due on February 5, 2022 for which Canopy Management is paying US$2,000 per month (plus applicable interest); and (iii) US$200,000 and an additional 200,000 Common Shares of the Company issued to the Golden Harvests Optionors will become due and payable when the Golden Harvests Purchase Option in accordance with the terms and subject to the conditions of the Golden Harvests Option Agreement.
Cease Trade Order and Resumption of Trading
On March 5, 2020, a failure to file cease trade order was issued by the Ontario Securities Commission concerning the Company because the Company did not timely file its annual financial statements and related management’s discussion and analysis, and the related certifications of the annual filings for the year ended October 31, 2019. The cease trade order was revoked on March 23, 2020.
Debt Financing of GR Michigan
On March 20, 2020, Grown Rogue announced that its majority owned subsidiary, GR Michigan issued a secured promissory note in the principal amount of USD$600,000 (the “DebtFinancing”). The note carries a two-year term, with monthly payments of principal commencing on June 15, 2020. Once the principal is repaid, each investor will receive a gross revenue royalty (the “Royalty”) of 1% per $100,000 invested based on any cannabis business that is majority owned by GR Michigan. The Royalty has a term of 2 years with maximum amount of two times the principal invested in the Debt Financing and a minimum amount equal to the principal amount of the note. Grown Rogue has the right, but not the obligation, to purchase the Royalty from any investor by paying the principal invested by such investor in the Debt Financing.
In addition, Grown Rogue pledged 100% of its ownership interests in GR Michigan to the investors in the Debt Financing as security until the principal of the note is repaid in full, 50% of its ownership interests in GR Michigan during year 1 of the Royalty payments and 33% of its ownership interests in GR Michigan during year 2 of the Royalty payments. Each investor in the Debt Financing also received 1% of the membership units in GR Michigan for every $100,000 invested, representing a value of USD$5,000. In exchange for services rendered, certain investors in the Debt Financing received an additional 1% of the membership units, one of which is a director of Grown Rogue. The President and Chief Executive Officer of Grown Rogue received 5% of the membership units in GR Michigan as part of his compensation for the structuring of the Debt Financing and leading Grown Rogue’s expansion into the Michigan market. Insiders of Grown Rogue invested an aggregate of USD$300,000 in the Debt Financing and received a 3% Royalty and 9% of the membership units in GR Michigan.
Issuance of Securities for Services
On March 27, 2020, Grown Rogue announced the issuance of an aggregate of 1,100,000 Common Shares to certain former and current consultants of the Company. The abovementioned Common Shares were issued at a price of $0.10 per share and are subject to a four month hold period expiring on July 27, 2020.
On May 4, 2020, Grown Rogue announced the issuance of an aggregate of 620,000 Common Shares to certain directors, officers and consultants of the Company. In addition, the Company issued 200,000 Common Shares to an existing member of Golden Harvests, LLC in connection with the first tranche of the consideration to be provided for the Company’s previously announced acquisition of an option to purchase a 60% controlling interest of Golden Harvests, LLC. The abovementioned Common Shares were issued at a price of $0.10 per share and are subject to a four month hold period expiring on September 5, 2020.
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Sale of Former California Subsidiary
On June 9, 2020, Grown Rogue announced that it had completed the sale of its former California subsidiary, GRD Cali, LLC, which included a warehouse and assets in Eureka, California for USD$85,000 in cash with the buyer additionally assuming approximately USD$30,000 of liabilities.
Amendment of Convertible Debentures andWarrant Cancellation
On July 10, 2020, Grown Rogue announced the amendment of the terms of its secured convertible debentures and has cancelled the related common share purchase warrants issued pursuant to non-brokered private placements in November of 2018 and May of 2019 (collectively, the “Amendments”). In addition, the Company announced the grant of an aggregate of 3,575,000 stock options to certain employees and consultants of the Company, exercisable at a price of $0.15 per share for a period of four years from the date of grant. The Company also issued a total of 255,636 Common Shares to certain directors and employees of the Company relating to amounts owed for services rendered. As of the date of this AIF, the amount owing under the Debentures is approximately $1,058,334.
Pursuant to the Amendments, the maturity date of the Debentures was extended from August 10, 2020 to November 1, 2021 and the conversion price was lowered from $0.44 to $0.125 per Common Share. The new conversion price represents a 25% premium to the price that was required to be lowered to pursuant to the terms of the debentures. In addition, the Amendments provide that all 6,818,182 Warrants have been cancelled, and the same number of new warrants have been issued to the holders thereof (the “New Warrants”). The terms of the New Warrants are the same as the Warrants, except that (i) the expiry date of the New Warrants has been extended to November 1, 2021, (ii) the exercise price of the New Warrants has been lowered from $0.55 to $0.16 per Common Share, and (iii) the New Warrants issued to the investors who participated in the private placement in May of 2019 do not include the requirement for the Company to issue additional warrants to the warrant holders in the event the Company issues warrants with an exercise price below $0.55 per Common Share during the term of such New Warrants. In consideration for the extension of the maturity date of the Debentures issued in 2019, the Company has issued an aggregate of 1,590,910 additional common share purchase warrants to the holders of such Debentures upon the same terms and conditions as the New Warrants.
Receipt of Class-C Adult Use Licence byGolden Harvests
On August 11, 2020, Golden Harvests received state and local approval for its first Class-C Adult Use Licence. Golden Harvests is a limited liability company incorporated in Michigan in which Grown Rogue may acquire an indirect interest through the exercise of an option granted to its subsidiary, GR Michigan, entitling GR Michigan to acquire a 87% equity interest in Canopy Management, which in turn has an option to acquire a 60% equity interest in Golden Harvests. The Class-C Adult-Use (Recreational) licence allows Golden Harvests to grow an additional 2,000 plants, while selling its high quality and consistent indoor flower to cannabis retailers approved for adult use sales across the state of Michigan. Golden Harvests also has two Class C Licences under the Medical Marijuana Facilities Licensing Act (Medical) that permits up to 3,000 plants in its 80,000 sq. foot Bay City facility. The Class-C-Adult-Use (Recreational) licences held by Golden Harvests were renewed as of March 9, 2021.
In order to capitalize on the increased plant count under the Class-C Adult Use licence, GR Michigan has committed an additional US$250,000 towards Golden Harvest’s facility expansion, which will add 2,500 sq. feet of flower canopy.
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On August 11, 2020, Grown Rogue announced that, in connection with the Original Golden Harvests Option Agreement, the Company exercised its option to extend for six months the payment of US$200,000 in cash and 200,000 Common Shares to the Golden Harvests Optionors in connection with the exercise of the option to acquire a 60% interest in Golden Harvests as provided for therein. In exchange for the delay, Grown Rogue paid to the owners of Golden Harvests US$25,000 in cash and 25,000 Common Shares.
In addition, a holder of a Grown Rogue debenture elected to convert a principal amount of $100,000 in exchange for 800,000 Common Shares at a price of $0.125 per share. The conversion was completed, and the Common Shares were issued pursuant to the terms of the debenture certificate that was issued on May 7, 2019 and amended on July 10, 2020.
Events Since the Financial Year Ended October31, 2020
Issuance of Securities for Services
On November 18, 2020, Grown Rogue announced that it issued a total of 240,908 Common Shares to certain directors and employees of the Company relating to amounts owed for services rendered. In addition, the Company issued 25,000 Common Shares to an existing member of Golden Harvests in connection with the extension of the next payment of cash and shares owed under the terms of the Original Golden Harvests Option Agreement. The abovementioned Common Shares were issued at a price of $0.11 per share.
Investments in Subsidiaries
On December 8, 2020, Grown Rogue announced debt and equity investments in GR Distribution; combined with a further equity investment in February 2021, in the aggregate amount of US$850,000. GR Distribution sold 11.875 common units at a price of US$40,000 per common unit for total proceeds of US$475,000. The unit holders have the future right to convert their common units in the subsidiary into Common Shares of the Company at the greater of $0.20 or the maximum permitted discount under the policies of the CSE at the time of conversion. GR Distribution issued unsecured promissory notes in the amount of US$375,000, which bear interest at a rate of 10% per annum, payable monthly and have a three-year maturity date. In addition, the subsidiary will make payments in months 39, 42, 45, and 48 that will double the principal investment (minus any interest paid).
Issuance of Promissory Note to GR Gardens
On December 2, 2020, GR Gardens issued an unsecured promissory note to a certain member of management in the principal amount of US$150,000 in exchange for a loan of such amount. The note bears interest at a rate of 10% per annum, accruing monthly with a 12-month maturity. The Company has the right to extend up to 50% of the principal amount under the note for up to six months by paying a one-time cash extension fee of 10% of the amount extended. The funds are expected to be used to complete the previously announced build out of its indoor facility in Medford, Oregon, which is expected to add 2,500 sq. ft. of flowering capacity while also increasing vegetative capacity at the facility.
Non-Brokered Offering of Common Shares andUnits
On January 19, 2021, Grown Rogue completed the first or two tranches of a non-brokered private placement offering, pursuant to which it issued an aggregate of 2,031,784 Common Shares at a price of $0.125 per share for gross proceeds of $253,973. In addition, Golden Harvests issued an unsecured promissory note in the amount of $250,000. Terms of the note include 10% interest, payable monthly and a 3-year maturity. Also, Golden Harvests will make payments in months 39, 42, 45, and 48 that will double the principal investment (minus any interest paid). The terms of the note require 400,000 Common Shares to be issued to the holder within 90 days at market price at the time of issuance. The funds will be used for continued expansion of the Golden Harvests’ 80,000 square foot facility located in Bay City, Michigan.
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On February 5, 2021, Grown Rogue completed the second tranche of the offering, pursuant to which it issued an aggregate of 8,200,000 units of the Company at a price of $0.16 per unit for gross proceeds of $1,312,000. Each unit was comprised of one Common Share and one common share purchase warrant, each warrant entitling the holder to purchase one Common Share at an exercise price of $0.20 per share for a period of two years. The Company has the right to accelerate the expiry date of the warrants to be thirty (30) days following written notice to the holder if during the term the Common Shares close at, or above, $0.32 on each trading day for a period of ten (10) consecutive trading days.
HSCP, LLC Transaction
On February 8, 2021, Grown Rogue announced that its subsidiary, Grown Rogue Distribution, LLC signed a definitive agreement and management services agreement dated February 5, 2021 with HSCP, LLC (“HSCP”), a subsidiary of Acreage Holdings Inc., relating to the acquisition of a previously operational 30,000 square foot indoor facility located in Medford, Oregon as well as a fully operational retain dispensary in Portland, Oregon, the 6^th^ largest metro area on the west coast. Grown Rogue expects to take possession of the retail operation in two to four months, after regulatory approval of the transaction.
Offering of Special Warrants
On March 5, 2021, Grown Rogue completed a brokered private placement offering (the “Special Warrant Offering”), pursuant to which it issued an aggregate of 21,056,890 special warrants (each a “Special Warrant”) at a price of $0.225 (the “Issue Price”) per Special Warrant for aggregate gross proceeds of $4,737,800.25. Each Special Warrant entitles the holder thereof to receive, for no additional consideration, one unit of the Company (a “Unit”), each consisting of one Common Share and one Common Share purchase warrant (a “Warrant”). Each Warrant entitles the holder thereof to purchase one Common Share at an exercise price of $0.30 for a period of twenty-four (24) months following the closing date of the Special Warrant Offering.
The Special Warrants are exercisable by the holders thereof at any time for no additional consideration and all unexercised Special Warrants will be deemed to be exercised, without any further action or payment of additional consideration by the holder thereof, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities for a (final) short form prospectus qualifying distribution of the Common Shares and warrants underlying the Special Warrants, and (ii) July 6, 2021. If the Company has not received a receipt for the prospectus on or before April 5, 2021, each unexercised Special Warrant will thereafter entitle the holder to receive upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units, consisting of 1.10 Common Shares and 1.10 Warrants (instead of one Unit consisting of one Common Share and one Warrant).
The Company paid to Eight Capital (the “Agent”) a cash commission of $253,745.63 and issued the Agent an aggregate of 1,127,758 broker warrants of the Company (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “CompensationOptions”) in connection with the Special Warrant Offering. As consideration for certain advisory services provided in connection with the Offering, the Company paid to the Agent an advisory fee of $25,500 and issued the Agent an aggregate of 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options. Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price for a period of twenty-four (24) months following the closing date of the Special Warrant Offering. Each Compensation Unit will be comprised of one Common Share and one common share purchase warrant of the Company (a “Compensation Warrant”). Each Compensation Warrant shall entitle the holder thereof to purchase one Common Share at a price of $0.30 for a period of twenty-four (24) months following the closing date of the Special Warrant Offering.
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Significant Acquisitions and Dispositions
Other than the Transaction and the GR Acquisition, the Company has not completed any significant acquisitions or dispositions for which disclosure is required under Part 8 of NI 51-102.
DESCRIPTION OF THE BUSINESS
Summary
Grown Rogue, headquartered in Medford, Oregon, is a multi-state cannabis company curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies its products based on “Mind, Body & Mood” effects which resonates with consumers from the “canna-curious” through the “canna-serious”. Grown Rogue aims to educate, inspire and empower consumers with information about cannabis so they can “enhance experiences” by selecting the appropriate product for individual needs. Grown Rogue is focused on high quality, low-cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates.
Oregon
Grown Rogue, through its wholly owned subsidiary, GR Gardens, operates four cultivation facilities, in Oregon comprising approximately 130,000 square feet of cultivation area, that currently service the Oregon recreational marijuana market: “Manzanita Glen” (sun grown), “Trail’s End” (sun grown), and two state-of-the-art indoor facilities (“Warehouse 1” and “Warehouse 2”). Warehouse 2 is comprised of assets acquired in February 2020, and approximately doubled its indoor productive capacity, which the Company is currently operating under a management services agreement. GR Gardens currently holds three producer licences in Oregon from the Oregon Liquor Control Commission, for the three properties described below, one wholesaler licence, and one processor licence. GR Gardens is currently not operating the processor licence.
GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. “Manzanita Glen” and “Trails End” are both outdoor, sun grown farms, with 40,000 square feet of flowering canopy, for a total of 80,000 square feet, sitting on a combined land package of approximately 45 acres.
Grown Rogue’s Oregon business is head-quartered in the world-renowned Emerald Triangle, which is known world-wide for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. The company is able to capitalize on an ideal outdoor growing environment where it can produce high-quality, low-cost cannabis flower. The two sun-grown farms produce one crop per year, which is planted in June and harvested in October.
With approximately 17,000 square feet indoor Warehouse 1, Grown Rogue is able to produce high-quality indoor flower through controlled atmosphere environment operations. By carefully controlling temperature, humidity, carbon dioxide levels, and other criteria, Grown Rogue is able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. Grown Rogue has been constructing the final two flower rooms in the facility with the facility expected to be fully constructed by the end of February 2021 with an additional eight dedicated flower rooms.
Warehouse 2 added an additional 30,000 square feet of indoor productive space to GR Gardens’ assets and management of the Company estimates annual production in 2021 of 2,400 pounds from this facility, with estimates of annual production in 2022 and beyond of 5,000 is possible. It is a short distance from Warehouse 1, which is a benefit to operating efficiency, and is equipped with state-of-the-art equipment which facilitates the implementation of best practices already developed at Warehouse 1.
The total annual production capacity for Grown Rogue’s Oregon operations, depending on the current constructed capacity, ranges between 6,000 and 7,000 pounds based on sun grown seasonality and strain performance. With the addition of Warehouse 2, Grown Rogue expects this annual Oregon production capacity to increase to approximately 11,000 to 12,000 pounds annually.
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Michigan
As discussed above under the sub-heading “EventsDuring the Financial Year Ended 2020 - Transaction with Golden Harvests, LLC”, pursuant to the terms of the Canopy Purchase Option Agreement, GR Unlimited holds the Canopy Purchase Option, providing it the option to acquire 87% of the outstanding membership interests of Canopy Management, which holds the Golden Harvests Purchase Option, an option to acquire a 60% equity interest in Golden Harvests. Golden Harvests has an approximately 80,000 square foot facility, of which approximately 25,500 square feet is operational.
As of the date of this AIF, the Company has paid $275,000 in cash and approximately $13,000 in shares towards option consideration and has invested approximately $452,000 in capital contributions as part of the investment in Golden Harvests.
If the Company exercises the Canopy Purchase Option (and Canopy Management exercises the Golden Harvests Purchase Option) in 2021, the Company believes that through its indirect interest in Golden Harvests, the Company would add up to an additional approximately 3,000 pounds of high-quality indoor flower production capacity in 2021 and potentially up to 5,500 pounds of production capacity in 2022. If the Canopy Purchase Option and the Golden Harvests Purchase Option are exercised, GR Michigan would oversee this capacity under the terms of its management services agreement with Golden Harvests.
See the section entitled “Risk Factors– Golden Harvests, LLC” in this AIF.
Production and Services
Grown Rogue produces a range of cultivars for consumers to enjoy (traditionally classified as indicas, sativas, or hybrids). Grown Rogue has a mix of “core” and “limited” strains to provide consumers with consistent and unique purchasing options at their local dispensary. Grown Rogue flower has won multiple awards in Oregon, which is one of the most competitive cannabis production environments in the world, including the prestigious Growers Cup competition on two occasions. Grown Rogue also won 1st place for highest THC content, 1st place for highest terpene content, and 3rd place in the grower’s choice category 2018 and won 1st place for highest terpene content in 2019. In addition, the company believes it achieved an outdoor production potency record in the state of Oregon, when its Monkey Train cultivar tested at a THC potency of 35.13%.
Genetics
Grown Rogue is committed to developing unique, proprietary genetics and has allocated research and development space to develop new strains, while also phenotype hunting to identify new and exciting strain options that will resonate with consumers. Grown Rogue has developed a compelling mix of proprietary strains, along with a library of “fan favorites” to ensure that consumer and dispensary demand will remain strong for its flower and flower-derived products. All Grown Rogue genetics are rigorously tested to establish the genetic makeup of each strain in its portfolio. Grown Rogue continues to focus on bringing new unique genetics to ensure a steady flow of innovative flower and flower products.
Distribution and Sales
Grown Rogue distributes product directly to Oregon dispensaries and aims to provide quality, consistent and a variety of products, year-round. Grown Rogue’s sales team works closely with dispensary owners and intake managers to provide consistent product, competitive prices, and service using sales techniques from other industries such as pharmaceutical and liquor.
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By way of example, Grown Rogue has developed end user product marketing collateral and other educational information regarding Grown Rogue products as part of all sales with dispensaries that include strain type, testing results, information on the product and other necessary information to clearly articulate the product being provided. Each product is uniquely packaged all while maintaining brand consistency across the product suite.
Grown Rogue works with dispensary owners to develop promotional opportunities for the retail customers and bud tenders. Grown Rogue provides detailed tutorials to the staff and owners of the dispensaries around the product and how it is grown, processed, cured, packaged and other items so that they are intimately familiar with the Grown Rogue process. Grown Rogue also invites dispensary owners and operators to Grown Rogue’s operating facilities so they can see first-hand the methods and processes used to create the product.
Branding
Management of Grown Rogue believes that developing compelling branding that engages, inspires, and creates transparency and trust with consumers is one of the most important aspects of building a successful cannabis company. Cannabis product branding has been evolving from promising high-quality flower, to providing descriptions of the effect a consumer should expect from a particular product.
Grown Rogue was one of the first brands in the United States to go to market with this type of branding as part of the ROGUE Categorization (Relax, Optimize, Groove, Uplift and Energize). The focus was to provide consumers with “The right experience, every time” made easier by a simple product description that was not cannabis based, such as sativa or indica.
Grown Rogue has leveraged consumer insights and product feedback to evolve the messaging to provide significantly more detail so consumers can make a more informed choice about which Grown Rogue products will optimally enhance their experience.
Grown Rogue’s unique “Mind, Body & Mood” product descriptions provide a level of detail about the expected cannabis experience that is much more insightful and beneficial than competitors. Instead of one word, such as Relax, describing a product, Grown Rogue has six words across three categories, which is both palatable to consumers as well as informative about the products.
In order to grow the Grown Rogue community and spread knowledge of its products, Grown Rogue leverages social media and other digital platforms. Grown Rogue aspires to eliminate the “dark mystery” historically associated with cannabis by empowering consumers to learn about the plant and then “enhance experiences” as they desire. The transition from prohibition to legal cannabis has provided the cannabis community with an opportunity to welcome a large group of new members and it is vital that product education is completed in an authentic and informative manner to ensure that everyone’s first cannabis experience is not only positive but also as expected.
Marketing and Advertising
Grown Rogue’s marketing channels include a comprehensive, fully responsive (mobile) interactive website. The website has been search engine optimized and includes calls to action that encourage consumers to become part of the Grown Rogue community by joining its newsletter list or following the company on social media. Grown Rogue is focused on providing education to new and existing consumers, which is available through its monthly newsletter or via the Blog section of its website. Consumers can find information about Grown Rogue, different types of cannabis products and general industry information.
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Grown Rogue strategically leverages digital advertising, primarily on industry websites such as “Leafly” and “Weedmaps”, and have selectively advertised in endemic and non-endemic magazines including “Grow”, “Northwest Leaf”, “Oregon Leaf”, “Dope”, “Portland Mercury”, and “Willamette Weekly”.
Grown Rogue has established a social media presence that includes Facebook, Twitter, and Instagram. Grown Rogue’s social identity will be defined by delivering fresh content and keeping interaction with followers/fans prompt and positive. Grown Rogue intends to attract existing cannabis industry participants as well as people not familiar with the industry by creating a positive, inclusive environment where dialogue is encouraged. The goal is to change existing stereotypes and overcome the stigmas associated with the cannabis industry.
Trademarks and Patents
Grown Rogue actively seeks to protect its brands and intellectual property. Grown Rogue, through its subsidiary GRIP, currently has eleven different trademarks that have been submitted to the USPTO for registration, with the following trademarks that have been registered with the USPTO:
| 1. | “Grown Rogue” was filed on September 22, 2017 and registered on August 7, 2018 under Registration<br>No. 5537240; |
|---|---|
| 2. | “The Right Experience Every Time” was filed on September 29, 2017 and registered on August<br>7, 2018 under Registration 5537260; and |
| --- | --- |
| 3. | “Sizzleberry” was filed on September 29, 2017 and registered on August 7, 2018 under Registration<br>5537259. |
| --- | --- |
GRIP filed a patent for its nitrogen sealed glass containers on February 15, 2018 with the USPTO. The nitrogen sealed glass containers preserve the freshness of the flower and essential terpenes to improve the “entourage effect.” The USPTO issued GRIP United States Patent Number 10,358,282 on July 23, 2019. Several third parties have contacted Grown Rogue to request licensing information on this technology. Grown Rogue plans on introducing the nitrogen sealed containers in each of the new markets the Company enter and may licence the technology to third parties operating in markets in which Grown Rogue is not currently licenced.
Social and Environmental Policies
Grown Rogue employs sustainable business models in all of its operations. Grown Rogue maintains the highest standards of environmental stewardship in cultivation. This includes sustainable water sources with optimization of reclamation and recapture from runoff and recycling of water input. Grown Rogue uses only natural and sustainable products in all applications, including nutrients and integrated pest management. Grown Rogue aims to maintain the highest level of sustainable cannabis practices through its focus on sustainable and natural cultivation methods.
Grown Rogue hires and pays competitive wages to all of its team members and is very involved in each of the communities where it operates.
When wildfires ravaged Oregon, particularly Jackson County, Grown Rogue quickly mobilized to support teammates and their families who lost homes or were adversely impacted, while also donating over $20,000 to community fire relief funds and organizing a Cannabis Coalition Fire Relief Fund with the United Way of Jackson County.
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Plans for Expansion and Economic Outlook
Grown Rogue continues to focus on taking its learnings and experience from Oregon into new markets across the US. During the last two years, Grown Rogue has established a platform that excels at licensing, compliance, understanding consumer purchasing preferences, and product innovation. This platform that places Grown Rogue in a superior position to capitalize on new markets compared to our competitors. Oregon is a highly competitive cannabis market, and management of Grown Rogue believe that it has excelled in this market by implementing standard business practices that make the Company well suited for entering and building successful brand presence in newly legalized cannabis markets.
The recently completed expansion into Warehouse 2 (described above) represents a template for growth and execution against management’s strategy of being a high-quality, low-cost flower producer. As other growth opportunities arise under favorable financial terms, management can activate known and repeatable systems into new assets.
Management of Grown Rogue believes that the future of the cannabis industry is in the branded products and the some of the notable brands are emerging from the west coast, which is an area that has become well known for producing high quality cannabis products. Grown Rogue differentiates itself from other cannabis companies in the market by focusing on establishing a larger number of licences in fewer states in order to capitalize on the economies of scale necessary to maximize profits. Over the next 12 months, Grown Rogue is plans to focus on furthering its footprint and market share in the Oregon market, continuing to add to the portfolio projects in Michigan, including acquiring its indirect interest in Golden Harvests by exercising the Canopy Purchase Option, and looking at strategic opportunities in other states in which the Company does not currently operate.
With the recent shift in political landscape, Grown Rogue has also begun analyzing the potential for federal de-regulation and the subsequent ability to export cannabis products across state lines. Oregon, as well as other states along the west coast of the United States, have been recognized for producing high quality cannabis and management of Grown Rogue believes that Oregon will become a central hub for exportation of cannabis products across the United States, and possibly internationally. Grown Rogue’s location in the Emerald Triangle provides a unique product differentiator due to the ability to produce high quality, low-cost sun grown flower due to the favourable environmental conditions that occur naturally in Southern Oregon. Management believes that Grown Rogue’s strategy will allow it to maintain itself as a competitive presence in the cannabis market.
Zoning and Land Use Requirements
Applicants in Oregon and Michigan are required to comply with all local zoning and land use requirements and provide written authorization from the property owner where the commercial cannabis operations are proposed to take place, which must dictate that the applicant has the property owner’s authorization to engage in the specific state-sanctioned commercial cannabis activities proposed to occur on the premises.
Record-Keeping and Continuous Reporting Requirements
Oregon and Michigan’s state licence application processes require comprehensive criminal history, regulatory history, financial and personal disclosures, coupled with stringent monitoring and continuous reporting requirements designed to ensure only good actors are granted licences and that licensees continue to operate in compliance with the State regulatory program.
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Operating Procedure Requirements
Applicants must submit standard operating procedures describing how the operator will, among other requirements, secure the facility, manage inventory, comply with the Michigan and Oregon’s seed-to-sale tracking requirements, dispense cannabis, and handle waste, as applicable to the licence sought. Once the standard operating procedures are determined compliant and approved by the applicable state regulatory agency, the licensee is required to abide by the processes described and seek regulatory agency approval before any changes to such procedures may be made. Licensees are additionally required to train their employees on compliant operations and are only permitted to transact with other legal and licensed businesses.
Site-Visits & Inspections
All licensees will not be able to obtain or maintain state licensure, and thus engage in commercial cannabis activities in the states of Oregon and Michigan without satisfying and maintaining compliance with state and local law. As a condition of state licensure, operators must consent to random and unannounced inspections of the commercial cannabis facility as well as all of the facility’s books and records to monitor and enforce compliance with applicable state law. Many localities have also enacted similar standards for inspections, and the state has already commenced site visits and compliance inspections for operators who have received state temporary or annual licensure.
Specialized Skill and Knowledge
Knowledge with respect to cultivating and growing medical marijuana is important to the medical marijuana industry. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are meticulously defined and controlled to produce consistent product and to avoid contamination. The product is cut, sorted and dried under defined conditions that are established to protect the activity and purity of the product. Once processing is complete, every processing batch is subjected to full testing against stringent quality specifications set for activity and purity.
The Company has recruited grow team with specialized skill sets unique to indoor agricultural cultivation and growing marijuana.
Competitive Conditions
The Company continues to face intense competition from the illicit market as well as other companies, some of which can be expected to have longer operating histories and more financial resources and manufacturing and marketing experience than the Company.
Increased competition by larger and better financed competitors could materially and adversely affect the Company’s business, financial condition, results of operations and prospects. Growers of cannabis and retailers operating in the illicit market continue to hold significant market share throughout the United States and are effectively competitors to the Company by diverting customers away due to product offering, price point, anonymity and convenience. Outdoor cultivation also significantly reduced the barrier to entry as it reduced the demands on start-up capital required for new entrants in the cannabis industry. It may also ultimately lower prices as capital expenditure requirements related to growing outside are typically much lower than those associated with indoor growing.
Employees
As at October 31, 2020, the Company’s most recent financial year-end, the Company and its subsidiaries had an aggregate of 41 employees.
Foreign Operations
As described above, the Company’s operations are principally carried out in the United States of America in Oregon and Michigan. The Company is dependent on its operations in Oregon to carry on business as currently conducted.
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UNITED STATES Regulatory Framework
In accordance with Staff Notice 51-352 of the Canadian Securities Administrators, as amended (“Staff Notice 51-352”), below is a table of concordance that is intended to assist readers in identifying those parts of this AIF that address the disclosure expectations outlined in Staff Notice 51-352:
| Industry Involvement | Specific Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties | AIF Cross Reference |
|---|---|---|
| All issuers with U.S. Marijuana-Related Activities | Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table. | Corporate Structure; General Development of the Business; United States Regulatory Framework |
| Prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk. | Cover page (disclosure in bold typeface); United States Regulatory Framework | |
| Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. | Cover page (disclosure in bold typeface); United States Regulatory Framework | |
| Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. | Risk Factors | |
| Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations. | General Development of the Business; Risk Factors | |
| Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities. | ||
| Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. | Legal advice has been obtained by external US counsel regarding (a) in the States of Michigan and Oregon; and regarding (b). |
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| U.S. Marijuana issuers with direct involvement in cultivation or distribution | Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | General Development of the Business; Description of the Business; United States Regulatory Framework |
|---|---|---|
| Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations. | General Development of the Business; Description of the Business; United States Regulatory Framework | |
| U.S. Marijuana Issuers with indirect involvement in cultivation or distribution | Outline the regulations for U.S. states in which the issuer’s investee(s) operate. | United States Regulatory Framework |
| Provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee’s licence, business activities or operations. | General Development of the Business; Description of the Business; United States Regulatory Framework | |
| U.S. Marijuana Issuers with material ancillary involvement | Provide reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | General Development of the Business; Description of the Business; United States Regulatory Framework |
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Regulatory Overview
In accordance with Staff Notice 51-352, below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where Grown Rogue, and its subsidiaries, are currently directly involved through their respective subsidiaries and affiliates, either as owners, operators, managers, consultants, and/or through licensing or other commercial arrangements. Grown Rogue’s subsidiaries and affiliates are directly engaged, either as owners, operators, managers, consultants and/or through licensing or other commercial arrangements, in the manufacture, possession, use, sale or distribution of cannabis in the adult-use and/or medicinal cannabis marketplace in the States of Michigan or Oregon. The Grown Rogue subsidiaries and affiliates are directly engaged, either as owners, operators, managers, consultants and/or through licensing or other commercial arrangements, in the manufacture, possession, use, sale or distribution of cannabis in the medicinal cannabis marketplace in the States of in Michigan and Oregon. In accordance with Staff Notice 51-352, Grown Rogue will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented, amended and promptly disclosed to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation.
Regulation of Cannabis in the United StatesFederally
Although a number of states of the United States have legalized medical cannabis, adult-use cannabis, or both, it remains illegal under United States federal law. Cannabis currently remains a Schedule I drug under the Controlled Substances Act (the “CSA”). Under United States federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration (the “FDA”) has not approved cannabis as a safe and effective drug for any indication (although in June 2018, the FDA approved a cannabis-derived cannabidiol drug for treatment of two rare forms of childhood epilepsy). It is anticipated that the CSA categorization as a Schedule I drug is not reflective of the medicinal properties of cannabis or the public perception thereof, and numerous studies show cannabis is unlikely to be abused in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered.
Although federally illegal, the U.S. federal government’s approach to enforcement of such laws has of least until recently trended toward non-enforcement. The United States Department of Justice (the “DOJ”) issued a memorandum known as the Cole Memorandum in August 2013^1^ and February 2014^2^ to all U.S. Attorneys’ offices (federal prosecutors). The Cole Memorandum generally directed U.S. Attorneys not to prioritize the enforcement of federal cannabis laws against individuals and businesses that rigorously comply with state regulatory provisions in states with strictly regulated medical or adult-use cannabis programs. While not legally binding, and merely prosecutorial guidance, the Cole Memorandum laid a framework for managing the tension between state and federal laws concerning state regulated cannabis businesses.
^1^ U.S. Dept. of Justice. (2013). Memorandum for all United States Attorneys re: Guidance Regarding Marijuana Enforcement. Washington, DC: US Government Printing Office. Retrieved from https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.
^2^ James M. Cole, Deputy Attorney General, U.S. Department of Justice, Memorandum for All United States Attorneys: Guidance Regarding Marijuana Related Financial Crimes (February 14, 2014).
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However, on January 4, 2018 the Cole Memorandum was revoked by Attorney General Jeff Sessions, a long-time opponent of state-regulated medical and adult-use cannabis. While this did not create a change in federal law, as the Cole Memorandum was not itself law, 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.
In addition to his revocation of the Cole Memorandum, Attorney General Sessions also issued a one-page memorandum known as the Sessions Memorandum. The Sessions Memorandum confirmed the rescission of the Cole Memorandum and explained the rationale of the DOJ in doing so: the Cole Memorandum, according to the Sessions Memorandum, was “unnecessary” due to existing general enforcement guidance adopted in the 1980s, as set forth in the U.S. Attorney’s Manual. The U.S. Attorney’s Manual enforcement priorities, like those of the Cole Memorandum, are also based on the federal government’s limited resources, and include “law enforcement priorities set by the Attorney General,” the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution,” and “the cumulative impact of particular crimes on the community.”
While the Sessions Memorandum emphasizes that cannabis is a Schedule I controlled substance, and reiterates the statutory view that cannabis is a “dangerous drug and that cannabis activity is a serious crime,” it does not otherwise indicate that the prosecution of cannabis-related offenses is now a DOJ priority. Furthermore, the Sessions Memorandum explicitly describes itself as a guide to prosecutorial discretion. Such discretion is firmly in the hands of U.S. Attorneys in deciding whether or not to prosecute cannabis related offenses. Grown Rogue’s outside U.S. counsel will continuously monitor all U.S. Attorney comments related to regulated medical and adult-use cannabis laws to assess various risks and enforcement priorities within each jurisdiction. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed, although a few have displayed greater ambivalence.
On January 15, 2019, U.S. Attorney General nominee William P. Barr intimated a markedly different approach to cannabis regulation than his predecessor during his confirmation hearing before the Senate Judiciary Committee. Mr. Barr stated that his approach to cannabis regulation would be not to upset settled expectations that have arisen as a result of the Cole Memorandum, that it would be inappropriate to upset the current situation as there has been reliance on the Cole Memorandum and that he would not be targeting companies that have relied on the Cole Memorandum and are complying with state laws with respect to the distribution and production of cannabis. While he did not offer support for cannabis legalization, Mr. Barr did emphasize the need for the U.S. Congress to clarify federal laws to address the untenable current situation which has resulted in a backdoor nullification of federal law. Furthermore, recent news concerning Mr. Barr’s personal opposition to cannabis may result in further resources being allocated to full-review merger investigations of transactions involving cannabis companies. Such reviews could cause substantial delays on the completion date of any mergers and could lead to deals collapsing due to regulatory delays.
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On or about December 14, 2020, Mr. Barr announced a planned resignation from the Trump administration, effective the following week. On December 24, 2020, Deputy Attorney General Mr. Jeffrey Rosen became Acting Attorney General. On January 7, 2021, President Joe Biden announced Judge Merrick Garland as his nomination for the next U.S. Attorney General. On January 20, 2021, Robert Wilkinson replaced Mr. Jeffrey Rosen as the Acting Attorney General while Judge Garland seeks confirmation from the U.S. Senate.
Additionally, due to the CSA categorization of cannabis as a Schedule I drug, U.S. federal law makes it illegal for financial institutions that depend on the Federal Reserve’s money transfer system to take any proceeds from cannabis sales as deposits. Banks and other financial institutions could risk prosecution and conviction of money laundering offenses for providing services to cannabis businesses. Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could also be found in violation of federal law. While there has been no change in U.S. federal banking laws to account for the trend towards legalizing medical and adult-use cannabis by U.S. states, in February 2014, Deputy Attorney General Cole issued guidance directing prosecutors to consider the Cole Memorandum enforcement priorities with respect to federal money laundering, unlicensed money transmitter, and Bank Secrecy Act offenses predicated on cannabis related violations of the CSA. Despite these laws, in February 2014, the FinCEN of the Treasury Department issued the FinCEN Memorandum^3^ clarifying how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act obligations, and aligning the information provided by financial institutions in Bank Secrecy Act reports with federal and state law enforcement priorities. The customer due diligence steps include, but are not limited to:
| 1. | verifying with the appropriate state authorities whether the business is duly licensed and registered; |
|---|---|
| 2. | reviewing the licence application (and related documentation) submitted by the business for obtaining<br>a state license to operate its cannabis-related business; |
| --- | --- |
| 3. | requesting from state licencing and enforcement authorities available information about the business and<br>related parties; |
| --- | --- |
| 4. | developing an understanding of the normal and expected activity for the business, including the types<br>of Products to be sold and the type of customers to be served (e.g., medical versus adult-use customers); |
| --- | --- |
| 5. | ongoing monitoring of publicly available sources for adverse information about the business and related<br>parties; |
| --- | --- |
| 6. | ongoing monitoring for suspicious activity; and |
| --- | --- |
| 7. | refreshing information obtained as part of customer due diligence on a periodic basis and commensurate<br>with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial<br>institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information<br>available. |
| --- | --- |
^3^ Department of the Treasury Financial Crimes Enforcement Network. (2014). Guidance re: BSA Expectations Regarding Marijuana-Related Businesses (FIN-2014- G001). Retrieved from https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-relatedbusinesses.
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Due to the risk aversion of financial institutions, cannabis businesses are often forced into becoming “cash only” businesses. As banks and other financial institutions in the U.S. are generally unwilling to be exposed to potential violations of federal law without guaranteed immunity from prosecution, many refuse to provide any kind of services to cannabis businesses. Despite the attempt by FinCEN to expand access to banking for cannabis-related businesses, practically the guidance has not improved access to banking services by cannabis businesses. This is because, as described above, the current law does not guarantee banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due diligence on each cannabis business they take on as a customer. Recently, some banks that have been servicing cannabis businesses have been closing accounts operated by cannabis businesses and are now refusing to open accounts for new cannabis businesses for the reasons enumerated above.
The few credit unions who have agreed to work with cannabis businesses are limiting those accounts to no more than 5% of their total deposits to avoid creating a liquidity risk. Since the federal government can change enforcement priorities at any time and without notice, these credit unions must keep sufficient cash on hand to be able to return the full value of all deposits from cannabis businesses in a single day, while also servicing the needs of their other customers.
The former U.S. Secretary of the Treasury, Stephen Mnuchin, had publicly stated that he did not participate in the Attorney General’s decision to rescind the Cole Memorandum and did not have a desire to rescind the FinCEN Memorandum for financial institutions without a replacement.^4^ Multiple legislators believe that Sessions’ rescission of the Cole Memorandum invites an opportunity for Congress to pass more definitive protections for cannabis businesses in states with legal cannabis programs during this Congress.^5^
Both Congress and cannabis-related businesses recognize that guidance is not law and thus have worked to continually renew the Rohrabacher Blumenauer Appropriations Amendment (originally the Rohrabacher Farr Amendment) since 2014. This amendment prevents the DOJ from using appropriated funds to impede the implementation of medical cannabis laws enacted at the state level. In 2017, Senator Patrick Leahy (Vermont) introduced a similar amendment to H.R.1625 – a vehicle for the Consolidated Appropriations Act of 2018, preventing federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level (the “Leahy Amendment”). The Leahy Amendment was set to expire with the 2018 fiscal year on September 30, 2018, but was effectively extended to December 21, 2018 when Congress passed the Continuing Appropriations Act, 2019 in September 2018, which expired on September 30, 2019. On December 20, 2019, the Leahy Amendment was continued with the passage of the fiscal year 2020 budget and is effective until September 30, 2020. In July 2020, a House subcommittee introduced a base appropriations bill with the amendment included. The amendment was then renewed through a series of stopgap spending bills on October 1, December 11, December 18, December 20 and December 27, 2020. On December 27, 2020, the amendment was renewed through the signing of the FY 2021 omnibus spending bill, effective through September 30, 2021. However, it should be noted that there is no assurance that such amendments will be passed into law.
^4^ Angell, Tom. (2018 February 6). Trump Treasury Secretary Wants Marijuana Money In Banks. Retrieved from https://www.forbes.com/sites/tomangell/2018/02/06/trump-treasury-secretary-wants-marijuana-money-inbanks/#2848046a3a53.
^5^ Jackson, Cherese. (2018 January 30). State-by-State Analysis of Sessions Move to Rescind Cole Memo. Retrieved from http://guardianlv.com/2018/01/state-state-analysis-sessions-move-rescind-cole-memo/; see also Velasquez, Josefa. (2018 January 23). NY Lawmaker Asks US Attorneys to Keep Hands Off State’s Med Marijuana Programs. Retrieved from https://www.law.com/newyorklawjournal/sites/newyorklawjournal/2018/01/22/nylawmaker-asks-us-attorneys-to-keep-hands-off-states-med-marijuana-programs/; see also “This is Outrageous”: Politicians react to news that A.G. Sessions is rescinding Cole Memo. (January 4 2018). Retrieved from https://www.thecannabist.co/2018/01/04/sessions-marijuana-cole-memo-politicians/95890/.
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On June 7, 2018, the Strengthening the Tenth Amendment Through Entrusting States Act (the “STATES Act”) was introduced in the Senate by Republican Senator Cory Gardner of Colorado and Democratic Senator Elizabeth Warren of Massachusetts. A companion bill was introduced in the House by Democratic representative Jared Polis of Colorado. The bill provides in relevant part that the provisions of the CSA, as applied to cannabis, “shall not apply to any person acting in compliance with state law relating to the manufacture, production, possession, distribution, dispensation, administration, or delivery of marihuana.” Even though cannabis will remain within Schedule I under the STATES Act, it makes the CSA unenforceable to the extent it is in conflict with state law. In essence, the bill extends the limitations afforded by the protection within the federal budget – which prevents the DOJ and the DEA from using funds to enforce federal law against state-legal medical cannabis commercial activity – to both medical and adult-use cannabis activity in all states where it has been legalized. By allowing continued prohibition to be a choice by the individual states, the STATES Act does not fully legalize cannabis on a national level. In that respect, the bill emphasizes states’ rights under the Tenth Amendment, which provides that “the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Under the STATES Act, companies operating legal cannabis operations would no longer be considered “trafficking” under the CSA, and this would likely assist financial institutions in transacting with individuals and businesses in the cannabis industry without the threat of money laundering prosecution, civil forfeiture, and other criminal violations that could lead to a charter revocation. The STATES Act is currently draft legislation and there is no guarantee that it will become law in its current form.
Since 2014, Congress has made immense strides in cannabis policy. The bipartisan Congressional Cannabis Caucus launched in 2017 is “dedicated to developing policy reforms that bridge the gap between federal laws banning cannabis and the laws in an ever-growing number of states that have legalized it for medical or adult-use purposes.”^6^ Additionally, each year more Representatives and Senators sign on and co-sponsor cannabis legalization bills including the CARERS Act, REFER Act and others. While there are different perspectives on the most effective route to end U.S. federal cannabis prohibition, Congressman Blumenauer and Senator Wyden introduced the three-bill package, Path to Marijuana Reform which would amend Section 280E of the Code, eliminate civil asset forfeiture and federal criminal penalties for businesses complying with state law, reduce barriers to banking, and would de-schedule, tax and regulate cannabis in 2017.^7^ Notwithstanding the foregoing, there is no guarantee that the current presidential administration will not change the stated policy of previous administrations regarding the low-priority enforcement of U.S. federal laws against state-legal cannabis businesses. This administration could decide to enforce U.S. federal laws vigorously. Senator Cory Booker has also introduced the Marijuana Justice Act, which would de-schedule cannabis, and in 2018 Congresswoman Barbara Lee introduced the House companion.
An additional challenge to cannabis-related businesses is Section 280E of the Code, which the Internal Revenue Service has applied to businesses operating in the state-legal medical and adult-use cannabis industries. Section 280E generally prohibits businesses from deducting or claiming tax credits with respect to amounts paid or incurred in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the CSA) which is prohibited by U.S. federal law or the law of any state in which such trade or business is conducted. Section 280E currently applies to businesses operating in the cannabis industry, irrespective of whether such businesses that are licensed and operating in accordance with applicable state laws. The application of Section 280E generally causes cannabis businesses to pay higher effective U.S. federal tax rates than similar businesses in other industries. The impact of Section 280E on the effective tax rate of a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry would likely be more profitable absent this provision. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, and recent legislative proposals, if enacted into law, could eliminate or diminish the application of Section 280E to cannabis businesses, there is no guarantee that these courts will issue an interpretation of Section 280E that is favorable to cannabis businesses and the enactment of any such law is uncertain.
^6^ Huddleston, Tom Jr. (2017 February 17). Pro-Pot Lawmakers Launch a Congressional Cannabis Caucus. Retrieved from http://fortune.com/2017/02/16/congress-cannabis-caucus/
^7^ Wyden, Blumenauer. (2017 March 30). Wyden, Blumenauer announce bipartisan path to marijuana reform. Retrieved from https://blumenauer.house.gov/media-center/press-releases/wyden-blumenauer-announcebipartisan-path-marijuana-reform.
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On December 20, 2018, Congress passed the Agriculture Improvement Act of 2018, which became law in the United States and included the legalization of hemp, which changed how hemp and hemp-derived products like CBD are regulated in the U.S.
Currently, there are 33 states plus the District of Columbia, Puerto Rico and Guam that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Other states are considering similar legislation.
Local, state, and U.S. federal medical cannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require Grown Rogue to incur substantial costs associated with compliance or alter certain aspects of its business plan. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of Grown Rogue’s business plan and result in a material adverse effect on certain aspects of its planned operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to certain aspects of Grown Rogue’s business. No prediction can be made as to the nature of any future laws, regulations, interpretations or applications, nor can it be determined what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on Grown Rogue’s business. On or about December 4, 2020, the U.S. House of Representatives voted 228 to 164 in favor of passing the Marijuana Opportunity Reinvestment and Expungement Act of 2019 (the “MORE Act”). The MORE Act seeks to remove marijuana from the list of scheduled substances under the CSA and eliminates penalties for individuals who manufacture, distribute, or possess marijuana. In addition to a number of programs aimed at expunging prior crimes related to marijuana use, the MORE Act also includes a 5% tax on cannabis products, revenues from which would be deposited into a trust fund to support various programs and services for individuals and businesses in communities impacted by the war on drugs. Notwithstanding passage in the House of Representatives, it is unclear whether the MORE Act has the requisite support to pass the U.S. Senate and whether President Biden would support the legislation. Laws and regulations affecting the medical cannabis industry are constantly changing, which could detrimentally affect the proposed operations of Grown Rogue. See the section entitled “Risk Factors” in this AIF.
U.S. Footprint of Grown Rogue’s Business
The following chart summarizes the US States in which Grown Rogue has operations:
| State | Entity with Licence | Brief Description of Operations<br><br> <br>**** |
|---|---|---|
| Oregon | Grown Rogue Gardens, LLC<br><br> <br><br><br> <br>Grown Rogue Distribution, LLC intends to acquire<br> licences from HSCP upon regulatory approval | ● Indoor<br>and Outdoor cultivation and distribution;<br><br> <br><br><br> <br>● US<br> Corporate Headquarters |
| Michigan | Golden Harvests, LLC^(1)^ | · Indoor<br>cultivation and distribution |
Note:
(1) Grown Rogue has an option to acquire GoldenHarvests, LLC pursuant to the Golden Harvests Purchase Option Agreement. For further details see “Events During the Financial YearEnded 2020 - Transaction with Golden Harvests, LLC”.
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Regulation of Cannabis Market at State andLocal Levels in Jurisdictions in which Grown Rogue Operates
Michigan
In November 2008, Michigan residents approved the Michigan Medical Marihuana Act (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan CannabisRegulations”) to provide a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program. Additionally, the Michigan Department of Licensing and Regulatory Affairs and its licensing board (“LARA”) has supplemented the Michigan Cannabis Regulations with “Emergency Rules” to further clarify the regulatory landscape surrounding the medical marijuana program. LARA is the main regulatory authority for the licensing of marijuana businesses.
Under the MMFLA, LARA administrates five types of “state operating licences” for medical marijuana businesses: (a) a “grower” licence, (b) a “processor” licence, (c) a “secure transporter” licence, (d) a “provisioning center” licence and (e) a “safety compliance facility” licence. There are no stated limits on the number of licences that can be made available on a state level; however, LARA has discretion over the approval of applications and municipalities can pass additional restrictions.
On November 6, 2018, Michigan voters approved Proposal 1, to make marijuana legal under state and local law for adults 21 years of age or older and to control the commercial production and distribution of marijuana under a system that licences, regulates, and taxes the businesses involved. The act will be known as the Michigan Regulation and Taxation of Marihuana Act. According to Proposal 1, LARA is required to start accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.
On November 13, 2019, the state’s Marijuana Regulatory Agency announced that any existing medically licensed businesses would be allowed to sell recreational use cannabis beginning December 1, 2019.
In December 2019, the state’s Marijuana Regulatory Agency adopted rules for adult-use cannabis.
See Section entitled “Description of Business – General – Michigan” of this AIF for additional information on Grown Rogue’s business operations in the State of Michigan.
Oregon
Oregon’s medical cannabis program was introduced in November 1998 when voters approved Measure 67, the Oregon Cannabis Medical Marijuana Act.
In November 2014, voters approved Measure 91, the Oregon Legalized Marijuana Initiative, which legalized adult-use cannabis in the state of Oregon. In October 2015, the first adult-use dispensaries opened.
The market is divided into six (6) classes of licences: retail producers, dispensaries, wholesalers, processors, laboratories and research. Extracted oils, edibles, and flower products are permitted to be manufactured and sold to consumers 21 years of age or older within Oregon borders.
To date, the Oregon market’s more relaxed licensing structure has led to an oversupply of product. In 2018, a report issued by the Oregon-Idaho High Intensity Drug Trafficking Area (“HIDTA”) program estimated that Oregon cannabis producers grew three times the amount of cannabis that could legally be consumed in the market.^8^
^8^ https://www.onea.org/news-events/onea-news/an-initial-assessment-of-cannabis-production-distribution-and-consumption-in-oregon-2018-an-insight-report-8-6-18
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In response to this report highlighting the oversupply issues in Oregon, the U.S. Attorney for Oregon, Billy Williams, said: “The recent HIDTA Insight Report on marijuana production, distribution, and consumption in Oregon confirms what we already know—it is out of control.” In June 2018, the Oregon Liquor Control Commission, which regulates adult-use cannabis, announced they would not process any new adult-use licence applications in order to work through the backlog that has developed as the result of 3,432 applications submitted as of May 2018. In July 2018, the Oregon Health Authority, which regulates medical cannabis in Oregon, conceded in a report that it has not provided effective oversight of growers and others in the industry.
See Section entitled “Description of Business – General – Oregon” of this AIF for additional information on Grown Rogue’s business operations in the State of Oregon.
In accordance with Staff Notice 51-352, this section provides a discussion of the federal and state-level U.S. regulatory regimes in the jurisdictions where Grown Rogue is currently directly involved through its subsidiaries or is planning to be directly involved in the future. Certain Grown Rogue subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market. In accordance with Staff Notice 51-352, Grown Rogue will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on Grown Rogue’s licences, business activities or operations will be promptly disclosed by Grown Rogue.
See the section entitled “Risk Factors” in this AIF.
Risk Factors
The risks presented in this AIF may not be all of the risks that the Company may face, although they are management’s current assessment of the risk factors that may cause actual results to be different from expected and historical results. The risks and uncertainties described herein are not the only ones the Company faces. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business. If any of the following risks actually occur, the Company’s business may be harmed and its financial condition and results of operations may suffer significantly.
COVID-19 Outbreak
The outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company in future periods. However, depending on the length and severity of the pandemic, COVID-19 could impact the Company’s operations, could cause delays relating to approval from the FDA, Health Canada or equivalent organizations in other countries, could postpone research activities, and could impair the Company’s ability to raise funds depending on COVID-19s effect on capital markets.
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To the knowledge of the Company’s management as of the date hereof, COVID-19 does not present, at this time, any specific known impacts to the Company in relation to the Company’s use of available funds, nor to the timelines, business objectives or disclosed milestones related thereto. The Company relies on third parties to conduct and monitor the Company’s pre-clinical studies and clinical trials. However, to the knowledge of Company’s management, the ability of these third parties to conduct and monitor pre-clinical studies and clinical trials has not been and is not anticipated to be impacted by COVID-19. The Company is not currently aware of any changes in laws, regulations or guidelines, including tax and accounting requirements, arising from COVID-19 which would be reasonably anticipated to materially affect the Company’s business.
Regulatory Risks
The adult-use and medical cannabis industries and markets are subject to a variety of laws in Canada, the United States and elsewhere.
For instance, in Canada, the Cannabis Act came into force on October 17, 2018, legalizing the sale of cannabis for adult recreational use. Prior to the Cannabis Act coming into force, only the sale of medical cannabis was legal. The Cannabis Act provides a licensing and permitting scheme for the production, importation, exportation, testing, packaging, labelling, sending, delivery, transportation, sale, possession and disposal of cannabis for non-medicinal use (i.e., adult use), implemented by the Cannabis Regulations. The Cannabis Act also maintains separate access to cannabis for medical purposes.
The activities of the Company are subject to regulation by governmental authorities. The Company’s business objectives are contingent upon, in part, compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the sale of its products in each jurisdiction in which it operates. The Company cannot predict the time required to secure all appropriate regulatory approvals and licences for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operations and financial condition of the Company. 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.
Furthermore, although the operations of the Company are currently carried out in accordance with all applicable rules and regulations, no assurance can be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner which could limit or curtail the Company’s ability to research, possess, produce, sell, transport and deliver products including, but not limited to, cannabis, cannabis resin, tetrahydrocannabinol and other cannabis-related products. Amendments to current laws and regulations governing the importation, distribution, transportation and/or production of cannabis and cannabis-related products, or more stringent implementation thereof could have a substantial adverse impact on the Company.
Involvement in the United States Cannabis Market
There is a significant risk that third party service providers could suspend or withdraw services and regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.
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The Company has significant involvement in the medical and adult-use marijuana industry in the United States where local state law permits such activities. Outlined below is a summary of certain risks that the board of directors of the Company has identified as being appropriate to highlight to investors at this time. These risks will continue to be considered, evaluated, reassessed, monitored and analyzed on an on-going basis and will be supplemented, amended and communicated to investors as necessary or advisable in the Company’s future public disclosure.
Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a controlled substance under the CSA and as such, cultivation, distribution, sale and possession of cannabis violates federal law in the United States. The inconsistency between federal and state laws and regulations is a major risk factor. As a result of the Sessions Memorandum, federal prosecutors are free to utilize their prosecutorial discretion to decide whether to prosecute cannabis-related activities despite the legality of these activities at the state-level. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Due to the ambiguity of the Sessions Memorandum, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis-related businesses that are otherwise compliant with state law.
U.S. federal law pre-empts state law in these circumstances, so that the federal government can assert criminal violations of federal law despite state law. The level of prosecutions of state-legal cannabis operations is entirely unknown, nonetheless the stated position of the current administration is hostile to legal cannabis, and furthermore may be changed at any time by the Department of Justice, to become even more aggressive. Now that the Cole Memorandum has been rescinded, the Department of Justice under the current administration or an aggressive federal prosecutor could allege that the Company and its board of directors and its shareholders “aided and abetted” violations of federal law by virtue of its operations.
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, the listing of its securities on the CSE or other applicable exchanges, its financial position, operating results, profitability or liquidity or the market price of the Common Shares.
United States Border Crossing and Travel Ban
Investors in the Company and the Company’s directors and officers may be subject to travel and entry bans into the United States. Recent media articles have reported that certain Canadian citizens have been rejected for entry into the United States, due to their involvement in the marijuana sector. In at least one widely reported incident, an investor in companies operating in the marijuana sector in states where it is legal to do so, received a lifetime ban.
The majority of persons travelling across the Canadian and U.S. border do so without incident, whereas some persons are simply barred entry one time. The U. S. Department of State and the Department of Homeland Security has indicated that the United States has not changed its admission requirements in response to the pending legalization in Canada of recreational cannabis, but anecdotal evidence indicates that the United States may be increasing its scrutiny of travelers and their cannabis related involvement.
Admissibility to the United States may be denied to any person working or ‘having involvement in’ the marijuana industry, including in U.S. states where it is deemed legal, according to United States Customs and Border Protection. Additionally, legal experts have indicated that the criteria are applied broadly such that a determination that the act of investing, working or collaborating with a U.S. cannabis company may be considered trafficking illegal drugs or aiding, abetting, assisting, conspiring or colluding in its trafficking. Inadmissibility in the United States implies a lifetime ban for entry as such designation is not lifted unless an individual applies for and obtains a waiver.
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Reliance on Licences
Government licences and permits are currently, and may in the future, be required in connection with the Company’s operations. The Company’s success depends on its ability to maintain and renew its licences and permits. To the extent such licences and permits are required and are not obtained or lapse, the Company may be curtailed or prohibited from its proposed production of medical or adult-use cannabis or from proceeding with the development of its operations as currently anticipated.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities, causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment or other remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed on it for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the production of medical and adult-use cannabis, or a more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs, could cause a reduction in levels of production or could require abandonment or delays in development. Additionally, the Company’s success is contingent upon many variables not in its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority.
While the Company’s compliance controls have been developed to mitigate the risk of any material violations of any licence, permit, or certificate the Company holds, there is no guarantee that the Company’s licences, permits, or certificates will be renewed with the applicable regulatory authority in a timely manner. Any unexpected delays or costs associated with the permitting and licensing process may impede the Company’s operations and have a material adverse effect on the Company’s business, financial condition and results of operations or prospects.
Golden Harvests, LLC
The Company does not currently have an ownership interest in Golden Harvests and, through GR Michigan, it currently provides certain services to Golden Harvests under a consulting services agreement. The Company’s ability to acquire an indirect equity interest in Golden Harvests is subject to the exercise by GR Unlimited of the Canopy Purchase Option and the exercise by Canopy Management of the Golden Harvests Purchase Option. There is a risk that the conditions for the exercise of the Canopy Purchase Option or the Golden Harvests Purchase Option will not be satisfied and the Company will not acquire an indirect interest or any interest in Golden Harvests. In addition to delivering the consideration payable by it in connection with any exercise of the Canopy Purchase Option, GR Unlimited may only exercise the Canopy Purchase Option if it has received all licensing and other regulatory or governmental approvals from the State of Michigan necessary to operate, or to own an equity interest in an entity that operates a cannabis business in the State of Michigan. There is a risk and there can be no assurance that any such approvals will be obtained.
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No Control Over Operations
The Company may not be directly involved in the ownership or operation of and may have no or limited contractual rights relating to the operations of its current and/or future royalty, equity, debt or other investee entities (collectively, the “Investees”). The Investees will generally have the power to determine the manner in which the business of such Investee is developed, expanded and operated. The interests of the Company and the Investees may not always be aligned. As a result, the cash flows of the Company from royalties, debt instruments or otherwise will be dependent upon the activities of the Investees, which creates the risk that at any time those Investees may: (i) have business interests or targets that are inconsistent with those of the Company; (ii) take action contrary to the Company’s policies or objectives; (iii) be unable or unwilling to fulfill their obligations under their agreements with the Company; or (iv) experience financial, operational or other difficulties, including insolvency, which could limit or suspend an Investee’s ability to perform its obligations under agreements with the Company. There is also the risk that such Investees may not comply with applicable laws, including by operating in jurisdictions where their activities are in breach of the laws of such jurisdictions. There can be no assurance that the Investees involved in the production of cannabis will ultimately meet forecasts or targets. Payments to the Company, in certain instances, will be based upon the payment of dividends by Investees, if any, or calculated by the Investees based on reported production, and such payments are subject to, and dependent upon, the adequacy and accuracy of the operators’ production and accounting functions. The Company must rely on the accuracy and timeliness of the public disclosure and other information it receives from the Investees. If the information contains material inaccuracies or omissions, the Company’s ability to accurately forecast or achieve its stated objectives may be materially impaired. Failure to receive the Company’s entitlements pursuant to the agreements it has entered into may have a material adverse effect on the Company.
Currently, the Company provides certain management services to Golden Harvests through its subsidiary GR Michigan, but does not currently have an equity interest in or control of Golden Harvests. The Company’s right to acquire an indirect interest in Golden Harvests exists solely from its rights under the Canopy Purchase Option Agreement and Canopy Management’s rights under the Golden Harvests Option Agreement, as described elsewhere in this AIF. The Company’s rights with respect to Golden Harvests and its business are dependent its exercise of its contractual right to acquire an equity interest in Canopy Management in accordance with the terms of the Canopy Purchase Option Agreement and Canopy Management’s exercise its rights to acquire an equity interest in Golden Harvests. There can be no assurance that the conditions for the exercise of these rights will be satisfied or that these rights will be exercised at all.
Expansion of Facilities
There is no guarantee that the Company will receive the necessary municipal, state and other regulatory approvals with respect to contemplated expansions in a timely fashion, nor is there any guarantee that the expansion will be completed in its currently proposed form, if at all. The failure of the Company to successfully execute its expansion strategy (including receiving the expected approvals in a timely fashion) could adversely affect the business, financial condition and results of operations of the Company and may result in the Company not meeting anticipated or future demand when it arises.
Competition
The regulated cannabis market is intense, rapidly evolving and competitive. There can be no assurance that the Company’s competitors, some of which have longer operating histories and more resources than the Company, will not develop products and services that achieve greater market share than the Company’s products and services. Such competitive forces could have a material adverse impact on the Company’s business, financial condition and results of operations.
In addition, the legal landscape for medical and recreational marijuana is changing internationally. More countries have passed laws that allow for the production and distribution of medical and recreational marijuana in some form or another. Increased international competition might lower the demand for the Company’s products on a global scale.
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Reliance on Key Inputs
The Company’s business is dependent on a number of key inputs and their related costs including raw materials and supplies related to its growing operations, as well as electricity, water and other utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the financial condition and operating results of the Company. 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 and operating results of the Company.
Financial Risk Factors
It is possible that the Company may not be able to foresee all of the risks that it may have to face. The market in which the Company currently competes is complex, competitive and changes rapidly. Sometimes new risks emerge and management may not be able to predict all of them or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. Readers of this AIF should not rely upon forward-looking statements as a prediction of future results.
Liquidity Risk
The Company’s liquidity risk is the risk the Company will not be able to meet its financial obligations as they become due. The Company manages its liquidity risk by reviewing on an ongoing basis its capital requirements.
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises two types of risk: currency rate risk and interest rate risk.
Dependence on Senior Management
The success of the Company and its strategic focus is dependent to a significant degree upon the contributions of senior management. The loss of any of these individuals, or an inability to attract, retain and motivate sufficient numbers of qualified senior management personnel could adversely affect its business. This risk is partially mitigated by the fact that the senior management team are significant shareholders in the Company. As well, the implementation of employee compensation packages, composed of monetary short-term compensation and long-term stock-based compensation, has been designed for the retention of key employees.
Sufficiency of Insurance
The Company maintains various types of insurance which may include financial institution bonds; errors and omissions insurance; directors’, trustees’ and officers’ insurance; property coverage; and, general commercial insurance. There is no assurance that claims will not exceed the limits of available coverage; that any insurer will remain solvent or willing to continue providing insurance coverage with sufficient limits or at a reasonable cost; or, that any insurer will not dispute coverage of certain claims due to ambiguities in the policies. A judgment against any member of the Company in excess of available coverage could have a material adverse effect on the Company in terms of damages awarded and the impact on the reputation of the Company.
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General Business Risk and Liability
Given the nature of the Company’s business, it may from time to time be subject to claims or complaints from investors or others in the normal course of business. The legal risks facing the Company, its directors, officers, employees or agents in this respect include potential liability for violations of securities laws, breach of fiduciary duty and misuse of investors’ funds. Some violations of securities laws and breach of fiduciary duty could result in civil liability, fines, sanctions, or the suspension or revocation of the Company’s right to carry on its existing business. The Company may incur significant costs in connection with such potential liabilities.
Regulation of the Marijuana Industry
The Company is heavily regulated in all jurisdictions where it carries on business. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over the activities of the Company, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Company’s products and services.
Possible sanctions include the revocation or imposition of conditions on licences to operate the Company’s business; the suspension or expulsion from a particular market or jurisdiction or of its key personnel; and, the imposition of fines and censures. To the extent that existing or future regulations affect the sale or offering of the Company’s product or services in any way, the Company’s revenues may be adversely affected.
Change in Laws, Regulations and Guidelines
Local, state and federal laws and enforcement policies concerning cannabis-related conduct are changing rapidly and will continue to do so for the foreseeable future. There can be no assurance that existing state laws that legalize and regulate the production, sale and use of cannabis will not be repealed, amended or overturned. In addition, local governments have the ability to limit, restrict and ban cannabis-related businesses from operating within their jurisdictions. Land use, zoning, local ordinances and similar laws could be adopted or changed in a manner that makes it extremely difficult or impossible to transact business in certain jurisdictions. These potential changes in state and local laws are unpredictable and could have a material adverse effect on the Company’s business.
While the impact of such changes is uncertain and are highly dependent on which specific laws or regulations are changed, the impact on the Company and its subsidiaries should be comparable to companies in the same business as the Company.
Limited Operating History
The Company is subject to many of the risks common to early-stage enterprises, including limitations with respect to personnel and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on shareholders’ investments and the likelihood of success must be considered in light of the early stage of operations.
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Factors Which May Prevent Realization of Growth Targets
The Company’s growth strategy contemplates outfitting its facilities with additional production resources and acquiring an indirect interest in Golden Harvests (as discussed elsewhere in this AIF). There is a risk that these additional resources will not be achieved on time, on budget, or at all, as they 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,<br>regulatory approvals; |
|---|---|
| ● | failure to obtain anticipated licence capacity<br>increases; |
| --- | --- |
| ● | plant design errors, non-performance by third<br>party contractors, increases in materials or labour costs; or, construction performance falling below expected levels of output or efficiency; |
| --- | --- |
| ● | environmental pollution; |
| --- | --- |
| ● | contractor or operator errors; or, breakdowns,<br>aging or failure of equipment or processes; |
| --- | --- |
| ● | labour disputes, disruptions or declines in productivity;<br>or, inability to attract sufficient numbers of qualified workers; |
| --- | --- |
| ● | disruption in the supply of energy and utilities; |
| --- | --- |
| ● | major incidents and/or catastrophic events such<br>as fires, explosions, earthquakes or storms; and |
| --- | --- |
| ● | any failure by Canopy Management to exercise<br>its option under the Golden Harvests Option Agreement and any failure by GR Unlimited to exercise the option under the Canopy Purchase<br>Option Agreement, including as a result of any delays or failure to obtain any required regulatory approvals in connection therewith. |
| --- | --- |
As a result, there is a risk that the Company may not have product, or sufficient product, available for shipment, to meet the expectations of its potential customers or in its business plan.
Vulnerability to Rising Energy Costs
The Company’s medical marijuana growing operations consume considerable energy, making the Company vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business of the Company and its ability to operate profitably.
Conflicts of Interest
The Company may be subject to various potential conflicts of interest because of the fact that some of its officers and directors 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 officers who may from time to time deal with persons, firms, institutions or corporations 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, in the event that 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.
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Unfavourable Publicity or Consumer Perception
The Company believes the medical marijuana industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the medical marijuana produced. 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 medical marijuana products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the medical marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable 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 and the Company’s cash flows. The Company’s dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on the Company, the demand for the Company’s products, and the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of medical marijuana in general, or the Company’s products specifically, or associating the consumption of medical marijuana 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.
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 medications or substances could occur. The Company may be subject to various product liability claims, including, 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 the 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 sufficient 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. The Company holds directors’ & officers’ insurance and general liability insurance.
Product Recalls
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 finished products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the Company’s 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 by Health Canada or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
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Client Acquisitions
The Company’s success depends on its ability to attract and retain clients. There are many factors which could impact the Company’s ability to attract and retain clients, including but not limited to the Company’s ability to continually produce desirable and effective product, the successful implementation of the Company’s client-acquisition plan and the continued growth in the aggregate number of patients selecting medical marijuana as a treatment option. The Company’s failure to acquire and retain patients as clients would have a material adverse effect on the Company’s business, operating results and financial condition.
Difficulties with Forecasts
The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical marijuana industry in the United States. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the Company.
Management of Growth
The Company may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. If the Company is unable to deal with this growth; that may have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.
Litigation
The Company may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the Company’s Common Shares and could use significant resources. Even if the Company is involved in litigation and wins, litigation can redirect significant company resources.
Dividends
The Company has no earnings or dividend record and may not pay any dividends on the Common Shares in the foreseeable future. Dividends paid by the Company could be subject to tax and, potentially, tax withholdings.
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Limited Market for Securities
The Common Shares are listed on the CSE and quoted on the OTCQB Venture Market, however, there can be no assurance that an active and liquid market for the Common Shares will be maintained and an investor may find it difficult to resell any securities of the Company.
Currency Risk
Due to the Company’s present operations in the United States, and its intention to continue operating outside of Canada, the Company is exposed to currency fluctuations. 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 operation results and prospects.
Sales of the Common Shares May Have an Adverse Effect on the Market Price of the Common Shares
Sales of a substantial number of Common Shares, or the availability of such securities for sale, could adversely affect the prevailing market prices for the Common Shares. A decline in the market prices of the Common Shares could impair the Company’s ability to raise additional capital through the sale of securities should it desire to do so.
DIVIDENDS and distributions
The Company has never paid any dividends or distributions on any of its securities and presently has no intention of paying dividends. The future dividend policy will be determined by the directors of the Company on the basis of earnings, financial requirements and other relevant factors.
DESCRIPTION OF CAPITAL STRUCTURE
The authorized share capital of Grown Rogue International Inc. consists of an unlimited number of Common Shares without par value and an unlimited number of preferred shares. As at October 31, 2020, there were 107,782,397 Common Shares and nil preferred shares issued and outstanding, and as of the date hereof there are 121,990,553 Common Shares and nil preferred shares issued and outstanding.
All of the Common Shares are of the same class and, once issued, rank equally as to entitlement to dividends, voting powers (one vote per share) and participation in assets of the Company upon dissolution or winding up. No Common Shares have been issued subject to call or assessment.
The Common Shares contain no pre-emptive rights, no conversion or exchange rights, no redemption, retraction, purchase for cancellation or surrender provisions. There are no sinking or purchase fund provisions, no provisions permitting or restricting the issue of additional securities or any other material restrictions, and there are no provisions which are capable of requiring a securityholder to contribute additional capital.
Warrants
As of the date of this AIF, the Company has the following warrants to purchase securities of the Company outstanding, each such warrant exercisable for securities of Grown Rogue, on the terms set out below:
| Number of Warrants | Exercise Price ($) | Expiry Date |
|---|---|---|
| 8,409,091^(1)^ | 0.16 | November 01, 2021 |
| 5,000,000^(1)^ | 0.125 | February 10, 2022 |
| 10,000,000^(1)^ | 0.13 | May 15, 2022 |
| 8,200,000^(1)^ | 0.20 | February 5, 2023 |
| 2,148,117^(1)^ | 0.44 | June 28, 2023 |
| 1,127,758^(2)(3)^ | 0.30 | March 5, 2023 |
| 113,500^(2)(4)^ | 0.30 | March 5, 2023 |
| 34,998,466 |
Notes:
(1) Exercisable to acquire Common Shares.
(2) Exercisable to acquire Compensation Options.
(3) 1,127,758 Broker Warrants Issued as compensationfor the services rendered by the Agent in connection with the Special Warrant Offering.
(4) 113,500 Advisory Warrants issued as compensationfor the services rendered by the Agent in connection with the Special Warrant Offering.
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Special Warrants
As of the date of this AIF, the Company has an aggregate of 21,056,890 Special Warrants outstanding. Each Special Warrant entitles the holder thereof to receive, for no additional consideration, Unit on the exercise or deemed exercise of the Special Warrant. Each Unit is comprised of one Common Share and one Warrant. Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $0.30 for a period of twenty-four (24) months following the closing date (the “Closing Date”) of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants. If the Company has not received a receipt for the prospectus on or before April 5, 2021, each unexercised Special Warrant will thereafter entitle the holder to receive upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units, consisting of 1.10 Common Shares and 1.10 Warrants (instead of one Unit consisting of one Common Share and one Warrant).
The Special Warrants are exercisable by the holders thereof at any time for no additional consideration and all unexercised Special Warrants will be deemed to be exercised, without any further action or payment of additional consideration by the holder thereof, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities for a (final) short form prospectus qualifying distribution of the Common Shares and Warrants underlying the Special Warrants, and (ii) July 6, 2021.
Stock Options
As of the date of this AIF, the Company has the following stock options outstanding, each such stock option exercisable for one Common Share, on the terms set out below:
| Number of Options | Exercise Price ($) | Expiry Date |
|---|---|---|
| 500,000 | 0.44 | January 1, 2022 |
| 150,000 | 0.44 | November 30, 2021 |
| 3,475,000 | 0.15 | July 9, 2024 |
| 100,000 | 0.15 | July 20, 2024 |
| 500,000 | 0.15 | December 1, 2024 |
| 200,000 | 0.15 | November 18, 2024 |
| 4,925,000 |
Stock Option Plan
The outstanding stock options of the Company were issued pursuant to the Company’s previous stock option plan (the “Stock Option Plan”), which was subsequently replaced by the adoption of a new equity incentive plan (“Equity Incentive Plan”) which was approved by the Company’s shareholders at its annual general and special meeting of shareholders on August 27, 2020. The Equity Incentive Plan was deemed necessary for certain purposes, including for the Company to facilitate grants of incentive stock options for the purposes of Section 422 of the United States Internal Revenue Code of 1986, as amended (the “Code”). The principal features of the Equity Incentive Plan are summarized below:
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Purpose
The purpose of the Equity Incentive Plan will be to enable the Company and its affiliated companies to: (i) promote and retain employees, officers, consultants, and directors capable of assuring the future success of the Company, (ii) to offer such persons incentives to put forth maximum efforts, and (iii) to compensate such persons through various share and cash-based arrangements and provide them with opportunities for share ownership, thereby aligning the interests of such persons and Shareholders.
The Equity Incentive Plan permits the grant of (i) nonqualified stock options (“NQSOs”) and incentive stock options (“ISOs”) (collectively, “Options”), (ii) restricted stock awards, (iii) restricted stock units (“RSUs”), (iv) stock appreciation rights (“SARs”), and (v) performance compensation awards (“PCAs”), which are referred to herein collectively as “Awards,” as more fully described below.
Eligibility
Any of the Company’s employees, officers, directors, consultants (who are natural persons) are eligible to participate in the Equity Incentive Plan (the “Participants”). The basis of participation of an individual under the Equity Incentive Plan, and the type and amount of any Award that an individual will be entitled to receive under the Equity Incentive Plan, will be determined by the board of directors of the Company (the “Board”) or the compensation committee of the Company (the “Compensation Committee”) based on its judgment as to the best interests of the Company.
The maximum number of Common Shares that may be issued under the Equity Incentive Plan shall be determined by the Board from time to time, but in no case shall exceed, in the aggregate, 20% of the number of Common Shares then outstanding. Notwithstanding the above, the total number of Common Shares issued under ISOs cannot exceed 20,000,000 Common Shares, subject to adjustment as provided in the Equity Incentive Plan.
Any shares subject to an Award under the Equity Incentive Plan that are forfeited, cancelled, expire unexercised, are settled in cash, or are used or withheld to satisfy tax withholding obligations of a Participant shall again be available for Awards under the Equity Incentive Plan. In the event of any dividend, recapitalization, forward or reverse stock split, reorganization, merger, amalgamation, consolidation, split-up, split-off, combination, repurchase or exchange of Common Shares or other securities of the Company, issuance of warrants or other rights to acquire Common Shares or other securities of the Company, or other similar corporate transaction or event, which affects the Common Shares, or unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or changes in applicable rules, rulings, regulations or other requirements of any governmental body or securities exchange or inter-dealer quotation system, accounting principles or law, the Compensation Committee or Board may make such adjustment, which is appropriate in order to prevent dilution or enlargement of the rights of Participants under the Equity Incentive Plan, to (i) the number and kind of shares which may thereafter be issued in connection with Awards, (ii) the number and kind of shares issuable in respect of outstanding Awards, (iii) the purchase price or exercise price relating to any Award or, if deemed appropriate, make provision for a cash payment with respect to any outstanding Award, and (iv) any share limit set forth in the Equity Incentive Plan.
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Awards
Options
The Compensation Committee is authorized to grant Options to purchase Common Shares that are either ISOs meaning they are intended to satisfy the requirements of Section 422 of the Code, or NQSOs, meaning they are not intended to satisfy the requirements of Section 422 of the Code. Options granted under the Equity Incentive Plan will be subject to the terms and conditions established by the Board or Compensation Committee. Under the terms of the Equity Incentive Plan, unless the Compensation Committee or Board determines otherwise in the case of an Option substituted for another Option in connection with a corporate transaction, the exercise price of the Options will not be lower than the greater of the closing market prices of the Common Shares on (a) the trading day prior to the date of grant of the stock options, and (b) the date of grant of the stock options. Options granted under the Equity Incentive Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the Compensation Committee or Board and specified in the applicable award agreement. The maximum term of an option granted under the Equity Incentive Plan will be ten years from the date of grant (or five years in the case of an ISO granted to a 10% shareholder). Payment in respect of the exercise of an Option may be made in cash or by cheque, by surrender of unrestricted shares (at their fair market value on the date of exercise) or by such other method as the Compensation Committee may determine to be appropriate.
Restricted Stock
A restricted stock award is a grant of Common Shares, which are subject to forfeiture restrictions during a restriction period. The Compensation Committee or Board will determine the price, if any, to be paid by the Participant for each Common Shares subject to a restricted stock award, but in any event the price may not be lower than the greater of the closing market prices of the Common Shares on (a) the trading day prior to the date of grant of the restricted stock, and (b) the date of grant of the restricted stock. The Compensation Committee or Board may condition the expiration of the restriction period, if any, upon: (a) the Participant’s continued service over a period of time with the Company or its affiliates; (b) the achievement by the Participant, the Company or its affiliates of any other performance goals set by the Compensation Committee; or (c) any combination of the above conditions as specified in the applicable award agreement. If the specified conditions are not attained, the Participant will forfeit the portion of the restricted stock award with respect to which those conditions are not attained, and the underlying Common Shares will be forfeited. At the end of the restriction period, if the conditions, if any, have been satisfied, the restrictions imposed will lapse with respect to the applicable number of Common Shares. During the restriction period, unless otherwise provided in the applicable award agreement, a Participant will have the right to vote the shares underlying the restricted stock; however, all dividends will remain subject to restriction until the stock with respect to which the dividend was issued lapses. The Compensation Committee may, in its discretion, accelerate the vesting and delivery of shares of restricted stock. Unless otherwise provided in the applicable award agreement or as may be determined by the Compensation Committee, upon a Participant’s termination of service with the Company, the unvested portion of a restricted stock award will be forfeited.
RSUs
RSUs are granted in reference to a specified number of Common Shares and entitle the holder to receive, on achievement of specific performance goals established by the Compensation Committee or Board or after a period of continued service with the Company or its affiliates or any combination of the above as set forth in the applicable award agreement, one Common Share for each such Common Share covered by the RSU; provided, that the Compensation Committee may elect to pay cash, or part cash and part Common Shares in lieu of delivering only Common Shares. The Compensation Committee or Board may, in its discretion, accelerate the vesting of RSUs. Unless otherwise provided in the applicable award agreement or as may be determined by the Compensation Committee, upon a Participant’s termination of service with the Company, the unvested portion of the RSUs will be forfeited. The value ascribed to the Common Shares covered by the RSU may not be lower than the greater of the closing market prices of the Common Shares on (a) the trading day prior to the date of grant of the RSUs, and (b) the date of grant of the RSUs.
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Stock Appreciation Rights
A SAR entitles the recipient to receive, upon exercise of the SAR, the increase in the fair market value of a specified number of Common Shares from the date of the grant of the SAR and the date of exercise payable in Common Shares. Any grant may specify a vesting period or periods before the SAR may become exercisable and permissible dates or periods on or during which the SAR shall be exercisable. No SAR may be exercised more than ten years from the grant date. Unless otherwise provided in the applicable award agreement or as may be determined by the Compensation Committee or Board, upon a Participant’s termination of service with the Company, the unvested portion of a SAR will be forfeited. The value ascribed to the Common Shares covered by the SARs may not be lower than the greater of the closing market prices of the Common Shares on (a) the trading day prior to the date of grant of the SAR, and (b) the date of grant of the SAR.
Performance Compensation Awards
PCAs may be granted under the Equity Incentive Plan, which (i) may be denominated or payable in cash, Common Shares, or other securities, awards or other property (including, without limitation, restricted stock and RSUs), and (ii) confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of one or more objective performance goals during such performance periods as the Compensation Committee or Board shall establish. Notwithstanding the foregoing, pursuant to the rules of the CSE, the value ascribed to the Common Shares covered by the PCAs may not be lower than the greater of the closing market prices of the Common Shares on (a) the trading day prior to the date of grant of the PCA, and (b) the date of grant of the PCA. Subject to the terms of the Equity Incentive Plan and the policies of the CSE, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any PCA granted, the amount of any payment or transfer to be made pursuant to any PCA and any other terms and conditions shall be determined by the Compensation Committee or Board. Unless otherwise provided in the applicable award agreement or as may be determined by the Compensation Committee or Board, upon a Participant’s termination of service with the Company, the unvested portion of a PCA will be forfeited.
General
The Compensation Committee or Board may impose restrictions on the grant, exercise or payment of an Award as it determines appropriate. Generally, Awards granted under the Equity Incentive Plan shall be non-transferable except by will or by the laws of descent and distribution. No Participant shall have any rights as a shareholder with respect to Common Shares covered by any Awards, unless and until such Awards are settled in Common Shares.
No Option (or, if applicable, SARs) shall be exercisable, no Common Shares shall be issued, no certificates for Common Shares shall be delivered and no payment shall be made under the Equity Incentive Plan except in compliance with all applicable laws. The Board may amend, alter, suspend, discontinue or terminate the Equity Incentive Plan and the Compensation Committee or Board may amend any outstanding Award at any time; provided that (i) such amendment, alteration, suspension, discontinuation, or termination shall be subject to the approval of the Company’s shareholders if such approval is necessary to comply with any tax or regulatory requirement applicable to the Equity Incentive Plan (including, without limitation, as necessary to comply with any rules or requirements of applicable securities exchange), and (ii) no such amendment or termination may adversely affect Awards then outstanding without the Award holder’s permission.
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In the event of any reorganization, merger, consolidation, split-up, spin-off, combination, plan of arrangement, takeover bid or tender offer, repurchase or exchange of Common Shares or other securities of the Company or any other similar corporate transaction or event involving the Company (or the Company shall enter into a written agreement to undergo such a transaction or event), the Compensation Committee or the Board may, in its sole discretion, provide for any (or a combination) of the following to be effective upon the consummation of the event (or effective immediately prior to the consummation of the event, provided that the consummation of the event subsequently occurs):
| ● | termination of the Award, whether or not vested,<br>in exchange for cash and/or other property, if any, equal to the amount that would have been attained upon the exercise of the vested<br>portion of the Award or realization of the Participant’s vested rights, |
|---|---|
| ● | the replacement of the Award with other rights<br>or property selected by the Compensation Committee or the Board, in its sole discretion, |
| --- | --- |
| ● | assumption of the Award by the successor or survivor<br>corporation, or a parent or subsidiary thereof, or shall be substituted for by similar options, rights or awards covering the stock of<br>the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares<br>and prices, |
| --- | --- |
| ● | that the Award shall be exercisable or payable<br>or fully vested with respect to all Common Shares covered thereby, notwithstanding anything to the contrary in the applicable award agreement,<br>or |
| --- | --- |
| ● | that the Award cannot vest, be exercised or become<br>payable after a date certain in the future, which may be the effective date of the event. |
| --- | --- |
Tax Withholding
The Company may take such action as it deems appropriate to ensure that all applicable federal, state, local and/or foreign payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant.
MARKET FOR SECURITIES
Common Shares
The following table sets out the high and low closing market prices and the volume traded of the Common Shares on the CSE for each month of the financial year ended October 31, 2020:
| Month | HIGH | LOW | VOLUME |
|---|---|---|---|
| October 2020 | 0.13 | 0.09 | 547,579 |
| September 2020 | 0.12 | 0.09 | 908,084 |
| August 2020 | 0.14 | 0.1 | 920,397 |
| July 2020 | 0.16 | 0.12 | 1,130,765 |
| June 2020 | 0.18 | 0.11 | 3,958,813 |
| May 2020 | 0.12 | 0.09 | 656,253 |
| April 2020 | 0.13 | 0.07 | 1,018,201 |
| March 2020 | 0.13 | 0.06 | 165,169 |
| February 2020 | 0.1 | 0.08 | 335,710 |
| January 2020 | 0.12 | 0.08 | 501,281 |
| December 2019 | 0.14 | 0.09 | 208,971 |
| November 2019 | 0.14 | 0.06 | 553,926 |
48
PRIOR SALES
The following table summarizes details of the following securities that are not listed or quoted on a marketplace issued by the Company during the year ended October 31, 2020:
| Security | Number of Securities | Issue/Exercise Price per Security | Date of Issue |
|---|---|---|---|
| Common Shares | 754,000 | $0.21 | November 14, 2019 |
| Units | 5,000,000 | $0.10 | February 10, 2020 |
| Units | 10,000,000 | $0.10 | May 15, 2020 |
| Common Shares | 1,100,000 | $0.10 | March 27, 2029 |
| Common Shares | 620,000 | $0.10 | May 4, 2020 |
| New Warrants | 6,818,182 | $0.16 to $0.55 | July 10, 2020 |
ESCROWED SECURITIES
The following table summarizes details of the Company’s securities of each class held, to the Company’s knowledge, in escrow or that are subject to a contractual restriction on transfer as of the Company’s fiscal year end, October 31, 2020:
| Designation of class | Number of securities held in escrow or that are subject to a contractual restriction on transfer (as at October 31, 2020)^(1)^ | Percentage of class (as at October 31, 2020) |
|---|---|---|
| Common Shares^(1)^ | 9,631,062 | 8.9% |
Note:
(1) The Escrowed Securities are held in escrowby Capital Transfer Agency, ULC as escrow agent and depository pursuant to an escrow agreement dated November 15, 2018 (the “EscrowAgreement”). Pursuant to the Escrow Agreement. 10% of such Escrowed Securities were released on the listing date of the CommonShares on the CSE, and 15% every six (6) months thereafter, subject to acceleration provisions provided for in National Policy 46-201– Escrow for Initial Public Offerings.
DIRECTORS AND OFFICERS
Name, Occupation and Security Holdings
The following table sets forth all current directors and executive officers of the Company as at the date hereof, their principal occupations or employment, the period or periods of service, and the approximate number of voting securities of the Company beneficially owned, directly or indirectly, or over which control or direction is exercised as of the date hereof. The Board currently consists of five directors, to be elected annually. The term of office of each director will be from the date of the meeting at which he or she is elected until the next annual meeting, or until his or her successor is elected or appointed.
49
| Name, Province and Country of Residence,Position | Position Since | Number^(1)^ and Percent^(2)^ of Common Shares Beneficially Owned^(4)^ | Principal Occupation During Past Five Years |
|---|---|---|---|
| J. Obie Strickler^(3)^<br><br> <br>Oregon, United States<br><br> <br>President, CEO and Director | November 15, 2018 | 31,018,766<br><br> <br>(25.4%) | President, Chief Executive Officer and Director of the Company |
| Michael Johnston<br><br> <br><br><br> <br>CFO and orporate SecretaryC | November 15, 2018 | Nil | Chief Financial Officer and Corporate Secretary of the Company |
| Adam August<br><br> <br><br><br> <br>CFO of Grown Rogue Unlimited,<br> LLC | April 5, 2019 | 3,938,636<br><br> <br>(3.2%) | Current Chief Financial Officer of Grown Rogue Unlimited, LLC; Formerly Vice President of Finance and Treasurer of Harry & David Holdings, Inc. |
| Rob Rigg<br><br> <br>Oregon, United States<br><br> <br><br><br> <br>Chief Marketing Officer | December 1, 2018 | 851,500<br><br> <br>(<1%) | Chief Marketing Officer of the Company; Director of Marketing (North America) of Cycling Sports Group from 2017 to 2018; Director (Global Product Marketing & Consumer Insights) of TaylorMade-adidas Golf Company from 2013 to 2016 |
| Ryan Kee<br><br> <br>Washington, United States<br><br> <br><br><br> <br>Chief Accounting Officer | August 1, 2020 | Nil | Certified Public Accountant |
| Abhilash Patel<br><br> <br>California, United States<br><br> <br><br><br> <br>Director | November 15, 2018 | 694,221<br><br> <br>(<1%) | Consultant |
| Stephen Gledhill^(3)^<br><br> <br>Ontario, Canada<br><br> <br><br><br> <br>Director | November 15, 2018 | 283,636<br><br> <br>(<1%) | Accountant |
| Steve Lightman^(3)^<br><br> <br>Oregon, United States<br><br> <br><br><br> <br>Director | January 27, 2021 | Nil | President 1-800 Flowers Food Group |
50
| Name, Province and Country of Residence,Position | Position Since | Number^(1)^ and Percent^(2)^ of Common Shares Beneficially Owned^(4)^ | Principal Occupation During Past Five Years |
|---|---|---|---|
| Sean Conacher<br><br> <br>Ontario, Canada<br><br> <br><br><br> <br>Director | August 2020 | 20,000<br><br> <br>(<1%) | Chief Executive Officer of Plant-Based Investment Corp. from September 2019 to September 2020; Chief Strategy Officer of Plant-Based Investment Corp. form October 2020 to Present; President & Chief Executive Officer of Scarlet Fire Investment Corp. from January 2014 to Present; Chief Executive Officer of Global Cannabis Innovators Corp. from February 2018 to Present; Former Managing Director of Specialty Finance Partners Corp. from April 2016 to February 2018 |
Notes:
| (1) | The information as to voting securities beneficially owned, controlled or directed, not being withinthe knowledge of the Company, has been furnished by the respective director and/or executive officer individually. |
|---|---|
| (2) | Based on 121,990,553 Common Shares issued and outstanding as of the date hereof. |
| --- | --- |
| (3) | Member of the Audit Committee. |
| --- | --- |
| (4) | The directors and executive officers of the Company, as a group, collectively beneficially own, orcontrol or direct, directly or indirectly, 36,806,759 Common Shares representing approximately 30.2*% of the number of CommonShares outstanding as of the date hereof.* |
| --- | --- |
Cease Trade Orders, Bankruptcies, Penalties or Sanctions
For the purposes of this section “Order” means:
| (a) | a cease trade order; |
|---|---|
| (b) | an order similar to a cease trade order; or |
| --- | --- |
| (c) | an order that denied the relevant company access to any exemption under securities legislation; |
| --- | --- |
that was in effect for more than 30 days.
Other than as set out below, none of the directors or executive officers of the Company or any shareholder holding a sufficient number of securities of the Company to materially affect control of the Company:
| (a) | is, as of the date of this AIF, or has been, within 10 years before the date of this AIF, a director or<br>executive officer of any company that: |
|---|---|
| (i) | was the subject of an Order that was issued while the director or executive officer was acting in the<br>capacity as director, chief executive officer or chief financial officer; |
| --- | --- |
| (ii) | was subject to an Order that was issued after the director or executive officer ceased to be a director,<br>chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the<br>capacity as director, chief executive officer or chief financial officer; or |
| --- | --- |
| (iii) | while that person was acting in that capacity, or within a year of that person ceasing to act in that<br>capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted<br>any proceeding, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;<br>or |
| --- | --- |
| (b) | has, within the 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation<br>relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or<br>had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director. |
| --- | --- |
51
Other than as set out below, none of the directors or executive officers of the Company, or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company has, within the last 10 years, been subject to: (i) any penalties or sanctions imposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or has entered a settlement agreement with a Canadian securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would be likely to be considered important to a reasonable investor making an investment decision.
In 2013, Sean Conacher was a trader and designated person at a firm regulated by The Investment Industry Regulatory Association of Canada (“IIROC”). It was determined that between June 2013 and October 2013, Mr. Conacher allowed a U.S. based client to enter orders directly on an IIROC-regulated marketplace through a firm inventory account, and therefore permitted trades to be executed that Mr. Conacher knew, or ought to have reasonably have known, would not comply with applicable regulatory requirements. Mr. Conacher and IIROC subsequently entered into a settlement agreement, resulting in: (i) a fine of $15,000; (ii) a suspension of access to IIROC-regulated marketplaces for three months effective from October 2013; and (iii) costs of $2,000.
On April 25, 2016, CO2 Gro Inc. (formerly BlueOcean NutraSciences Inc.) (“BOC”) applied to the applicable Canadian securities regulatory authorities pursuant to National Policy 12-203 – Cease Trade Orders for Continuous Disclosure Defaults (“Policy 12-203”) for a MCTO, which precluded members of management (including Stephen Gledhill, CFO) from trading BOC common shares until such time as the MCTO is no longer in effect. The MCTO was sought by BOC as it would not be filing its audited annual financial statements, related management discussion and analysis and applicable officer certifications (the “Annual Materials”) by the deadline date of April 29, 2016. On May 9, 2016, the OSC granted a temporary MCTO, effective until May 16, 2016. On May 16, 2016, the OSC issued a permanent MCTO in effect until 2 days following BOC filing its Annual Materials with the applicable regulatory authorities. On July 19, 2016, BOC filed its Annual Materials and on July 21, 2016, the MCTO was lifted.
On January 12, 2016 (further to a TSX Venture Exchange Bulletin dated January 11, 2016), Gemoscan Canada, Inc.’s (“GES”) shares were suspended from trading on the TSX Venture Exchange for failing to maintain exchange requirements, GES having made assignment into bankruptcy. Effective January 13, 2016, GES’s listing was transferred to the NEX. Stephen Gledhill served as CFO of GES from August 2010 to November 2015.
Michael Johnston was subject to a management cease trade order (MCTO) issued by the OSC on September 13, 2017 as a result of Canada House Wellness Group Inc. being unable to file the audited financial statements and MD&A (and related certifications) for the year ended April 30, 2017. The delay occurred because the issuer was denied access to certain records to a subsidiary for which there was an ownership dispute. The MCTO was extended until such time as the interim financial statements and MD&A (and related certifications) for the interim period ended July 31, 2017 were filed. The MCTO was revoked on November 22, 2017 after the financial statements (and related documents) were filed.
52
Conflicts of Interest
There are no known existing or potential conflicts of interest among the Company and the directors and officers of the Company as a result of their outside business interests except that certain of the directors and officers may serve as directors, officers, promoters and members of management of other companies and therefore it is possible that a conflict may arise between their duties as a director and officer of the Company and their duties as a director, officer, promoter or member of management of such other companies.
The directors and officers of the Company have been advised of the existence of laws governing accountability of directors and officers regarding corporate opportunity and requiring disclosures by directors of conflicts of interest, and the Company will rely upon such laws in respect of any directors’ and officers’ conflicts of interest or in respect of any breaches of duty by any of the directors or officers. All such conflicts shall be disclosed by such directors or officers and treated in accordance with the applicable laws of British Columbia and the Company’s constating documents.
LEGAL PROCEEDINGS and regulatory actions
The Company was not subject to any material legal proceedings during its most recently completed financial year, nor is the Company or any of its properties a party to or the subject of any such proceedings, and no such proceedings are known to be contemplated. The Company may be involved in routine, non-material litigation arising in the ordinary course of business, from time to time.
There were no penalties or sanctions imposed against the Company by a court relating to provincial and territorial securities legislation or by a securities regulatory authority during its most recently completed financial year, nor have there been any other penalties or sanctions imposed by a court or regulatory body against the Company, and the Company has not entered into any settlement agreements before a court relating to provincial and territorial securities legislation or with a securities regulatory authority.
INTERESTS OF MANAGEMENT IN MATERIAL TRANSACTIONS
To the knowledge of management of the Company, no director or executive officer of the Company, person or company that beneficially owns, controls or directs, directly or indirectly, more than 10% of the Common Shares, or any associate or affiliate of any such persons, has or had any material interest, direct or indirect, in any transaction within the Company’s three most recently completed financial years which has materially affected or is reasonably expected to materially affect the Company or any of its subsidiaries other than as set out elsewhere herein (including, without limitation, the disclosure regarding the Canopy Purchase Option Agreement and the related Golden Harvests Option Agreement).
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent of the Company is Capital Transfer Agency, ULC, having an address of 390 Bay St Suite 920, Toronto, ON M5H 2Y2.
MATERIAL CONTRACTS
The Company entered into the following material contract during the year ended October 31, 2020 that is still in effect as of the date of this AIF:
| ● | the Cannabis Growth Voting and Resale Agreement; |
|---|
a copy of which has been filed on SEDAR under the Company’s issuer profile.
53
Experts and INTERESTS OF EXPERTS
Dale Matheson Carr-Hilton Labonte LLP (“DMCL LLP”) is the external auditor of the Company. DMCL LLP has audited the consolidated financial statements of the Company as at and for the financial year ended October 31, 2020, which were filed with the Canadian securities regulators on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. DMCL LLP has informed the Company that it is independent with respect to the Company within the meaning of the Code of Professional Conduct of Chartered Professional Accountants of British Columbia.
ADDITIONAL INFORMATION
Additional information relating to the Company may be found through a database search at SEDAR. Additional information on the Company, including directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities, securities authorized for issuance under equity compensation plans and audit committee disclosure, is contained in the Company’s management information circular dated July 20, 2020, which may be found on SEDAR.
Additional financial information regarding the Company is provided in the Company’s audited annual consolidated financial statements and management’s discussion and analysis for the financial year ended October 31, 2020, which may be found on SEDAR.
54
Exhibit 2
FORM 52-109FV1
CERTIFICATION OF ANNUAL FILINGS
VENTURE ISSUER BASIC CERTIFICATE
This certificate is being filed on the same date that Grown Rogue International Inc. (the “issuer”) has voluntarily filed an AIF:
I, J. Obie Strickler, Chief Executive Officer of Grown Rogue International Inc., certify the following:
| 1. | Review: I have reviewed the AIF, annual financial statements and annual MD&A, including,<br>for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”)<br>of the issuer for the financial year ended October 31, 2020. |
|---|---|
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the<br>annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is<br>necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual<br>filings. |
| --- | --- |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual<br>financial statements together with the other financial information included in the annual filings fairly present in all material respects<br>the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual<br>filings. |
| --- | --- |
| Date: March 15, 2021. | |
| --- | |
| “J. Obie Strickler” (Signed) | |
| J. Obie Strickler | |
| Chief Executive Officer |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
| i. | controls and other procedures designed to provide reasonable assurance that information<br>required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation<br>is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
|---|---|
| ii. | a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation<br>of financial statements for external purposes in accordance with the issuer’s GAAP. |
| --- | --- |
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit 3
FORM 52-109FV1
CERTIFICATION OF ANNUAL FILINGS
VENTURE ISSUER BASIC CERTIFICATE
This certificate is being filed on the same date that Grown Rogue International Inc. (the “issuer”) has voluntarily filed an AIF:
I, Michael Johnston, Chief Financial Officer of Grown Rogue International Inc., certify the following:
| 1. | Review: I have reviewed the AIF, annual financial statements and annual MD&A, including,<br>for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”)<br>of the issuer for the financial year ended October 31, 2020. |
|---|---|
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the<br>annual filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is<br>necessary to make a statement not misleading in light of the circumstances under which it was made, for the period covered by the annual<br>filings. |
| --- | --- |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual<br>financial statements together with the other financial information included in the annual filings fairly present in all material respects<br>the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the annual<br>filings. |
| --- | --- |
| Date: March 15, 2021. | |
| --- | |
| “Michael Johnston” (Signed) | |
| Michael Johnston | |
| Chief Financial Officer |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
| i. | controls and other procedures designed to provide reasonable assurance that information<br>required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation<br>is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
|---|---|
| ii. | a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation<br>of financial statements for external purposes in accordance with the issuer’s GAAP. |
| --- | --- |
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit4
Form45-106F1 Report of Exempt Distribution
| A. | GeneralInstructions |
|---|---|
| 1. | Filinginstructions |
| --- | --- |
An issuer or underwriter that is required to file a report of exempt distribution and pay the applicable fee must file the report and pay the fee as follows:
| ● | InBritish Columbia – through BCSC eServices at http://www.bcsc.bc.ca. |
|---|---|
| ● | InOntario – through the online e-form available at http://www.osc.gov.on.ca. |
| --- | --- |
| ● | Inall other jurisdictions – through the System for Electronic Document Analysis and Retrieval (SEDAR) in accordance with<br>National Instrument 13-101 System for Electronic Document Analysis and Retrieval (SEDAR) if required, or otherwise with the securities<br>regulatory authority or regulator, as applicable, in the applicable jurisdictions at the addresses listed at the end of this form. |
| --- | --- |
The issuer or underwriter must file the report in a jurisdiction of Canada if the distribution occurs in the jurisdiction, and the issuer or underwriter is relying on a specific exemption from the prospectus requirement set out in section 6.1 of the Instrument. The requirement to file this report might also be a condition of a prospectus exemption provided in a national, multilateral or local rule or instrument, or a condition of an exemptive relief order. If a distribution is made in more than one jurisdiction of Canada, the issuer or underwriter may satisfy its obligation to file the report by completing a single report identifying all purchasers, and file the report in each jurisdiction of Canada in which the distribution occurs. Filing fees payable in a particular jurisdiction are not affected by identifying all purchasers in a single report.
In order to determine the applicable fee in a particular jurisdiction of Canada, consult the securities legislation of that jurisdiction.
| 2. | Issuerslocated outside of Canada |
|---|
If an issuer located outside of Canada determines that a distribution has taken place in a jurisdiction of Canada, include information about purchasers resident in that jurisdiction only.
| 3. | Multipledistributions |
|---|
An issuer may use one report for multiple distributions occurring within 10 days of each other, provided the report is filed on or before the 10th day following the first distribution date. However, an investment fund issuer that is relying on the exemptions set out in subsection 6.2(2) of NI 45-106 may file the report annually in accordance with that subsection.
| 4. | Referencesto purchaser |
|---|
References to a purchaser in this form are to the beneficial owner of the securities.
However, if a trust company, trust corporation, or registered adviser described in paragraph (p) or (q) of the definition of “accredited investor” in section 1.1 of NI 45-106 has purchased the securities on behalf of a fully managed account, provide information about the trust company, trust corporation or registered adviser only; do not include information about the beneficial owner of the fully managed account.
Joint purchasers may be treated as one purchaser for the purposes of Item 7(f) of this form.
| 5. | Referencesto issuer |
|---|
References to “issuer” in this form include an investment fund issuer and a non-investment fund issuer, unless otherwise specified.
| 6. | Investmentfund issuers |
|---|
If the issuer is an investment fund, complete Items 1-3, 6-8, 10, 11 and Schedule 1 of this form.
| 7. | Mortgageinvestment entities |
|---|
If the issuer is a mortgage investment entity, complete all applicable items of this form other than Item 6.
| 8. | Language |
|---|
The report must be filed in English or in French. In Québec, the issuer or underwriter must comply with linguistic rights and obligations prescribed by Québec law.
| 9. | Currency |
|---|
All dollar amounts in the report must be in Canadian dollars. If the distribution was made or any compensation was paid in connection with the distribution in a foreign currency, convert the currency to Canadian dollars using the daily exchange rate of the Bank of Canada on the distribution date. If the distribution date occurs on a date when the daily exchange rate of the Bank of Canada is not available, convert the currency to Canadian dollars using the most recent daily exchange rate of the Bank of Canada available before the distribution date. For investment funds in continuous distribution, convert the currency to Canadian dollars using the average daily exchange rate of the Bank of Canada for the distribution period covered by the report.
If the distribution was not made in Canadian dollars, provide the foreign currency in Item 7(a) of the report.
| 10. | Dateof information in report |
|---|
Unless otherwise indicated in this form, provide the information as of the distribution end date.
| 11. | Dateof formation |
|---|
For the date of formation, provide the date on which the issuer was incorporated, continued or organized (formed). If the issuer resulted from an amalgamation, arrangement, merger or reorganization, provide the date of the most recent amalgamation, arrangement, merger or reorganization.
| 12. | Securitycodes |
|---|
Wherever this form requires disclosure of the type of security, use the following security codes:
| Security code | Security type |
|---|---|
| BND | Bonds |
| CER | Certificates (including pass-through<br> certificates, trust certificates) |
| CMS | Common shares |
| CVD | Convertible debentures |
| CVN | Convertible notes |
| CVP | Convertible preferred shares |
| DCT | Digital coins or tokens |
| DEB | Debentures |
| DRS | Depository receipts (such as American<br> or Global depository receipts/shares) |
| FTS | Flow-through shares |
| FTU | Flow-through units |
| LPU | Limited partnership units and limited partnership<br> interests (including capital commitments) |
| MTG | Mortgages (other than syndicated mortgages) |
| NOT | Notes (include all types of notes except<br> convertible notes) |
| OPT | Options |
| PRS | Preferred shares |
| RTS | Rights |
| SMG | Syndicated mortgages |
| SUB | Subscription receipts |
| UBS | Units of bundled securities (such as<br> a unit consisting of a common share and a warrant) |
| UNT | Units (exclude units of bundled securities,<br> include trust units and mutual fund units) |
| WNT | Warrants (including special warrants) |
| OTH | Other securities not included above (if<br> selected, provide details of security type in Item 7d) |
| 2 |
| --- | | 13. | Distributionsby more than one issuer of a single security | | --- | --- |
If two or more issuers distributed a single security, provide the full legal names of the co-issuers in Item 3.
| B. | Termsused in the form |
|---|---|
| 1. | For<br>the purposes of this form: |
| --- | --- |
“designatedforeign jurisdiction” means Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, New Zealand, Singapore, South Africa, Spain, Sweden, Switzerland or the United Kingdom of Great Britain and Northern Ireland;
“eligibleforeign security” means a security offered primarily in a foreign jurisdiction as part of a distribution of securities in either of the following circumstances:
| (a) | the<br>security is issued by an issuer |
|---|---|
| (i) | that<br>is incorporated, formed or created under the laws of a foreign jurisdiction, |
| --- | --- |
| (ii) | that<br>is not a reporting issuer in a jurisdiction of Canada, |
| --- | --- |
| (iii) | that<br>has its head office outside of Canada, and |
| --- | --- |
| (iv) | that<br>has a majority of the executive officers and a majority of the directors ordinarily resident outside of Canada; |
| --- | --- |
| (b) | the<br>security is issued or guaranteed by the government of a foreign jurisdiction; |
| --- | --- |
“foreignpublic issuer” means an issuer where any of the following apply:
| (a) | the<br>issuer has a class of securities registered under section 12 of the 1934 Act; |
|---|---|
| (b) | the<br>issuer is required to file reports under section 15(d) of the 1934 Act; |
| --- | --- |
| (c) | the<br>issuer is required to provide disclosure relating to the issuer and the trading in its securities to the public, to security holders<br>of the issuer or to a regulatory authority and that disclosure is publicly available in a designated foreign jurisdiction; |
| --- | --- |
“legalentity identifier” means a unique identification code assigned to the person
| (a) | in<br>accordance with the standards set by the Global Legal Entity Identifier System, or |
|---|---|
| (b) | that<br>complies with the standards established by the Legal Entity Identifier Regulatory Oversight Committee for pre-legal entity identifiers; |
| --- | --- |
**“NRD”**means National Registration Database;
“permittedclient” has the same meaning as in National Instrument 31-103 Registration Requirements, Exemptions andOngoing Registrant Obligations;
“SEDARprofile” means a filer profile required under section 5.1 of National Instrument 13-101 System for ElectronicDocument Analysis and Retrieval (SEDAR).
| 2. | For<br>the purposes of this form, a person is connected with an issuer or an investment fund manager if either of the following applies: |
|---|---|
| (a) | one<br>of them is controlled by the other; |
| --- | --- |
| (b) | each<br>of them is controlled by the same person. |
| --- | --- |
| 3 |
| --- |
| 4 |
| --- |
| 5 |
| --- |
| 6 |
| --- |
| 7 |
| --- |
| 8 |
| --- |
| 9 |
| --- |
| 10 |
| --- |
| 11 |
| --- |
SCHEDULE 1 TO FORM 45-106F1 (CONFIDENTIAL PURCHASER INFORMATION)
Schedule1 must be filed in the format of an Excel spreadsheet in a form acceptable to the securities regulatory authority or regulator.
The information in this schedule will not be placed on the public file of any securities regulatory authority or regulator. However, freedom of information legislation may require the securities regulatory authority or regulator to make this information available if requested.
| a) | Generalinformation (provide only once) |
|---|---|
| 1. | Name<br>of issuer |
| --- | --- |
| 2. | Certification<br>date (YYYY-MM-DD) |
| --- | --- |
Providethe following information for each purchaser that participated in the distribution. For each purchaser, create separateentries for each distribution date, security type and exemption relied on for the distribution.
| b) | Legalname of purchaser |
|---|
Iftwo or more individuals have purchased a security as joint purchasers, provide information for each purchaser under the columnsfor family name, first given name and secondary given names, if applicable, and separate the individuals’ names with anampersand. For example, if Jane Jones and Robert Smith are joint purchasers, indicate “Jones & Smith” in the familyname column.
| 1. | Family<br>name |
|---|---|
| 2. | First<br>given name |
| --- | --- |
| 3. | Secondary<br>given names (if applicable) |
| --- | --- |
| 4. | Full<br>legal name of non-individual (if applicable) |
| --- | --- |
| c) | Contactinformation of purchaser |
| --- | --- |
| 1. | Residential<br>street address |
| --- | --- |
| 2. | Municipality |
| --- | --- |
| 3. | Province/State |
| --- | --- |
| 4. | Postal<br>code/Zip code |
| --- | --- |
| 5. | Country |
| --- | --- |
| 6. | Telephone<br>number |
| --- | --- |
| 7. | Email<br>address (if available) |
| --- | --- |
| d) | Detailsof securities purchased |
| --- | --- |
| 1. | Date<br>of distribution (YYYY-MM-DD) |
| --- | --- |
| 2. | Number<br>of securities |
| --- | --- |
| 3. | Security<br>code |
| --- | --- |
| 4. | Amount<br>paid (Canadian $) |
| --- | --- |
| e) | Detailsof exemption relied on |
| --- | --- |
| 1. | Rule,<br>section and subsection number |
| --- | --- |
| 2. | If<br>relying on section 2.3 [Accredited investor] of NI 45-106, provide the paragraph number in the definition of “accredited<br>investor” in section 1.1 of NI 45-106 that applies to the purchaser. (select only one – if the purchaser is a permittedclient that is not an individual, “NIPC” can be selected instead of the paragraph number) |
| --- | --- |
| 3. | If<br>relying on section 2.5 [Family, friends and business associates] of NI 45-106, provide: |
| --- | --- |
| a. | the<br>paragraph number in subsection 2.5(1) that applies to the purchaser (select only one); and |
| --- | --- |
| b. | if<br>relying on paragraphs 2.5(1)(b) to (i), provide: |
| --- | --- |
| i. | the<br>name of the director, executive officer, control person, or founder of the issuer or affiliate of the issuer claiming a relationship<br>to the purchaser. (Note: if Item 9(a) has been completed, the name of the director, executive officer or control person must be consistentwith the name provided in Item 9 and Schedule 2.) |
| --- | --- |
| ii. | the<br>position of the director, executive officer, control person, or founder of the issuer or affiliate of the issuer claiming a relationship<br>to the purchaser. |
| --- | --- |
| 4. | If<br>relying on subsection 2.9(2) or, in Alberta, New Brunswick, Nova Scotia, Ontario, Québec, or Saskatchewan, subsection 2.9(2.1)<br>[Offering memorandum] of NI 45-106 and the purchaser is an eligible investor, provide the paragraph number in the definition of<br>“eligible investor” in section 1.1 of NI 45-106 that applies to the purchaser. (select only one) |
| --- | --- |
| 12 |
| --- | | f) | Otherinformation | | --- | --- |
Paragraphsf)1. and f)2. do not apply if any of the following apply:
| (a) | theissuer is a foreign public issuer; |
|---|---|
| (b) | theissuer is a wholly owned subsidiary of a foreign public issuer; |
| --- | --- |
| (c) | theissuer is distributing only eligible foreign securities and the distribution is to permitted clients only. |
| --- | --- |
| 1. | Is<br>the purchaser a registrant? (Y/N) |
| --- | --- |
| 2. | Is<br>the purchaser an insider of the issuer? (Y/N) (not applicable if the issuer is an investment fund) |
| --- | --- |
| 3. | Full<br>legal name of person compensated for distribution to purchaser. If a person compensated is a registered firm, provide the firm<br>NRD number only. (Note: the names must be consistent with the names of the persons compensated as provided in Item 8.) |
| --- | --- |
INSTRUCTIONSFOR SCHEDULE 1
Any securities issued as payment for commissions or finder’s fees must be disclosed in Item 8 of the report, not in Schedule 1.
Detailsof exemption relied on – When identifying the exemption the issuer relied on for the distribution to each purchaser, refer to the rule, statute or instrument in which the exemption is provided and identify the specific section and, if applicable, subsection or paragraph. For example, if the issuer is relying on an exemption in a National Instrument, refer to the number of the National Instrument, and the subsection or paragraph number of the specific provision. If the issuer is relying on an exemption in a local blanket order, refer to the blanket order by number.
For exemptions that require the purchaser to meet certain characteristics, such as the exemption in section 2.3 [Accreditedinvestor], section 2.5 [Family, friends and business associates] or subsection 2.9(2) or, in Alberta, New Brunswick, Nova Scotia, Ontario, Québec, or Saskatchewan, subsection 2.9(2.1) [Offering memorandum] of NI 45-106, provide the specific paragraph in the definition of those terms that applies to each purchaser.
Reportsfiled under paragraph 6.1(1)(j) [TSX Venture Exchange offering] of NI 45-106 – For reports filed under paragraph 6.1(1)(j) [TSX Venture Exchange offering] of NI 45-106, Schedule 1 must list the total number of purchasers by jurisdiction only, and is not required to include the name, residential address, telephone number or email address of the purchasers.
| 13 |
| --- |
SCHEDULE 2 TO FORM 45-106F1 (CONFIDENTIAL DIRECTOR, EXECUTIVE OFFICER, PROMOTER AND CONTROL PERSON INFORMATION)
Schedule2 must be filed in the format of an Excel spreadsheet in a form acceptable to the securities regulatory authority or regulator.
Complete the following only if Item 9(a) is required to be completed. This schedule also requires information to be provided aboutcontrol persons of the issuer at the time of the distribution.
The information in this schedule will not be placed on the public file of any securities regulatory authority or regulator. However, freedom of information legislation may require the securities regulatory authority or regulator to make this information available if requested.
| a) | Generalinformation (provide only once) |
|---|---|
| 1. | Name<br>of issuer |
| --- | --- |
| 2. | Certification<br>date (YYYY-MM-DD) |
| --- | --- |
| b) | Businesscontact information of Chief Executive Officer (if not provided in Item 10 or 11 of report) |
| --- | --- |
| 1. | Email<br>address |
| --- | --- |
| 2. | Telephone<br>number |
| --- | --- |
| c) | Residentialaddress of directors, executive officers, promoters and control persons of the issuer |
| --- | --- |
Providethe following information for each individual who is a director, executive officer, promoter or control person of the issuerat the time of the distribution. If the promoter or control person is not an individual, provide the following information for each directorand executive officer of the promoter and control person. (Note: names of directors, executive officers and promoters must be consistentwith the information in Item 9 of the report, if required to be provided.)
| 1. | Family<br>name |
|---|---|
| 2. | First<br>given name |
| --- | --- |
| 3. | Secondary<br>given names |
| --- | --- |
| 4. | Residential<br>street address |
| --- | --- |
| 5. | Municipality |
| --- | --- |
| 6. | Province/State |
| --- | --- |
| 7. | Postal<br>code/Zip code |
| --- | --- |
| 8. | Country |
| --- | --- |
| 9. | Indicate<br>whether the individual is a control person, or a director and/or executive officer of a control person (if applicable) |
| --- | --- |
| d) | Non-individualcontrol persons (if applicable) |
| --- | --- |
Ifthe control person is not an individual, provide the following information. For locations within Canada, state the provinceor territory, otherwise state the country.
| 1. | Organization<br>or company name |
|---|---|
| 2. | Province<br>or country of business location |
| --- | --- |
| 14 |
| --- |
Questions:
Refer any questions to:
AlbertaSecurities Commission
Suite 600, 250 – 5th Street SW
Calgary, Alberta T2P 0R4
Telephone: 403-297-6454
Toll free in Canada: 1-877-355-0585
Facsimile: 403-297-2082
Public official contact regarding indirect collection of information: FOIP Coordinator
BritishColumbia Securities Commission
P.O. Box 10142, Pacific Centre
701 West Georgia Street
Vancouver, British Columbia V7Y 1L2
Inquiries: 604-899-6854
Toll free in Canada: 1-800-373-6393
Facsimile: 604-899-6581
Email: [email protected]
Public official contact regarding indirect collection of information: FOI Inquiries
TheManitoba Securities Commission
500 – 400 St. Mary Avenue
Winnipeg, Manitoba R3C 4K5
Telephone: 204-945-2561
Toll free in Manitoba: 1-800-655-5244
Facsimile: 204-945-0330
Public official contact regarding indirect collection of information: Director
Financialand Consumer Services Commission (New Brunswick)
85 Charlotte Street, Suite 300
Saint John, New Brunswick E2L 2J2
Telephone: 506-658-3060
Toll free in Canada: 1-866-933-2222
Facsimile: 506-658-3059
Email: [email protected]
Public official contact regarding indirect collection of information: Chief Executive Officer and Privacy Officer
Governmentof Newfoundland and Labrador Financial Services Regulation Division
P.O. Box 8700
Confederation Building
2nd Floor, West Block
Prince Philip Drive
St. John’s, Newfoundland and Labrador A1B 4J6
Attention: Director of Securities
Telephone: 709-729-4189
Facsimile: 709-729-6187
Public official contact regarding indirect collection of information: Superintendent of Securities
Governmentof the Northwest Territories
Office of the Superintendent of Securities
P.O. Box 1320
Yellowknife, Northwest Territories X1A 2L9
Telephone: 867-767-9305
Facsimile: 867-873-0243
Public official contact regarding indirect collection of information: Superintendent of Securities
NovaScotia Securities Commission
Suite 400, 5251 Duke Street
Duke Tower
P.O. Box 458
Halifax, Nova Scotia B3J 2P8
Telephone: 902-424-7768
Facsimile: 902-424-4625
Public official contact regarding indirect collection of information: Executive Director
Governmentof Nunavut
Departmentof Justice
Legal Registries Division
P.O. Box 1000, Station 570
1st Floor, Brown Building
Iqaluit, Nunavut X0A 0H0
Telephone: 867-975-6590
Facsimile: 867-975-6594
Public official contact regarding indirect collection of information: Superintendent of Securities
OntarioSecurities Commission
20 Queen Street West, 22nd Floor
Toronto, Ontario M5H 3S8
Telephone: 416-593-8314
Toll free in Canada: 1-877-785-1555
Facsimile: 416-593-8122
Email: [email protected]
Public official contact regarding indirect collection of information: Inquiries Officer
PrinceEdward Island Securities Office
95 Rochford Street, 4th Floor Shaw Building
P.O. Box 2000
Charlottetown, Prince Edward Island C1A 7N8
Telephone: 902-368-4569
Facsimile: 902-368-5283
Public official contact regarding indirect collection of information: Superintendent of Securities
| 15 |
| --- | | Autorité des marchés financiers | | --- | | 800, rue du Square-Victoria, 22e étage | | C.P. 246, tour de la Bourse | | Montréal, Québec H4Z 1G3 | | Telephone: 514-395-0337 or 1-877-525-0337 | | Facsimile: 514-873-6155 (For filing purposes only) | | Facsimile: 514-864-6381 (For privacy requests only) | | Email: [email protected] (For corporate finance issuers); [email protected] (For investment fund issuers) | | Public official contact regarding indirect collection of information: Corporate Secretary | | Financial and Consumer Affairs Authority of Saskatchewan | | Suite 601 - 1919 Saskatchewan Drive | | Regina, Saskatchewan S4P 4H2 | | Telephone: 306-787-5842 | | Facsimile: 306-787-5899 | | Public official contact regarding indirect collection of information: Director | | Office of the Superintendent of Securities | | Government of Yukon | | Department of Community Services | | 307 Black Street, 1st Floor | | P.O. Box 2703, C-6 | | Whitehorse, Yukon Y1A 2C6 | | Telephone: 867-667-5466 | | Facsimile: 867-393-6251 | | Email: [email protected] | | Public official contact regarding indirect collection of information: Superintendent of Securities |
| 16 |
| --- |
Exhibit 5
A copy of this preliminary short form prospectushas been filed with the securities regulatory authorities in the Provinces of British Columbia, Alberta, Nova Scotia and Ontario, buthas not yet become final for the purpose of the sale of securities. Information contained in this preliminary short form prospectus maynot be complete and may have to be amended. The securities may not be sold until a receipt for the short form prospectus is obtained fromthe securities regulatory authorities.
No securities regulatory authority has expressedan opinion about these securities and it is an offence to claim otherwise. This short form prospectus constitutes a public offering ofthese securities only in those jurisdictions where they may be lawfully offered for sale and therein only by persons permitted to sellsuch securities. These securities have not been, and will not be, registered under the United States Securities Act of 1933, as amended(the “U.S. Securities Act”) or the securities laws of any state of the United States and, subject to certain exceptions, maynot be offered, sold or delivered, directly or indirectly, in the United States (as such term is defined in Regulation S under the U.S.Securities Act) (the “United States”) except pursuant to an exemption from the registration requirements of the U.S. SecuritiesAct and applicable state securities laws. This short form prospectus does not constitute an offer to sell or solicitation of an offerto buy any of these securities in the United States. See “Plan of Distribution”.
Informationhas been incorporated by reference in this short form prospectus from documents filed with securities commissions or similar authoritiesin Canada. Copies of the documents incorporated herein by reference may be obtainedon request without charge from the Chief Financial Officer of Grown Rogue International Inc., at 340 Richmond Street West, Toronto, OntarioM5V 1X2, Telephone (503) 765-8108, and are also available electronically at www.sedar.com.
| New Issue | March 23, 2021 |
|---|
PRELIMINARY SHORT FORM PROSPECTUS
GROWN ROGUE INTERNATIONAL INC.
$4,737,800****21,056,890 Common Shares and 21,056,890 Common Share Purchase Warrants
Issuable upon Exercise of 21,056,890 SpecialWarrants
This short form prospectus (the “Prospectus”) qualifies the distribution of 21,056,890 Units (the “Units”) of Grown Rogue International Inc. (“Grown Rogue” or the “Corporation”) issuable upon the exercise or deemed exercise of 21,056,890 special warrants (the “Special Warrants”) of the Corporation (the “Offering”). Each Unit consists of one common share (a “Unit Share”) in the capital of the Corporation and one common share purchase warrant (a “Warrant”) of the Corporation. Each Warrant entitles the holder thereof to purchase one common share (a “Warrant Share”) of the Corporation at a price of $0.30 at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023. The Special Warrants were issued on March 5, 2021 pursuant to the terms of a special warrant indenture (the “Special WarrantIndenture”) between the Corporation and Capital Transfer Agency, ULC (“Capital Transfer”). The SpecialWarrants are not available for purchase pursuant to this Prospectus and no additional funds are to be received by the Corporation fromthe distribution of the Units upon the exercise of the Special Warrants.
The Special Warrants were issued by the Corporation on a private placement basis. An aggregate of 17,800,000 Special Warrants were issued pursuant to the terms of an agency agreement dated March 5, 2021 (the “Agency Agreement”) between the Corporation and Eight Capital (the “Agent”) (the “BrokeredOffering”) and the remaining 3,256,890 Special Warrants were issued on a non-brokered basis. The Special Warrants were issued at a price of $0.225 per Special Warrant (the “Offering Price”) for aggregate gross proceeds of $4,737,800. The Offering Price and other terms of the Offering were determined by arm’s length negotiation between the Corporation and the Agent.
The issued and outstanding common shares (the “Common Shares”) of the Corporation are listed on the Canadian Securities Exchange (the “CSE”) under the trading symbol “GRIN”. On February 10, 2021, the last trading day before the announcement of the Offering, the closing price of the Common Shares on the CSE was $0.28 per Common Share. On March 22, 2021, the last trading day before the filing of this Prospectus, the closing price of the Common Shares on the CSE was $0.25 per Common Share. The Corporation will apply to the CSE to list the Unit Shares, the Warrant Shares, the Compensation Shares and the Compensation Warrant Shares on the CSE. Such listing will be subject to the fulfillment of all of the listing requirements of the CSE.
Price: $0.225 per SpecialWarrant
| Price to the Public | Agent’s Fee ^(1)^ | Net Proceeds to theCorporation^(2)(3)^ | ||||
|---|---|---|---|---|---|---|
| Per Special Warrant | $ | 0.225 | $ | 0.0157 | $ | 0.2092 |
| Per Special Warrant (President’s list) | $ | 0.225 | $ | 0.0078 | $ | 0.2171 |
| Total Offering | $ | 4,737,800 | $ | 253,745 | $ | 4,458,555 |
Notes:
| (1) | Pursuant to the Agency Agreement, the Corporation paid to the Agent (i) a cash fee of $253,745 (the “Agent’sFee”), representing 7.0% of the gross proceeds of the Brokered Offering (the “Agent’s Fee”), subject<br>to a reduced fee of up to 3.5% for Special Warrants sold by the Agent to certain purchasers designated by the Corporation on the President’s<br>list (the “President’s List”), and (ii) a cash fee of $25,500 (the “Advisory Fee”) for advisory<br>services provided to the Corporation in connection with the Offering. As additional compensation, the Corporation also issued to the Agent<br>(A) 1,127,758 warrants (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “CompensationOptions”) of the Corporation for no additional consideration; and (B) 113,500 advisory warrants (the “Advisory Warrants”),<br>exercisable to acquire 113,500 Compensation Options for no additional consideration. Each Compensation Option will be exercisable to acquire<br>one Unit (a “Compensation Unit”) comprised of one Unit Share (a “Compensation Share”) and one Warrant<br>(a “Compensation Warrant”) at the Offering Price at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023. Each<br>Compensation Warrant shall entitle the holder thereof to purchase one Common Share (a “Compensation Warrant Share”)<br>at a price of $0.30 at any time before 5:00 p.m. (Toronto time) on March 5, 2023, subject to adjustment in certain events. This Prospectus<br>qualifies the distribution of the Compensation Options. See “Plan of Distribution”. | ||
|---|---|---|---|
| (2) | After deducting the Agent’s Fee and the Advisory Fee, but before deducting the expenses of the Offering<br>and the qualification for distribution of the Units, estimated to be $300,000, which will be paid out of the gross proceeds of the Offering. | ||
| --- | --- | ||
| (3) | The distribution of the Units upon exercise of the Special Warrants will not result in any proceeds being<br>received by the Corporation. | ||
| --- | --- | ||
| Agent’s Position | Maximum Size or Number of securities available | Exercise Period | Exercise Price |
| --- | --- | --- | --- |
| Broker Warrants | 1,127,758 Broker Warrants exercisable (for no consideration) to acquire an equal number of Compensation Options, which are in turn exercisable to acquire an equal number of Compensation Units | Compensation Options are exercisable at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023 | $0.225 per Compensation Unit |
| Advisory Warrants | 113,500 Advisory Warrants exercisable (for no consideration) to acquire an equal number of Compensation Options, which are in turn exercisable to acquire an equal number of Compensation Units | Compensation Options are exercisable at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023 | $0.225 per Compensation Unit |
Each Special Warrant entitles its holder to receive, upon exercise or deemed exercise, one Unit at no additional cost. Each Special Warrant shall be deemed exercised on behalf of, and without any required action on the part of, the holder thereof, on the day (the “Qualification Date”) that is the earlier of: (i) July 6, 2021; and (ii) the third business day after a receipt is issued for a final short form prospectus qualifying the distribution of the Unit Shares and the Warrants in the Qualifying Jurisdictions. See “Plan of Distribution” and “Description of Securities Distributed”.
The Corporation has agreed to use reasonable commercial efforts to file, and obtain a receipt for, a final short form prospectus qualifying the Units issuable upon exercise of the Special Warrants on or before April 4, 2021, being 30 days after the Closing Date (the “Penalty Date”). In the event that the Qualification Date is later than April 4, 2021, each holder of a Special Warrant shall be entitled to receive, without payment of additional consideration, an additional number of Units equal to 10% of the number of Units originally issuable upon the exercise or deemed exercise of the Special Warrants, resulting in each Special Warrant being exercisable for 1.10 Units (the “Penalty Provision”). This Prospectus qualifies the distribution of up to an aggregate of 2,105,689 Unit Shares and 2,105,689 Warrants issuable pursuant to the Penalty Provision, if applicable. See “Plan of Distribution”.
The Special Warrants were sold directly to subscribers by the Corporation or through the Agent to purchasers resident in each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario (the “Qualifying Jurisdictions”), in addition to offshore purchasers, on a private placement basis pursuant to prospectus exemptions under applicable securities legislation and were issued under and are governed by the Special Warrant Indenture. There is no market through which the Special Warrants may be sold and none is expected to develop.
No additional proceeds will be received by the Corporation, and no commission or fee will be payable by the Corporation, in connection with the issue of the Units upon exercise or deemed exercise of the Special Warrants.
The Warrants are issuable pursuant to a warrant indenture dated March 5, 2021 (the “Warrant Indenture”) between the Corporation and Capital Transfer.
There is currently no market through whichthe Warrants may be sold, and purchasers may not be able to resell the Warrants acquired pursuant to the Offering. This may affect thepricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants andthe extent of issuer regulation. An investment in the securities of the Corporation is speculative and involves a significant degree ofrisk. See “Risk Factors”.
An investment in the securities of the Corporationis highly speculative and involves significant risks that should be carefully considered by prospective investors before purchasing suchsecurities. The risks outlined in this Prospectus and in the documents incorporated by reference herein should be carefully reviewed andconsidered by prospective investors in connection with an investment in such securities. See “Risk Factors” and “CautionaryStatement Regarding Forward Looking Information”. Potential investors are advised to consult their own legal counsel and other professionaladvisers in order to assess income tax, legal and other aspects of this investment.
The Brokered Offering was conducted through the non-certificated inventory system maintained by CDS Clearing and Depository Services Inc. (“CDS”) and the Special Warrants issued pursuant to the Brokered Offering were registered and deposited with CDS on the Closing Date in electronic form. Other than for Special Warrants sold pursuant to the non-brokered portion of the Offering, which will be represented by certificates, the Unit Shares and Warrants to be issued upon exercise or deemed exercise of the Special Warrants and the Warrant Shares to be issued upon exercise of the Warrants will be registered and deposited in the non-certificated inventory system of CDS and a purchaser of the Special Warrants will not receive a definitive certificate representing the Unit Shares, Warrants or Warrant Shares. See “Plan of Distribution”.
Investors should rely only on the informationcontained or incorporated by reference in this Prospectus. The Corporation and the Agent have not authorized anyone to provide investorswith information different from that contained or incorporated by reference in this Prospectus. Readers should not assume that the informationcontained in this Prospectus is accurate as of any date other than the date on the cover page of this Prospectus.
Investors are advised to consult their owntax advisors regarding the application of Canadian federal income tax laws to their particular circumstances, as well as any other provincial,foreign and other tax consequences of acquiring, holding or disposing of the Special Warrants, the Unit Shares and the Warrants, includingthe Canadian federal income tax consequences applicable to a foreign controlled Canadian corporation that acquires the Special Warrants,the Unit Shares and the Warrants.
Certain legal matters in connection with the Offering are being reviewed on behalf of the Corporation by Irwin Lowy LLP and on behalf of the Agent by Wildeboer Dellelce LLP.
Unless otherwise indicated, all references to dollar amounts in this Prospectus are to Canadian dollars. The Corporation’s registered and head office is located at 340 Richmond Street West, Toronto, Ontario M5V 1X2.
Reference to Grown Rogue or the Corporation also includes its subsidiary entities, as the context requires or permits.
Mr. J. Obie Strickler, a director and President and Chief Executive Officer of the Corporation, resides outside of Canada. Mr. Strickler has appointed the Corporation, 340 Richmond Street West, Toronto, Ontario M5V 1X2, as his agent for service of process. Purchasers are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that is incorporated, continued or otherwise organized under the laws of a foreign jurisdiction or resides outside of Canada, even if the party has appointed an agent for service of process. See “Risk Factors”.
TABLE OF CONTENTS
| ABOUT THIS PROSPECTUS | 1 |
|---|---|
| DEFINITIONS | 1 |
| ELIGIBILITY FOR INVESTMENT | 1 |
| SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | 2 |
| CURRENCY PRESENTATION AND EXCHANGE RATE INFORMATION | 2 |
| DOCUMENTS INCORPORATED BY REFERENCE | 3 |
| SUMMARY DESCRIPTION OF THE BUSINESS | 4 |
| CONSOLIDATED CAPITALIZATION | 9 |
| DESCRIPTION OF SECURITIES BEING DISTRIBUTED | 10 |
| PRIOR SALES | 13 |
| USE OF PROCEEDS | 15 |
| PLAN OF DISTRIBUTION | 16 |
| RISK FACTORS | 19 |
| AUDITORS, TRANSFER AGENT, REGISTRAR AND WARRANT AGENT | 22 |
| LEGAL MATTERS | 23 |
| PROMOTERS | 23 |
| STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION | 24 |
| CONTRACTUAL RIGHT OF RESCISSION | 24 |
| CERTIFICATE OF THE CORPORATION | C-1 |
| CERTIFICATE OF THE AGENT | C-2 |
| CERTIFICATE OF THE PROMOTER | C-3 |
i
ABOUT THIS PROSPECTUS
Investors should rely only on the information contained or incorporated by reference in this Prospectus and are not entitled to rely only on certain parts of the information contained or incorporated by reference in this Prospectus to the exclusion of the remainder. The Corporation and the Agent have not authorized anyone to provide investors with different information. If anyone provides you with different or additional information, you should not rely on it. The Corporation is not offering the securities in any jurisdiction in which the Offering is not permitted. Investors should assume that the information contained in this Prospectus is accurate only as of the date on the front of this Prospectus and that information contained in any document incorporated by reference is accurate only as of the date of that document, regardless of the time of delivery of this Prospectus or of any sale of the securities pursuant thereto.
DEFINITIONS
All capitalized terms not defined herein have the meanings ascribed to them in the Annual Information Form (as defined herein).
ELIGIBILITY FOR INVESTMENT
In the opinion of Irwin Lowy LLP, counsel to the Corporation, and Wildeboer Dellelce LLP, counsel to the Agent, based on the provisions of the Income Tax Act (Canada) and the regulations thereunder (collectively, the “Tax Act”) as of the date hereof, the Unit Shares and Warrants acquired pursuant to the deemed exercise of the Special Warrants and the Warrant Shares, if issued on the date hereof, would be “qualified investments” under the Tax Act for a trust governed by a registered retirement savings plan (“RRSP”), registered retirement income fund (“RRIF”), deferred profit sharing plan, registered education savings plan (“RESP”), registered disability savings plan (“RDSP”) and tax-free savings account (“TFSA”) (collectively, “Deferred Plans”) provided that (i) the Common Shares are listed on a “designated stock exchange” as defined in the Tax Act (which currently includes the CSE), and (ii) in the case of the Warrants, neither the Corporation, nor any person with whom the Corporation does not deal at arm’s length, is an annuitant, a beneficiary, an employer or a subscriber under, or a holder of the particular Deferred Plan.
Notwithstanding that the Unit Shares, Warrants and Warrant Shares may be a “qualified investment” for a Deferred Plan, the annuitant under an RRSP or RRIF, the holder of a TFSA or RDSP, or the subscriber of an RESP, as the case may be, will be subject to a penalty tax if such Unit Shares, Warrants and Warrant Shares are a “prohibited investment” (as defined in the Tax Act) for the RRSP, RRIF, RESP, RDSP or TFSA. The Unit Shares, Warrants and Warrant Shares will generally not be a “prohibited investment” for a particular RRSP, RRIF, RESP, RDSP or TFSA provided that the annuitant under the RRSP or RRIF, the holder of the TFSA or RDSP, or the subscriber of the RESP, as the case may be, deals at arm’s length with the Corporation for purposes of the Tax Act and does not have a “significant interest” (as defined in the Tax Act) in the Corporation. In addition, the Unit Shares and Warrant Shares will not be a prohibited investment if such securities are “excluded property” (as defined in the Tax Act for purposes of these rules) for the particular TFSA, RRSP, RESP, RDSP or RRIF. Persons who intend to hold Unit Shares, Warrants and Warrant Shares in a trust governed by a Deferred Plan should consult their own tax advisors with respect to the application of these rules in their particular circumstances.
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SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS
Certain statements contained in this Prospectus and the documents incorporated by reference herein constitute forward-looking statements, as such term is defined under applicable securities laws. These statements relate to future events or future performance and reflect management’s expectations and assumptions regarding the growth, results of operations, performances and business prospects and opportunities of the Corporation. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “intend”, “will”, “project”, “could”, “believe”, “predict”, “potential”, “should” or the negative of these terms or other similar expressions are intended to identify forward-looking statements. In particular, information regarding the Corporation’s future business plans, operating results and economic performance; the completion of the HSCP Transaction (as hereinafter defined) and the exercise of the Canopy Purchase Option Agreement (as hereinafter defined); and the Corporation’s expected use of proceeds from the Offering is forward-looking information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or events to differ materially from those anticipated, discussed or implied in such forward-looking statements. The Corporation believes the expectations reflected in such forward- looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this Prospectus and the documents incorporated by reference herein should be considered carefully and investors should not place undue reliance on them as the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements. These statements speak only as of the date of this Prospectus or the particular document incorporated by reference herein. Such statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about production output; building and operating costs; credit risk; liquidity risk; market risk; currency risk; interest risk; concentration risk; dependence on senior management; sufficiency of insurance; competition; general business risk and liability; risks related to the Canopy Option Agreement; anticipated production at the Corporations facilities (including at Manzanita Glen, Trails End, Warehouse 1 and Warehouse 2); the completion of the HSCP Transaction; the Corporation’s business objectives for the next twelve months; regulation of the marijuana industry; regulatory risks; change in laws, regulations and guidelines; reliance on licence renewal; reliance on a single facility; limited operating history; factors which may prevent realization of growth targets; risks inherent in an agricultural business; vulnerability to rising energy and building costs; publicity or consumer perception; product liability; product recalls; reliance on key inputs; difficulties with forecasts; exchange restrictions on business; management of growth; litigation; dividends; limited market for securities; environmental and employee health and safety regulations; and the potential impact of the COVID-19 pandemic on the Corporation and/or its operations, and the cannabis industry and currency fluctuations.
These forward-looking statements involve risks and uncertainties relating to, among other things, risks related to the cannabis industry, access to skilled personnel, cannabis production activities, uninsured risks, regulatory changes, defects in title, availability of materials and equipment, timeliness of government approvals and unanticipated environmental impacts on operations. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the risk factors contained in this Prospectus and documents incorporated by reference herein. Investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. The Corporation cautions that the foregoing list of important factors is not exhaustive. The forward looking statements contained in this Prospectus and the documents incorporated by reference herein are expressly qualified by this cautionary statement. Neither the Corporation nor the Agent undertake any obligation to publicly update or revise any forward-looking statements except as expressly required by applicable securities law.
CURRENCY PRESENTATION AND EXCHANGE RATEINFORMATION
This Prospectus contains references to United States dollars and Canadian dollars. All dollar amounts referenced, unless otherwise indicated, are Canadian dollars and United States dollars are referred to as “US$”.
On March 22, 2020, the closing exchange rate for Canadian dollars in terms of the United States dollar, as quoted by the Bank of Canada, was US$1.00 = $1.2513.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents of the Corporation, filed with the various securities commissions or similar authorities in Canada, are specifically incorporated by reference into, and form an integral part of, this Prospectus:
| (a) | the annual information form<br>of the Corporation dated March 15, 2021 for the financial year<br>ended October 31, 2020 (the “AIF”); |
|---|---|
| (b) | the audited consolidated financial<br>statements of the Corporation as at and for the years ended October 31, 2020 and 2019, together with the notes thereto and the auditors’<br>report thereon dated March 1, 2021; |
| --- | --- |
| (c) | the management’s<br>discussion and analysis of the financial condition and results of operations of the Corporation as at and for the year ended October 31,<br>2020 dated March 1, 2021; |
| --- | --- |
| (d) | the management information circular dated July 20, 2020 relating to the annual general meeting of shareholders<br>held on August 17, 2020; |
| --- | --- |
| (e) | the material change report of the Corporation dated February 16, 2021 in respect of the closing of a private<br>placement on February 5, 2021 and the signing of an asset purchase agreement and management services agreement in connection with the<br>HSCP Transaction (as defined below); and |
| --- | --- |
| (f) | the material change report of<br>the Corporation dated March 9, 2021 in respect of the Offering. |
| --- | --- |
Any documents of the type described above (other than confidential material change reports) or any other disclosure documents required to be incorporated by reference into a prospectus under National Instrument 44-101 - Short Form ProspectusDistributions (“NI 44-101”), if filed by the Corporation with the securities commissions or similar authorities in Canada, after the date of this Prospectus and before completion of the distribution of the Units, are deemed to be incorporated by reference in this Prospectus. The documents incorporated or deemed to be incorporated herein by reference contain meaningful and material information relating to the Corporation and readers should review all information contained in this Prospectus and the documents incorporated or deemed to be incorporated by reference herein.
Any statement contained ina document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for the purposesof this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemedto be, incorporated by reference herein modifies or supersedes such statement. The modifying or superseding statement need not state thatit has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes.The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement,when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is requiredto be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. Any statementso modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus.
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Copies of the documents incorporated herein by reference may be obtained on request without charge from the Chief Financial Officer of the Corporation at 340 Richmond Street West, Toronto, Ontario M5V 1X2, Telephone (503) 765-8108, and are also available electronically through the System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com.
SUMMARY DESCRIPTION OF THE BUSINESS
The Corporation was amalgamated under the Business Corporations Act (Ontario) on November 30, 2009 under the name “Eagleford Energy Inc.” The Corporation filed articles of amendment effective August 25, 2014 and changed its name to “Eagleford Energy Corp.” The Corporation filed articles of amendment effective February 1, 2016 and changed its name from “Eagleford Energy Corp.” to “Intelligent Content Enterprises Inc.”, and consolidated its common shares on the basis of one new share for every ten old shares. The Corporation filed articles of amendment effective May 26, 2017 and changed its name from “Intelligent Content Enterprises Inc.” to “Novicius Corp.” and consolidated its common shares on the basis of one new share for every ten old shares. On November 1, 2018, in preparation for the reverse take-over of Novicius by Grown Rogue Unlimited, LLC and related transactions, the Corporation completed a consolidation of its common shares on the basis of 1.4 pre-consolidated common shares for one post-consolidated common share and changed its name to its current name, “Grown Rogue International Inc.”.
The Corporation, headquartered in Medford, Oregon, is a multi-state cannabis Corporation curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies its products based on “Mind, Body & Mood” effects which resonates with consumers from the “canna-curious” through the “canna-serious”. The Corporation aims to educate, inspire and empower consumers with information about cannabis so they can “enhance experiences” by selecting the appropriate product for individual needs. The Corporation is focused on high quality, low-cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates.
The Corporation, through its wholly owned subsidiary, Grown Rogue Gardens, LLC (“GR Gardens”), operates four cultivation facilities in Oregon comprising approximately 130,000 square feet of cultivation area, that currently service the Oregon recreational marijuana market: “Manzanita Glen” (sun grown), “Trail’s End” (sun grown), and two indoor facilities, “Warehouse 1” and “Warehouse 2”. GR Gardens currently holds three producer licenses in Oregon from the Oregon Liquor Control Commission (the “OLCC”), for its Oregon properties, one wholesaler license, and one processor license. GR Gardens is currently not operating the processor license.
GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. “Manzanita Glen” and “Trails End” are both outdoor, sun grown farms, with 40,000 square feet of flowering canopy, for a total of 80,000 square feet, sitting on a combined land package of approximately 45 acres.
The Corporation’s Oregon business is head-quartered in the world-renowned Emerald Triangle, which is known world-wide for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. The Corporation is able to capitalize on an outdoor growing environment where it can produce high-quality, low-cost cannabis flower. The two sun-grown farms produce one crop per year, which is planted in June and harvested in October.
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GR Gardens operates Warehouse 1, consisting of an approximately 17,000 square feet of indoor growing facility, where it is able to produce high-quality indoor flower in a controlled atmosphere. By carefully controlling temperature, humidity, carbon dioxide levels, and other criteria, GR Gardens is able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. In addition, the Corporation, through its wholly owned subsidiary, Grown Rogue Distribution, LLC (“GRDistribution”), operates Warehouse 2, through a management services agreement, which is a short distance from Warehouse 1 and contributes an additional 30,000 square feet of indoor productive space to its operations. Management of GR Gardens estimates that annual production of 2,400 pounds in 2021 and 5,000 pounds in 2022 from this facility is possible. The Corporation has agreed to acquire Warehouse 2 in accordance with the terms of the Asset Purchase Agreement (as defined below) and intends to close this acquisition, upon the satisfaction of certain conditions to closing, including the receipt of all necessary regulatory approvals, at which time GR Distribution will become the beneficial owner of Warehouse 2 and its current Management Agreement (as defined below) for the facility will terminate. See “HSCP Transaction” below.
Pursuant to the terms of an option agreement (the “Canopy Purchase Option Agreement”) dated February 4, 2021, between the Corporation’s subsidiary, Grown Rogue Unlimited, LLC (“GR Unlimited”) and J. Obie Strickler, the President and Chief Executive Officer of the Corporation, Mr. Strickler granted to GR Unlimited an option (the “Canopy Purchase Option”) to acquire 87% of the outstanding membership interests in Canopy Management, LLC (“Canopy Management”) at any time prior to February 4, 2023. Canopy Management in turn holds an option (the “Golden Harvests Purchase Option”) to acquire a 60% equity interest in Golden Harvests, LLC (“Golden Harvests”), which has an approximately 80,000 square foot cultivation facility located in Bay City, Michigan, of which approximately 25,500 square feet is currently operational.
If the Corporation exercises the Canopy Purchase Option (and Canopy Management exercises the Golden Harvests Purchase Option) in 2021, the Corporation believes that through its indirect interest in Golden Harvests, the Corporation would add up to an additional approximately 3,000 pounds of high-quality indoor flower production capacity in 2021 and potentially up to 5,500 pounds of production capacity in 2022. If the Canopy Purchase Option and the Golden Harvests Purchase Option are exercised, it is anticipated that the Corporation’s subsidiary, GR Michigan LLC, would oversee this capacity under the terms of its current management services agreement with Golden Harvests.
Recent Developments
HSCP Transaction
Asset Purchase Agreement
On February 5, 2021 (the “Effective Date”), GR Distribution entered into an asset purchase agreement (the “AssetPurchase Agreement”) with HSCP Oregon, LLC, an Oregon limited liability company (the “Seller”), and High Street Capital Partners, LLC, a Delaware limited liability company (“HSCP” and together with Seller, the “SellerParties”), in connection with an asset purchase and sale transaction (the “HSCP Transaction”). Pursuant to the Asset Purchase Agreement, the Seller agreed to sell to GR Distribution and GR Distribution agreed to purchase from the Seller, all of the assets (the “Purchased Assets”) used or held for use in connection with the following businesses (collectively, the “Business”): (a) recreational cannabis production operations and related business activities (the “ProducerBusiness”) at 550 Airport Road, Medford, Oregon 97504 (the “Producer Premises”) pursuant to OLCC producer license number 020-1003642197C (the “Producer License”), OLCC wholesale license number 060-1013984A526 (the “WholesaleLicense”), and OLCC processor license number 030-1013975ABC8 (the “Processor License”), and (b) a retail recreational cannabis dispensary and related business activities (the “Retail Business”) at 8701 SE Powell Boulevard, Portland, Oregon 97266 (together with the Producer Premises, the “Premises”) pursuant to OLCC retailer license number 050- 10026747951.
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A summary of certain key terms and conditions of the Asset Purchase Agreement is as follows:
PurchasePrice. The aggregate purchase price (the “Purchase Price”) for the Purchased Assets is US$3,000,000 plus the assumption of certain liabilities of the Business, provided that, if prior to the completion of the purchase and sale of the Purchased Assets (the “Closing”), the Asset Purchase Agreement is terminated with respect to the Retail Business or the Producer Business, then the Purchase Price shall be reduced by the amount of US$1,000,000 or US$2,000,000, respectively, as the case may be.
Paymentof Purchase Price. The Purchase Price is payable as follows:
| (a) | as to US$750,000 (the “Deposit”), upon<br>the execution of the Asset Purchase Agreement (paid); |
|---|---|
| (b) | as to US$250,000, on Closing, which shall, together with<br>the Deposit, constitute payment in full for the purchase of the Retail Business; and |
| --- | --- |
| (c) | as to the remaining US$2,000,000: |
| --- | --- |
| (i) | if the Closing occurs before the 12-month anniversary of the<br>Effective Date, by the delivery to the Seller of non-interest bearing secured promissory note in the principal amount of US$2,000,000,<br>with a such principal amount becoming due and payable on the date (the “Maturity Date”) that is the 18-month anniversary<br>of the Effective Date; |
| --- | --- |
| (ii) | if the Closing occurs on or after the 12-month anniversary<br>of the Effective Date, but before the 18-month anniversary of the Effective Date, by paying to the Seller US$750,000 on the Closing and<br>by the delivery to the Seller of non-interest bearing secured promissory note in the principal amount of the remaining US$1,250,000,<br>with a such principal amount becoming due and payable on the Maturity Date; and |
| --- | --- |
| (iii) | if the Closing occurs after the 18-month anniversary of the<br>Effective Date, by paying US$2,000,000 on such Closing. |
| --- | --- |
The amounts outstanding under any promissory note to be delivered on Closing will be secured by the Purchased Assets and any proceeds from the disposition thereof.
RegulatoryMatters.
| (a) | LicenseTransfers: As of the Effective Date, each of the Processor License and the Wholesale License is held by Gesundheit Foods, LLC, an<br>indirect subsidiary of HSPC, for the facility located at the Producer Premises, and Gesundheit Foods, LLC has applied to transfer each<br>of the Processor License and the Wholesaler License to Seller at the Producer Premises (together, the “License Transfers”).<br>If the OLCC denies Seller’s pending transfer of location for either of the Processor License or Wholesaler License, or both, then<br>the parties will cooperate with each other, and take all steps reasonably necessary, to secure an alternative location or approval process<br>that results in the transfer of the Processor License and/or Wholesaler License (as applicable). |
|---|---|
| (b) | OLCC Approval: Applicable Oregon Law prohibits GR<br>Distribution from operating the Business until it has itself been approved by the OLCC as a cannabis producer, processor, wholesaler,<br>and retailer at the applicable Premises and the OLCC has approved the change in ownership of the Purchased Assets from Seller to GR Distribution<br>(collectively, the “OLCC Approval”). |
| --- | --- |
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ClosingConditions. The obligations of the parties to complete the purchase and sale of the Purchased Assets is subject to certain typical mutual conditions, including there being no action by a governmental authority to prevent the transaction; the truth of the representations of warranties of the other parties at Closing; the performance of covenants; obtaining necessary approvals; and the delivery of typical closing items. In addition, the obligation of GR Distribution to effect the Closing is subject to the satisfaction or waiver of the following conditions at or prior to Closing:
| (a) | the License Transfers shall have occurred or, alternatively,<br>the parties shall have mutually agreed in writing to an alternative location or approval process that results in the transfer of the<br>Processor License and/or Wholesaler License (as applicable); and |
|---|---|
| (b) | GR Distribution shall have received the OLCC Approval. |
| --- | --- |
Closing. The Closing shall take place on the date or dates mutually selected by the parties following the date or dates on which the OLCC Approval is issued and all of the other conditions to the Closing in the Asset Purchase Agreement have been satisfied or waived. If the OLCC Approval with respect to the Retail Business and the Producer Business is issued by the OLCC on different dates, the parties may elect to consummate the closing of the purchase and sale of the Purchased Assets associated with the Retail Business and the Producer Business on different dates.
See “RiskFactors – HSCP Transaction” below.
Management Agreement
As a result of the required OLCC Approval, the Seller will continue to own the Business until Closing has occurred. However, on the Effective Date, GR Distribution and the Seller entered into a management services agreement (the “Management Agreement”), with respect to the Producer Business at the Producer Premises, whereby GR Distribution agreed, on behalf of Seller, to provide services to, and have operational control over, the Producer Business, on the terms and subject to the conditions set forth in the Management Agreement. The Management Agreement will terminate on Closing, the termination by a party for breach thereof by the other party or the termination of the Asset Purchase Agreement.
Use of Proceeds of PreviousOfferings
In December and February 2021 the Corporation’s subsidiaries, GR Distribution and GR Gardens, received total gross proceeds of $1,269,865 from certain debt and equity financings, and on January 19, 2021 and February 5, 2021, the Corporation completed non-brokered private placement offerings for aggregate gross proceeds of $253,973 and $1,312,000, respectively (collectively, the “Prior Offerings”). The following table sets out a comparison of how the Corporation has used the proceeds from the Prior Offerings as of the date of this Prospectus, an explanation of variances and the impact of variances on the ability of the Corporation to achieve its business objectives and milestones.
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| Intended Use ofProceeds and Amount of Prior Offerings | Actual Use of Proceeds from Prior Offerings | Variance (Over)/Under Expenditure | Explanation of Variance and impact on business objectives | |
|---|---|---|---|---|
| for general corporate purposes<br> and to complete the build out of the Warehouse 1 indoor facility located in Medford, Oregon<br><br> <br><br><br> <br>to satisfy certain option payments<br> due to Golden Harvests and for general corporate purposes<br><br> <br><br><br> <br>for strategic acquisitions,<br> expansion into Michigan and for general corporate purposes | $1,269,865^(1)^<br><br> <br>(US$1,000,000)<br><br> <br><br><br> <br><br><br> <br>$253,973<br><br> <br>(US$200,000)<br><br> <br><br><br> <br>$1,312,000^(4)^<br><br> <br>(US$1,025,000) | $1,269,865^(1)(2)^<br><br> <br>(US$1,000,000)<br><br> <br><br><br> <br><br><br> <br>$253,973^(1)(3)^<br><br> <br>(US$200,000)<br><br> <br><br><br> <br>$640,000^(4)(5)^<br><br> <br>(US$500,000) | None<br><br> <br><br><br> <br><br><br> <br><br><br> <br>None<br><br> <br><br><br> <br><br><br> <br>$672,000<br><br> <br>(US$525,000) | N/A<br><br> <br><br><br> <br><br><br> <br><br><br> <br>N/A<br><br> <br><br><br> <br><br><br> <br>Of<br> the under expenditure variance amount of $672,000 (US$525,000),<br> $588,800 (US$460,000) remains payable in connection with the exercise of the Canopy Purchase Option and is expected to be paid when due,<br> and approximately, $83,200 (US$65,000) is planned to be used to pay certain vendors, when invoiced. These variances had no material impact<br> on the Corporation’s business objectives. |
Notes:
| (1) | The actual amounts were received in United States dollars and converted to Canadian dollars at a rateof $1.26 equals US$1.00. |
|---|---|
| (2) | Of the total proceeds of approximately $1,269,865 (US$1,000,000), $1,079,385 (US$850,000) was usedin connection with the payments due pursuant to the HSCP Transaction for the acquisition of a 30,000 square foot indoor growing facilityand a retail dispensary, and the remainder of approximately $190,480 (US$150,000) was used to complete the build out of the existing Warehouse1 indoor facility in Medford, Oregon. |
| --- | --- |
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| (3) | Of the total proceeds of approximately $253,973 (US$200,000), $126,987 (US$100,000) was paid towardthe exercise price of the Canopy Purchase Option and the balance of $126,987 (US$100,000) was used for general corporate purposes. |
|---|---|
| (4) | The actual amounts were received in United States dollars and converted to Canadian dollars at a rateof $1.28 equals US$1.00. |
| --- | --- |
| (5) | Of the total proceeds used of approximately $640,000 (US$500,000), $128,000 (US$100,000) was used forexpenses at the Golden Harvests indoor facility in connection with Corporation’s expansion into Michigan, under the terms of theManagement Agreement, $256,000 (US$200,000) was used for operating expenses and capital improvements at the Warehouse 2 indoor facility,and the balance of approximately $256,000 (US$200,000) was used for general corporate purposes, including in respect of the payment ofinvoices and audit and tax costs. |
| --- | --- |
CONSOLIDATED CAPITALIZATION
Except as otherwise noted herein, there have been no material changes in the consolidated share capitalization or in the indebtedness of the Corporation since October 31, 2020, the date of the Corporation’s most recently filed financial statements.
Issuance of Securitiesfor Services
On or around November 18, 2020, the Corporation issued a total of 240,908 Common Shares to certain directors and employees of the Corporation relating to amounts owed for services rendered. In addition, the Corporation issued 25,000 Common Shares to an existing member of Golden Harvests in connection with the extension of the next payment of cash and shares payable under the terms of the Original Golden Harvests Option Agreement (as defined in the AIF). The abovementioned Common Shares were issued at a price of $0.11 per share. See “Prior Sales”.
Investments in Subsidiaries
On or around December 8, 2020, the Corporation announced debt and equity investments in its indirectly held subsidiary, GR Distribution, combined with a further equity investment in February 2021, in the aggregate amount of US$850,000. The Corporation sold 11.875 units of this non-operating subsidiary at a price of US$40,000 per unit for total proceeds of US$475,000. The unit holders have the future right to convert their units in the subsidiary into Common Shares of the Corporation at the greater of $0.20 or the maximum permitted discount under the policies of the CSE at the time of conversion. GR Distribution issued unsecured promissory notes in the amount of US$375,000, which bear interest at a rate of 10% per annum, payable monthly and have a three-year maturity date. In addition, the subsidiary will make payments in months 39, 42, 45, and 48 that will double the principal investment (minus any interest paid).
Issuance of PromissoryNote by GR Gardens
On December 2, 2020, GR Gardens issued an unsecured promissory note to a member of its operational management in the principal amount of US$150,000 in exchange for a loan of such amount. The note bears interest at a rate of 10% per annum, accruing monthly with a 12-month maturity. The Corporation has the right to extend up to 50% of the principal amount under the note for up to six months by paying a one-time cash extension fee of 10% of the amount extended.
Non-Brokered Offeringof Common Shares and Units
On January 19, 2021, the Corporation completed the first or two tranches of a non-brokered private placement offering, pursuant to which it issued an aggregate of 2,031,784 Common Shares at a price of $0.125 per share for gross proceeds of $253,973. On February 5, 2021, the Corporation completed the second tranche of the offering, pursuant to which it issued an aggregate of 8,200,000 units of the Corporation at a price of $0.16 per unit for gross proceeds of $1,312,000. Each unit was comprised of one Common Share and one common share purchase warrant, each warrant entitling the holder to purchase one Common Share at an exercise price of $0.20 per share for a period of two years. The Corporation has the right to accelerate the expiry date of the warrants to be thirty (30) days following written notice to the holder if during the term the Common Shares close at, or above, $0.32 on each trading day for a period of ten (10) consecutive trading days. See “Prior Sales”.
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Conversion of OutstandingDebt
On March 2, 2021 the Corporation issued 3,933,328 Common Shares at deemed price of $0.125 per Common Share on the conversion and settlement of an aggregate of $491,666 of outstanding debt owed by the Corporation.
The Offering
On March 5 2021, the Corporation completed the Offering. After giving effect to the Offering, the number of (i) Special Warrants increased by 21,056,890, (ii) Broker Warrants increased by 1,127,758, and (iii) Advisory Warrants increased by 113,500.
Upon completion of the Offering and the exercise of the Special Warrants (assuming no Units are issued pursuant to the Penalty Provision), an additional 21,056,890 Common Shares, 21,056,890 Warrants and 1,241,258 Compensation Options will be issued.
DESCRIPTION OF SECURITIES BEING DISTRIBUTED
This Prospectus is being filed for the purpose of qualifying the distribution of 21,056,890 Unit Shares and 21,056,890 Warrants, which are to be issued upon the exercise or deemed exercise of the Special Warrants.
Description of Special Warrants
The Special Warrants are governed by the terms and conditions set forth in the Special Warrant Indenture. An aggregate of 21,056,890 Special Warrants are outstanding as of the date of this Prospectus. The material terms and conditions of the Special Warrants are summarized below:
| ● | each of the Special Warrants entitles the holder thereof to acquire, for no additional consideration to<br>the Corporation, one Unit for each Special Warrant, subject to adjustment as provided for in the Special Warrant Indenture; |
|---|---|
| ● | the Special Warrants will be deemed to be exercised on the Qualification Date; |
| --- | --- |
| ● | the Special Warrant Indenture provides for and contains provisions designed to keep the holders of the<br>Special Warrants unaffected by the possible occurrence of certain corporate events, including the amalgamation, merger or corporate reorganization<br>of the Corporation; |
| --- | --- |
| ● | the holders of Special Warrants do not have any right or interest whatsoever as shareholders of the Corporation,<br>including but not limited to any right to vote at, to receive notice of, or to attend, any meeting of shareholders or any other proceedings<br>of the Corporation or any right to receive any dividend or other distribution; |
| --- | --- |
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| ● | the rights of holders of Special Warrants may be modified by extraordinary resolution at a meeting of<br>Special Warrant holders. The Special Warrant Indenture provides for meetings by holders of Special Warrants and the passing of resolutions<br>and extraordinary resolutions by such holders which are binding on all holders of Special Warrants. Certain amendments to the Special<br>Warrant Indenture may only be made by “extraordinary resolution”, which is defined in the Special Warrant Indenture as a resolution<br>proposed at a meeting of Special Warrant holders duly convened for that purpose at which there are present in person or by proxy Special<br>Warrant holders holding at least 25% of the aggregate number of the then outstanding Special Warrants passed by the affirmative votes<br>of Special Warrant holders holding not less than 66⅔% of the aggregate<br>number of the then outstanding Special Warrants represented at the meeting and voted on the poll upon such resolution; |
|---|---|
| ● | Capital Transfer and the Corporation, without the consent of the holders of Special Warrants, may be able<br>to amend or supplement the Special Warrant Indenture for certain purposes, including rectifying any ambiguities, defective provisions,<br>clerical omissions or mistakes, or other errors contained in the Special Warrant Indenture or in any deed or indenture supplemental or<br>ancillary to the Special Warrant Indenture, provided that, in the opinion of Capital Transfer, relying on the opinion of legal counsel,<br>the rights of the holders of Special Warrants, as a group, are not prejudiced thereby; and |
| --- | --- |
| ● | the Corporation has agreed to provide to the holders of the Special Warrants a contractual right of rescission.<br>See “Contractual Rights of Rescission” below. |
| --- | --- |
The foregoing is a summary description of certain material provisions of the Special Warrant Indenture, it does not purport to be a comprehensive summary and is qualified in its entirety by reference to the more detailed provisions of the Special Warrant Indenture between the Corporation and Capital Transfer, as Special Warrant Agent, a copy of which may be obtained on request without charge from the Corporation at its registered office or electronically on SEDAR at www.sedar.com.
Common Shares
Each Common Share carries the right to attend and vote at all general meetings of shareholders. Holders of Common Shares are entitled to receive on a pro rata basis such dividends, if any, as and when declared by the Corporation’s board of directors at its discretion from funds legally available for the payment of dividends and upon the liquidation, dissolution or winding up of the Corporation are entitled to receive on a pro rata basis the net assets of the Corporation after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on a pro rata basis with the holders of Common Shares with respect to dividends or liquidation. The Common Shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or purchase fund provisions.
Warrants
The Warrants will be issued under and governed by the terms of the Warrant Indenture. The following summary of certain provisions of the Warrant Indenture does not purport to be complete and is subject in its entirety to the detailed provisions of the Warrant Indenture, which is available for review under the Corporation’s profile at www.sedar.com. A register of holders will be maintained at the principal offices of Capital Transfer in Toronto, Ontario.
Each Warrant will entitle the holder to acquire one Warrant Share at an exercise price of $0.30 until 5:00 p.m. (Toronto time) on March 5, 2023, after which time the Warrants will expire and become null and void. The exercise price and the number of Warrant Shares issuable upon exercise of Warrants are both subject to adjustment in certain circumstances as more fully described below.
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The Warrant Indenture provides for adjustment in the number of Warrant Shares issuable upon the exercise of the Warrants and/or the exercise price per Warrant Share upon the occurrence of certain events, including:
| (a) | the issuance of Common Shares or securities exchangeable or exercisable for or convertible into Common<br>Shares to all or substantially all of the holders of the Common Shares as a stock dividend or other distribution (other than a distribution<br>of Common Shares upon the exercise of warrants or options of the Corporation); |
|---|---|
| (b) | the subdivision, redivision or change of the Common Shares into a greater number of shares; |
| --- | --- |
| (c) | the reduction, combination or consolidation of the Common Shares into a lesser number of shares; |
| --- | --- |
| (d) | the issuance to all or substantially all of the holders of the Common Shares of rights, options or warrants<br>under which such holders are entitled, during a period expiring not more than 45 days after the record date for such issuance, to subscribe<br>for or purchase Common Shares, or securities exchangeable or exercisable for or convertible into Common Shares, at a price per Common<br>Share to the holder (or at an exchange, exercise or conversion price per share) of less than 95% of the “current market price”,<br>as defined in the Warrant Indenture, for the Common Shares on such record date; and |
| --- | --- |
| (e) | the issuance or distribution to all or substantially all of the holders of Common Shares of (i) securities,<br>including rights, options or warrants to acquire shares of any class or securities exchangeable, exercisable or convertible into any such<br>shares or property or assets or (ii) any property or assets, including evidences of indebtedness. |
| --- | --- |
The Warrant Indenture also provides for adjustments in the class and/or number of securities issuable upon exercise of the Warrants and/or exercise price per security in the event of the following additional events: (i) reclassifications of the Common Shares or exchange or change of the Common Shares into other shares, or capital reorganization of the Corporation (other than as described in clauses (b) or (c) above), (ii) consolidations, amalgamations, arrangements, mergers of the Corporation with or into another entity (other than a consolidation, amalgamation, arrangement, merger or other business combination which does not result in any reclassification of the Corporation’s outstanding Common Shares or an exchange or change of the Common Shares into other shares), or (ii) any sale or conveyance of the property and assets of the Corporation as an entirety or substantially as an entirety to any other body corporate, trust, partnership or other entity, in which case each holder of a Warrant which is thereafter exercised will receive, in lieu of Common Shares, the kind and number or amount of other securities or property which such holder would have been entitled to receive as a result of such event if such holder had exercised the Warrants prior to the event.
The Corporation also covenants in the Warrant Indenture that, during the period in which the Warrants are outstanding, it will give notice to holders of Warrants of certain stated events, including events that would result in an adjustment to the exercise price for the Warrants or the number of Warrant Shares issuable upon exercise of the Warrants, not less than 14 days prior to such applicable record date of such events.
No fractional Common Shares will be issuable to any holder of Warrants upon the exercise thereof, and no cash or other consideration will be paid in lieu of fractional shares. The holding of Warrants will not make the holder thereof a shareholder of the Corporation or entitle such holder to any right or interest in respect of the Warrants except as expressly provided in the Warrant Indenture. Holders of Warrants will not have any voting or pre-emptive rights or any other rights of a holder of Common Shares.
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The Warrant Indenture provides that, from time to time, subject to CSE approval, if required, Capital Transfer and the Corporation, without the consent of the holders of Warrants, may amend or supplement the Warrant Indenture for certain purposes, including rectifying any ambiguities, defective provisions, clerical omissions or mistakes, or other errors contained in the Warrant Indenture or in any deed or indenture supplemental or ancillary to the Warrant Indenture, provided that, in the opinion of Capital Transfer, relying on the opinion of legal counsel, the rights of the holders of Warrants, as a group, are not prejudiced thereby.
The Warrant Indenture contains provisions making binding upon all holders of Warrants resolutions passed at meetings of such holders in accordance with such provisions or by instruments in writing signed by holders of Warrants holding a specified percentage of the Warrants. Any amendment or supplement to the Warrant Indenture that is prejudicial to the interests of the holders of Warrants, as a group, and certain other amendments or other actions, will be subject to approval by an “Extraordinary Resolution”, which will be defined in the Warrant Indenture as a resolution either: (i) passed at a meeting of the holders of Warrants at which there are holders of Warrants present in person or represented by proxy representing at least 25% of the aggregate number of the then outstanding Warrants and passed by the affirmative vote of holders of Warrants representing not less than 662⁄3% of the aggregate number of Warrants represented at the meeting in person or by proxy and voted on the poll upon such resolution; or (ii) adopted by an instrument in writing signed by the holders of Warrants representing not less than 662⁄3% of the number of all of the then outstanding Warrants.
The principal transfer office of Capital Transfer in Toronto, Ontario is the location at which Warrants may be surrendered for exercise or transfer.
PRIOR SALES
The following table summarizes issuances of Common Shares of the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Description of Transaction | Number of Common Shares Issued | Price per Common Share | ||
|---|---|---|---|---|---|
| March 26, 2020 | Shares for Services | 1,100,000 | $ | 0.10 | |
| May 4, 2020 | Shares for Services | 620,000 | $ | 0.10 | |
| May 4, 2020 | Option Payment | 200,000 | $ | 0.10 | |
| May 15, 2020 | Private Placement Offering | 10,000,000 | $ | 0.10 | |
| July 10, 2020 | Shares for Services | 320,636 | $ | 0.15 | |
| August 4, 2020 | Conversion of Convertible Debt | 800,000 | $ | 0.125 | |
| November 18, 2020 | Shares for Services | 240,908 | $ | 0.11 | |
| November 18, 2020 | Option Payment | 25,000 | $ | 0.11 | |
| January 19, 2021 | Private Placement Offering | 2,031,784 | $ | 0.125 | |
| February 5, 2021 | Private Placement Offering | 8,200,000 | $ | 0.16 | |
| March 2, 2021 | Conversion of Convertible Debt | 3,933,328 | $ | 0.125 |
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The following table summarizes issuances of warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Warrants Issued | Exercise Price per Warrant | |||
|---|---|---|---|---|---|
| May 15, 2020 | Private Placement Offering | 10,000,000 | $ | 0.13 | |
| July 10, 2020 | Debt Restructuring | 8,409,091 | $ | 0.16 | |
| February 5, 2021 | Private Placement Offering | 8,200,000 | $ | 0.20 |
The following table summarizes issuances of options within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Options Issued | Exercise Price per Option | ||
|---|---|---|---|---|
| July 9, 2020 | 3,475,000 | $ | 0.15 | |
| July 20, 2020 | 100,000 | $ | 0.15 | |
| December 1, 2020 | 500,000 | $ | 0.15 | |
| November 18, 2020 | 200,000 | $ | 0.15 |
The following table summarizes issuances of Special Warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Special Warrants Issued | Exercise Price per Special Warrant | ||
|---|---|---|---|---|
| March 5, 2021 | 21,056,890 | - |
The following table summarizes issuances of Broker Warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Broker Warrants Issued | Exercise Price per Broker Warrant | ||
|---|---|---|---|---|
| March 5, 2021 | 1,127,758 | - |
The following table summarizes issuances of Advisory Warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Advisory Warrants Issued | Exercise Price per Advisory Warrant | ||
|---|---|---|---|---|
| March 5, 2021 | 113,500 | - |
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Trading Price and Volume
The Common Shares trade on the CSE under the symbol “GRIN”. The following table sets forth the price range and trading volumes for the Common Shares on the CSE as reported by the CSE for the periods indicated:
| Date | High () | Low () | Trading Volume | |
|---|---|---|---|---|
| 2020 | ||||
| March | 165,169 | |||
| April | 1,018,201 | |||
| May | 656,253 | |||
| June | 3,958,813 | |||
| July | 1,130,765 | |||
| August | 920,397 | |||
| September | 908,084 | |||
| October | 547,579 | |||
| November | 1,346,639 | |||
| December | 2,061,916 | |||
| 2021 | ||||
| January | 2,690,159 | |||
| February | 5,027,550 | |||
| March 1-22 | 1,224,501 |
All values are in US Dollars.
USE OF PROCEEDS
The Corporation has received gross proceeds of $4,737,800.25 from the sale of the Special Warrants. The net proceeds to the Corporation from the Offering are approximately $4,158,554 after deducting the Agent’s Fee, the Advisory Fee and expenses in connection with the Offering and the estimated expenses of the Corporation in connection with the qualification for distribution of the Units. The Corporation intends to use the net proceeds from the Offering as set out in the table below:
| Time period | Amount^(^****^1)(2)^ | ||
|---|---|---|---|
| Milestone | From | To | $ |
| Capital costs for facility upgrades (dehumidifiers, HVAC, etc.) and operating costs at Warehouse 2, HSCP Oregon, LLC’s 30,000 square foot indoor growing facility in Medford, Oregon operated by GR Distribution | March 2021 | June 30, 2021 | 504,832 <br>(US$400,000) |
| Payment of a portion of amounts owing pursuant to outstanding convertible debentures | March 2021 | April 30, 2021 | 757,248^(3)^<br> <br>(US$600,000) |
| Capital costs to construct new outdoor farm in Medford Oregon | March 2021 | June 30 2021 | 631,040 <br>(US$500,000) |
| Working Capital, Operating Expenses, Cash Reserves | March 2021 | December 31 2021 | 2,265,434 <br>(US$1,795,000) |
| Total | $4,158,554<br> <br>(US$3,295,000) |
Notes:
| (1) | The Corporation is not expecting the COVID-19 health crisisto have a material impact on the ability of the Corporation to complete the above listed business objectives and milestones within theexpected time frame but if the health crisis significantly worsens unexpected delays could occur. |
|---|
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| (2) | The actual budgeted amounts are in United States dollarsand converted to Canadian dollars at a rate of $1.26 equals US$1.00. |
|---|---|
| (3) | The Corporation plans to use approximately $757,248 (US$600,000)of the net proceeds to reduce or retire indebtedness owing under convertible debentures issued in August 2018. |
| --- | --- |
Although the Corporation intends to expend the net proceeds from the Offering as set forth above, there may be circumstances where, for sound business reasons, a reallocation of funds may be deemed prudent or necessary and may vary materially from that set forth above. While actual expenditures may differ from the above amounts and allocations, the net proceeds will be used by the Corporation for facility upgrades and operating costs at Warehouse 2, repayment of outstanding indebtedness, constructing a new outdoor growing facility in Medford Oregon and for general corporate purposes.
The key business objectives of the Corporation in the near term are as set out in the preceding table. While the Corporation believes that it has the skills and resources necessary to accomplish its stated business objectives, carrying on business in the cannabis sector has a number of inherent risks. See the risk factors described under “Risk Factors” herein and in the AIF for factors that may impact the timing and success of the Corporation’s planned activities.
Pending the expenditure described above, the Corporation intends to invest the net proceeds of the Offering in the Corporation’s bank accounts.
The Corporation currently has working capital and cash of approximately US$4 million ($3,196,675.46). Based on its currently planned use of its available funds and the net proceeds of the Offering, as disclosed in this Prospectus, the Corporation expects to have sufficient available funds to continue operations for more than 12 months.
The Corporation has had negative operating cash flows from operations to date, and reported a total comprehensive loss of approximately $2.5 million for the year ended October 31, 2020. To the extent that the Corporation has negative cash flow in future periods, the Corporation may need to deploy a portion of its cash reserves to fund such negative cash flow. See “Risk Factors”.
PLAN OF DISTRIBUTION
This Prospectus is being filed in the Provinces of British Columbia, Alberta, Nova Scotia and Ontario to qualify the distribution of 21,056,890 Unit Shares and 21,056,890 Warrants issuable upon the exercise or deemed exercise of 21,056,890 Special Warrants.
On March 5, 2021, the Corporation completed the Offering of 21,056,890 Special Warrants pursuant to prospectus exemptions under applicable securities legislation in each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario (and in jurisdictions outside of Canada in compliance with laws applicable therein), on a private placement basis at the Offering Price per Special Warrant, a portion of which was sold through the Agent pursuant to the Agency Agreement. The gross proceeds of the Offering were $4,737,800. Pursuant to the Agency Agreement the Agent agreed to offer for sale Special Warrants in the Qualifying Jurisdictions, and in certain other jurisdictions outside Canada, on a commercially reasonable best efforts private placement basis at the Offering Price. The Offering Price was determined by arm’s length negotiation between the Corporation and the Agent.
The Special Warrants were issued pursuant to the terms of the Special Warrant Indenture between the Corporation and Capital Transfer. Each Special Warrant entitles its holder to receive, upon exercise or deemed exercise, at no additional cost to the holder, one Unit, each Unit being comprised of one Unit Share and one Warrant.
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Each Special Warrant shall be deemed exercised on behalf of, and without any required action on the part of, the holder thereof, on the Qualification Date, being the earlier of: (i) July 6, 2021; and (ii) the third business day after a receipt is issued for a final short form prospectus qualifying the distribution of the Unit Shares and Warrants issuable upon the exercise of the Special Warrants by the Canadian securities regulatory authorities in each of the Qualifying Jurisdictions. The Corporation has agreed to use reasonable commercial efforts to file, and obtain a receipt for, a final short form prospectus qualifying the Units issuable upon exercise of the Special Warrants on or before the Penalty Date, being April 4, 2021. If the receipt for the final Prospectus is not received on or before the Penalty Date, each holder of a Special Warrant shall be entitled to receive, without payment of additional consideration, an additional number of Units equal to 10% of the number of Units originally issuable upon the exercise or deemed exercise of the Special Warrants, resulting in each Special Warrant being exercisable for 1.10 Units (the “Penalty Provision”). This Prospectus qualifies the distribution of up to an aggregate of 2,105,689 Unit Shares and 2,105,689 Warrants issuable pursuant to the Penalty Provision, if applicable.
All transfers or exercises of Special Warrants issued in the Brokered Offering conducted through the non-certificated inventory system maintained by CDS shall occur in accordance with CDS’ rules and procedures. The rights of a holder of Special Warrants issued pursuant to the Brokered Offering shall be exercised only through CDS and the CDS participants and shall be limited to those established by law and agreements between such holders and CDS and the CDS participants upon instructions from the CDS participants. Each of Capital Transfer and the Corporation may deal with CDS for all purposes as the authorized representative of the respective holders of Special Warrants and such dealing with CDS shall constitute satisfaction or performance, as applicable, of their respective obligations under the Special Warrant Indenture.
The Special Warrant Indenture provides that in the event of certain alterations of the outstanding Common Shares, including any subdivision, consolidation or reclassification, an adjustment shall be made to the terms of the Special Warrants such that the holders shall, upon exercise of the Special Warrants following the occurrence of any of those events, be entitled to receive the same number and kind of securities that they would have been entitled to receive had they exercised their Special Warrants prior to the occurrence of those events. No fractional Unit Shares or Warrants will be issued upon the exercise of the Special Warrants. The holding of Special Warrants does not make the holder thereof a shareholder of the Corporation or entitle the holder to any right or interest granted to shareholders. The Special Warrant Indenture provides that all holders of Special Warrants shall be bound by any resolution passed at a meeting of the holders of Special Warrants held in accordance with the provisions of the Special Warrant Indenture. The foregoing summary of certain provisions of the Special Warrant Indenture is qualified in its entirety by reference to the provisions of the Special Warrant Indenture, which is available for review under the Corporation’s profile at www.sedar.com.
The Warrants will be created and issued pursuant to the Warrant Indenture between the Corporation and Capital Transfer, as warrant agent thereunder. Each Warrant will entitle the holder to acquire, subject to adjustment in certain circumstances, one Warrant Share at an exercise price of $0.30 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023 after which time the Warrants will expire and be void and of no value. The Corporation does not intend to apply to list the Warrants on the CSE. This may affect the trading price of the securities in the secondary market, the transparency and availability of trading prices, the liquidity of the securities and the extent of issuer regulation. See “Description of Securities Being Distributed”.
Pursuant to the Agency Agreement, the Corporation paid to the Agent a cash fee of $253,745.63 (excluding the reimbursement for certain expenses incurred in connection with the Offering by the Agent), representing 7.0% of the gross proceeds of the Brokered Offering from purchasers in the Qualifying Jurisdictions, subject to a reduced fee of up to 3.5% for Special Warrants sold by the Agent to President’s List purchasers. In addition, the Corporation paid the Agent the Advisory Fee in the amount of $25,500. The Agent will receive no other fees in connection with the distribution of the Unit Shares or Warrants under this short form prospectus.
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As additional compensation, the Corporation issued to the Agent (A) 1,127,758 Broker Warrants exercisable to acquire 1,127,758 Compensation Options for no additional consideration; and (B) 113,500 Advisory Warrants exercisable to acquire 113,500 Compensation Options for no additional consideration. Each Compensation Option will be exercisable to acquire one Compensation Unit, comprised of one Compensation Share and one Compensation Warrant at the Offering Price at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023. Each Compensation Warrant shall entitle the holder thereof to purchase one Compensation Warrant Share at a price of $0.30 at any time before 5:00 p.m. (Toronto time) on March 5, 2023, subject to adjustment in certain events. This Prospectus qualifies the distribution of the Compensation Options.
The Corporation has agreed to reimburse the Agent for certain expenses related to the Offering. There are no payments in cash, securities or other consideration being made, or to be made, to a promoter, finder or any other person or company in connection with the Offering other than the payments to be made to the Agent in accordance with the terms of the Agency Agreement.
The Corporation will apply to the CSE to list the Unit Shares, the Warrant Shares, the Compensation Shares and the Compensation Warrant Shares on the CSE. Such listing will be subject to the fulfillment of all of the listing requirements of the CSE. On February 10, 2021, the last trading day before the announcement of the Offering, the closing price of the Common Shares on the CSE was $0.28 per Common Share. On March 22, 2021, the last trading day before the filing of this Prospectus, the closing price of the Common Shares on the CSE was $0.25 per Common Share.
The Brokered Offering was conducted through the non-certificated inventory system maintained by CDS Clearing and Depository Services Inc. (“CDS”) and the Special Warrants issued pursuant to the Brokered Offering were registered and deposited with CDS on the Closing Date in electronic form. Other than for Special Warrants sold pursuant to the non-brokered portion of the Offering, which will be represented by certificates, the Unit Shares and Warrants to be issued upon exercise or deemed exercise of the Special Warrants and the Warrant Shares to be issued upon exercise of the Warrants will be registered and deposited in the non-certificated inventory system of CDS and a purchaser of the Special Warrants will not receive a definitive certificate representing the Unit Shares, Warrants or Warrant Shares.
The Corporation has agreed that, during the period commencing on the Closing Date and ending 120 days after the Closing Date, it will not, directly or indirectly, without the prior written consent of the Agent, such consent not to be unreasonably withheld or delayed, sell, agree or offer to sell, authorize, issue, announce or grant any option for the sale of, or otherwise dispose of any Common Share or related financial instruments or securities convertible or exchangeable into Common Shares (including, without limitation, Special Warrants), other than in conjunction with: (i) the issuance of Common Shares in connection with the exercise of any convertible securities, options, warrants or performance share units of the Corporation outstanding as of the Closing Date, (ii) the issuance of options to acquire Common Shares pursuant to any stock option plan or other equity based compensation plan of the Corporation, as each such plan may be amended from time to time, and the issuance of Common Shares on the exercise or vesting thereof, (iii) the issuance of stock-based compensation arrangements of the Corporation pursuant to any stock based compensation plan of the Corporation, as each such plan may be amended from time to time, and (iv) the issuance of securities pursuant to the Offering and on any exercise of such securities, as applicable.
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Lock-up agreements were entered into on the Closing Date in favour of the Agent in connection with securities of the Corporation held by directors and officers of the Corporation, providing that until the earlier of 120 days following the First Closing Date, each will not, directly or indirectly, offer, sell, contract to sell, lend, swap, or enter into any other agreement to transfer the economic consequences of, or otherwise dispose of or deal with, or publicly announce any intention to offer, sell, contract to sell, grant or sell any option to purchase, hypothecate, pledge, transfer, assign, purchase any option or contract to sell, lend, swap or enter into any agreement to transfer the economic consequences of, or otherwise dispose of or deal with, whether through the facilities of a stock exchange, by private placement or otherwise, any Common Shares or other securities of the Corporation held by them, directly or indirectly, unless: (i) they obtain the prior written consent of the Agents such consent not to be unreasonably withheld or delayed; or (ii) there occurs a take-over bid, plan of arrangement, amalgamation or similar transaction involving a change of control of the Corporation.
The Unit Shares and Warrants have not been and will not be registered under the U.S. Securities Act or any state securities laws of the United States and, subject to certain exceptions, may not be offered or sold in the United States. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby within the United States or to, or for the account or benefit of, U.S. Persons (as such term is defined in the U.S. Securities Act). None of the Special Warrants, Unit Shares and Warrants have been or will be registered under the U.S. Securities Act or the securities laws of any state of the United States and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. Persons, except in transactions exempt from the registration requirements of the U.S. Securities Act and applicable state securities laws.
The Corporation has agreed, pursuant to the Agency Agreement, to indemnify the Agent and their affiliates and directors, officers, employees, shareholders, partners, advisors and agents and each other person, if any, controlling the Agent or their affiliates and against certain liabilities and expenses, including liabilities under Canadian securities legislation in certain circumstances or to contribute to payments the Agent may have to make because of such liabilities.
RISK FACTORS
Investment in securities of Grown Rogue involves a significant degree of risk and should be considered speculative due to the nature of Grown Rogue’s business and the present stage of its development. Prospective purchasers of Common Shares should carefully consider the risk factors set out under the heading “Risk Factors” starting on page 33 of the AIF incorporated herein by reference, as well as other risk factors relating to the Offering set out below and the other information contained in this Prospectus and documents incorporated by reference herein, including the historical financial statements of the Corporation and the notes thereto, before acquiring any of the securities distributed under this Prospectus. See “Documents Incorporated by Reference”. Such risk factors could materially affect the Corporation’s future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to the Corporation.
Negative Operating Cash Flow
The Corporation is an early stage company and has not yet generated positive cash flow from operations. The Corporation is devoting significant resources to its cannabis operations in the United States, however there can be no assurance that it will generate positive cash flow from operations in the future. The Corporation expects to continue to incur negative consolidated operating cash flow and losses in the near term. The Corporation has had negative operating cash flows from operations to date, and reported a total comprehensive loss of approximately $2.5 million for the year ended October 31, 2020. To the extent that the Corporation has negative cash flow in future periods, the Corporation may need to deploy a portion of its cash reserves to fund such negative cash flow.
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Price Fluctuations: Share PriceVolatility
In recent years, the securities markets in the United States and Canada and throughout the world have experienced a high level of price and volume volatility, and the market prices of securities of many companies, including the Corporation, have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. Further, market prices for securities of cannabis companies historically have been volatile and future developments concerning the Corporation or its industry may have a significant impact on the market price of the Common Shares. There can be no assurance that continual fluctuations in the price of the Common Shares will not occur.
Discretion in the Use of Proceeds
The Corporation currently intends to allocate the net proceeds received from the Offering as described under “Useof Proceeds”. However, management of the Corporation will have discretion concerning the use of proceeds of the Offering as well as the timing of their expenditures. As a result, investors will be relying on the judgment of management as to the application of the proceeds of the Offering. Management may use the net proceeds of the Offering in ways that an investor may not consider desirable. The results and effectiveness of the application of the proceeds are uncertain. If the proceeds are not applied effectively, the Corporation’s results of operations may suffer.
Securities of the Corporationand Dilution
The Offering Price was determined by negotiation between the Corporation and the Agent and bears no relationship to earnings, book value or other valuation criteria. The Corporation plans to use the proceeds of the Offering to carry out its activities as described under “Use of Proceeds”, but to further such activities, the Corporation may require additional funds and it is likely that, to obtain the necessary funds, the Corporation will have to sell additional securities including, but not limited to, its Common Shares or securities convertible into Common Shares, the effect of which could result in a substantial dilution of the present equity interests of the Corporation’s shareholders.
Enforceability of Foreign Judgments
The Corporation’s material subsidiaries are incorporated, continued or otherwise organized under the laws of jurisdictions in the United States of America. Some or all of the officers and directors of the Corporation and these subsidiaries reside outside of Canada. Some or all of the assets of those persons and the Corporation’s material subsidiaries are located outside of Canada. It may not be possible for investors to collect from these persons and subsidiaries or enforce judgments obtained in Canada predicated on the civil liability provisions of Canadian securities legislation against the Corporation’s material subsidiaries and these officers and directors of the Corporation. In addition, it may not be possible for investors or any other person or entity to assert claims under Canadian securities laws or otherwise in original actions instituted in a foreign jurisdiction. Consequently, investors may be effectively prevented form pursing remedies against the Corporation under Canadian securities laws or otherwise.
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Public Health Crises such asthe COVID-19 Pandemic and other Uninsurable Risks
Events in the financial markets have demonstrated that businesses and industries throughout the world are very tightly connected to each other. General global economic conditions seemingly unrelated to the Corporation or to the cannabis industry, including, without limitation, interest rates, general levels of economic activity, fluctuations in the market prices of securities, participation by other investors in the financial markets, economic uncertainty, national and international political circumstances, natural disasters, or other events outside of the Corporation’s control may affect the activities of the Corporation directly or indirectly. The Corporation’s business, operations and financial condition could also be materially adversely affected by the outbreak of epidemics or pandemics or other health crises. For example, in late December 2019, a novel coronavirus (“COVID-19”) originated, subsequently spread worldwide and on March 11, 2020, the World Health Organization declared it was a pandemic, which is ongoing and is expected to continue for an uncertain period. The risks of public health crises such as the COVID-19 pandemic to the Corporation’s business include without limitation, the ability to gain access to government officials, the ability to raise funds, employee health, workforce productivity, increased insurance premiums, limitations on travel, the availability of industry experts and personnel, disruption of the Corporation’s supply chains and other factors that will depend on future developments beyond the Corporation’s control. In particular, the continued spread of the coronavirus globally, prolonged restrictive measures put in place in order to control an outbreak of COVID-19 or other adverse public health developments could materially and adversely impact the Corporation’s business could materially slow down or the Corporation could be required to suspend its operations for an indeterminate period. There can be no assurance that the Corporation’s personnel will not ultimately see its workforce productivity reduced or that the Corporation will not incur increased medical costs or insurance premiums as a result of these health risks. In addition, the coronavirus pandemic or the fear thereof could adversely affect global economies and financial markets resulting in volatility or an economic downturn that could have an adverse effect on the Corporation’s future prospects. Epidemics such as COVID-19 could have a material adverse impact on capital markets and the Corporation’s ability to raise sufficient funds to finance the ongoing development of its business. All of these factors could have a material and adverse effect on the Corporation’s business, financial condition and results of operations. The extent to which COVID-19 impacts the Corporation’s business, including its operations and the market for its securities, will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. It is not always possible to fully insure against such risks, and the Corporation may decide not to insure such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the Common Shares of the Corporation. Even after the COVID-19 pandemic is over, the Corporation may continue to experience material adverse effects to its business, financial condition and prospects as a result of the continued disruption in the global economy and any resulting recession, the effects of which may persist beyond that time. The COVID-19 pandemic may also have the effect of heightening other risks and uncertainties disclosed and described in this Prospectus and the AIF. To date, the COVID-19 crisis has not materially impacted the Corporation’s operations, financial condition, cash flows and financial performance. In response to the outbreak, the Corporation has instituted operational and monitoring protocols to ensure the health and safety of its employees and stakeholders, which follow the advice of local governments and health authorities where it operates. The Corporation has adopted a work from home policy where possible. The Corporation continues to operate effectively working remotely. The Corporation will continue to monitor developments of the pandemic and continuously assess the pandemic’s potential further impact on the Corporation’s operations and business.
No Market for Warrants
There is currently no market through which the Warrants may be sold. Accordingly, the purchasers may not be able to resell the securities qualified under this Prospectus. This may affect the pricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants, and the extent of issuer regulation.
21
Holders of Warrants Have noRights as a Shareholder
Until a holder of Warrants acquires Warrant Shares upon the due exercise of Warrants, such holder will have no rights with respect to the Warrant Shares underlying such Warrants. Upon due exercise of such Warrants, such holder will be entitled to exercise the rights of a holder of Common Shares only as to matters for which the record date occurs after the exercise date.
HSCP Transaction
The Corporation’s subsidiary, GR Distribution, proposes to complete the HSCP Transaction in accordance with the Asset Purchase Agreement as described elsewhere in this Prospectus. The Corporation cannot guarantee that the HSCP Transaction will close in the near future, or at all, and even if closed, that the Corporation will achieve the expected benefits of the transaction. See “Summary Description of the Business - Recent Developments
- HSCP Transaction” for additional information regarding the HSCP Transaction.
The completion of the HSCP Transaction is subject to certain conditions, including, among other things, that the License Transfers shall have occurred and GR Distribution shall have received the OLCC Approval. There is no guarantee that the OLCC will approve the License Transfers or provide the OLCC Approval in the near future, or at all. Additionally, the regulatory approval processes may take a lengthy period of time to complete, which could delay closing of the HSCP Transaction.
Certain of these conditions, including with respect to the License Transfers and the OLCC Approval, are outside of the Corporation’s control. There can be no certainty, and the Corporation cannot provide any assurance, that all conditions precedent to the consummation of the HSCP Transaction will be satisfied or waived, or, if satisfied or waived, when they will be satisfied or waived and, accordingly, the HSCP Transaction may not be completed within the next 12-18 months as anticipated, or at all. If, for any reason, the HSCP Transaction is not completed or its completion is materially delayed and/or the Asset Purchase Agreement is terminated, the market price of the Common Shares may be materially adversely affected. In such events, the Corporation’s business, financial condition or results of operations could also be subject to various material adverse consequences.
Even if GR Distribution does close the HSCP Transaction, the intended benefits of the HSCP Transaction to the Corporation may not be realized. The HSCP Transaction poses risks for the Corporation’s ongoing operations, including, among others, that: (i) any funds used by the Corporation in connection with the HSCP Transaction or the Business (including the portion of the proceeds of the Offering planned to be used for facility upgrades and operating costs at Warehouse 2) will not otherwise be available for use in its other operations and may not be recoverable or produce any return on investment, especially if the completion of the HSCP Transaction is delayed or does not occur; (ii) there may be costs and expenses associated with any undisclosed or potential liabilities; (iii) the Business may not perform as the Corporation anticipates; and (iv) unforeseen difficulties may arise in integrating or operating the Business. The Corporation cannot assure that the HSCP Transaction will be accretive to it in the near term or at all. Furthermore, if the Corporation fails to realize the intended benefits of HSCP Transaction, the market price of the Common Shares could decline to the extent that the market price reflects those benefits.
AUDITORS,TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The auditors of the Corporation are Dale Matheson Carr-Hilton Labonte LLP, 1500 - 1140 West Pender St., Vancouver, BC V6E 4G1.
22
The registrar and transfer agent and Special Warrant Agent of the Corporation is Capital Transfer Agency, ULC, having an address of 390 Bay St Suite 920, Toronto, ON M5H 2Y2.
LEGAL MATTERS
In connection with the Offering, certain legal matters have been or will be passed upon by Irwin Lowy LLP on behalf of the Corporation and Wildeboer Dellelce LLP on behalf of the Agent. As at the date hereof, each of the aforementioned partnerships (and their partners, associates and employees) beneficially own, directly or indirectly, in the aggregate, less than 1% of the outstanding securities of the Corporation.
PROMOTERS
Mr. J. Obie Strickler, a director and President and Chief Executive Officer of the Corporation, may be considered to be a promoter of the Corporation under applicable Canadian securities legislation given his initiative in reorganizing the Corporation. Mr. Strickler beneficially owns, or has control over, directly or indirectly, 31,018,766 Common Shares, representing approximately 25.4% of the issued and outstanding Common Shares on a non-diluted basis.
On March 5, 2020, a failure to file cease trade order was issued by the Ontario Securities Commission concerning the Corporation because the Corporation did not timely file its annual financial statements and related management’s discussion and analysis, and the related certifications of the annual filings for the year ended October 31, 2019. The cease trade order was revoked on March 23, 2020.
Other than as disclosed in this section or elsewhere in this Prospectus, no person who was a promoter of the Corporation within the last two years:
| 1. | received anything of value directly or indirectly from the Corporation or a subsidiary; |
|---|---|
| 2. | sold or otherwise transferred any asset to the Corporation or a subsidiary within the last two years; |
| --- | --- |
| 3. | has been a director, officer or promoter of any Corporation that during the past 10 years was the subject<br>of a cease trade order or similar order or an order that denied the Corporation access to any exemptions under securities legislation<br>for a period of more than 30 consecutive days or became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency<br>or been subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver or receiver manager or trustee<br>appointed to hold its assets; |
| --- | --- |
| 4. | has been subject to any penalties or sanctions imposed by a court relating to Canadian securities legislation<br>or by a Canadian securities regulatory authority or has entered into a settlement agreement with a Canadian securities regulatory authority; |
| --- | --- |
| 5. | has been subject to any other penalties or sanctions imposed by a court or regulatory body that would<br>be likely to be considered important to a reasonable investor making an investment decision; or |
| --- | --- |
| 6. | has within the past 10 years become bankrupt, made a proposal under any legislation relating to bankruptcy<br>or insolvency or been subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver or receiver<br>manager or trustee appointed to hold its assets. |
| --- | --- |
23
STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces of Canada, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that the remedies for rescission, revision of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province. Any purchaser who acquired Special Warrants pursuant to the Offering directly from the Corporation will have the same rights and remedies for rescission and/or damages against the Corporation and the Agent, as the case may be, as purchasers who acquired Special Warrants through the Agent. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province in which the purchaser resides for the particulars of these rights or consult with a legal advisor.
In an offering of Warrants, investors are cautioned that the statutory right of action for damages for a misrepresentation contained in this short form prospectus is limited, in certain provincial securities legislation, to the price at which the Warrants are offered to the public under the Offering. This means that, under the securities legislation of certain provinces, if the purchaser pays additional amounts upon exercise of the Warrants, those amounts may not be recoverable under the statutory right of action for damages that applies in those provinces. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province for the particulars of this right of action for damages or consult with a legal adviser.
CONTRACTUAL RIGHT OF RESCISSION
Pursuant to the terms of the Agency Agreement and the subscription agreements between the Corporation and the purchasers of Special Warrants, the Corporation has granted to each holder of a Special Warrant a contractual right of rescission of the prospectus-exempt transaction under which the Special Warrant was initially acquired. The contractual right of rescission provides that if a holder of a Special Warrant who acquires Units on the exercise or deemed exercise of the Special Warrant as provided for in this Prospectus is, or becomes, entitled under the securities legislation of a jurisdiction to the remedy of rescission because of this Prospectus or an amendment to this Prospectus containing a misrepresentation,
| (a) | the holder is entitled to rescission of both the holder’s exercise or deemed exercise of its Special Warrant<br>and the private placement transaction under which the Special Warrant was initially acquired, |
|---|---|
| (b) | the holder is entitled in connection with the rescission to a full refund of all consideration paid to<br>the Corporation on the acquisition of the Special Warrant, and |
| --- | --- |
| (c) | if the holder is a permitted assignee of the interest of the original Special Warrant subscriber, the<br>holder is entitled to exercise the rights of rescission and refund as if the holder was the original subscriber. |
| --- | --- |
The contractual rights of action described above are in addition to and without derogation from any other right or remedy that a purchaser of Special Warrants may have at law.
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CERTIFICATE OF THE CORPORATION
Dated: March 23, 2021
This Prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Prospectus as required by the securities legislation of each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario.
GROWN ROGUE INTERNATIONAL INC.
| By:<br> “J. Obie Strickler”<br><br> <br><br><br> <br>Chief Executive Officer and Director | By: “Michael Johnston”<br><br> <br><br><br> <br>Chief Financial Officer |
|---|
ON BEHALF OF THE BOARD OF DIRECTORS
| By:<br> “Stephen Gledhill”<br><br> <br><br><br> <br>Director | By:<br> “Sean Conacher”<br><br> <br><br><br> <br>Director |
|---|
C-1
CERTIFICATE OF THEAGENT
Dated March 23, 2021
To the best of our knowledge, information and belief, this Prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Prospectus as required by the securities legislation of each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario.
| EIGHT CAPITAL |
|---|
| By: “Elizabeth Staltari”<br><br> <br><br><br> <br>Principal, Managing Director |
C-2
CERTIFICATE OF THEPROMOTER
Dated March 23, 2021
This Prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Prospectus as required by the securities legislation of each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario.
| By:<br> “J. Obie Strickler”<br><br> <br><br><br> <br>Chief Executive Officer and Director |
|---|
C-3
Exhibit 6
QUALIFICATION CERTIFICATE
The undersigned, J. Obie Stickler, the President and Chief Executive Officer of Grown Rogue International Inc. (the “Issuer”), hereby certifies on behalf of the Issuer in connection with the filing of the preliminary short form prospectus of the Issuer dated March 23, 2021 (the “Prospectus”) pursuant to Section 2.2 of National Instrument 44-101 – Short Forms of Prospectus (“NI 44-101”), that:
| (a) | the Issuer is an electronic filer under National Instrument 13-101- System for Electronic DocumentAnalysis and Retrieval (SEDAR); |
|---|---|
| (b) | the Issuer is a reporting issuer in at least one jurisdiction of Canada; |
| --- | --- |
| (c) | the Issuer has filed with the securities regulatory authority in each jurisdiction in which it is a reporting<br>issuer all periodic and timely disclosure documents that it is required to have filed in that jurisdiction: |
| --- | --- |
| (i) | under applicable securities legislation, |
| --- | --- |
| (ii) | pursuant to an order issued by the securities regulatory authority, or |
| --- | --- |
| (iii) | pursuant to an undertaking to the securities regulatory authority; |
| --- | --- |
| (d) | the Issuer has, in at least one jurisdiction in which it is a reporting issuer, |
| --- | --- |
| (i) | current annual financial statements (as that term is more specifically defined under NI 44-101), and |
| --- | --- |
| (ii) | a current AIF (as that term is more specifically defined under NI 44-101); |
| --- | --- |
| (e) | the Issuer’s equity securities are listed and posted for trading on a short form eligible exchange<br>and the Issuer is not an issuer: |
| --- | --- |
| (i) | whose operations have ceased, or |
| --- | --- |
| (ii) | whose principal asset is cash, cash equivalents, or its exchange listing; |
| --- | --- |
| (f) | all of the material incorporated by reference in the Prospectus and not previously filed is being filed<br>with the Prospectus. |
| --- | --- |
DATED this 23^rd^ day of March, 2021.
| GROWN ROGUE INTERNATIONAL INC. | |
|---|---|
| Per: | “J. Obie Stickler” |
| J. Obie Stickler | |
| President and Chief Executive Officer |
Exhibit 7
EXECUTION COPY
AGENCY AGREEMENT
March 5, 2021
Grown Rogue International Inc.
340 Richmond Street West
Toronto, Ontario M5V 1X2
Attention: Mr. Obie Strickler, President,Chief Executive Officer and Chairman
Dear Sir:
The undersigned, Eight Capital (the “Agent”), as sole agent and sole bookrunner, understands that Grown Rogue International Inc. (the “Company”) proposes to issue and sell up to 13,350,000 special warrants (the “Offered Special Warrants”) at a price of $0.225 per Special Warrant (the “Issue Price”) for aggregate gross proceeds of up to $3,003,750, subject to the terms and conditions set out below. In addition, the Company hereby grants the Agent an option (“Over-Allotment Option”) to increase the size of the Offering by up to an additional 7,706,890 Special Warrants (the “Additional Special Warrants”) for additional gross proceeds of up to $1,734,050. The Over-Allotment Option is exercisable at any time on or before forty-eight (48) hours prior to the Closing Date (as defined herein). The Offered Special Warrants and the Additional Special Warrants are collectively referred to herein as the “SpecialWarrants” and each, individually, a “Special Warrant”. The offer and sale of the Offered Special Warrants and the Additional Special Warrants, if any, are collectively referred to as the “Offering”.
Each Special Warrant will entitle the holder thereof to receive, for no additional consideration, one unit of the Company (a “Unit”) on the exercise or deemed exercise of the Special Warrant. Each Unit will consist of one Common Share (as hereinafter defined) (a “Unit Share”) and one Common Share purchase warrant (a “Warrant”), subject to adjustment in certain events. The Special Warrants shall be duly and validly created and issued pursuant to, and governed by, a special warrant indenture (the “Special Warrant Indenture”) to be entered into as of the Closing Date between the Company and Capital Transfer Agency, ULC (or such other special warrant agent as may be acceptable to the Company and the Agent), in its capacity as special warrant agent thereunder. The Unit Shares and Warrants underlying the Special Warrants are referred to herein as the “Underlying Securities”.
Each Warrant shall entitle the holder thereof to purchase one Common Share (a “Warrant Share”) at a price of $0.30 at any time before 5:00 p.m. (Toronto time) on the day that is twenty-four (24) months following the Closing Date (as hereinafter defined), subject to adjustment in certain events. The Warrants shall be duly and validly created and issued pursuant to, and governed by, a warrant indenture (the “Warrant Indenture”) to be entered into as of the Closing Date between the Company and Capital Transfer Agency, ULC (or such other warrant agent as may be acceptable to the Company and the Agent), in its capacity as warrant agent thereunder.
The Special Warrants will be exercisable by the holders thereof at any time after the Closing Date for no additional consideration and all unexercised Special Warrants and Agent’s Warrants (as hereinafter defined) will be deemed to be exercised (for no additional consideration and with no further action on the part of the holder) on the date (the “Qualifying Date”) that is the earlier of: (a) the day that is four months and one day following the Closing Date; and (b) the third business day after a receipt is issued for the Final Qualification Prospectus (as hereinafter defined) by the Securities Regulators (as hereinafter defined) in each of the Qualifying Jurisdictions (as hereinafter defined) qualifying the distribution of the Unit Shares and Warrants issuable upon the exercise of the Special Warrants.
The Company shall use reasonable commercial efforts to obtain a receipt for the Final Qualification Prospectus on or prior to the date that is 30 days following the Closing Date (the “PenaltyDate”). If the Company fails to qualify the distribution of the Unit Shares and Warrants underlying the Special Warrants pursuant to a Final Qualification Prospectus on or prior to the Penalty Date, the holders of Special Warrants will be entitled to receive an additional number of Units equal to 10% of the number of Units issuable upon the exercise or deemed exercise of the Special Warrants, resulting in each Special Warrant being exercisable for 1.10 Units (the “Penalty Provision”). For the avoidance of doubt, references in this Agreement to the Underlying Securities include any Underlying Securities issued in connection with the Penalty Provision.
The descriptions of the Special Warrants and Warrants herein are a summary only and are subject to the specific attributes and detailed provisions of the Special Warrants and the Warrants to be set forth in the Special Warrant Indenture and the Warrant Indenture, respectively. In the case of any inconsistency between the description of the Special Warrants or the Warrants in this Agreement and their terms and conditions as set forth in the Special Warrant Indenture and Warrant Indenture, respectively, the provisions of the Special Warrant Indenture or Warrant Indenture, as applicable, shall govern.
Upon and subject to the terms and conditions set forth herein, the Agent hereby agrees to act, and the Company hereby appoints the Agent, as the Company’s exclusive agent to offer for sale to Purchasers (as hereinafter defined) in the Selling Jurisdictions (as hereinafter defined), on a best efforts agency basis, without underwriter liability, the Special Warrants at the Issue Price. For greater certainty, the Agent shall not be under any obligation whatsoever to purchase any of the Special Warrants, although the Agent may subscribe for Special Warrants if it so desires. Notwithstanding the foregoing, the Company has included certain Purchasers as identified by the Company on a president’s list (the “President’sList”) who will settle directly with the Company (the “Direct Settlers”). The parties hereto acknowledge that the Agent shall not be required to conduct a suitability review in respect of the sale of any Special Warrants issued to Direct Settlers and the indemnity set out in Section 12 of this Agreement shall apply in respect of such sales.
The Company agrees that the Agent will be permitted to appoint other registered dealers (or other dealers duly licensed or registered in their respective jurisdictions) (each, a “SellingFirm”) as their agents to assist in the Offering and that the Agent shall determine the remuneration payable to such other dealers appointed by them. Such remuneration shall be payable by the Agent.
In consideration of the services rendered by the Agent in connection with the Offering, the Company shall pay to the Agent at Closing (as hereinafter defined): (i) a cash commission (the “Commission”) equal to 7% of the gross proceeds of the Offering; provided that, the Commission shall be reduced to 3.5% in respect of certain Purchasers on the President’s List (the “President’s List Purchasers”), subject to an aggregate maximum of 20% of Special Warrants sold pursuant to the Offering subscribed for by President’s List Purchasers and Direct Settlers; and (ii) a cash fee of $25,500 (inclusive of HST) for advisory services provided to the Company in connection with the Offering (the “Advisory Fee”). The Commission and the Advisory Fee will be payable by the Company on the Closing Date. The Commission and the Advisory Fee are payable in cash and each may, at the option of the Agent, be made by way of deduction from the aggregate gross proceeds of the Offering on the Closing Date derived from the sale of Special Warrants to Purchasers who are not Direct Settlers and shall be fully earned by the Agent at that time.
2
As additional compensation, on the Closing Date, the Company will issue to the Agent (or any Selling Firm engaged by the Agent in amounts determined by the Agent): (i) that number of warrants (the “Broker Warrants”) exercisable to acquire that number of compensation options (the “CompensationOptions”) as is equal to 7% of the number of Special Warrants sold pursuant to the Offering (excluding Special Warrants sold to any Direct Settlers); and (ii) 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options. The Broker Warrants and Advisory Warrants are collectively referred to as the “Agent’s Warrants”. Each Compensation Option shall entitle the holder thereof to purchase one unit (a “Compensation Unit”) at the Issue Price for a period of twenty-four (24) months following the Closing Date, subject to adjustment in certain events. Each Compensation Unit shall be comprised of one Common Share (a “Compensation Share”) and one Common Share purchase warrant (a “CompensationWarrant”). Each Compensation Warrant shall entitle the holder thereof to purchase one Common Share (a “CompensationWarrant Share”) at a price of $0.30 at any time before 5:00 p.m. (Toronto time) on the day that is twenty-four (24) months following the Closing Date, subject to adjustment in certain events. The Company shall execute and deliver to the Agent at Closing certificates evidencing the Agent’s Warrants (the “Agent’s Warrant Certificates”) to which the Agent is entitled, in a form to be agreed upon by the Agent and the Company, each acting reasonably.
The parties acknowledge the Special Warrants and the Underlying Securities have not been and will not be registered under the U.S. Securities Act (as hereinafter defined) or the securities laws of any state of the United States (as hereinafter defined) and may not be offered or sold in the United States, or to U.S. Persons (as hereinafter defined) unless they have been registered under the U.S. Securities Act and applicable state securities laws, or an exemption from such registration requirements is available. The Company and the Agent further agree that any offers to sell or sales of the Special Warrants to, or for the account or benefit of, persons in the United States and U.S. Persons, (i) be made in compliance with Schedule B attached hereto, which forms part of this Agreement, and allows for the Agent, acting through its U.S. Affiliate (as hereinafter defined), to offer the Special Warrants for sale by the Company to Qualified Institutional Buyers (as hereinafter defined) that are also U.S. Accredited Investors in accordance with Rule 506(b) of Regulation D; (ii) be conducted in such a manner so as not to require registration thereof or the filing of a prospectus or an offering memorandum with respect thereto under the U.S. Securities Act; and (iii) be conducted through the duly registered U.S. Affiliates of the Agent in compliance with applicable federal and state securities laws of the United States.
DEFINITIONS
In this Agreement, in addition to the terms defined above or elsewhere in this Agreement, the following terms shall have the following meanings:
“affiliate”, “associate”, “distribution”, “material change”, “material fact” and “misrepresentation” have the respective meanings ascribed thereto in the Securities Act (Ontario);
“Agreement” means the agreement resulting from the acceptance by the Company of the offer made by the Agent hereby, as amended or supplemented from time to time;
“best of the knowledge” means the actual knowledge of the Company and Obie Strickler as the duly appointed President and Chief Executive Officer of the Company, as of the date hereof, and the knowledge which they would have had if they had conducted a diligent inquiry into the relevant subject matter;
3
“Business” means the business of the Company, being the of growth, distribution and sale of innovative cannabis products;
“Business Day” means a day which is not a Saturday, Sunday or statutory or civic holiday in the City of Toronto, Ontario;
“Canopy Option Agreement” means the option agreement dated February 1, 2021, between Grown Rogue Unlimited, LLC and J. Obie Strickler;
“Canadian Securities Laws” means all applicable securities laws in each of the Canadian Selling Jurisdictions and the respective regulations made thereunder, together with applicable published fee schedules, prescribed forms, policy statements, notices, orders, blanket rulings and other regulatory instruments of the securities regulatory authorities in such provinces and all rules and policies of the CSE;
“Closing” means the closing on the Closing Date of the transaction of purchase and sale in respect of the Special Warrants as contemplated by this Agreement and the Subscription Agreements;
“Closing Date” means March 5, 2021 or such other date as the Agent and the Company may agree;
“Closing Time” means 8:30 a.m. (Toronto time) on the Closing Date or such other time on the Closing Date as the Company and the Agent may agree;
“Common Shares” means the common shares in the capital of the Company;
“Company’s Auditors” means DMCL LLP, Chartered Professional Accountants, or such other firm of chartered accountants as the Company may have appointed or may from time to time appoint as auditors of the Company;
“Compensation Securities” has the meaning ascribed thereto in Section 6(v);
“Contracts” means all agreements, contracts or commitments of any nature, written or oral, including, for greater certainty and without limitation, leases, loan documents and security documents;
“CSE” means the Canadian Securities Exchange;
“Documents Incorporated by Reference” means all financial statements, management information circulars, annual information forms, material change reports, business acquisition reports or other documents filed by the Company, whether before or after the date of this Agreement, that are required by applicable Canadian Securities Laws to be incorporated by reference into the Prospectus;
“Environmental Laws” means all laws and agreements with Governmental Authorities and all other statutory requirements relating to public health and safety, noise control, pollution or the protection of the environment or to the generation, production, installation, use, storage, treatment, transportation, release or threatened release of Hazardous Materials, including civil responsibility for acts or omissions with respect to the environment, and all Authorizations issued pursuant to such Law, agreements or other statutory requirements;
4
“Environmental Permits” includes all orders, permits, certificates, approvals, consents, registrations and licences issued by any authority of competent jurisdiction under any Environmental Law;
“Final Qualification Prospectus” means the (final) short form prospectus of the Company, including all of the Documents Incorporated by Reference, prepared by the Company and certified by the Company and the Agent, qualifying the distribution of the Unit Shares and Warrants issuable upon exercise of the Special Warrants and for which a receipt or deemed receipt has been issued by the Principal Regulator and each of the other Canadian Securities Regulators pursuant to the Passport System and NP 11-202;
“Governmental Authority” means and includes, without limitation, any national or federal government, province, state, municipality or other political subdivision of any of the foregoing, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation or other entity owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing;
“Harvest Companies” means Canopy Management LLC, incorporated under the laws of Michigan, and Golden Harvests, LLC, incorporated under the laws of Michigan;
“HarvestOption Agreement” means the option to purchase controlling interest dated February 4, 2021 among David Pleitner, Allan Pleitner, Golden Harvests LLC and Canopy Management, LLC, pursuant to which Canopy Management, LLC has the option to acquire 60% of the membership interest of Golden Harvests LLC;
“Hazardous Materials” has the meaning ascribed to it in Section 5(a)(xlviii) of this Agreement;
“IFRS” means International Financial Reporting Standards applicable as at the date on which date such calculation is made or required to be made in accordance with generally accepted accounting principles applied on a basis consistent with preceding years;
“including” means including without limitation;
“Indebtedness” means all indebtedness for borrowed money or for the deferred purchase price of property or services (including any guarantees in respect of the foregoing, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers’ acceptances, whether or not matured);
“Intellectual Property” means any registered or unregistered trade-marks and trade-mark applications, trade names, certification marks, patents and patent applications, copyrights, domain names, industrial designs, trade secrets, know-how, formulae, processes, inventions, technical expertise, research data and other similar property, all associated registrations and applications for registration, and all associated rights, including moral rights;
“Licences” means the licenses held through: (A) Grown Rogue Gardens, LLC, being: (i) Marijuana Producer License - Outdoor Tier II 1006166A33A; (ii) Marijuana Producer License - Outdoor Tier II 10063940AA8; (iii) Marijuana Processor License, endorsed for Concentrates 1009512285E; (iv) Marijuana Producer License - Indoor Tier II 1006168AB1B; (v) Marijuana Wholesaler License 1006219C093; and (B) Golden Harvests, LLC, being (i) Medical Marijuana Facility License (Grower License C) GR-C-000025; (ii) Medical Marihuana Facility Operating License (MM Grower Class C Operating Lic) GR-C-000426; (iii) Adult Use Facility License (AU Grower Class C Operating Lic) AU-G-C-000226; and (iv) Adult Use Facility License (AU Grower Class C Operating Lic) AU-GA-C-000309.
“Lien” means any mortgage, charge, pledge, hypothecation, security interest, assignment, lien (statutory or otherwise), charge, title retention agreement or arrangement, restrictive covenant or other encumbrance of any nature, or any other arrangement or condition which, in substance, secures payment or performance of an obligation;
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“Material Adverse Effect” means any change (including a decision to implement such a change made by the board of directors or by senior management who believe that confirmation of the decision of the board of directors is probable), event, violation, inaccuracy, circumstance, development or effect that is materially adverse to the business, assets (including intangible assets), capitalization, liabilities (contingent or otherwise), condition (financial or otherwise), prospects or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising in the ordinary course of business;
“NI 44-101” means National Instrument 44-101 – Short Form ProspectusDistributions;
“NP 11-202” means National Policy 11-202 – Process for ProspectusReviews in Multiple Jurisdictions;
“Passport System” means the system and procedures for prospectus filing and review under Multilateral Instrument 11-102 – Passport System adopted by the Canadian Securities Regulators (other than the Ontario Securities Commission);
“Permitted Encumbrances” means: (i) any validly perfected security interest given by the Company in respect of any indebtedness; (ii) any other security given by the Company in connection with the operation of the Business; (iii) liens against the Company or its assets for taxes, assessments or governmental charges or levies not due and delinquent; (iv) undetermined or inchoate liens and charges incidental to the current operations of the Company which have not been filed pursuant to law or which relate to obligations not due or delinquent; and (v) those otherwise disclosed to the Agent in writing and (vi) those Liens set out in Schedule C;
“person” shall be broadly interpreted and includes any individual, corporation, partnership, joint venture, association, trust or other legal entity;
“Personnel” has the meaning ascribed thereto in Section 12(a);
“Preliminary Qualification Prospectus” means the preliminary short form prospectus of the Company, including all of the Documents Incorporated by Reference, prepared by the Company and certified by the Company and the Agent relating to the distribution of the Unit Shares and Warrants issuable upon exercise of the Special Warrants and for which a receipt or deemed receipt has been issued by the Principal Regulator and each of the other Canadian Securities Regulators pursuant to the Passport System and NP 11-202;
“Principal Regulator” means the principal regulator of the Company under the Passport System and NP 11-202;
“Prospectus” means, collectively, the Preliminary Qualification Prospectus and the Final Qualification Prospectus;
“Public Disclosure Documents” means, collectively, all of the publicly available documents which have been filed by or on behalf of the Company prior to the Closing Time with the relevant Securities Regulators pursuant to the requirements of Canadian Securities Laws, including all press releases, annual information forms, material change reports, financial statements, information circulars and other documents that have been publicly disclosed by the Company or otherwise posted on SEDAR;
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“Purchasers” means the persons (which may include the Agent) who, as purchasers or beneficial purchasers acquire Special Warrants by duly completing, executing and delivering Subscription Agreements and any other required documentation and permitted assignees or transferees of such persons from time to time;
“Qualified Institutional Buyer” means a “qualified institutional buyer” within the meaning of Rule 144A under the U.S. Securities Act;
“Qualifying Jurisdictions” means, collectively, each of the provinces of Canada, except Quebec, where Special Warrants are offered and sold;
“Regulation D” means Regulation D adopted by the SEC under the U.S. Securities Act;
“Rule 144A” means Rule 144A adopted by the SEC under the U.S. Securities Act;
“SEC” means the United States Securities and Exchange Commission;
“Securities Regulators” means, collectively, the securities regulators in Canada and other applicable securities regulatory authorities, including the CSE, in the Selling Jurisdictions;
“Selling Firm” has the meaning ascribed thereto on the face page of this Agreement.
“Selling Jurisdictions” means collectively, the Qualifying Jurisdictions, and such other jurisdictions outside of Canada, as mutually agreed to by the Company and the Agent;
“Subscription Agreements” means, collectively, the subscription agreements in the forms agreed upon by the Agent and the Company, pursuant to which Purchasers agree to subscribe for and purchase the Special Warrants as herein contemplated and shall include, for greater certainty, all schedules thereto;
“Subsequent Disclosure Documents” means any financial statements, management information circulars, annual information forms, business acquisition reports, material change reports or other documents issued by the Company after the date of this Agreement that are required to be incorporated by reference in the Prospectus;
“Subsidiaries” means the subsidiaries of the Company, being: Grown Rogue Unlimited, LLC, incorporated under the laws of Oregon, Grown Rogue Gardens, LLC, incorporated under the laws of Oregon, Grown Rogue Distribution, LLC, incorporated under the laws of Oregon, GRU Properties, LLC, incorporated under the laws of Oregon, GRIP, LLC, incorporated under the laws of Oregon, Grown Rogue Michigan, incorporated under the laws of Michigan, Idalia, LLC, incorporated under the laws of Oregon, and “Subsidiary” means any one of them;
“subsidiary” and “subsidiaries” shall have the meaning ascribed thereto in the Business Corporations Act (Ontario);
“Supplementary Material” means, collectively, any amendment to the Prospectus, any amendment or supplemental prospectus or ancillary materials that may be filed by or on behalf of the Company under the Canadian Securities Laws relating to the distribution of the Unit Shares and Warrants comprising the Units;
“Taxes” has the meaning ascribed thereto in Section 5(a)(xxxi);
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“Transaction Documents” means, collectively, this Agreement, the Subscription Agreements, the Special Warrant Indenture, the certificates representing the Special Warrants, the Warrant Indenture and the Agent’s Warrant Certificates;
“United States” means the United States of America, its territories and possessions, any State of the United States, and the District of Columbia;
“U.S. Accredited Investors” means an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the U.S. Securities Act;
“U.S. Affiliate” means the duly registered broker-dealer affiliate of the Agent;
“U.S. Person” means “U.S. Person” as defined in Rule 902(k) of Regulations S of the U.S. Securities Act; and
“U.S. Securities Act” means the United States Securities Act of 1933, as amended.
TERMS AND CONDITIONS
1. (a) Saleon Exempt Basis. The Agent shall offer for sale and sell the Special Warrants on behalf of the Company in the Selling Jurisdictions on a private placement basis in compliance with all applicable securities laws in the Selling Jurisdictions (including the Canadian Securities Laws) such that the offer and sale of the Special Warrants does not obligate the Company to file or deliver a prospectus, registration statement or other offering document under applicable securities laws in connection with such offer and sale of the Special Warrants (provided, however, the Company shall comply with its obligations under Section 2 of this Agreement in respect of the qualification of the distribution of the Unit Shares and Warrants issuable upon exercise of the Special Warrants).
(b) Filings. The Company undertakes to file, or cause to be filed, all forms or undertakings required to be filed by the Company in connection with the issue and sale of the Special Warrants so that the distribution of the Special Warrants to the Purchasers may lawfully occur without the necessity of filing a prospectus or other offering document in Canada (but on terms that will permit the Special Warrants acquired by the Purchasers in the Selling Jurisdictions and the Underlying Securities to be sold by such Purchasers at any time in the Selling Jurisdictions subject to applicable hold periods under Canadian Securities Laws and the policies of the CSE, all applicable securities laws of the other Selling Jurisdictions and the provisions of Section 3 of this Agreement), and the Agent undertakes to use its commercially reasonable best efforts to cause Purchasers of Special Warrants to complete any forms required by Canadian Securities Laws, the CSE or applicable securities laws of the other Selling Jurisdictions. All prescribed fees payable in connection with such filings shall be at the expense of the Company.
(c) NoOffering Memorandum. Neither the Company nor the Agent shall: (i) provide to any prospective purchasers of Special Warrants any document or other material that would constitute an offering memorandum or future-oriented financial information within the meaning of Canadian Securities Laws; or (ii) engage in any form of general solicitation or general advertising in connection with the offer and sale of the Special Warrants, including any advertisement, article, notice or other communication published in any newspaper, magazine, printed public media, printed media or similar media, or broadcast over radio, television or telecommunications, including electronic display, or any seminar or meeting relating to the offer and sale of the Special Warrants whose attendees have been invited by general solicitation or advertising.
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(d) PressReleases. In order to comply with applicable U.S. securities laws, any press release announcing or otherwise concerning the Offering shall include an appropriate notation on each page as follows: “Not for distribution to United States Newswire Services or fordissemination in the United States”, provided however, that any press release issued announcing the closing of the Offering shall not bear such legend. In addition, any such press release shall contain the following disclaimer: “This press release shall not constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful. The securities being offered have not been, nor will they be, registered under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and may not be offered or sold to, or for the account or benefit of, persons in the United States or “U.S. Persons” absent registration or an applicable exemption from the registration requirements of the U.S. Securities Act and applicable state securities laws.”
2. Prospectus.
(a) PreliminaryQualification Prospectus. The Company covenants and agrees to use commercially reasonable efforts to, as soon as practicable following the Closing Date: (i) prepare and file the Preliminary Qualification Prospectus and obtain a receipt or deemed receipt therefor from the Principal Regulator and each of the other Securities Regulators in the Qualifying Jurisdictions with respect to the proposed distribution of the Unit Shares and Warrants issuable upon exercise of the Special Warrants; and (ii) resolve all comments received or deficiencies raised by the Securities Regulators in the Qualifying Jurisdictions in respect of the Preliminary Qualification Prospectus as expeditiously as possible.
(b) FinalQualification Prospectus. The Company covenants and agrees to use commercially reasonable efforts to, as soon as practicable after all comments of the Securities Regulators in the Qualifying Jurisdictions have been satisfied with respect to the Preliminary Qualification Prospectus, prepare and file the Final Qualification Prospectus and obtain a receipt or deemed receipt therefor from the Principal Regulator and each of the other Securities Regulators in the Qualifying Jurisdictions with respect to the proposed distribution of the Unit Shares and Warrants issuable upon exercise of the Special Warrants. The Company shall promptly take, or cause to be taken, all reasonable steps and proceedings that may from time to time be required under applicable Canadian Securities Laws to qualify the distribution of the Unit Shares and Warrants issuable upon exercise of the Special Warrants in the Qualifying Jurisdictions and shall use commercially reasonable efforts to ensure that such requirements (including the issuance of a receipt by the Securities Regulators for the Final Qualification Prospectus) shall be fulfilled as expeditiously as possible, and in any event on or prior to the Penalty Date.
(c) SupplementaryMaterial. If applicable, the Company shall also prepare and deliver promptly to the Agent signed copies of all Supplementary Material. Concurrently with the delivery of any Supplementary Material or the incorporation by reference in the Prospectus of any Subsequent Disclosure Document, the Company shall deliver to the Agent, with respect to such Supplementary Material or Subsequent Disclosure Document, documents substantially similar to those referred to in Section 2(i).
(d) CommercialCopies. The Company shall cause copies of the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material to be delivered to the Agent without charge, in such numbers and in such locations in the Selling Jurisdictions as the Agent may reasonably request. Such delivery shall be effected as soon as practicable and, in any event, on or before a date two Business Days after the issuance of the receipt thereof. The Agent shall cause to be delivered to holders of Special Warrants copies of the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any required Supplementary Material.
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(e) Representationas to Prospectus and Supplementary Material. Each delivery of the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material shall constitute a representation and warranty by the Company to the Agent, the holders of Special Warrants and their permitted assigns that all information and statements (except information and statements relating solely to and provided by the Agent for inclusion in the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material) contained in the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material are true and correct in all material respects at the time of delivery thereof and contain no misrepresentations and constitute full, true and plain disclosure of all material facts relating to the Company and the Unit Shares and Warrants issuable upon exercise of the Special Warrants and that no material fact or information has been omitted therefrom (except information and statements relating solely to and provided by the Agent for inclusion in the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material) which is required to be stated therein or is necessary to make the statements or information contained therein not misleading in light of the circumstances under which they were made. Such deliveries shall also constitute the Company’s consent to the Agent’s use of the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material relating to the distribution of the Unit Shares and Warrants issuable upon the exercise of the Special Warrants in the Qualifying Jurisdictions in compliance with the provisions of this Agreement and Canadian Securities Laws.
(f) The form and substance of the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material shall be satisfactory to the Company and its counsel and the Agent and their counsel, each acting reasonably.
(g) The Company shall permit the Agent and its counsel to participate in the preparation of the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material, to discuss the Company’s business with its corporate officials and auditors and to conduct such full and comprehensive review and investigation of the Company’s business, affairs, capital and operations as the Agent and their counsel reasonably consider to be necessary to establish a due diligence defence under Canadian Securities Laws to an action for misrepresentation or damages and to enable the Agent to responsibly execute the Agent’s certificate in the Preliminary Qualification Prospectus, the Final Qualification Prospectus and any Supplementary Material. The Company also covenants to use its best efforts to secure the cooperation of the Company’s professional advisors (including its legal advisors and auditors) to participate in any due diligence conference calls required by the Agent, and the Company consents to the use and the disclosure of information obtained during the course of the due diligence investigation where such disclosure is required by law or required by the Agent to maintain a defence to any regulatory or other civil action.
(h) The Preliminary Qualification Prospectus and the Final Qualification Prospectus shall contain a contractual right of rescission granted by the Company to the Purchasers and their permitted assigns for misrepresentations in the Prospectus.
(i) Concurrently with the filing of the Preliminary Qualification Prospectus, the Company shall deliver to the Agent a copy of any document required to be filed by the Company under applicable Canadian Securities Laws in connection with the filing of the Preliminary Qualification Prospectus and concurrently with the filing of the Final Qualification Prospectus (including any amendments thereto), as applicable, the Company shall deliver the following documents to the Agent and their counsel, each of which shall be in a form and substance satisfactory to the Agent and their counsel:
| (i) | a copy of any document required to be filed by the Company under applicable Canadian Securities Laws in<br>connection with the filing of the Final Qualification Prospectus; and |
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| (ii) | a “long-form” comfort letter of the Company’s Auditors dated the date of the Final Qualification<br>Prospectus (with the requisite procedures to be completed by the Company’s Auditor within two Business Days of the date of such<br>letter), in form and substance satisfactory to the Agent, acting reasonably, addressed to the Agent and the directors of the Company,<br>with respect to certain financial and accounting information relating to the Company in the Final Qualification Prospectus, which letter<br>shall be in addition to the auditors’ report incorporated by reference in the Final Qualification Prospectus and the auditors’<br>consent and comfort letter, if any, addressed to the Canadian Securities Regulators. |
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3. Covenantsof the Company. The Company hereby covenants to the Agent, the Purchasers and their respective permitted assigns, and acknowledges that each of them is relying on such covenants in connection with the purchase of the Special Warrants, that the Company shall:
| (i) | unless otherwise inconsistent with the fiduciary duties of the board of directors of the Company, for<br>a period of 24 months after the Closing Date, use commercially reasonable efforts to remain a reporting issuer under Canadian Securities<br>Laws in the provinces of British Columbia and Ontario and, following the filing of the Final Qualification Prospectus, in each of the<br>other Qualifying Jurisdictions, not in default of any requirement of the Canadian Securities Laws applicable in such jurisdictions; |
|---|---|
| (ii) | for a period of 24 months after the Closing Date, use commercially reasonable efforts to remain a corporation<br>validly existing under the laws of its jurisdiction of incorporation, and shall, directly or indirectly remain licensed, registered or<br>qualified as an extra-provincial or foreign corporation in all jurisdictions where the character of its properties owned or leased or<br>the nature of the activities conducted by it make such licensing, registration or qualification necessary and shall carry on its business<br>in the ordinary course and in compliance in all material respects with all applicable laws, rules and regulations of each such jurisdiction; |
| --- | --- |
| (iii) | allow the Agent and its representatives the opportunity to conduct all due diligence which the Agent may<br>reasonably require to be conducted prior to and until the Qualifying Date; |
| --- | --- |
| (iv) | duly execute and deliver the Transaction Documents at or prior to the Closing Time and comply with and<br>satisfy all terms, conditions and covenants herein and therein contained to be complied with or satisfied by the Company unless otherwise<br>waived by the Agent; |
| --- | --- |
| (v) | fulfil or cause to be fulfilled, at or prior to the Closing Date, each of the conditions applicable to<br>the Company set out in Section 8 unless otherwise waived by the Agent; |
| --- | --- |
| (vi) | ensure that, at the Closing Time, the Special Warrants are duly and validly created, authorized and issued<br>on payment of the purchase price therefor and have attributes corresponding in all material respects to the description thereof set forth<br>in this Agreement, the Subscription Agreements and the Special Warrant Indenture; |
| --- | --- |
| (vii) | ensure that, at the Closing Time, the Agent’s Warrants are duly and validly created, authorized<br>and issued and have attributes corresponding in all material respects to the description thereof set forth in this Agreement and the Agent’s<br>Warrants Certificates; |
| --- | --- |
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| (viii) | ensure that at all times prior to the exercise of the Special Warrants, a sufficient number of Unit Shares<br>and Warrants shall be duly and validly allotted and reserved for issuance upon the due exercise of the Special Warrants and, upon such<br>exercise, the Unit Shares and Warrants have attributes corresponding in all material respects to the respective descriptions thereof set<br>forth in this Agreement, the Subscription Agreements and the Warrant Indenture, as applicable; |
|---|---|
| (ix) | ensure that, upon the due exercise of the Special Warrants, the Unit Shares are duly issued as fully paid<br>and non-assessable shares of the Company and the Warrants are duly created and issued; |
| --- | --- |
| (x) | ensure that at all times prior to the expiry of the Warrants, a sufficient number of Warrant Shares are<br>allotted and reserved for issuance upon the due exercise of the Warrants in accordance with their terms; |
| --- | --- |
| (xi) | ensure that, upon the due exercise of the Warrants, the Warrant Shares shall be duly issued as fully paid<br>and non-assessable shares of the Company on payment of the purchase price therefor; |
| --- | --- |
| (xii) | ensure that, as of the Qualifying Date, the Compensation Options are duly and validly created, authorized<br>and issued and have attributes corresponding in all material respects to the description thereof set forth in this Agreement and the certificates<br>representing the Compensation Options; |
| --- | --- |
| (xiii) | ensure that at all times prior to the exercise of the Compensation Options, a sufficient number of Compensation<br>Shares and Compensation Warrants shall be duly and validly allotted and reserved for issuance upon the due exercise of the Compensation<br>Options and, upon such exercise, the Compensation Shares and the Compensation Warrants have attributes corresponding in all material respects<br>to the respective descriptions thereof set forth in this Agreement, the Subscription Agreements, the Warrant Indenture and the certificates<br>representing the Compensation Options, as applicable; |
| --- | --- |
| (xiv) | ensure that, upon the due exercise of the Compensation Options, the Compensation Shares are duly issued<br>as fully paid and non-assessable shares of the Company and the Compensation Warrants are duly created and issued on the payment of the<br>purchase price therefor; |
| --- | --- |
| (xv) | ensure that at all times prior to the expiry of the Compensation Warrants, a sufficient number of Compensation<br>Warrant Shares are allotted and reserved for issuance upon the due exercise of the Compensation Warrants in accordance with their terms; |
| --- | --- |
| (xvi) | ensure that, upon due exercise of the Compensation Warrants, the Compensation Warrant Shares shall be<br>duly issued as fully paid and non-assessable shares of the Company on the payment of the purchase price therefor; |
| --- | --- |
| (xvii) | use commercially reasonable efforts to ensure that the Qualifying Date occurs prior to the Penalty Date; |
| --- | --- |
| (xviii) | execute and file with the CSE all necessary documents and use reasonable best efforts to ensure that the<br>Unit Shares, Warrant Shares, Compensation Shares and Compensation Warrant Shares have been approved for listing and trading on the CSE<br>on their respective dates of issuance; |
| --- | --- |
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| (xix) | unless otherwise inconsistent with the fiduciary duties of the board of directors of the Company, use<br>best efforts to maintain the listing of the Common Shares on the CSE (or such other recognized stock exchange or quotation system as the<br>Agent may approve, acting reasonably) for a period of 24 months following the Closing Date; |
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| (xx) | ensure that the Special Warrants and the Underlying Securities will not be subject to a restricted period<br>or to a statutory hold period under Canadian Securities Laws or to any resale restrictions under the policies of the CSE which extends<br>beyond four months and one day after the Closing Date; |
| --- | --- |
| (xxi) | in connection with the issuance of the Special Warrants, execute and file with the Securities Regulators<br>all forms, notices and certificates required to be filed pursuant to the Canadian Securities Laws or other applicable securities laws<br>in the Selling Jurisdictions within prescribed time periods, including, for greater certainty, all forms, notices and certificates set<br>forth in the opinions delivered to the Agent pursuant to Section 8 required to be filed by the Company; |
| --- | --- |
| (xxii) | until the Qualifying Date, consult in good faith with the Agent as to the content and form of any press<br>release relating to the Offering or the Prospectus or the transactions contemplated therein; |
| --- | --- |
| (xxiii) | principally use the net proceeds of the Offering for working capital and general corporate purposes; and |
| --- | --- |
| (xxiv) | use its best efforts to cause each director and officer of the Company to enter into a lock-up agreement,<br>substantially in the form of Schedule A. |
| --- | --- |
4. MaterialChanges
(a) During the period from the date of this Agreement to the completion of distribution of the Unit Shares and Warrants under the Final Qualification Prospectus, the Company covenants and agrees with the Agent that it shall promptly notify the Agent in writing of:
| (i) | any material change in the business, affairs, operations, assets, liabilities (contingent or otherwise)<br>or capital of the Company and the Subsidiaries, taken as a whole; |
|---|---|
| (ii) | any material fact (other than any fact relating solely to any of the Agent) which has arisen or has been<br>discovered following the Closing Date and is required to be stated in the Preliminary Qualification Prospectus, the Final Qualification<br>Prospectus or any Supplementary Material or would have been required to have been stated in the Preliminary Qualification Prospectus,<br>the Final Qualification Prospectus or any Supplementary Material had the fact arisen or been discovered on, or prior to, the date of such<br>document; and |
| --- | --- |
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| (iii) | any change in any material fact (which for the purposes of this Agreement shall be deemed to include the<br>disclosure of any previously undisclosed material fact) (other than any fact relating solely to any of the Agent) contained in the Public<br>Disclosure Documents, the Preliminary Qualification Prospectus, the Final Qualification Prospectus or any Supplementary Material which<br>fact or change is, or may be, of such a nature as to render any statement in the Public Disclosure Documents, the Preliminary Qualification<br>Prospectus, the Final Qualification Prospectus or any Supplementary Material misleading or untrue in any material respect or which would<br>result in a misrepresentation in the Public Disclosure Documents, the Preliminary Qualification Prospectus, the Final Qualification Prospectus<br>or any Supplementary Material or which would result in the Public Disclosure Documents, the Preliminary Qualification Prospectus, the<br>Final Qualification Prospectus or any Supplementary Material not complying (to the extent that such compliance is required) with Canadian<br>Securities Laws. |
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The Company shall promptly, and in any event within any applicable time limitation, comply, to the satisfaction of the Agent, acting reasonably, with all applicable filings and other requirements under Canadian Securities Laws as a result of such fact or change, including, without limitation, compliance with Section 57 of the Securities Act (Ontario); provided that the Company shall not file any Supplementary Material or other document without first consulting with the Agent with respect to the form and content thereof, it being understood and agreed that no such amendment shall be filed with any Securities Regulator prior to the review thereof by the Agent and their counsel, acting reasonably. The Company shall in good faith discuss with the Agent any fact or change in circumstances which is of such a nature that there is or could be reasonable doubt whether written notice need be given under this Section 4(a).
(b) Changein Canadian Securities Laws. If during the period of distribution of the Special Warrants or during the time that the Preliminary Qualification Prospectus or the Final Qualification Prospectus, as the case may be, is outstanding there shall be any change in Canadian Securities Laws which, in the opinion of the Agent, acting reasonably, requires the filing of any Supplementary Material, upon written notice from the Agent, the Company covenants and agrees with the Agent that it shall, to the satisfaction of the Agent, acting reasonably, promptly prepare and file such Supplementary Material with the appropriate Securities Regulator in each of the Qualifying Jurisdictions where such filing is required.
5. Representationsand Warranties of the Company.
(a) The Company represents and warrants to the Agent and the Purchasers, and acknowledges that each of them is relying upon such representations and warranties in connection with the Offering, that:
| (i) | the Company and each of the Subsidiaries has been duly incorporated or otherwise organized and is validly<br>existing as a corporation under the laws of the jurisdiction in which it was incorporated, or otherwise organized, as the case may be,<br>and no steps or proceedings have been taken by any person, voluntary or otherwise, requiring or authorizing the dissolution or winding<br>up of the Company or the Subsidiaries; |
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| (ii) | the Company and each of the Subsidiaries is duly qualified to carry on its business in each jurisdiction<br>in which the conduct of its business or the ownership, leasing or operation of its material assets and properties requires such qualification<br>(except for such jurisdictions where the failure to be so qualified would not result in a Material Adverse Effect) and has all requisite<br>corporate power and authority to conduct its business and to own, lease and operate its material assets and properties and to execute,<br>deliver and perform its obligations under this Agreement and any other document, filing, instrument or agreement delivered in connection<br>with the Offering; |
| --- | --- |
| (iii) | neither the Company nor any of the Subsidiaries is: (i) in material violation of its articles of incorporation<br>or by-laws; or (ii) in default of the performance or observance of any obligation, agreement, covenant or condition contained in any contract,<br>indenture, trust deed, joint venture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or<br>by which it or its property may be bound for any such violations or defaults that would result in a Material Adverse Effect; |
| --- | --- |
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| (iv) | the Company has no direct or indirect subsidiaries other than the Subsidiaries, nor any investment in<br>any Person which currently accounts for or which, for the financial year ended October 31, 2020, is expected to account for, more than<br>ten percent of the assets or revenues of the Company or would otherwise be material to the Business and affairs of the Company other than<br>pursuant to the Canopy Option Agreement and its related investments in Golden Harvests, LLC. The Company owns all of the voting securities<br>of its Subsidiaries (other than Grown Rogue Distribution, LLC, which is owned by Grown Rogue Unlimited, LLC as to 89% of the voting securities,<br>GR Michigan, LLC which is owned by Grown Rogue Unlimited, LLC as to 87% of the voting securities and Idalia, LLC, which is owned by Grown<br>Rogue Unlimited, LLC as to 60% of the voting securities), in each case free and clear of all Liens except for Permitted Encumbrances,<br>and no Person has any agreement, option, right or privilege (whether pre-emptive or contractual) capable of becoming an agreement, for<br>the purchase from the Company or any of the Subsidiaries of the Company of any interest in any of the shares in the capital of the Subsidiaries; |
|---|---|
| (v) | each of the Company, the Subsidiaries and, to the best of the knowledge of the Company, the Harvest Companies<br>owns or has the right to use all material assets and properties currently owned or used in the Business by it, including: (i) all Contracts<br>that are material to its Business; and (ii) all material assets and properties necessary to enable the Company, the Subsidiaries and,<br>to the best of the knowledge of the Company, the Harvest Companies to carry on its Business as now conducted and as presently proposed<br>to be conducted; |
| --- | --- |
| (vi) | except for the Permitted Encumbrances, no third party has any ownership right, title, interest in, claim<br>in, Lien against or any other right to any material assets and properties purported to be owned by the Company; |
| --- | --- |
| (vii) | all material Contracts are in good standing in all material respects and in full force and effect; |
| --- | --- |
| (viii) | to the best of the knowledge of the Company, the Harvest Option Agreement and the Canopy Option Agreement<br>are in good standing in all material respects and in full force and effect; |
| --- | --- |
| (ix) | neither the Company, any of the Subsidiaries nor, to the knowledge of the Company, any other party thereto<br>is in material default or breach of any material Contract, including, without limitation, to the best of the knowledge of the Company,<br>the Harvest Option Agreement and the Canopy Option Agreement, and there exists no condition, event or act which, with the giving of notice<br>or lapse of time or both would constitute a material default or breach under any material Contract which would give rise to a right of<br>termination on the part of any other party to a material Contract; |
| --- | --- |
| (x) | each of the Company, the Subsidiaries and, to the best of the knowledge of the Company, the Harvest Companies<br>is duly qualified and possesses all material permits, certificates, licences, approvals, consents and other authorizations issued by the<br>appropriate Governmental Authority necessary to conduct the Business; (ii) each of the Company and the Subsidiaries is in material compliance<br>with the terms and conditions of all material licences (including the Licences) necessary to conduct the Business; (iii) all material<br>licences (including the Licences) necessary to conduct the Business are valid and in full force and effect; and (iv) the Company has not<br>received any notice relating to the revocation or modification of any material licences (including the Licences) necessary to conduct<br>the Business; |
| --- | --- |
15
| (xi) | the Company, each of the Subsidiaries and, to the best of the knowledge of the Company, the Harvest Companies<br>and, to the knowledge of the Company, all directors, officers and employees of each: (i) is and at all times has been in material compliance<br>with all applicable laws of each jurisdiction in which it carries on business and with all applicable laws, tariffs and directives material<br>to its operations, including all applicable federal, state, municipal, and local laws and regulations and other lawful requirements of<br>any Governmental Authority that govern all aspects of the Company’s, the Subsidiaries’ or the Harvest Companies’ business<br>(collectively, “Applicable Laws”) in all material respects; (ii) has not received any correspondence or notice from<br>Health Canada or any other Governmental Authority alleging or asserting material non-compliance with any Applicable Laws or any licences<br>(including the Licences), certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required<br>by any such Applicable Laws (collectively, “Authorizations”); (iii) possesses all Authorizations required for the conduct<br>of its Business, and such Authorizations are valid and in full force and effect and the Company, each of the Subsidiaries and the Harvest<br>Companies and, to the knowledge of the Company, all directors, officers and employees of each are not in violation of any material term<br>of any such Authorization; (iv) has not received notice of any pending or threatened claim, suit, proceeding, charge, hearing, enforcement,<br>audit, investigation, arbitration or other action from any Governmental Authority or third party alleging that any operation or activity<br>of the Company, any of the Subsidiaries or the Harvest Companies or, to the knowledge of the Company any of their directors, officers<br>and/or employees is in violation of any Applicable Laws or material Authorizations and has no knowledge or reason to believe that any<br>such Governmental Authority or third party is considering or would have reasonable grounds to consider any such claim, suit, proceeding,<br>charge, hearing, enforcement, audit, investigation, arbitration or other action; (v) has not received notice that any Governmental Authority<br>has taken, is taking, or intends to take action to limit, suspend, modify or revoke any material Authorizations including the Licences<br>and has no knowledge or reason to believe that any such Governmental Authority is considering taking or would have reasonable grounds<br>to take such action; and (vi) has, or has had on its behalf, filed, declared, obtained, maintained or submitted all reports, documents,<br>forms, notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or material<br>Authorizations and to keep the Licences in good standing and that all such reports, documents, forms, notices, applications, records,<br>claims, submissions and supplements or amendments were materially complete and correct on the date filed (or were corrected or supplemented<br>by a subsequent submission); |
|---|---|
| (xii) | the Company is not aware of any pending or contemplated change to any applicable law or regulation or<br>governmental position that would materially adversely affect the business of the Company, any of the Subsidiaries or, to the best of the<br>knowledge of the Company, the Harvest Companies or the business or legal environment under which the Company, any of the Subsidiaries<br>operate or the Harvest Companies; |
| --- | --- |
| (xiii) | the authorized capital of the Company consists of an unlimited number of Common Shares with no par value<br>and an unlimited number of preferred shares, issuable in series, of which, as at the close of business on March 4, 2021, 121,990,553 Common<br>Shares and no preferred shares are issued and outstanding as fully paid and non-assessable shares in the capital of the Company; |
| --- | --- |
16
| (xiv) | at the Closing Time on the Closing Date, no rights to acquire, or instruments convertible into or exchangeable<br>for, any shares in the capital of the Company will be outstanding and no Person has any agreement, option, right or privilege (contractual<br>or otherwise) capable of becoming an agreement for the purchase or acquisition of any interest in the shares or other securities of the<br>Company, other than (a) the pre-emptive right granted by the Company to Plant-Based Investment Corp. for it to participate in future offerings<br>of securities of the Company and to maintain its proportionate ownership of the Common Shares; (b) common share purchase warrants of the<br>Company entitling the holder thereof to purchase an aggregate of up to 33,757,208 Common Shares; (c) stock options entitling the holders<br>thereof to purchase an aggregate of up to 4,325,000 Common Shares; (d) convertible debentures convertible into up to 18,866,672 Common<br>Shares; and (e) up to approximately 1,727,273 Common Shares issuable pursuant to the Grown Rogue Distribution, LLC First Amended and Restated<br>Operating Agreement dated November 23, 2020; |
|---|---|
| (xv) | the Company is a reporting issuer in the provinces of Ontario and British Columbia and is not in default<br>of any requirement of Canadian Securities Laws of such jurisdictions; |
| --- | --- |
| (xvi) | the Company is in material compliance with its timely and continuous disclosure obligations under Securities<br>Laws and the policies, rules and regulations of the CSE and, without limiting the generality of the foregoing, there is no material fact,<br>and there has not occurred any material change (actual, anticipated, contemplated, threatened, financial or otherwise), relating to the<br>assets, liabilities (contingent or otherwise), Business, affairs, operations, prospects, capital or control of the Company and its Subsidiaries<br>taken as a whole which has not been publicly disclosed on a non-confidential basis and, except as may have been corrected by subsequent<br>disclosure, all the statements set forth in all documents publicly filed by or on behalf of the Company were true, correct, and complete<br>in all material respects and did not contain any misrepresentation as of the date of such statements and the Company has not filed any<br>confidential material change reports since the date of such statements which remains confidential as at the date hereof; |
| --- | --- |
| (xvii) | all information which has been prepared by the Company relating to the Company and the Subsidiaries and<br>their business, property and liabilities and either publicly disclosed or provided to the Agent, including all financial, marketing, sales<br>and operational information provided to the Agent and all Public Disclosure Documents, is, as of the date of such information, true and<br>correct in all material respects and, as applicable, complies with Canadian Securities Laws, and no fact or facts have been omitted therefrom<br>which would make such information materially misleading; |
| --- | --- |
| (xviii) | this Agreement has been duly authorized, executed and delivered by the Company and, at the Closing Time,<br>the Subscription Agreements, the Special Warrant Indenture, the certificates representing the Special Warrants, the Warrant Indenture<br>and the Agent’s Warrant Certificates shall have been duly authorized, executed and delivered and, upon such execution and delivery,<br>each shall and constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its<br>terms, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting creditors’<br>rights generally, general principles of equity, and the qualifications that equitable remedies may only be granted in the discretion of<br>a court of competent jurisdiction and except that rights of indemnity, contribution, waiver and the ability to sever unenforceable terms<br>may be limited under applicable law; |
| --- | --- |
17
| (xix) | each of the execution and delivery of this Agreement and the other Transaction Documents, the performance<br>by the Company of its obligations hereunder and thereunder, including the issue and sale of the Special Warrants, the issuance of the<br>Unit Shares and Warrants upon the exercise of the Special Warrants, the issuance of the Warrant Shares upon the exercise of the Warrants,<br>the issuance of the Agent’s Warrants, the issuance of the Compensation Options upon the exercise of the Agent’s Warrants,<br>the issuance of the Compensation Shares and the Compensation Warrants upon exercise of the Compensation Options, the issuance of the Compensation<br>Warrant Shares upon the exercise of the Compensation Warrants, and the consummation of the transactions contemplated in this Agreement<br>and other Transaction Documents: (i) do not and will not conflict with or result in a material breach or violation of any of the terms<br>or provisions of, or constitute a material default under (whether after notice or lapse of time or both): (A) any statute, rule, regulation<br>or Law applicable to the Company or the Subsidiaries; (B) the articles of incorporation, by-laws or resolutions of the directors or shareholders<br>of the Company or the Subsidiaries; (C) any material Contract to which the Company or any of the Subsidiaries is a party or by which any<br>of them is bound; or (D) any judgment, decree or order binding the Company or the Subsidiaries or the material assets or properties thereof;<br>and (ii) do not affect the rights, duties and obligations of any parties to a material Contract, nor give a party the right to terminate<br>a material Contract, by virtue of the application of terms, provisions or conditions in such Contract; |
|---|---|
| (xx) | at the Closing Time, all necessary corporate action will have been taken by the Company to create and<br>issue the Special Warrants and, upon the due exercise of the Special Warrants, the Unit Shares will be validly issued as fully paid and<br>non-assessable shares in the capital of the Company and the Warrants will be validly created and issued; |
| --- | --- |
| (xxi) | upon the due exercise of the Warrants in accordance with the provisions thereof, the Warrant Shares will<br>be validly issued as fully paid and non-assessable shares in the capital of the Company; |
| --- | --- |
| (xxii) | at the Closing Time, all necessary corporate action will have been taken by the Company to create and<br>issue the Agent’s Warrants and, upon the due exercise of the Agent’s Warrants, the Compensation Options will be duly and validly<br>created, and issued and, upon the due exercise of the Compensation Options, the Compensation Shares will be validly issued as fully paid<br>and non-assessable shares in the capital of the Company and the Compensation Warrants will be validly created and issued; |
| --- | --- |
| (xxiii) | upon the due exercise of the Compensation Warrants in accordance with the provisions thereof, the Compensation<br>Warrant Shares will be validly issued as fully paid and non-assessable shares in the capital of the Company; |
| --- | --- |
| (xxiv) | Capital Transfer Agency, ULC, at its principal offices in Toronto, Ontario has been duly appointed as<br>transfer agent and registrar for the Common Shares; |
| --- | --- |
| (xxv) | at or prior to the Closing Time, Capital Transfer Agency, ULC shall have been duly appointed as special<br>warrant agent under the Special Warrant Indenture; |
| --- | --- |
| (xxvi) | at or prior to the Closing Time, Capital Transfer Agency, ULC shall have been duly appointed as warrant<br>agent under the Warrant Indenture; |
| --- | --- |
| (xxvii) | the audited consolidated financials statements of the Company as at and for the years ended October 31,<br>2020 and 2019 (the “Financial Statements”) contain no material misrepresentations and have been prepared in accordance<br>with IFRS consistently applied throughout the periods referred to therein and present fully, fairly and correctly, in all material respects,<br>the financial position (including the assets and liabilities, whether absolute, contingent or otherwise) of the Company and the Subsidiaries<br>(as applicable) as at such dates and the results of operations of the Company and the Subsidiaries (as applicable) for the periods then<br>ended and contain and reflect adequate provisions or allowance for all reasonably anticipated liabilities, expenses and losses of the<br>Company and the Subsidiaries (as applicable) and there has been no change in accounting policies or practices of the Company since October<br>31, 2020 except as publicly disclosed; and on the date hereof, the Company has no Indebtedness except as set out in the Financial Statements<br>or indebtedness to vendors, suppliers and service providers incurred in the ordinary course of Business since October 31, 2020 or in connection<br>with the Offering; |
| --- | --- |
18
| (xxviii) | to the knowledge of the Company, the Company’s Auditors are independent public accountants as required<br>under Canadian Securities Laws of the Qualifying Jurisdictions and there has never been a reportable event (within the meaning of National<br>Instrument 51-102 – Continuous Disclosure Obligations) between the Company and such auditors or, to the knowledge of the<br>Company, any former auditors of the Company or the Subsidiaries; |
|---|---|
| (xxix) | the responsibilities and composition of the Company’s audit committee comply with National Instrument<br>52-110 – Audit Committees; |
| --- | --- |
| (xxx) | the Company has established and maintains a system of disclosure controls and procedures and internal<br>control over financial reporting, and has: (i) designed such disclosure controls and procedures, or caused them to be designed under management’s<br>supervision, to provide reasonable assurance that material information relating to the Company and the Subsidiaries is made known to management<br>by others, particularly during the period in which the financial statements are being prepared; (ii) designed such internal control over<br>financial reporting, or caused it to be designed under management’s supervision, to provide reasonable assurance regarding the reliability<br>of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS; and (iii) evaluated<br>the effectiveness of the Company’s disclosure controls and procedures as of the end of the periods covered by the Financial Statements<br>and as of October 31, 2020 and have caused the Company to disclose in the management’s discussion and analysis forming part of the<br>Public Disclosure Documents the conclusions about the effectiveness of the disclosure controls and procedures as of the end of the periods<br>covered by the Financial Statements based on such evaluation; |
| --- | --- |
| (xxxi) | other than as set out in the going concern note set forth in the Financial Statements, no auditor, consultant,<br>or professional advisor of any kind, that has been or is currently retained by the Company, has expressed doubts regarding the Company’s<br>ability to continue as a going concern; |
| --- | --- |
| (xxxii) | to the knowledge of the Company, except as publicly disclosed, none of the directors, executive officers<br>or shareholders who beneficially own, directly or indirectly, or exercise control or direction over, more than 10% of the outstanding<br>Common Shares or any known associate or affiliate of any such person, had or has any material interest, direct or indirect, in any transaction<br>or any proposed transaction (including, without limitation, any loan made to or by any such person) with the Company which, as the case<br>may be, materially affects, is material to or will materially affect the Company on a consolidated basis; |
| --- | --- |
| (xxxiii) | all taxes (including income tax, capital tax, payroll taxes, employer health tax, workers’ compensation<br>payments, property taxes, custom and land transfer taxes), duties, royalties, levies, imposts, assessments, deductions, charges or withholdings<br>and all liabilities with respect thereto including any penalty and interest payable with respect thereto (collectively, “Taxes”)<br>due and payable by the Company and the Subsidiaries have been paid, except where the failure to pay Taxes would not have a Material Adverse<br>Effect. All tax returns, declarations, remittances and filings required to be filed by the Company and the Subsidiaries have been filed<br>with all appropriate authorities and all such returns, declarations, remittances and filings are complete and accurate and no material<br>fact or facts have been omitted therefrom which would make any of them misleading, except where the failure to file such documents would<br>not have a Material Adverse Effect. To the knowledge of the Company: (i) no examination of any tax return of the Company or any Subsidiaries<br>is currently in progress; and (ii) there are no issues or disputes outstanding with any Governmental Authority respecting any Taxes that<br>have been paid, or may be payable, by the Company or any Subsidiaries, except where such examinations, issues or disputes would not have<br>a Material Adverse Effect; |
| --- | --- |
19
| (xxxiv) | the Company and, as applicable, each of the Subsidiaries, have established on their books and records<br>reserves that are adequate for the payment of all Taxes not yet due and payable and there are no liens for Taxes on the assets of the<br>Company or any of its subsidiaries, and, to the knowledge of the Company: (i) there are no audits pending of the tax returns of the Company<br>or any of its Subsidiaries (whether federal, state, provincial, local or foreign); and (ii) there are no claims which have been or may<br>be asserted relating to any such tax returns, which audits and claims, if determined adversely, would result in the assertion by any governmental<br>agency of any deficiency that would result in a Material Adverse Effect; |
|---|---|
| (xxxv) | since October 31, 2020: (i) there has been no material adverse change (actual, anticipated, contemplated,<br>threatened, financial or otherwise) in the assets, liabilities (contingent or otherwise), business, affairs, operations, prospects, capital<br>or control of the Company and its subsidiaries taken as a whole as of the date of this Agreement that has not been generally disclosed;<br>and (ii) no material transactions have been entered into by the Company or the Subsidiaries other than in the ordinary course of business,<br>except as publicly disclosed; |
| --- | --- |
| (xxxvi) | except as publicly disclosed, neither the Company nor any Subsidiary is currently party to any agreement<br>in respect of: (i) the purchase of any material assets or properties or any interest therein or the sale, transfer or other disposition<br>of any material assets or properties or any interest therein currently owned, directly or indirectly, by the Company or the Subsidiaries<br>whether by asset sale, transfer of shares or otherwise; or (ii) the change of control of the Company or the Subsidiaries (whether by sale<br>or transfer of shares or sale of all or substantially all of the assets and properties of the Company or the Subsidiaries or otherwise); |
| --- | --- |
| (xxxvii) | the Company and the Subsidiaries are in compliance with all laws respecting employment and employment<br>practices, terms and conditions of employment, occupational health and safety, pay equity and wages, except for such failures to comply<br>as would not have a Material Adverse Effect. There is not currently any, or any reasonably foreseeable, labour disruption or conflict<br>involving the Company or the Subsidiaries as would have a Material Adverse Effect; |
| --- | --- |
| (xxxviii) | no union has been accredited or otherwise designated to represent any employees of the Company or any<br>of its Subsidiaries and, to the Company’s knowledge, no accreditation request or other representation question is pending with respect<br>to the employees of the Company or the Subsidiaries and no collective agreement or collective bargaining agreement or modification thereof<br>has expired or is in effect in any of the facilities of the Company or its Subsidiaries and none is currently being negotiated by the<br>Company or any of the Subsidiaries; |
| --- | --- |
| (xxxix) | all material accruals for unpaid vacation pay, premiums for unemployment insurance, health premiums, pension<br>plan premiums, accrued wages, salaries and commissions and employee benefit plan payments of the Company and the Subsidiaries have been<br>recorded in accordance with IFRS and are reflected on the books and records of the Company; |
| --- | --- |
20
| (xl) | there is no agreement, plan or practice relating to the payment of any management, consulting, service<br>or other fee or any bonus, pensions, share of profits or retirement allowance, insurance, health or other employee benefit other than<br>in the ordinary course of business; |
|---|---|
| (xli) | except as publicly disclosed, none of the directors, officers or employees of the Company or any associate<br>or affiliate of any of the foregoing has any material interest, direct or indirect, in any material transaction or any proposed material<br>transaction with the Company that materially affects, is material to or will materially affect the Company; |
| --- | --- |
| (xlii) | except as disclosed in the Public Disclosure Documents or Indebtedness in respect of trade payables, neither<br>the Company nor any of its subsidiaries is party to any debt instrument or any agreement, contract or commitment to create, assume or<br>issue any Indebtedness or debt instrument; |
| --- | --- |
| (xliii) | there are no legal or governmental actions, suits, judgments, investigations, charges or proceedings pending<br>to which the Company, the Subsidiaries or, to the best of the knowledge of the Company, the Harvest Companies are a party or to which<br>the Company’s assets or properties are subject, which if finally determined adversely to the Company would be expected to result<br>in a Material Adverse Effect and, to the knowledge of the Company, no such proceedings have been threatened against or are pending with<br>respect to the Company, the Subsidiaries or, to the best of the knowledge of the Company, the Harvest Companies, or with respect to the<br>assets and properties of the Company taken as a whole and the Company and the Subsidiaries are not subject to any judgment, order, writ,<br>injunction, decree or award of any Governmental Authority that could be expected to result in a Material Adverse Effect; |
| --- | --- |
| (xliv) | as required under the Securities Laws of the Qualifying Jurisdictions, the material Contracts and agreements<br>of the Company not made in the ordinary course of Business have been publicly disclosed, and have or will be filed with the Canadian Securities<br>Regulators in accordance with such Securities Laws; |
| --- | --- |
| (xlv) | the minute books and records of the Company made available to counsel to the Agent in connection with<br>its due diligence investigation of the Company for the periods from the respective dates of incorporation or formation of the Company<br>to the date hereof are all of the minute books and records of the Company and contain copies of all significant proceedings of the shareholders,<br>the boards of directors and all committees of the boards of directors of the Company to the date hereof and there have not been any other<br>formal meetings, resolutions or proceedings of the shareholders, boards of directors or any committees of the boards of directors of the<br>Company to the date hereof not reflected in such minute books and other records other than those which have been disclosed in writing<br>to the Agent or at or in respect of which no material corporate matter or business was approved or transacted; |
| --- | --- |
| (xlvi) | no order, ruling or determination having the effect of suspending the sale or ceasing the trading in any<br>securities of the Company has been issued by any Governmental Authority and is continuing in effect and no proceedings for that purpose<br>have been instituted or, to the knowledge of the Company, are pending, contemplated or threatened by any Governmental Authority; |
| --- | --- |
| (xlvii) | no Canadian Securities Regulator or comparable authority has issued any order preventing the distribution<br>of the Special Warrants in any Qualifying Jurisdiction nor instituted proceedings for that purpose and, to the knowledge of the Company,<br>no such proceedings are pending or contemplated; |
| --- | --- |
21
| (xlviii) | with respect to each premises of the Company or the Subsidiaries which is material to the Company and<br>the Subsidiaries on a consolidated basis and which the Company or a Subsidiary occupies as tenant (the “Leased Premises”),<br>the Company or the Subsidiaries occupies the Leased Premises and has the exclusive right to occupy and use the Leased Premises and each<br>of the leases pursuant to which the Company and/or such Subsidiary occupies the Leased Premises is in good standing and in full force<br>and effect; |
|---|---|
| (xlix) | neither the Company nor the Subsidiaries own any real property; |
| --- | --- |
| (l) | (i) each of the Company, the Subsidiaries, its material assets and properties and the operation of its<br>Business, have been and are, to the knowledge of the Company, in compliance in all material respects with all Environmental Laws; (ii)<br>neither the Company nor the Subsidiaries are in violation of any regulation relating to the release or threatened release of chemicals,<br>pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, which violation could reasonably<br>be expected to cause a Material Adverse Effect (collectively, “Hazardous Materials”); (iii) each of the Company and<br>the Subsidiaries has complied in all material respects with all reporting and monitoring requirements under all Environmental Laws; (iv)<br>neither the Company nor the Subsidiaries has ever received any notice of any material non-compliance in respect of any Environmental Laws;<br>(v) to the knowledge of the Company, there are no events or circumstances relating to Hazardous Materials or any Environmental Laws that<br>might reasonably be expected to form the basis of an order for clean up or remediation, or an action, suit or proceeding by any private<br>party or governmental body or agency, against or affecting the Company, which could reasonably be expected to have a Material Adverse<br>Effect relating to Hazardous Materials or any Environmental Laws; and (vi) there are no Environmental Permits necessary to conduct the<br>Business; |
| --- | --- |
| (li) | the Company owns or has the right to use all of the material Intellectual Property owned or used by the<br>Business as of the date hereof. All registrations, if any, and filings that the Company has considered necessary to preserve the rights<br>of the Company in such material Intellectual Property have been made and are in good standing. The Company has no pending action or proceeding,<br>nor any threatened action or proceeding, against any Person with respect to the use of the Intellectual Property, and there are no circumstances<br>known to the Company which would cast doubt on the validity or enforceability of the Intellectual Property owned or used by the Company.<br>The conduct of the Business does not, to the knowledge of the Company, infringe upon the intellectual property rights of any other Person.<br>The Company has no pending action or proceeding, nor, to the knowledge of the Company, is there any threatened action or proceeding against<br>it with respect to the Company’s use of the Intellectual Property; |
| --- | --- |
| (lii) | the Company maintains insurance against loss of, or damage to, its assets by all insurable risks on a<br>replacement cost basis in accordance with industry standards and such insurance coverage is in good standing in all material respects<br>and not in default except in each case as could not reasonably be expected to have a Material Adverse Effect; |
| --- | --- |
| (liii) | all necessary corporate action will have been taken by or on behalf of the Company and each of the Subsidiaries,<br>including the passing of all requisite resolutions of the respective directors and/or shareholders thereof, necessary to carry out its<br>obligations hereunder by the Closing Time; |
| --- | --- |
| (liv) | all information which has been prepared by the Company relating to the Company and its Business, property<br>and liabilities thereof and either publicly disclosed, provided or made available to the Agent, is as of the date of such information,<br>true and correct in all material respects, taken as whole, and no fact or facts have been omitted therefrom which would make such information<br>materially misleading; |
| --- | --- |
22
| (lv) | the Company has not withheld and will not withhold from the Agent prior to the Closing Time, any material<br>facts that are within its knowledge relating to the Company, any of the Subsidiaries or the Offering; |
|---|---|
| (lvi) | the Company has not completed any “significant acquisition” or “significant disposition”,<br>nor are there any “probable acquisitions” (as such terms are used in NI 44-101 and Form 44-101F1) that, would require the<br>filing of a business acquisition report pursuant to applicable Canadian Securities Laws of the Qualifying Jurisdictions; |
| --- | --- |
| (lvii) | none of the Company, its Subsidiaries or, to the knowledge of the Company, any director, officer, agent,<br>employee or affiliate of the Company or its Subsidiaries has had any sanctions administered by the Office of Foreign Assets Control of<br>the U.S. Treasury Department, the Government of Canada or any other relevant sanctions authority (collectively, “Sanctions”)<br>imposed upon such person, and the Company and Subsidiaries are not in violation of any of the Sanctions or any law or executive order<br>relating thereto, or are conducting business with any person subject to any Sanctions; |
| --- | --- |
| (lviii) | all necessary notices and filings have been made with, and all necessary consents, approvals and authorizations<br>obtained by the Company from, the CSE to ensure that the Unit Shares and the Warrant comprising the Units, the Warrant Shares issuable<br>upon exercise of the Warrants, the Compensation Shares issuable upon exercise of the Compensation Options and the Compensation Warrant<br>Shares issuable upon exercise of the Compensation Warrants will be listed and posted for trading on the CSE upon their issuance, subject<br>to filing a Form 9 – Notice of Proposed Issuance of Listed Securities with the CSE; |
| --- | --- |
| (lix) | to the knowledge of the Company, the closing of the Offering will not create a new “control person”<br>as such term is defined in the CSE corporate finance manual; and |
| --- | --- |
| (lx) | other than the Agent pursuant to this Agreement and any Selling Firms appointed by the Agent, there is<br>no Person acting or purporting to act at the request of the Company or any of its Subsidiaries which is entitled to any brokerage, agency<br>or other fiscal advisory or similar fee in connection with the transactions contemplated herein. |
| --- | --- |
6. Representations,Warranties and Covenants of the Agent. The Agent represents, warrants and covenants to the Company and acknowledges that the Company is relying upon such representations and warranties in connection with the Offering, that:
| (i) | in respect of the offer and sale of the Special Warrants, it and its representatives are duly registered<br>in accordance with Canadian Securities Laws will comply with all Canadian Securities Laws and all applicable laws of the other Selling<br>Jurisdictions in which it offers the Special Warrants; |
|---|---|
| (ii) | it and its representatives have not engaged in or authorized, and will not engage in or authorize, any<br>form of general solicitation or general advertising in connection with or in respect of the Special Warrants in any advertisement, article,<br>notice or other communication published in any newspaper, magazine, or any similar media, or broadcast over radio or television or otherwise<br>or conducted any seminar or meeting concerning the offer or sale of the Special Warrants whose attendees have been invited by any general<br>solicitation or general advertising; and |
| --- | --- |
23
| (iii) | it and its representatives have not and will not solicit offers to purchase or sell the Special Warrants<br>so as to require the filing of a prospectus or offering memorandum with respect thereto or the provision of a contractual right of action<br>(as defined in Ontario Securities Commission Rule 14-501 – Definitions) under the laws of any jurisdiction. |
|---|---|
| (iv) | it will not offer or sell the Special Warrants in any jurisdiction other than the Qualifying Jurisdictions<br>and to or for the account or benefit of U.S. Persons or persons in the United States (unless agreed to by the Corporation) in accordance<br>with the terms of this Agreement, including Schedule “B” hereto; and |
| --- | --- |
| (v) | it acknowledges and agrees that the Agent’s Warrants, Compensation Units, Compensation Shares, Compensation<br>Warrants and Compensation Warrant Shares (the “Compensation Securities”) have not been and will not be registered under<br>the U.S. Securities Act or the securities laws of any state of the United States. In connection with the issuance of the Agent’s<br>Warrants, each Agent represents, warrants, and covenants that it is acquiring the Compensation Securities as principal for its own account<br>and not for the benefit of any other person. Each Agent represents, warrants, and covenants that (i) it is not a U.S. Person and is not<br>acquiring the Compensation Securities in the United States, or on behalf of a U.S. Person or a person located in the United States; and<br>(ii) this Agreement was executed and delivered outside the United States. Each Agent acknowledges and agrees that the Agent’s Warrants<br>may not be exercised for the account or benefit of a U.S. Person or a person in the United States, unless such exercise is not subject<br>to registration under the U.S. Securities Act and the applicable securities laws of any state of the United States. Each Agent agrees<br>that it will not offer or sell any Compensation Securities in the United States or to U.S. Persons unless in compliance with an exemption<br>from the registration requirements of the U.S. Securities Act and any applicable state securities laws. |
| --- | --- |
7. ClosingDeliveries. The purchase and sale of the Special Warrants shall be completed at the Closing Time on the Closing Date electronically. At or prior to the Closing Time the Company shall deliver to the Agent:
| (i) | the opinions, certificates and agreements referred to in Section 8 and all other documents required to<br>be provided by the Company to the Agent pursuant to this Agreement; |
|---|---|
| (ii) | other than in respect of Direct Settlers, certificates representing the Special Warrants registered in<br>the name of “CDS & Co.” or any Purchaser or in such other name or names as the Agent may direct. Notwithstanding the foregoing,<br>if the Agent and the Company determine to issue any of the Special Warrants to Purchasers who are not Direct Settlers as book-entry only<br>securities in accordance with the “non-certificated inventory” rules and procedures of CDS, then as an alternative or in addition<br>to the Company delivering one or more definitive certificates representing such Special Warrants, the Agent will provide a direction to<br>CDS with respect to the crediting of the Special Warrants to the accounts of participants of CDS as shall be designated by the Agent in<br>writing in sufficient time prior to the Closing Date to permit such crediting; |
| --- | --- |
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| (iii) | the Company’s receipt for payment by the Agent of an amount equal to the aggregate purchase price<br>for the Special Warrants sold to Purchasers who are not Direct Settlers pursuant to the Offering less an amount equal to the Commission,<br>Advisory Fee and the costs and expenses of the Agent provided for in Section 13; |
|---|---|
| (iv) | such further documentation as may be contemplated by this Agreement or as counsel to the Agent or the<br>applicable regulatory authorities may reasonably require; |
| --- | --- |
| (v) | other than in respect of Direct Settlers, all duly completed Subscription Agreements tendered by the Purchasers<br>for the Special Warrants being issued and sold and, where applicable, all completed forms, schedules and certificates contemplated by<br>the Subscription Agreements; |
| --- | --- |
| (vi) | payment by way of wire transfer of immediately available funds of an amount equal to the aggregate purchase<br>price for the Special Warrants sold to Purchasers who are not Direct Settlers pursuant to the Offering, less an amount equal to the Commission,<br>the Advisory Fee and the costs and expenses of the Agent provided for in Section 13; and |
| --- | --- |
| (vii) | a receipt signed by the Agent for the Commission, the Advisory Fee and the costs and expenses of the Agent<br>provided for in Section 13 and the Special Warrants delivered to the Agent in accordance with this Section 7. |
| --- | --- |
8. ClosingConditions. Each Purchaser’s obligation to purchase the Special Warrants at the Closing Time shall be conditional upon the fulfilment at or before the Closing Time of the following conditions:
(a) the Agent shall have received a certificate, dated as of the Closing Date, signed by the Chief Executive Officer and Chief Financial Officer of the Company, or such other officers of the Company as the Agent may agree, certifying for and on behalf of the Company, to the best of their knowledge, information and belief after due inquiry, that:
| (i) | no order, ruling or determination having the effect of suspending the sale or ceasing the trading in any<br>securities of the Company has been issued by any regulatory authority and is continuing in effect and no proceedings for that purpose<br>have been instituted or are pending or, are contemplated or threatened by any regulatory authority; |
|---|---|
| (ii) | the Company has duly complied with all the terms, covenants and conditions of this Agreement on its part<br>to be complied with up to the Closing Time; |
| --- | --- |
| (iii) | since October 31, 2020, (A) there has been no adverse material change (actual, proposed or prospective,<br>whether financial or otherwise) in the business, prospects, affairs, operations, assets, liabilities (contingent or otherwise) or capital<br>of the Company as of the date of this Agreement that has not been generally disclosed, and (B) no transactions have been entered into<br>by the Company other than in the ordinary course of business, except as has been disclosed in the Public Disclosure Documents; and |
| --- | --- |
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| (iv) | the representations and warranties of the Company contained in this Agreement are true and correct as<br>of the Closing Time with the same force and effect as if made at and as of the Closing Time after giving effect to the transactions contemplated<br>by this Agreement. |
|---|
(b) the Agent shall have received at the Closing Time certificates dated the Closing Date, signed by the Chief Executive Officer of the Company (or such other officers as the Agent may agree to), in a form satisfactory to the Agent, acting reasonably, certifying for and on behalf of the Company and without personally liability with respect to:
| (i) | the constating documents of the Company; |
|---|---|
| (ii) | the resolutions of the board of directors of the Company relevant to the issue and sale of the Special<br>Warrants and the issuance of the Agent’s Warrants, and the authorization of the Transaction Documents and the transactions contemplated<br>herein and therein; and |
| --- | --- |
| (iii) | the incumbency and specimen signatures of signing officers of the Company; |
| --- | --- |
(c) the Agent shall have received at the Closing Time, evidence that all requisite approvals, consents and acceptances of the appropriate regulatory authorities and the CSE required to be made or obtained by the Company in order to complete the Offering have been made or obtained;
(d) each of the Transaction Documents shall have been executed and delivered by the parties thereto in form and substance satisfactory to the Agent and their counsel, acting reasonably;
(e) the Agent shall have received a certificate from Capital Transfer Agency, ULC, in its capacity as transfer agent and registrar for the Common Shares, as to the number of Common Shares issued and outstanding as at a date no more than two Business Days prior to the Closing Date;
(f) the Agent shall have received favourable legal opinions addressed to the Agent, its counsel and the Purchasers (other than the Direct Settlers), in form and substance satisfactory to the Agent and its counsel, acting reasonably, dated the Closing Date, from counsel for the Company (it being understood that such counsel may rely to the extent appropriate in the circumstances, (i) as to matters of fact, on certificates of the Company executed on its behalf by a senior officer of the Company, (ii) as to the issued and outstanding capital of the Company, on a certificate or letter of Capital Transfer Agency, ULC; (iii) as to matters of fact not independently established, on certificates of the Company’s auditors or a public official; and (iv) as to matters of law, with respect to consulting counsel in the applicable local jurisdictions) with respect to the following matters:
| (i) | as to the incorporation and valid existence of the Company; |
|---|---|
| (ii) | as to the corporate power and capacity of the Company to execute and deliver the Transaction Documents<br>and to perform all of its obligations thereunder and to create and issue the Special Warrants, the Agent’s Warrants and the other<br>securities underlying such securities; |
| --- | --- |
| (iii) | as to the authorized and issued capital of the Company immediately prior to the Closing Time; |
| --- | --- |
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| (iv) | as to the registered ownership of the issued and outstanding shares of the Subsidiaries; |
|---|---|
| (v) | as to the Company having the corporate power and capacity to carry on business as presently carried on<br>and to own, lease and operate its assets and properties; |
| --- | --- |
| (vi) | as to all necessary corporate action having been taken by the Company to authorize the execution and delivery<br>of the Transaction Documents and the performance by the Company of its obligations thereunder; |
| --- | --- |
| (vii) | as to each of the Transaction Documents having been authorized, executed and delivered by the Company,<br>and constituting a valid and legally binding agreement of the Company enforceable against it in accordance with its terms, except as enforcement<br>thereof may be limited by bankruptcy, insolvency, liquidation, reorganization, moratorium or similar laws affecting the rights of creditors<br>generally and except as limited by the application of equitable principles when equitable remedies are sought, and the qualification that<br>the enforceability of rights of indemnity, contribution and waiver and the ability to sever unenforceable terms may be limited by applicable<br>Law; |
| --- | --- |
| (viii) | as to none of: (A) the execution and delivery of the applicable Transaction Documents; (B) the performance<br>by the Company of its obligations thereunder; or (C) the sale or issuance of the Offering Securities conflicting with or resulting in<br>any breach of: (x) the articles and by-laws of the Company; or (y) the provisions of the Business Corporations Act (Ontario) and<br>the regulations thereunder; |
| --- | --- |
| (ix) | as to all necessary corporate action having been taken by the Company to authorize the issue of (i) the<br>Special Warrants; (ii) the Unit Shares and Warrants to be issued upon exercise of the Special Warrants; (ii) the Warrant Shares to be<br>issued upon the exercise of the Warrants; (iii) the Broker Warrants; (iv) the Advisory Warrants; (v) the Compensation Options issuable<br>upon exercise of the Broker Warrants and the Advisory Warrants; (v) the Compensation Shares and Compensation Warrants to be issued upon<br>the exercise of the Compensation Options; and (vi) the Compensation Warrant Shares to be issued upon the exercise of the Compensation<br>Warrants; |
| --- | --- |
| (x) | as to the Unit Shares to be issued upon exercise of the Special Warrants, the Warrant Shares to be issued<br>upon the exercise of the Warrants, the Compensation Shares to be issued upon the exercise of the Compensation Options and the Compensation<br>Warrant Shares to be issued upon the exercise of the Compensation Warrants having been reserved for issuance and such Unit Shares, Warrant<br>Shares, Compensation Shares and Compensation Warrant Shares, when issued upon the exercise of the Special Warrants, Warrants, Compensation<br>Options or Compensation Warrants, respectively, in accordance with the terms thereof, will be validly issued as fully paid and non-assessable<br>common shares of the Company; |
| --- | --- |
| (xi) | as to the Warrants underlying the Special Warrants, the Compensation Options underlying the Broker Warrants<br>and the Advisory Warrants and the Compensation Warrants underlying the Compensation Options having been validly reserved for issuance<br>upon exercise of the Special Warrants, the Broker Warrants, the Advisory Warrants or the Compensation Options, as the case may be, and<br>such Warrants, Compensation Options and Compensation Warrants, when issued upon exercise of the Special Warrants, Broker Warrants, Advisory<br>Warrants and Compensation Options, respectively, in accordance with the terms thereof, will be validly issued and created; |
| --- | --- |
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| (xii) | as to the offering, sale and issuance of the Special Warrants to Purchasers in accordance with the Subscription<br>Agreements and the Agency Agreement; and the issuance of Brokers Warrants and Advisory Warrants to the Agent in accordance with the Agency<br>Agreement, being exempt from the prospectus and registration requirements of Canadian Securities Laws in the Qualifying Jurisdictions<br>in which sales of the Special Warrants occurred and no prospectus is required, nor are any other documents required to be filed, proceedings<br>taken or approvals, permits, consents, orders or authorizations of any regulatory authority required to be obtained by the Company under<br>the Canadian Securities Laws to permit the offering, sale and issuance of the Special Warrants to the Purchasers in accordance with the<br>Subscription Agreements and the Agency Agreement, or the issuance of the Broker Warrants and Advisory Warrants to the Agent in accordance<br>with the Agency Agreement, subject to the requirement that the Company, within ten days after the Closing Date, file a report on Form<br>45-106F1 with the Securities Regulators, accompanied by the prescribed fees, if any. |
|---|---|
| (xiii) | as to the issuance by the Company of: (i) the Unit Shares and Warrants upon the exercise or deemed exercise<br>of the Special Warrants; (ii) the Warrant Shares upon the exercise of the Warrants; (iii) the Compensation Options upon exercise of the<br>Agent’s Warrants; (iv) the Compensation Shares and the Compensation Warrants upon exercise of the Compensation Options; and (v)<br>the Compensation Warrant Shares upon the exercise of the Compensation Warrants, in each case in accordance with the terms and conditions<br>thereof, being exempt from the prospectus and registration requirements of applicable Canadian Securities Laws and no prospectus will<br>be required, nor will any other documents required to be filed, proceedings taken or approvals, permits, consents, orders or authorizations<br>of any regulatory authority required to be obtained under applicable Canadian Securities Laws to permit the issuance by the Company of<br>such securities; |
| --- | --- |
| (xiv) | as to the first trade of the Special Warrants, the Units Shares, the Warrants, the Compensation Shares,<br>the Compensation Warrants, the Warrant Shares and the Compensation Warrant Shares; |
| --- | --- |
| (xv) | if a Final Qualification Prospectus qualifying the distribution by the Company of the Unit Shares, Warrants<br>and Compensation Options (collectively, the “Qualified Securities”) has been filed with, and a receipt obtained therefor,<br>from the Securities Regulators in the Qualifying Jurisdictions and provided no “material change”, within the meaning of applicable<br>Canadian Securities Laws, occurs between the date of issuance of the final receipt and the date of exercise of the Special Warrants or<br>the Broker Warrants or Advisory Warrants, as applicable: (i) the sale by a Purchaser of any Qualified Securities after the issuance of<br>the final receipt will not be subject to the prospectus requirements under applicable Canadian Securities Laws; (ii) such Qualified Securities<br>will not be subject to any statutory hold period or restricted period under applicable Canadian Securities Laws; and (iii) no filing,<br>proceeding, approval, consent or authorization under the prospectus requirements of applicable Canadian Securities Laws will be required<br>to permit the trading of such Qualified Securities in the Qualifying Jurisdictions; and |
| --- | --- |
| (xvi) | as to the appointment of Capital Transfer Agency, ULC, at its principal office in Toronto, Ontario, as<br>the duly appointed special warrant agent in respect of the Special Warrants and warrant agent in respect of the Warrants. |
| --- | --- |
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(g) the Agent shall have received a favourable legal opinion addressed to the Agent and the Purchasers from counsel to each of the Subsidiaries, dated as of the Closing Date, in form and substance satisfactory to the Agent and its counsel, acting reasonably, as to (i) the incorporation and existence of each of the Subsidiaries; (ii) the ability of each of the Subsidiaries to carry on its business as presently carried on and to own, lease and operate its properties and assets; (iii) the authorized capital and issued and outstanding share capital of each of the Subsidiaries; and (iv) as to the ownership of the issued and outstanding securities of each of the Subsidiaries;
(h) the Agent shall have received a favourable legal opinion addressed to the Agent from regulatory counsel to each of Grown Rogue Gardens, LLC, dated as of the Closing Date, in form and substance satisfactory to the Agent and its counsel, acting reasonably, as to the status of the Licenses held by each of Grown Rogue Gardens, LLC under applicable state cannabis laws;
(i) the Agent shall have received an undertaking to provide, using its commercially reasonable efforts, a favourable legal opinion addressed to the Agent from legal counsel to each of the Harvest Companies, as soon as practicable following the Closing Date and in any event prior to the Qualifying Date, in form and substance satisfactory to the Agent and its counsel, acting reasonably, as to: (i) the incorporation and existence of each of the Harvest Companies; (ii) the ability of each of the Harvest Companies to carry on its business as presently carried on and to own, lease and operate its properties and assets; (iii) the authorized capital and issued and outstanding share capital of each of the Harvest Companies; (iv) as to the ownership of the issued and outstanding securities of each of the Harvest Companies; and (vii) the status of the Licenses held by each of the Harvest Companies under applicable state cannabis laws;
(j) the Agent shall have received a certificate of status (or equivalent) with respect to the Company and each of the Subsidiaries under the jurisdiction of its existence, unless the Company is unable to obtain any such certificate after using its commercially reasonable efforts to do so;
(k) the Agent shall have received an executed lock-up agreement, substantially in the form of Schedule A, from each of the directors and officers of the Company; and
(l) the Agent shall have completed and be satisfied, in its sole discretion, acting reasonably, with the results of their due diligence investigations regarding the Company, its business, operations and financial condition and market conditions at the Closing Time.
9. TerminationRights.
(a) The Agent shall be entitled to terminate its obligations hereunder and the obligations of the Purchasers in relation to the Offering by written notice to that effect given to the Company at or prior to a Closing Time if:
| (i) | the due diligence investigations performed by the Agent or its representatives reveal any material information<br>or fact, which, in the sole opinion the Agent, is materially adverse to the Company or its business, or materially adversely affects the<br>price or value of the Special Warrants; |
|---|
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| (ii) | there shall be any material change or a change in any material fact or a new material fact shall arise<br>or there should be discovered any previously undisclosed material fact required to be disclosed or any amendment thereto, in each case,<br>that has or would be expected to have, in the sole opinion of the Agent, a significant adverse change or effect on the business or affairs<br>of the Company or on the market price or the value of the securities of the Company; |
|---|---|
| (iii) | there should develop, occur or come into effect or existence any event, action, state, condition (including<br>terrorism or accident) or major financial occurrence of national or international consequence or a new or change in any law or regulation<br>which in the sole opinion of the Agent seriously adversely affects or involves or may seriously adversely affect or involve the financial<br>markets or the business, operations or affairs of the Company and the Subsidiaries taken as a whole or the market price or value of the<br>securities of the Company, (B) any inquiry, action, suit, proceeding or investigation (whether formal or informal) is commenced, announced<br>or threatened in relation to the Company or any one of the officers or directors of the Company or any of its principal shareholders where<br>wrongdoing is alleged or any order is made by any federal, provincial, state, municipal or other governmental department, commission,<br>board, bureau, agency or instrumentality including any Securities Regulator which involves a finding of wrongdoing; or (C) any order,<br>action or proceeding which cease trades or otherwise operates to prevent or restrict the trading of the Common Shares or any other securities<br>of the Company is made or threatened by any Securities Regulator; |
| --- | --- |
| (iv) | the Company is in breach of a material term, condition or covenant of this Agreement or any representation<br>or warranty given by the Company in this Agreement is or becomes false in any material respect; or |
| --- | --- |
| (v) | the state of the financial markets in Canada or elsewhere where it is planned to market the Special Warrants<br>is such that in the reasonable opinion of the Agent the Special Warrants cannot be profitably marketed. |
| --- | --- |
(b) The Company agrees that all material terms and conditions in this Agreement shall be construed as conditions and complied with so far as the same relate to acts to be performed or caused to be performed by the Company and that it will use its best efforts (or all commercially reasonable efforts, as applicable) to cause such conditions to be complied with, and any breach or failure by the Company to comply with any of such conditions shall entitle the Agent, at its option in accordance with this Section 9 hereof, to terminate its obligations under this Agreement (and the obligations of the Purchasers arranged by it to purchase the Special Warrants) by notice to that effect given to the Company at or prior to the Closing Time. The Agent may waive, in whole or in part, or extend the time for compliance with, any terms and conditions without prejudice to its rights in respect of any other of such terms and conditions or any other or subsequent breach or non-compliance, provided that any such waiver or extension shall be binding upon the Agent only if the same is in writing and signed by it.
10. Exerciseof Termination Rights. The rights of termination contained in Section 9 are in addition to any other rights or remedies the Agent may have in respect of any of the matters contemplated by this Agreement or otherwise. Any such termination shall not discharge or otherwise affect any obligation or liability of the Company provided herein or prejudice any other rights or remedies any party may have as a result of any breach, default or non-compliance by any other party. In the event of any such termination by the Agent, there shall be no further liability on the part of the Agent to the Company or on the part of the Company to the Agent except in respect of any liability which may have arisen or may arise after such termination in respect of acts or omissions prior to such termination under Sections 11, 12 and 13.
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11. Survivalof Representations and Warranties. All warranties and representations, herein contained or contained in any documents submitted pursuant to this Agreement and in connection with the transactions herein contemplated shall survive the purchase and sale of the Special Warrants and continue in full force and effect for the benefit of the Agent and the Purchasers until the later of (i) the second anniversary of the Closing Date; and (ii) the latest date under the Canadian Securities Laws relevant to a Purchaser (non-residents of Canada being deemed to be resident in the Province of Ontario for such purposes) that a Purchaser may be entitled to commence an action or exercise a right of rescission, with respect to a misrepresentation contained in the Final Qualification Prospectus and the Agent and the Purchasers shall not be limited or prejudiced by any investigation made by or on behalf of the Agent in connection with the purchase and sale of the Special Warrants. Without any limitation of the foregoing, the provisions contained in this Agreement in any way related to indemnification or contribution obligations shall survive and continue, in full force and effect, indefinitely.
12. Indemnity.
(a) The Company agrees to indemnify and hold harmless the Agent and each member of the soliciting dealer group and their respective subsidiaries, affiliates and their respective directors, officers, employees securityholders and agents (hereinafter referred to as the “Personnel” and together with the Agent, the “Indemnified Parties” and each, an “Indemnified Party”) harmless from and against any and all expenses, fees, losses (other than loss of profits), claims, actions, damages, obligations or liabilities, whether joint or several, of any nature (including the reasonable fees and expenses of their respective counsel that may be incurred in advising with respect to and/or investigating, defending and/or settling any action, suit, proceeding, investigation or claim that may be made or threatened against the Agent and/or the Personnel) (collectively, the “Claims”) by any third parties other than the Company, to which and Indemnified Party may become subject or otherwise involved in any capacity under any statute or common law or otherwise insofar as the Claims arise out of or are based, directly or indirectly, upon the performance of professional services rendered to the Company by the Indemnified Parties hereunder (including as related to sales of Special Warrants to Direct Settlers) together with any expenses, losses, claims, damages or liabilities that are incurred in enforcing this indemnity.
(b) Notwithstanding anything to the contrary contained herein, the indemnity contemplated in this Section 12 shall not apply to the extent that a court of competent jurisdiction in a final judgment that has become non-appealable shall determine that:
| (i) | the Indemnified Party has been grossly negligent or has committed any fraudulent act or acted in wilful<br>misconduct in the course of the performance of professional services rendered to the Company by the Indemnified Party or otherwise in<br>connection with the matters referred to in this Agreement; and |
|---|---|
| (ii) | the Claims, as to which indemnification is claimed, were caused by the negligence, illegality, fraud or<br>wilful misconduct referred to in Section 12(b)(i). |
| --- | --- |
(c) The Company agrees to waive any right it may have of first requiring an Indemnified Party to proceed against or enforce any other right, power, remedy or security or claim payment from any other person before claiming under this indemnity.
(d) If for any reason (other than the occurrence of any of the events referred to immediately above), the indemnification contemplated in this Section 12 is unavailable to an Indemnified Party or insufficient to hold them harmless in respect of any Claim, then the Company shall contribute to the amount paid or payable by such Indemnified Party as a result of such Claim in such proportion as is appropriate to reflect not only the relative benefits received by the Company on the one hand and the Indemnified Party on the other hand but also the relative fault of the Company and the Indemnified Party, as well as any relevant equitable considerations; provided that the Company shall, in any event, contribute to the amount paid or payable by an Indemnified Party as a result of such Claim, any excess of such amount over the amount of the Commission received by the Agent hereunder pursuant to this Agreement.
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(e) The Company agrees that in case any legal proceeding shall be brought against, or an investigation is commenced in respect of, the Company and/or the Indemnified Party and an Indemnified Party or its personnel shall be required to testify in connection therewith or shall be required to respond to procedures designed to discover information regarding, in connection with, or by reason of the performance of professional services rendered to the Company by the Agent, the Indemnified Party shall have the right to employ one firm of its own counsel in connection therewith, and the reasonable fees and expenses of such counsel as well as the reasonable and documented costs (including an amount to reimburse the Indemnified Party for time spent by its personnel in connection therewith at its normal per diem rates together with such disbursements and out-of-pocket expenses incurred by its personnel in connection therewith) shall be paid by the Company as they occur.
(f) Promptly after receiving notice of the commencement of any Claim against any Indemnified Party or after receipt of notice of the commencement of any investigation, which is based, directly or indirectly, upon any matter in respect of which indemnification may be sought from the Company, the Agent will promptly notify the Company in writing of the commencement thereof, stating the particulars thereof, and, throughout the course thereof, will provide copies of all relevant documentation to the Company and, unless the Company assumes defense thereof, will keep the Company advised of the progress thereof and will discuss with the Company all significant actions proposed. The omission to so notify the Company shall not relieve the Company of any liability which the Company may have to an Indemnified Party except only to the extent that any such delay in giving or failure to give notice as herein required materially prejudices the defence of such Claim or results in any material increase in the liability which the Company would otherwise have under this indemnity had the Agent not so delayed in giving or failed to give the notice required hereunder.
(g) The Company shall be entitled, at its own expense, to participate in and, to the extent it or its insurers may wish to do so, assume the defence of any Claim, provided such defence is conducted by counsel of good standing acceptable to the Agent. Upon the Company notifying the Agent in writing of its election to assume the defence and retaining counsel, the Company shall not be liable to an Indemnified Party for any legal expenses subsequently incurred by them in connection with such defence. If such defence is not assumed by the Company, the Indemnified Parties, throughout the course thereof, shall provide copies of all relevant documentation to the Company, will keep the Company advised of the progress thereof and will discuss with the Company all significant actions proposed. If such defense is assumed by the Company, the Company throughout the course thereof will provide copies of all relevant documentation to the Agent, will keep the Agent advised of the progress thereof and will discuss with the Agent all significant actions proposed.
(h) Notwithstanding Section 12(g), any Indemnified Party shall have the right, at the Company’s expense, to separately retain counsel of such Indemnified Party’s choice, in respect of the defence of any Claim if: (i) the employment of such counsel has been authorized by the Company; or (ii) the Company has not assumed the defence and employed counsel therefor promptly after receiving notice of such Claim; or (iii) counsel retained by the Company or the Indemnified Party has advised the Indemnified Party that representation of both parties by the same counsel would be inappropriate for any reason, including the reason that there may be legal defences available to the Indemnified Party which are different from or in addition to those available to the Company or that there is a conflict of interest between the Company and the Indemnified Party or the subject matter of the Claim may not fall within the indemnity set forth herein (in any of which events the Company shall not have the right to assume or direct the defence on the Indemnified Party’s behalf).
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(i) No admission of liability, no settlement of any Claim, no compromise nor any consent to the entry of any judgement shall be made by the Company without the consent of the Indemnified Party affected. The Company hereby acknowledges that the Agent acts as trustee for the other Indemnified Parties of the Company’s covenants under this Section 12 and the Agent agrees to accept such trust and to hold and enforce such covenants on behalf of such persons.
(j) The indemnity and contribution obligations of the Company shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to the Indemnified Parties and shall be binding upon and enure to the benefit of any permitted successors, assigns, heirs and personal representatives of the Company, the Agent and any other Indemnified Party.
(k) The foregoing provisions shall survive the completion of professional services rendered under this Agreement or any termination of this Agreement and continue in full force and effect, indefinitely.
13. Expenses. Whether or not the Offering or this Agreement is completed, all expenses of or incidental to the Offering shall be paid by the Company, including, without limitation: (i) listing fees and expenses payable in connection with the issuance of the Special Warrants and the qualification for distribution of the Underlying Securities issuable upon the exercise of the Special Warrants; (ii) the fees and disbursements of the Company’s legal counsel and the fees and disbursements of local counsel to the Company, as applicable; (iii) the fees and expenses of the Company’s auditors; and (iv) all reasonable fees and expenses incurred by the Agent, including the reasonable fees and disbursements of the Agent’s legal counsel and all applicable taxes on any of the foregoing.
14. Advertisements. The Company acknowledges that the Agent shall have the right, subject always to clauses 1(a) and (c) of this Agreement, at their own expense, and subject to the prior approval of the Company, to place such advertisement or advertisements relating to the sale of the Special Warrants contemplated herein as the Agent may consider desirable or appropriate and as may be permitted by applicable law. The Company and the Agent each agree that they will not make or publish any advertisement in any media whatsoever relating to, or otherwise publicize, the transaction provided for herein so as to result in any exemption from the prospectus and registration requirements of applicable Canadian Securities Laws or the securities legislation in any other jurisdiction in which the Special Warrants shall be offered or sold being unavailable in respect of the sale of the Special Warrants to prospective purchasers.
15. Restrictionson Offerings. The Company shall not, directly or indirectly, without the prior written consent of the Agent, which consent shall not be unreasonably withheld or delayed, sell, agree or offer to sell, authorize, issue, announce or grant any option for the sale of, or otherwise dispose of any Common Shares or related financial instruments or securities convertible or exchangeable into Common Shares (including, without limitation, Special Warrants) during the period commencing on the date hereof and ending on the date that is 120 days following the Closing Date, except for (a) the issuance of Common Shares in connection with the exercise of any convertible securities, options, warrants or performance share units of the Company outstanding as of the date hereof, (b) the issuance of options to acquire Common Shares pursuant to any stock option plan or other equity based compensation plan of the Company, as each such plan may be amended from time to time, and the issuance of Common Shares on the exercise or vesting thereof, (c) the issuance of stock-based compensation arrangements of the Company pursuant to any stock based compensation plan of the Company, as each such plan may be amended from time to time, and (d) the issuance of securities pursuant to the Offering and on any exercise of such securities, as applicable.
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16. Rightof Participation. The Company hereby grants the Agent the right, but not the obligation, to act as: (i) sole lead manager, underwriter and/or agent and sole bookrunner for any follow-on offerings of Common Shares, securities exchangeable or convertible into Common Shares, or debt instruments of the Company, with a minimum syndicate position of 50%; and (ii) exclusive financial advisor for any Subsequent Transaction (as defined below), until the date that is twelve (12) months following the Closing Date. It is understood that the terms and conditions and related fees payable in connection with the foregoing services will be negotiated in good faith and be consistent with then prevailing market practice. If the Agent does not accept the terms and conditions contained in the Company’s offer, the Company may engage any other financial institution as manager, underwriter, agent and/or financial advisor (as the case may be, depending on the nature of the transaction) in connection with such transaction, provided that the terms and conditions of any such engagement shall be no more favourable to such other financial institution than the terms and conditions offered by the Company to the Agent. A “Subsequent Transaction” means any one of the following: (i) a disposition of all or a portion of the shares or assets of the Company; (ii) an investment (by way of equity, debt, preferred securities or otherwise) by the Company in one or more counterparty, or by a third party into the Company; (iii) an amalgamation, merger, arrangement, joint venture, farm-in, strategic alliance or other business combination or transaction involving the Company and one or more counterparty; (iv) a disposition of a royalty interest in the assets of the company or the sale or contracting out of interests or throughput of the Company’s facilities, infrastructure or pipeline assets; or (v) any other similar business transaction, whether in one or a series of transactions, directly or indirectly, by the Company, either alone or in combination with others.
17. Notices. Unless otherwise expressly provided in this Agreement, any notice or other communication to be given under this Agreement (a “notice”) shall be in writing addressed as follows:
| (a) | If to the Company, to: |
|---|
Grown Rogue International Inc.
340 Richmond Street West
Toronto, Ontario M7V 1X2
| Attention: | Obie Strickler |
|---|---|
| Email: | [email protected] |
| --- | --- |
with a copy to:
Irwin Lowy LLP
217 Queen Street West, Suite 401
Toronto, Ontario M5V 0R2
| Attention: | Eric Lowy |
|---|---|
| Email: | [email protected] |
| --- | --- |
| (b) | If to the Agent, to: |
| --- | --- |
Eight Capital
100 Adelaide Street West, Suite 2900
Toronto, Ontario M5H 1S3
| Attention: | Elizabeth Staltari |
|---|---|
| Email: | [email protected] |
| --- | --- |
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with a copy to:
Wildeboer Dellelce LLP
Wildeboer Dellelce Place
365 Bay Street, Suite 800
Toronto, Ontario M5H 2V1
| Attention: | Peter Volk |
|---|---|
| Email: | [email protected] |
| --- | --- |
or to such other address as any of the parties may designate by notice given to the others.
Each notice shall be personally delivered to the addressee or sent by fax or email transmission to the addressee and (i) a notice which is personally delivered shall, if delivered on a Business Day, be deemed to be given and received on that day and, in any other case, be deemed to be given and received on the first Business Day following the day on which it is delivered; and (ii) a notice which is sent by fax or email transmission shall, if delivered prior to 5:00 p.m. (Toronto time) on a Business Day, be deemed to be given and received on that day and, in any other case, be deemed to be given and received on the first Business Day following the day on which it is delivered.
18. Timeof the Essence. Time shall, in all respects, be of the essence hereof.
19. CanadianDollars. All references herein to dollar amounts are to lawful money of Canada.
20. Headings. The headings contained herein are for convenience only and shall not affect the meaning or interpretation hereof.
21. Singularand Plural, etc. Where the context so requires, words importing the singular number include the plural and vice versa, and words importing gender shall include the masculine, feminine and neuter genders.
22. EntireAgreement. This Agreement constitutes the only agreement between the parties with respect to the subject matter hereof and shall supersede any and all prior negotiations and understandings, including the engagement letter between the Company and the Agent dated February 11, 2021. This Agreement may be amended or modified in any respect by written instrument only.
23. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect or limit the validity or enforceability of the remaining provisions of this Agreement.
24. GoverningLaw. This Agreement shall be governed by and construed in accordance with the laws of Ontario and the laws of Canada applicable therein.
25. Successorsand Assigns. The terms and provisions of this Agreement shall be binding upon and enure to the benefit of the Company, the Agent and the Purchasers and their respective executors, heirs, successors and permitted assigns; provided that, except as provided herein or in the Subscription Agreements, this Agreement shall not be assignable by any party without the written consent of the others.
26. FurtherAssurances. Each of the parties hereto shall do or cause to be done all such acts and things and shall execute or cause to be executed all such documents, agreements and other instruments as may reasonably be necessary or desirable for the purpose of carrying out the provisions and intent of this Agreement.
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27. EffectiveDate. This Agreement is intended to and shall take effect as of the date first set forth above, notwithstanding its actual date of execution or delivery.
28. Language. The parties hereby acknowledge that they have expressly required this Agreement and all notices, statements of account and other documents required or permitted to be given or entered into pursuant hereto to be drawn up in the English language only. Les parties reconnaissentavoir expressment demandées que la présente Convention ainsi que tout avis, tout état de compte et tout autre documentà être ou pouvant être donné ou conclu en vertu des dispositions des présentes, soient rédigésen langue anglaise seulement.
29. Counterparts. This Agreement may be executed in any number of counterparts and by facsimile, each of which so executed shall constitute an original and all of which taken together shall form one and the same agreement.
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If the Company is in agreement with the foregoing terms and conditions, please so indicate by executing a copy of this letter where indicated below and delivering the same to the Agent.
Yours very truly,
EIGHT CAPITAL
Per: ______________________________
Authorized Signing Officer
The foregoing is hereby accepted on the terms and conditions therein set forth.
DATED as of March ____, 2021.
GROWN ROGUE INTERNATIONAL INC.
Per: ______________________________
Authorized Signing Officer
37
SCHEDULE A
FORM OF LOCK-UP AGREEMENT
LOCK-UP AGREEMENT
, 2021
Eight Capital
100 Adelaide Street West, Suite 2900
Toronto, Ontario M5H 1S3
- and –
Grown Rogue International Inc.
340 Richmond Street West
Toronto, Ontario M5V 1X2
Ladies and Gentlemen:
The undersigned director or officer of Grown Rogue International Inc. (the “Company”) understands that an agency agreement (“Agency Agreement”) has been executed and delivered by the Company and Eight Capital (the “Agent”), whereby the Agent has agreed, subject to the terms and conditions set forth therein, to act as exclusive agent to offer for sale to purchasers special warrants of the Company on a best efforts private placement basis (the “Offering”). The execution and delivery by the undersigned of this agreement (“Lock-Up Letter Agreement”) is a condition to the closing of the Offering.
In consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned hereby agrees not to, directly or indirectly, offer, sell, contract to sell, lend, swap or enter into any other agreement to transfer the economic consequences of, other otherwise dispose of or deal with, or publicly announce any intention to offer, sell, grant or sell any option to purchase, hypothecate, pledge, transfer, assign, purchase any option to contract to sell, lend, swap or enter into any other agreement to transfer the economic consequences of, or otherwise dispose of or deal with, whether through the facilities of a stock exchange, by private placement or otherwise, any common shares or other securities of the Company held by the undersigned, directly or indirectly (the “Locked-Up Securities”), without, in each case, the prior written consent of the Agent, which will not be unreasonably withheld or delayed, until 120 days following the date of the closing of the Offering (the “Lock-Up Period”).
Notwithstanding anything to the contrary contained in this Lock-Up Letter Agreement, during the Lock-Up Period, the undersigned may, without the consent of the Agent: (i) transfer, sell or tender any or all of the Locked-Up Securities pursuant to a take-over bid (as defined in the Securities Act (Ontario)) or any other transaction, including, without limitation, a merger, arrangement or amalgamation, involving a change of control of the Company (provided that all Locked-Up Securities not transferred, sold or tendered remain subject to this undertaking) and provided further that it shall be a condition of transfer that if such take-over bid or other transaction is not completed, any Locked-Up Securities subject to this undertaking shall remain subject to the restrictions in this Lock-Up Letter Agreement; or (ii) transfer any or all of the Locked-Up Securities to any nominee or custodian where there is no change in beneficial ownership.
| 1 |
| --- |
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Letter Agreement and that, upon the reasonable request of the Agent, the undersigned will execute any additional documents necessary or desirable in connection with the enforcement of this Lock-Up Letter Agreement. This Lock-Up Letter Agreement is irrevocable and shall be binding upon the heirs, legal representatives, successors and assigns of the undersigned.
This Lock-Up Letter Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the federal laws of Canada applicable in the Province of Ontario, without reference to conflicts of laws.
This Lock-Up Letter Agreement constitutes the entire agreement and understanding between and among the parties with respect to the subject matter of this Lock-Up Letter Agreement and supersedes any prior agreement, representation or undertaking with respect to such subject matter.
This Lock-Up Letter Agreement may be executed by facsimile or other electronic signatures and by electronic transmission, each of which shall be effective as original signatures.
This Lock-Up Letter Agreement has been entered into on the date first written above.
| Yours very truly, |
|---|
| _____________________________ |
| Print Name: |
| 2 |
| --- |
Schedule B
COMPLIANCE WITH UNITED STATES SECURITIES LAWS
This is Schedule B to the agency agreement dated as of March 5,2021 between Grown Rogue International Inc. and Eight Capital.
As used in this Schedule B, the following terms shall have the following meanings:
“Dealer Covered Person” has the meaning set forth in Section B.10 below;
“Directed Selling Efforts” means “directed selling efforts” as that term is defined in Rule 902(c) of Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule, it means, subject to the exclusions from the definition of directed selling efforts contained in Regulation S, any activity undertaken for the purpose of, or that could reasonably be expected to have the effect of, conditioning the market in the United States for any of the Securities, and includes the placement of any advertisement in a publication with a general circulation in the United States that refers to the offering of the Securities;
“Disqualification Event” has the meaning set forth in Section A.10 below;
“Foreign Issuer” means a “foreign issuer” as that term is defined in Regulation S. Without limiting the foregoing, but for greater clarity in this Schedule, it means any issuer which is (a) the government of any country other than the United States or of any political subdivision of a country other than the United States; or (b) a corporation or other organization incorporated or organized under the laws of any country other than the United States, except an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter: (1) more than 50 percent of the outstanding voting securities of such issuer are directly or indirectly owned of record by residents of the United States; and (2) any of the following; (i) the majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States;
“General Solicitation or GeneralAdvertising” means “general solicitation or general advertising”, as used in Rule 502(c) of Regulation D, including any advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio or television or the internet, or any seminar or meeting whose attendees had been invited by general solicitation or general advertising;
“Issuer Covered Person” has the meaning set forth in Section A.10 below;
“Offshore Transaction” means “offshore transaction” as that term is defined in Rule 902(h) of Regulation S;
“Regulation S” means Regulation S adopted by the SEC under the U.S. Securities Act;
“Securities” means the Special Warrants and Underlying Securities;
“Substantial U.S. Market Interest” means “substantial U.S. market interest” as that term is defined in Rule 902(j) Regulation S; and
| 1 |
| --- |
“U.S. Purchaser” means an original Purchaser of the Special Warrants that is either a Qualified Institutional Buyer or a U.S. Accredited Investor who, at the time of purchase, (a) was in the United States or a U.S. Person, (b) was purchasing such Special Warrants on behalf of, or for the account or benefit of, any U.S. Person or any person in the United States, (c) receives or received an offer to acquire such Special Warrants while in the United States, and (d) was in the United States at the time such person’s buy order was made or the Subscription Agreement pursuant to which such Special Warrants were acquired was executed or delivered.
All other capitalized terms used but not otherwise defined in this Schedule B shall have the meanings assigned to them in the agency agreement to which this Schedule B is attached.
A. Representations, Warranties and Covenants of the Company
The Company represents and warrants to and covenants with the Agent, as at the date hereof and as at the Closing Date, that:
It is, and on the Closing Date will be, a Foreign Issuer with no Substantial U.S. Market Interest with respect to any of its equity securities.
It has not offered and sold, and will not offer and sell, any Special Warrants except in accordance with this Schedule B (i) to, or for the account or benefit of, persons in the United States and U.S. Persons that are Qualified Institutional Buyers or U.S. Accredited Investors in reliance upon the exemption from the registration requirements of the U.S. Securities Act available pursuant to Rule 506(b) of Regulation D and similar exemptions under applicable U.S. state securities laws, and (ii) outside the United States in Offshore Transactions in reliance upon the exclusion from the registration requirements of the U.S. Securities Act available pursuant to Rule 903 of Regulation S, neither the Company nor any of its affiliates, nor any person acting on any of their behalf (other than the Agent, the U.S. Affiliate, their respective affiliates or any person acting on any of their behalf, in respect of which no representation, warranty or covenant is made), has made or will make: (A) any offer to sell, or any solicitation of an offer to buy, any Special Warrants to a person in the United States or a U.S. Person; or (B) any sale of Special Warrants unless, at the time the buy order was or will have been originated, the purchaser is (i) outside the United States and not a U.S. Person or (ii) the Company, its affiliates, and any person acting on their behalf reasonably believe that the purchaser is outside the United States and not a U.S. Person.
None of the Company or any of its affiliates or any persons acting on any of their behalf (other than the Agent, the U.S. Affiliate, their respective affiliates or any person acting on any of their behalf, in respect of which no representation, warranty or covenant is made) has made or will make any Directed Selling Efforts or has engaged or will engage in any form of General Solicitation or General Advertising or has acted in any manner involving a public offering within the meaning of Section 4(a)(2) of the U.S. Securities Act with respect to the offer and sale of Securities to, or for the account or benefit of, persons in the United States or U.S. Persons.
The Company is not, and as a result of the sales of the Special Warrants and issuance of the Underlying Securities contemplated hereby will not be, registered or required to be registered as an “investment company”, as such term is defined in the United States Investment Company Act of 1940, as amended, under such Act.
The Company has not sold, offered for sale or solicited any offer to buy and will not sell, offer for sale or solicit any offer to buy, during the period beginning six months prior to the start of the earlier Offering of the Special Warrants and ending six months after the later of the completion of the Offering of the Special Warrants, any of its securities in a manner that would be integrated with and would cause (i) the exemption from registration provided by Rule 506(b) of Regulation D or the exclusion from registration provided by Rule 903 of Regulation S, to be unavailable with respect to offers and sales of the Special Warrants in the Offering pursuant to this Schedule B.
2 The Company will not take any action that would cause the exemptions or exclusions provided by Rule 506(b) of Regulation D or Rule 903 of Regulation S or to be unavailable with respect to offers and sales of the Special Warrants in the Offering to, or for the account or benefit of, persons in the United States and U.S. Persons pursuant to the Agency Agreement including this Schedule B.
Neither the Company nor any of its predecessors or affiliates has been subject to any order, judgment, or decree of any court of competent jurisdiction temporarily, preliminarily or permanently enjoining such person for failure to comply with Rule 503 of Regulation D.
None of the Company, its affiliates or any person acting on behalf of any of them (other than the Agent, the U.S. Affiliate, their respective affiliates or any person acting on any of their behalf, in respect of which no representation, warranty or covenant is made) has engaged or will engage in any violation of Regulation M under the U.S. Exchange Act in connection with this Offering.
The Company will, within prescribed time periods, prepare and file any forms or notices required under the U.S. Securities Act or applicable state securities laws in connection with the Offering.
With respect to the Special Warrants to be offered and sold hereunder in reliance on Rule 506(b) of Regulation D, none of the Company, any of its predecessors, any director, executive officer, other officer of the Company participating in the offering, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the U.S. Securities Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person” and, together, “Issuer Covered Persons”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the U.S. Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine (i) the identity of each person that is an Issuer Covered Person; and (ii) whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Agent a copy of any disclosures provided thereunder.
The Company is not aware of any person (other than any Dealer Covered Person) that has been or will be paid (directly or indirectly) remuneration for solicitation of Purchasers in connection with the sale of Special Warrants in the Offering pursuant to Rule 506(b) of Regulation D under the U.S. Securities Act.
None of the Company, its affiliates or any person acting on any of their behalf (other than the Agent, the U.S. Affiliate, their respective affiliates or any person acting on any of their behalf, in respect of which no representation, warranty or covenant is made), will (i) take any action that would cause the exemption provided by Section 3(a)(9) of the U.S. Securities Act to be unavailable for the exchange of Special Warrants for the Underlying Securities, or (ii) pay or give any commission or other remuneration, directly or indirectly, for soliciting the exchange of Special Warrants for the Underlying Securities.
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B. Representations, Warranties and Covenants of the Agent
The Agent represents and warrants to and covenants and agrees with the Company, as at the date hereof and as at the Closing Date, that:
It acknowledges that the Securities have not been and will not be registered under the U.S. Securities Act or any U.S. state securities laws and may not be offered or sold except pursuant to an exclusion or exemption from the registration requirements of the U.S. Securities Act and applicable U.S. state securities laws. It has offered and sold and will offer and sell the Special Warrants only (i) outside the United States in Offshore Transactions in accordance with Rule 903 of Regulation S, or (ii) to, or for the account or benefit of, persons in the United States and U.S. Persons as provided in this Schedule B. Accordingly, none of the Agent, its affiliates (including its U.S. Affiliate) or any persons acting on its or their behalf: (i) have engaged or will engage in any Directed Selling Efforts; or (ii) except as permitted by this Schedule B, have made or will make (x) any offers to sell or solicitations of offers to buy Special Warrants to, or for the account or benefit of, persons in the United States or U.S. Persons, or (y) any sale of Special Warrants unless at the time the purchaser made its buy order therefor, the Agent, its affiliates (including its U.S. Affiliate), and any person acting on any of their behalf reasonably believed that such person was outside the United States and not a U.S. Person or acting for the account or benefit of a person in the United States or a U.S. Person.
It has not entered and will not enter into any contractual arrangement with respect to the offer and sale of the Special Warrants, except with the U.S. Affiliate, any Selling Firm or with the prior written consent of the Company. The Agent shall require its U.S. Affiliate and any Selling Firm to agree for the benefit of the Company, to comply with, and shall cause its U.S. Affiliate and any Selling Firm to comply with the same provisions of the Agreement and this Schedule “B” as apply to the Agent as if its provisions applied to such U.S. Affiliate and such Selling Firm.
All offers and sales of the Special Warrants to, or for the account or benefit of, persons in the United States or U.S. Persons will be effected by the U.S. Affiliate in accordance with all applicable U.S. federal and state broker-dealer requirements. Such U.S. Affiliate is on the date hereof, and will be on the date of each offer or sale of Special Warrants to, or for the account or benefit of, a person in the United States or a U.S. Person, duly registered as a broker-dealer pursuant to Section 15(b) of the U.S. Exchange Act and the securities laws of each state in which such offer or sale is made (unless exempted from the respective state’s broker-dealer registration requirements) and a member of and in good standing with the Financial Industry Regulatory Authority, Inc.
Any offers, or solicitations of offers to buy Special Warrants that have been made or will be made to, or for the account or benefit of, persons in the United States or U.S. Persons, was or will be made only (i) to Qualified Institutional Buyers or U.S. Accredited Investors in transactions that are exempt from the registration requirements of the U.S. Securities Act available pursuant to Rule 506(b) of Regulation D and exempt from registration under all applicable state securities laws, and (ii) outside the United States in Offshore Transactions that are exempt from the registration requirements of the U.S. Securities Act available pursuant to Rule 903 of Regulation S.
Immediately prior to making offers to, or for the account or benefit of, persons in the United States or U.S. Persons, the Agent, its affiliates (including its U.S. Affiliate), and any person acting on any of their behalf had reasonable grounds to believe and did believe that each such offeree was either a Qualified Institutional Buyer or U.S. Accredited Investor with respect to which the Agent or its affiliates (including its U.S. Affiliate) had a pre-existing business relationship; and at the time of completion of each sale to a U.S. Purchaser, the Agent, its affiliates (including its U.S. Affiliate), and any person acting on any of their behalf will have reasonable grounds to believe and will believe, that each such U.S. Purchaser is either a Qualified Institutional Buyer or U.S. Accredited Investor.
Offers and sales of Special Warrants to, or for the account or benefit of, persons in the United States or U.S. Persons have not been and shall not be made by any form of General Solicitation or General Advertising or in any manner involving a public offering within the meaning of Section 4(a)(2) of the U.S. Securities Act.
4 At least one Business Day prior to the Closing Date, it shall provide the Company and its transfer agent with a list of all U.S. Purchasers of the Special Warrants, together with their addresses (including state of residence), the number of Special Warrants purchased and the registration and delivery instructions for the Special Warrants.
Prior to any sale of Special Warrants to U.S. Purchasers, it shall cause each such U.S. Purchaser to execute and deliver to the Company, the Agent and the U.S. Affiliate, the Subscription Agreement, including the Qualified Institutional Buyer Investment Letter annexed thereto as Schedule “C” – Annex 1 or the U.S. Accredited Investor Certificate annexed thereto as Schedule “C” – Annex 2.
All offerees of the Special Warrants that are, or are acting for the account or benefit of, persons in the United States or U.S. Persons shall be informed that the Securities have not been and will not be registered under the U.S. Securities Act and applicable state securities laws and are being offered and sold to such persons in reliance on the exemption from the registration requirements of the U.S. Securities Act and similar exemptions under applicable U.S. state securities laws.
None of it, any of its affiliates (including, the U.S. Affiliate) or any person acting on any of their behalf has taken or will take, directly or indirectly, any action in violation of Regulation M under the U.S. Exchange Act in connection with the offer and sale of the Securities.
With respect to the Special Warrants to be offered and sold hereunder in reliance on Rule 506(b) of Regulation D, none of (i) the Agent or the U.S. Affiliate, (ii) the Agent’s or the U.S. Affiliate’s general partners or managing members, (iii) any of the Agent’s or U.S. Affiliate’s directors, executive officers or other officers participating in the offering of the Special Warrants, (iv) any of the Agent’s or U.S. Affiliate’s general partners’ or managing members’ directors, executive officers or other officers participating in the offering of the Special Warrants or (v) any other person associated with any of the above persons, including any Selling Firm and any such persons related to such Selling Firm, that has been or will be paid (directly or indirectly) remuneration for solicitation of Purchasers in connection with the sale of the Special Warrants (each, a “Dealer Covered Person” and, collectively, the “Dealer Covered Persons”), is subject to any Disqualification Event except for a Disqualification Event contemplated by Rule 506(d)(2) of the U.S. Securities Act and a description of which has been furnished in writing to the Company prior to the date hereof. It will notify the Company in writing, prior to the Closing Date of (a) any Disqualification Event relating to any Dealer Covered Person not previously disclosed to the Company hereunder, any (b) any event that would, with the passage of time, become a Disqualification Event relating to any Dealer Covered Person.
The Agent represents that it is not aware of any person other than a Dealer Covered Person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of the Special Warrants pursuant to Rule 506(b) of Regulation D of the U.S. Securities Act. It will notify the Company, prior to the Closing Date of any agreement entered into between it and any such person in connection with such sale.
At Closing, the Agent, together with its U.S. Affiliate, will provide a certificate, substantially in the form of Exhibit A to this Schedule B, relating to the manner of the offer and sale of the Special Warrants to, or for the account or benefit of, persons in the United States or U.S. Persons, or will be deemed to have represented that they did not offer or sell Special Warrants to, or for the account or benefit of, persons in the United States or U.S. Persons.
None of the Agent, any of its affiliates (including, the U.S. Affiliate) or any person acting on any of their behalf will (i) take an action that would cause the exemption provided by Section 3(a)(9) of the U.S. Securities Act to be unavailable for the exchange of Special Warrants for the Underlying Securities, or (ii) receive any commission or other remuneration, directly or indirectly, for soliciting the exchange of Special Warrants for the Underlying Securities.
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Exhibit A
AGENT’S CERTIFICATE
In connection with the private placement in the United States of special warrants of Grown Rogue International Inc. (the “Company”) pursuant to the Agency Agreement dated March 5, 2021 among the Company and Eight Capital (the “Agency Agreement”), each of the undersigned does hereby certify to the Company as follows:
| (a) | _________________________ (the “U.S. Affiliate”) is,<br>and at all relevant times was, a duly registered broker or dealer with the United States Securities and Exchange Commission and is a member<br>of and in good standing with the Financial Industry Regulatory Authority, Inc. on the date hereof and the date on which each offer by<br>it and sale by the Company of Securities was made to, or for the account or benefit of, persons in the United States or U.S. Persons,<br>and all offers and sales of the Securities to, or for the account or benefit of, persons in the United States or U.S. Persons have been<br>effected by the U.S. Affiliate in compliance with all U.S. federal and state broker-dealer requirements; |
|---|---|
| (b) | immediately prior to making any offers of Special Warrants to, or for the<br>account or benefit of, persons in the United States, or U.S. Persons, we had reasonable grounds to believe and did believe that the U.S.<br>Purchaser was either a Qualified Institutional Buyer or U.S. Accredited Investor and, on the date hereof, we continue to believe that<br>each such U.S. Purchaser purchasing Securities from us is either a Qualified Institutional Buyer or U.S. Accredited Investor; |
| --- | --- |
| (c) | no form of General Solicitation or General Advertising was used by us, including<br>advertisements, articles, notices or other communications published in any newspaper, magazine or similar media or broadcast over radio<br>or television or the internet or any seminar or meeting whose attendees had been invited by General Solicitation or General Advertising,<br>in connection with the offer or sale of the Special Warrants to, or for the account or benefit of, persons in the United States or U.S.<br>Persons; |
| --- | --- |
| (d) | neither we, nor our affiliates or any person acting on any of our behalf<br>have taken or will take, directly or indirectly, any action in a violation of Regulation M under the U.S. Exchange Act in connection with<br>the offer and sale of the Special Warrants; |
| --- | --- |
| (e) | none of (i) the undersigned, (ii) the undersigned’s general partners<br>or managing members, (iii) any of the undersigned’s directors, executive officers or other officers participating in the offering<br>of the Special Warrants, (iv) any of the undersigned’s general partners’ or managing members’ directors, executive officers<br>or other officers participating in the offering of the Special Warrants or (v) any Dealer Covered Person is subject to any of the “Bad<br>Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under Regulation D, except for a Disqualification Event contemplated<br>by Rule 506(d)(2) of the U.S. Securities Act and a description of which has been furnished in writing to the Company prior to the date<br>hereof; and (vii) the undersigned is not aware of any person (other than any Dealer Covered Person) that has been or will be paid (directly<br>or indirectly) remuneration for solicitation of purchasers in connection with the sale of the Special Warrants; |
| --- | --- |
6
| (f) | all offerees and Purchasers that are, or are acting for the account or benefit<br>of, persons in the United States or U.S. Persons have been informed that the Special Warrants have not been and will not be registered<br>under the U.S. Securities Act and are being offered and sold to such Purchasers without registration in reliance on the exemption from<br>the registration requirements of the U.S. Securities Act provided by Rule 506(b) of Regulation D and similar exemptions under applicable<br>state securities laws; and |
|---|---|
| (g) | the offering of the Special Warrants in the United States has been conducted<br>by us in accordance with the terms of the Agency Agreement including Schedule B thereto. |
| --- | --- |
Terms used in this certificate have the meanings given to them in the Agency Agreement, including Schedule A thereto, unless otherwise defined herein.
DATED this _______ day of _________________, 2021.
| [●] | [●] |
|---|---|
| By: | By: |
| Name: | Name: |
| Title: | Title: |
7
SCHEDULE C
PERMITTED ENCUMBRANCES
| ● | Pledge agreement dated February 28, 2020 between Grown Rogue Unlimited, LLC and GR Michigan, LLC, in favour<br>made by GR Michigan, LLC, a Michigan limited liability company, in favour of Thermal Ventures LLC. |
|---|---|
| ● | Security, collateral agency and collateral sharing agreement dated August 14, 2018 between Grown Rogue<br>Unlimited, LLC, an Oregon limited liability company, GRU Properties, LLC, Grown Rogue Distribution, LLC, Grown Rogue Gardens, LLC, GRIP,<br>LLC, Grown Rogue Meds, LLC and KW Capital Partners Ltd. |
| --- | --- |
| 1 |
| --- |
Exhibit 8
| Ontario<br><br>Securities<br><br>Commission | Commission des<br><br>valeurs mobilières<br><br>de l’Ontario | 22nd Floor<br><br>20 Queen Street West<br><br>Toronto ON M5H 3S8 | 22e étage<br><br>20, rue Queen ouest<br><br>Toronto On M5H 3S8 |
|---|
RECEIPT
Grown Rogue International Inc.
This is the receipt of the Ontario Securities Commission for the Preliminary Short Form Prospectus of the above issuer dated March 23, 2021 (the preliminary prospectus).
The preliminary prospectus has been filed under Multilateral Instrument 11-102 Passport System in British Columbia, Alberta and Nova Scotia. A receipt for the preliminary prospectus is deemed to be issued by the regulator in each of those jurisdictions, if the conditions of the Instrument have been satisfied.
March 23, 2021
| Sonny Randhawa |
|---|
| Sonny Randhawa |
| Director, Corporate Finance Branch |
| SEDAR Project # 3191010 |
Exhibit 9
GROWN ROGUE INTERNATIONAL INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three Months ended January 31, 2021 and 2020
Expressed in United States Dollars
NOTICE TO READER
The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company’s management and the Company’s independent auditors have not performed a review of these interim financial statements.
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Financial Position
Unaudited - Expressed in United States Dollars
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| ASSETS | ||||||
| Current assets | ||||||
| Cash | $ | 1,278,401 | $ | 217,788 | ||
| Accounts receivable (Note 19) | 238,987 | 172,121 | ||||
| Biological assets (Note 4) | 216,191 | 250,690 | ||||
| Inventory (Note 5) | 896,078 | 1,124,360 | ||||
| Prepaid expenses and other assets | 79,060 | 69,816 | ||||
| Total current assets | $ | 2,708,717 | $ | 1,834,775 | ||
| Marketable securities (Note 6) | 914,970 | 585,035 | ||||
| Other investment (Note 7) | 189,915 | 187,812 | ||||
| Right-of-use assets (Note 9) | 867,928 | 50,468 | ||||
| Property and equipment (Note 10) | 1,023,673 | 1,101,331 | ||||
| Intangible assets | - | 4,997 | ||||
| TOTAL ASSETS | $ | 5,705,203 | $ | 3,764,418 | ||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 1,275,456 | $ | 1,059,971 | ||
| Current portion of lease liabilities (Note 9) | 175,662 | 100,277 | ||||
| Current portion of long-term debt (Note 11) | 329,166 | 46,099 | ||||
| Interest payable (Note 11) | 12,155 | 9,367 | ||||
| Convertible debentures (Note 12) | 1,899,080 | - | ||||
| Derivative liabilities (Note 12.1) | 930,195 | 583,390 | ||||
| Unearned revenue | 84,600 | - | ||||
| Total current liabilities | $ | 4,706,314 | $ | 1,799,104 | ||
| Accrued liabilities (Note 8) | 389,816 | 389,816 | ||||
| Lease liabilities (Note 9) | 740,731 | 16,630 | ||||
| Long-term debt (Note 11) | 1,050,588 | 753,715 | ||||
| Convertible debentures (Note 12) | - | 1,739,678 | ||||
| Redemption liabilities (Note 23.3) | 375,000 | - | ||||
| Deferred rent | - | 10,494 | ||||
| TOTAL LIABILITIES | $ | 7,262,449 | $ | 4,709,437 | ||
| EQUITY | ||||||
| Share capital (Note 13) | $ | 14,629,885 | $ | 14,424,341 | ||
| Shares issuable (Note 13) | 88,963 | - | ||||
| Subscriptions payable (Note 13) | 125,000 | - | ||||
| Contributed surplus (Notes 14, 15) | 3,735,253 | 4,070,264 | ||||
| Accumulated other comprehensive income (loss) | (88,131 | ) | (12,197 | ) | ||
| Accumulated deficit | (20,394,729 | ) | (19,394,044 | ) | ||
| Equity attributable to shareholders | $ | (1,903,759 | ) | $ | (911,636 | ) |
| Non-controlling interest (Notes 23) | 346,513 | (33,383 | ) | |||
| TOTAL EQUITY | $ | (1,557,246 | ) | $ | (945,019 | ) |
| TOTAL LIABILITIES AND EQUITY | $ | 5,705,203 | $ | 3,764,418 |
Going Concern (Note 2)
Subsequent Events (Note 24)
Approved on behalf of the Board of Directors:
| Signed “J. Obie Strickler”, Director | Signed “Stephen Gledhill”, Director |
|---|
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 2 of 29
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Comprehensive Loss
Unaudited - Expressed in United States Dollars
| Three months ended <br><br>January 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Revenue | ||||||
| Product sales | $ | 874,824 | $ | 1,106,296 | ||
| Service revenue (Note 7) | 176,361 | - | ||||
| Total revenue | $ | 1,051,185 | $ | 1,106,296 | ||
| Cost of goods sold | ||||||
| Cost of finished cannabis inventory sold (Note 5) | $ | (388,933 | ) | $ | (521,680 | ) |
| Costs of service revenues (Note 7) | (84,153 | ) | - | |||
| Gross profit, excluding fair value items | $ | 578,099 | $ | 584,616 | ||
| Realized fair value amounts in inventory sold | (173,598 | ) | (632,630 | ) | ||
| Unrealized fair value gain (loss) on growth of biological assets (Note 4) | (124,311 | ) | 701,559 | |||
| Gross profit | $ | 280,190 | $ | 653,545 | ||
| Expenses | ||||||
| Accretion expense | $ | 248,357 | $ | 68,210 | ||
| Amortization of intangible assets | 4,997 | 7,659 | ||||
| Amortization of property and equipment (Note 10) | 124,381 | 49,677 | ||||
| Amortization of right-of-use assets (Note 9) | 48,605 | 35,822 | ||||
| General and administrative (Note 20) | 752,478 | 670,768 | ||||
| Share-based compensation | 88,438 | - | ||||
| Total expenses | $ | 1,267,256 | $ | 832,136 | ||
| Loss from operations | $ | (987,066 | ) | $ | (178,591 | ) |
| Other income and (expense) | ||||||
| Interest expense | $ | (8,527 | ) | $ | (90,514 | ) |
| Other income | - | 15,000 | ||||
| Gain on debt settlement | 16,623 | - | ||||
| Unrealized gain on marketable securities | 302,808 | - | ||||
| Unrealized loss on derivative liability (Note 12.1) | (319,627 | ) | - | |||
| Gain on disposal of property and equipment | - | 20,918 | ||||
| Net loss | $ | (995,789 | ) | $ | (233,187 | ) |
| Other comprehensive income (items that may be subsequently reclassified to profit & loss) | ||||||
| Currency translation | (75,934 | ) | (16,575 | ) | ||
| Total comprehensive loss | $ | (1,071,723 | ) | $ | (249,762 | ) |
| Loss per share attributable to owners of the parent - basic & diluted | $ | (0.01 | ) | (0.00 | ) | |
| Weighted average shares outstanding - basic & diluted | 108,038,431 | 72,562,742 | ||||
| Net loss for the period attributable to: | ||||||
| Non-controlling interest | $ | 4,896 | $ | (16,145 | ) | |
| Shareholders | (1,000,685 | ) | (217,042 | ) | ||
| Net loss | $ | (995,789 | ) | $ | (233,187 | ) |
| Comprehensive loss for the period attributable to: | ||||||
| Non-controlling interest | $ | 4,896 | $ | (16,145 | ) | |
| Shareholders | (1,076,619 | ) | (233,617 | ) | ||
| Total comprehensive loss | $ | (1,071,723 | ) | $ | (249,762 | ) |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 3 of 29
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Changes in Shareholders’ Deficit
Unaudited - Expressed in United States Dollars
| Number of common shares | Share capital | Shares issuable | Subscriptions payable | Contributed surplus | Currency translation reserve | Accumulated deficit | Non-controlling interests | Total equity | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at October 31, 2020 | $ | 107,782,397 | $ | 14,424,341 | $ | - | $ | - | $ | 4,070,264 | $ | (12,197 | ) | $ | (19,394,044 | ) | $ | (33,383 | ) | (945,019 | ) | ||
| Shares issued for employment & consulting services (Note 13.1) | 18,044 | 3,441 | 3,753 | - | - | - | - | - | 7,194 | ||||||||||||||
| Shares issued pursuant to private placement (Note 13.2) | 2,031,784 | 200,000 | - | - | - | - | - | - | 200,000 | ||||||||||||||
| Shares issued to extend payment due date (Notes 7.2, Note 13.3) | 25,000 | 2,103 | - | - | - | - | - | - | 2,103 | ||||||||||||||
| Shares issuable pursuant to partner creditor (Note 13.4) | - | - | 36,310 | - | - | - | - | - | 36,310 | ||||||||||||||
| Shares issuable for services (Note 13.5) | - | - | 48,900 | - | - | - | - | - | 48,900 | ||||||||||||||
| Proceeds received prior to close of private placement (Note 13.2) | - | - | - | 125,000 | - | - | - | - | 125,000 | ||||||||||||||
| Issuance of non-controlling interest in subsidiary for cash (Note 23.3) | - | - | - | - | (375,000 | ) | - | - | 375,000 | - | |||||||||||||
| Stock option vesting expense | - | - | - | - | 39,989 | - | - | - | 39,989 | ||||||||||||||
| Currency translation adjustment | - | - | - | - | - | (75,934 | ) | - | - | (75,934 | ) | ||||||||||||
| Net loss | - | - | - | - | - | - | (1,000,685 | ) | 4,896 | (995,789 | ) | ||||||||||||
| Balance at January 31, 2021 | 109,857,225 | $ | 14,629,885 | $ | 88,963 | $ | 125,000 | $ | 3,735,253 | $ | (88,131 | ) | $ | (20,394,729 | ) | $ | 346,513 | $ | (1,557,246 | ) | |||
| Number of common shares | Share capital | Shares issuable | Subscriptions payable | Contributed surplus | Currency translation reserve | Accumulated deficit | Non-controlling interests | Total equity | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Balance at October 31, 2019 | 71,653,598 | $ | 12,647,930 | $ | - | $ | 5,136 | $ | 2,890,435 | $ | 121,920 | $ | (17,112,605 | ) | $ | 19,538 | $ | (1,427,646 | ) | ||||
| Common shares issued for services (Note 13.6) | 1,058,750 | 71,910 | - | - | - | - | - | - | 71,910 | ||||||||||||||
| Currency translation adjustment | - | - | - | - | - | (16,575 | ) | - | - | (16,575 | ) | ||||||||||||
| Net loss | - | - | - | - | - | - | (217,042 | ) | (16,145 | ) | (233,187 | ) | |||||||||||
| Balance at January 31, 2020 | 72,712,348 | $ | 12,719,840 | $ | - | $ | 5,136 | $ | 2,890,435 | $ | 105,345 | $ | (17,329,647 | ) | $ | 3,393 | $ | (1,605,498 | ) |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 4 of 29
Grown Rogue International Inc.
Condensed Interim Consolidated Cash Flow Statements
Unaudited - Expressed in United States Dollars
| Three months ended <br><br>January 31, | ||||||
|---|---|---|---|---|---|---|
| Cash provided by (used in) | 2021 | 2020 | ||||
| Operating activities | ||||||
| Net loss | $ | (995,789 | ) | $ | (233,187 | ) |
| Adjustments for non-cash items in net loss | ||||||
| Amortization of property and equipment | 124,381 | 49,677 | ||||
| Amortization of right-of-use assets | 48,605 | 35,822 | ||||
| Amortization of intangible assets | 4,997 | 7,659 | ||||
| Unrealized gain on changes in fair value of biological assets | 124,311 | (701,559 | ) | |||
| Share-based compensation | 88,963 | 18,375 | ||||
| Stock option expense | 43,485 | - | ||||
| Accretion expense | 248,357 | 68,210 | ||||
| Gain on liability settlement | (16,623 | ) | - | |||
| Gain on disposal of property & equipment | - | (20,918 | ) | |||
| Interest on lease liabilities | - | 13,003 | ||||
| Unrealized gain on marketable securities | (302,808 | ) | - | |||
| Loss on fair value of derivative liability | 319,627 | - | ||||
| Effects of foreign exchange | (828 | ) | (9,016 | ) | ||
| $ | (313,322 | ) | $ | (771,934 | ) | |
| Changes in non-cash working capital (Note 16) | 436,727 | 922,318 | ||||
| Net cash provided by operating activities | $ | 123,405 | $ | 150,384 | ||
| Investing activities | ||||||
| Purchase of property and equipment | $ | (159,016 | ) | $ | (4,528 | ) |
| Net cash used in investing activities | $ | (159,016 | ) | $ | (4,528 | ) |
| Financing activities | ||||||
| Third party investment in subsidiary | $ | 375,000 | $ | - | ||
| Proceeds from long-term debt | 525,000 | 15,000 | ||||
| Repayment of long-term debt | (62,197 | ) | (34,911 | ) | ||
| Proceeds of subscription receipts | 125,000 | - | ||||
| Payments of lease principal | (66,579 | ) | (67,225 | ) | ||
| Proceeds from private placement | 200,000 | - | ||||
| Net cash provided by financing activities | $ | 1,096,224 | $ | (87,136 | ) | |
| Change in cash | $ | 1,060,613 | $ | 58,720 | ||
| Cash balance, beginning | $ | 217,788 | $ | 74,926 | ||
| Cash balance, ending | $ | 1,278,401 | $ | 133,646 |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 5 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 1. | Corporate Information |
|---|
These unaudited condensed interim consolidated financial statements for the three months ended January 31, 2021 and 2020 (the “Financial Statements”), include the accounts of Grown Rogue International, Inc (together with its subsidiaries, “GRIN” or the “Company”) and its subsidiaries. The registered office of GRIN is located at 340 Richmond Street West, Toronto, Ontario, M5V 1X2.
GRIN’s subsidiaries and ownership thereof are summarized in the table below.
| Company | Ownership |
|---|---|
| Grown Rogue Unlimited, LLC | 100% by GRIN |
| Grown Rogue Gardens, LLC | 100% by Grown Rogue Unlimited, LLC |
| GRU Properties, LLC | 100% by Grown Rogue Unlimited, LLC |
| GRIP, LLC | 100% by Grown Rogue Unlimited, LLC |
| GR Michigan, LLC | 87% by Grown Rogue Unlimited, LLC |
| Grown Rogue Distribution, LLC | 91.4% by Grown Rogue Unlimited, LLC |
| Idalia, LLC | 60% by Grown Rogue Unlimited, LLC |
GRIN is primarily engaged in the business of growing and selling cannabis products. The primary cannabis product produced and sold is cannabis flower.
| 2. | Basis of Presentation |
|---|
Statement of Compliance and Going Concern
The Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) IAS 34 - Interim Financial Reporting, applicable to a going concern, which contemplates the realization of assets and liabilities in the normal course of business as they become due.
The Company’s ability to continue as a going concern is dependent upon, but not limited to, its ability to raise financing necessary to discharge its liabilities as they become due and generate positive cash flows from operations. For the three months ended January 31, 2021, the Company incurred a net loss of approximately $1 million, and as of that date, the Company’s accumulated deficit was approximately $20.4 million. As at January 31, 2021, the Company had a working capital deficit of approximately $2 million. These conditions have resulted in material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and to meet its obligations will be dependent upon successful sales of product and generating positive cash flows from operations as well as obtaining suitable financing. The accompanying Financial Statements do not reflect any adjustment that might result from the outcome of this uncertainty. If the going concern assumption is not used, then the adjustments required to report the Company’s assets and liabilities at liquidation values could be material to these Financial Statements.
These Financial Statements do not include all disclosures required by IFRS for annual audited consolidated financial statements and accordingly should be read in conjunction with our annual consolidated financial statements for the year ended October 31, 2020. These unaudited condensed interim financial statements were authorized for issuance by the Board of Directors on April 1, 2021.
Pg 6 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Basis of Measurement
These Financial Statements have been prepared on a historical cost basis except for certain financial instruments and biological assets, which are measured at fair value, as described herein.
Functional and Presentation Currency
The Company’s functional currency is the Canadian dollar and the functional currency of its subsidiaries is the United States (“U.S.”) dollar. These Financial Statements are presented in U.S. dollars.
Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates prevailing at the end of the reporting period. All exchange gains and losses are included in the statements of loss and comprehensive loss.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Company are expressed in U.S. Dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive loss and reported as currency translation reserve in shareholders’ equity.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which, in substance, is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive loss.
Basis of Consolidation
The subsidiaries are those companies controlled by the Company, as the Company is exposed, or has rights, to variable returns from its involvement with the subsidiaries and has the ability to affect those returns through its power over the subsidiaries by way of its ownership and rights pertaining to the subsidiaries. The financial statements of subsidiaries are included in these Financial Statements from the date that control commences until the date control ceases. All intercompany balances and transactions have been eliminated upon consolidation.
Estimation Uncertainty due to COVID-19
On March 11, 2020, the World Health Organization declared a global outbreak of COVID-19 (coronavirus) to be a pandemic, which has had a significant impact on businesses through the restrictions put in place by the federal, state, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders in Canada and the United States. Government measures imposed to limit the spread of COVID-19 did not have a material impact on the Company’s operations during the three months ended January 31, 2021, and the Company has not observed any material impairments, or significant changes in the fair value of its assets as a result of COVID-19.
Pg 7 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
At this time, it is unknown the extent of the impact the COVID-19 outbreak may have on the Company as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put in place by Canada, the United States and other countries to fight the virus. While the extent of the impact is unknown, it remains possible that this outbreak may cause reduced customer demand, supply chain disruptions, staff shortages, and increased government regulations, all of which may negatively impact the Company’s business, results of operations and financial condition. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business.
| 3. | Significant Accounting Policies and Significant Judgements |
|---|
The preparation of these Financial Statements requires management to make judgments, estimates, and assumptions that affect the application of policies and reported amounts of assets, liabilities, and expenses. Areas that have the most significant effect on the amounts recognized in the financial statements are disclosed in Note 4 of the Company’s consolidated financial statements for the year ended October 31, 2020. The accounting policies applied in these Financial Statements are consistent with those used in the Company’s consolidated financial statements for the year ended October 31, 2020.
| 4. | Biological Assets |
|---|
Biological assets consist of cannabis plants, which reflect measurement a fair value less costs to sell (“FVLCTS”). Changes in the carrying amounts of biological assets for the three months ended January 31, 2021 are as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Beginning balance | $ | 250,690 | $ | 156,589 | ||
| Purchased cannabis plants | 185,059 | 724,878 | ||||
| Allocation of operational overhead | 172,164 | 1,130,712 | ||||
| Change in FVLCTS due to biological transformation | (124,311 | ) | 1,515,492 | |||
| Transferred to inventory upon harvest | (267,411 | ) | (3,276,981 | ) | ||
| Ending balance | $ | 216,191 | $ | 250,690 |
Pg 8 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
FVLCTS is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price per gram and also for any additional costs to be incurred, such as post-harvest costs.
The following significant unobservable inputs, all of which are classified as level 3 on the fair value hierarchy, were used by management as part of this model:
| - | Expected costs required to grow the cannabis up to the point of harvest | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| - | Estimated selling price per pound | |||||||||
| --- | --- | |||||||||
| - | Expected yield from the cannabis plants | |||||||||
| --- | --- | |||||||||
| - | Estimated stage of growth – The Company applied a weighted average number of days out of the 60-day<br>growing cycle that biological assets have reached as of the measurement date based on historical evidence. The Company assigns fair value<br>basis according to the stage of growth and estimated costs to complete cultivation. | |||||||||
| --- | --- | |||||||||
| Impact of 20% change | ||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| January 31, <br><br>2021 | October 31, <br><br>2020 | January 31, <br><br>2021 | October 31, <br><br>2020 | |||||||
| Estimated selling price per (pound) | $ | 1,100 | $ | 1,123 | $ | 25,658 | $ | 57,879 | ||
| Estimated stage of growth | 38 | % | 71 | % | $ | 21,902 | $ | 46,209 | ||
| Estimated flower yield per harvest (pound) | 307 | 216 | $ | 21,902 | $ | 46,209 | ||||
| 5. | Inventory | |||||||||
| --- | --- |
The Company’s inventory composition is as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Raw materials | $ | 9,868 | $ | 8,588 |
| Work in process | 741,064 | 919,464 | ||
| Finished goods | 145,147 | 196,308 | ||
| Ending balance | $ | 896,078 | $ | 1,124,360 |
The cost of inventories included as an expense and included in cost of goods sold for the three months ended January 31, 2021, was $388,933 (2020 - $521,680).
| 6. | Marketable Securities |
|---|
During the year ended October 31, 2020, the Company received 2,362,204 common shares of Plant-Based Investment Corp (“PBIC”) by issuing to PBIC 15,000,000 common shares of the Company pursuant to a subscription agreement. On the date of the transaction, February 10, 2020, the fair value of PBIC shares per share was CAD$0.635 per share, resulting in a fair value of $848,011. The Company does not have control or significant influence over PBIC and has accounted for the investment at fair value through profit or loss.
Pg 9 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
As at January 31, 2021, the fair value of the shares was $914,970 (October 31, 2020 - $585,035), based upon the publicly quoted price of PBIC shares. The Company recorded an unrealized gain on the shares in the amount of $302,807 (2020 - $Nil) and foreign currency translation gain of $27,128 during three months ended January 31, 2021 (2020 - $Nil).
| 7. | Other Investment |
|---|
On February 6, 2020, the Company entered into a purchase agreement to acquire an option to acquire a 60% controlling interest (the “Option”) of a fully-licensed Michigan based operator, pending Municipal and State regulatory approval, called Golden Harvests, LLC (“Golden Harvests”). In order to exercise the Option, the Company agreed to pay $810,000 in cash and issue 800,000 common shares of the Company in four tranches:
| 7.1 | Payment of $150,000 within five days of signing the Option and the issuance of 200,000 common shares of<br>the Company within 60 days after signing the Option (during the year ended October 31, 2020, the cash amount of $150,000 was paid and<br>200,000 common shares were issued with a fair value of $12,812). |
|---|
| 7.2 | Payment of $200,000 and the issuance of 200,000 common shares of the Company on the sixth-month anniversary<br>of signing the Option. The Company paid $25,000 and issued 25,000 shares (Note 13.3) to extend this payment for six-months. Subsequent<br>to January 31, 2021, a cash payment of $100,000 was made and a note payable for $100,000 was issued to fulfill the $200,000 payment. The<br>note payable bears interest at $2,000 per month. |
|---|
| 7.3 | Payment of $260,000 and the issuance of 200,000 common shares of the Company on the twelve-month anniversary<br>of signing the Option. The Company can elect to extend the due date of this tranche of the purchase consideration for an additional six<br>months by payment of $25,000 and issuance of 25,000 shares. |
|---|
| 7.4 | Payment of $200,000 and the issuance of 200,000 common shares of the Company due upon exercise of the<br>Option, pending Municipal and State regulatory approval. |
|---|
The aggregate invested into Golden Harvests under the Option, as at January 31, 2021, included the following:
| Investment | January 31, <br><br>2021 | October 31, <br><br>2020 | ||
|---|---|---|---|---|
| Beginning balance | $ | 187,812 | $ | - |
| Cash payments against the Option | - | 175,000 | ||
| Share payments against Option | 2,103 | 12,812 | ||
| Ending balance | $ | 189,915 | $ | 187,812 |
Subsequent to January 31, 2021, the Company’s subsidiary, GR Michigan, LLC, terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. Canopy has already been approved by the State of Michigan for licensing and this will allow the Company to accelerate its option exercise to obtain a 60% interest in Golden Harvests. Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company. The Company has an option to acquire an 87% interest in Canopy which when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had in GR Michigan.
Pg 10 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The Company has a contract to provide operations management services to Golden Harvests. Under this agreement, during the three months ended January 31, 2021, the Company earned revenues of $176,361 (2020 - $Nil) and costs for those revenues were $84,153 (2020 – $Nil).
| 8. | Accrued Liabilities |
|---|
The following table summarizes the liability payable to creditors who agreed to defer settlement for longer than one year from October 31, 2020 and 2019:
| CEO | Trade Vendors | Total | ||||||
|---|---|---|---|---|---|---|---|---|
| Balance at October 31, 2019 | $ | 180,799 | - | $ | 180,799 | |||
| Amounts deferred | 45,000 | 241,255 | 286,255 | |||||
| Amounts settled | - | (77,238 | ) | (77,238 | ) | |||
| Balance at October 31, 2020 and January 31, 2021 | $ | 225,799 | **** | 164,017 | **** | $ | 389,816 | **** |
| 9. | Leases | |||||||
| --- | --- |
At January 31, 2021, The Company reported lease liabilities pertaining to five underlying liabilities, including three leases for property for growing operations and two leases used to finance fixed asset purchases.
One lease for outdoor growing property, executed with the Company’s CEO, was extended during the three months ended January 31, 2021, through December 31, 2025. This lease was accordingly remeasured, resulting in an increase to the liability and right-of-use asset of $281,707. A second lease for outdoor growing property was extended during the three months ended January 31, 2021, through December 31, 2021. This lease was accordingly remeasured, resulting in an increase to lease liabilities and right-of-use assets of $43,490.
During the three months ended January 31, 2021, management determined that it would exercise extension options on the lease for its indoor growing facility through March 31, 2027. This lease was accordingly remeasured, resulting in an increase to lease liabilities and right-of-use assets of $540,868.
Two leases used to finance property and equipment purchases comprise $49,393 of total lease liabilities at January 31, 2021 (October 31, 2020 - $66,338). Of the January 31, 2021 balance, $42,565 is current and 6,828 is non-current (October 31, 2020 - $49,708 was current and $16,630 was non-current).
Pg 11 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Set out below are the carrying amounts of right-of-use assets recognized and the movements during the three months ended January 31, 2021.
| Land and Buildings | Leased equipment | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | - | $ | 232,059 | $ | 232,059 | |||
| Adoption of IFRS 16 | 276,431 | - | 276,431 | ||||||
| Additions | - | 68,035 | 68,035 | ||||||
| Amortization | (225,963 | ) | (79,401 | ) | (305,364 | ) | |||
| Balance - October 31, 2020 | $ | 50,468 | $ | 220,693 | $ | 271,161 | |||
| Additions | 866,065 | - | 866,065 | ||||||
| Amortization | (48,605 | ) | (21,400 | ) | (70,005 | ) | |||
| Balance - January 31, 2021 | $ | 867,928 | $ | 199,293 | $ | 1,067,221 |
Leased equipment was reported in property and equipment in the statements of financial position at January 31, 2021 and October 31, 2020. Depreciation expense related to leased equipment is included in amortization of property and equipment and cost of sales in the statements of comprehensive loss (see Note 10).
Set out below are the carrying amounts and movements of lease liabilities.
| ****<br><br>Lease liabilities | January 31, <br><br>2021 | October 31, <br><br>2020 | ||||
|---|---|---|---|---|---|---|
| Balance - beginning | $ | 116,907 | $ | 142,205 | ||
| Adoption of IFRS 16 | - | 276,431 | ||||
| Additions | 866,065 | 68,035 | ||||
| Accretion of interest | 5,096 | 65,433 | ||||
| Payments | (71,675 | ) | (435,197 | ) | ||
| Balance - ending | $ | 916,393 | $ | 116,907 | ||
| Current portion | 175,662 | 100,277 | ||||
| Non-current portion | 740,731 | 16,630 |
Payments during the three months ended January 31, 2021 of $71,675 included principal payments of $66,579 and interest of $5,096. Payments during the year ended October 31, 2020 of $435,197 included principal payments of $372,154 and interest of $63,043.
Set out below are the minimum future lease payments after January 31, 2021.
| Total future minimum lease payments | ||
|---|---|---|
| Less than one year | $ | 261,300 |
| Between one and five years | 936,010 | |
| Total | $ | 1,197,310 |
The Company has one lease contract with extension options remaining after the periods included in the financial statements at January 31, 2021, which was negotiated by management to provide flexibility in managing business needs. Set out below are the undiscounted potential rental payments related to periods following the date of exercise options that are not included in the lease term.
| Within five years | More than five years | |||
|---|---|---|---|---|
| Extension options available to be exercised | $ | 6,180 | $ | 843,981 |
Pg 12 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 10. | Property and Equipment | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Computer and Office Equipment | Production Equipment and Other | Construction in Progress | Leasehold Improvements | Total | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| COST | |||||||||||||||
| Balance - October 31, 2019 | $ | 55,960 | $ | 443,598 | $ | 476,783 | $ | 1,310,471 | $ | 2,286,812 | |||||
| Additions | 1,031 | 283,065 | 90,342 | 251,355 | 625,793 | ||||||||||
| Transfers | (2,061 | ) | 2,061 | (512,719 | ) | 512,719 | - | ||||||||
| Disposals | (39,764 | ) | (17,350 | ) | (9,331 | ) | (947 | ) | (67,392 | ) | |||||
| Balance - October 31, 2020 | $ | 15,166 | $ | 711,374 | $ | 45,075 | $ | 2,073,598 | $ | 2,845,213 | |||||
| Additions | - | - | - | 159,016 | 159,016 | ||||||||||
| Balance - January 31, 2021 | $ | 15,166 | $ | 711,374 | $ | 45,075 | $ | 2,232,614 | $ | 3,004,229 | |||||
| ACCUMULATED DEPRECIATION | |||||||||||||||
| Balance - October 31, 2018 | $ | 1,907 | $ | 71,157 | $ | - | $ | 429,896 | $ | 502,960 | |||||
| Amortization for the period | 17,794 | 61,322 | - | 239,819 | 318,935 | ||||||||||
| Balance - October 31, 2019 | $ | 19,701 | $ | 132,479 | $ | - | $ | 669,715 | $ | 821,895 | |||||
| Amortization for the period | 6,360 | 106,441 | - | 824,977 | 937,778 | ||||||||||
| Transfers | (2,405 | ) | 2,405 | - | - | - | |||||||||
| Disposals | (8,490 | ) | (7,301 | ) | - | - | (15,791 | ) | |||||||
| Balance - October 31, 2020 | $ | 15,166 | $ | 234,024 | $ | - | $ | 1,494,692 | $ | 1,743,882 | |||||
| Amortization for the period | - | 32,712 | - | 203,962 | 236,674 | ||||||||||
| Balance - January 31, 2021 | $ | 15,166 | $ | 266,736 | $ | - | $ | 1,698,654 | $ | 1,980,556 | |||||
| NET BOOK VALUE | |||||||||||||||
| As at October 31, 2020 | $ | - | $ | 477,350 | $ | 45,075 | $ | 578,906 | $ | 1,101,331 | |||||
| As at January 31, 2021 | $ | - | $ | 444,638 | $ | 45,075 | $ | 533,960 | $ | 1,023,673 |
At January 31, 2021, production equipment includes $199,293 in assets purchased by lease, and of these assets, $99,435 in assets have associated lease payments remaining to be paid (2019
$220,693 assets purchased by lease and $105,699 in assets with lease payments remaining to be paid). For the three months ended January 31, 2021, $136,072 in amortization costs were included in cost of sales (2020 – $45,397). As at January 31, 2021, $63,966 in amortization costs were included in biological assets (October 31, 2020 – $72,165), and $196,175 in amortization costs were included in inventory (October 31, 2020 – $208,177). Depreciation expense not capitalized left net depreciation expense of $124,381 on the statement of comprehensive loss for the three months ended January 31, 2021 (2020 – $49,677).
Pg 13 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 11. | Long-term Debt |
|---|
Transactions related to the Company’s unsecured promissory notes for the three months ended January 31, 2021 and January 31, 2020, include the following:
| Face value | Carrying amount | Interest payable | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | 150,000 | $ | 150,000 | $ | 7,979 | |||
| 60% - December 5, 2019 (11.4) | 15,000 | 15,000 | - | ||||||
| Interest expense on long-term debt | - | - | 24,854 | ||||||
| Debt repayments | (151,000 | ) | (151,000 | ) | (23,466 | ) | |||
| Proceeds (11.5) | 600,000 | 600,000 | - | ||||||
| Debt repayments (11.5) | (75,126 | ) | (75,126 | ) | - | ||||
| Interest accretion | - | 260,940 | - | ||||||
| Balance - October 31, 2020 | $ | 538,874 | $ | 799,814 | $ | 9,367 | |||
| 10% - November 23, 2020 (11.1) | 125,000 | 125,000 | - | ||||||
| 10% - December 2, 2020 (11.2) | 150,000 | 150,000 | - | ||||||
| 10% - January 27, 2021 (11.3) | 250,000 | 250,000 | - | ||||||
| Interest expense | - | - | 2,788 | ||||||
| Debt repayments | (62,197 | ) | (62,197 | ) | - | ||||
| Interest payments | - | (2,326 | ) | - | |||||
| Interest accretion | - | 119,463 | - | ||||||
| Balance - January 31, 2021 | $ | 1,001,677 | $ | 1,379,754 | $ | 12,155 | |||
| Less: Current Portion | - | 329,166 | 12,155 | ||||||
| January 31, 2021 non-current portion | $ | 1,001,677 | $ | 1,050,588 | $ | - | |||
| 11.1 | On November 23, 2020, debt was issued by Grown Rogue Distribution, LLC with a principal amount of $125,000,<br>interest accrued at 10% per annum, and a maturity date of November 23, 2023. After the maturity date, additional interest payments are<br>due quarterly, at amounts that cause total interest paid over the life of the debt to equal $125,000. The note is reported at amortized<br>cost using an effective interest rate of approximately 27%. | ||||||||
| --- | --- |
| 11.2 | On December 2, 2020, debt was issued by Grown Rogue Gardens, LLC with a principal amount of $150,000,<br>interest accrued at 10% per annum, and a maturity date of December 31, 2021. Interest and principal are payable upon maturity. The maturity<br>date can be extended by up to six-months for a $1,000 fee per $10,000 of principal extended. |
|---|
| 11.3 | On January 27, 2021, debt was issued by Grown Rogue Distribution, LLC with a principal amount of $250,000,<br>interest accrued at 10% per annum, and a maturity date of January 27, 2024. After the maturity date, additional interest payments are<br>due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized<br>cost using an effective interest rate of approximately 27%. |
|---|
| 11.4 | On December 5, 2019, debt was issued with a principal amount of $15,000, with simple interest accrued<br>at a rate of 60% per annum and a maturity of 60 days. On February 18, 2020, all principal and interest were repaid. This amount was owed<br>to the CEO of the Company. |
|---|---|
| 11.5 | Debt issuance by GR Michigan, LLC |
| --- | --- |
On March 20, 2020, debt with a principal amount of $600,000 was received under a secured debt investment of $600,000 (the “Michigan Debt”). The Michigan Debt carries a two-year term, with monthly payments of principal commencing June 15, 2020, and with payments calculated at 1% of cash sales receipts of Golden Harvests (Note 7). Once the principal is repaid, each investor will receive a monthly royalty of 1% per $100,000 invested based upon cash sales receipts of Golden Harvests (see Note 7) (the “Royalty”). The Royalty commences on the date that repayments equal to principal have been made, and continues for a period of two years. The Royalty maximum is two times the amount of principal invested, and the Royalty minimum is equal to the principal loaned; the Company expects to pay the Royalty maximum by July 2023. The Company has the right, but not the obligation, to purchase the Royalty from any lender by paying an amount equal to the original principal invested by such lender. The debt is reported at the carrying value of the probability-weighted estimated future cash flows of all payments under the Michigan Debt agreement at amortized cost using the effective interest method. Interest accreted during the three months ended January 31, 2021 was $113,107 (year ended October 31, 2020 - $260,940), calculated using an effective interest rate of approximately 73%. During the three months ended January 31, 2021 $62,197 was repaid against this debt (year ended October 31, 2020 - $75,126).
Pg 14 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Principal amounts of the Michigan Debt of $50,000 and $100,000 (a total of $150,000), were loaned by officers of the Company. Principal of $150,000 was loaned by a director of the Company.
| 12. | Convertible Debentures |
|---|
Transactions related to the Company’s convertible debentures for the three months ended January 31, 2021 and the year ended October 31, 2020, include the following:
| Face value | Carrying amount | Interest payable | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | 2,179,056 | $ | 1,995,609 | $ | 7,850 | |||
| Interest accretion through July 10, 2020 | - | 246,015 | - | ||||||
| Conversion to common shares (12.1) | (37,733 | ) | (37,733 | ) | - | ||||
| Effects of foreign exchange | (56,341 | ) | (56,341 | ) | |||||
| Deemed extinguishment (12.1) | (2,084,982 | ) | (2,147,550 | ) | - | ||||
| Balance after deemed extinguishment | $ | - | $ | - | $ | 7,850 | |||
| Deemed re-issuance (12.1) | 2,169,135 | 2,464,241 | - | ||||||
| Fair value of derivative liability | - | (787,264 | ) | - | |||||
| Conversion to common shares (12.1) | (75,130 | ) | (75,130 | ) | |||||
| Interest accretion | - | 146,964 | - | ||||||
| Interest payments | - | (44,138 | ) | (7,850 | ) | ||||
| Effects of foreign exchange | - | 35,005 | - | ||||||
| Balance -October 31, 2020 | $ | 2,094,005 | $ | 1,739,678 | $ | - | |||
| Interest accretion | - | 128,899 | - | ||||||
| Interest payments | - | (44,603 | ) | - | |||||
| Effects of foreign exchange | - | 75,106 | - | ||||||
| Balance - January 31, 2021 | $ | 2,094,005 | **** | $ | 1,899,080 | **** | $ | - | **** |
| 12.1 | Modification of terms during the year ended October 31, 2020 and conversions |
|---|
During the year ended October 31, 2020, two conversions of principal were recorded, totaling $112,863 (CAD$150,000), into a total of 1,038,095 common shares.
During the year ended October 31, 2020, the Company extended the maturity of all convertible notes outstanding, such that the following terms applied to all convertible notes outstanding as at October 31, 2020.
| o | Original principal loan amount of $2,169,135 (CAD$2,950,000) due on November 1, 2021 (October 31, 2020<br>balance was $2,138,925 (CAD$2,850,000); |
|---|---|
| o | Interest payable at 8% per annum; |
| --- | --- |
| o | Convertible at CAD$0.125 into shares of the Company; |
| --- | --- |
| o | If at any time while the debentures are outstanding the Company issues securities for cash in a private<br>placement at a price per share lower than CAD$0.125, the conversion price for any unconverted portion of the convertible debentures would<br>be reduced to such lower price per security; and |
| --- | --- |
| o | Convertible at CAD$0.05 if the Company defaults on debt service. |
| --- | --- |
Pg 15 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Pursuant to the modification of the debentures, the following warrant transactions occurred:
| o | Cancellation of 6,818,182 warrants issued pursuant to the convertible debenture agreements outstanding<br>prior to the modification on July 10, 2020; |
|---|---|
| o | Issuance of 6,818,182 new warrants with as exercise price of CAD$0.16 and an expiration date of November<br>1, 2021; |
| --- | --- |
| o | The fair value of the newly issued warrants was recognized as an expense of debt restructuring on the<br>statement of loss and comprehensive loss for the year ended October 31, 2020; |
| --- | --- |
| o | Issuance of 1,590,909 warrants as part of the consideration to the creditors for extending the maturity<br>of the debt. The fair value of these warrants was recognized as an expense of debt restructuring on the statement of loss and comprehensive<br>loss for the year ended October 31, 2020. |
| --- | --- |
As described above, the conversion price of the debenture is subject to change based upon whether a lower-than-CAD$0.125 private placement of equity is completed. This conversion feature was determined to be a derivative liability in accordance with IFRS 9. The value of the derivative liability as at October 31, 2020 was estimated to be $583,390, using the Black-Scholes pricing model with the following assumptions:
| o | Expected dividend yield | Nil |
|---|---|---|
| o | Risk-free interest rate | 0.24% |
| --- | --- | --- |
| o | Expected life | 1.0 year |
| --- | --- | --- |
| o | Expected volatility | 90% |
| --- | --- | --- |
The fair value of the deemed reissuance was allocated as follows:
| CAD | |||
|---|---|---|---|
| Convertible debentures, principal | $ | 2,280,671 | |
| Conversion option | 1,070,670 | ||
| $ | 3,351,341 |
All values are in US Dollars.
The discounted value of the loan after the modifications of terms was more than 10% lower than the carrying value of the loan and was therefore deemed an extinguishment and reissuance under IFRS 9. The costs of completing the modification were expensed.
The loss of restructuring this debt, as recognized on the statement of loss and comprehensive loss for the year ended October 31, 2020, was comprised of the following:
| Composition of loss from debt restructuring | ||
|---|---|---|
| Difference: carrying value of deemed prior debt and deemed reissued debt | $ | 337,997 |
| Replacement warrants - quantity 6,818,182 | 346,792 | |
| Consideration warrants - quantity 1,590,909 | 80,918 | |
| Total loss from deemed restructuring | $ | 765,707 |
The Company recorded a gain of $244,572 upon derecognition of the Company’s previously recorded derivative liability upon modification of the debt.
Pg 16 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The derivative liability is remeasured at fair value through profit and loss at each reporting period using the Black-Scholes pricing model. The fair value at January 31, 2021, was $930,195 (October 31, 2020 - $583,390), and the unrealized loss from remeasurement for the three months ended January 31, 2021 was $319,627 (2020 - $Nil).
| 13. | Share Capital, Shares Issuable, and subscriptions payable |
|---|
The Company is authorized to issue an unlimited number of common shares at no par value and an unlimited number of preferred shares issuable in series.
During the three months ended January 31, 2021, the following share transactions occurred:
| 13.1 | The Company issued 18,044 common shares with a fair value of $3,441, and also recorded shares issuable<br>with a fair value of $3,753, for employment compensation and director services for shares which had not yet been issued at January 31,<br>2021. |
|---|
| 13.2 | The Company issued 2,031,784 common shares with a fair value of $200,000 in the first tranche of a private<br>placement. The second tranche of the private placement closed subsequent to January 31, 2021, and the Company received $125,000 of second<br>tranche proceeds during the three months ended January 31, 2021. |
|---|
| 13.3 | The Company issued 25,000 shares with a fair value of $2,103 in order to extend the Golden Harvests payment<br>described at Note 7.2. |
|---|
| 13.4 | On January 14, 2021, the Company agreed to issue 400,000 shares with a fair value of $48,900 to a lender<br>of Golden Harvests in order to support Golden Harvests’ (Note 7) business development. As at January 31, 2021, the shares had not<br>yet been issued. |
|---|
| 13.5 | On November 2, 2020, a member of Golden Harvests earned 500,000 shares with a fair value of $48,900, based<br>upon achievement of a production target. As at January 31, 2021, the shares had not yet been issued. |
|---|
During the three months ended January 31, 2020, the following share transactions occurred:
| 13.6 | The Company issued 1,058,750 shares with a fair value of $71,910 as compensation to directors, officers,<br>and consultants of the Company. |
|---|
Pg 17 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 14. | Warrants |
|---|
During the three months ended January 31, 2021, no new warrants were issued. The following table summarizes the warrant activities for the three months ended January 31, 2021:
| Number | Weighted Average Exercise Price | |||||
|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | 27,584,605 | 0.53 | ||||
| Issued pursuant to private placement | 5,000,000 | 0.13 | ||||
| Issued pursuant to private placement | 10,000,000 | 0.13 | ||||
| Expired | (17,183 | ) | (14.05 | ) | ||
| Cancellation of prior warrants associated with convertible debt (Note 12.1) | (6,818,182 | ) | 0.55 | |||
| Issuance of new warrants associated with convertible debt (Notes 12.1) | 6,818,182 | 0.16 | ||||
| Consideration warrants for convertible debt maturity extension (Notes 12.1) | 1,590,909 | 0.16 | ||||
| Balance - October 31, 2020 | 44,158,331 | 0.33 | ||||
| Expiration of broker warrants | (757,125 | ) | 0.44 | |||
| Expiration of warrants | (17,843,998 | ) | 0.55 | |||
| Balance - January 31, 2021 | 25,557,208 | 0.24 |
As at January 31, 2021, the following warrants were issued and outstanding:
| Warrants | Remaining contractual | |||||
|---|---|---|---|---|---|---|
| Exercise price | outstanding | life (years) | Expiry date | |||
| $ | 0.16 | 8,409,091 | 0.8 | November 01, 2021 | ||
| 0.13 | 5,000,000 | 1.0 | February 10, 2022 | |||
| 0.13 | 10,000,000 | 1.3 | May 15, 2022 | |||
| 0.44 | 2,148,117 | 2.4 | June 28, 2023 | |||
| $ | 0.17 | 25,557,208 | 1.2 | |||
| 15. | Stock Options | |||||
| --- | --- |
The following table summarizes the stock option movements for the three months ended January 31, 2021:
| Number | Exercise price (CAD) | |||
|---|---|---|---|---|
| Balance - October 31, 2019 | 650,000 | |||
| Granted to employees | 3,575,000 | |||
| Forfeitures by service provider | (150,000 | ) | ||
| Forfeitures by employees | (355,000 | ) | ||
| Balance - October 31, 2020 | 3,720,000 | |||
| Granted to employees | 700,000 | |||
| Forfeitures by employees | (68,750 | ) | ||
| Balance - January 31, 2021 | 4,351,250 |
All values are in US Dollars.
Pg 18 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 15.1 | During the three months ended January 31, 2021, 700,000 options were granted (2020 – nil) to employees. |
|---|
The fair value of the options granted during the three months ended January 31, 2021, was approximately $36,500 (CAD$47,078) which was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil% |
|---|---|---|
| o | Risk-free interest rate | 0.33% |
| --- | --- | --- |
| o | Expected life | 4.0 years |
| --- | --- | --- |
| o | Expected volatility | 96% |
| --- | --- | --- |
The vesting terms of options granted during the three months ended January 31, 2021 are set out in the table below:
| Number granted | Vesting terms |
|---|---|
| 500,000 | 1/2 on grant date, 1/2 on first anniversary of grant date |
| 200,000 | 1/2 on second anniversary of grant date, 1/2 on the fourth anniversary of grant date |
| 700,000 |
As at January 31, 2021 the following Stock Options were issued and outstanding (all prices are in Canadian Dollars unless otherwise noted):
| ****<br><br>Exercise price | Options outstanding | Number exercisable | Remaining Contractual Life (years) | Expiry date | ||||
|---|---|---|---|---|---|---|---|---|
| $ | 0.44 | 500,000 | 500,000 | 0.9 | January 01, 2022 | |||
| 0.15 | 3,151,250 | 2,083,750 | 3.4 | July 09, 2024 | ||||
| 0.15 | 500,000 | 250,000 | 3.8 | December 01, 2024 | ||||
| 0.15 | 200,000 | - | 3.8 | November 18, 2024 | ||||
| $ | 0.19 | 4,351,250 | 2,833,750 | 3.2 | ||||
| 16. | Changes in Non-Cash Working Capital | |||||||
| --- | --- |
The changes to the Company’s non-cash working capital for the three months ended January 31, 2021 and 2020 are as follows:
| Three months ended January 31, | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Accounts receivable | $ | (66,866 | ) | $ | (10,981 | ) |
| Inventory | 250,762 | 718,792 | ||||
| Prepaid expenses and other assets | (9,244 | ) | (13,903 | ) | ||
| Accounts payable and accrued liabilities | 221,616 | 245,387 | ||||
| Interest payable | (44,141 | ) | 18,023 | |||
| Unearned revenue | 84,600 | (35,000 | ) | |||
| Total | $ | 436,727 | $ | 922,318 |
Pg 19 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 17. | Supplemental Cash Flow Disclosure | |||
|---|---|---|---|---|
| Three months ended January 31, | 2021 | 2020 | ||
| --- | --- | --- | --- | --- |
| Interest paid | $ | 50,159 | $ | - |
| Fair value of common shares issued & issuable for services | 56,094 | 71,910 | ||
| Fair value of common shares issued to extend Golden Harvests Option payment | 2,103 | - | ||
| Fair value of common shares issued to Golden Harvests creditor | 36,310 | - | ||
| 18. | Related Party Transactions | |||
| --- | --- |
During the three months ended January 31, 2021, the Company incurred the following related party transactions:
| 18.1 | Through its wholly owned subsidiary, GRU Properties, LLC, the Company leased a property located in Trail,<br>Oregon owned by the Company’s President and CEO. The lease was extended during the three months ended January 31, 2021 and expires on<br>December 31, 2025. Rent of $19,000 was incurred for the three months ended January 31, 2021 (2020 - $18,500). The Company had $45,000<br>(October 31, 2020 - $45,000) owing under this lease at January 31, 2021 from lease payments which the CEO agreed to defer (Note 8). The<br>lease balance at January 31, 2021, was $275,707 (October 31, 2020 - $12,532). |
|---|
| 18.2 | The Company incurred expenses of $11,250 (2020 - $12,000) for services provided by the spouse of the CEO.<br>At January 31, 2021, accounts and accrued liabilities payable to this individual were $3,750 (October 31, 2020 - $1,946). During the year<br>ended October 31, 2020, this individual was granted 500,000 options which vested on the grant date. |
|---|
| 18.3 | Key management personnel consist of the President and CEO; the former Chief Strategy Officer; the CFO<br>of GR Unlimited; the Chief Market Officer; the Chief Accounting Officer; and the CFO of Grown Rogue International, Inc. The compensation<br>paid or payable to key management for services for the periods as follows: | |||
|---|---|---|---|---|
| Three months ended January 31, | 2021 | 2020 | ||
| --- | --- | --- | --- | --- |
| Salaries and consulting fees | $ | 164,675 | $ | 100,500 |
| Share-based compensation | 14,296 | 10,188 | ||
| Stock option expense | 16,806 | - | ||
| Total | $ | 195,777 | $ | 110,688 |
Stock options granted to key management personnel and close family members of key management personnel include the following options, granted during the year ended October 31, 2020: 750,000 options to the CFO of GR Unlimited; 750,000 options to the Chief Market Officer; and 250,000 option to the Chief Accounting Officer.
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Accounts payable and accrued liabilities due to key management at January 31, 2021 totaled $510,455 (October 31, 2020 - $441,424), including the accrued liabilities described at Note 8.
| 18.4 | Debt balances and movements with related parties |
|---|
The following table sets out portions of debt pertaining to related parties:
| CEO | CFO of GR Unlimited LLC | Directors | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | - | $ | - | $ | - | $ | - | ||||
| Borrowed | 50,000 | 100,000 | 150,000 | 300,000 | ||||||||
| Interest | 21,745 | 43,491 | 65,236 | 130,472 | ||||||||
| Payments | (10,252 | ) | (20,504 | ) | (30,756 | ) | (61,512 | ) | ||||
| Balance - October 31, 2020 | $ | 61,493 | $ | 122,987 | $ | 184,480 | $ | 368,960 | ||||
| Borrowed | - | - | - | - | ||||||||
| Interest | 9,426 | 18,851 | 28,277 | 56,554 | ||||||||
| Payments | (1,191 | ) | (2,383 | ) | (3,574 | ) | (7,148 | ) | ||||
| Balance - January 31, 2021 | $ | 69,728 | $ | 139,455 | $ | 209,183 | $ | 418,366 |
Pursuant to the loan agreements transacted during the year ended October 31, 2020, the CEO, CFO of GR Unlimited LLC, and a director obtained 5.5%; 1%; and 2.5% of GR Michigan LLC, respectively; third parties obtained 4% as part of the same loan agreements (Note 11.5), such that GR Michigan has a 13% non-controlling interest (Note 23.2).
On November 23, 2020, an individual who became a director purchased 6.25 newly issued equity units of Grown Rogue Distribution, LLC for $250,000 (Note 23.3), out of the total of 9.375 such units issued during the three months ended January 31, 2021.
| 19. | Financial Instruments |
|---|
| 19.1 | Market Risk (including interest rate risk and currency risk) |
|---|
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
| 19.1.1 | Interest Rate Risk |
|---|
At January 31, 2021, the Company’s exposure to interest rate risk relates to long-term debt, convertible promissory notes, and finance lease obligations; each of these items bears interest at a fixed rate.
| 19.1.2 | Currency Risk |
|---|
As at January 31, 2021, the Company had accounts payable and accrued liabilities of CAD$567,665 and convertible debentures of CAD$2,850,000, as well as a derivative liability of CAD$1,188,748. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar.
Pg 21 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 19.2 | Credit Risk |
|---|
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
The carrying amount of cash, accounts receivable, and other receivables represent the Company’s maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 |
| Accounts Receivable | 238,987 | 172,121 | ||
| Total | $ | 1,517,388 | $ | 389,909 |
The allowance for doubtful accounts at January 31, 2021 is $1,000 (October 31, 2020 - $7,425).
As at January 31, 2021 and October 31, 2020, the Company’s trade accounts receivable and other receivable were aged as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Current | 79,156 | 66,660 | ||||
| 1-30 days | 74,642 | 49,204 | ||||
| 31 days-older | 89,189 | 63,682 | ||||
| Allowance for doubtful accounts | (1,000 | ) | (7,425 | ) | ||
| Total trade accounts receivable | $ | 238,987 | $ | 172,121 |
The change in the provision for expected credit losses is as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Balance, beginning of period | $ | 7,425 | $ | 129,131 | ||
| Additional allowance (reduction) | (6,017 | ) | 10,349 | |||
| Amounts collected | 12,442 | (6,757 | ) | |||
| Amounts used | - | (125,298 | ) | |||
| Balance, end of period | $ | 1,000 | $ | 7,425 |
| 19.3 | Liquidity Risk |
|---|
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
Pg 22 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At January 31, 2021, the Company’s working capital accounts were as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | ||||
|---|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 | |
| Current assets excluding cash | 1,430,316 | 1,616,987 | |||
| Total current assets | 2,708,717 | 1,834,775 | |||
| Current liabilities | 4,706,314 | 1,799,104 | |||
| Working capital (deficit) | $ | (1,997,597 | ) | $ | 35,671 |
The contractual maturities of the Company’s accounts payable and accrued liabilities, debt, leases, unearned revenue, and derivative liabilities occur over the next three years as follows, excluding the redemption liabilities of $375,000, which do not have a scheduled maturity:
| Year 1 | Years 2 - 3 | |||
|---|---|---|---|---|
| Accounts payable and accrued liabilities | $ | 1,275,456 | $ | 389,816 |
| Debt and convertible debentures | 2,228,246 | 1,050,588 | ||
| Lease liabilities | 175,662 | 740,731 | ||
| Interest payable | 12,155 | - | ||
| Unearned revenue | 84,600 | |||
| Derivative liabilities | 930,195 | - | ||
| Total | $ | 4,706,314 | $ | 2,181,135 |
| 19.4 | Fair Values |
|---|
The carrying amounts for the Company’s cash, accounts receivable, prepaid and other assets, accounts payable and accrued liabilities, current portions of debt and debentures payable, unearned revenue, and interest payable approximate their fair values because of the short-term nature of these items.
| 19.5 | Fair Value Hierarchy |
|---|
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Pg 23 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The carrying values of the financial instruments at January 31, 2021 are summarized in the following table:
| Level in fair value hierarchy | Amortized Cost | FVTPL | |||
|---|---|---|---|---|---|
| Financial Assets | |||||
| Cash | Level 1 | $ | 1,278,401 | $ | - |
| Accounts receivable | Level 2 | 238,987 | - | ||
| Marketable securities | Level 1 | - | 914,970 | ||
| Financial Liabilities | |||||
| Accounts payable and accrued liabilities | Level 2 | $ | 1,665,272 | $ | - |
| Convertible debentures | Level 2 | 1,899,080 | - | ||
| Debt | Level 2 | 1,379,754 | - | ||
| Interest payable | Level 2 | 12,155 | - | ||
| Derivative liabilities | Level 2 | - | 930,195 | ||
| Redemption liabilities | Level 2 | 375,000 | - |
During the three months ended January 31, 2021 there were no transfers of amounts between levels.
| 20. | General and Administrative Expenses |
|---|
General and administrative expenses for the three months ended January 31, 2021 and 2020 are as follows:
| Three months ended January 31, | 2021 | 2020 | ||
|---|---|---|---|---|
| Office, banking, travel, and overheads | $ | 122,546 | $ | 117,685 |
| Professional services | 136,428 | 165,352 | ||
| Salaries and benefits | 493,504 | 387,731 | ||
| Total | $ | 752,478 | $ | 670,768 |
| 21. | Capital Disclosures | |||
| --- | --- |
The Company includes equity, comprised of share capital, contributed surplus (including the fair value of equity instruments to be issued), equity component of convertible promissory notes and deficit, in the definition of capital.
The Company’s objectives when managing capital are as follows:
| o | to safeguard the Company’s assets and ensure the Company’s ability to continue as a going<br>concern. |
|---|---|
| o | to raise sufficient capital to finance the construction of<br>its production facility and obtain license to produce recreational marijuana; and |
| --- | --- |
| o | to raise sufficient capital to meet its general and administrative expenditures. |
| --- | --- |
Pg 24 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The Company manages its capital structure and makes adjustments to it, based on the general economic conditions, the Company’s short-term working capital requirements, and its planned capital requirements and strategic growth initiatives.
The Company’s principal source of capital is from the issuance of common shares. In order to achieve its objectives, the Company expects to spend its working capital, when applicable, and raise additional funds as required.
The Company does not have any externally imposed capital requirements.
| 22. | Segment Reporting |
|---|
Geographical information relating to the Company’s activities is as follows:
| Revenue – three months ended January 31, | 2021 | 2020 | ||
|---|---|---|---|---|
| United States | $ | 1,051,185 | $ | 1,106,296 |
| Canada | - | - | ||
| Total | $ | 1,105,185 | $ | 1,106,296 |
| Non-current assets as at: | January 31, 2021 | October 31, 2020 | ||
| --- | --- | --- | --- | --- |
| United States ^(1)^ | $ | 2,996,486 | $ | 1,929,643 |
| Canada | - | - | ||
| Total | $ | 2,996,486 | $ | 1,929,643 |
(1) Includes: plant and equipment
Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues. During the three months ended January 31, 2021, one major customer accounted for 17% of revenues (2020 – three major customers accounted for 43% of annual revenues).
Pg 25 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 23. | Non-controlling Interests |
|---|
The changes to the non-controlling interest for the years ended January 31, 2021 and October 31, 2020 are as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Balance, beginning of period | $ | (33,383 | ) | $ | 19,538 | |
| Elimination of GRD Cali, LLC non-controlling interest | - | 22,128 | ||||
| Non-controlling interest’s 40% share of GRD Cali, LLC | - | (36,366 | ) | |||
| Non-controlling interest’s 40% share of Idalia, LLC | (302 | ) | (129 | ) | ||
| Non-controlling interest’s 13% share of GR Michigan, LLC | 5,742 | (38,554 | ) | |||
| Non-controlling interest’s 8.6% share of Grown Rogue Distribution, LLC | 374,456 | - | ||||
| Balance, end of period | $ | 346,513 | $ | (33,383 | ) |
| 23.1 | Non-controlling interest in Idalia, LLC |
|---|
The following is summarized financial information for Idalia, LLC:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Non-current assets | $ | 9,475 | $ | 10,230 |
| Net loss for the period | 755 | 322 |
| 23.2 | Non-controlling interest in GR Michigan, LLC: | |||
|---|---|---|---|---|
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
| --- | --- | --- | --- | --- |
| Current assets | $ | 119,913 | $ | 74,961 |
| Non-current assets | 609,817 | 603,895 | ||
| Current liabilities | 104,385 | 489,266 | ||
| Advances from parent | 732,429 | 68,994 | ||
| Net loss for the period | 48,867 | 296,570 |
Nine percent (9%) of GR Michigan LLC is owned by officers and directors of the Company; this ownership is pursuant to an agreement that included their loans made to GR Michigan LLC (Note 18.4). The total non-controlling ownership, including ownership by officers and directors, is 13%.
Pg 26 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 23.3 | Non-controlling interest in Grown Rogue Distribution, LLC |
|---|
The following is summarized financial information for Grown Rogue Distribution, LLC:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Non-current assets | $ | 49,665 | $ | - |
| Current liabilities | 60,866 | - | ||
| Non-current liabilities | 318,159 | - | ||
| Net loss for the period | 6,351 | - |
During the three months ended January 31, 2021, the Company sold an approximately 8.6% interest in Grown Rogue Distribution, LLC (“GR Distribution”) for $375,000. The interest was comprised of 9.375 newly issued equity units (“GR Distribution Units”) and each GR Distribution Unit was sold for $40,000. After the issuance, 109.375 GR Distribution Units were issued and outstanding. Of the 9.375 units issued, 6.25 were issued to a director of the Company, for proceeds of $250,000. The GR Distribution Units are puttable by the subscribers to the Company and callable from the subscribers by the Company, and can be settled in Company shares at a value agreed upon by the Company and the GR Distribution non-controlling interests, or in cash, or in a combination of cash and shares of the Company’s choice. The Company has accordingly recognized redemption liabilities of $375,000 at January 31, 2021 (2020 - $Nil), recorded by way of a reduction in Company contributed surplus.
| 24. | Subsequent Events |
|---|
On February 15, 2021, Grown Rogue Distribution LLC (“GR Distribution”) sold 2.5 equity units for US$40,000 per unit each for total proceeds of $100,000. After this transaction, GR Distribution had 111.875 equity units outstanding, of which the Company owns 100. The unit holders have the future right to convert their units in the subsidiary, at a price agreed upon by the Company and the subscriber, into common shares of the Company at the greater of CAD$0.20 or the maximum permitted discount under the policies of the Canadian Securities Exchange at the time of conversion.
On February 5, 2021 the Company completed the second tranche of a private placement; the second tranche was comprised of 8,200,000 units at CAD$0.16 per unit for proceeds of CAD$1,323,000. Each unit was comprised of one common share and one warrant to purchase one common share. Each warrant has an exercise price of CAD$0.20 and a term of two years. The second tranche included subscriptions by the following related parties: the CEO subscribed to 1,600,000 units; the CFO of GR Unlimited subscribed to 2,000,000 units; a key Company operations manager subscribed to 1,000,000 units; and PBIC subscribed to 2,000,000 units.
Subsequent to January 31, 2021, the Company’s subsidiary, GR Michigan, LLC, terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. Canopy has already received approval by the State of Michigan for licensing and this will allow the Company to accelerate its option exercise to obtain a 60% interest in Golden Harvests. Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company. The Company has an option to acquire an 87% membership interest in Canopy, from GRIN’s CEO, which when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had with GR Michigan.
Pg 27 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
On February 5, 2021, the Company agreed to acquire (the “HSCP Transaction”) substantially all of the assets of the growing and retail operations of High Street Capital Partners, LLC (“HSCP”) for total consideration of $3,000,000, payable in a series of tranches, subject to receipt of all necessary regulatory and other approvals, not to exceed 18 months from the date of the agreement evidencing the HSCP. The Company also executed a management services agreement (“MSA”) with HSCP pursuant to which the Company agreed to pay $21,500 per month to HSCP as consideration for their services rendered thereunder, until the completion of the HSCP Transaction. In accordance with the MSA, the Company will own all production from the growing assets derived from the growing operations of HSCP. The Company will operate the growing facility of HSCP under the MSA until receipt of the necessary regulatory approvals relating to the acquisition by the Company of HSCP’s growing assets. The Company will have no involvement with the retail operations until the HSCP Transaction is completed.
On March 2, 2021, holders of convertible debentures converted principal of CAD$491,666 into common shares at CAD$0.125 per share, and accordingly the Company issued 3,933,328 common shares to those holders. After this conversion, the undiscounted principal amount of convertible debentures outstanding was approximately $1.9 million (CAD$2,358,334).
On March 17, 2021, the Company executed a lease for a new outdoor grow property. The lease term is through February 28, 2024. The annual lease cost is $40,000 per year, due in two equal semiannual payments on March 1^st^ and June 1^st^. There are no extension options in this agreement for periods after February 28, 2024. Management will transfer one of its existing outdoor growing licenses to this new location, and cease outdoor grow operations at the prior location. The remaining term at the prior location is through December 31, 2021, and undiscounted remaining payments from February 1, 2021 to the end of the lease term total $41,800.
Brokered private placement of special warrants
On March 5, 2021, the Company announced completion of a brokered private placement offering through the issuance of an aggregate of 21,056,890 special warrants (each a “Special Warrant”) at a price of $0.225 (the “Issue Price”) per Special Warrant for aggregate gross proceeds of approximately $3.7 million (CAD$4,737,800) (the “Offering”). The Offering was led by Eight Capital (the “Agent”), as sole agent and bookrunner.
Each Special Warrant entitles the holder thereof to receive, for no additional consideration, one unit of the Company (each, a “Unit”) on the exercise or deemed exercise of the Special Warrant. Each Unit is comprised of one common share in the capital of the Company (each, a “Common Share”) and one Common Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of CAD$0.30 for a period of twenty-four (24) months following the closing date (the “Closing Date”) of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants.
The Special Warrants are exercisable by the holders thereof at any time for no additional consideration and all unexercised Special Warrants will be deemed to be exercised, without any further action or payment of additional consideration by the holder thereof, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities (the “Securities Commissions”) for a final short form prospectus qualifying distribution of the Common Shares and Warrants underlying the Special Warrants (the “Qualifying Prospectus”), and (ii) July 6, 2021.
Pg 28 of 29
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
If the Company has not received a receipt from the Securities Commissions for the Qualifying Prospectus on or before April 5, 2021, each unexercised Special Warrant will thereafter entitle the holder to receive upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units (instead of one (1) Unit).
As consideration for the services rendered by the Agent in connection with the Offering, the Company paid to the Agent a cash commission of $253,746 and issued the Agent an aggregate of 1,127,758 broker warrants of the Company (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “Compensation Options”). As consideration for certain advisory services provided in connection with the Offering, the Company paid to the Agent an advisory fee of $25,500 and issued the Agent an aggregate of 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options.
Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price for a period of twenty-four (24) months following the Closing Date, subject to adjustment in certain events. Each Compensation Unit shall be comprised of one Common Share and one common share purchase warrant of the Company (a “Compensation Warrant”). Each Compensation Warrant shall entitle the holder thereof to purchase one common share in the capital of the Company (a “Compensation Warrant Share”) at a price of CAD$0.30 at any time before 5:00 p.m. (Toronto time) on the day that is twenty-four (24) months following the Closing Date, subject to adjustment in certain events.
Prior to the filing of the Qualifying Prospectus and the deemed exercise of the Special Warrants, the securities issued under the Offering will be subject to a four month hold period from the date of closing of the Offering in addition to any other restrictions under applicable law.
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Exhibit 10
GROWN ROGUE INTERNATIONAL INC.
FORM 51-102F1
MANAGEMENT DISCUSSION & ANALYSIS
FOR THE THREE MONTHS ENDED JANUARY 31, 2021
TABLE OF CONTENTS
| Management’s Responsibilities for Financial Reporting | 1 |
|---|---|
| Forward-Looking Statements | 2 |
| Description of Business | 2 |
| Selected Annual Information | 8 |
| Results of Operations | 8 |
| Summary of Quarterly Results | 11 |
| Liquidity | 11 |
| Capital Resources | 15 |
| Off-Balance Sheet Arrangements | 16 |
| Transactions with Related Parties | 16 |
| Other Selected Financial Information | 18 |
| Outstanding Share Data | 20 |
| Critical Accounting Judgments and Estimation Uncertainties | 20 |
| Newly Adopted Accounting Pronouncements | 21 |
| Financial Instruments and Other Risk Factors | 21 |
| Subsequent Events | 23 |
| Regulatory Disclosure | 25 |
| Internal Control over Financial Reporting and Disclosure Controls | 37 |
| i |
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This Management Discussion and Analysis (“MD&A”) made as of April 1, 2021 should be read in conjunction with the unaudited condensed interim consolidated financial statements of Grown Rogue International Inc. (the “Company”, (“we”, “our”, or “us”) for the three months ended January 31, 2021 and 2020 (the “Reporting Period”), and the related notes thereto (the “Financial Statements”). The Company’s Financial Statements are presented on a consolidated basis with its wholly-owned subsidiaries: Grown Rogue Unlimited, LLC (“GR Unlimited”) and GR Unlimited’s wholly-owned subsidiaries Grown Rogue Gardens, LLC (“GR Gardens”), GRU Properties, LLC (“GRU Properties”), and GRIP, LLC (“GRIP”); as well as GR Unlimited’s 87% interest in GR Michigan, LLC, GR Unlimited’s 91.4% interest in Grown Rogue Distribution, LLC (“GR Distribution”), and GR Unlimited’s 60% interest in Idalia, LLC. The Company’s reporting currency is the United States dollar and all amounts in this MD&A are expressed in United States dollars unless otherwise noted. The use of “CAD$” refers to Canadian dollars.
The three months ended January 31, 2021 and 2020 are referred to herein as “Q1 2021” and “Q1 2020,” respectively.
The Company’s comparative information included in this MD&A has been prepared in accordance with IFRS.
Additional information relating to the Company is also available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. The common shares of GRIN are listed on the Canadian Securities Exchange under the symbol “GRIN”.
Management’s Responsibilities for Financial Reporting
The Financial Statements have been prepared by management in accordance with IFRS and have been approved by the Company’s board of directors (the “Board”). The integrity and objectivity of the Financial Statements are the responsibility of management. In addition, management is responsible for ensuring that the information contained in the MD&A is consistent where appropriate, with the information contained in the Financial Statements.
The Financial Statements may contain certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis to ensure that the Financial Statements are presented fairly in all material respects.
As the Company is a Venture Issuer (as defined under under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) (“NI 52-109”), the Company and Management are not required to include representations relating to the evaluation, design, establishment and/or maintenance of disclosure controls and procedures (“DC&P”) and/or Internal Controls over Financial Reporting (“ICFR”), as defined in NI 52-109, nor has it completed such an evaluation. Inherent limitations on the ability of the certifying officers to design and implement on a cost-effective bases DC&P and ICFR for the issuer may result in additional risks of quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
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Forward-Looking Statements
This MD&A contains information and projections based on current expectations. Certain statements herein may constitute “forward-looking” statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such statements use such words as “will”, “may”, “could”, “intends”, “potential”, “plans”, “believes”, “expects”, “projects”, “estimates”, “anticipates”, “continue”, “potential”, “predicts” or “should” and other similar terminology. These statements reflect expectations regarding future events and performance but speak only as of the date of this MD&A. Forward-looking statements include, among others, statements with respect to planned acquisitions, strategic partnerships or other transactions and expansions not yet concluded; plans to market, sell and distribute products; market competition; plans to retain and recruit personnel; the ability to secure funding; and the ability to obtain regulatory and other approvals are all forward-looking information. These statements should not be read as guarantees of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from those implied by such statements.
There can be no assurance that any intended or proposed activity or transaction will occur or that, if any such action or transaction is undertaken, it will be completed on terms currently intended by the Company. The Company assumes no responsibility to update or revise forward-looking information to reflect new events or circumstances unless required by law.
Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. The forward-looking statements herein speak only as of the date hereof. Actual results could differ materially from those anticipated due to a number of factors and risks including those described in this MD&A under “Risk Factors” and in section 17 of the Company’s Listing Statement dated November 15, 2018 which can be found under the Company’s profile on www.sedar.com.
Description of Business
Grown Rogue, headquartered in Medford, Oregon, is a multi-state cannabis company curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies their products based on “Mind, Body & Mood” effects which resonates with consumers from the so-called canna-curious through the canna-serious. Grown Rogue is committed to educating, inspiring and empowering consumers with information about cannabis so they can “enhance experiences” by selecting the right product. Grown Rogue is focused on high quality, low-cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates. With its best-in-class production methods, low cost cultivation, award winning product, and geographic location in the famed Emerald Triangle, Grown Rogue is well positioned to become a leading flower producer in the cannabis sector.
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Oregon
Grown Rogue, through its wholly owned subsidiary, GR Gardens, operates four cultivation facilities, in Oregon comprising approximately 130,000 sq ft of cultivation area, that currently service the Oregon recreational marijuana market: “Manzanita Glen” (sungrown), “Trail’s End” (sungrown), and two state-of-the-art indoor facilities (“Warehouse 1” and “Warehouse 2”). Warehouse 2 is comprised of assets being operated under a management agreement that was signed during Q2 2021 which will approximately double our indoor production capacity. GR Gardens currently holds three producer licenses in Oregon from the Oregon Liquor Control Commission (“OLCC”), for the three properties described above, one wholesaler license, and one processor license. GR Gardens is currently not operating the processor license. Warehouse 2 also has a cultivation license and is awaiting the transfer of a wholesale and processing license to this location.
GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. Manzanita Glen and Trails End are both outdoor, sungrown farms, with 40,000 sq ft of flowering canopy, for a total of 80,000 square feet, sitting on a combined land package of approximately 45 acres.
Grown Rogue’s Oregon business is headquartered in the world-renowned Emerald Triangle, which is known world-wide for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. The company capitalizes on this ideal outdoor growing environment to produce high-quality, low-cost cannabis flower. The two sungrown farms produce one crop per year per farm, which is planted in June and harvested in October.
Warehouse 1, an approximately 17,000 square-foot indoor facility, produces high-quality indoor flower through controlled atmosphere environment operations. By carefully controlling temperature, humidity, carbon dioxide levels, and other criteria, Grown Rogue is able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. We have recently completed final construction of Warehouse 1, which now has eight dedicated flower rooms, which will allow for approximately four harvests per month.
Warehouse 2 added 30,000 square feet of indoor productive space, and we estimate production of 2,400 pounds from this facility in the remainder of 2021 (not a full year, having begun to operate the assets in February of 2021). After planned improvements, annual productive capacity will be increased to as much as 5,500 pounds. Warehouse 2 is a short distance from Warehouse 1, which is a benefit to operating efficiency, and it is equipped with state-of-the-art equipment which facilitates the implementation of best practices already developed at Warehouse 1.
The total annual production capacity for Grown Rogue’s Oregon operations, based on the current constructed capacity, will range between 12,000 and 14,000 pounds, depending upon various factors, including sungrown seasonality and strain performance.
Michigan
In February 2020, Grown Rogue, through its subsidiary GR Michigan, LLC, signed an Option to Purchase Agreement (“Option”) to acquire a 60% ownership in Golden Harvests, LLC (“Golden Harvests”). Golden Harvests is a Michigan-based, fully licensed, and operating cultivation company located in Bay City, Michigan. Golden Harvests has an approximately 80,000 square foot facility of which approximately 25,500 square feet is operational.
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With the addition of Golden Harvests, Grown Rogue will be adding an additional 3,000 pounds of high-quality indoor flower production capacity in 2021 and an anticipated 5,500 pounds of production capacity in 2022. Grown Rogue will oversee this capacity under the terms of a management services agreement prior to exercising its purchase option once regulatory approval is received.
Subsequent to January 31, 2021, the Company’s terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. These agreements and related agreements will provide identical economic rights as the Company originally had in GR Michigan. These transactions are described under the section ‘Subsequent Events,’ below.
Product
Grown Rogue produces a range of cultivars for consumers to enjoy (traditionally classified as indicas, sativas, and hybrids). Grown Rogue has a mix of “core” and “limited” strains to provide consumers with consistent and unique purchasing options at their local dispensary. Grown Rogue flower has won multiple awards in Oregon, which is one of the most competitive cannabis production environments in the world, including the prestigious Growers Cup competition on two occasions. Grown Rogue also won 1^st^ place for highest THC content, 1^st^ place for highest terpene content, and 3^rd^ place in the grower’s choice category 2018 and won 1^st^ place for highest terpene content in 2019. In addition, the company believes it achieved an outdoor production potency record in the state of Oregon, when its Monkey Train cultivar tested at a THC potency of 35.13%.
Genetics
We are committed to developing unique, proprietary genetics and have allocated research and development space to develop new strains, while also phenotype hunting to identify new and exciting strain options that will resonate with consumers. Grown Rogue has developed a compelling mix of proprietary strains, along with a library of “fan favorites” to ensure that consumer and dispensary demand will remain strong for its flower and flower-derived products. All Grown Rogue genetics are rigorously tested to establish the genetic makeup of each strain in its portfolio. We continue to focus on bringing new unique genetics to ensure a steady flow of innovative flower and flower products.
Distribution and Sales
Grown Rogue distributes product directly to Oregon dispensaries to provide quality, consistency, and product variety year-round. Grown Rogue’s sales team works closely with dispensary owners and intake managers to provide consistent product, competitive prices, and service using sales techniques from other industries such as pharmaceutical and liquor.
By way of example, Grown Rogue has developed end user product marketing collateral and other educational information regarding Grown Rogue products as part of all sales with dispensaries that include strain type, testing results, information on the product and other necessary information to clearly articulate the product being provided. Each product is uniquely packaged all while maintaining brand consistency across the product suite.
Grown Rogue works with dispensary owners to develop promotional opportunities for the retail customers and bud tenders. Grown Rogue provides detailed tutorials to the staff and owners of the dispensaries around the product and how it is grown, processed, cured, packaged and other items so that they are intimately familiar with the Grown Rogue process. Grown Rogue also invites dispensary owners and operators to Grown Rogue’s operating facilities so they can see first-hand the methods and processes used to create the product.
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Branding
Developing compelling branding that engages, inspires, and creates transparency and trust with consumers is one of the most important aspects of building a successful cannabis company. Cannabis product branding has been evolving from promising high-quality flower, to providing descriptions of the effect a consumer should expect from a particular product.
Grown Rogue was one of the first brands in the United States to go to market with this type of branding as part of the ROGUE Categorization: Relax, Optimize, Groove, Uplift and Energize. The focus was to provide consumers with “The Right Experience, Every time” made easier by a simple product description that was not cannabis based, such as “sativa” or “indica”.
While other brands have shifted into the “one word” product description, Grown Rogue has leveraged consumer insights and product feedback to evolve the messaging to provide significantly more detail so consumers can make a more informed choice about which Grown Rogue products will optimally enhance their experience.
Grown Rogue’s unique “Mind, Body & Mood” product descriptions provide a level of detail about the expected cannabis experience that is much more insightful and beneficial than competitors. Instead of one word, such as “Relax,” describing a product, Grown Rogue has six words across three categories, which is easy to understand, but much more informative. Grown Rogue is refining this branding effort and intends to launch this new and innovative approach to ensuring consumers select the right experience in 2021.
In order to grow the Grown Rogue community and spread knowledge of its products, Grown Rogue leverages social media and other digital platforms. Grown Rogue aspires to eliminate the “dark mystery” historically associated with cannabis by empowering consumers to learn about the plant and then “enhance experiences” as they desire. The transition from prohibition to legal cannabis has provided the cannabis community with an opportunity to welcome a large group of new members and it is vital that product education is completed in an authentic and informative manner to ensure that everyone’s first cannabis experience is not only positive but also as expected.
Marketing and Advertising
Grown Rogue’s marketing channels include a comprehensive, fully responsive (mobile) interactive website. The website has been search engine optimized and includes calls to action that encourage consumers to become part of the Grown Rogue community by joining its newsletter list or following the company on social media. Grown Rogue is focused on providing education to new and existing consumers, which is available through its monthly newsletter or via the Blog section of its website. Consumers can find information about Grown Rogue, different types of cannabis products and general industry information.
We strategically leverage digital advertising, primarily on industry sites such as Leafly and Weedmaps, and have selectively advertised in endemic and non-endemic magazines including Grow, Northwest Leaf, Oregon Leaf, Dope, Portland Mercury, and Willamette Weekly.
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Grown Rogue has established a social media presence that includes Facebook, Twitter, and Instagram. Grown Rogue’s social identity will be defined by delivering fresh content and keeping interaction with followers/fans prompt and positive. Grown Rogue intends to attract existing cannabis industry participants as well as people not familiar with the industry by creating a positive, inclusive environment where dialogue is encouraged. The goal is to change existing stereotypes and overcome the stigmas associated with the cannabis industry.
Trademarks and Patents
Grown Rogue actively seeks to protect its brand and intellectual property. Grown Rogue currently has three registered trademarks:
| 1. | Grown Rogue was filed on September 22, 2017 and registered on August 7, 2018 under Registration No. 5537240 |
|---|---|
| 2. | The Right Experience Every Time was filed on September 29, 2017 and registered on August 7, 2018 under<br>Registration 5537260. |
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| 3. | Sizzleberry was filed on September 29, 2017 and registered on August 7, 2018 under Registration 5537259. |
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Grown Rogue filed a patent for its nitrogen sealed glass containers on February 15, 2018 with the United States Patent and Trademark Office (“USPTO”). The nitrogen sealed glass containers preserve the freshness of the flower and essential terpenes to improve the “entourage effect.” The USPTO issued Grown Rogue United States Patent Number 10,358,282 on July 23, 2019. Several third parties have contacted us to request licensing information on this technology. We have introduced nitrogen sealed jars in Michigan and plan on launching them as we enter additional new markets and may license the technology to third parties operating in markets in which Grown Rogue is not currently licensed.
Social and Environmental Policies
Grown Rogue employs sustainable business models in all of its operations. Grown Rogue maintains the highest standards of environmental stewardship in cultivation. This includes sustainable water sources with optimization of reclamation and recapture from runoff and recycling of water input. We use only natural and sustainable products in all applications, including nutrients and integrated pest management. We maintain the highest level of sustainable cannabis practices through our focus on sustainable and natural cultivation methods.
Grown Rogue hires and pays living wage to all of its team members and is very involved in each of the communities where it operates.
When wildfires ravaged Oregon during the year ended October 31, 2020, particularly Jackson County, Grown Rogue quickly mobilized to support teammates and their families who lost homes or were adversely impacted, while also donating over $20,000 to community fire relief funds and organizing a Cannabis Coalition Fire Relief Fund with the United Way of Jackson County.
Plans for Expansion & Economic Outlook
Grown Rogue continues to focus on taking its learnings and experience from Oregon into new markets across the US. During the last two years, Grown Rogue has established a platform that excels at licensing, compliance, high quality and low cost production methods, understanding consumer purchasing preferences, and product innovation. This platform places Grown Rogue in a superior position to capitalize on new markets compared to our competitors. Oregon is arguably the most competitive cannabis market in the world, and we have excelled by implementing standard business practices that make the Company well suited for entering and building successful brand presence in newly legalized cannabis markets.
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The recently completed expansion into Warehouse 2 (described in the Oregon heading under Description of Business) represents a template for growth and execution against management’s strategy of being a high quality, low cost flower producer. As other growth opportunities arise under favorable financial terms, management can activate known and repeatable systems into new assets.
The future of the cannabis industry is in the branded products and the best brands are being created in the west coast, which is the area that has become synonymous with high quality cannabis. Unlike many current multi-state operators who prefer to obtain just a few licenses in a large volume of states, Grown Rogue is very focused on establishing a larger number of licenses in fewer states to capitalize on the economies of scale necessary to maximize profits. Over the next 12 months, Grown Rogue is focused on furthering its footprint and market share in the Oregon market, continuing to add to the portfolio projects in Michigan and looking at strategic opportunities in new states.
With the recent shift in political landscape, Grown Rogue has also begun analyzing the potential for federal de-regulation and the subsequent ability to export cannabis products across state lines. Oregon and the west coast have become synonymous with high quality cannabis and long term we believe Oregon will be a large export state across the US and international. Being located in the Emerald Triangle also provides a unique product differentiator due to the ability to produce high quality low cost sungrown flower due to the environmental conditions that occur naturally in Southern Oregon. Our strategy for how to take advantage of what will surely be a multi-billion dollar export business is developing and we are excited to begin implementation of this business plan over the coming years.
Going Concern
The Company’s ability to continue as a going concern is dependent upon, but not limited to, its ability to raise financing necessary to fund its development programs and general and administrative expenses, discharge its liabilities as they become due and generate positive cash flows from operations. There is no certainty that the Company will be successful in raising additional capital or generating positive cash flow from operations.
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Selected Annual Information
The following selected financial data for each of the three completed financial years are derived from the audited annual financial statements of the Company.
| Year Ended October 31, | 2020 | 2019 | 2018 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Total revenue | $ | 4,239,604 | $ | 3,924,983 | $ | 1,932,128 | |||
| Loss from operations | (1,574,679 | ) | (7,622,956 | ) | (4,967,609 | ) | |||
| Net loss | (2,356,488 | ) | (9,476,934 | ) | (7,509,986 | ) | |||
| Net loss per share, basic and diluted | (0.03 | ) | (0.13 | ) | (0.22 | ) | |||
| Comprehensive Loss | (2,490,605 | ) | (9,355,014 | ) | (7,509,986 | ) | |||
| Comprehensive loss per share, basic & diluted | (0.03 | ) | (0.13 | ) | (0.22 | ) | |||
| Total assets | 3,764,418 | 2,932,476 | 5,366,268 | ||||||
| Total non-current liabilities | 2,910,333 | 217,633 | 2,292,634 | ||||||
| Cash dividends | Nil | Nil | Nil |
Results of Operations
Selected financial results of operations for three months ended January 31, 2021, are summarized below:
| Three months ended January 31, | 2021() | 2020() | Variance | Variance % | |||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | ) | (5 | )% | ||||||
| Cost of goods sold, excluding fair value adjustments | ) | ) | (9 | )% | |||||
| Gross profit (loss) before fair value adjustments | ) | (1 | )% | ||||||
| Net loss | ) | ) | ) | 327 | % |
All values are in US Dollars.
Significant expense items contributing to the increase in net loss between the three months ended January 31, 2021 and 2020 are summarized in the table below.
| Three months ended January 31, | 2021() | 2020() | Variance | Variance % | ||||
|---|---|---|---|---|---|---|---|---|
| Realized fair value amounts in inventory sold | ) | (73 | )% | |||||
| Unrealized fair value loss (gain) on growth of biological assets | ) | (118 | )% | |||||
| Accretion expense | 264 | % | ||||||
| Amortization of property and equipment | 150 | % | ||||||
| General and administrative expenses | 12 | % |
All values are in US Dollars.
More detailed analysis of the components of results of operations are described in the following sections.
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Revenues
The following tables summarizes revenues earned during the three months ended January 31, 2021 and 2020.
| Three months ended January 31, | 2021() | 2020() | Variance () | Variance (%) | |||
|---|---|---|---|---|---|---|---|
| Revenue from third-party products | ) | (100 | )% | ||||
| Revenue from management services | -- | ||||||
| Revenue from Grown Rogue production | ) | (18 | )% | ||||
| Total revenue | ) | (5 | )% |
All values are in US Dollars.
The following table summarizes revenues from Grown Rogue production.
| Three months ended January 31, | 2021() | 2020() | Variance () | Variance (%) | |||
|---|---|---|---|---|---|---|---|
| Indoor | ) | (15 | )% | ||||
| Outdoor | ) | (22 | )% | ||||
| Trim & other | 14 | % | |||||
| Revenue from Grown Rogue production | ) | (18 | )% |
All values are in US Dollars.
Revenues during Q1 2021 were lower than Q1 2020 revenues, due to a decrease in pounds sold of indoor and outdoor flower, which was offset in part by an increase in average selling price of indoor flower. The following tables summarize pounds sold, revenues from those pounds, and average selling prices.
The following table summarizes sales prices and volumes. “ASP” refers to average selling price.
| Revenue from | Q1 2021 Pounds sold | Q1 2020 pounds sold | Pounds variance | Q1 2021 <br>ASP () | Q1 2020 <br>ASP () | ASP <br><br>variance | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Indoor | 327 | 490 | (163 | ) | 275 | ||||||
| Outdoor | 587 | 787 | (200 | ) | 27 | ||||||
| Total | 914 | 1,277 | (363 | ) | 107 |
All values are in US Dollars.
The decreased pounds sold in Q1 2021 as compared to Q1 2020 reflects, in part, our intentional hold-back of portions of inventory in expectation that prices would rise in the following months. This was based upon our observations over time that market prices for flower are seasonally low during the months of our first fiscal quarter.
Costs of goods and services sold
| Three months ended January 31, | 2021 | 2020 | Change () | Change (%) | |||||
|---|---|---|---|---|---|---|---|---|---|
| Cost of finished cannabis inventory sold | $ | 388,933 | $ | 521,680 | ) | (25 | )% | ||
| Costs of service revenues | 84,153 | - | -- | ||||||
| Costs of goods sold, excluding fair value items | $ | 473,086 | $ | 521,680 | ) | (9 | )% |
All values are in US Dollars.
Cost of finished cannabis inventory sold decreased 25%, while revenues for Grown Rogue production decreased 18%, reflecting favorable operational efficiency. As no service revenues were earned during Q1 2020, there are no comparable costs of service revenues for Q1 2021.
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Net loss
Share-based compensation
During Q1 2021, we granted, or committed to grant, common shares as compensation to employees and service providers. The common shares issuances and stock options (measured at fair value using the Black-Scholes pricing model) resulted in total expense recognition of $88,438 during Q1 2021 (2020 - $Nil).
General and administrative expenses
| Three months ended January 31, | 2021 | 2020 | Change () | Change (%) | |||||
|---|---|---|---|---|---|---|---|---|---|
| Office, banking, travel, and overheads | $ | 122,546 | $ | 117,685 | 4 | % | |||
| Professional services | 136,428 | 165,352 | ) | (17 | )% | ||||
| Salaries and benefits | 493,504 | 387,731 | 27 | % | |||||
| General and administrative expenses | $ | 752,478 | $ | 670,768 | 12 | % |
All values are in US Dollars.
The increase in the general and administrative costs quarter over quarter was in part due to additional staffing required to support expansion and growth, which demanded increases in management expertise in operations and corporate positions.
Interest and interest accretion expense
| Three months ended January 31, | 2021 | 2020 | Change () | Change (%) | ||||
|---|---|---|---|---|---|---|---|---|
| Interest and accretion expense | $ | 256,884 | $ | 158,724 | 62 | % |
All values are in US Dollars.
The increase in interest from Q1 2021 over Q1 2020 reflects interest on higher debt outstanding in Q1 2021 as compared to Q1 2020. In Q1 2021, interest attributable to convertible debentures was approximately $130,000 (2020 – approximately $147,000). Debt issued after Q1 2020 includes debt principal of $600,000 issued on March 20, 2020, at an effective interest rate of 73%; two debt issuances in Q1 2021 with total principal of $375,000 and effective interest rates of approximately 27%; and a debt issuance during Q1 2021 of $150,000 with an annual interest rate of 10%.
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Summary of Quarterly Results
The following table sets out selected quarterly results of the Company for the eight quarters ended on or before January 31, 2021. The information contained herein is drawn from the interim financial statements of the Company for each of the aforementioned eight quarters.
| Fiscal Year | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter ended | Oct | Jul | Apr | ||||||||
| Revenue () | 1,051,185 | 1,056,702 | 903,994 | 1,172,612 | |||||||
| Net loss () | (995,789 | ) | (122,401 | ) | (794,072 | ) | (1,206,828 | ) | |||
| Net loss, basic & diluted (/share) | (0.01 | ) | (0.00 | ) | (0.01 | ) | (0.01 | ) |
All values are in US Dollars.
| Fiscal Year | 2019 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter ended | Oct | Jul | Apr | ||||||||
| Revenue () | 1,106,296 | 431,629 | 773,930 | 1,885,115 | |||||||
| Net loss () | (233,187 | ) | (2,098,742 | ) | (931,184 | ) | (1,648,446 | ) | |||
| Net loss, basic & diluted (/share) | (0.00 | ) | (0.02 | ) | (0.01 | ) | (0.02 | ) |
All values are in US Dollars.
Liquidity
Our ability to generate cash in the short term is based upon sales from production and financing proceeds, and in the long term is based upon sales from production, including production from investments in production increases, or from growth by business acquisitions, or a combination thereof. Investments to increase production or acquire business may require further financing. The Company generates cash flows from sales of cannabis products which generate margin that contribute to coverage of other operating costs, but has not yet reached productive scale to generate net income and positive net cash flows from operations on a consistent basis. We have raised financing historically through debt and equity, which has been and will be invested in the business in order to improve production yields and increase total productive capacity, as well as cover operating costs. We raised proceeds of approximately $1.23 million during Q1 2021 (2020 - $15,000), and net proceeds of approximately $3.5 million (CAD$4,458,555) subsequent to Q1 2021.
We are typically able to sell finished goods shortly after inventory reaches its final state, and sales are primarily made on cash-on-delivery terms, or with short net terms. Our ability to fund operations, to plan capital expenditures, and to plan acquisitions, depends on future operating performance and cash flows and the availability of capital by way of debt or equity investment in the Company, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond the Company’s control.
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Cash flows
The following table summarizes certain cash flow items for the three months ended January 31, 2021 and 2020.
| Three months ended January 31, | 2021 () | 2020 () | ||
|---|---|---|---|---|
| Net loss | ) | ) | ||
| Net cash provided by operating activities | ||||
| Net cash used in investing activities | ) | ) | ||
| Net cash provided (used) by financing activities | ) | |||
| Net increase in cash and cash equivalents | ||||
| Effect of currency translation | ) | ) | ||
| Cash and cash equivalents, beginning | ||||
| Cash and cash equivalents, ending |
All values are in US Dollars.
Operating activities
During the three months ended January 31, 2021, cash provided by operating activities was $123,405 (2020 - $150,384), which included the following significant non-cash items added back to net loss:
| ● | $124,381 (2020 - $49,677) in amortization of property & equipment; |
|---|---|
| ● | $124,311 (2020 – deduction of $701,559) from the unrealized change in fair value of biological assets; |
| --- | --- |
| ● | $132,448 (2020 - $18,375) in share-based compensation and stock option vesting expense, including expense<br>for option grants under our stock option plan implemented during 2020, as well as shares issued directly as compensation for employees,<br>directors, and service providers; |
| --- | --- |
| ● | $248,357 (2020 - $68,210) in accretion of interest expense on debt and convertible debentures outstanding.<br>As a point of reference, debt and convertible debentures outstanding at January 31, 2021 totaled approximately $3.28 million (January<br>31, 2020 – approximately $2.5 million); and |
| --- | --- |
| ● | $319,627 (2020 - $Nil) from the fair value remeasurement of the derivative liability component of convertible<br>debentures. |
| --- | --- |
Cash used in operating activities also reflects an adjustment for the following non-cash item deducted from net loss:
| ● | $302,808 (2020 – $Nil) from the unrealized gain on our investment in PBIC shares, measured at PBIC’s<br>publicly quoted share price. |
|---|
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Increases in non-cash working capital are summarized in the following table.
| Three months ended January 31, | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Accounts receivable | $ | (66,866 | ) | $ | (10,981 | ) |
| Inventory | 250,762 | 718,792 | ||||
| Prepaid expenses and other assets | (9,244 | ) | (13,903 | ) | ||
| Accounts payable and accrued liabilities | 221,616 | 245,387 | ||||
| Interest payable | (44,141 | ) | 18,023 | |||
| Unearned revenue | 84,600 | (35,000 | ) | |||
| Total | $ | 436,727 | $ | 922,318 |
Changes in accounts receivable are due to the timing and collection of sales and were relatively small factors in changes in non-cash working capital. Decreases in inventories, with corresponding increases to non-cash working capital, are significantly influenced by the unrealized fair value adjustments to biological assets, which are transferred to inventory upon harvest, as well as the timing of harvests and the timing of sales of finished inventory. Changes in liabilities, including accounts payable and accrued liabilities reflect the use of credit terms and cash flow management based upon ongoing liquidity management. Unearned revenues reflect payments for contracts with future delivery requirements, which we use from time to time as part of our sales strategy.
Investing activities
During the three months ended January 31, 2021, we invested $159,016 into property and equipment, primarily to expand our Warehouse 1 facility (2020 - $4,528).
Financing activities
Net cash flows from financing activities in Q1 2021 were $1,096,224 (2020 – net cash used of $87,136). Significant financing activities included the following:
| ● | Debt proceeds of $150,000 borrowed to expand Warehouse 1 productive capacity; |
|---|---|
| ● | Debt proceeds of $375,000 borrowed to advance the acquisition of Warehouse 2; |
| --- | --- |
| ● | Equity issuance by a subsidiary of $375,000, also to advance the acquisition of Warehouse 2; and |
| --- | --- |
| ● | $200,000 raised through a private placement of common shares, and $125,000 deposited in advance of the close<br>of the second tranche of this private placement closed February 5, 2021 (see Subsequent Events). |
| --- | --- |
Financing activities during Q1 2020 included the following:
| ● | $15,000 in debt proceeds; and |
|---|---|
| ● | $34,911 in repayments of long-term debt, as well as $67,225 in repayments of lease principal. |
| --- | --- |
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Trends and expected fluctuations in liquidity
| January 31, <br>2021 () | October 31, <br>2020 () | Variance <br>() | Variance <br><br>(%) | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Current assets | 48 | % | |||||||
| Current liabilities | ) | ) | ) | 162 | % | ||||
| Working capital | ) | ) | (5700 | )% | |||||
| Add: derivative liabilities (not cash-settled) | 59 | % | |||||||
| Working capital excluding derivative liabilities | ) | ) | (272 | )% |
All values are in US Dollars.
Working capital, excluding derivative liabilities, varied from October 31, 2020 to January 31, 2021 due in large part to approximately $1.8 million in convertible debentures becoming current after October 31, 2020.
We expect significant ongoing fluctuations in working capital over time, as we are in the early stages of growth. We have historically raised debt with principal due on maturity, and accordingly, we expect significant one-time payments as debt matures, as opposed to smooth cash outflows over time. We have historically been able to meet commitments, modify debt maturities, and raise new financing as required in order to respond to changes in liquidity position, although there is no guarantee we will be able to do so in the future. We are exposed to market pricing for cannabis products, which materially impacts our liquidity and is out of our control. The market for cannabis products, including flower, which is our primary product, is relatively immature, having recently become legal to buy and sell in certain markets. We have observed some indications of seasonality, and in addition, we have observed that market conditions can change rapidly without apparent explanations or analyzable causes. We cannot control whether we will be able to raise financing when required or sell cannabis products at profitable prices in the future; however, part of our strategy is to produce flower at sustainable gross margins over a growing productive base, which, holding other factors constant, is expected to result in improved net loss or net income, as well as net cash flows.
Commitments and obligations
Set out below are minimum future lease payments after January 31, 2021.
| Total future minimum lease payments | ||
|---|---|---|
| Less than one year | $ | 261,300 |
| Between one and five years | 936,010 | |
| Total | $ | 1,197,310 |
The Company has one lease contract with extension options remaining after January 31, 2021, which was negotiated by management to provide flexibility in managing business needs. Set out below are the undiscounted potential rental payments related to periods following the date of exercise options that are not included in the lease term:
| Within five years | More than five years | |||
|---|---|---|---|---|
| Extension options available to be exercised | $ | 6,180 | $ | 843,981 |
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The contractual maturities of the Company’s accounts payable and accrued liabilities, debt, leases, and unearned revenue occur over the next three years as follows:
| Year 1 | Years 2 - 3 | |||
|---|---|---|---|---|
| Accounts payable and accrued liabilities | $ | 1,275,456 | $ | 389,816 |
| Debt and convertible debentures | 2,228,246 | 1,050,588 | ||
| Lease liabilities | 175,662 | 740,731 | ||
| Interest payable | 12,155 | - | ||
| Unearned revenue | 84,600 | - | ||
| Total | $ | 3,776,119 | $ | 2,181,135 |
The above table excludes the derivative liability reported at January 31, 2021, of $930,195, which is not cash-settled, as well as redemption liabilities of $375,000, which do not have a maturity date.
Other liquidity items
We hold shares in PBIC, which are classified as non-current. If or when we choose to sell these shares, we will be subject to market conditions for PBIC shares at the time of sale. We are not in default or arrears on our liabilities, noting that we have liabilities which have been deferred into non-current periods by creditors; such amounts were $389,816 at January 31, 2010 and October 31, 2020. We have a callable instrument represented at January 31, 2021 by a redemption liability of $375,000 (October 31, 2020 - $Nil) which represents a non-controlling interest that may be put to the Company; if exercised, the Company may choose to settle in cash or shares of the Company, or a combination thereof.
Capital Resources
Debt financing
Long-term debt
On November 23, 2020, we issued debt with a principal amount of $125,000, interest accrued at 10% per annum, and a maturity date of November 23, 2023. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $125,000. The note is reported at amortized cost using an effective interest rate of approximately 27%.
On December 2, 2020, we issued debt with a principal amount of $150,000, interest accrued at 10% per annum, and a maturity date of December 31, 2021. Interest and principal are payable upon maturity. The maturity date can be extended by up to six-months for a $1,000 fee per $10,000 of principal extended.
On January 27, 2021, we issued debt with a principal amount of $250,000, interest accrued at 10% per annum, and a maturity date of January 27, 2024. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized cost using an effective interest rate of approximately 27%.
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Equity financing
Issuance of non-controlling equity interest in subsidiary
During Q1 2021, the Company sold an 8.6% interest in Grown Rogue Distribution, LLC (“GR Distribution”) for $375,000, through the issuance of 9.375 new equity units (“GR Distribution Units”) out of 109.375 total issued and outstanding GR Distribution Units after the issuance. The GR Distribution Equity Units are puttable by the subscribers and callable by the Company, and can be settled in Company shares at a value agreed upon by the Company and the GR Distribution non-controlling interests, or in cash, or in a combination of cash and shares. The Company has accordingly recognized a redemption liability of $375,000 at January 31, 2021 (2020 - $Nil), recorded by way of a reduction in Company contributed surplus.
Trends and expected fluctuations in capital resources
We generated net cash flows from financing of approximately $1.1 million during Q1 2021 (2020 – net outflows of approximately $90,000). Proceeds of $525,000 were raised from debt issuances during the three months ended January 31, 2021 (2020 - $15,000), and proceeds of $325,000 were raised from equity issuances and subscriptions (2020 - $Nil).
Financing activities have been critical to our ability to continue operating, and significant portions of our financing have historically been raised from key management personnel. These individuals have not provided assurance that they will provide additional financing if we require financing but are unable to raise such financing from third parties; this highlights the importance of management’s strategy of scaling operations. We raised proceeds, including debt and equity, of approximately $1.23 million during Q1 2021 (2020 - $15,000), and net proceeds of approximately $3.3 million (CAD$4,458,555) subsequent to Q1 2021. Our business strategy contemplates growing cash flows from operations, which may contribute to reinvestment and growth; however, further financing may be required or utilized based upon our future capital position and future business opportunities.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Transactions with Related Parties
Transactions with key management and directors
During the three month period ended January 31, 2021, the Company completed the following related party transactions:
| 1. | Through its wholly owned subsidiary, GRU Properties, LLC, the Company leased a property located in Trail,<br>Oregon owned by the Company’s President and CEO. The lease was extended during the three months ended January 31, 2021 and expires on<br>December 31, 2025. Rent of $19,000 was incurred for the three months ended January 31, 2021 (2020 $18,500). The Company had $45,000 (October<br>31, 2020 - $45,000) owing under this lease at January 31, 2021 from lease payments which the CEO agreed to defer. The lease balance at<br>January 31, 2021, was $275,707 (October 31, 2020 - $12,532). |
|---|
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| --- | | 2. | The Company incurred expenses of $11,250 (2020 - $12,000) for services provided by the spouse of the CEO.<br>At January 31, 2021, accounts and accrued liabilities payable to this individual were $3,750 (October 31, 2020 - $1,946). During the year<br>ended October 31, 2020, this individual was granted 500,000 options which vested on the grant date. | | --- | --- | | 3. | Key management personnel consist of the President and CEO; the former Chief Strategy Officer; the CFO<br>of GR Unlimited; the Chief Marketing Officer; and the Chief Accounting Officer; and the CFO of Grown Rogue International, Inc. The compensation<br>paid or payable to key management for services for the periods as follows: | | --- | --- | | Three months ended January 31, | 2021 | | 2020 | | | --- | --- | --- | --- | --- | | Salaries and consulting fees | $ | 164,675 | $ | 100,500 | | Share-based compensation | | 14,296 | | 10,188 | | Stock option expense | | 16,806 | | - | | Total | $ | 195,777 | $ | 110,688 |
Stock options granted to key management personnel and close family members of key management personnel include the following options, granted during the year ended October 31, 2020: 750,000 options to the CFO of GR Unlimited; 750,000 options to the Chief Market Officer; and 250,000 option to the Chief Accounting Officer.
Accounts payable and accrued liabilities due to key management at October 31, 2020 totaled $510,455 (October 31, 2019 - $441,424), including the accrued liabilities described at Note 8.
debt balances and movements with key management and directors
The following table sets out the movements and balances of debt with related parties during Q1 2021 and the year ended October 31, 2020.
| CEO | CFO of GR Unlimited LLC | Directors | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | - | $ | - | $ | - | $ | - | ||||
| Borrowed | 50,000 | 100,000 | 150,000 | 300,000 | ||||||||
| Interest | 21,745 | 43,491 | 65,236 | 130,472 | ||||||||
| Payments | (10,252 | ) | (20,504 | ) | (30,756 | ) | (61,512 | ) | ||||
| Balance - October 31, 2020 | $ | 61,493 | $ | 122,987 | $ | 184,480 | $ | 368,960 | ||||
| Borrowed | - | - | - | - | ||||||||
| Interest | 9,426 | 18,851 | 28,277 | 56,554 | ||||||||
| Payments | (1,191 | ) | (2,383 | ) | (3,574 | ) | (7,148 | ) | ||||
| Balance - January 31, 2021 | $ | 69,728 | $ | 139,455 | $ | 209,183 | $ | 418,366 |
On November 23, 2020, an individual who became a director purchased 6.25 newly issued equity units of Grown Rogue Distribution, LLC for $250,000, out of the total of 9.375 such units issued during the three months ended January 31, 2021.
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Other Selected Financial Information
Adjusted EBITDA (non-IFRS measure)
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income or loss for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance.
We have included a figure within the Adjusted EBITDA reconciliation called “Adjusted Gross Margin.” Adjusted Gross Margin is calculated by removing the impact of fair value adjustments and amortization of fixed assets from net loss.
| Three months ended | ||||||
|---|---|---|---|---|---|---|
| January 31, | ||||||
| Adjusted EBITDA Reconciliation | 2021 | 2020 | ||||
| Net loss, as reported | $ | (995,789 | ) | $ | (233,187 | ) |
| Add back realized fair value amounts included in inventory sold | 173,598 | 632,630 | ||||
| Add back (less) unrealized fair value loss (gain) on growth of biological assets | 124,311 | (701,559 | ) | |||
| Add back amortization of property & equipment included in cost of sales | 136,072 | 45,397 | ||||
| $ | (561,808 | ) | $ | (256,719 | ) | |
| Add back accretion expense, as reported | 248,357 | 68,210 | ||||
| Add back amortization of intangible assets, as reported | 4,997 | 7,659 | ||||
| Add back amortization of property and equipment, as reported | 124,381 | 49,677 | ||||
| Add back amortization of right-of-use assets, as reported | 48,605 | 35,822 | ||||
| Add back share-based compensation expense, as reported | 88,438 | |||||
| Add back interest expense, as reported | 8,527 | 90,514 | ||||
| Deduct unrealized gain on marketable securities, as reported | (302,808 | ) | - | |||
| Add back unrealized loss on derivative liability | 319,627 | - | ||||
| Adjusted EBITDA (loss) | $ | (21,684 | ) | $ | (4,837 | ) |
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Cash margin analysis (non-IFRS measure)
“Cash Margin” is a non-IFRS measure used by management that does not have any meaning under IFRS and may not be comparable to similar measures presented by other companies. To define Cash Margin, first we define “Cash Production Costs,” pertaining to revenue from our products and third-party products, as the cost of finished cannabis inventory sold, as reported on the statement of comprehensive loss, less non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments; costs for service revenues are as presented on the statement of comprehensive loss. Cash Margin is arrived at by subtracting Cash Production Costs from their corresponding revenue category, and dividing the result by revenue to arrive at a percentage of revenue. The Company believes that this is a useful metric to evaluate its operating performance.
The following table presents Cash Margin by revenue type.
| Three months ended | |||||
|---|---|---|---|---|---|
| January 31, 2021 | |||||
| Cash Margin analysis | Revenue | Costs | Margin % | ||
| Grown Rogue products | 73 | % | |||
| Third party products | -- | ||||
| Service revenues | 52 | % | |||
| Asset depreciation included in COGS | -- | ||||
| Cost of packaging & other included in COGS | -- | ||||
| Total costs of finished cannabis inventory sold, as reported | 55 | % | |||
| Realized fair value amounts in inventory sold, as reported | -- | ||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | ||||
| Totals, as reported | 27 | % |
All values are in US Dollars.
| Three months ended | ||||||
|---|---|---|---|---|---|---|
| January 31, 2020 | ||||||
| Cash Margin analysis | Revenue | Costs | Margin % | |||
| Grown Rogue products | 60 | % | ||||
| Third party products | 23 | % | ||||
| Service revenues | -- | |||||
| Asset depreciation included in COGS | -- | |||||
| Cost of packaging & other included in COGS | -- | |||||
| Total costs of finished cannabis inventory sold, as reported | 53 | % | ||||
| Realized fair value amounts in inventory sold, as reported | -- | |||||
| Unrealized fair value (gain) on growth of biological assets, as reported | ) | -- | ||||
| Totals, as reported | 59 | % |
All values are in US Dollars.
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Outstanding Share Data
As of the date of the MD&A, the Company had 121,990,553 common shares outstanding.
As of the date of this MD&A, the Company has the following warrants outstanding, exercisable into common shares:
| Exercise price | Warrants outstanding | Life (years) | Expiry date | |||
|---|---|---|---|---|---|---|
| $ | 0.16 | 8,409,091 | 0.6 | November 01, 2021 | ||
| 0.13 | 5,000,000 | 0.9 | February 10, 2022 | |||
| 0.13 | 10,000,000 | 1.1 | May 15, 2022 | |||
| 0.20 | 8,200,000 | 1.8 | February 5, 2023 | |||
| 0.44 | 2,148,117 | 2.2 | June 28, 2023 | |||
| $ | 0.17 | 33,757,208 | 1.2 |
As of the date of this MD&A, the Company has the following stock options outstanding and exercisable into common shares:
| Exercise price | Options outstanding | Number exercisable | Remaining Contractual Life (years) | Expiry date | ||||
|---|---|---|---|---|---|---|---|---|
| $ | 0.44 | 500,000 | 500,000 | 0.8 | January 01, 2022 | |||
| 0.15 | 3,125,000 | 2,082,500 | 3.3 | July 09, 2024 | ||||
| 0.15 | 500,000 | 250,000 | 3.7 | December 01, 2024 | ||||
| 0.15 | 200,000 | - | 3.6 | November 18, 2024 | ||||
| $ | 0.18 | 4,325,000 | 2,832,500 | 2.9 |
Critical Accounting Judgments and Estimation Uncertainties
The preparation of the consolidated financial statements in conformity with IFRS requires that the Company’s management make critical judgments, estimates and assumptions about future events that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The most significant judgments include those related to the ability of the Company to continue as a going concern, the determination of when property and equipment are available for use, and impairment of its financial and non-financial assets. The most significant estimates and assumptions include those related to the valuation of biological assets, the collectability of accounts receivable, the useful lives of property and equipment, inputs used in accounting the determination of the discount rate used to estimate the fair value of the liability component of convertible promissory notes, the discount rates used to calculate present values of lease liabilities, the inputs used in the estimate of the fair value of unit-based compensation and the inputs used in the estimate of the fair value of the unit purchase option and warrants issued.
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Newly Adopted Accounting Pronouncements
No new accounting pronouncements were adopted during Q1 2021.
Financial Instruments and Other Risk Factors
Market Risk
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
Interest Rate Risk
At January 31, 2021 and October 31, 2020, the Company’s exposure to interest rate risk relates to long-term debt, convertible debentures, and leases; each of these items bears interest at a fixed rate.
Currency Risk
As at January 31, 2021, the Company had accounts payable and accrued liabilities of CAD$567,665 and convertible debentures of CAD$2,850,000, as well as a derivative liability of CAD$1,188,748. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
The carrying amount of cash and trade accounts receivable represents the Company’s maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 |
| Accounts Receivable | 238,987 | 172,121 | ||
| Total | $ | 1,517,388 | $ | 389,909 |
The allowance for doubtful accounts at January 31, 2021 is $1,000 (October 31, 2020 - $7,425).
Liquidity Risk
Liquidity risk represents the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At January 31, 2021, the Company had current assets of $2,708,717 (October 31, 2020 - $1,834,775) and current liabilities of $4,706,314 (October 31, 2020 - $1,799,104), which resulted in a working capital deficit of $1,997,597 (October 31, 2020 – working capital of $35,671). As discussed above, our working capital deficit after adjusting for non-cash settled derivative liabilities was approximately $1.1 million. Subsequent to January 31, 2021, we raised gross proceeds of approximately $3.7 million (CAD$4,737,800) through a brokered private placement (see Subsequent Events).
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The Company faces risks inherent in an agricultural business.
Cannabis is an agricultural product. There are risks inherent in the agricultural business, such as insects, plant diseases, forest fire and similar agricultural risks. Although some of the Company’s cannabis flower is grown indoors under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of the Company’s products.
COVID-19 Pandemic
The Company’s business, operations and financial condition could be materially and adversely affected by the outbreak of epidemics or pandemics or other health crises, including the recent outbreak of COVID-19. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, on March 11, 2020, the World Health Organization declared the outbreak a pandemic and on March 13, 2020 the U.S. declared that the COVID-19 outbreak in the United States constitutes a national emergency. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business. Such public health crises can result in volatility and disruptions in the supply and demand for products and financial markets, as well as declining trade and market sentiment and reduced mobility of people, all of which could affect consumer good prices, interest rates, credit ratings, credit risk and inflation. The risks to the Company of such public health crises also include risks to employee health and safety, a slowdown or temporary suspension of operations impacted by an outbreak, increased labour and fuel costs, regulatory changes, political or economic instabilities or civil unrest. At this point, COVID-19 has not had a significant impact on the Company’s supply chain nor its ability to continue operations and sustain revenues; however, it is possible that COVID-19 may in the future have a material adverse effect on the Company’s business, results of operations and financial condition.
Fair Values
The carrying amounts for the Company’s cash, accounts receivable, amounts due from a related company, short-term advance to a related party, accounts payable and accrued liabilities, amounts due to employee/director, short-term advance payable, promissory notes and convertible promissory notes approximate their fair values because of the short-term nature of these items.
FairValue Hierarchy
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
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Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
During the period ended January 31, 2021, there were no transfers of amounts between levels.
See additional risk factors relating to the Company as described in section 17 of the Company’s Listing Statement dated November 15, 2018 which can be found under the Company’s profile on www.sedar.com.
Subsequent Events
On February 15, 2021, Grown Rogue Distribution LLC (“GR Distribution”) sold 2.5 equity units for US$40,000 per unit each for total proceeds of $100,000. After this transaction, GR Distribution had 111.875 equity units outstanding, of which the Company owns 100. The unit holders have the future right to convert their units in the subsidiary, at an agreed-upon price, into common shares of the Company at the greater of CAD$0.20 or the maximum permitted discount under the policies of the Canadian Securities Exchange at the time of conversion.
On February 5, 2021 the Company completed the second tranche of a private placement; the second tranche was comprised of 8,200,000 units at CAD$0.16 per unit for proceeds of CAD$1,323,000. Each unit was comprised of one common share and one warrant to purchase one common share. Each warrant has an exercise price of CAD$0.20 and a term of two years. The second tranche included subscriptions by the following related parties: the CEO subscribed to 1,600,000 units; the CFO of GR Unlimited subscribed to 2,000,000 units; a key Company operations manager subscribed to 1,000,000 units; and PBIC subscribed to 2,000,000 units.
Subsequent to January 31, 2021, the Company’s subsidiary, GR Michigan, LLC, terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. Canopy has already received approval by the State of Michigan for licensing and this will allow the Company to accelerate its option exercise to obtain a 60% interest in Golden Harvests. Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company. The Company has an option to acquire an 87% membership interest in Canopy, from GRIN’s CEO, which when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had with GR Michigan.
On February 5, 2021, the Company agreed to acquire substantially all of the assets of the growing and retail operations of High Street Capital Partners, LLC (“HSCP”) for total consideration of $3,000,000 in a series of tranches based on estimated regulatory approvals not to exceed 18 months. The Company also executed a Management Services Agreement (“MSA”) with HSCP. The Company will operate the growing facility under the MSA until the acquisition of the growing assets obtains regulatory approval.
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On March 2, 2021, holders of convertible debentures converted principal of CAD$491,666 into common shares at CAD$0.125 per share, and accordingly the Company issued 3,933,328 common shares to those holders.
On March 17, 2021, the Company executed a lease for a new outdoor grow property. The lease term is through February 28, 2024. The annual lease cost is $40,000 per year, due in two equal semiannual payments on March 1st and June 1st of each year. There are no extension options in this agreement for periods after February 28, 2024. Management will transfer one of its existing outdoor growing licenses to this new location, and cease outdoor grow operations at the prior location. The remaining term at prior location is through December 31, 2021, and undiscounted remaining payments from February 1, 2021 to the end of the lease term total $41,800.
Brokered private placement of special warrants
On March 5, 2021, the Company announced completion of a brokered private placement offering through the issuance of an aggregate of 21,056,890 special warrants (each a “Special Warrant”) at a price of $0.225 (the “Issue Price”) per Special Warrant for aggregate gross proceeds of approximately $3.7 million (CAD$4,737,800) (the “Offering”).
Each Special Warrant entitles the holder thereof to receive, for no additional consideration, one unit of the Company (each, a “Unit”) on the exercise or deemed exercise of the Special Warrant. Each Unit is comprised of one common share in the capital of the Company (each, a “Common Share”) and one Common Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of CAD$0.30 for a period of twenty-four (24) months following the closing date (the “Closing Date”) of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants.
The Special Warrants are exercisable by the holders thereof at any time for no additional consideration and all unexercised Special Warrants will be deemed to be exercised, without any further action or payment of additional consideration by the holder thereof, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities (the “Securities Commissions”) for a (final) short form prospectus qualifying distribution of the Common Shares and Warrants underlying the Special Warrants (the “Qualifying Prospectus”), and (ii) July 6, 2021.
If the Company has not received a receipt from the Securities Commissions for the Qualifying Prospectus on or before April 5, 2021, each unexercised Special Warrant will thereafter entitle the holder to receive upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units (instead of one (1) Unit).
As consideration for the services rendered by the Agent in connection with the Offering, the Company paid to the Agent a cash commission of $253,746 and issued the Agent an aggregate of 1,127,758 broker warrants of the Company (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “Compensation Options”). As consideration for certain advisory services provided in connection with the Offering, the Company paid to the Agent an advisory fee of $25,500 and issued the Agent an aggregate of 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options.
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Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price for a period of twenty-four (24) months following the Closing Date, subject to adjustment in certain events. Each Compensation Unit shall be comprised of one Common Share and one common share purchase warrant of the Company (a “Compensation Warrant”). Each Compensation Warrant shall entitle the holder thereof to purchase one common share in the capital of the Company (a “Compensation Warrant Share”) at a price of CAD$0.30 at any time before 5:00 p.m. (Toronto time) on the day that is twenty-four (24) months following the Closing Date, subject to adjustment in certain events.
Prior to the filing of the Qualifying Prospectus and the deemed exercise of the Special Warrants, the securities issued under the Offering will be subject to a four month hold period from the date of closing of the Offering in addition to any other restrictions under applicable law.
Regulatory Disclosure
Grown Rogue derives a substantial portion of its revenues from the cannabis industry in the United States, which industry is illegal under United States federal law. Grown Rogue is indirectly involved (through subsidiaries) in the cannabis industry in the United States where local state laws permit such activities. Currently, its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market – we have an option to acquire a controlling interest in a Michigan operator (see subsection ‘Option to Acquire Controlling Interest In Golden Harvests,’ above).
The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication.
In the United States cannabis is largely regulated at the state level. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, and the increasing number of states with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the CSA and as such, violates federal law in the United States. Senators Elizabeth Warren and Cory Gardner have introduced a bipartisan Senate bill titled “Strengthening the Tenth Amendment Through Entrusting States (STATES) Act” that would lift the Controlled Substance Act’s restrictions on cannabis in states that have written their own laws. However, there can be no assurances as to when this bill will pass, or if it will pass at all. The Supremacy Clause of the United States Constitution and United States federal laws made pursuant to it are paramount and in case of conflict between federal and state law in the United States, the federal law shall apply.
As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states had enacted laws relating to cannabis for medical and recreational purposes. The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that enacted laws legalizing cannabis in some form and that also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level.
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In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued a memorandum (the “SessionsMemorandum”) that rescinded the Cole Memorandum. As a result of the Sessions Memorandum, federal prosecutors are no longer bound by the priorities in the Cole Memorandum relating to the prosecution of cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions.
There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the Controlled Substances Act with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law. 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 applicable state laws are repealed or curtailed, Grown Rogue’s business, results of operations, financial condition and prospects would be materially adversely affected. Until Congress amends the federal law with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities.
In light of the uncertainty surrounding the treatment of United States cannabis-related activities, including the rescission of the Cole Memorandum, the Canadian Securities Administrators published a staff notice (Staff Notice 51-352 (Revised)) on February 8, 2018 setting out certain disclosure expectations for issuers with United States cannabis-related activities. Staff Notice 51-352 (Revised) includes additional disclosure expectations that apply to all issuers with United States 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 United States cannabis industry.
In accordance with the Canadian Securities Administrators Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”), below is a table of concordance that is intended to assist readers in identifying the disclosure expectations outlined in Staff Notice 51-352.
In accordance with Staff Notice 51-352, this section provides a discussion of the federal and state-level U.S. regulatory regimes in the jurisdictions where Grown Rogue is currently directly involved through its subsidiaries or is planning to be directly involved in the future. Certain Grown Rogue subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market. In accordance with Staff Notice 51-352, Grown Rogue will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on Grown Rogue’s licenses, business activities or operations will be promptly disclosed by Grown Rogue.
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| --- | | All Issuers with US Marijuana-Related Activities | Response | | --- | --- | | Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicates for at least one of the direct, indirect and ancillary industry involvement types. | See above under “Description of Business”.<br><br> <br><br><br> <br>See below under “U.S. Regulatory Matters” | | Prominently state that marijuana is illegal under US federal law and that enforcement of relevant laws is a significant risk | See above | | Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. | See below under “U.S. Regulatory Matters”<br><br> <br><br><br> <br>See the following risk factors included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s Business is Illegal under U.S. Federal Law<br><br> <br><br><br> <br>Section 17 – Risk Factors – Because<br> marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA | | Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. | See the following risk factors included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s Business is Illegal under U.S. Federal Law<br><br> <br><br><br> <br>Section 17 – Risk Factors – Because<br> marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA<br><br> <br><br><br> <br>Section 17 – Risk Factors – Risks<br> Relating to Other Laws and Regulations<br><br> <br><br><br> <br>Section 17 – Risk Factors – Current<br> and Future Consumer Protection Regulatory Requirements<br><br> <br><br><br> <br>Section 17 – Risk Factors – Operational<br> Risks<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue will not be able to deduct many normal business expenses |
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| --- | | All Issuers with US Marijuana-Related Activities | Response | | --- | --- | | | Section 17 – Risk Factors – External<br>Factors<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Failure<br>to Protect Intellectual Property<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Agricultural<br>Operations<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Liability,<br>Enforcement Complaints etc.<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Grown<br>Rogue’s business is highly regulated and it may not be issued necessary licenses, permits, and cards<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Licenses<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Local<br>Laws and Ordinances<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Third<br>party service providers to Grown Rogue may withdraw or suspend their service<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Grown<br>Rogue may not be able to obtain or maintain a bank account<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Grown<br>Rogue’s contracts may be unenforceable and property may be subject to seizure<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – The protections<br>of US bankruptcy law may be unavailable<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Grown<br>Rogue may have a difficult time obtaining insurance which may expose Grown Rogue to additional risk and financial liabilities<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – Grown<br>Rogue’s websites are accessible in jurisdictions where medicinal or recreational use of marijuana is not permitted and, as a result<br>Grown Rogue may be found to be violating the laws of those jurisdictions<br><br><br><br><br><br><br><br>Section 17 – Risk Factors – The marijuana industry faces<br>significant opposition in the United States |
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| --- | | All Issuers with US Marijuana-Related Activities | Response | | --- | --- | | Given the illegality of marijuana under US federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are/are not available in order to support continuing operations. | See above under “Description of Business”.<br><br> <br><br><br> <br>See the following risk factor included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue may not be able to obtain or maintain a bank account | | Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities. | 100% of Grown Rogue’s balance sheet and operating statements are exposed to U.S. marijuana-related activities. | | Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. | Grown Rogue has received legal advice from multiple attorneys regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. | | CSA Requirement – US Marijuana Issuers with direct involvement in cultivation or distribution | Response | | Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | See below under “U.S. Regulatory Matters” | | Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations. | See below under “U.S. Regulatory Matters”<br><br> <br><br><br> <br>See the following risk factors included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s Business is Illegal under U.S. Federal Law<br><br> <br><br><br> <br>Section 17 – Risk Factors – Risks<br> Relating to Other Laws and Regulations<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s business is highly regulated and it may not be issued necessary licenses, permits, and cards<br><br> <br><br><br> <br>Section 17 – Risk Factors – Licenses<br><br> <br><br><br> <br>Section 17 – Risk Factors – Liability,<br>Enforcement Complaints etc. |
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| --- | | All Issuers with US Marijuana-Related Activities | Response | | --- | --- | | US Marijuana Issuers with indirect involvement in cultivation or distribution | Response | | Outline the regulations for U.S. states in which the issuer’s investee(s) operate. | N/A | | Provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee’s licence, business activities or operations. | N/A | | US Marijuana Issuers with material ancillary involvement | Response | | Provide<br>reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance<br>with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | N/A |
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U.S. Regulatory Matters
Grown Rogue (through its subsidiaries) has direct involvement in the cultivation and distribution of marijuana in the United States. Grown Rogue and its subsidiaries are primarily involved in the U.S. marijuana industry as a seed to retail company with operations currently in Oregon (a state that has legalized recreational marijuana). Currently Grown Rogue through its subsidiaries produces recreational marijuana and distributes it to dispensaries throughout Oregon.
Producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a federal crime in the United States. The United States federal government regulates drugs through the Controlled Substances Act (the “Federal CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Schedule I drugs are the most tightly restricted category of drugs under the Federal CSA.
State and territorial laws that allow the use of medical cannabis or legalize cannabis for adult recreational use are in conflict with the Federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the Federal CSA, which makes cannabis use and possession illegal on a federal level. Additionally, the Supremacy Clause of the United States Constitution establishes that the Constitution, federal laws made pursuant to the Constitution, and treaties made under the Constitution’s authority constitute the supreme law of the land. The Supremacy Clause provides that state courts are bound by the supreme law; in case of conflict between federal and state law, including Oregon and other state law legalizing certain cannabis uses, the federal law must be applied.
Until Congress amends the Federal CSA with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities. The US 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. Additionally, even if the U.S. federal government does not prove a violation of the Federal CSA, the U.S. federal government may seize, through civil asset forfeiture proceedings, certain assets such as equipment, real estate, moneys and proceeds, or your assets as an investor in the Company, if the U.S. federal government can prove a substantial connection between these assets or your investment and marijuana distribution or cultivation.
Because many states in the United States have approved certain medical or recreational uses of cannabis, the U.S. Department of Justice, through the Cole Memorandum, had previously described a set of priorities for federal prosecutors operating in states that had legalized the medical or other adult use of cannabis. The Cole Memorandum represented a significant shift in U.S. federal government priorities away from strict enforcement of federal cannabis prohibition.
However, the Cole Memorandum was merely a directive regarding enforcement and did not overturn or invalidate the Federal CSA or any other federal law or regulation.
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The Cole Memorandum was rescinded in January 2018 by Jeff Sessions, the former U.S. Attorney General, who deemed it “unnecessary”. This is based on Mr. Sessions’s belief, which was also expressed in the Cole Memorandum that each state’s federal prosecutor should “follow the well-established principles that govern all federal prosecutions. These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The rescission of the Cole Memorandum, and comments made publicly by Mr. Sessions and other members of the Trump Administration, signal a significant shift by the U.S. federal government back to more strict enforcement of federal law.
On January 4, 2018, Billy J. Williams, the current United States Attorney for the District of Oregon and former Multnomah County (Oregon) Deputy District Attorney who handled major violent crimes and later served as a Chief of the Violent Crimes Unit and as the Indian Country AUSA/Tribal Liaison for the Department of Justice prior to being appointed as the federal prosecutor for Oregon, Mr. Williams provided the below statement on marijuana enforcement in the District of Oregon: “As noted by Attorney General Sessions, today’s memo on marijuana enforcement directs all U.S. Attorneys to use the reasoned exercise of discretion when pursuing prosecutions related to marijuana crimes. We will continue working with our federal, state, local and tribal law enforcement partners to pursue shared public safety objectives, with an emphasis on stemming the overproduction of marijuana and the diversion of marijuana out of state, dismantling criminal organizations and thwarting violent crime in our communities.”
In an editorial published on January 12, 2018, Mr. Williams wrote: “In sum, I have significant concerns about the state’s current regulatory framework and the resources allocated to policing marijuana in Oregon.”
At a meeting on February 2, 2018, Mr. Williams told Oregon’s top politicians and law enforcement officials that there’s more cannabis being produced in the state than can legally be consumed. “And make no mistake about it, we’re going to do something,” Williams told dozens of politicians, tribal leaders, sheriffs as well as representatives of the FBI and the U.S. Drug Enforcement Administration. “Here’s what I know, in terms of the landscape here in Oregon: We have an identifiable and formidable marijuana over-production and diversion problem,” Williams said. “That’s the fact. My responsibly is to work with our state partners to do something about it.”
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is illegal under U.S. federal law, investing in cannabis business could be found to violate the Federal CSA. As a result, individuals involved with cannabis business, including but not limited to investors and lenders, may be indicted under U.S. federal law. An investment in the Company may: (a) expose an investor personally to criminal liability under U.S. federal law, resulting in monetary fines and jail time; and (b) expose any real and personal property used in connection with Grown Rogue’s business to seizure and forfeiture to the U.S. federal government.
Active enforcement of the current federal law on cannabis may thus directly and adversely affect revenues and profits of Grown Rogue. The risk of strict enforcement of the Federal CSA remains uncertain.
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U.S. Federal Laws Applicable to Banking
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a crime under the Federal CSA, most U.S. banks and other financial institutions are unwilling to provide banking services to marijuana businesses due to concerns about criminal liability under the Federal CSA as well as concerns related to federal money laundering rules under the U.S. Bank Secrecy Act. Canadian banks are also hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses.
Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. In both Canada and the United States transactions by cannabis businesses involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Though guidelines issued in past years allow financial institutions to provide bank accounts to certain cannabis businesses, few U.S. banks have taken advantage of those guidelines and many U. S. cannabis businesses still operate on an all-cash basis.
Oregon State Regulation
The Oregon Medical Marijuana Program (“OMMP”) is a state registry program within the Public Health Division, Oregon Health Authority (“OHA”). The role of the OHA is to administer the Oregon Medical Marijuana Act. The OMMP allows individuals with a medical history of one or more qualifying illnesses and a doctor’s written statement to apply for registration with the OMMP. Qualified applicants are issued a medical marijuana card that entitles them to legally possess and cultivate cannabis, subject to certain limitations.
On November 4, 2014, Oregon voters passed Measure 91, known as the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act (the “Act”), effectively ending the state’s prohibition of recreational marijuana and legalizing the possession, use, and cultivation of marijuana within legal limits by adults 21 years and older. The Act did not amend or effect the Oregon Medical Marijuana Act and the OMMP. The Act empowered the Oregon Liquor Control Commission (“OLCC”) with regulating sales of recreational marijuana in Oregon. It is possible that the voters could potentially repeal the law that permits both the medical and recreational marijuana industry to operate under state law.
Under current Oregon law, possession and home cultivation by adults at least 21 years old is allowed within legal limits. Public sales of marijuana and marijuana products may be done only through licensed retailers. The OLCC has the authority to decide how many licenses to allow in a specific area or location and may refuse granting a license if there are reasonable grounds to believe there are sufficient licenses in the area or if the granting of a license is not demanded by public interest or convenience. The OLCC may disqualify applicants for a number of reasons, including for lacking a good moral character, for lacking sufficient financial resources or responsibility, for relevant past convictions, and for using marijuana, alcohol, or drugs “to excess.”
Grown Rogue has a comprehensive compliance program administered through its Director of Compliance, which tracks all aspects of operations through the METRC program (an online software tool mandated through the State of Oregon that tracks seed to retail purchases), as well as compliance with all state and federal employment and other safety regulations.
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Grown Rogue is periodically advised by various outside attorneys about the requirements for compliance with Oregon law.
Grown Rogue is in compliance with Oregon state law and its related licensing framework.
Michigan State Regulation
As part of its business plan, Grown Rogue intends to enter the Michigan state market.
In November 2008, Michigan residents approved the Michigan Medical Marihuana Act20 (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act21 (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program. Additionally, the Michigan Department of Licensing and Regulatory Affairs and its licensing board (“LARA”) has supplemented the Michigan Cannabis Regulations with “Emergency Rules” to further clarify the regulatory landscape surrounding the medical marijuana program. LARA is the main regulatory authority for the licensing of marijuana businesses.
Under the MMFLA, LARA administrates five types of “state operating licenses” for medical marijuana businesses: (a) a “grower” license, (b) a “processor” license, (c) a “secure transporter” license, (d) a “provisioning center” license and (e) a “safety compliance facility” license. There are no stated limits on the number of licenses that can be made available on a state level; however, LARA has discretion over the approval of applications and municipalities can pass additional restrictions.
On November 6, 2018, Michigan voters approved Proposal 1, to make marihuana legal under state and local law for adults 21 years of age or older and to control the commercial production and distribution of marihuana under a system that licenses, regulates, and taxes the businesses involved. The act will be known as the Michigan Regulation and Taxation of Marihuana Act24. According to Proposal 1, LARA is required to art accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.
Michigan License
State operating licenses for marijuana businesses have a 1 year term and are annually renewable if certain conditions are met: (a) the renewal application is submitted prior to the date the license expires, or within sixty (60) days of expiration if all other conditions are met and a late fee is paid, (b) the licensee pays the regulatory assessment fee set by LARA and (c) the licensee continues to meet the requirements to be a licensee under the Michigan Cannabis Regulations. Each renewal application is reviewed by LARA, but there is no guarantee of a timely renewal. There is no ultimate expiry after which no renewals are permitted.
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Michigan Regulations
Michigan Marijuana Products may be purchased in a retail setting from a provisioning center by a registered qualified patient or registered primary caregivers connected to a registered qualifying patient (“Michigan Qualified Purchaser”); in each case, Michigan Qualified Purchasers must present a valid registry identification card issued by LARA (a “Michigan Registry ID”). For a Michigan Qualified Purchaser to receive Michigan Marijuana Products, provision centers must deploy an inventory control and tracking system that is capable of interfacing with the statewide monitoring system to determine (a) whether a Michigan Qualified Purchaser holds a Michigan Registry ID and (b) whether the sale or transfer will exceed the then-current daily and monthly purchasing limit for the holder of the Michigan Registry ID.
In order to receive a Michigan Registry ID, an applicant must provide: a completed application dated within one year of submission, a written certification from a physician with a bona-fide physician-patient relationship to the underlying patient, the application or renewal fee, contact information for the patient, caregiver (if applicable) and physician, as well as proof of Michigan residency.
For registered qualifying patients, the daily purchasing limit is 2.5 ounces, and for registered primary caregivers, the daily purchasing limit is 2.5 ounces per underlying registered qualifying patient that the registered primary caregiver is connected with through the registration process. Finally, the licensee shall verify in the statewide monitoring system that the sale or transfer does not exceed the monthly purchasing limit of ten (10) ounces of marihuana product per month to a qualifying patient, either directly or through the qualifying patient’s registered primary caregiver.
Allowable forms of medical marihuana includes smokable dried flower, dried flower for vaporizing and marihuana infused products, which are defined under the Act to include topical formulations, tinctures, beverages, edible substances or similar products containing usable marijuana that is intended for human consumption in a matter other than smoke inhalation. Under the Michigan Cannabis Regulations, marijuana-infused products shall not be considered food.
Qualifying conditions for the medical marijuana program in Michigan are the following:
| ● | Cancer, glaucoma, positive status for human immunodeficiency virus, acquired immune deficiency syndrome,<br>hepatitis C, amyotrophic lateral sclerosis, Crohn’s disease, agitation of Alzheimer’s disease, nail patella or the treatment of these<br>conditions; |
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| ● | A chronic or debilitating disease or medical condition or its treatment that produces 1 or more of the<br>following: cachexia or wasting syndrome; severe and chronic pain; severe nausea; seizures, including but not limited to those characteristic<br>of epilepsy; or severe and persistent muscle spasms, including but not limited to those characteristic of multiple sclerosis; |
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| ● | Post-Traumatic Stress Disorder (PTSD); and/or |
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| ● | Any other medical condition or its treatment approved by the<br>department under the Michigan Cannabis Regulations. |
| --- | --- |
Reporting Requirements
Pursuant to the requirements of the MTA, Michigan selected Franwell’s METRC software as the state’s third-party solution for integrated marijuana industry verification. Using METRC, regulators are able to track third party inventory, permissible sales and seed-to-sale information. Additionally, provisioning centers can use the METRC API to connect their own inventory management and/or point-of-sale systems to verify the identity as well as permissible sales for Michigan Qualified Purchasers.
| Pg 35 of 37 |
| --- |
Storage and Security
To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, a provisioning center is required to:
Maintain and submit a security operations plan that includes the following at a minimum:
| ● | Escorts for all non-employee personnel in limited access areas. |
|---|---|
| ● | Secure locks for all interior rooms, windows and points of entry and exits with commercial grade, nonresidential<br>door locks. |
| --- | --- |
| ● | An alarm system. Licensees will make all information related to the alarm system including monitoring<br>and alarm activity available to LARA. |
| --- | --- |
| ● | A video surveillance system that, at a minimum, consists of digital or network video recorders, cameras,<br>video monitors, digital archiving devices and a color printer capable of delivering still photos. |
| --- | --- |
| ● | 24-hour surveillance footage with fixed, mounted cameras, tamper/theft proof secured storage mediums and<br>a notification system for interruption or failure of surveillance footage or storage of surveillance footage. All surveillance footage<br>must be of sufficient resolution to identify individuals, have accurate time/date stamps and be stored for a minimum of 14 days unless<br>state regulators notify that such recordings may be destroyed. |
| --- | --- |
| ● | State access to view and obtain copies of any surveillance footage through LARA or related investigators,<br>agents, auditors and/or state police. A facility shall also provide copies of recordings to LARA upon request. |
| --- | --- |
| ● | Logs of the following: the identities of the employee or employees responsible for monitoring the video<br>surveillance system, the identity of the employee who removed the recording from the video surveillance system storage device and the<br>time and date removed and the identity of the employee who destroyed any recording. |
| --- | --- |
Maintain marijuana storage plan for provisioning centers that includes the following at a minimum:
| ● | A secured limited access area for inventories of Michigan Marijuana Products. |
|---|---|
| ● | Clearly labeled containers (a) marked, labeled or tagged, (b) enclosed on all sides and (c) latched or<br>locked to keep all contents secured within. All such containers must be identified and tracked in accordance with the MTA. |
| --- | --- |
| ● | A locked area for chemical and solvents separate from Michigan Marijuana Products. |
| --- | --- |
| ● | Separation of marijuana-infused products from toxic or flammable materials. |
| --- | --- |
| ● | A sales or transfer counter or barrier separated from stock rooms to ensure registered qualifying patients<br>or registered primary caregivers do not have direct access to Michigan Marijuana Products. |
| --- | --- |
There are significant risks associated with the business of the Company, as described above and in Section 17 – Risk Factors of the Company’s Listing Statement as filed on www.sedar.com. Readers are strongly encouraged to carefully read all of the risk factors contained in Section 17 – RiskFactors of the Company’s Listing Statement.
| Pg 36 of 37 |
| --- |
Internal Control over Financial Reporting and Disclosure Controls
Management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), is responsible for designing, establishing, and maintaining a system of internal controls over financial reporting (“ICFR”) to provide reasonable assurance that all information prepared by the Company for external purposes is reliable and timely. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with IFRS.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated Financial Statements. Due to its inherent limitations, internal control over financial reporting and disclosure may not prevent or detect all misstatements.
The CEO and CFO have evaluated whether there were changes to the ICFR during the three month period ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, the ICFR. As a result, no such significant changes were identified through their evaluation.
There have been no material changes in the Company’s internal control over financial reporting during the three month period ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
| Pg 37 of 37 |
| --- |
Exhibit 11
Form 52-109FV2
Certification of Interim Filings – VentureIssuer Basic Certificate
I, J. Obie Strickler, President and Chief Executive Officer of Grown Rogue International Inc., certify the following:
***Review:***I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Grown RogueInternational Inc. (the “issuer”) for the interim period ended January 31, 2021.
Nomisrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
Fairpresentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: April 1, 2021
| “J. Obie Strickler” |
|---|
| J. Obie Strickler |
| President and Chief Executive Officer |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit 12
Form 52-109FV2
Certification of Interim Filings – VentureIssuer Basic Certificate
I, Michael Johnston, Chief Financial Officer and Corporate Secretary of Grown Rogue International Inc., certify the following:
***Review:***I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Grown RogueInternational Inc. (the “issuer”) for the interim period ended January 31, 2021.
Nomisrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
Fairpresentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: April 1, 2021
| “Michael Johnston” |
|---|
| Michael Johnston |
| Chief Financial Officer and Corporate Secretary |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit13
GrownRogue Reports 5^th^ Consecutive Quarter of Positive Adjusted
Pro-FormaEBITDA, Record Pro-Forma Revenue of $2M, and Record
73%Cash Margin
Medford,Oregon, April 5, 2021 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan reports a record quarterly cash margin^2^ of 73%, helping to drive the 5^th^ consecutive quarter of positive adjusted pro-forma EBITDA^1,3^of $0.2M for the three months ended January 31, 2021. The Company also had it largest pro-forma revenue^3^in Company history in Q1 2020, despite the first quarter being the most challenging due to industry seasonality.
All amounts are expressed in United States Dollars unless otherwise indicated. Certain metrics, including those expressed on an adjusted basis, are non-IFRS measures.
Financialand Business Highlights
| ● | Record<br> pro-forma revenue^3^of $2.0M |
|---|---|
| ● | 5^th^consecutive quarter of positive Adjusted pro-forma EBITDA^1,3^ of $0.2M |
| --- | --- |
| ● | Record<br> Cash Margin of 73% in Q1 2021 for Oregon flower production |
| --- | --- |
| ● | Successfully<br> launched our Certified Fresh Nitrogen Sealed Jars in the Michigan market, obtaining rapid<br> market acceptance and reorders now accounting for approximately 30% of sales in Michigan |
| --- | --- |
| ● | During<br> and subsequent to quarter-end, raised gross debt and equity (brokered and non-brokered private<br> equity placements) proceeds of CAD$7.6M |
| --- | --- |
| ● | Started<br> construction to add 40% additional capacity at current Oregon indoor facility and subsequent<br> to quarter end completed construction |
| --- | --- |
| ● | Subsequent<br> to quarter-end executed an asset purchase agreement to acquire a turn-key 30,000 square foot<br> indoor growing facility in Medford, Oregon and a retail dispensary in Portland, Oregon from<br> HSCP, LLC, a subsidiary of Acreage Holdings Inc. |
| --- | --- |
“Grown Rogue continues to build upon its success with a record quarter for both cash margin and pro-forma revenue, including our 5^th^consecutive quarter of positive adjusted pro-forma EBITDA to begin 2021,” said Obie Strickler, CEO of Grown Rogue. “Our focused goal remains to efficiently and consistently produce high-quality and low-cost flower, maintain excellent customer relationships and meet the demand of our consumers. With our recent acquisitions and financings, we are well poised for a year of growth and profitability in 2021.”
ManagementCommentary
Beginning its third year as a publicly traded company, Grown Rogue continued to leverage its simplified business model, resulting in its 5^th^consecutive quarter of positive Adjusted Pro-Forma EBITDA^1,3^, improvements and opportunities to scale up production through expansion of existing facilities and acquisitions of new assets. These improvements have led to a record quarter of pro-forma Revenue^3^ of $2.0M even during the slowest quarter of our fiscal year. Consistent cash margins^2^of near 70%, coupled with the ability to retrofit and implement proven cultivation methods, bodes well for Grown Rogue’s continued strategy and growth.
Highlightsby State
OregonOperations
| ● | Grown<br> Rogue Indoor flower sold at an average price of $1,361/lb., versus $1,034/lb. in 2020, an<br> increase of over 30% which resulted in a 66% cash margin^2^ |
|---|---|
| ● | Grown<br> Rogue Sungrown flower sold at an average price of $705/lb., versus $681/lb in 2020, an increase<br> of 3% and resulting in a 75% cash margin^2^ |
| --- | --- |
| ● | More<br> than doubled indoor growing capacity with the acquisition (pending regulatory approval) of<br> a turn-key 30,000 square foot facility. First harvest from this facility is expected in May |
| --- | --- |
MichiganOperations (of our partner Golden Harvests, LLC in which a subsidiary of the Company holds an indirect option to acquire 60% equity interestin Golden Harvests, LLC, pending Municipal and State regulatory approval)
| ● | Pro-forma^3^Revenues of approximately $0.95M, with average selling price exceeding $3k per pound |
|---|---|
| ● | Launched<br> our branded, Certified Fresh Nitrogen Sealed Jars in December quickly gaining market traction.<br> Early results over the last several months showing jars representing approximately one-third<br> of sales and commanding $500-$1000/lb more than bulk sales |
| --- | --- |
| ● | Construction<br> continued to maximize output from the 80,000 square foot facility. 25,000 square feet are<br> now under cultivation with another 20,000 square feet expected to be online by December 2021 |
| --- | --- |
| ● | Currently<br> operating 2 Adult Use Producer Licenses and 2 Medical Producer Licenses, bringing total plant<br> count capacity to 7,000. The application processes have been started for 4 additional licenses |
| --- | --- |
2
SelectedFinancial Information (Complete financial tables have been filed on www.sedar.com)
(Dollars in $000s, share amounts in 000s)
| Three Months<br> Ended January 31, | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Reported<br> Revenue | $ | 1,051 | 1,106 | |||
| Gross profit, excluding fair<br> value items, as reported | $ | 578 | 585 | |||
| Proforma Revenue^3^ | $ | 2,001 | 1,670 | |||
| Adjusted EBITDA^1^(loss) | $ | (22 | ) | (5 | ) | |
| Net loss per share | $ | (0.01 | ) | (0.00 | ) | |
| Weighted Common Shares Outstanding | 108,038 | 72,563 |
Grown Rogue maintained revenue at $1.1M, comparable to 2020 results.
Pro Forma Adjusted EBITDA^1,3^ was $0.2M as compared to $0.1M in Q1 2020, driven by increasing sales in Michigan and continued improvements in margin.
Cash Margin for Grown Rogue products^2^ increased to 73% from 60% in Q1 2020, driven by operational efficiencies and improved pricing.
General and administrative expenses climbed modestly from $670k to $750k, driven in part by increased corporate costs associated with business expansion, as well as higher salaries from recent hires in skilled positions.
The Company generated $123k of cash from operations versus $150k in 2020, with net working capital continuing to improve, after adjusting for the reclassification of convertible debentures from long-term to short-term. The Company anticipates that the remaining debentures will either be converted or retired in the second quarter, using money raised from the private placements.
3
| Three<br> months ended | ||||||
|---|---|---|---|---|---|---|
| January<br> 31, | ||||||
| Adjusted<br> EBITDA Reconciliation | 2021 | 2020 | ||||
| Net loss, as reported | $ | (995,789 | ) | $ | (233,187 | ) |
| Add back realized fair value<br> amounts included in inventory sold | 173,598 | 632,630 | ||||
| Add back (deduct) unrealized<br> fair value gain (loss) on growth of biological assets | 124,311 | (701,559 | ) | |||
| Add back amortization of property<br> & equipment included in cost of<br> sales | 136,072 | 45,397 | ||||
| $ | (561,808 | ) | $ | (256,719 | ) | |
| Add back accretion expense,<br> as reported | 248,357 | 68,210 | ||||
| Add back amortization of intangible<br> assets, as reported | 4,997 | 7,659 | ||||
| Add back amortization of property<br> and equipment, as reported | 124,381 | 49,677 | ||||
| Add back amortization of right-of-use<br> assets, as reported | 48,605 | 35,822 | ||||
| Add back share-based compensation<br> expense, as reported | 88,438 | |||||
| Add back interest expense,<br> as reported | 8,527 | 90,514 | ||||
| Deduct unrealized gain on<br> marketable securities, as reported | (302,808 | ) | - | |||
| Add back<br> unrealized loss on derivative liability | 319,627 | - | ||||
| Adjusted<br> EBITDA (loss) | $ | (21,684 | ) | $ | (4,837 | ) |
| Three<br> months ended | ||||||
| --- | --- | --- | --- | --- | --- | |
| January<br> 31, 2021 | ||||||
| Cash<br> Margin analysis | Revenue | Costs | Margin<br> % | |||
| Grown Rogue products | 73 | % | ||||
| Third party products | -- | |||||
| Service revenues | 52 | % | ||||
| Asset depreciation included<br> in COGS | -- | |||||
| Cost<br> of packaging & other included in COGS | -- | |||||
| Total costs of finished cannabis<br> inventory sold, as reported | 55 | % | ||||
| Realized fair value amounts<br> in inventory sold, as reported | -- | |||||
| Unrealized<br> fair value (gain) on growth of biological assets, as reported | -- | |||||
| Totals, as reported | 27 | % |
All values are in US Dollars.
4
NOTES:
1.
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income (loss) for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance. The following is a reconciliation of the Company’s net income (loss) to Adjusted EBITDA.
2.
The Company has provided Cash Margin Analysis to demonstrate the methodology for calculating its non-IFRS production cost and margin metrics. Cash production costs of Grown Rogue products is calculated by taking the cost of finished cannabis inventory sold and deducting non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments, and cost of products purchased from other Licensed Producers that were sold. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash production costs of Grown Rogue products by total grams of dried cannabis sold in the period. Management believes these measures provide useful information as they remove noncash amortization and packaging costs and provide a benchmark of the Company against its competitors.
3.
The Company has provided unaudited pro-forma revenue information, which assumes that closed and pending mergers and acquisitions in 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020 for the Company and target companies.
NON-IFRSFINANCIAL MEASURES
Cashproduction costs of Grown Rogue products, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions underIFRS. The Company has also provided unaudited pro-forma financial information, which assumes that closed and pending mergers and acquisitionsin 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020. The Companyhas provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental informationand in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financialmeasures are presented because management has evaluated the financial results both including and excluding the adjusted items and believethat the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operatingperformance of the business. These supplemental non-IFRS financial measures should not be considered superior to, as a substitute foror as an alternative to, and should only be considered in conjunction with, the IFRS financial measures presented herein. Accordingly,the following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directlycomparable financial measures calculated and presented in accordance with IFRS.
AboutGrown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
5
FORWARD-LOOKINGSTATEMENTS
Thispress release contains statements which constitute “forward-looking information” within the meaning of applicable securitieslaws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future businessactivities. Forward- looking information is often identified by the words “may,” “would,” “could,”“should,” “will,” “intend,” “plan,” “anticipate,” “believe,”“estimate,” “expect” or similar expressions and include information regarding: (i) statements regarding the futuredirection of the Company (ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans forexpansion of the Company into Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business,and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflectthe Company’s management’s expectations, estimates or projections concerning the business of the Company’s future resultsor events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Althoughthe Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risksand uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have materialadverse effects on future results, performance or achievements of the combined company. Among the key factors that could cause actualresults to differ materially from those projected in the forward-looking information are the following: changes in general economic,business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raisedebt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreasesin the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicablelaws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and relatedcosts, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Shouldone or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect,actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Althoughthe Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially,there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assumeany obligation, to update this forward-looking information except as otherwise required by applicable law.
SAFEHARBOR STATEMENT
Thispress release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), including all statements that are not statements of historical fact regarding the intent, belief orcurrent expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company’s financingplans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategyand operating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,” “will,”“expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressionsand variations thereof are intended to identify forward-looking statements. Also, forward-looking statements represent our management’sbeliefs and assumptions only as of the date hereof. Except as required by law, we assume no obligation to update these forward-lookingstatements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-lookingstatements, even if new information becomes available in the future. Investors are cautioned that any such forward-looking statementsare not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s ability tocontrol, and that actual results may differ materially from those projected in the forward-looking statements as a result of variousfactors including the risk disclosed in the Company’s Form 20-F and 6-K filings with the Securities and Exchange Commission.
TheCompany is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplacein the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activitieshowever, these activities are currently illegal under United States federal law. Additional information regarding this and other risksand uncertainties relating to the Company’s business are disclosed in the Company’s Listing Statement filed on its issuer profileon SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptionsunderlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from thosedescribed herein as intended, planned, anticipated, believed, estimated or expected.
6
Nostock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
Forfurther information on Grown Rogue International please visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
7
Exhibit 14
FORM 62-103F3
REPORT UNDER PART 4 OF
NATIONAL INSTRUMENT 62-103
Item1 – Security and Reporting Issuer
| 1.1 | State the designation of securities to which this report relates and the name and address of the head office of the issuer of the<br>securities. |
|---|
This report relates to the common shares (“Shares”) in the capital of:
Grown Rogue International Inc. (the “Issuer”)
340 Richmond Street West
Toronto, Ontario
M5V 1X2
| 1.2 | State the name of the market in which the transaction or other occurrence that triggered the requirement to file this report took<br>place. |
|---|
Not applicable.
Item 2 – Identity of the Eligible Institutional Investor
| 2.1 | State the name and address of the eligible institutional<br>investor. |
|---|---|
| MM | Asset Management Inc. (“MM Asset”) |
| --- | --- |
161 Bay Street
Suite 2240
Toronto, Ontario
M5J 2S1
MMCAP International Inc. SPC (“MMCAP”) is an investment fund advised by MM Asset.
| 2.2 | State the date of the transaction or other occurrence that triggered the requirement to file this report<br>and briefly describe the transaction or other occurrence. |
|---|
On March 5, 2021, MM Asset, on behalf of MMCAP, participated in a private placement offering of special warrants (“Special Warrants”) of the Issuer and acquired 8,001,000 Special Warrants at a price of $0.225 per Special Warrant. Each Special Warrant entitles the holder to acquire, for no additional consideration, one unit (a “Unit”) of Issuer consisting of one Share and one common share purchase warrant (“Warrant”) of the Issuer. Each Warrant entitles the holder to acquire one Share at an exercise price of $0.30 per Share for a period of 24 months from the date of issue. If the Issuer does not obtain a receipt for a final short form prospectus (the “Qualifying Prospectus”) qualifying the distribution of the Units issuable upon exercise of the Special Warrants on or before April 4, 2021, each Special Warrant shall be automatically exercised, without payment of additional consideration, into 1.10 Units (“Penalty Securities”).
The Special Warrants are exercisable and will be deemed to be exercised, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Issuer obtains a receipt from the “Qualifying Prospectus”, and (ii) July 6, 2021.
| 2.3 | State the name of any joint<br>actors. |
|---|
Not applicable.
| 2.4 | State that the eligible institutional investor is eligible to file reports under Part 4 in respect of the reporting issuer. |
|---|
MM Asset is eligible to file reports under Part 4 of National Instrument 62-103 (“NI 62-103”) in respect of the Issuer.
Item 3 – Interest in Securities of the Reporting Issuer
| 3.1 | State the designation and the net increase or decrease in the number or principal amount of securities,<br>and in the eligible institutional investor’s securityholding percentage in the class of securities, since the last report filed<br>by the eligible institutional investor under Part 4 or the early warning requirements. |
|---|
Not applicable. This is an initial report filed by MM Asset under Part 4 of NI 62-103 in respect of securities of the Issuer.
| 3.2 | State the designation and number or principal amount of securities and the eligible institutional investor’s<br>securityholding percentage in the class of securities at the end of the month for which the report is made. |
|---|
As at the end of March 2021, assuming the exercise of the Special Warrants (without regard to the Penalty Securities), MM Asset, on behalf of MMCAP, exercised control and direction over an aggregate of 8,001,000 Shares and 8,001,000 Warrants, representing approximately 10.59% of the Issuer’s 143,047,443 outstanding Shares as reported in its Management Discussion and Analysis dated April 1, 2021 and a Press Release dated March 5, 2021, calculated on a partially diluted basis.
| 3.3 | If the transaction involved a securities lending arrangement,<br>state that fact. |
|---|
Not applicable.
2
| 3.4 | State the designation and number or principal amount of securities and the percentage of outstanding securities<br>of the class of securities to which this report relates and over which |
|---|---|
| (a) | the eligible institutional investor, either alone or together with any joint actors, has ownership and control, |
| --- | --- |
Not applicable.
| (b) | the eligible institutional investor, either alone or together with any joint actors, has ownership but<br>control is held by persons or companies other than the eligible institutional investor or any joint actor, and |
|---|
Not applicable.
| (c) | the eligible institutional investor, either alone or together with any joint actors, has exclusive or shared control but does not<br>have ownership. |
|---|
MM Asset exercises control or direction, but not ownership, over all of the securities referred to in item 3.2 above over which it has discretionary trading authority. MM Asset specifically disclaims any beneficial ownership of the securities referred to herein.
| 3.5 | If the eligible institutional investor or any of its joint actors has an interest in, or right or obligation<br>associated with, a related financial instrument involving a security of the class of securities in respect of which disclosure is required<br>under this item, describe the material terms of the related financial instrument and its impact on the eligible institutional investor’s<br>securityholdings. |
|---|
Not applicable.
| 3.6 | If the eligible institutional investor or any of its joint actors is a party to a securities lending arrangement<br>involving a security of the class of securities in respect of which disclosure is required under this item, describe the material terms<br>of the arrangement including the duration of the arrangement, the number or principal amount of securities involved and any right to recall<br>the securities or identical securities that have been transferred or lent under the arrangement. State if the securities lending arrangement<br>is subject to the exception provided in section 5.7 of NI 62-104. |
|---|
Not applicable.
3
| 3.7 | If the eligible institutional investor or any of its joint actors is a party to an agreement, arrangement<br>or understanding that has the effect of altering, directly or indirectly, the eligible institutional investor’s economic exposure<br>to the security of the class of securities to which this report relates, describe the material terms of the agreement, arrangement or<br>understanding. |
|---|
Not applicable.
Item 4 – Purpose of the Transaction
State the purpose or purposes of the eligible institutional investor and any joint actors for the acquisition or disposition of securities of the reporting issuer. Describe any plans or future intentions which the eligible institutional investor and any joint actors may have which relate to or would result in any of the following:
The securities were acquired in the ordinary course of business, for investment purposes only and not for the purpose of exercising control or direction over the Issuer.
| (a) | the acquisition of additional securities of the reporting issuer, or the disposition of securities of the issuer; |
|---|
Depending on market conditions and other factors, MM Asset, on behalf of MMCAP, may in the future increase or decrease its ownership, control or direction over securities of the Issuer through open market transactions, private agreements or otherwise.
| (b) | a sale or transfer of a material amount of the assets of the reporting issuer or any of its subsidiaries; |
|---|
Not applicable.
| (c) | a change in the board of directors or management of the reporting issuer, including any plans or intentions<br>to change the number or term of directors or to fill any existing vacancy on the board; |
|---|
Not applicable.
| (d) | a material change in the present capitalization or dividend policy of the reporting issuer; |
|---|
Not applicable.
| (e) | a material change in the reporting issuer’s business or corporate structure;<br><br> <br><br><br> <br>Not applicable. |
|---|
4
| (f) | a change in the reporting issuer’s charter, bylaws or similar instruments or another action which<br>might impede the acquisition of control of the reporting issuer by any person; |
|---|
Not applicable.
| (g) | a class of securities of the reporting issuer being delisted from, or ceasing to be authorized to be quoted on, a marketplace; |
|---|
Not applicable.
| (h) | the issuer ceasing to be a reporting issuer in any jurisdiction of Canada;<br><br> <br><br><br> <br>Not applicable. |
|---|---|
| (i) | a solicitation of proxies from securityholders;<br><br> <br><br><br> <br>Not applicable. |
| --- | --- |
| (j) | an action similar to any of those enumerated above.<br><br> <br><br><br> <br>Not applicable. |
| --- | --- |
Item 5 – Agreements, Arrangements, Commitmentsor Understandings With Respect to Securities of the Reporting Issuer
Describe the material terms of any agreements, arrangements, commitments or understandings between the eligible institutional investor and a joint actor and among those persons and any person with respect to securities of the class of securities to which this report relates, including but not limited to the transfer or the voting of any of the securities, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies. Include such information for any of the securities that are pledged or otherwise subject to a contingency, the occurrence of which would give another person voting power or investment power over such securities except that disclosure of standard default and similar provisions contained in loan agreements need not be included
Not applicable.
Item 6 – Change in Material Fact
If applicable, describe any change in a material fact set out in a previous report filed by the eligible institutional investor under the early warning requirements or Part 4 in respect of the reporting issuer’s securities.
Not applicable.
5
Item 7 – Certification
The undersigned, as the eligible institutional investor, certifies, or the undersigned, as the agent filing the report on behalf of the eligible institutional investor, certifies to the best of its knowledge, information and belief, that the statements made in this report are true and complete in every respect.
DATED this 12^th^ day of April, 2021.
| MM ASSET MANAGEMENT INC. | |
|---|---|
| By: | “Hillel Meltz” |
| Hillel Meltz, President |
6
Exhibit 15
NOTICE TO READER
Grown Rogue International Inc. (the “Company”) is hereby filing these amended and restated unaudited condensed interim consolidated financial statements for the three months ended January 31, 2021 and 2020, as the Company has determined restatements are required as part of a review of its condensed interim consolidated financial statements. Please refer to Note 2 for the restatement details.
In connection with the filing of these amended and restated unaudited condensed interim consolidated financial statements, the Company is also filing (i) amended and restated management discussion and analysis in compliance with the requirements of National Instrument 51-102 Continuous Disclosure Obligations, and (ii) CEO and CFO certifications in compliance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annualand Interim Filings.
Toronto, Ontario
April 16, 2021
GROWN ROGUE INTERNATIONAL INC.
Amended and Restated Condensed Interim Consolidated Financial Statements
(Unaudited)
For the Three Months ended January 31, 2021 and 2020
Expressed in United States Dollars
Grown Rogue International Inc.
Amended and Restated Condensed Interim Consolidated Statements ofFinancial Position
Unaudited - Expressed in United States Dollars
| January 31, 2021<br> <br>Restated – Note 2 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| ASSETS | ||||||
| Current assets | ||||||
| Cash | $ | 1,278,401 | $ | 217,788 | ||
| Accounts receivable (Note 19) | 238,987 | 172,121 | ||||
| Biological assets (Note 4) | 220,981 | 250,690 | ||||
| Inventory (Note 5) | 970,934 | 1,124,360 | ||||
| Prepaid expenses and other assets | 79,060 | 69,816 | ||||
| Total current assets | $ | 2,788,363 | $ | 1,834,775 | ||
| Marketable securities (Note 6) | 914,970 | 585,035 | ||||
| Other investment (Note 7) | 189,915 | 187,812 | ||||
| Right-of-use assets (Note 9) | 788,168 | 50,468 | ||||
| Property and equipment (Note 10) | 1,023,673 | 1,101,331 | ||||
| Intangible assets | - | 4,997 | ||||
| TOTAL ASSETS | $ | 5,705,089 | $ | 3,764,418 | ||
| LIABILITIES | ||||||
| Current liabilities | ||||||
| Accounts payable and accrued liabilities | $ | 1,275,456 | $ | 1,059,971 | ||
| Current portion of lease liabilities (Note 9) | 183,746 | 100,277 | ||||
| Current portion of long-term debt (Note 11) | 329,166 | 46,099 | ||||
| Interest payable (Note 11) | 12,155 | 9,367 | ||||
| Convertible debentures (Note 12) | 1,899,080 | - | ||||
| Derivative liabilities (Note 12.1) | 930,195 | 583,390 | ||||
| Unearned revenue | 84,600 | - | ||||
| Total current liabilities | $ | 4,714,398 | $ | 1,799,104 | ||
| Accrued liabilities (Note 8) | 389,816 | 389,816 | ||||
| Lease liabilities (Note 9) | 651,809 | 16,630 | ||||
| Long-term debt (Note 11) | 1,050,588 | 753,715 | ||||
| Convertible debentures (Note 12) | - | 1,739,678 | ||||
| Redemption liabilities (Note 23.3) | 375,000 | - | ||||
| Deferred rent | - | 10,494 | ||||
| TOTAL LIABILITIES | $ | 7,181,611 | $ | 4,709,437 | ||
| EQUITY | ||||||
| Share capital (Note 13) | $ | 14,629,885 | $ | 14,424,341 | ||
| Shares issuable (Note 13) | 88,963 | - | ||||
| Subscriptions payable (Note 13) | 125,000 | - | ||||
| Contributed surplus (Notes 14, 15) | 3,735,253 | 4,070,264 | ||||
| Accumulated other comprehensive income (loss) | (88,131 | ) | (12,197 | ) | ||
| Accumulated deficit | (20,314,005 | ) | (19,394,044 | ) | ||
| Equity attributable to shareholders | $ | (1,823,035 | ) | $ | (911,636 | ) |
| Non-controlling interest (Notes 23) | 346,513 | (33,383 | ) | |||
| TOTAL EQUITY | $ | (1,476,522 | ) | $ | (945,019 | ) |
| TOTAL LIABILITIES AND EQUITY | $ | 5,705,089 | $ | 3,764,418 |
Going Concern (Note 2)
Subsequent Events (Note 24)
Approved on behalf of the Board of Directors:
| Signed “J. Obie Strickler”, Director | Signed “Stephen Gledhill”, Director |
|---|
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 3 of 32
Grown Rogue International Inc.
Amended and Restated Condensed Interim Consolidated Statements ofComprehensive Loss
Unaudited - Expressed in United States Dollars
| Three months ended <br><br>January 31, | ||||||
|---|---|---|---|---|---|---|
| 2021<br> <br>Restated – Note 2 | 2020 | |||||
| Revenue | ||||||
| Product sales | $ | 874,824 | $ | 1,106,296 | ||
| Service revenue (Note 7) | 176,361 | - | ||||
| Total revenue | $ | 1,051,185 | $ | 1,106,296 | ||
| Cost of goods sold | ||||||
| Cost of finished cannabis inventory sold (Note 5) | $ | (470,554 | ) | $ | (521,680 | ) |
| Costs of service revenues (Note 7) | (84,153 | ) | - | |||
| Gross profit, excluding fair value items | $ | 496,478 | $ | 584,616 | ||
| Realized fair value amounts in inventory sold | (169,328 | ) | (632,630 | ) | ||
| Unrealized fair value gain (loss) on growth of biological assets (Note 4) | (186,806 | ) | 701,559 | |||
| Gross profit | $ | 140,344 | $ | 653,545 | ||
| Expenses | ||||||
| Accretion expense | $ | 248,357 | $ | 68,210 | ||
| Amortization of intangible assets | 4,997 | 7,659 | ||||
| Amortization of property and equipment (Note 10) | 29,967 | 49,677 | ||||
| Amortization of right-of-use assets (Note 9) | 8,188 | 35,822 | ||||
| General and administrative (Note 20) | 666,739 | 670,768 | ||||
| Share-based compensation | 88,438 | - | ||||
| Total expenses | $ | 1,046,686 | $ | 832,136 | ||
| Loss from operations | $ | (906,342 | ) | $ | (178,591 | ) |
| Other income and (expense) | ||||||
| Interest expense | $ | (8,527 | ) | $ | (90,514 | ) |
| Other income | - | 15,000 | ||||
| Gain on debt settlement | 16,623 | - | ||||
| Unrealized gain on marketable securities (Note 6) | 302,808 | - | ||||
| Unrealized loss on derivative liability (Note 12.1) | (319,627 | ) | - | |||
| Gain on disposal of property and equipment | - | 20,918 | ||||
| Net loss | $ | (915,065 | ) | $ | (233,187 | ) |
| Other comprehensive income (items that may be subsequently reclassified to profit & loss) | ||||||
| Currency translation | (75,934 | ) | (16,575 | ) | ||
| Total comprehensive loss | $ | (990,999 | ) | $ | (249,762 | ) |
| Loss per share attributable to owners of the parent - basic & diluted | $ | (0.01 | ) | (0.00 | ) | |
| Weighted average shares outstanding - basic & diluted | 108,038,431 | 72,562,742 | ||||
| Net loss for the period attributable to: | ||||||
| Non-controlling interest | $ | 4,896 | $ | (16,145 | ) | |
| Shareholders | (919,961 | ) | (217,042 | ) | ||
| Net loss | $ | (915,065 | ) | $ | (233,187 | ) |
| Comprehensive loss for the period attributable to: | ||||||
| Non-controlling interest | $ | 4,896 | $ | (16,145 | ) | |
| Shareholders | (995,895 | ) | (233,617 | ) | ||
| Total comprehensive loss | $ | (990,999 | ) | $ | (249,762 | ) |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 4 of 32
Grown Rogue International Inc.
Amended and Restated Condensed Interim Consolidated Statements of Changes in Shareholders’ Deficit
Unaudited - Expressed in United States Dollars
| Number of common shares | Share capital | Shares issuable | Subscriptions payable | Contributed surplus | Currency translation reserve | Accumulated deficit | Non-controlling interests | Total equity | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at October 31, 2020 | 107,782,397 | $ | 14,424,341 | $ | - | $ | - | $ | 4,070,264 | $ | (12,197 | ) | $ | (19,394,044 | ) | $ | (33,383 | ) | (945,019 | ) | |||
| Shares issued for employment & consulting services (Note 13.1) | 18,044 | 3,441 | 3,753 | - | - | - | - | - | 7,194 | ||||||||||||||
| Shares issued pursuant to private placement (Note 13.2) | 2,031,784 | 200,000 | - | - | - | - | - | - | 200,000 | ||||||||||||||
| Shares issued to extend payment due date (Notes 7.2, Note 13.3) | 25,000 | 2,103 | - | - | - | - | - | - | 2,103 | ||||||||||||||
| Shares issuable pursuant to partner creditor (Note 13.4) | - | - | 36,310 | - | - | - | - | - | 36,310 | ||||||||||||||
| Shares issuable for services (Note 13.5) | - | - | 48,900 | - | - | - | - | - | 48,900 | ||||||||||||||
| Proceeds received prior to close of private placement (Note 13.2) | - | - | - | 125,000 | - | - | - | - | 125,000 | ||||||||||||||
| Issuance of non-controlling interest in subsidiary for cash (Note 23.3) | - | - | - | - | (375,000 | ) | - | - | 375,000 | - | |||||||||||||
| Stock option vesting expense | - | - | - | - | 39,989 | - | - | - | 39,989 | ||||||||||||||
| Currency translation adjustment | - | - | - | - | - | (75,934 | ) | - | - | (75,934 | ) | ||||||||||||
| Net loss | - | - | - | - | - | - | (919,961 | ) | 4,896 | (915,065 | ) | ||||||||||||
| Balance at January 31, 2021 | 109,857,225 | $ | 14,629,885 | $ | 88,963 | $ | 125,000 | $ | 3,735,253 | $ | (88,131 | ) | $ | (20,314,005 | ) | $ | 346,513 | $ | (1,476,522 | ) | |||
| Number of common shares | Share capital | Shares issuable | Subscriptions payable | Contributed surplus | Currency translation reserve | Accumulated deficit | Non-controlling interests | Total equity | |||||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | |
| Balance at October 31, 2019 | 71,653,598 | $ | 12,647,930 | $ | - | $ | 5,136 | $ | 2,890,435 | $ | 121,920 | $ | (17,112,605 | ) | $ | 19,538 | $ | (1,427,646 | ) | ||||
| Common shares issued for services (Note 13.6) | 1,058,750 | 71,910 | - | - | - | - | - | - | 71,910 | ||||||||||||||
| Currency translation adjustment | - | - | - | - | - | (16,575 | ) | - | - | (16,575 | ) | ||||||||||||
| Net loss | - | - | - | - | - | - | (217,042 | ) | (16,145 | ) | (233,187 | ) | |||||||||||
| Balance at January 31, 2020 | 72,712,348 | $ | 12,719,840 | $ | - | $ | 5,136 | $ | 2,890,435 | $ | 105,345 | $ | (17,329,647 | ) | $ | 3,393 | $ | (1,605,498 | ) |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 5 of 32
Grown Rogue International Inc.
Amended and Restated Condensed Interim Consolidated Cash Flow Statements
Unaudited - Expressed in United States Dollars
| Three months ended <br><br>January 31, | ||||||
|---|---|---|---|---|---|---|
| Cash provided by (used in) | 2021<br> <br>Restated – Note 2 | 2020 | ||||
| Operating activities | ||||||
| Net loss | $ | (915,065 | ) | $ | (233,187 | ) |
| Adjustments for non-cash items in net loss | ||||||
| Amortization of property and equipment | 29,967 | 49,677 | ||||
| Amortization of right-of-use assets | 8,188 | 35,822 | ||||
| Amortization of intangible assets | 4,997 | 7,659 | ||||
| Unrealized loss (gain) on changes in fair value of biological assets | 186,806 | (701,559 | ) | |||
| Share-based compensation | 88,963 | 18,375 | ||||
| Stock option expense | 43,485 | - | ||||
| Accretion expense | 248,357 | 68,210 | ||||
| Gain on disposal of property & equipment | - | (20,918 | ) | |||
| Interest on lease liabilities | - | 13,003 | ||||
| Unrealized gain on marketable securities | (302,808 | ) | - | |||
| Loss on fair value of derivative liability | 319,627 | - | ||||
| Effects of foreign exchange | (828 | ) | (9,016 | ) | ||
| $ | (288,311 | ) | $ | (771,934 | ) | |
| Changes in non-cash working capital (Note 16) | 411,716 | 922,318 | ||||
| Net cash provided by operating activities | $ | 123,405 | $ | 150,384 | ||
| Investing activities | ||||||
| Purchase of property and equipment | $ | (159,016 | ) | $ | (4,528 | ) |
| Net cash used in investing activities | $ | (159,016 | ) | $ | (4,528 | ) |
| Financing activities | ||||||
| Third party investment in subsidiary | $ | 375,000 | $ | - | ||
| Proceeds from long-term debt | 525,000 | 15,000 | ||||
| Repayment of long-term debt | (62,197 | ) | (34,911 | ) | ||
| Proceeds of subscription receipts | 125,000 | - | ||||
| Payments of lease principal | (66,579 | ) | (67,225 | ) | ||
| Proceeds from private placement | 200,000 | - | ||||
| Net cash provided by financing activities | $ | 1,096,224 | $ | (87,136 | ) | |
| Change in cash | $ | 1,060,613 | $ | 58,720 | ||
| Cash balance, beginning | $ | 217,788 | $ | 74,926 | ||
| Cash balance, ending | $ | 1,278,401 | $ | 133,646 |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 6 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 1. | Corporate Information |
|---|
These unaudited condensed interim consolidated financial statements for the three months ended January 31, 2021 and 2020 (the “Financial Statements”), include the accounts of Grown Rogue International, Inc. (together with its subsidiaries, “GRIN” or the “Company”) and its subsidiaries. The registered office of GRIN is located at 340 Richmond Street West, Toronto, Ontario, M5V 1X2.
GRIN’s subsidiaries and ownership thereof are summarized in the table below.
| Company | Ownership |
|---|---|
| Grown Rogue Unlimited, LLC | 100% by GRIN |
| Grown Rogue Gardens, LLC | 100% by Grown Rogue Unlimited, LLC |
| GRU Properties, LLC | 100% by Grown Rogue Unlimited, LLC |
| GRIP, LLC | 100% by Grown Rogue Unlimited, LLC |
| GR Michigan, LLC | 87% by Grown Rogue Unlimited, LLC |
| Grown Rogue Distribution, LLC | 91.4% by Grown Rogue Unlimited, LLC |
| Idalia, LLC | 60% by Grown Rogue Unlimited, LLC |
GRIN is primarily engaged in the business of growing and selling cannabis products. The primary cannabis product produced and sold is cannabis flower.
| 2. | Basis of Presentation |
|---|
Statement of Compliance and Going Concern
The Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) IAS 34 - Interim Financial Reporting, applicable to a going concern, which contemplates the realization of assets and liabilities in the normal course of business as they become due.
The Company’s ability to continue as a going concern is dependent upon, but not limited to, its ability to raise financing necessary to discharge its liabilities as they become due and generate positive cash flows from operations. For the three months ended January 31, 2021, the Company incurred a net loss of approximately $915,000, and as of that date, the Company’s accumulated deficit was approximately $20.3 million, and its working capital deficit was approximately $1.9 million. These conditions have resulted in material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern and to meet its obligations will be dependent upon successful sales of product and generating positive cash flows from operations as well as obtaining suitable financing. The accompanying Financial Statements do not reflect any adjustment that might result from the outcome of this uncertainty. If the going concern assumption is not used, then the adjustments required to report the Company’s assets and liabilities at liquidation values could be material to these Financial Statements.
These Financial Statements do not include all disclosures required by IFRS for annual audited consolidated financial statements and accordingly should be read in conjunction with our annual consolidated financial statements for the year ended October 31, 2020. These unaudited condensed interim financial statements were authorized for issuance by the Board of Directors on April 16, 2021 (“Financial Statement Date”).
Pg 7 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Basis of Measurement
These Financial Statements have been prepared on a historical cost basis except for certain financial instruments and biological assets, which are measured at fair value, as described herein.
Functional and Presentation Currency
The Company’s functional currency is the Canadian dollar and the functional currency of its subsidiaries is the United States (“U.S.”) dollar. These Financial Statements are presented in U.S. dollars.
Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates prevailing at the end of the reporting period. All exchange gains and losses are included in the statements of loss and comprehensive loss.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Company are expressed in U.S. Dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive loss and reported as currency translation reserve in shareholders’ equity.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which, in substance, is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive loss.
Basis of Consolidation
The subsidiaries are those companies controlled by the Company, as the Company is exposed, or has rights, to variable returns from its involvement with the subsidiaries and has the ability to affect those returns through its power over the subsidiaries by way of its ownership and rights pertaining to the subsidiaries. The financial statements of subsidiaries are included in these Financial Statements from the date that control commences until the date control ceases. All intercompany balances and transactions have been eliminated upon consolidation.
Restatement of Previously Reported Consolidated Financial Statements
The Company has restated its consolidated statement of financial position as at January 31, 2021; its consolidated statement of loss and comprehensive loss, consolidated statement of cash flows, and consolidated statement of changes in equity for the three months ended January 31, 2021.
As part of a review of its condensed interim consolidated financial statements, the Company determined the following restatements.
Pg 8 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| ● | Adjusted costs capitalized into biological assets and inventory, and related cost of finished cannabis<br>inventory sold, realized fair value amounts included in inventory sold, and unrealized fair value loss on growth of biological assets; |
|---|---|
| o | Expenses capitalized to biological assets and inventory included amortization of property and equipment,<br>amortization of right-of-use assets, and overhead costs (reported in general and administrative costs); and |
| --- | --- |
| ● | Reduction to the remeasurement of right-of-use assets and lease liabilities resulting from a correction<br>to the amount of the future lease payments. |
| --- | --- |
As a result of the restatements, the Company’s reported gross profit decreased by $139,846, to a gross profit of $140,344; and the Company’s reported net loss decreased by $80,724, to a net loss of $915,065.
Line items restated on the amended and restated consolidated statements of financial position are presented in the table below.
| As at January 31, 2021 | As previously reported () | Adjustment | As restated () | ||||
|---|---|---|---|---|---|---|---|
| Biological assets (Note 4) | 4,790 | ||||||
| Inventory (Note 5) | 74,856 | ||||||
| Total current assets | 79,646 | ||||||
| Right-of-use assets (Note 9) | (79,760 | ) | |||||
| Total assets | (114 | ) | |||||
| Current portion of lease liabilities (Note 9) | 8,084 | ||||||
| Total current liabilities | 8,084 | ||||||
| Lease liabilities (Note 9) | (88,922 | ) | |||||
| Total liabilities | (80,838 | ) | |||||
| Accumulated deficit | ) | 80,724 | ) | ||||
| Total equity | ) | 80,724 | ) |
All values are in US Dollars.
Pg 9 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Line items restated on the amended and restated consolidated statements of loss and comprehensive loss are presented in the table below.
| Three months ended January 31, 2021 | As previously reported () | Adjustment | As restated () | ||||
|---|---|---|---|---|---|---|---|
| Cost of finished cannabis inventory sold (Note 5) | 81,621 | ||||||
| Gross profit, excluding fair value items | (81,621 | ) | |||||
| Realized fair value amounts in inventory sold | (4,270 | ) | |||||
| Unrealized fair value gain (loss) on growth of biological assets (Note 4) | 62,495 | ||||||
| Gross profit | (139,846 | ) | |||||
| Amortization of property and equipment (Note 10) | (94,414 | ) | |||||
| Amortization of right-of-use assets (Note 9) | (40,417 | ) | |||||
| General and administrative (Note 20) | (85,739 | ) | |||||
| Total expenses after gross profit | (220,570 | ) | |||||
| Loss from operations | ) | 80,724 | ) | ||||
| Net loss | (80,724 | ) | |||||
| Net loss attributable to: | |||||||
| Shareholders | ) | 80,724 | ) | ||||
| Total comprehensive loss | ) | 80,724 | ) | ||||
| Total comprehensive loss attributable to: | |||||||
| Shareholders | ) | 80,724 | ) |
All values are in US Dollars.
Estimation Uncertainty due to COVID-19
On March 11, 2020, the World Health Organization declared a global outbreak of COVID-19 (coronavirus) to be a pandemic, which has had a significant impact on businesses through the restrictions put in place by the federal, state, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders in Canada and the United States. Government measures imposed to limit the spread of COVID-19 did not have a material impact on the Company’s operations during the three months ended January 31, 2021, and the Company has not observed any material impairments, or significant changes in the fair value of its assets as a result of COVID-19.
At this time, it is unknown the extent of the impact the COVID-19 outbreak may have on the Company as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put in place by Canada, the United States and other countries to fight the virus. While the extent of the impact is unknown, it remains possible that this outbreak may cause reduced customer demand, supply chain disruptions, staff shortages, and increased government regulations, all of which may negatively impact the Company’s business, results of operations and financial condition. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business.
Pg 10 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 3. | Significant Accounting Policies and Significant Judgements |
|---|
The preparation of these Financial Statements requires management to make judgments, estimates, and assumptions that affect the application of policies and reported amounts of assets, liabilities, and expenses. Areas that have the most significant effect on the amounts recognized in the financial statements are disclosed in Note 4 of the Company’s consolidated financial statements for the year ended October 31, 2020. The accounting policies applied in these Financial Statements are consistent with those used in the Company’s consolidated financial statements for the year ended October 31, 2020.
| 4. | Biological Assets |
|---|
Biological assets consist of cannabis plants, which reflect measurement a fair value less costs to sell (“FVLCTS”). Changes in the carrying amounts of biological assets for the three months ended January 31, 2021 are as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Beginning balance | $ | 250,690 | $ | 156,589 | ||
| Purchased cannabis plants | 185,059 | 724,878 | ||||
| Allocation of operational overhead | 243,194 | 1,130,712 | ||||
| Change in FVLCTS due to biological transformation | (186,806 | ) | 1,515,492 | |||
| Transferred to inventory upon harvest | (271,156 | ) | (3,276,981 | ) | ||
| Ending balance | $ | 220,981 | $ | 250,690 |
FVLCTS is determined using a model which estimates the expected harvest yield for plants currently being cultivated, and then adjusts that amount for the expected selling price and also for any additional costs to be incurred, such as post-harvest costs.
The following significant unobservable inputs, all of which are classified as level 3 on the fair value hierarchy, were used by management as part of this model:
| - | Expected costs required to grow the cannabis up to the point of harvest |
|---|---|
| - | Estimated selling price per pound |
| --- | --- |
| - | Expected yield from the cannabis plants |
| --- | --- |
| - | Estimated stage of growth – The Company applied a weighted average number of days out of the 60-day<br>growing cycle that biological assets have reached as of the measurement date based on historical evidence. The Company assigns fair value<br>according to the stage of growth and estimated costs to complete cultivation. |
| --- | --- |
Pg 11 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| Impact of 20% change | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| January 31, <br><br>2021 | October 31, <br><br>2020 | January 31, <br><br>2021 | October 31, <br><br>2020 | |||||||
| Estimated selling price per (pound) | $ | 1,100 | $ | 1,123 | $ | 25,658 | $ | 57,879 | ||
| Estimated stage of growth | 38 | % | 71 | % | $ | 21,902 | $ | 46,209 | ||
| Estimated flower yield per harvest (pound) | 307 | 216 | $ | 21,902 | $ | 46,209 | ||||
| 5. | Inventory | |||||||||
| --- | --- |
The Company’s inventory composition is as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Raw materials | $ | 9,868 | $ | 8,588 |
| Work in process | 736,476 | 919,464 | ||
| Finished goods | 224,590 | 196,308 | ||
| Ending balance | $ | 970,934 | $ | 1,124,360 |
The cost of inventories included as an expense and included in cost of goods sold for the three months ended January 31, 2021, was $470,554 (2020 - $521,680). For the three months ended January 31, 2021, $159,545 in property and equipment amortization costs were included in cost of finished cannabis inventory sold (2020 – $45,397).
| 6. | Marketable Securities |
|---|
During the year ended October 31, 2020, the Company received 2,362,204 common shares of Plant-Based Investment Corp (“PBIC”) by issuing to PBIC 15,000,000 common shares of the Company pursuant to a subscription agreement. On the date of the transaction, February 10, 2020, the fair value of PBIC shares per share was CAD$0.635 per share, resulting in a fair value of $848,011. The Company does not have control or significant influence over PBIC and has accounted for the investment at fair value through profit or loss.
As at January 31, 2021, the fair value of the shares was $914,970 (October 31, 2020 - $585,035), based upon the publicly quoted price of PBIC shares. The Company recorded an unrealized gain on the shares in the amount of $302,808 (2020 - $Nil) and foreign currency translation gain of $27,127 during three months ended January 31, 2021 (2020 - $Nil).
Pg 12 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 7. | Other Investment |
|---|
On February 6, 2020, the Company entered into a definitive agreement for an option to acquire a 60% controlling interest (the “Option”) of a fully-licensed Michigan based operator, Golden Harvests, LLC (“Golden Harvests”). In addition to the payments described below, the Company must receive certain regulatory approvals in order to exercise the Option. Subsequent to January 31, 2021, the Option was terminated, and a materially similar new option agreement was signed between Canopy Management LLC (“Canopy”) and Golden Harvests (the “New Option”). Under the Option, the Company agreed to pay $810,000 in cash and issue 800,000 common shares of the Company under the following schedule:
| 7.1 | Payment of $150,000 within five days of signing the Option and the issuance of 200,000 common shares of<br>the Company within 60 days after signing the Option (during the year ended October 31, 2020, the cash amount of $150,000 was paid and<br>200,000 common shares were issued with a fair value of $12,812). |
|---|
| 7.2 | Payment of $200,000 and the issuance of 200,000 common shares of the Company on the sixth-month anniversary<br>of signing the Option. The Company paid $25,000 and issued 25,000 shares (Note 13.3) to extend this payment for six-months. Subsequent<br>to January 31, 2021, under the New Option, a cash payment of $100,000 was made, and a 12-month note payable for $100,000 was issued to<br>fulfill the $200,000 payment. The note payable bears interest at $2,000 per month. |
|---|
| 7.3 | Payment of $260,000 and the issuance of 200,000 common shares of the Company on the twelve-month anniversary<br>of signing the Option. The Company could elect to extend the due date of this tranche of the purchase consideration for an additional<br>six months by payment of $25,000 and issuance of 25,000 shares. |
|---|
| 7.4 | Payment of $200,000 and the issuance of 200,000 common shares of the Company due upon exercise of the<br>Option, pending Municipal and State regulatory approval. |
|---|
The Company has a contract to provide operations management services to Golden Harvests. Under this agreement, during the three months ended January 31, 2021, the Company earned revenues of $176,361 (2020 - $Nil) and costs for those revenues were $84,153 (2020 – $Nil).
The aggregate invested into Golden Harvests under the Option, as at January 31, 2021, included the following:
| Investment | January 31, <br><br>2021 | October 31, <br><br>2020 | ||
|---|---|---|---|---|
| Beginning balance | $ | 187,812 | $ | - |
| Cash payments against the Option | - | 175,000 | ||
| Share payments against Option | 2,103 | 12,812 | ||
| Ending balance | $ | 189,915 | $ | 187,812 |
Subsequent to January 31, 2021, and concurrent with the timing of the New Option, the Company obtained an option to acquire an 87% membership interest in Canopy (the “Canopy Option”) from GRIN’s CEO, who is the majority owner of Canopy and who has a fiduciary responsibility to the Company. Exercise of the Canopy Option will ultimately provide identical economic rights as the Company originally had from the Option. In order to exercise the Canopy Option, the Company must: (1) make payments to Canopy, described below, such that Canopy can fulfill the option payments required for Canopy to acquire Golden Harvests under the New Option, and (2) for the Company to have all licensing and other regulatory or governmental approvals from the state of Michigan necessary to operate, or to own an equity interest in an entity that operates, a cannabis business in the state of Michigan.
Pg 13 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The Company’s Canopy Option payments, made such that Canopy can complete its option payments to Golden Harvests under the New Option, are as follows:
| ● | Payment of $260,000 and the issuance of 200,000 common shares of the Company on February 6, 2021. Canopy<br>extended this payment to August 6, 2021, by committing to pay 200,000 shares of the Company; these shares have not been issued at the<br>Financial Statement Date, but are expected to be issued in the normal course of business. These payments are analogous to those described<br>at Note 7.3. |
|---|---|
| ● | Payment of $200,000 and the issuance of 200,000 common shares of the Company on February 6, 2021. A cash<br>payment of $100,000 was made, and a 12-month note payable for $100,000 was issued to fulfill the $200,000 payment. The note payable bears<br>interest at $2,000 per month. As of the Financial Statement Date, the 200,000 common shares have not been issued, but are expected to<br>be issued in the normal course of business. These payments under the New Option are analogous to those described at Note 7.2. |
| --- | --- |
| ● | Payment of $200,000 and the issuance of 200,000 common shares of the Company due upon exercise of the<br>New Option, pending Municipal and State regulatory approval. These payments are analogous to Note 7.4. |
| --- | --- |
| 8. | Accrued Liabilities |
| --- | --- |
The following table summarizes the liability payable to creditors who agreed to defer settlement for longer than one year from October 31, 2020 and 2019:
| CEO | Trade Vendors | Total | ||||||
|---|---|---|---|---|---|---|---|---|
| Balance at October 31, 2019 | $ | 180,799 | - | $ | 180,799 | |||
| Amounts deferred | 45,000 | 241,255 | 286,255 | |||||
| Amounts settled | - | (77,238 | ) | (77,238 | ) | |||
| Balance at October 31, 2020 and January 31, 2021 | $ | 225,799 | 164,017 | $ | 389,816 | |||
| 9. | Leases | |||||||
| --- | --- |
At January 31, 2021, The Company reported lease liabilities pertaining to five underlying liabilities, including three leases for property for growing operations and two leases for equipment.
One lease for outdoor growing property, executed with the Company’s CEO, was extended during the three months ended January 31, 2021, through December 31, 2025. This lease was accordingly remeasured, resulting in an increase to the liability and right-of-use asset of $281,707.
Pg 14 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
A second lease for outdoor growing property was extended during the three months ended January 31, 2021, through December 31, 2021. This lease was accordingly remeasured, resulting in an increase to lease liabilities and right-of-use assets of $43,490.
During the three months ended January 31, 2021, management determined that it would exercise extension options on the lease for its indoor growing facility through March 31, 2027. This lease was accordingly remeasured, resulting in an increase to lease liabilities and right-of-use assets of $460,030.
Two leases used to purchase property and equipment purchases comprise $49,393 of total lease liabilities at January 31, 2021 (October 31, 2020 - $66,338). Of the January 31, 2021 balance, $42,565 is current and 6,828 is non-current (October 31, 2020 - $49,708 was current and $16,630 was non-current).
Set out below are the carrying amounts of right-of-use assets recognized and the movements during the three months ended January 31, 2021.
| Land and Buildings | Leased equipment | Total | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | - | $ | 232,059 | $ | 232,059 | |||
| Adoption of IFRS 16 | 276,431 | - | 276,431 | ||||||
| Additions | - | 68,035 | 68,035 | ||||||
| Amortization | (225,963 | ) | (79,401 | ) | (305,364 | ) | |||
| Balance - October 31, 2020 | $ | 50,468 | $ | 220,693 | $ | 271,161 | |||
| Additions | 785,227 | - | 785,227 | ||||||
| Amortization | (47,527 | ) | (21,400 | ) | (68,927 | ) | |||
| Balance - January 31, 2021 | $ | 788,168 | $ | 199,293 | $ | 987,461 |
Leased equipment was reported in property and equipment in the statements of financial position at January 31, 2021 and October 31, 2020. Depreciation expense related to leased equipment is included in amortization of property and equipment and cost of sales in the statements of comprehensive loss (see Note 10).
Set out below are the carrying amounts and movements of lease liabilities.
| Lease liabilities | January 31, <br><br>2021 | October 31, <br><br>2020 | ||||
|---|---|---|---|---|---|---|
| Balance - beginning | $ | 116,907 | $ | 142,205 | ||
| Adoption of IFRS 16 | - | 276,431 | ||||
| Additions | 785,227 | 68,035 | ||||
| Accretion of interest | 5,096 | 65,433 | ||||
| Payments | (71,675 | ) | (435,197 | ) | ||
| Balance - ending | $ | 835,555 | $ | 116,907 | ||
| Current portion | 183,746 | 100,277 | ||||
| Non-current portion | 651,809 | 16,630 |
Payments during the three months ended January 31, 2021 of $71,675 included principal payments of $66,579 and interest of $5,096 (three months ended January 31, 2020 – payments of $108,106, comprised of principal payments of $89,004 and interest of $19,102).
Set out below are the minimum future lease payments after January 31, 2021.
| Total future minimum lease payments | ||
|---|---|---|
| Less than one year | $ | 261,300 |
| Between one and five years | 816,010 | |
| Total | $ | 1,077,310 |
Pg 15 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 10. | Property and Equipment | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Computer and Office Equipment | Production Equipment and Other | Construction in Progress | Leasehold Improvements | Total | |||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| COST | |||||||||||||||
| Balance - October 31, 2019 | $ | 55,960 | $ | 443,598 | $ | 476,783 | $ | 1,310,471 | $ | 2,286,812 | |||||
| Additions | 1,031 | 283,065 | 90,342 | 251,355 | 625,793 | ||||||||||
| Transfers | (2,061 | ) | 2,061 | (512,719 | ) | 512,719 | - | ||||||||
| Disposals | (39,764 | ) | (17,350 | ) | (9,331 | ) | (947 | ) | (67,392 | ) | |||||
| Balance - October 31, 2020 | $ | 15,166 | $ | 711,374 | $ | 45,075 | $ | 2,073,598 | $ | 2,845,213 | |||||
| Additions | - | - | - | 159,016 | 159,016 | ||||||||||
| Balance - January 31, 2021 | $ | 15,166 | $ | 711,374 | $ | 45,075 | $ | 2,232,614 | $ | 3,004,229 | |||||
| ACCUMULATED DEPRECIATION | |||||||||||||||
| Balance - October 31, 2018 | $ | 1,907 | $ | 71,157 | $ | - | $ | 429,896 | $ | 502,960 | |||||
| Amortization for the period | 17,794 | 61,322 | - | 239,819 | 318,935 | ||||||||||
| Balance - October 31, 2019 | $ | 19,701 | $ | 132,479 | $ | - | $ | 669,715 | $ | 821,895 | |||||
| Amortization for the period | 6,360 | 106,441 | - | 824,977 | 937,778 | ||||||||||
| Transfers | (2,405 | ) | 2,405 | - | - | - | |||||||||
| Disposals | (8,490 | ) | (7,301 | ) | - | - | (15,791 | ) | |||||||
| Balance - October 31, 2020 | $ | 15,166 | $ | 234,024 | $ | - | $ | 1,494,692 | $ | 1,743,882 | |||||
| Amortization for the period | - | 32,712 | - | 203,962 | 236,674 | ||||||||||
| Balance - January 31, 2021 | $ | 15,166 | $ | 266,736 | $ | - | $ | 1,698,654 | $ | 1,980,556 | |||||
| NET BOOK VALUE | |||||||||||||||
| As at October 31, 2020 | $ | - | $ | 477,350 | $ | 45,075 | $ | 578,906 | $ | 1,101,331 | |||||
| As at January 31, 2021 | $ | - | $ | 444,638 | $ | 45,075 | $ | 533,960 | $ | 1,023,673 |
At January 31, 2021, production equipment includes $199,293 in leased assets (October 31, 2019 - $220,693). For the three months ended January 31, 2021, amortization capitalized was $206,707 (2020 - $174,163) and expensed amortization was $29,967 (2020 - $49,677).
Pg 16 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 11. | Long-term Debt |
|---|
Transactions related to the Company’s unsecured promissory notes for the three months ended January 31, 2021 and January 31, 2020, include the following:
| Face value | Carrying amount | Interest payable | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | 150,000 | $ | 150,000 | $ | 7,979 | |||
| 60% - December 5, 2019 (11.4) | 15,000 | 15,000 | - | ||||||
| Interest expense on long-term debt | - | - | 24,854 | ||||||
| Debt repayments | (151,000 | ) | (151,000 | ) | (23,466 | ) | |||
| Proceeds (11.5) | 600,000 | 600,000 | - | ||||||
| Debt repayments (11.5) | (75,126 | ) | (75,126 | ) | - | ||||
| Interest accretion | - | 260,940 | - | ||||||
| Balance - October 31, 2020 | $ | 538,874 | $ | 799,814 | $ | 9,367 | |||
| 10% - November 23, 2020 (11.1) | 125,000 | 125,000 | - | ||||||
| 10% - December 2, 2020 (11.2) | 150,000 | 150,000 | - | ||||||
| 10% - January 27, 2021 (11.3) | 250,000 | 250,000 | - | ||||||
| Interest expense | - | - | 2,788 | ||||||
| Debt repayments | (62,197 | ) | (62,197 | ) | - | ||||
| Interest payments | - | (2,326 | ) | - | |||||
| Interest accretion | - | 119,463 | - | ||||||
| Balance - January 31, 2021 | $ | 1,001,677 | $ | 1,379,754 | $ | 12,155 | |||
| Less: Current Portion | 715,544 | 329,166 | 12,155 | ||||||
| January 31, 2021 non-current portion | $ | 286,133 | $ | 1,050,588 | $ | - | |||
| 11.1 | On November 23, 2020, debt was issued by Grown Rogue Distribution, LLC with a principal amount of $125,000,<br>interest accrued at 10% per annum, and a maturity date of November 23, 2023. After the maturity date, additional interest payments are<br>due quarterly, at amounts that cause total interest paid over the life of the debt to equal $125,000. The note is reported at amortized<br>cost using an effective interest rate of approximately 27%. | ||||||||
| --- | --- |
| 11.2 | On December 2, 2020, debt was issued by Grown Rogue Gardens, LLC with a principal amount of $150,000,<br>interest accrued at 10% per annum, and a maturity date of December 31, 2021. Interest and principal are payable upon maturity. The maturity<br>date can be extended by up to six-months for a $1,000 fee per $10,000 of principal extended. |
|---|
| 11.3 | On January 27, 2021, debt was issued by Grown Rogue Distribution, LLC with a principal amount of $250,000,<br>interest accrued at 10% per annum, and a maturity date of January 27, 2024. After the maturity date, additional interest payments are<br>due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized<br>cost using an effective interest rate of approximately 27%. |
|---|
| 11.4 | On December 5, 2019, debt was issued with a principal amount of $15,000, with simple interest accrued<br>at a rate of 60% per annum and a maturity of 60 days. On February 18, 2020, all principal and interest were repaid. This amount was owed<br>to the CEO of the Company. |
|---|
Pg 17 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 11.5 | Debt issuance by GR Michigan, LLC |
|---|
On March 20, 2020, debt with a principal amount of $600,000 was received under a secured debt investment of $600,000 (the “Michigan Debt”). The Michigan Debt carries a two-year term, with monthly payments of principal commencing June 15, 2020, and with payments calculated at 1% of cash sales receipts of Golden Harvests (Note 7). Once the principal is repaid, each investor will receive a monthly royalty of 1% per $100,000 invested based upon cash sales receipts of Golden Harvests (see Note 7) (the “Royalty”). The Royalty commences on the date that repayments equal to principal have been made, and continues for a period of two years. The Royalty maximum is two times the amount of principal invested, and the Royalty minimum is equal to the principal loaned; the Company expects to pay the Royalty maximum by July 2023. The Company has the right, but not the obligation, to purchase the Royalty from any lender by paying an amount equal to the original principal invested by such lender. The debt is reported at the carrying value of the probability-weighted estimated future cash flows of all payments under the Michigan Debt agreement at amortized cost using the effective interest method. Interest accreted during the three months ended January 31, 2021 was $113,107 (year ended October 31, 2020 - $260,940), calculated using an effective interest rate of approximately 73%. During the three months ended January 31, 2021 $62,197 was repaid against this debt (year ended October 31, 2020 - $75,126).
Principal amounts of the Michigan Debt of $50,000 and $100,000 (a total of $150,000), were loaned by officers of the Company. Principal of $150,000 was loaned by a director of the Company.
Pg 18 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 12. | Convertible Debentures |
|---|
Transactions related to the Company’s convertible debentures for the three months ended January 31, 2021 and the year ended October 31, 2020, include the following:
| Face value | Carrying amount | Interest payable | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | 2,179,056 | $ | 1,995,609 | $ | 7,850 | |||
| Interest accretion through July 10, 2020 | - | 246,015 | - | ||||||
| Conversion to common shares (12.1) | (37,733 | ) | (37,733 | ) | - | ||||
| Effects of foreign exchange | (56,341 | ) | (56,341 | ) | |||||
| Deemed extinguishment (12.1) | (2,084,982 | ) | (2,147,550 | ) | - | ||||
| Balance after deemed extinguishment | $ | - | $ | - | $ | 7,850 | |||
| Deemed re-issuance (12.1) | 2,169,135 | 2,464,241 | - | ||||||
| Fair value of derivative liability | - | (787,264 | ) | - | |||||
| Conversion to common shares (12.1) | (75,130 | ) | (75,130 | ) | |||||
| Interest accretion | - | 146,964 | - | ||||||
| Interest payments | - | (44,138 | ) | (7,850 | ) | ||||
| Effects of foreign exchange | - | 35,005 | - | ||||||
| Balance - October 31, 2020 | $ | 2,094,005 | $ | 1,739,678 | $ | - | |||
| Interest accretion | - | 128,899 | - | ||||||
| Interest payments | - | (44,603 | ) | - | |||||
| Effects of foreign exchange | 136,120 | 75,106 | - | ||||||
| Balance - January 31, 2021 | $ | 2,230,125 | $ | 1,899,080 | $ | - |
| 12.1 | The derivative liability component of the convertible debentures is remeasured at fair value through profit<br>and loss at each reporting period using the Black-Scholes pricing model. The fair value at January 31, 2021, was $930,195 (October 31,<br>2020 - $583,390), and the unrealized loss from remeasurement for the three months ended January 31, 2021 was $319,627 (2020 - $Nil). The<br>Black-Scholes pricing model assumptions used in the January 31, 2021, valuation were as follows: | |
|---|---|---|
| o | Expected dividend yield | Nil% |
| --- | --- | --- |
| o | Risk-free interest rate | 0.14% |
| --- | --- | --- |
| o | Expected life | 0.75 years |
| --- | --- | --- |
| o | Expected volatility | 92% |
| --- | --- | --- |
Pg 19 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 13. | Share Capital, Shares Issuable, and subscriptions payable |
|---|
The Company is authorized to issue an unlimited number of common shares at no par value and an unlimited number of preferred shares issuable in series.
During the three months ended January 31, 2021, the following share transactions occurred:
| 13.1 | The Company issued 18,044 common shares with a fair value of $3,441, and also recorded shares issuable<br>with a fair value of $3,753, for employment compensation and director services for shares which had not yet been issued at January 31,<br>2021. |
|---|
| 13.2 | The Company issued 2,031,784 common shares with a fair value of $200,000 in the first tranche of a private<br>placement. The second tranche of the private placement closed subsequent to January 31, 2021, and the Company received $125,000 of second<br>tranche proceeds during the three months ended January 31, 2021. |
|---|
| 13.3 | The Company issued 25,000 shares with a fair value of $2,103 in order to extend the Golden Harvests payment<br>described at Note 7.2. |
|---|
| 13.4 | On January 14, 2021, the Company agreed to issue 400,000 shares with a fair value of $36,310 to a lender<br>of Golden Harvests in order to support Golden Harvests’ (Note 7) business development. As at January 31, 2021, the shares had not<br>yet been issued. |
|---|
| 13.5 | On November 2, 2020, a member of Golden Harvests earned 500,000 shares with a fair value of $48,900, based<br>upon achievement of a production target. As at January 31, 2021, the shares had not yet been issued. |
|---|
During the three months ended January 31, 2020, the following share transactions occurred:
| 13.6 | The Company issued 1,058,750 shares with a fair value of $71,910 as compensation to directors, officers,<br>and consultants of the Company. |
|---|
Pg 20 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 14. | Warrants |
|---|
During the three months ended January 31, 2021, no new warrants were issued. The following table summarizes the warrant activities for the three months ended January 31, 2021:
| Number | Weighted Average Exercise Price | |||||
|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | 27,584,605 | 0.53 | ||||
| Issued pursuant to private placement | 5,000,000 | 0.13 | ||||
| Issued pursuant to private placement | 10,000,000 | 0.13 | ||||
| Expired | (17,183 | ) | (14.05 | ) | ||
| Cancellation of prior warrants associated with convertible debt (Note 12.1) | (6,818,182 | ) | 0.55 | |||
| Issuance of new warrants associated with convertible debt (Notes 12.1) | 6,818,182 | 0.16 | ||||
| Consideration warrants for convertible debt maturity extension (Notes 12.1) | 1,590,909 | 0.16 | ||||
| Balance - October 31, 2020 | 44,158,331 | 0.33 | ||||
| Expiration of broker warrants | (757,125 | ) | 0.44 | |||
| Expiration of warrants | (17,843,998 | ) | 0.55 | |||
| Balance - January 31, 2021 | 25,557,208 | 0.24 |
As at January 31, 2021, the following warrants were issued and outstanding:
| Remaining contractual | ||||||
|---|---|---|---|---|---|---|
| Exercise price | Warrants outstanding | life<br><br> (years) | Expiry date | |||
| $ | 0.16 | 8,409,091 | 0.8 | November 01, 2021 | ||
| 0.13 | 5,000,000 | 1.0 | February 10, 2022 | |||
| 0.13 | 10,000,000 | 1.3 | May 15, 2022 | |||
| 0.44 | 2,148,117 | 2.4 | June 28, 2023 | |||
| $ | 0.17 | 25,557,208 | 1.2 | |||
| 15. | Stock Options | |||||
| --- | --- |
The following table summarizes the stock option movements for the three months ended January 31, 2021:
| Number | Exercise price (CAD) | |||
|---|---|---|---|---|
| Balance - October 31, 2019 | 650,000 | |||
| Granted to employees | 3,575,000 | |||
| Forfeitures by service provider | (150,000 | ) | ||
| Forfeitures by employees | (355,000 | ) | ||
| Balance - October 31, 2020 | 3,720,000 | |||
| Granted to employees | 700,000 | |||
| Forfeitures by employees | (68,750 | ) | ||
| Balance - January 31, 2021 | 4,351,250 |
All values are in US Dollars.
Pg 21 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 15.1 | During the three months ended January 31, 2021, 700,000 options were granted (2020 – nil) to employees. |
|---|
The fair value of the options granted during the three months ended January 31, 2021, was approximately $36,500 (CAD$47,078) which was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil% |
|---|---|---|
| o | Risk-free interest rate | 0.33% |
| --- | --- | --- |
| o | Expected life | 4.0 years |
| --- | --- | --- |
| o | Expected volatility | 96% |
| --- | --- | --- |
The vesting terms of options granted during the three months ended January 31, 2021 are set out in the table below:
| Number granted | Vesting terms |
|---|---|
| 500,000 | 1/2 on grant date, 1/2 on first anniversary of grant date |
| 200,000 | 1/2 on second anniversary of grant date, 1/2 on the fourth anniversary of grant date |
| 700,000 |
As at January 31, 2021 the following Stock Options were issued and outstanding (all prices are in Canadian Dollars unless otherwise noted):
| Exercise price | Options outstanding | Number exercisable | Remaining Contractual Life (years) | Expiry date | ||||
|---|---|---|---|---|---|---|---|---|
| $ | 0.44 | 500,000 | 500,000 | 0.9 | January 01, 2022 | |||
| 0.15 | 3,151,250 | 2,083,750 | 3.4 | July 09, 2024 | ||||
| 0.15 | 500,000 | 250,000 | 3.8 | December 01, 2024 | ||||
| 0.15 | 200,000 | - | 3.8 | November 18, 2024 | ||||
| $ | 0.19 | 4,351,250 | 2,833,750 | 3.2 | ||||
| 16. | Changes in Non-Cash Working Capital | |||||||
| --- | --- |
The changes to the Company’s non-cash working capital for the three months ended January 31, 2021 and 2020 are as follows:
| Three months ended January 31, | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Accounts receivable | $ | (66,866 | ) | $ | (10,981 | ) |
| Inventory | 242,376 | 718,792 | ||||
| Prepaid expenses and other assets | (9,244 | ) | (13,903 | ) | ||
| Accounts payable and accrued liabilities | 204,991 | 245,387 | ||||
| Interest payable | (44,141 | ) | 18,023 | |||
| Unearned revenue | 84,600 | (35,000 | ) | |||
| Total | $ | 411,716 | $ | 922,318 |
Pg 22 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 17. | Supplemental Cash Flow Disclosure | |||
|---|---|---|---|---|
| Three months ended January 31, | 2021 | 2020 | ||
| --- | --- | --- | --- | --- |
| Interest paid | $ | 50,159 | $ | - |
| Fair value of common shares issued & issuable for services | 56,094 | 71,910 | ||
| Fair value of common shares issued to extend Golden Harvests Option payment | 2,103 | - | ||
| Fair value of common shares issued to Golden Harvests creditor | 36,310 | - | ||
| 18. | Related Party Transactions | |||
| --- | --- |
During the three months ended January 31, 2021, the Company incurred the following related party transactions:
| 18.1 | Through its wholly owned subsidiary, GRU Properties, LLC, the Company leased a property located in Trail,<br>Oregon owned by the Company’s President and CEO. The lease was extended during the three months ended January 31, 2021 and expires on<br>December 31, 2025. Rent of $19,000 was incurred for the three months ended January 31, 2021 (2020 - $18,500). The Company had $45,000<br>(October 31, 2020 - $45,000) owing under this lease at January 31, 2021 from lease payments which the CEO agreed to defer (Note 8). The<br>lease balance at January 31, 2021, was $275,707 (October 31, 2020 - $12,532). |
|---|
| 18.2 | The Company incurred expenses of $11,250 (2020 - $12,000) for services provided by the spouse of the CEO.<br>At January 31, 2021, accounts and accrued liabilities payable to this individual were $3,750 (October 31, 2020 - $1,946). During the year<br>ended October 31, 2020, this individual was granted 500,000 options which vested on the grant date. |
|---|
| 18.3 | Key management personnel consist of the President and CEO; the former Chief Strategy Officer; the CFO<br>of GR Unlimited; the Chief Market Officer; the Chief Accounting Officer; and the CFO of Grown Rogue International, Inc. The compensation<br>paid or payable to key management for services for the periods as follows: | |||
|---|---|---|---|---|
| Three months ended January 31, | 2021 | 2020 | ||
| --- | --- | --- | --- | --- |
| Salaries and consulting fees | $ | 164,675 | $ | 100,500 |
| Share-based compensation | 14,296 | 10,188 | ||
| Stock option expense | 16,806 | - | ||
| Total | $ | 195,777 | $ | 110,688 |
Stock options granted to key management personnel and close family members of key management personnel include the following options, granted during the year ended October 31, 2020: 750,000 options to the CFO of GR Unlimited; 750,000 options to the Chief Market Officer; and 250,000 option to the Chief Accounting Officer.
Accounts payable and accrued liabilities due to key management at January 31, 2021 totaled $510,455 (October 31, 2020 - $441,424), including the accrued liabilities described at Note 8.
Pg 23 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 18.4 | Debt balances and movements with related parties |
|---|
The following table sets out portions of debt pertaining to related parties:
| CEO | CFO of GR Unlimited LLC | Directors | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | - | $ | - | $ | - | $ | - | ||||
| Borrowed | 50,000 | 100,000 | 150,000 | 300,000 | ||||||||
| Interest | 21,745 | 43,491 | 65,236 | 130,472 | ||||||||
| Payments | (10,252 | ) | (20,504 | ) | (30,756 | ) | (61,512 | ) | ||||
| Balance - October 31, 2020 | $ | 61,493 | $ | 122,987 | $ | 184,480 | $ | 368,960 | ||||
| Borrowed | - | - | - | - | ||||||||
| Interest | 9,426 | 18,851 | 28,277 | 56,554 | ||||||||
| Payments | (1,191 | ) | (2,383 | ) | (3,574 | ) | (7,148 | ) | ||||
| Balance - January 31, 2021 | $ | 69,728 | $ | 139,455 | $ | 209,183 | $ | 418,366 |
Pursuant to the loan agreements transacted during the year ended October 31, 2020, the CEO, CFO of GR Unlimited LLC, and a director obtained 5.5%; 1%; and 2.5% of GR Michigan LLC, respectively; third parties obtained 4% as part of the same loan agreements (Note 11.5), such that GR Michigan has a 13% non-controlling interest (Note 23.2).
On November 23, 2020, an individual who became a director purchased 6.25 newly issued equity units of Grown Rogue Distribution, LLC for $250,000 (Note 23.3), out of the total of 9.375 such units issued during the three months ended January 31, 2021.
| 19. | Financial Instruments |
|---|
| 19.1 | Market Risk (including interest rate risk and currency risk) |
|---|
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
| 19.1.1 | Interest Rate Risk |
|---|
At January 31, 2021, the Company’s exposure to interest rate risk relates to long-term debt, convertible promissory notes, and finance lease obligations; each of these items bears interest at a fixed rate.
| 19.1.2 | Currency Risk |
|---|
As at January 31, 2021, the Company had accounts payable and accrued liabilities of CAD$567,665 and convertible debentures of CAD$2,850,000, as well as a derivative liability of CAD$1,188,748. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar.
Pg 24 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 19.2 | Credit Risk |
|---|
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
The carrying amount of cash, accounts receivable, and other receivables represent the Company’s maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 |
| Accounts Receivable | 238,987 | 172,121 | ||
| Total | $ | 1,517,388 | $ | 389,909 |
The allowance for doubtful accounts at January 31, 2021 is $1,000 (October 31, 2020 - $7,425).
As at January 31, 2021 and October 31, 2020, the Company’s trade accounts receivable and other receivable were aged as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Current | 79,156 | 66,660 | ||||
| 1-30 days | 74,642 | 49,204 | ||||
| 31 days-older | 89,189 | 63,682 | ||||
| Allowance for doubtful accounts | (1,000 | ) | (7,425 | ) | ||
| Total trade accounts receivable | $ | 238,987 | $ | 172,121 |
The change in the provision for expected credit losses is as follows:
| January 31, <br> 2021 | October 31, <br> 2020 | |||||
|---|---|---|---|---|---|---|
| Balance, beginning of period | $ | 7,425 | $ | 129,131 | ||
| Additional allowance (reduction) | 6,017 | 10,349 | ||||
| Amounts collected | (12,442 | ) | (6,757 | ) | ||
| Amounts used | - | (125,298 | ) | |||
| Balance, end of period | $ | 1,000 | $ | 7,425 |
Pg 25 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 19.3 | Liquidity Risk |
|---|
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At January 31, 2021, the Company’s working capital accounts were as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | ||||
|---|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 | |
| Current assets excluding cash | 1,509,962 | 1,616,987 | |||
| Total current assets | 2,788,363 | 1,834,775 | |||
| Current liabilities | 4,714,398 | 1,799,104 | |||
| Working capital (deficit) | $ | (1,926,035 | ) | $ | 35,671 |
The contractual maturities of the Company’s accounts payable and accrued liabilities, debt, leases, unearned revenue, and derivative liabilities occur over the next three years as follows, excluding the redemption liabilities of $375,000, which do not have a scheduled maturity, and derivative liabilities of $930,195, which are not cash-settled:
| Year 1 | Years 2 - 3 | |||
|---|---|---|---|---|
| Accounts payable and accrued liabilities | $ | 1,275,456 | $ | 389,816 |
| Debt and convertible debentures | 2,228,246 | 1,050,588 | ||
| Lease liabilities | 183,746 | 651,809 | ||
| Interest payable | 12,155 | - | ||
| Unearned revenue | 84,600 | - | ||
| Total | $ | 3,784,203 | $ | 2,092,213 |
| 19.4 | Fair Values |
|---|
The carrying amounts for the Company’s cash, accounts receivable, prepaid and other assets, accounts payable and accrued liabilities, current portions of debt and debentures payable, unearned revenue, and interest payable approximate their fair values because of the short-term nature of these items.
| 19.5 | Fair Value Hierarchy |
|---|
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Pg 26 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The carrying values of the financial instruments at January 31, 2021 are summarized in the following table:
| Level in fair value hierarchy | Amortized Cost | FVTPL | |||
|---|---|---|---|---|---|
| Financial Assets | |||||
| Cash | Level 1 | $ | 1,278,401 | $ | - |
| Accounts receivable | Level 2 | 238,987 | - | ||
| Marketable securities | Level 1 | - | 914,970 | ||
| Financial Liabilities | |||||
| Accounts payable and accrued liabilities | Level 2 | $ | 1,665,272 | $ | - |
| Convertible debentures | Level 2 | 1,899,080 | - | ||
| Debt | Level 2 | 1,379,754 | - | ||
| Interest payable | Level 2 | 12,155 | - | ||
| Derivative liabilities | Level 2 | - | 930,195 | ||
| Redemption liabilities | Level 2 | - | 375,000 |
During the three months ended January 31, 2021 there were no transfers of amounts between levels.
| 20. | General and Administrative Expenses |
|---|
General and administrative expenses for the three months ended January 31, 2021 and 2020 are as follows:
| Three months ended January 31, | 2021 | 2020 | ||
|---|---|---|---|---|
| Office, banking, travel, and overheads | $ | 100,708 | $ | 117,685 |
| Professional services | 136,428 | 165,352 | ||
| Salaries and benefits | 429,603 | 387,731 | ||
| Total | $ | 666,739 | $ | 670,768 |
| 21. | Capital Disclosures | |||
| --- | --- |
The Company includes equity, comprised of share capital, contributed surplus (including the fair value of equity instruments to be issued), equity component of convertible promissory notes and deficit, in the definition of capital.
The Company’s objectives when managing capital are as follows:
| o | to safeguard the Company’s assets and ensure the Company’s ability to continue as a going<br>concern. |
|---|---|
| o | to raise sufficient capital to finance the construction of its production facility and obtain license<br>to produce recreational marijuana; and |
| --- | --- |
| o | to raise sufficient capital to meet its general and administrative expenditures. |
| --- | --- |
Pg 27 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The Company manages its capital structure and makes adjustments to it, based on the general economic conditions, the Company’s short-term working capital requirements, and its planned capital requirements and strategic growth initiatives.
The Company’s principal source of capital is from the issuance of common shares. In order to achieve its objectives, the Company expects to spend its working capital, when applicable, and raise additional funds as required.
The Company does not have any externally imposed capital requirements.
| 22. | Segment Reporting |
|---|
Geographical information relating to the Company’s activities is as follows:
| Revenue – three months ended January 31, | 2021 | 2020 | ||
|---|---|---|---|---|
| United States | $ | 1,051,185 | $ | 1,106,296 |
| Canada | - | - | ||
| Total | $ | 1,105,185 | $ | 1,106,296 |
| Non-current assets as at: | January 31, <br><br>2021 | October 31, <br><br>2020 | ||
| --- | --- | --- | --- | --- |
| United States ^(1)^ | $ | 2,916,726 | $ | 1,929,643 |
| Canada | - | - | ||
| Total | $ | 2,996,486 | $ | 1,929,643 |
(1) Includes: plant and equipment
Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues. During the three months ended January 31, 2021, one major customer accounted for 17% of revenues (2020 – three major customers accounted for 43% of annual revenues).
Pg 28 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 23. | Non-controlling Interests |
|---|
The changes to the non-controlling interest for the years ended January 31, 2021 and October 31, 2020 are as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||||
|---|---|---|---|---|---|---|
| Balance, beginning of period | $ | (33,383 | ) | $ | 19,538 | |
| Elimination of GRD Cali, LLC non-controlling interest | - | 22,128 | ||||
| Non-controlling interest’s 40% share of GRD Cali, LLC | - | (36,366 | ) | |||
| Non-controlling interest’s 40% share of Idalia, LLC | (302 | ) | (129 | ) | ||
| Non-controlling interest’s 13% share of GR Michigan, LLC | 5,742 | (38,554 | ) | |||
| Non-controlling interest’s 8.6% share of Grown Rogue Distribution, LLC | 374,456 | - | ||||
| Balance, end of period | $ | 346,513 | $ | (33,383 | ) |
| 23.1 | Non-controlling interest in Idalia, LLC |
|---|
The following is summarized financial information for Idalia, LLC:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Non-current assets | $ | 9,475 | $ | 10,230 |
| Net loss for the period | 755 | 322 |
| 23.2 | Non-controlling interest in GR Michigan, LLC: | |||
|---|---|---|---|---|
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
| --- | --- | --- | --- | --- |
| Current assets | $ | 119,913 | $ | 74,961 |
| Non-current assets | 609,817 | 603,895 | ||
| Current liabilities | 104,385 | 489,266 | ||
| Advances from parent | 732,429 | 68,994 | ||
| Net loss for the period | 48,867 | 296,570 |
Nine percent (9%) of GR Michigan LLC is owned by officers and directors of the Company; this ownership is pursuant to an agreement that included their loans made to GR Michigan LLC (Note 18.4). The total non-controlling ownership, including ownership by officers and directors, is 13%.
Pg 29 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 23.3 | Non-controlling interest in Grown Rogue Distribution, LLC |
|---|
The following is summarized financial information for Grown Rogue Distribution, LLC:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Non-current assets | $ | 49,665 | $ | - |
| Current liabilities | 60,866 | - | ||
| Non-current liabilities | 318,159 | - | ||
| Net loss for the period | 6,351 | - |
During the three months ended January 31, 2021, the Company sold an approximately 8.6% interest in Grown Rogue Distribution, LLC (“GR Distribution”) for $375,000. The interest was comprised of 9.375 newly issued equity units (“GR Distribution Units”) and each GR Distribution Unit was sold for $40,000. After the issuance, 109.375 GR Distribution Units were issued and outstanding. Of the 9.375 units issued, 6.25 were issued to a director of the Company, for proceeds of $250,000. The GR Distribution Units are puttable by the subscribers to the Company and callable from the subscribers by the Company, and can be settled in Company shares at a value agreed upon by the Company and the GR Distribution non-controlling interests, or in cash, or in a combination of cash and shares of the Company’s choice. The Company has accordingly recognized redemption liabilities of $375,000 at January 31, 2021 (2020 - $Nil), recorded by way of a reduction in Company contributed surplus.
| 24. | Subsequent Events |
|---|
On February 15, 2021, Grown Rogue Distribution LLC (“GR Distribution”) sold 2.5 equity units for US$40,000 per unit each for total proceeds of $100,000. After this transaction, GR Distribution had 111.875 equity units outstanding, of which the Company owns 100. The unit holders have the future right to convert their units in the subsidiary, at a price agreed upon by the Company and the subscriber, into common shares of the Company at the greater of CAD$0.20 or the maximum permitted discount under the policies of the Canadian Securities Exchange at the time of conversion.
On February 5, 2021 the Company completed the second tranche of a private placement; the second tranche was comprised of 8,200,000 units at CAD$0.16 per unit for proceeds of CAD$1,312,000. Each unit was comprised of one common share and one warrant to purchase one common share. Each warrant has an exercise price of CAD$0.20 and a term of two years. The second tranche included subscriptions by the following related parties: the CEO subscribed to 1,600,000 units; the CFO of GR Unlimited subscribed to 2,000,000 units; a key Company operations manager subscribed to 1,000,000 units; and PBIC subscribed to 2,000,000 units.
Subsequent to January 31, 2021, the Company’s subsidiary, GR Michigan, LLC, terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. Canopy has already received approval by the State of Michigan for licensing and this will allow the Company to accelerate its option exercise to obtain a 60% interest in Golden Harvests. Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company. The Company has an option to acquire an 87% membership interest in Canopy, from GRIN’s CEO, which when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had with GR Michigan.
Pg 30 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
On February 5, 2021, the Company agreed to acquire (the “HSCP Transaction”) substantially all of the assets of the growing and retail operations of High Street Capital Partners, LLC (“HSCP”) for total consideration of $3,000,000, payable in a series of tranches, subject to receipt of all necessary regulatory and other approvals, not to exceed 18 months from the date of the agreement evidencing the HSCP. The Company also executed a management services agreement (“MSA”) with HSCP pursuant to which the Company agreed to pay $21,500 per month to HSCP as consideration for their services rendered thereunder, until the completion of the HSCP Transaction. In accordance with the MSA, the Company will own all production from the growing assets derived from the growing operations of HSCP. The Company will operate the growing facility of HSCP under the MSA until receipt of the necessary regulatory approvals relating to the acquisition by the Company of HSCP’s growing assets. The Company will have no involvement with the retail operations until the HSCP Transaction is completed.
On March 2, 2021, holders of convertible debentures converted principal of CAD$491,666 into common shares at CAD$0.125 per share, and accordingly the Company issued 3,933,328 common shares to those holders. On April 9, 2021, the Company paid holders of the convertible debentures principal of CAD$1,538,889. After the conversions and the payment, the undiscounted principal amount of convertible debentures outstanding was approximately $650,000 (CAD$819,445).
On March 17, 2021, the Company executed a lease for a new outdoor grow property. The lease term is through February 28, 2024. The annual lease cost is $40,000 per year, due in two equal semiannual payments on March 1^st^ and June 1^st^. There are no extension options in this agreement for periods after February 28, 2024. Management will transfer one of its existing outdoor growing licenses to this new location, and cease outdoor grow operations at the prior location. The remaining term at the prior location is through December 31, 2021, and undiscounted remaining payments from February 1, 2021 to the end of the lease term total $41,800.
Brokered private placement of special warrants
On March 5, 2021, the Company announced completion of a brokered private placement offering through the issuance of an aggregate of 21,056,890 special warrants (each a “Special Warrant”) at a price of $0.225 (the “Issue Price”) per Special Warrant for aggregate gross proceeds of approximately $3.7 million (CAD$4,737,800) (the “Offering”). The Offering was led by Eight Capital (the “Agent”), as sole agent and bookrunner.
Each Special Warrant entitles the holder thereof to receive, for no additional consideration, one unit of the Company (each, a “Unit”) on the exercise or deemed exercise of the Special Warrant. Each Unit is comprised of one common share in the capital of the Company (each, a “Common Share”) and one Common Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of CAD$0.30 for a period of twenty-four (24) months following the closing date (the “Closing Date”) of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants.
Pg 31 of 32
Grown Rogue International Inc.
Notes to the Amended and Restated Condensed Interim ConsolidatedFinancial Statements
For the Three Months Ended January 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The Special Warrants are exercisable by the holders thereof at any time for no additional consideration and all unexercised Special Warrants will be deemed to be exercised, without any further action or payment of additional consideration by the holder thereof, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities (the “Securities Commissions”) for a final short form prospectus qualifying distribution of the Common Shares and Warrants underlying the Special Warrants (the “Qualifying Prospectus”), and (ii) July 6, 2021.
As the Company did not receive a final receipt from the Ontario Securities Commission for the Qualifying Prospectus on or before April 5, 2021, each Special Warrant holder will receive, upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units upon exercise of each Special Warrant (instead of one (1) Unit); accordingly, the final aggregate number of Units to be issued will be 23,162,579.
As consideration for the services rendered by the Agent in connection with the Offering, the Company paid to the Agent a cash commission of $253,746 and issued the Agent an aggregate of 1,127,758 broker warrants of the Company (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “Compensation Options”). As consideration for certain advisory services provided in connection with the Offering, the Company paid to the Agent an advisory fee of $25,500 and issued the Agent an aggregate of 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options.
Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price for a period of twenty-four (24) months following the Closing Date, subject to adjustment in certain events. Each Compensation Unit shall be comprised of one Common Share and one common share purchase warrant of the Company (a “Compensation Warrant”). Each Compensation Warrant shall entitle the holder thereof to purchase one common share in the capital of the Company (a “Compensation Warrant Share”) at a price of CAD$0.30 at any time before 5:00 p.m. (Toronto time) on the day that is twenty-four (24) months following the Closing Date, subject to adjustment in certain events.
Prior to the filing of the Qualifying Prospectus and the deemed exercise of the Special Warrants, the securities issued under the Offering will be subject to a four month hold period from the date of closing of the Offering in addition to any other restrictions under applicable securities laws.
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Exhibit 16
NOTICE TO READER
Subsequent to the three months ended January 31, 2021, the Company determined restatements are required as part of a review of its condensed interim consolidated financial statements. Details of the changes are described in Note 2 to the Company’s amended and restated condensed interim consolidated financial statements for the three months ended January 31, 2021 and 2020 as filed on SEDAR on April 16, 2021.
In connection with the filing of the amended and restated unaudited condensed interim consolidated financial statements for the three months ended January 31, 2021 and 2020, the Company is also filing (i) amended and restated management discussion and analysis (“MD&A) in compliance with the requirements of National Instrument 51-102 Continuous Disclosure Obligations, and (ii) CEO and CFO certifications in compliance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings.
As part of a review of its condensed interim consolidated financial statements, the Company determined the following restatements:
| ● | Adjusted costs capitalized into biological assets and inventory, and related cost of finished cannabis<br>inventory sold, realized fair value amounts included in inventory sold, and unrealized fair value loss on growth of biological assets; |
|---|---|
| o | Expenses capitalized to biological assets and inventory included amortization of property and equipment,<br>amortization of right-of-use assets, and overhead costs (reported in general and administrative costs); and |
| --- | --- |
| ● | Reduction to the remeasurement of right-of-use assets and lease liabilities resulting from a correction<br>to the amount of the future lease payments. |
| --- | --- |
As a result of the restatements, the Company’s reported gross profit decreased by $139,846, to a gross profit of $140,344; and the Company’s reported net loss decreased by $80,724, to a net loss of $915,065.
This MD&A is amended and restated as of April 16, 2021. It should be read in conjunction with the Company’s unaudited interim condensed amended and restated consolidated financial statements for the three months ended January 31, 2021 and 2020, including the accompanying notes and the audited consolidated financial statements for the years ended October 31, 2020 and 2019, including the accompanying notes.
Toronto, Ontario
April 16, 2021
GROWN ROGUE INTERNATIONAL INC.
FORM 51-102F1
AMENDED AND RESTATED MANAGEMENT DISCUSSION & ANALYSIS
FOR THE THREE MONTHS ENDED JANUARY 31, 2021
TABLE OF CONTENTS
| Management’s Responsibilities for Financial Reporting | 1 |
|---|---|
| Forward-Looking Statements | 2 |
| Description of Business | 2 |
| Selected Annual Information | 8 |
| Results of Operations | 8 |
| Summary of Quarterly Results | 11 |
| Liquidity | 11 |
| Capital Resources | 15 |
| Off-Balance Sheet Arrangements | 16 |
| Transactions with Related Parties | 16 |
| Other Selected Financial Information | 18 |
| Outstanding Share Data | 20 |
| Critical Accounting Judgments and Estimation Uncertainties | 20 |
| Newly Adopted Accounting Pronouncements | 21 |
| Financial Instruments and Other Risk Factors | 21 |
| Subsequent Events | 23 |
| Regulatory Disclosure | 25 |
| Internal Control over Financial Reporting and Disclosure Controls | 37 |
This Amended and Restated Management Discussion and Analysis (“MD&A”) made as of April 16, 2021 should be read in conjunction with the amended and restated unaudited condensed interim consolidated financial statements of Grown Rogue International Inc. (the “Company”, (“we”, “our”, or “us”) for the three months ended January 31, 2021 and 2020 (the “Reporting Period”), and the related notes thereto (the “Financial Statements”). The Company’s Financial Statements are presented on a consolidated basis with its wholly-owned subsidiaries: Grown Rogue Unlimited, LLC (“GR Unlimited”) and GR Unlimited’s wholly-owned subsidiaries Grown Rogue Gardens, LLC (“GR Gardens”), GRU Properties, LLC (“GRU Properties”), and GRIP, LLC (“GRIP”); as well as GR Unlimited’s 87% interest in GR Michigan, LLC, GR Unlimited’s 91.4% interest in Grown Rogue Distribution, LLC (“GR Distribution”), and GR Unlimited’s 60% interest in Idalia, LLC. The Company’s reporting currency is the United States dollar and all amounts in this MD&A are expressed in United States dollars unless otherwise noted. The use of “CAD$” refers to Canadian dollars.
The three months ended January 31, 2021 and 2020 are referred to herein as “Q1 2021” and “Q1 2020,” respectively.
The Company’s comparative information included in this MD&A has been prepared in accordance with IFRS.
Additional information relating to the Company is also available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. The common shares of GRIN are listed on the Canadian Securities Exchange under the symbol “GRIN”.
Management’s Responsibilities for Financial Reporting
The Financial Statements have been prepared by management in accordance with IFRS and have been approved by the Company’s board of directors (the “Board”). The integrity and objectivity of the Financial Statements are the responsibility of management. In addition, management is responsible for ensuring that the information contained in the MD&A is consistent where appropriate, with the information contained in the Financial Statements.
The Financial Statements may contain certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis to ensure that the Financial Statements are presented fairly in all material respects.
As the Company is a Venture Issuer (as defined under under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) (“NI 52-109”), the Company and Management are not required to include representations relating to the evaluation, design, establishment and/or maintenance of disclosure controls and procedures (“DC&P”) and/or Internal Controls over Financial Reporting (“ICFR”), as defined in NI 52-109, nor has it completed such an evaluation. Inherent limitations on the ability of the certifying officers to design and implement on a cost-effective bases DC&P and ICFR for the issuer may result in additional risks of quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
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Forward-Looking Statements
This MD&A contains information and projections based on current expectations. Certain statements herein may constitute “forward-looking” statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such statements use such words as “will”, “may”, “could”, “intends”, “potential”, “plans”, “believes”, “expects”, “projects”, “estimates”, “anticipates”, “continue”, “potential”, “predicts” or “should” and other similar terminology. These statements reflect expectations regarding future events and performance but speak only as of the date of this MD&A. Forward-looking statements include, among others, statements with respect to planned acquisitions, strategic partnerships or other transactions and expansions not yet concluded; plans to market, sell and distribute products; market competition; plans to retain and recruit personnel; the ability to secure funding; and the ability to obtain regulatory and other approvals are all forward-looking information. These statements should not be read as guarantees of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from those implied by such statements.
There can be no assurance that any intended or proposed activity or transaction will occur or that, if any such action or transaction is undertaken, it will be completed on terms currently intended by the Company. The Company assumes no responsibility to update or revise forward-looking information to reflect new events or circumstances unless required by law.
Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. The forward-looking statements herein speak only as of the date hereof. Actual results could differ materially from those anticipated due to a number of factors and risks including those described in this MD&A under “Risk Factors” and in section 17 of the Company’s Listing Statement dated November 15, 2018 which can be found under the Company’s profile on www.sedar.com.
Description of Business
Grown Rogue, headquartered in Medford, Oregon, is a multi-state cannabis company curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies their products based on “Mind, Body & Mood” effects which resonates with consumers from the so-called canna-curious through the canna-serious. Grown Rogue is committed to educating, inspiring and empowering consumers with information about cannabis so they can “enhance experiences” by selecting the right product. Grown Rogue is focused on high quality, low-cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates. With its best-in-class production methods, low cost cultivation, award winning product, and geographic location in the famed Emerald Triangle, Grown Rogue is well positioned to become a leading flower producer in the cannabis sector.
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Oregon
Grown Rogue, through its wholly owned subsidiary, GR Gardens, operates four cultivation facilities, in Oregon comprising approximately 130,000 sq ft of cultivation area, that currently service the Oregon recreational marijuana market: “Manzanita Glen” (sungrown), “Trail’s End” (sungrown), and two state-of-the-art indoor facilities (“Warehouse 1” and “Warehouse 2”). Warehouse 2 is comprised of assets being operated under a management agreement that was signed during Q2 2021 which will approximately double our indoor production capacity. GR Gardens currently holds three producer licenses in Oregon from the Oregon Liquor Control Commission (“OLCC”), for the three properties described above, one wholesaler license, and one processor license. GR Gardens is currently not operating the processor license. Warehouse 2 also has a cultivation license and is awaiting the transfer of a wholesale and processing license to this location.
GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. Manzanita Glen and Trails End are both outdoor, sungrown farms, with 40,000 sq ft of flowering canopy, for a total of 80,000 square feet, sitting on a combined land package of approximately 45 acres.
Grown Rogue’s Oregon business is headquartered in the world-renowned Emerald Triangle, which is known world-wide for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. The company capitalizes on this ideal outdoor growing environment to produce high-quality, low-cost cannabis flower. The two sungrown farms produce one crop per year per farm, which is planted in June and harvested in October.
Warehouse 1, an approximately 17,000 square-foot indoor facility, produces high-quality indoor flower through controlled atmosphere environment operations. By carefully controlling temperature, humidity, carbon dioxide levels, and other criteria, Grown Rogue is able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. We have recently completed final construction of Warehouse 1, which now has eight dedicated flower rooms, which will allow for approximately four harvests per month.
Warehouse 2 added 30,000 square feet of indoor productive space, and we estimate production of 2,400 pounds from this facility in the remainder of 2021 (not a full year, having begun to operate the assets in February of 2021). After planned improvements, annual productive capacity will be increased to as much as 5,500 pounds. Warehouse 2 is a short distance from Warehouse 1, which is a benefit to operating efficiency, and it is equipped with state-of-the-art equipment which facilitates the implementation of best practices already developed at Warehouse 1.
The total annual production capacity for Grown Rogue’s Oregon operations, based on the current constructed capacity, will range between 12,000 and 14,000 pounds, depending upon various factors, including sungrown seasonality and strain performance.
Michigan
In February 2020, Grown Rogue, through its subsidiary GR Michigan, LLC, signed an Option to Purchase Agreement (“Option”) to acquire a 60% ownership in Golden Harvests, LLC (“Golden Harvests”). Golden Harvests is a Michigan-based, fully licensed, and operating cultivation company located in Bay City, Michigan. Golden Harvests has an approximately 80,000 square foot facility of which approximately 25,500 square feet is operational.
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With the addition of Golden Harvests, Grown Rogue will be adding an additional 3,000 pounds of high-quality indoor flower production capacity in 2021 and an anticipated 5,500 pounds of production capacity in 2022. Grown Rogue will oversee this capacity under the terms of a management services agreement prior to exercising its purchase option once regulatory approval is received.
Subsequent to January 31, 2021, the Company’s terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. These agreements and related agreements will provide identical economic rights as the Company originally had in GR Michigan. These transactions are described under the section ’Subsequent Events,’ below.
Product
Grown Rogue produces a range of cultivars for consumers to enjoy (traditionally classified as indicas, sativas, and hybrids). Grown Rogue has a mix of “core” and “limited” strains to provide consumers with consistent and unique purchasing options at their local dispensary. Grown Rogue flower has won multiple awards in Oregon, which is one of the most competitive cannabis production environments in the world, including the prestigious Growers Cup competition on two occasions. Grown Rogue also won 1^st^ place for highest THC content, 1^st^ place for highest terpene content, and 3^rd^ place in the grower’s choice category 2018 and won 1^st^ place for highest terpene content in 2019. In addition, the company believes it achieved an outdoor production potency record in the state of Oregon, when its Monkey Train cultivar tested at a THC potency of 35.13%.
Genetics
We are committed to developing unique, proprietary genetics and have allocated research and development space to develop new strains, while also phenotype hunting to identify new and exciting strain options that will resonate with consumers. Grown Rogue has developed a compelling mix of proprietary strains, along with a library of “fan favorites” to ensure that consumer and dispensary demand will remain strong for its flower and flower-derived products. All Grown Rogue genetics are rigorously tested to establish the genetic makeup of each strain in its portfolio. We continue to focus on bringing new unique genetics to ensure a steady flow of innovative flower and flower products.
Distribution and Sales
Grown Rogue distributes product directly to Oregon dispensaries to provide quality, consistency, and product variety year-round. Grown Rogue’s sales team works closely with dispensary owners and intake managers to provide consistent product, competitive prices, and service using sales techniques from other industries such as pharmaceutical and liquor.
By way of example, Grown Rogue has developed end user product marketing collateral and other educational information regarding Grown Rogue products as part of all sales with dispensaries that include strain type, testing results, information on the product and other necessary information to clearly articulate the product being provided. Each product is uniquely packaged all while maintaining brand consistency across the product suite.
Grown Rogue works with dispensary owners to develop promotional opportunities for the retail customers and bud tenders. Grown Rogue provides detailed tutorials to the staff and owners of the dispensaries around the product and how it is grown, processed, cured, packaged and other items so that they are intimately familiar with the Grown Rogue process. Grown Rogue also invites dispensary owners and operators to Grown Rogue’s operating facilities so they can see first-hand the methods and processes used to create the product.
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Branding
Developing compelling branding that engages, inspires, and creates transparency and trust with consumers is one of the most important aspects of building a successful cannabis company. Cannabis product branding has been evolving from promising high-quality flower, to providing descriptions of the effect a consumer should expect from a particular product.
Grown Rogue was one of the first brands in the United States to go to market with this type of branding as part of the ROGUE Categorization: Relax, Optimize, Groove, Uplift and Energize. The focus was to provide consumers with “The Right Experience, Every time” made easier by a simple product description that was not cannabis based, such as “sativa” or “indica”.
While other brands have shifted into the “one word” product description, Grown Rogue has leveraged consumer insights and product feedback to evolve the messaging to provide significantly more detail so consumers can make a more informed choice about which Grown Rogue products will optimally enhance their experience.
Grown Rogue’s unique “Mind, Body & Mood” product descriptions provide a level of detail about the expected cannabis experience that is much more insightful and beneficial than competitors. Instead of one word, such as “Relax,” describing a product, Grown Rogue has six words across three categories, which is easy to understand, but much more informative. Grown Rogue is refining this branding effort and intends to launch this new and innovative approach to ensuring consumers select the right experience in 2021.
In order to grow the Grown Rogue community and spread knowledge of its products, Grown Rogue leverages social media and other digital platforms. Grown Rogue aspires to eliminate the “dark mystery” historically associated with cannabis by empowering consumers to learn about the plant and then “enhance experiences” as they desire. The transition from prohibition to legal cannabis has provided the cannabis community with an opportunity to welcome a large group of new members and it is vital that product education is completed in an authentic and informative manner to ensure that everyone’s first cannabis experience is not only positive but also as expected.
Marketing and Advertising
Grown Rogue’s marketing channels include a comprehensive, fully responsive (mobile) interactive website. The website has been search engine optimized and includes calls to action that encourage consumers to become part of the Grown Rogue community by joining its newsletter list or following the company on social media. Grown Rogue is focused on providing education to new and existing consumers, which is available through its monthly newsletter or via the Blog section of its website. Consumers can find information about Grown Rogue, different types of cannabis products and general industry information.
We strategically leverage digital advertising, primarily on industry sites such as Leafly and Weedmaps, and have selectively advertised in endemic and non-endemic magazines including Grow, Northwest Leaf, Oregon Leaf, Dope, Portland Mercury, and Willamette Weekly.
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Grown Rogue has established a social media presence that includes Facebook, Twitter, and Instagram. Grown Rogue’s social identity will be defined by delivering fresh content and keeping interaction with followers/fans prompt and positive. Grown Rogue intends to attract existing cannabis industry participants as well as people not familiar with the industry by creating a positive, inclusive environment where dialogue is encouraged. The goal is to change existing stereotypes and overcome the stigmas associated with the cannabis industry.
Trademarks and Patents
Grown Rogue actively seeks to protect its brand and intellectual property. Grown Rogue currently has three registered trademarks:
| 1. | Grown Rogue was filed on September 22, 2017 and registered on August 7, 2018 under Registration No. 5537240 |
|---|---|
| 2. | The Right Experience Every Time was filed on September 29, 2017 and registered on August 7, 2018 under<br>Registration 5537260. |
| --- | --- |
| 3. | Sizzleberry was filed on September 29, 2017 and registered on August 7, 2018 under Registration 5537259. |
| --- | --- |
Grown Rogue filed a patent for its nitrogen sealed glass containers on February 15, 2018 with the United States Patent and Trademark Office (“USPTO”). The nitrogen sealed glass containers preserve the freshness of the flower and essential terpenes to improve the “entourage effect.” The USPTO issued Grown Rogue United States Patent Number 10,358,282 on July 23, 2019. Several third parties have contacted us to request licensing information on this technology. We have introduced nitrogen sealed jars in Michigan and plan on launching them as we enter additional new markets and may license the technology to third parties operating in markets in which Grown Rogue is not currently licensed.
Social and Environmental Policies
Grown Rogue employs sustainable business models in all of its operations. Grown Rogue maintains the highest standards of environmental stewardship in cultivation. This includes sustainable water sources with optimization of reclamation and recapture from runoff and recycling of water input. We use only natural and sustainable products in all applications, including nutrients and integrated pest management. We maintain the highest level of sustainable cannabis practices through our focus on sustainable and natural cultivation methods.
Grown Rogue hires and pays living wage to all of its team members and is very involved in each of the communities where it operates.
When wildfires ravaged Oregon during the year ended October 31, 2020, particularly Jackson County, Grown Rogue quickly mobilized to support teammates and their families who lost homes or were adversely impacted, while also donating over $20,000 to community fire relief funds and organizing a Cannabis Coalition Fire Relief Fund with the United Way of Jackson County.
Plans for Expansion & Economic Outlook
Grown Rogue continues to focus on taking its learnings and experience from Oregon into new markets across the US. During the last two years, Grown Rogue has established a platform that excels at licensing, compliance, high quality and low cost production methods, understanding consumer purchasing preferences, and product innovation. This platform places Grown Rogue in a superior position to capitalize on new markets compared to our competitors. Oregon is arguably the most competitive cannabis market in the world, and we have excelled by implementing standard business practices that make the Company well suited for entering and building successful brand presence in newly legalized cannabis markets.
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The recently completed expansion into Warehouse 2 (described in the Oregon heading under Description of Business) represents a template for growth and execution against management’s strategy of being a high quality, low cost flower producer. As other growth opportunities arise under favorable financial terms, management can activate known and repeatable systems into new assets.
The future of the cannabis industry is in the branded products and the best brands are being created in the west coast, which is the area that has become synonymous with high quality cannabis. Unlike many current multi-state operators who prefer to obtain just a few licenses in a large volume of states, Grown Rogue is very focused on establishing a larger number of licenses in fewer states to capitalize on the economies of scale necessary to maximize profits. Over the next 12 months, Grown Rogue is focused on furthering its footprint and market share in the Oregon market, continuing to add to the portfolio projects in Michigan and looking at strategic opportunities in new states.
With the recent shift in political landscape, Grown Rogue has also begun analyzing the potential for federal de-regulation and the subsequent ability to export cannabis products across state lines. Oregon and the west coast have become synonymous with high quality cannabis and long term we believe Oregon will be a large export state across the US and international. Being located in the Emerald Triangle also provides a unique product differentiator due to the ability to produce high quality low cost sungrown flower due to the environmental conditions that occur naturally in Southern Oregon. Our strategy for how to take advantage of what will surely be a multi-billion dollar export business is developing and we are excited to begin implementation of this business plan over the coming years.
Going Concern
The Company’s ability to continue as a going concern is dependent upon, but not limited to, its ability to raise financing necessary to fund its development programs and general and administrative expenses, discharge its liabilities as they become due and generate positive cash flows from operations. There is no certainty that the Company will be successful in raising additional capital or generating positive cash flow from operations.
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Selected Annual Information
The following selected financial data for each of the three completed financial years are derived from the audited annual financial statements of the Company.
| Year Ended October 31, | 2020 | 2019 | 2018 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Total revenue | $ | 4,239,604 | $ | 3,924,983 | $ | 1,932,128 | |||
| Loss from operations | (1,574,679 | ) | (7,622,956 | ) | (4,967,609 | ) | |||
| Net loss | (2,356,488 | ) | (9,476,934 | ) | (7,509,986 | ) | |||
| Net loss per share, basic and diluted | (0.03 | ) | (0.13 | ) | (0.22 | ) | |||
| Comprehensive Loss | (2,490,605 | ) | (9,355,014 | ) | (7,509,986 | ) | |||
| Comprehensive loss per share, basic & diluted | (0.03 | ) | (0.13 | ) | (0.22 | ) | |||
| Total assets | 3,764,418 | 2,932,476 | 5,366,268 | ||||||
| Total non-current liabilities | 2,910,333 | 217,633 | 2,292,634 | ||||||
| Cash dividends | Nil | Nil | Nil |
Results of Operations
Selected financial results of operations for three months ended January 31, 2021, are summarized below:
| Three months ended January 31, | 2021 () | 2020 () | Variance | Variance % | |||||
|---|---|---|---|---|---|---|---|---|---|
| Revenue | ) | (5 | )% | ||||||
| Cost of goods sold, excluding fair value adjustments | ) | ) | ) | 6 | % | ||||
| Gross profit (loss) before fair value adjustments | ) | (15 | )% | ||||||
| Net loss | ) | ) | ) | 292 | % |
All values are in US Dollars.
Significant expense items contributing to the increase in net loss between the three months ended January 31, 2021 and 2020 are summarized in the table below.
| Three months ended January 31, | 2021 () | 2020 () | Variance | Variance % | ||||
|---|---|---|---|---|---|---|---|---|
| Realized fair value amounts in inventory sold | ) | (73 | )% | |||||
| Unrealized fair value loss (gain) on growth of biological assets | ) | (127 | )% | |||||
| Accretion expense | 264 | % | ||||||
| Amortization of property and equipment | ) | (40 | )% | |||||
| General and administrative expenses | ) | (1 | )% |
All values are in US Dollars.
More detailed analysis of the components of results of operations are described in the following sections.
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Revenues
The following tables summarizes revenues earned during the three months ended January 31, 2021 and 2020.
| Three months ended January 31, | 2021 () | 2020 () | Variance () | Variance (%) | |||
|---|---|---|---|---|---|---|---|
| Revenue from third-party products | ) | (100 | )% | ||||
| Revenue from management services | -- | ||||||
| Revenue from Grown Rogue production | ) | (18 | )% | ||||
| Total revenue | ) | (5 | )% |
All values are in US Dollars.
The following table summarizes revenues from Grown Rogue production.
| Three months ended January 31, | 2021 () | 2020 () | Variance () | Variance (%) | |||
|---|---|---|---|---|---|---|---|
| Indoor | ) | (15 | )% | ||||
| Outdoor | ) | (22 | )% | ||||
| Trim & other | 14 | % | |||||
| Revenue from Grown Rogue production | ) | (18 | )% |
All values are in US Dollars.
Revenues during Q1 2021 were lower than Q1 2020 revenues, due to a decrease in pounds sold of indoor and outdoor flower, which was offset in part by an increase in average selling price of indoor flower. The following tables summarize pounds sold, revenues from those pounds, and average selling prices.
The following table summarizes sales prices and volumes. “ASP” refers to average selling price.
| Revenue from | Q1 2021 Pounds sold | Q1 2020 pounds sold | Pounds variance | Q1 2021<br>ASP () | Q1 2020<br>ASP () | ASP variance | |||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Indoor | 327 | 490 | (163 | ) | 275 | ||||||
| Outdoor | 587 | 787 | (200 | ) | 27 | ||||||
| Total | 914 | 1,277 | (363 | ) | 107 |
All values are in US Dollars.
The decreased pounds sold in Q1 2021 as compared to Q1 2020 reflects, in part, our intentional hold-back of portions of inventory in expectation that prices would rise in the following months. This was based upon our observations over time that market prices for flower are seasonally low during the months of our first fiscal quarter.
Costs of goods and services sold
| Three months ended January 31, | 2021 | 2020 | Change () | Change (%) | |||||
|---|---|---|---|---|---|---|---|---|---|
| Cost of finished cannabis inventory sold | $ | 470,554 | $ | 521,680 | ) | (10 | )% | ||
| Costs of service revenues | 84,153 | - | -- | ||||||
| Costs of goods sold, excluding fair value items | $ | 554,707 | $ | 521,680 | 6 | % |
All values are in US Dollars.
Cost of finished cannabis inventory sold decreased 10%, while revenues for Grown Rogue production decreased 18%, reflecting favorable operational efficiency. As no service revenues were earned during Q1 2020, there are no comparable costs of service revenues for Q1 2021.
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Net loss
Share-based compensation
During Q1 2021, we granted, or committed to grant, common shares as compensation to employees and service providers. The common shares issuances and stock options (measured at fair value using the Black-Scholes pricing model) resulted in total expense recognition of $88,438 during Q1 2021 (2020 - $Nil).
General and administrative expenses
| Three months ended January 31, | 2021 | 2020 | Change () | Change (%) | |||||
|---|---|---|---|---|---|---|---|---|---|
| Office, banking, travel, and overheads | $ | 100,708 | $ | 117,685 | ) | (14 | )% | ||
| Professional services | 136,428 | 165,352 | ) | (17 | )% | ||||
| Salaries and benefits | 429,603 | 387,731 | 11 | % | |||||
| General and administrative expenses | $ | 666,739 | $ | 670,768 | ) | (1 | )% |
All values are in US Dollars.
The increase in the general and administrative costs quarter over quarter was in part due to additional staffing required to support expansion and growth, which demanded increases in management expertise in operations and corporate positions.
Interest and interest accretion expense
| Three months ended January 31, | 2021 | 2020 | Change () | Change (%) | ||||
|---|---|---|---|---|---|---|---|---|
| Interest and accretion expense | $ | 256,884 | $ | 158,724 | 62 | % |
All values are in US Dollars.
The increase in interest from Q1 2021 over Q1 2020 reflects interest on higher debt outstanding in Q1 2021 as compared to Q1 2020. In Q1 2021, interest attributable to convertible debentures was approximately $130,000 (2020 – approximately $147,000). Debt issued after Q1 2020 includes debt principal of $600,000 issued on March 20, 2020, at an effective interest rate of 73%; two debt issuances in Q1 2021 with total principal of $375,000 and effective interest rates of approximately 27%; and a debt issuance during Q1 2021 of $150,000 with an annual interest rate of 10%.
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Summary of Quarterly Results
The following table sets out selected quarterly results of the Company for the eight quarters ended on or before January 31, 2021. The information contained herein is drawn from the interim financial statements of the Company for each of the aforementioned eight quarters.
| Fiscal Year | 2020 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter ended | Oct | Jul | Apr | ||||||||
| Revenue () | 1,051,185 | 1,056,702 | 903,994 | 1,172,612 | |||||||
| Net loss () | (915,065 | ) | (122,401 | ) | (794,072 | ) | (1,206,828 | ) | |||
| Net loss, basic & diluted (/share) | (0.01 | ) | (0.00 | ) | (0.01 | ) | (0.01 | ) |
All values are in US Dollars.
| Fiscal Year | 2019 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Quarter ended | Oct | Jul | Apr | ||||||||
| Revenue () | 1,106,296 | 431,629 | 773,930 | 1,885,115 | |||||||
| Net loss () | (233,187 | ) | (2,098,742 | ) | (931,184 | ) | (1,648,446 | ) | |||
| Net loss, basic & diluted (/share) | (0.00 | ) | (0.02 | ) | (0.01 | ) | (0.02 | ) |
All values are in US Dollars.
Liquidity
Our ability to generate cash in the short term is based upon sales from production and financing proceeds, and in the long term is based upon sales from production, including production from investments in production increases, or from growth by business acquisitions, or a combination thereof. Investments to increase production or acquire business may require further financing. The Company generates cash flows from sales of cannabis products which generate margin that contribute to coverage of other operating costs, but has not yet reached productive scale to generate net income and positive net cash flows from operations on a consistent basis. We have raised financing historically through debt and equity, which has been and will be invested in the business in order to improve production yields and increase total productive capacity, as well as cover operating costs. We raised proceeds of approximately $1.23 million during Q1 2021 (2020 - $15,000), and net proceeds of approximately $3.5 million (CAD$4,458,555) subsequent to Q1 2021.
We are typically able to sell finished goods shortly after inventory reaches its final state, and sales are primarily made on cash-on-delivery terms, or with short net terms. Our ability to fund operations, to plan capital expenditures, and to plan acquisitions, depends on future operating performance and cash flows and the availability of capital by way of debt or equity investment in the Company, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond the Company’s control.
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Cash flows
The following table summarizes certain cash flow items for the three months ended January 31, 2021 and 2020.
| Three months ended January 31, | 2021 () | 2020 () | ||
|---|---|---|---|---|
| Net loss | ) | ) | ||
| Net cash provided by operating activities | ||||
| Net cash used in investing activities | ) | ) | ||
| Net cash provided (used) by financing activities | ) | |||
| Net increase in cash and cash equivalents | ||||
| Effect of currency translation | ) | ) | ||
| Cash and cash equivalents, beginning | ||||
| Cash and cash equivalents, ending |
All values are in US Dollars.
Operating activities
During the three months ended January 31, 2021, cash provided by operating activities was $123,405 (2020 - $150,384), which included the following significant non-cash items added back to net loss:
| ● | $29,967 (2020 - $49,677) in amortization of property & equipment; |
|---|---|
| ● | $186,806 (2020 – deduction of $701,559) from the unrealized change in fair value of biological assets; |
| --- | --- |
| ● | $132,448 (2020 - $18,375) in share-based compensation and stock option vesting expense, including expense<br>for option grants under our stock option plan implemented during 2020, as well as shares issued directly as compensation for employees,<br>directors, and service providers; |
| --- | --- |
| ● | $248,357 (2020 - $68,210) in accretion of interest expense on debt and convertible debentures outstanding.<br>As a point of reference, debt and convertible debentures outstanding at January 31, 2021 totaled approximately $3.28 million (January<br>31, 2020 – approximately $2.5 million); and |
| --- | --- |
| ● | $319,627 (2020 - $Nil) from the fair value remeasurement of the derivative liability component of convertible<br>debentures. |
| --- | --- |
Cash used in operating activities also reflects an adjustment for the following non-cash item deducted from net loss:
| ● | $302,808 (2020 – $Nil) from the unrealized gain on our investment in PBIC shares, measured at PBIC’s<br>publicly quoted share price. |
|---|
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Increases in non-cash working capital are summarized in the following table.
| Three months ended January 31, | 2021 | 2020 | ||||
|---|---|---|---|---|---|---|
| Accounts receivable | $ | (66,866 | ) | $ | (10,981 | ) |
| Inventory | 242,376 | 718,792 | ||||
| Prepaid expenses and other assets | (9,244 | ) | (13,903 | ) | ||
| Accounts payable and accrued liabilities | 204,991 | 245,387 | ||||
| Interest payable | (44,141 | ) | 18,023 | |||
| Unearned revenue | 84,600 | (35,000 | ) | |||
| Total | $ | 411,716 | $ | 922,318 |
Changes in accounts receivable are due to the timing and collection of sales and were relatively small factors in changes in non-cash working capital. Decreases in inventories, with corresponding increases to non-cash working capital, are significantly influenced by the unrealized fair value adjustments to biological assets, which are transferred to inventory upon harvest, as well as the timing of harvests and the timing of sales of finished inventory. Changes in liabilities, including accounts payable and accrued liabilities reflect the use of credit terms and cash flow management based upon ongoing liquidity management. Unearned revenues reflect payments for contracts with future delivery requirements, which we use from time to time as part of our sales strategy.
Investing activities
During the three months ended January 31, 2021, we invested $159,016 into property and equipment, primarily to expand our Warehouse 1 facility (2020 - $4,528).
Financing activities
Net cash flows from financing activities in Q1 2021 were $1,096,224 (2020 – net cash used of $87,136). Significant financing activities included the following:
| ● | Debt proceeds of $150,000 borrowed to expand Warehouse 1 productive capacity; |
|---|---|
| ● | Debt proceeds of $375,000 borrowed to advance the acquisition of Warehouse 2; |
| --- | --- |
| ● | Equity issuance by a subsidiary of $375,000, also to advance the acquisition of Warehouse 2; and |
| --- | --- |
| ● | $200,000 raised through a private placement of common shares, and $125,000 deposited in advance of the close<br>of the second tranche of this private placement closed February 5, 2021 (see Subsequent Events). |
| --- | --- |
Financing activities during Q1 2020 included the following:
| ● | $15,000 in debt proceeds; and |
|---|---|
| ● | $34,911 in repayments of long-term debt, as well as $67,225 in repayments of lease principal. |
| --- | --- |
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Trends and expected fluctuations in liquidity
| January 31, <br>2021 () | October 31, <br>2020 () | Variance () | Variance (%) | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Current assets | 52 | % | |||||||
| Current liabilities | ) | ) | ) | 162 | % | ||||
| Working capital | ) | ) | (5499 | )% | |||||
| Add: derivative liabilities (not cash-settled) | 59 | % | |||||||
| Working capital excluding derivative liabilities | ) | ) | (261 | )% |
All values are in US Dollars.
Working capital, excluding derivative liabilities, varied from October 31, 2020 to January 31, 2021 due in large part to approximately $1.8 million in convertible debentures becoming current after October 31, 2020.
We expect significant ongoing fluctuations in working capital over time, as we are in the early stages of growth. We have historically raised debt with principal due on maturity, and accordingly, we expect significant one-time payments as debt matures, as opposed to smooth cash outflows over time. We have historically been able to meet commitments, modify debt maturities, and raise new financing as required in order to respond to changes in liquidity position, although there is no guarantee we will be able to do so in the future. We are exposed to market pricing for cannabis products, which materially impacts our liquidity and is out of our control. The market for cannabis products, including flower, which is our primary product, is relatively immature, having recently become legal to buy and sell in certain markets. We have observed some indications of seasonality, and in addition, we have observed that market conditions can change rapidly without apparent explanations or analyzable causes. We cannot control whether we will be able to raise financing when required or sell cannabis products at profitable prices in the future; however, part of our strategy is to produce flower at sustainable gross margins over a growing productive base, which, holding other factors constant, is expected to result in improved net loss or net income, as well as net cash flows.
Commitments and obligations
Set out below are minimum future lease payments after January 31, 2021.
| Total future minimum lease payments | ||
|---|---|---|
| Less than one year | $ | 261,300 |
| Between one and five years | 816,010 | |
| Total | $ | 1,077,310 |
The Company has one lease contract with extension options remaining after January 31, 2021, which was negotiated by management to provide flexibility in managing business needs. Set out below are the undiscounted potential rental payments related to periods following the date of exercise options that are not included in the lease term:
| Within five years | More than five years | |||
|---|---|---|---|---|
| Extension options available to be exercised | $ | 6,180 | $ | 843,981 |
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The contractual maturities of the Company’s accounts payable and accrued liabilities, debt, leases, and unearned revenue occur over the next three years as follows:
| Year 1 | Years 2 - 3 | |||
|---|---|---|---|---|
| Accounts payable and accrued liabilities | $ | 1,275,456 | $ | 389,816 |
| Debt and convertible debentures | 2,228,246 | 1,050,588 | ||
| Lease liabilities | 183,746 | 651,809 | ||
| Interest payable | 12,155 | - | ||
| Unearned revenue | 84,600 | - | ||
| Total | $ | 3,784,203 | $ | 2,092,213 |
The above table excludes the derivative liability reported at January 31, 2021, of $930,195, which is not cash-settled, as well as redemption liabilities of $375,000, which do not have a maturity date.
Other liquidity items
We hold shares in PBIC, which are classified as non-current. If or when we choose to sell these shares, we will be subject to market conditions for PBIC shares at the time of sale. We are not in default or arrears on our liabilities, noting that we have liabilities which have been deferred into non-current periods by creditors; such amounts were $389,816 at January 31, 2010 and October 31, 2020. We have a callable instrument represented at January 31, 2021 by a redemption liability of $375,000 (October 31, 2020 - $Nil) which represents a non-controlling interest that may be put to the Company; if exercised, the Company may choose to settle in cash or shares of the Company, or a combination thereof.
Capital Resources
Debt financing
Long-term debt
On November 23, 2020, we issued debt with a principal amount of $125,000, interest accrued at 10% per annum, and a maturity date of November 23, 2023. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $125,000. The note is reported at amortized cost using an effective interest rate of approximately 27%.
On December 2, 2020, we issued debt with a principal amount of $150,000, interest accrued at 10% per annum, and a maturity date of December 31, 2021. Interest and principal are payable upon maturity. The maturity date can be extended by up to six-months for a $1,000 fee per $10,000 of principal extended.
On January 27, 2021, we issued debt with a principal amount of $250,000, interest accrued at 10% per annum, and a maturity date of January 27, 2024. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized cost using an effective interest rate of approximately 27%.
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Equity financing
Issuance of non-controlling equity interest in subsidiary
During Q1 2021, the Company sold an 8.6% interest in Grown Rogue Distribution, LLC (“GR Distribution”) for $375,000, through the issuance of 9.375 new equity units (“GR Distribution Units”) out of 109.375 total issued and outstanding GR Distribution Units after the issuance. The GR Distribution Equity Units are puttable by the subscribers and callable by the Company, and can be settled in Company shares at a value agreed upon by the Company and the GR Distribution non-controlling interests, or in cash, or in a combination of cash and shares. The Company has accordingly recognized a redemption liability of $375,000 at January 31, 2021 (2020 - $Nil), recorded by way of a reduction in Company contributed surplus.
Trends and expected fluctuations in capital resources
We generated net cash flows from financing of approximately $1.1 million during Q1 2021 (2020 – net outflows of approximately $90,000). Proceeds of $525,000 were raised from debt issuances during the three months ended January 31, 2021 (2020 - $15,000), and proceeds of $325,000 were raised from equity issuances and subscriptions (2020 - $Nil).
Financing activities have been critical to our ability to continue operating, and significant portions of our financing have historically been raised from key management personnel. These individuals have not provided assurance that they will provide additional financing if we require financing but are unable to raise such financing from third parties; this highlights the importance of management’s strategy of scaling operations. We raised proceeds, including debt and equity, of approximately $1.23 million during Q1 2021 (2020 - $15,000), and net proceeds of approximately $3.5 million (CAD$4,458,555) subsequent to Q1 2021. Our business strategy contemplates growing cash flows from operations, which may contribute to reinvestment and growth; however, further financing may be required or utilized based upon our future capital position and future business opportunities.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Transactions with Related Parties
Transactions with key management and directors
During the three month period ended January 31, 2021, the Company completed the following related party transactions:
| 1. | Through its wholly owned subsidiary, GRU Properties, LLC, the Company leased a property located in Trail,<br>Oregon owned by the Company’s President and CEO. The lease was extended during the three months ended January 31, 2021 and expires on<br>December 31, 2025. Rent of $19,000 was incurred for the three months ended January 31, 2021 (2020 $18,500). The Company had $45,000 (October<br>31, 2020 - $45,000) owing under this lease at January 31, 2021 from lease payments which the CEO agreed to defer. The lease balance at<br>January 31, 2021, was $275,707 (October 31, 2020 - $12,532). |
|---|
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| 2. | The Company incurred expenses of $11,250 (2020 - $12,000) for services provided by the spouse of the CEO.<br>At January 31, 2021, accounts and accrued liabilities payable to this individual were $3,750 (October 31, 2020 - $1,946). During the year<br>ended October 31, 2020, this individual was granted 500,000 options which vested on the grant date. | |||
|---|---|---|---|---|
| 3. | Key management personnel consist of the President and CEO; the former Chief Strategy Officer; the CFO<br>of GR Unlimited; the Chief Marketing Officer; and the Chief Accounting Officer; and the CFO of Grown Rogue International, Inc. The compensation<br>paid or payable to key management for services for the periods as follows: | |||
| --- | --- | |||
| Three months ended January 31, | 2021 | 2020 | ||
| --- | --- | --- | --- | --- |
| Salaries and consulting fees | $ | 164,675 | $ | 100,500 |
| Share-based compensation | 14,296 | 10,188 | ||
| Stock option expense | 16,806 | - | ||
| Total | $ | 195,777 | $ | 110,688 |
Stock options granted to key management personnel and close family members of key management personnel include the following options, granted during the year ended October 31, 2020: 750,000 options to the CFO of GR Unlimited; 750,000 options to the Chief Market Officer; and 250,000 option to the Chief Accounting Officer.
Accounts payable and accrued liabilities due to key management at January 31, 2021 totaled $510,455 (October 31, 2020 - $441,424), including the accrued liabilities described at Note 8.
Debt balances and movements with key management and directors
The following table sets out the movements and balances of debt with related parties during Q1 2021 and the year ended October 31, 2020.
| CEO | CFO of GR Unlimited LLC | Directors | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance - October 31, 2019 | $ | - | $ | - | $ | - | $ | - | ||||
| Borrowed | 50,000 | 100,000 | 150,000 | 300,000 | ||||||||
| Interest | 21,745 | 43,491 | 65,236 | 130,472 | ||||||||
| Payments | (10,252 | ) | (20,504 | ) | (30,756 | ) | (61,512 | ) | ||||
| Balance - October 31, 2020 | $ | 61,493 | $ | 122,987 | $ | 184,480 | $ | 368,960 | ||||
| Borrowed | - | - | - | - | ||||||||
| Interest | 9,426 | 18,851 | 28,277 | 56,554 | ||||||||
| Payments | (1,191 | ) | (2,383 | ) | (3,574 | ) | (7,148 | ) | ||||
| Balance - January 31, 2021 | $ | 69,728 | $ | 139,455 | $ | 209,183 | $ | 418,366 |
On November 23, 2020, an individual who became a director purchased 6.25 newly issued equity units of Grown Rogue Distribution, LLC for $250,000, out of the total of 9.375 such units issued during the three months ended January 31, 2021.
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Other Selected Financial Information
Adjusted EBITDA (non-IFRS measure)
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income or loss for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance.
We have included a figure within the Adjusted EBITDA reconciliation called “Adjusted Gross Margin.” Adjusted Gross Margin is calculated by removing the impact of fair value adjustments and amortization of fixed assets from net loss.
| Three months ended | ||||||
|---|---|---|---|---|---|---|
| January 31, | ||||||
| Adjusted EBITDA Reconciliation | 2021 | 2020 | ||||
| Net loss, as reported | $ | (915,065 | ) | $ | (233,187 | ) |
| Add back realized fair value amounts included in inventory sold | 169,328 | 632,630 | ||||
| Add back (less) unrealized fair value loss (gain) on growth of biological assets | 186,806 | (701,559 | ) | |||
| Add back amortization of property & equipment included in cost of sales | 159,545 | 45,397 | ||||
| $ | (399,386 | ) | $ | (256,719 | ) | |
| Add back accretion expense, as reported | 248,357 | 68,210 | ||||
| Add back amortization of intangible assets, as reported | 4,997 | 7,659 | ||||
| Add back amortization of property and equipment, as reported | 29,967 | 49,677 | ||||
| Add back amortization of right-of-use assets, as reported | 8,188 | 35,822 | ||||
| Add back share-based compensation expense, as reported | 88,438 | |||||
| Add back interest expense, as reported | 8,527 | 90,514 | ||||
| Deduct unrealized gain on marketable securities, as reported | (302,808 | ) | - | |||
| Add back unrealized loss on derivative liability | 319,627 | - | ||||
| Adjusted EBITDA (loss) | $ | 5,907 | $ | (4,837 | ) |
Pg 18 of 37
Cash margin analysis (non-IFRS measure)
“Cash Margin” is a non-IFRS measure used by management that does not have any meaning under IFRS and may not be comparable to similar measures presented by other companies. To define Cash Margin, first we define “Cash Production Costs,” pertaining to revenue from our products and third-party products, as the cost of finished cannabis inventory sold, as reported on the statement of comprehensive loss, less non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments; costs for service revenues are as presented on the statement of comprehensive loss. Cash Margin is arrived at by subtracting Cash Production Costs from their corresponding revenue category, and dividing the result by revenue to arrive at a percentage of revenue. The Company believes that this is a useful metric to evaluate its operating performance.
The following table presents Cash Margin by revenue type.
| Three months ended | |||||
|---|---|---|---|---|---|
| January 31, 2021 | |||||
| Cash Margin analysis | Revenue | Costs | Margin % | ||
| Grown Rogue products | 66 | % | |||
| Third party products | -- | ||||
| Service revenues | 52 | % | |||
| Asset depreciation included in COGS | -- | ||||
| Cost of packaging & other included in COGS | -- | ||||
| Total costs of finished cannabis inventory sold, as reported | 47 | % | |||
| Realized fair value amounts in inventory sold, as reported | -- | ||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | ||||
| Totals, as reported | 13 | % |
All values are in US Dollars.
| Three months ended | ||||||
|---|---|---|---|---|---|---|
| January 31, 2020 | ||||||
| Cash Margin analysis | Revenue | Costs | Margin % | |||
| Grown Rogue products | 60 | % | ||||
| Third party products | 23 | % | ||||
| Service revenues | -- | |||||
| Asset depreciation included in COGS | -- | |||||
| Cost of packaging & other included in COGS | -- | |||||
| Total costs of finished cannabis inventory sold, as reported | 53 | % | ||||
| Realized fair value amounts in inventory sold, as reported | -- | |||||
| Unrealized fair value (gain) on growth of biological assets, as reported | ) | -- | ||||
| Totals, as reported | 59 | % |
All values are in US Dollars.
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Outstanding Share Data
As of the date of the MD&A, the Company had 121,990,553 common shares outstanding.
As of the date of this MD&A, the Company has the following warrants outstanding, exercisable into common shares:
| Exercise price | Warrants outstanding | Life (years) | Expiry date | |||
|---|---|---|---|---|---|---|
| $ | 0.16 | 8,409,091 | 0.6 | November 01, 2021 | ||
| 0.13 | 5,000,000 | 0.9 | February 10, 2022 | |||
| 0.13 | 10,000,000 | 1.1 | May 15, 2022 | |||
| 0.20 | 8,200,000 | 1.8 | February 5, 2023 | |||
| 0.44 | 2,148,117 | 2.2 | June 28, 2023 | |||
| $ | 0.17 | 33,757,208 | 1.2 |
As of the date of this MD&A, the Company has the following stock options outstanding and exercisable into common shares:
| Exercise price | Options outstanding | Number exercisable | Remaining Contractual Life (years) | Expiry date | ||||
|---|---|---|---|---|---|---|---|---|
| $ | 0.44 | 500,000 | 500,000 | 0.8 | January 01, 2022 | |||
| 0.15 | 3,125,000 | 2,082,500 | 3.3 | July 09, 2024 | ||||
| 0.15 | 500,000 | 250,000 | 3.7 | December 01, 2024 | ||||
| 0.15 | 200,000 | - | 3.6 | November 18, 2024 | ||||
| $ | 0.18 | 4,325,000 | 2,832,500 | 2.9 |
Critical Accounting Judgments and Estimation Uncertainties
The preparation of the consolidated financial statements in conformity with IFRS requires that the Company’s management make critical judgments, estimates and assumptions about future events that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The most significant judgments include those related to the ability of the Company to continue as a going concern, the determination of when property and equipment are available for use, and impairment of its financial and non-financial assets. The most significant estimates and assumptions include those related to the valuation of biological assets, the collectability of accounts receivable, the useful lives of property and equipment, inputs used in accounting the determination of the discount rate used to estimate the fair value of the liability component of convertible promissory notes, the discount rates used to calculate present values of lease liabilities, the inputs used in the estimate of the fair value of unit-based compensation and the inputs used in the estimate of the fair value of the unit purchase option and warrants issued.
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Newly Adopted Accounting Pronouncements
No new accounting pronouncements were adopted during Q1 2021.
Financial Instruments and Other Risk Factors
Market Risk
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
Interest Rate Risk
At January 31, 2021 and October 31, 2020, the Company’s exposure to interest rate risk relates to long-term debt, convertible debentures, and leases; each of these items bears interest at a fixed rate.
Currency Risk
As at January 31, 2021, the Company had accounts payable and accrued liabilities of CAD$567,665 and convertible debentures of CAD$2,850,000, as well as a derivative liability of CAD$1,188,748. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
The carrying amount of cash and trade accounts receivable represents the Company’s maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| January 31, <br><br>2021 | October 31, <br><br>2020 | |||
|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 |
| Accounts Receivable | 238,987 | 172,121 | ||
| Total | $ | 1,517,388 | $ | 389,909 |
The allowance for doubtful accounts at January 31, 2021 is $1,000 (October 31, 2020 - $7,425).
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Liquidity Risk
Liquidity risk represents the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At January 31, 2021, the Company’s working capital accounts were as follows:
| January 31, <br><br>2021 | October 31, <br><br>2020 | ||||
|---|---|---|---|---|---|
| Cash | $ | 1,278,401 | $ | 217,788 | |
| Current assets excluding cash | 1,509,962 | 1,616,987 | |||
| Total current assets | 2,788,363 | 1,834,775 | |||
| Current liabilities | 4,714,398 | 1,799,104 | |||
| Working capital (deficit) | $ | (1,926,035 | ) | $ | 35,671 |
As discussed above, our working capital deficit, after adjusting for non-cash settled derivative liabilities, was approximately $996,000. Subsequent to January 31, 2021, we raised gross proceeds of approximately $3.7 million (CAD$4,737,800) through a brokered private placement (see Subsequent Events).
The Company faces risks inherent in an agricultural business.
Cannabis is an agricultural product. There are risks inherent in the agricultural business, such as insects, plant diseases, forest fire and similar agricultural risks. Although some of the Company’s cannabis flower is grown indoors under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of the Company’s products.
COVID-19 Pandemic
The Company’s business, operations and financial condition could be materially and adversely affected by the outbreak of epidemics or pandemics or other health crises, including the recent outbreak of COVID-19. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, on March 11, 2020, the World Health Organization declared the outbreak a pandemic and on March 13, 2020 the U.S. declared that the COVID-19 outbreak in the United States constitutes a national emergency. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business. Such public health crises can result in volatility and disruptions in the supply and demand for products and financial markets, as well as declining trade and market sentiment and reduced mobility of people, all of which could affect consumer good prices, interest rates, credit ratings, credit risk and inflation. The risks to the Company of such public health crises also include risks to employee health and safety, a slowdown or temporary suspension of operations impacted by an outbreak, increased labour and fuel costs, regulatory changes, political or economic instabilities or civil unrest. At this point, COVID-19 has not had a significant impact on the Company’s supply chain nor its ability to continue operations and sustain revenues; however, it is possible that COVID-19 may in the future have a material adverse effect on the Company’s business, results of operations and financial condition.
Fair Values
The carrying amounts for the Company’s cash, accounts receivable, amounts due from a related company, short-term advance to a related party, accounts payable and accrued liabilities, amounts due to employee/director, short-term advance payable, promissory notes and convertible promissory notes approximate their fair values because of the short-term nature of these items.
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Fair Value Hierarchy
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
During the period ended January 31, 2021, there were no transfers of amounts between levels.
See additional risk factors relating to the Company as described in section 17 of the Company’s Listing Statement dated November 15, 2018 which can be found under the Company’s profile on www.sedar.com.
Subsequent Events
On February 15, 2021, Grown Rogue Distribution LLC (“GR Distribution”) sold 2.5 equity units for US$40,000 per unit each for total proceeds of $100,000. After this transaction, GR Distribution had 111.875 equity units outstanding, of which the Company owns 100. The unit holders have the future right to convert their units in the subsidiary, at an agreed-upon price, into common shares of the Company at the greater of CAD$0.20 or the maximum permitted discount under the policies of the Canadian Securities Exchange at the time of conversion.
On February 5, 2021 the Company completed the second tranche of a private placement; the second tranche was comprised of 8,200,000 units at CAD$0.16 per unit for proceeds of CAD$1,312,000. Each unit was comprised of one common share and one warrant to purchase one common share. Each warrant has an exercise price of CAD$0.20 and a term of two years. The second tranche included subscriptions by the following related parties: the CEO subscribed to 1,600,000 units; the CFO of GR Unlimited subscribed to 2,000,000 units; a key Company operations manager subscribed to 1,000,000 units; and PBIC subscribed to 2,000,000 units.
Subsequent to January 31, 2021, the Company’s subsidiary, GR Michigan, LLC, terminated its Option to Acquire Golden Harvests. Simultaneously with the termination, a new entity, Canopy Management, LLC (“Canopy”) signed an Option to Purchase Golden Harvests under similar terms. Canopy has already received approval by the State of Michigan for licensing and this will allow the Company to accelerate its option exercise to obtain a 60% interest in Golden Harvests. Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company. The Company has an option to acquire an 87% membership interest in Canopy, from GRIN’s CEO, which when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had with GR Michigan.
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On February 5, 2021, the Company agreed to acquire substantially all of the assets of the growing and retail operations of High Street Capital Partners, LLC (“HSCP”) for total consideration of $3,000,000 in a series of tranches based on estimated regulatory approvals not to exceed 18 months. The Company also executed a Management Services Agreement (“MSA”) with HSCP. The Company will operate the growing facility under the MSA until the acquisition of the growing assets obtains regulatory approval.
On March 2, 2021, holders of convertible debentures converted principal of CAD$491,666 into common shares at CAD$0.125 per share, and accordingly the Company issued 3,933,328 common shares to those holders. On April 9, 2021, the Company paid holders of the convertible debentures principal of CAD$1,538,889. After the conversions and the payment, the undiscounted principal amount of convertible debentures outstanding was approximately $650,000 (CAD$819,445).
On March 17, 2021, the Company executed a lease for a new outdoor grow property. The lease term is through February 28, 2024. The annual lease cost is $40,000 per year, due in two equal semiannual payments on March 1st and June 1st of each year. There are no extension options in this agreement for periods after February 28, 2024. Management will transfer one of its existing outdoor growing licenses to this new location, and cease outdoor grow operations at the prior location. The remaining term at prior location is through December 31, 2021, and undiscounted remaining payments from February 1, 2021 to the end of the lease term total $41,800.
Brokered private placement of special warrants
On March 5, 2021, the Company announced completion of a brokered private placement offering through the issuance of an aggregate of 21,056,890 special warrants (each a “Special Warrant”) at a price of $0.225 (the “Issue Price”) per Special Warrant for aggregate gross proceeds of approximately $3.7 million (CAD$4,737,800) (the “Offering”). The Offering was led by Eight Capital (the “Agent”), as sole agent and bookrunner.
Each Special Warrant entitles the holder thereof to receive, for no additional consideration, one unit of the Company (each, a “Unit”) on the exercise or deemed exercise of the Special Warrant. Each Unit is comprised of one common share in the capital of the Company (each, a “Common Share”) and one Common Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of CAD$0.30 for a period of twenty-four (24) months following the closing date (the “Closing Date”) of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants.
The Special Warrants are exercisable by the holders thereof at any time for no additional consideration and all unexercised Special Warrants will be deemed to be exercised, without any further action or payment of additional consideration by the holder thereof, on the date that is the earlier of: (i) the date that is three (3) business days following the date on which the Company obtains a receipt from the applicable securities regulatory authorities (the “Securities Commissions”) for a final short form prospectus qualifying distribution of the Common Shares and Warrants underlying the Special Warrants (the “Qualifying Prospectus”), and (ii) July 6, 2021.
As the Company did not receive a final receipt from the Ontario Securities Commission for the Qualifying Prospectus on or before April 5, 2021, each Special Warrant holder will receive, upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units upon exercise of each Special Warrant (instead of one (1) Unit); accordingly, the final aggregate number of Units to be issued will be 23,162,579.
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As consideration for the services rendered by the Agent in connection with the Offering, the Company paid to the Agent a cash commission of $253,746 and issued the Agent an aggregate of 1,127,758 broker warrants of the Company (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “Compensation Options”). As consideration for certain advisory services provided in connection with the Offering, the Company paid to the Agent an advisory fee of $25,500 and issued the Agent an aggregate of 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options.
Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price for a period of twenty-four (24) months following the Closing Date, subject to adjustment in certain events. Each Compensation Unit shall be comprised of one Common Share and one common share purchase warrant of the Company (a “Compensation Warrant”). Each Compensation Warrant shall entitle the holder thereof to purchase one common share in the capital of the Company (a “Compensation Warrant Share”) at a price of CAD$0.30 at any time before 5:00 p.m. (Toronto time) on the day that is twenty-four (24) months following the Closing Date, subject to adjustment in certain events.
Prior to the filing of the Qualifying Prospectus and the deemed exercise of the Special Warrants, the securities issued under the Offering will be subject to a four month hold period from the date of closing of the Offering in addition to any other restrictions under applicable securities laws.
Regulatory Disclosure
Grown Rogue derives a substantial portion of its revenues from the cannabis industry in the United States, which industry is illegal under United States federal law. Grown Rogue is indirectly involved (through subsidiaries) in the cannabis industry in the United States where local state laws permit such activities. Currently, its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market – we have an option to acquire a controlling interest in a Michigan operator (see subsection ‘Option to Acquire Controlling Interest In Golden Harvests,’ above).
The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication.
In the United States cannabis is largely regulated at the state level. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, and the increasing number of states with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the CSA and as such, violates federal law in the United States. Senators Elizabeth Warren and Cory Gardner have introduced a bipartisan Senate bill titled “Strengthening the Tenth Amendment Through Entrusting States (STATES) Act” that would lift the Controlled Substance Act’s restrictions on cannabis in states that have written their own laws. However, there can be no assurances as to when this bill will pass, or if it will pass at all. The Supremacy Clause of the United States Constitution and United States federal laws made pursuant to it are paramount and in case of conflict between federal and state law in the United States, the federal law shall apply.
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As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states had enacted laws relating to cannabis for medical and recreational purposes. The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that enacted laws legalizing cannabis in some form and that also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level.
In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued a memorandum (the “SessionsMemorandum”) that rescinded the Cole Memorandum. As a result of the Sessions Memorandum, federal prosecutors are no longer bound by the priorities in the Cole Memorandum relating to the prosecution of cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions.
There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the Controlled Substances Act with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law. 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 applicable state laws are repealed or curtailed, Grown Rogue’s business, results of operations, financial condition and prospects would be materially adversely affected. Until Congress amends the federal law with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities.
In light of the uncertainty surrounding the treatment of United States cannabis-related activities, including the rescission of the Cole Memorandum, the Canadian Securities Administrators published a staff notice (Staff Notice 51-352 (Revised)) on February 8, 2018 setting out certain disclosure expectations for issuers with United States cannabis-related activities. Staff Notice 51-352 (Revised) includes additional disclosure expectations that apply to all issuers with United States 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 United States cannabis industry.
In accordance with the Canadian Securities Administrators Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”), below is a table of concordance that is intended to assist readers in identifying the disclosure expectations outlined in Staff Notice 51-352.
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In accordance with Staff Notice 51-352, this section provides a discussion of the federal and state-level U.S. regulatory regimes in the jurisdictions where Grown Rogue is currently directly involved through its subsidiaries or is planning to be directly involved in the future. Certain Grown Rogue subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market. In accordance with Staff Notice 51-352, Grown Rogue will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on Grown Rogue’s licenses, business activities or operations will be promptly disclosed by Grown Rogue.
| All Issuers with US Marijuana-Related Activities | Response |
|---|---|
| Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicates for at least one of the direct, indirect and ancillary industry involvement types. | See above under “Description of Business”.<br><br> <br><br><br> <br>See below under “U.S. Regulatory Matters” |
| Prominently state that marijuana is illegal under US federal law and that enforcement of relevant laws is a significant risk | See above |
| Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. | See below under “U.S. Regulatory Matters”<br><br> <br><br><br> <br>See the following risk factors included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s Business is Illegal under U.S. Federal Law<br><br> <br><br><br> <br>Section 17 – Risk Factors – Because<br> marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA |
| Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. | See the following risk factors included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s Business is Illegal under U.S. Federal Law<br><br> <br><br><br> <br>Section 17 – Risk Factors – Because<br> marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA<br><br> <br><br><br> <br>Section 17 – Risk Factors –<br>Risks Relating to Other Laws and Regulations |
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| All Issuers with US Marijuana-Related Activities | Response |
|---|---|
| Section 17 – Risk Factors – Current<br> and Future Consumer Protection Regulatory Requirements<br><br> <br><br><br> <br>Section 17 – Risk Factors – Operational<br> Risks<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue will not be able to deduct many normal business expenses<br><br> <br><br><br> <br>Section 17 – Risk Factors – External<br> Factors<br><br> <br><br><br> <br>Section 17 – Risk Factors – Failure<br> to Protect Intellectual Property<br><br> <br><br><br> <br>Section 17 – Risk Factors – Agricultural<br> Operations<br><br> <br><br><br> <br>Section 17 – Risk Factors – Liability,<br> Enforcement Complaints etc.<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s business is highly regulated and it may not be issued necessary licenses, permits, and cards<br><br> <br><br><br> <br>Section 17 – Risk Factors – Licenses<br><br> <br><br><br> <br>Section 17 – Risk Factors – Local<br> Laws and Ordinances<br><br> <br><br><br> <br>Section 17 – Risk Factors – Third<br> party service providers to Grown Rogue may withdraw or suspend their service<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue may not be able to obtain or maintain a bank account<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s contracts may be unenforceable and property may be subject to seizure<br><br> <br><br><br> <br>Section 17 – Risk Factors – The protections<br> of US bankruptcy law may be unavailable<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue may have a difficult time obtaining insurance which may expose Grown Rogue to additional risk and financial liabilities<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s websites are accessible in jurisdictions where medicinal or recreational use of marijuana is not permitted and, as a result<br> Grown Rogue may be found to be violating the laws of those jurisdictions<br><br> <br><br><br> <br>Section 17 – Risk Factors – The marijuana<br> industry faces significant opposition in the United States |
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| All Issuers with US Marijuana-Related Activities | Response |
|---|---|
| Given the illegality of marijuana under US federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are/are not available in order to support continuing operations. | See above under “Description of Business”.<br><br> <br><br><br> <br>See the following risk factor included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue may not be able to obtain or maintain a bank account |
| Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities. | 100% of Grown Rogue’s balance sheet and operating statements are exposed to U.S. marijuana-related activities. |
| Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. | Grown Rogue has received legal advice from multiple attorneys regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. |
| CSA Requirement – US Marijuana Issuers with direct involvement in cultivation or distribution | Response |
| Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | See below under “U.S. Regulatory Matters” |
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| All Issuers with US Marijuana-Related Activities | Response |
|---|---|
| Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations. | See below under “U.S. Regulatory Matters”<br><br> <br><br><br> <br>See the following risk factors included in the<br> Company’s Listing Statement available on www.SEDAR.com:<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s Business is Illegal under U.S. Federal Law<br><br> <br><br><br> <br>Section 17 – Risk Factors – Risks<br> Relating to Other Laws and Regulations<br><br> <br><br><br> <br>Section 17 – Risk Factors – Grown<br> Rogue’s business is highly regulated and it may not be issued necessary licenses, permits, and cards<br><br> <br><br><br> <br>Section 17 – Risk Factors – Licenses<br><br> <br><br><br> <br>Section 17 – Risk Factors – Liability,<br> Enforcement Complaints etc. |
| US Marijuana Issuers with indirect involvement in cultivation or distribution | Response |
| Outline the regulations for U.S. states in which the issuer’s investee(s) operate. | N/A |
| Provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee’s licence, business activities or operations. | N/A |
| US Marijuana Issuers with material ancillary involvement | Response |
| Provide reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | N/A |
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U.S. Regulatory Matters
Grown Rogue (through its subsidiaries) has direct involvement in the cultivation and distribution of marijuana in the United States. Grown Rogue and its subsidiaries are primarily involved in the U.S. marijuana industry as a seed to retail company with operations currently in Oregon (a state that has legalized recreational marijuana). Currently Grown Rogue through its subsidiaries produces recreational marijuana and distributes it to dispensaries throughout Oregon.
Producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a federal crime in the United States. The United States federal government regulates drugs through the Controlled Substances Act (the “Federal CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Schedule I drugs are the most tightly restricted category of drugs under the Federal CSA.
State and territorial laws that allow the use of medical cannabis or legalize cannabis for adult recreational use are in conflict with the Federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the Federal CSA, which makes cannabis use and possession illegal on a federal level. Additionally, the Supremacy Clause of the United States Constitution establishes that the Constitution, federal laws made pursuant to the Constitution, and treaties made under the Constitution’s authority constitute the supreme law of the land. The Supremacy Clause provides that state courts are bound by the supreme law; in case of conflict between federal and state law, including Oregon and other state law legalizing certain cannabis uses, the federal law must be applied.
Until Congress amends the Federal CSA with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities. The US 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. Additionally, even if the U.S. federal government does not prove a violation of the Federal CSA, the U.S. federal government may seize, through civil asset forfeiture proceedings, certain assets such as equipment, real estate, moneys and proceeds, or your assets as an investor in the Company, if the U.S. federal government can prove a substantial connection between these assets or your investment and marijuana distribution or cultivation.
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Because many states in the United States have approved certain medical or recreational uses of cannabis, the U.S. Department of Justice, through the Cole Memorandum, had previously described a set of priorities for federal prosecutors operating in states that had legalized the medical or other adult use of cannabis. The Cole Memorandum represented a significant shift in U.S. federal government priorities away from strict enforcement of federal cannabis prohibition.
However, the Cole Memorandum was merely a directive regarding enforcement and did not overturn or invalidate the Federal CSA or any other federal law or regulation.
The Cole Memorandum was rescinded in January 2018 by Jeff Sessions, the former U.S. Attorney General, who deemed it “unnecessary”. This is based on Mr. Sessions’s belief, which was also expressed in the Cole Memorandum that each state’s federal prosecutor should “follow the well-established principles that govern all federal prosecutions. These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The rescission of the Cole Memorandum, and comments made publicly by Mr. Sessions and other members of the Trump Administration, signal a significant shift by the U.S. federal government back to more strict enforcement of federal law.
On January 4, 2018, Billy J. Williams, the current United States Attorney for the District of Oregon and former Multnomah County (Oregon) Deputy District Attorney who handled major violent crimes and later served as a Chief of the Violent Crimes Unit and as the Indian Country AUSA/Tribal Liaison for the Department of Justice prior to being appointed as the federal prosecutor for Oregon, Mr. Williams provided the below statement on marijuana enforcement in the District of Oregon: “As noted by Attorney General Sessions, today’s memo on marijuana enforcement directs all U.S. Attorneys to use the reasoned exercise of discretion when pursuing prosecutions related to marijuana crimes. We will continue working with our federal, state, local and tribal law enforcement partners to pursue shared public safety objectives, with an emphasis on stemming the overproduction of marijuana and the diversion of marijuana out of state, dismantling criminal organizations and thwarting violent crime in our communities.”
In an editorial published on January 12, 2018, Mr. Williams wrote: “In sum, I have significant concerns about the state’s current regulatory framework and the resources allocated to policing marijuana in Oregon.”
At a meeting on February 2, 2018, Mr. Williams told Oregon’s top politicians and law enforcement officials that there’s more cannabis being produced in the state than can legally be consumed. “And make no mistake about it, we’re going to do something,” Williams told dozens of politicians, tribal leaders, sheriffs as well as representatives of the FBI and the U.S. Drug Enforcement Administration. “Here’s what I know, in terms of the landscape here in Oregon: We have an identifiable and formidable marijuana over-production and diversion problem,” Williams said. “That’s the fact. My responsibly is to work with our state partners to do something about it.”
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Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is illegal under U.S. federal law, investing in cannabis business could be found to violate the Federal CSA. As a result, individuals involved with cannabis business, including but not limited to investors and lenders, may be indicted under U.S. federal law. An investment in the Company may: (a) expose an investor personally to criminal liability under U.S. federal law, resulting in monetary fines and jail time; and (b) expose any real and personal property used in connection with Grown Rogue’s business to seizure and forfeiture to the U.S. federal government.
Active enforcement of the current federal law on cannabis may thus directly and adversely affect revenues and profits of Grown Rogue. The risk of strict enforcement of the Federal CSA remains uncertain.
U.S. Federal Laws Applicable to Banking
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a crime under the Federal CSA, most U.S. banks and other financial institutions are unwilling to provide banking services to marijuana businesses due to concerns about criminal liability under the Federal CSA as well as concerns related to federal money laundering rules under the U.S. Bank Secrecy Act. Canadian banks are also hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses.
Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. In both Canada and the United States transactions by cannabis businesses involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Though guidelines issued in past years allow financial institutions to provide bank accounts to certain cannabis businesses, few U.S. banks have taken advantage of those guidelines and many U. S. cannabis businesses still operate on an all-cash basis.
Oregon State Regulation
The Oregon Medical Marijuana Program (“OMMP”) is a state registry program within the Public Health Division, Oregon Health Authority (“OHA”). The role of the OHA is to administer the Oregon Medical Marijuana Act. The OMMP allows individuals with a medical history of one or more qualifying illnesses and a doctor’s written statement to apply for registration with the OMMP. Qualified applicants are issued a medical marijuana card that entitles them to legally possess and cultivate cannabis, subject to certain limitations.
On November 4, 2014, Oregon voters passed Measure 91, known as the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act (the “Act”), effectively ending the state’s prohibition of recreational marijuana and legalizing the possession, use, and cultivation of marijuana within legal limits by adults 21 years and older. The Act did not amend or effect the Oregon Medical Marijuana Act and the OMMP. The Act empowered the Oregon Liquor Control Commission (“OLCC”) with regulating sales of recreational marijuana in Oregon. It is possible that the voters could potentially repeal the law that permits both the medical and recreational marijuana industry to operate under state law.
Under current Oregon law, possession and home cultivation by adults at least 21 years old is allowed within legal limits. Public sales of marijuana and marijuana products may be done only through licensed retailers. The OLCC has the authority to decide how many licenses to allow in a specific area or location and may refuse granting a license if there are reasonable grounds to believe there are sufficient licenses in the area or if the granting of a license is not demanded by public interest or convenience. The OLCC may disqualify applicants for a number of reasons, including for lacking a good moral character, for lacking sufficient financial resources or responsibility, for relevant past convictions, and for using marijuana, alcohol, or drugs “to excess.”
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Grown Rogue has a comprehensive compliance program administered through its Director of Compliance, which tracks all aspects of operations through the METRC program (an online software tool mandated through the State of Oregon that tracks seed to retail purchases), as well as compliance with all state and federal employment and other safety regulations.
Grown Rogue is periodically advised by various outside attorneys about the requirements for compliance with Oregon law.
Grown Rogue is in compliance with Oregon state law and its related licensing framework.
Michigan State Regulation
As part of its business plan, Grown Rogue intends to enter the Michigan state market.
In November 2008, Michigan residents approved the Michigan Medical Marihuana Act20 (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act21 (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program. Additionally, the Michigan Department of Licensing and Regulatory Affairs and its licensing board (“LARA”) has supplemented the Michigan Cannabis Regulations with “Emergency Rules” to further clarify the regulatory landscape surrounding the medical marijuana program. LARA is the main regulatory authority for the licensing of marijuana businesses.
Under the MMFLA, LARA administrates five types of “state operating licenses” for medical marijuana businesses: (a) a “grower” license, (b) a “processor” license, (c) a “secure transporter” license, (d) a “provisioning center” license and (e) a “safety compliance facility” license. There are no stated limits on the number of licenses that can be made available on a state level; however, LARA has discretion over the approval of applications and municipalities can pass additional restrictions.
On November 6, 2018, Michigan voters approved Proposal 1, to make marihuana legal under state and local law for adults 21 years of age or older and to control the commercial production and distribution of marihuana under a system that licenses, regulates, and taxes the businesses involved. The act will be known as the Michigan Regulation and Taxation of Marihuana Act24. According to Proposal 1, LARA is required to art accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.
Michigan License
State operating licenses for marijuana businesses have a 1 year term and are annually renewable if certain conditions are met: (a) the renewal application is submitted prior to the date the license expires, or within sixty (60) days of expiration if all other conditions are met and a late fee is paid, (b) the licensee pays the regulatory assessment fee set by LARA and (c) the licensee continues to meet the requirements to be a licensee under the Michigan Cannabis Regulations. Each renewal application is reviewed by LARA, but there is no guarantee of a timely renewal. There is no ultimate expiry after which no renewals are permitted.
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Michigan Regulations
Michigan Marijuana Products may be purchased in a retail setting from a provisioning center by a registered qualified patient or registered primary caregivers connected to a registered qualifying patient (“Michigan Qualified Purchaser”); in each case, Michigan Qualified Purchasers must present a valid registry identification card issued by LARA (a “Michigan Registry ID”). For a Michigan Qualified Purchaser to receive Michigan Marijuana Products, provision centers must deploy an inventory control and tracking system that is capable of interfacing with the statewide monitoring system to determine (a) whether a Michigan Qualified Purchaser holds a Michigan Registry ID and (b) whether the sale or transfer will exceed the then-current daily and monthly purchasing limit for the holder of the Michigan Registry ID.
In order to receive a Michigan Registry ID, an applicant must provide: a completed application dated within one year of submission, a written certification from a physician with a bona-fide physician-patient relationship to the underlying patient, the application or renewal fee, contact information for the patient, caregiver (if applicable) and physician, as well as proof of Michigan residency.
For registered qualifying patients, the daily purchasing limit is 2.5 ounces, and for registered primary caregivers, the daily purchasing limit is 2.5 ounces per underlying registered qualifying patient that the registered primary caregiver is connected with through the registration process. Finally, the licensee shall verify in the statewide monitoring system that the sale or transfer does not exceed the monthly purchasing limit of ten (10) ounces of marihuana product per month to a qualifying patient, either directly or through the qualifying patient’s registered primary caregiver.
Allowable forms of medical marihuana includes smokable dried flower, dried flower for vaporizing and marihuana infused products, which are defined under the Act to include topical formulations, tinctures, beverages, edible substances or similar products containing usable marijuana that is intended for human consumption in a matter other than smoke inhalation. Under the Michigan Cannabis Regulations, marijuana-infused products shall not be considered food.
Qualifying conditions for the medical marijuana program in Michigan are the following:
| ● | Cancer, glaucoma, positive status for human immunodeficiency virus, acquired immune deficiency syndrome,<br>hepatitis C, amyotrophic lateral sclerosis, Crohn’s disease, agitation of Alzheimer’s disease, nail patella or the treatment of these<br>conditions; |
|---|---|
| ● | A chronic or debilitating disease or medical condition or its treatment that produces 1 or more of the<br>following: cachexia or wasting syndrome; severe and chronic pain; severe nausea; seizures, including but not limited to those characteristic<br>of epilepsy; or severe and persistent muscle spasms, including but not limited to those characteristic of multiple sclerosis; |
| --- | --- |
| ● | Post-Traumatic Stress Disorder (PTSD); and/or |
| --- | --- |
| ● | Any other medical condition or its treatment approved by<br>the department under the Michigan Cannabis Regulations. |
| --- | --- |
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Reporting Requirements
Pursuant to the requirements of the MTA, Michigan selected Franwell’s METRC software as the state’s third-party solution for integrated marijuana industry verification. Using METRC, regulators are able to track third party inventory, permissible sales and seed-to-sale information. Additionally, provisioning centers can use the METRC API to connect their own inventory management and/or point-of-sale systems to verify the identity as well as permissible sales for Michigan Qualified Purchasers.
Storage and Security
To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, a provisioning center is required to:
Maintain and submit a security operations plan that includes the following at a minimum:
| ● | Escorts for all non-employee personnel in limited access areas. |
|---|---|
| ● | Secure locks for all interior rooms, windows and points of entry and exits with commercial grade, nonresidential<br>door locks. |
| --- | --- |
| ● | An alarm system. Licensees will make all information related to the alarm system including monitoring<br>and alarm activity available to LARA. |
| --- | --- |
| ● | A video surveillance system that, at a minimum, consists of digital or network video recorders, cameras,<br>video monitors, digital archiving devices and a color printer capable of delivering still photos. |
| --- | --- |
| ● | 24-hour surveillance footage with fixed, mounted cameras, tamper/theft proof secured storage mediums and<br>a notification system for interruption or failure of surveillance footage or storage of surveillance footage. All surveillance footage<br>must be of sufficient resolution to identify individuals, have accurate time/date stamps and be stored for a minimum of 14 days unless<br>state regulators notify that such recordings may be destroyed. |
| --- | --- |
| ● | State access to view and obtain copies of any surveillance footage through LARA or related investigators,<br>agents, auditors and/or state police. A facility shall also provide copies of recordings to LARA upon request. |
| --- | --- |
| ● | Logs of the following: the identities of the employee or employees responsible for monitoring the video<br>surveillance system, the identity of the employee who removed the recording from the video surveillance system storage device and the<br>time and date removed and the identity of the employee who destroyed any recording. |
| --- | --- |
Maintain marijuana storage plan for provisioning centers that includes the following at a minimum:
| ● | A secured limited access area for inventories of Michigan Marijuana Products. |
|---|---|
| ● | Clearly labeled containers (a) marked, labeled or tagged, (b) enclosed on all sides and (c) latched or<br>locked to keep all contents secured within. All such containers must be identified and tracked in accordance with the MTA. |
| --- | --- |
| ● | A locked area for chemical and solvents separate from Michigan Marijuana Products. |
| --- | --- |
| ● | Separation of marijuana-infused products from toxic or flammable materials. |
| --- | --- |
| ● | A sales or transfer counter or barrier separated from stock rooms to ensure registered qualifying patients<br>or registered primary caregivers do not have direct access to Michigan Marijuana Products. |
| --- | --- |
There are significant risks associated with the business of the Company, as described above and in Section 17 – Risk Factors of the Company’s Listing Statement as filed on www.sedar.com. Readers are strongly encouraged to carefully read all of the risk factors contained in Section 17 – RiskFactors of the Company’s Listing Statement.
Pg 36 of 37
Internal Control over Financial Reporting and Disclosure Controls
Management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), is responsible for designing, establishing, and maintaining a system of internal controls over financial reporting (“ICFR”) to provide reasonable assurance that all information prepared by the Company for external purposes is reliable and timely. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with IFRS.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated Financial Statements. Due to its inherent limitations, internal control over financial reporting and disclosure may not prevent or detect all misstatements.
The CEO and CFO have evaluated whether there were changes to the ICFR during the three month period ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, the ICFR. As a result, no such significant changes were identified through their evaluation.
There have been no material changes in the Company’s internal control over financial reporting during the three month period ended January 31, 2021 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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Exhibit 17
Form 52-109F2R – Certification of refiledinterim filings
This certificate is being filed on the same date that Grown Rogue International Inc. (the “issuer”) has refiled the interim financial statements and MD&A for the period ended January 31, 2021.
I, J. Obie Strickler, President and Chief Executive Officer of Grown Rogue International Inc., certify that:
| 1. | Review: I have reviewed the amended and restated interim financial statements and amended<br>and restated interim MD&A (together the interim filings) of the issuer for the interim period ended January 31, 2021. |
|---|---|
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the<br>interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that<br>is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered<br>by the interim filings. |
| --- | --- |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim<br>financial report together with the other financial information included in the interim filings fairly present in all material respects<br>the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim<br>filings. |
| --- | --- |
Date: April 16, 2021
| (signed) “J. Obie Strickler” | |
|---|---|
| Name: | J. Obie Strickler |
| Title: | President and Chief Executive Officer |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
| i) | controls and other procedures designed to provide reasonable assurance that information<br>required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation<br>is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
|---|---|
| ii) | a process to provide reasonable assurance regarding the reliability of financial reporting<br>and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
| --- | --- |
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit 18
Form 52-109F2R – Certification of refiledinterim filings
This certificate is being filed on the same date that Grown Rogue International Inc. (the “issuer”) has refiled the interim financial statements and MD&A for the period ended January 31, 2021.
I, Michael Johnston, Chief Financial Officer and Corporate Secretary of Grown Rogue International Inc., certify that:
| 1. | Review: I have reviewed the amended and restated interim financial statements and amended<br>and restated interim MD&A (together the interim filings) of the issuer for the interim period ended January 31, 2021. |
|---|---|
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the<br>interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that<br>is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered<br>by the interim filings. |
| --- | --- |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim<br>financial report together with the other financial information included in the interim filings fairly present in all material respects<br>the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim<br>filings. |
| --- | --- |
Date: April 16, 2021
| (signed) “Michael Johnston” | |
|---|---|
| Name: | Michael Johnston |
| Title: | Chief Financial Officer |
| and Corporate Secretary |
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
| i) | controls and other procedures designed to provide reasonable assurance that information<br>required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation<br>is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
|---|---|
| ii) | a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation<br>of financial statements for external purposes in accordance with the issuer’s GAAP. |
| --- | --- |
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52- 109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
Exhibit 19
Grown Rogue FilesAmended and Restated Q1 Financial Statementsand Management Discussion and Analysis
Medford,Oregon, April 16, 2021 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), announces the filing of amended and restated unaudited condensed interim consolidated financial statements (“RefiledFinancial Statements”) and Management Discussion and Analysis (“Refiled MD&A”) for the three months ended January 31, 2021 and 2020.
The adjustments caused Cash Margin^2^ to change from 73%, as previously reported, to 66%, and Adjusted EBITDA^1^ to change from negative $21,684, as previously reported, to positive earnings of $5,907.
The Company adjusted expenses capitalized into biological assets and inventory, and related cost of sales, realized fair value amounts included in inventory sold, and unrealized gain in the growth of biological assets.
The Company also reduced a right-of-use asset and associated lease liability for a leased property by approximately $80,000, based upon corrections to future lease payment amounts.
These corrections are described in Note 2 to the Refiled Financial Statements, filed on Sedar on April 16, 2021.
The impacts to the amended and restated unaudited condensed interim consolidated statement of financial position at January 31, 2021 are summarized below.
| As previously | |||||||
|---|---|---|---|---|---|---|---|
| As at January 31, 2021 | reported () | Adjustment | As restated () | ||||
| Biological assets (Note 4) | 4,790 | ||||||
| Inventory (Note 5) | 74,856 | ||||||
| Total current assets | 79,646 | ||||||
| Right-of-use assets (Note 9) | (79,760 | ) | |||||
| Total assets | (114 | ) | |||||
| Current portion of lease liabilities (Note 9) | 8,084 | ||||||
| Total current liabilities | 8,084 | ||||||
| Lease liabilities (Note 9) | (88,922 | ) | |||||
| Total liabilities | (80,838 | ) | |||||
| Accumulated deficit | ) | 80,724 | ) | ||||
| Total equity | ) | 80,724 | ) |
All values are in US Dollars.
The impacts to the amended and restated unaudited condensed interim consolidated statements of loss and comprehensive loss for the three months ended January 31, 2021 are summarized below.
| Three months ended January 31, 2021 | As previously reported () | Adjustment | As restated () | ||||
|---|---|---|---|---|---|---|---|
| Cost of finished cannabis inventory sold (Note 5) | 81,621 | ||||||
| Gross profit, excluding fair value items | (81,621 | ) | |||||
| Realized fair value amounts in inventory sold | (4,270 | ) | |||||
| Unrealized fair value gain (loss) on growth of biological assets (Note 4) | 62,495 | ||||||
| Gross profit | (139,846 | ) | |||||
| Amortization of property and equipment (Note 10) | (94,414 | ) | |||||
| Amortization of right-of-use assets (Note 9) | (40,417 | ) | |||||
| General and administrative (Note 20) | (85,739 | ) | |||||
| Total expenses after gross profit | (220,570 | ) | |||||
| Loss from operations | ) | 80,724 | ) | ||||
| Net loss | (80,724 | ) | |||||
| Net loss attributable to: | |||||||
| Shareholders | ) | 80,724 | ) | ||||
| Total comprehensive loss | ) | 80,724 | ) | ||||
| Total comprehensive loss attributable to: | |||||||
| Shareholders | ) | 80,724 | ) |
All values are in US Dollars.
The Refiled MD&A reflects updates to references to conform to the values provided in the Refiled Financial Statements in various sections, including sections entitled Results of Operations, Summary of Quarterly Results, and Liquidity, which include references to affected expenses and net loss for the three months ended January 31, 2021.
NOTES:
1.
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income (loss) for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance. The following is a reconciliation of the Company’s net income (loss) to Adjusted EBITDA.
2
2.
The Company has provided Cash Margin Analysis to demonstrate the methodology for calculating its non-IFRS production cost and margin metrics. Cash production costs of Grown Rogue products is calculated by taking the cost of finished cannabis inventory sold and deducting non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments, and cost of products purchased from other Licensed Producers that were sold. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash production costs of Grown Rogue products by total grams of dried cannabis sold in the period. Management believes these measures provide useful information as they remove noncash amortization and packaging costs and provide a benchmark of the Company against its competitors.
NON-IFRS FINANCIAL MEASURES
Cash productioncosts of Grown Rogue products, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS.The Company has also provided unaudited pro-forma financial information, which assumes that closed and pending mergers and acquisitionsin 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020. The Companyhas provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental informationand in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financialmeasures are presented because management has evaluated the financial results both including and excluding the adjusted items and believethat the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operatingperformance of the business. These supplemental non-IFRS financial measures should not be considered superior to, as a substitute foror as an alternative to, and should only be considered in conjunction with, the IFRS financial measures presented herein. Accordingly,the following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directlycomparable financial measures calculated and presented in accordance with IFRS.
About Grown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD-LOOKING STATEMENTS
This press releasecontains statements which constitute “forward-looking information” within the meaning of applicable securities laws, includingstatements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities.Forward- looking information is often identified by the words “may,” “would,” “could,” “should,”“will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,”“expect” or similar expressions and include information regarding: (i) statements regarding the future direction of the Company(ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Companyinto Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors.Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’sexpectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions,assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes thatthe expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, andundue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on futureresults, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materiallyfrom those projected in the forward-looking information are the following: changes in general economic, business and political conditions,including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amountsand at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabisand cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the applicationor enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’spublic disclosure documents filed on www.sedar.com.
3
Should one ormore of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actualresults may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Althoughthe Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially,there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assumeany obligation, to update this forward-looking information except as otherwise required by applicable law.
SAFE HARBOR STATEMENT
This press releasemay contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), including all statements that are not statements of historical fact regarding the intent, belief or current expectationsof the Company, its directors or its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trendsaffecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategy and operating strategy;and (iv) the declaration and payment of dividends. The words “may,” “would,” “will,” “expect,”“estimate,” “anticipate,” “believe,” “intend” and similar expressions and variationsthereof are intended to identify forward-looking statements. Also, forward-looking statements represent our management’s beliefsand assumptions only as of the date hereof. Except as required by law, we assume no obligation to update these forward-looking statementspublicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements,even if new information becomes available in the future. Investors are cautioned that any such forward-looking statements are not guaranteesof future performance and involve risks and uncertainties, many of which are beyond the Company’s ability to control, and thatactual results may differ materially from those projected in the forward-looking statements as a result of various factors includingthe risk disclosed in the Company’s Form 20-F and 6-K filings with the Securities and Exchange Commission.
The Companyis indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplacein the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activitieshowever, these activities are currently illegal under United States federal law. Additional information regarding this and other risksand uncertainties relating to the Company’s business are disclosed in the Company’s Listing Statement filed on its issuer profileon SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptionsunderlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from thosedescribed herein as intended, planned, anticipated, believed, estimated or expected.
No stock exchange,securities commission or other regulatory authority has approved or disapproved the information contained herein.
For further information on GrownRogue International please visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
4
Exhibit 20
Grown Rogue Reports Record March Sales of US$1.25M
Medford, Oregon, April 20, 2021 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, reported record sales orders of US$1.25M for March 2021 as it scales production assets in both Oregon and Michigan.
The unprecedented month follows a record Q1 2021 pro-forma revenue^1^ of US$2.0M with a 66%^2^ cash margin. March sales represents 63% of the pro-forma revenue^1^ in Q1 2021 which puts Grown Rogue on an annualized run rate of US$15M.
“This record month shows the tremendous progress our company and team have made over the past year as we scale our low cost, high margin business,” said Obie Strickler, Grown Rogue CEO. “March starts the recovery in pricing and consumer demand we have been tracking for several years. We are excited to continue setting record months as we move into the summer. That’s when we will begin harvesting from an additional 15,000 sq. ft. of fully constructed flower capacity expected to produce an additional 500 lbs. per month.”
The Company’s Michigan partner Golden Harvests, LLC (“Golden Harvests”), in which Grown Rogue holds an indirect option to acquire 60% of its equity, continues to perform exceptionally, with US$0.7M in total sales orders. Grown Rogue proprietary nitrogen sealed flower jars accounted for almost 40% of total monthly sales at an average price of US$3,297/lb. These branded products are quickly gaining traction and market share as Grown Rogue brings its innovation from the highly competitive Oregon market to Michigan.
The quality of the flower produced in Michigan by Golden Harvests -- through Grown Rogue’s proven methods -- has been recognized around the state, driving the above average price per pound Grown Rogue has traditionally received. In addition, other brands have sought Grown Rogue’s flower for their own branded flower. This furthers the Company’s brand awareness in Michigan, resulting in higher revenues and profitability, as branded flower typically sells for US$500 to US$1,000 per pound more than bulk flower. In March, Grown Rogue sold approximately 10% white label product in other brands jars as they work to minimize the lower valued bulk flower sales.
According to MarketScape, Golden Harvests was the 13^th^ top selling brand in Michigan during March, accounting for slightly more than 2% of the market. Like many early cannabis markets, there is high fragmentation. Grown Rogue is excited that Golden Harvests’ has obtained over 2% market share in Michigan as they work towards the goal of 10% market share in Michigan.
NOTES:
1.
The Company has provided unaudited pro-forma revenue information, which assumes that closed and pending mergers and acquisitions in 2020 and 2021 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020 for the Company and target companies.
2.
The Company has provided Cash Margin Analysis to demonstrate the methodology for calculating its non-IFRS production cost and margin metrics. Cash production costs of Grown Rogue products is calculated by taking the cost of finished cannabis inventory sold and deducting non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments, and cost of products purchased from other Licensed Producers that were sold. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash production costs of Grown Rogue products by total grams of dried cannabis sold in the period. Management believes these measures provide useful information as they remove noncash amortization and packaging costs and provide a benchmark of the Company against its competitors.
About Grown Rogue
Grown Rogue International (CSE: GRIN |
OTC: GRUSF) is a vertically integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD-LOOKING STATEMENTS
This press release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking information is often identified by the words “may,” “would,” “could,” “should,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: changes in general economic, business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.
2
SAFE HARBOR STATEMENT
This press release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including all statements that are not statements of historical fact regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identify forward- looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date hereof. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors including the risk disclosed in the Company’s Form 20-F and 6-K filings with the Securities and Exchange Commission.
The Company is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currently illegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company’s business are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.
No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
For further information on Grown Rogue Internationalplease visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
3
Exhibit21
Nosecurities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. Thisshort form prospectus constitutes a public offering of these securities only in those jurisdictions where they may be lawfullyoffered for sale and therein only by persons permitted to sell such securities. These securities have not been, and will not be,registered under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) or the securitieslaws of any state of the United States and, subject to certain exceptions, may not be offered, sold or delivered, directly orindirectly, in the United States (as such term is defined in Regulation S under the U.S. Securities Act) (the “United States”)except pursuant to an exemption from the registration requirements of the U.S. Securities Act and applicable state securitieslaws. This short form prospectus does not constitute an offer to sell or solicitation of an offer to buy any of these securitiesin the United States. See “Plan of Distribution”.
Informationhas been incorporated by reference in this short form prospectus from documents filed with securities commissions or similar authoritiesin Canada. Copies of the documents incorporated herein by reference may be obtainedon request without charge from the Chief Financial Officer of Grown Rogue International Inc., at 340 Richmond Street West, Toronto,Ontario M5V 1X2, Telephone (503) 765-8108, and are also available electronically at www.sedar.com.
| New Issue | April23, 2021 |
|---|
SHORTFORM PROSPECTUS
GROWNROGUE INTERNATIONAL INC.
$4,737,80023,162,579 Common Shares and 23,162,579 Common Share Purchase Warrants
Issuableupon Exercise of 21,056,890 Special Warrants
This short form prospectus (the “Prospectus”) qualifies the distribution of 23,162,579 Units (the “Units”) of Grown Rogue International Inc. (“Grown Rogue” or the “Corporation”) issuable upon the exercise or deemed exercise of 21,056,890 special warrants (the “Special Warrants”) of the Corporation (the “Offering”). Each Unit consists of one common share (a “Unit Share”) in the capital of the Corporation and one common share purchase warrant (a “Warrant”) of the Corporation. Each Warrant entitles the holder thereof to purchase one common share (a “Warrant Share”) of the Corporation at a price of $0.30 at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023. The Special Warrants were issued on March 5, 2021 pursuant to the terms of a special warrant indenture (the “Special Warrant Indenture”) between the Corporation and Capital Transfer Agency, ULC (“Capital Transfer”). The Special Warrants are not available for purchasepursuant to this Prospectus and no additional funds are to be received by the Corporation from the distribution of the Units uponthe exercise of the Special Warrants.
The Special Warrants were issued by the Corporation on a private placement basis. An aggregate of 17,800,000 Special Warrants were issued pursuant to the terms of an agency agreement dated March 5, 2021 (the “Agency Agreement”) between the Corporation and Eight Capital (the “Agent”) (the “Brokered Offering”) and the remaining 3,256,890 Special Warrants were issued on a non-brokered basis. The Special Warrants were issued at a price of $0.225 per Special Warrant (the “Offering Price”) for aggregate gross proceeds of $4,737,800. The Offering Price and other terms of the Offering were determined by arm’s length negotiation between the Corporation and the Agent.
The issued and outstanding common shares (the “Common Shares”) of the Corporation are listed on the Canadian Securities Exchange (the “CSE”) under the trading symbol “GRIN”. On February 10, 2021, the last trading day before the announcement of the Offering, the closing price of the Common Shares on the CSE was $0.28 per Common Share. On April 22, 2021, the last trading day before the filing of this Prospectus, the closing price of the Common Shares on the CSE was $0.22 per Common Share. The Corporation has provided notice to the CSE to list the Unit Shares, the Warrant Shares, the Compensation Shares and the Compensation Warrant Shares on the CSE. Such listing will be subject to the fulfillment of all of the listing requirements of the CSE.
Price:$0.225 per Special Warrant
| Price to the Public | Agent’s Fee^(1)^ | Net Proceeds to the Corporation^(2)(3)^ | ||||
|---|---|---|---|---|---|---|
| Per Special Warrant | $ | 0.225 | $ | 0.0157 | $ | 0.2092 |
| Per Special Warrant (President’s list) | $ | 0.225 | $ | 0.0078 | $ | 0.2171 |
| Total Offering | $ | 4,737,800 | $ | 253,745 | $ | 4,458,555 |
Notes:
| (1) | Pursuant<br> to the Agency Agreement, the Corporation paid to the Agent (i) a cash fee of $253,745<br> (the “Agent’s Fee”), representing 7.0% of the gross proceeds<br> of the Brokered Offering (the “Agent’s Fee”), subject to a reduced<br> fee of up to 3.5% for Special Warrants sold by the Agent to certain purchasers designated<br> by the Corporation on the President’s list (the “President’s List”),<br> and (ii) a cash fee of $25,500 (the “Advisory Fee”) for advisory services<br> provided to the Corporation in connection with the Offering. As additional compensation,<br> the Corporation also issued to the Agent (A) 1,127,758 warrants (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “Compensation Options”) of the Corporation for no additional consideration; and (B) 113,500<br> advisory warrants (the “Advisory Warrants”), exercisable to acquire<br> 113,500 Compensation Options for no additional consideration. Each Compensation Option<br> will be exercisable to acquire one Unit (a “Compensation Unit”) comprised<br> of one Unit Share (a “Compensation Share”) and one Warrant (a “Compensation Warrant”) at the Offering Price at any time prior to 5:00 p.m. (Toronto time)<br> on March 5, 2023. Each Compensation Warrant shall entitle the holder thereof to purchase<br> one Common Share (a “Compensation Warrant Share”) at a price of $0.30<br> at any time before 5:00 p.m. (Toronto time) on March 5, 2023, subject to adjustment in<br> certain events. This Prospectus qualifies the distribution of the Compensation Options.<br> See “Plan of Distribution”. | ||
|---|---|---|---|
| (2) | After<br> deducting the Agent’s Fee and the Advisory Fee, but before deducting the expenses<br> of the Offering and the qualification for distribution of the Units, estimated to be<br> $300,000, which will be paid out of the gross proceeds of the Offering. | ||
| --- | --- | ||
| (3) | The<br> distribution of the Units upon exercise of the Special Warrants will not result in any<br> proceeds being received by the Corporation. | ||
| --- | --- | ||
| Agent’s Position | Maximum Size or Number of securities available | Exercise Period | Exercise Price |
| --- | --- | --- | --- |
| Broker Warrants | 1,127,758 Broker Warrants exercisable (for no consideration) to acquire an equal number of Compensation Options, which are in turn exercisable to acquire an equal number of Compensation Units | Compensation Options are exercisable at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023 | $0.225 per Compensation Unit |
| Advisory Warrants | 113,500 Advisory Warrants exercisable (for no consideration) to acquire an equal number of Compensation Options, which are in turn exercisable to acquire an equal number of Compensation Units | Compensation Options are exercisable at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023 | $0.225 per Compensation Unit |
Each Special Warrant entitles its holder to receive, upon exercise or deemed exercise, one Unit at no additional cost. Each Special Warrant shall be deemed exercised on behalf of, and without any required action on the part of, the holder thereof, on the day (the “Qualification Date”) that is the earlier of: (i) July 6, 2021; and (ii) the third business day after a receipt is issued for a final short form prospectus qualifying the distribution of the Unit Shares and the Warrants in the Qualifying Jurisdictions. See “Plan of Distribution” and “Description of Securities Distributed”.
The Corporation agreed to use reasonable commercial efforts to file, and obtain a receipt for, a final short form prospectus qualifying the Units issuable upon exercise of the Special Warrants on or before April 4, 2021, being 30 days after the Closing Date (the “Penalty Date”). A receipt for a final short form prospectus was not obtained on or before the Penalty Date. Since the Qualification Date is later than April 4, 2021, each holder of a Special Warrant is entitled to receive, without payment of additional consideration, an additional number of Units equal to 10% of the number of Units originally issuable upon the exercise or deemed exercise of the Special Warrants, resulting in each Special Warrant being exercisable for 1.10 Units (the “PenaltyProvision”). Accordingly, this Prospectus qualifies the distribution of up to an aggregate of 21,056,890 Unit Shares and 21,056,890 Warrants originally issuable upon the exercise or deemed exercise of the Special Warrants, and 2,105,689 Unit Shares and 2,105,689 Warrants issuable pursuant to the Penalty Provision. See “Plan of Distribution”.
The Special Warrants were sold directly to subscribers by the Corporation or through the Agent to purchasers resident in each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario (the “Qualifying Jurisdictions”), in addition to offshore purchasers, on a private placement basis pursuant to prospectus exemptions under applicable securities legislation and were issued under and are governed by the Special Warrant Indenture. There is no market through which the Special Warrants may be sold and none is expected to develop.
No additional proceeds will be received by the Corporation, and no commission or fee will be payable by the Corporation, in connection with the issue of the Units upon exercise or deemed exercise of the Special Warrants.
The Warrants are issuable pursuant to a warrant indenture dated March 5, 2021 (the “Warrant Indenture”) between the Corporation and Capital Transfer.
Thereis currently no market through which the Warrants may be sold, and purchasers may not be able to resell the Warrants acquiredpursuant to the Offering. This may affect the pricing of the Warrants in the secondary market, the transparency and availabilityof trading prices, the liquidity of the Warrants and the extent of issuer regulation. An investment in the securities of the Corporationis speculative and involves a significant degree of risk. See “Risk Factors”.
Aninvestment in the securities of the Corporation is highly speculative and involves significant risks that should be carefullyconsidered by prospective investors before purchasing such securities. The risks outlined in this Prospectus and in the documentsincorporated by reference herein should be carefully reviewed and considered by prospective investors in connection with an investmentin such securities. See “Risk Factors” and “Cautionary Statement Regarding Forward Looking Information”.Potential investors are advised to consult their own legal counsel and other professional advisers in order to assess income tax,legal and other aspects of this investment.
The Brokered Offering was conducted through the non-certificated inventory system maintained by CDS Clearing and Depository Services Inc. (“CDS”) and the Special Warrants issued pursuant to the Brokered Offering were registered and deposited with CDS on the Closing Date in electronic form. Other than for Special Warrants sold pursuant to the non-brokered portion of the Offering, which will be represented by certificates, the Unit Shares and Warrants to be issued upon exercise or deemed exercise of the Special Warrants and the Warrant Shares to be issued upon exercise of the Warrants will be registered and deposited in the non-certificated inventory system of CDS and a purchaser of the Special Warrants will not receive a definitive certificate representing the Unit Shares, Warrants or Warrant Shares. See “Plan of Distribution”.
Investorsshould rely only on the information contained or incorporated by reference in this Prospectus. The Corporation and the Agent havenot authorized anyone to provide investors with information different from that contained or incorporated by reference in thisProspectus. Readers should not assume that the information contained in this Prospectus is accurate as of any date other thanthe date on the cover page of this Prospectus.
Investorsare advised to consult their own tax advisors regarding the application of Canadian federal income tax laws to their particularcircumstances, as well as any other provincial, foreign and other tax consequences of acquiring, holding or disposing of the SpecialWarrants, the Unit Shares and the Warrants, including the Canadian federal income tax consequences applicable to a foreign controlledCanadian corporation that acquires the Special Warrants, the Unit Shares and the Warrants.
Certain legal matters in connection with the Offering are being reviewed on behalf of the Corporation by Irwin Lowy LLP and on behalf of the Agent by Wildeboer Dellelce LLP.
Unless otherwise indicated, all references to dollar amounts in this Prospectus are to Canadian dollars. The Corporation’s registered and head office is located at 340 Richmond Street West, Toronto, Ontario M5V 1X2.
Reference to Grown Rogue or the Corporation also includes its subsidiary entities, as the context requires or permits.
The Corporation’s registered and head office is in Toronto, Ontario. However, its operations are conducted from its offices in Medford, Oregon. Each of J. Obie Strickler, Adam August, Rob Rigg, Ryan Kee, Abhilash Patel, and Steven Lightman, directors and/or officers of the Corporation, resides outside of Canada and, in each case, has appointed the Corporation, at 340 Richmond Street West, Toronto, Ontario M5V 1X2 as its agent for service of process. Purchasers are advised that it may not be possible for investors to enforce judgments obtained in Canada against any person or company that is incorporated, continued or otherwise organized under the laws of a foreign jurisdiction or resides outside of Canada, even if the party has appointed an agent for service of process. See “Risk Factors”.
| The Corporation and its subsidiaries derive substantially all of their revenues from the cannabis industry in the States of Oregon and Michigan in the United States, which industry is illegal under United States federal law. Currently, The Corporation is directly and indirectly involved (through its licensed subsidiaries and managed entities) in the cannabis industry in the United States where local state laws permit such activities. Currently, its subsidiaries and managed entities are directly or indirectly engaged in the cultivation, manufacture, possession, use, sale or distribution of cannabis in the medical and/or adult-use cannabis marketplaces in the States of Oregon and Michigan. The Corporation is also currently indirectly engaged in cannabis cultivation and production operations in Michigan pursuant to a master services agreement between GR Michigan, LLC, which is an 87% owned subsidiary of the Corporation, and Golden Harvests, LLC, which is not currently a subsidiary of the Corporation, and a master services agreement between Grown Rogue Distribution, LLC, which is wholly-owned subsidiary of the Corporation, and HSCP Oregon, LLC, which is not a subsidiary of the Corporation. From an accounting perspective, the Corporation has control of the cannabis related assets of HSCP Oregon, LLC.<br><br> <br><br><br> <br>The United States federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811) (the “CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under United States federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration has not approved cannabis as a safe and effective drug for any indication.<br><br> <br><br><br> <br>In the United States, cannabis is largely regulated at the state level. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act, which makes cannabis use and possession federally illegal. Although certain states authorize medical and/or adult-use cannabis production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and transfer of cannabis and any cannabis-related drug paraphernalia is illegal and any such acts are criminal acts under federal law. The Supremacy Clause of the United States Constitution establishes that the United States Constitution and federal laws made pursuant to it are paramount and in case of conflict between federal and state law, the federal law shall apply.<br><br> <br><br><br> <br>On January 4, 2018, former U.S. Attorney General Jeff Sessions issued a memorandum to U.S. district attorneys which rescinded previous guidance from the DOJ (as defined herein) specific to cannabis enforcement in the United States, including the Cole Memorandum (as defined herein). With the Cole Memorandum rescinded, U.S. federal prosecutors have been given discretion in determining whether to prosecute cannabis related violations of U.S. federal law. If the DOJ policy was to aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such DOJ policies through pursuing prosecutions, then the Corporation could face (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries, and (ii) the arrest of its employees, directors, officers, managers and investors, who could face charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to state- licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis. Additionally, as has recently been affirmed by U.S. Customs and Border Protection, employees, directors, officers, managers and investors of the Corporation who are not U.S. citizens face the risk of being barred from entry into the United States for life.<br><br> <br><br><br> <br>Inaddition, Attorney General Jeff Sessions resigned and left the DOJ, and William Barr was confirmed as Attorney General on February14, 2019. On December 14, 2020, Mr. Barr tendered his resignation. Following the resignation of Mr. Barr, Jeffery Rosen was appointedas acting Attorney General. On January 14, 2021, President Joseph Biden appointed Merrick Garland to succeed Mr. Rosen as theU.S. Attorney General. It is unclear what further impact, if any, the new administration will have on U.S. federal governmentenforcement policy on cannabis. |
|---|
| Subsequentto the issuance of the Sessions Memorandum (as defined herein) on January 4, 2018, the U.S. Congress passed its omnibus appropriationsbill, SJ 1662, which for the fourth consecutive year contained a rider, in 2018 called the Rohrabacher-Blumenauer Amendment (asdefined herein), which barred the Department of Justice from spending money on the prosecution of any licensed medical cannabisbusiness or operator in states where medical cannabis is legal. The Rohrabacher-Blumenauer Amendment was included in the fiscalyear 2018 budget passed on March 23, 2018 and the consolidated appropriations bill signed into legislation in February 2019. TheRohrabacher-Blumenauer Amendment (now referred to as the “Blumenauer-Farr Amendment” due to a change in the legislation’sCongressional sponsors) was also included in the consolidated appropriations bill signed into legislation by President Trump onDecember 20, 2019 and remains in effect until September 30, 2020. On October 1, 2020, the Amendment was renewed through the signingof a stopgap spending bill, effective through December 11, 2020. On December 11, 2020, the Blumenauer-Farr Amendment expired,but was included in the 2021 Appropriations Act, HR 133, which then-President Trump signed into law on December 27, 2020. Accordingly,the Blumenauer-Farr Amendment protections will remain through the end of September 2021, barring any additional Congressionalaction.<br><br> <br><br><br> <br>There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that U.S. federal authorities may enforce current U.S. federal law. If the U.S. federal government begins to enforce U.S. federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Corporation’s business, results of operations, financial condition and prospects would be materially adversely affected.<br><br> <br><br><br> <br>In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018, the Canadian Securities Administrators published Staff Notice 51-352 setting out the Canadian Securities Administrator’s disclosure expectations for specific risks facing issuers with cannabis-related activities in the United States. 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 parties involved in the U.S. cannabis industry.<br><br> <br><br><br> <br>For these reasons, the Corporation’s operations in the United States cannabis market may subject the Corporation to heightened scrutiny by regulators, stock exchanges, clearing agencies and other Canadian and U.S. authorities. There are a number of risks associated with the business of the Corporation. See sections entitled “Risk Factors” and “Regulatory Framework” in this Prospectus.<br><br> <br><br><br> <br>To the Corporation’s knowledge, no statement has been made by federal authorities or prosecutors regarding the risk of enforcement action with respect to state-sanctioned marijuana activities in the states of Oregon or Michigan. |
| --- |
TABLEOF CONTENTS
| ABOUT THIS PROSPECTUS | 1 |
|---|---|
| DEFINITIONS | 1 |
| ELIGIBILITY FOR INVESTMENT | 1 |
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | 2 |
| CURRENCY PRESENTATION AND EXCHANGE RATE INFORMATION | 3 |
| DOCUMENTS INCORPORATED BY REFERENCE | 3 |
| UNITED STATES REGULATORY FRAMEWORK | 4 |
| CONSOLIDATED CAPITALIZATION | 22 |
| SUMMARY DESCRIPTION OF THE BUSINESS | 23 |
| DESCRIPTION OF SECURITIES BEING DISTRIBUTED | 32 |
| PRIOR SALES | 35 |
| USE OF PROCEEDS | 37 |
| PLAN OF DISTRIBUTION | 41 |
| RISK FACTORS | 44 |
| MATERIAL CONTRACTS | 55 |
| AUDITORS, TRANSFER AGENT, REGISTRAR AND WARRANT AGENT | 55 |
| LEGAL MATTERS | 55 |
| PROMOTERS | 56 |
| STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION | 56 |
| CONTRACTUAL RIGHT OF RESCISSION | 57 |
| CERTIFICATE OF THE CORPORATION | C-1 |
| CERTIFICATE OF THE AGENT | C-2 |
| CERTIFICATE OF THE PROMOTER | C-3 |
i
ABOUTTHIS PROSPECTUS
Investors should rely only on the information contained or incorporated by reference in this Prospectus and are not entitled to rely only on certain parts of the information contained or incorporated by reference in this Prospectus to the exclusion of the remainder. The Corporation and the Agent have not authorized anyone to provide investors with different information. If anyone provides you with different or additional information, you should not rely on it. The Corporation is not offering the securities in any jurisdiction in which the Offering is not permitted. Investors should assume that the information contained in this Prospectus is accurate only as of the date on the front of this Prospectus and that information contained in any document incorporated by reference is accurate only as of the date of that document, regardless of the time of delivery of this Prospectus or of any sale of the securities pursuant thereto.
DEFINITIONS
All capitalized terms not defined herein have the meanings ascribed to them in the Annual Information Form (as defined herein).
ELIGIBILITYFOR INVESTMENT
In the opinion of Irwin Lowy LLP, counsel to the Corporation, and Wildeboer Dellelce LLP, counsel to the Agent, based on the provisions of the Income Tax Act (Canada) and the regulations thereunder (collectively, the “Tax Act”) as of the date hereof, the Unit Shares and Warrants acquired pursuant to the deemed exercise of the Special Warrants and the Warrant Shares, if issued on the date hereof, would be “qualified investments” under the Tax Act for a trust governed by a registered retirement savings plan (“RRSP”), registered retirement income fund (“RRIF”), deferred profit sharing plan, registered education savings plan (“RESP”), registered disability savings plan (“RDSP”) and tax-free savings account (“TFSA”) (collectively, “Deferred Plans”) provided that (i) the Common Shares are listed on a “designated stock exchange” as defined in the Tax Act (which currently includes the CSE), and (ii) in the case of the Warrants, neither the Corporation, nor any person with whom the Corporation does not deal at arm’s length, is an annuitant, a beneficiary, an employer or a subscriber under, or a holder of the particular Deferred Plan.
Notwithstanding that the Unit Shares, Warrants and Warrant Shares may be a “qualified investment” for a Deferred Plan, the annuitant under an RRSP or RRIF, the holder of a TFSA or RDSP, or the subscriber of an RESP, as the case may be, will be subject to a penalty tax if such Unit Shares, Warrants and Warrant Shares are a “prohibited investment” (as defined in the Tax Act) for the RRSP, RRIF, RESP, RDSP or TFSA. The Unit Shares, Warrants and Warrant Shares will generally not be a “prohibited investment” for a particular RRSP, RRIF, RESP, RDSP or TFSA provided that the annuitant under the RRSP or RRIF, the holder of the TFSA or RDSP, or the subscriber of the RESP, as the case may be, deals at arm’s length with the Corporation for purposes of the Tax Act and does not have a “significant interest” (as defined in the Tax Act) in the Corporation. In addition, the Unit Shares and Warrant Shares will not be a prohibited investment if such securities are “excluded property” (as defined in the Tax Act for purposes of these rules) for the particular TFSA, RRSP, RESP, RDSP or RRIF. Persons who intend to hold Unit Shares, Warrants and Warrant Shares in a trust governed by a Deferred Plan should consult their own tax advisors with respect to the application of these rules in their particular circumstances.
1
CAUTIONARYSTATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus and the documents incorporated by reference herein constitute forward-looking statements, as such term is defined under applicable securities laws. These statements relate to future events or future performance and reflect management’s expectations and assumptions regarding the growth, results of operations, performances, business prospects and opportunities of the Corporation and estimated sources and uses of funds and forecasted operating cash flows. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “intend”, “will”, “project”, “could”, “believe”, “predict”, “potential”, “should” or the negative of these terms or other similar expressions are intended to identify forward-looking statements. In particular, information regarding the Corporation’s future business plans, operating results and economic performance; the completion of the HSCP Transaction (as hereinafter defined) and any exercise of the Canopy Purchase Option by GR Unlimited and any exercise by Canopy Management of the Golden Harvests Purchase Option Agreement (as such terms are hereinafter defined); the Corporation’s estimated sources and uses of funds for the period commencing on March 1, 2021 and ending on February 28, 2022; and the Corporation’s expected use of proceeds from the Offering is forward-looking information. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, achievements or events to differ materially from those anticipated, discussed or implied in such forward-looking statements. The Corporation believes the expectations reflected in such forward- looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this Prospectus and the documents incorporated by reference herein should be considered carefully and investors should not place undue reliance on them as the Corporation cannot assure investors that actual results will be consistent with these forward-looking statements. These statements speak only as of the date of this Prospectus or the particular document incorporated by reference herein. Such statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to, assumptions about production output; building and operating costs; credit risk; liquidity risk; market risk; currency risk; interest risk; concentration risk; dependence on senior management; sufficiency of insurance; competition; general business risk and liability; risks related to the Canopy Purchase Option Agreement, including with respect to the Corporation’s ability to realize the anticipated benefits therefrom both before and after its exercise of the option, if ever; receiving all operating profits of Golden Harvests that are distributed to Canopy Management, if any, through one or more management agreements and/or licensing agreements to be entered into by such parties and the amounts and timing of receipt thereof; anticipated production at the Corporations facilities (including at Manzanita Glen, Trails End, Warehouse 1 and Warehouse 2); the completion of the HSCP Transaction; the Corporation’s business objectives for the next twelve months; regulation of the marijuana industry; regulatory risks; change in laws, regulations and guidelines; reliance on licence renewal; reliance on a single facility; limited operating history; factors which may prevent realization of growth targets; risks inherent in an agricultural business; vulnerability to rising energy and building costs; publicity or consumer perception; product liability; product recalls; reliance on key inputs; difficulties with forecasts; exchange restrictions on business; management of growth; litigation; dividends; limited market for securities; environmental and employee health and safety regulations; and the potential impact of the COVID-19 pandemic on the Corporation and/or its operations, and the cannabis industry and currency fluctuations.
These forward-looking statements involve risks and uncertainties relating to, among other things, risks related to the cannabis industry, access to skilled personnel, cannabis production activities, uninsured risks, regulatory changes, defects in title, availability of materials and equipment, timeliness of government approvals and unanticipated environmental impacts on operations. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, the risk factors contained in this Prospectus and documents incorporated by reference herein. Investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur. The Corporation cautions that the foregoing list of important factors is not exhaustive. The forward looking statements contained in this Prospectus and the documents incorporated by reference herein are expressly qualified by this cautionary statement. Neither the Corporation nor the Agent undertake any obligation to publicly update or revise any forward-looking statements except as expressly required by applicable securities law.
2
CURRENCYPRESENTATION AND EXCHANGE RATE INFORMATION
This Prospectus contains references to United States dollars and Canadian dollars. All dollar amounts referenced, unless otherwise indicated, are Canadian dollars and United States dollars are referred to as “US$”.
On April 22, 2021, the closing exchange rate for Canadian dollars in terms of the United States dollar, as quoted by the Bank of Canada, was US$1.00 = $0.80.
DOCUMENTSINCORPORATED BY REFERENCE
The following documents of the Corporation, filed with the various securities commissions or similar authorities in Canada, are specifically incorporated by reference into, and form an integral part of, this Prospectus:
| (a) | the<br> annual information form of the Corporation dated March 15, 2021 for the financial year<br> ended October 31, 2020 (the “AIF”); |
|---|---|
| (b) | the<br> audited consolidated financial statements of the Corporation as at and for the years<br> ended October 31, 2020 and 2019, together with the notes thereto and the auditors’<br> report thereon dated March 1, 2021; |
| --- | --- |
| (c) | the<br> management’s discussion and analysis of the financial condition and results of<br> operations of the Corporation as at and for the year ended October 31, 2020 dated March<br> 1, 2021; |
| --- | --- |
| (d) | the<br> management information circular dated July 20, 2020 relating to the annual general meeting<br> of shareholders held on August 17, 2020; |
| --- | --- |
| (e) | the<br> material change report of the Corporation dated February 16, 2021 in respect of the closing<br> of a private placement on February 5, 2021 and the signing of an asset purchase agreement<br> and management services agreement in connection with the HSCP Transaction (as defined<br> below); |
| --- | --- |
| (f) | the<br> material change report of the Corporation dated March 9, 2021 in respect of the Offering; |
| --- | --- |
| (g) | the<br> unaudited amended and restated condensed interim consolidated financial statements of<br> the Corporation as at and for the three-month period ended January 31, 2021 and 2020,<br> together with the notes thereto; and |
| --- | --- |
| (h) | the<br> amended and restated management’s discussion and analysis of the financial condition<br> and results of operations of the Corporation as at and for the three-month period ended<br> January 31, 2021. |
| --- | --- |
Any documents of the type described above (other than confidential material change reports) or any other disclosure documents required to be incorporated by reference into a prospectus under National Instrument 44-101 - ShortForm Prospectus Distributions (“NI 44-101”), if filed by the Corporation with the securities commissions or similar authorities in Canada, after the date of this Prospectus and before completion of the distribution of the Units, are deemed to be incorporated by reference in this Prospectus. The documents incorporated or deemed to be incorporated herein by reference contain meaningful and material information relating to the Corporation and readers should review all information contained in this Prospectus and the documents incorporated or deemed to be incorporated by reference herein.
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Anystatement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modifiedor superseded for the purposes of this Prospectus to the extent that a statement contained herein or in any other subsequentlyfiled document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Themodifying or superseding statement need not state that it has modified or superseded a prior statement or include any other informationset forth in the document that it modifies or supersedes. The making of a modifying or superseding statement shall not be deemedan admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation, an untruestatement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to makea statement not misleading in light of the circumstances in which it was made. Any statement so modified or superseded shall notbe deemed, except as so modified or superseded, to constitute a part of this Prospectus.
Copies of the documents incorporated herein by reference may be obtained on request without charge from the Chief Financial Officer of the Corporation at 340 Richmond Street West, Toronto, Ontario M5V 1X2, Telephone (503) 765-8108, and are also available electronically through the System for Electronic Document Analysis and Retrieval (SEDAR) website at www.sedar.com.
UNITEDSTATES REGULATORY FRAMEWORK
In accordance with Staff Notice 51-352 of the Canadian Securities Administrators, as amended (“Staff Notice 51-352”), below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where the Corporation is currently directly involved through their respective subsidiaries and affiliates, either as owners, operators, managers, consultants, and/or through licensing or other commercial arrangements. The Corporation’s subsidiaries and affiliates are directly engaged, either as owners, operators, managers, consultants and/or through licensing or other commercial arrangements, in the manufacture, possession, use, sale or distribution of cannabis in the adult-use and/or medicinal cannabis marketplace in the States of Michigan or Oregon. The Corporation’s subsidiaries and affiliates are directly engaged, either as owners, operators, managers, consultants and/or through licensing or other commercial arrangements, in the manufacture, possession, use, sale or distribution of cannabis in the medicinal cannabis marketplace in the States of in Michigan and Oregon.
In accordance with Staff Notice 51-352, the Corporation will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding cannabis regulation. Any non-compliance, citations or notices of violation which may have an impact on the Corporation’s licenses, business activities or operations will be promptly disclosed by the Corporation. See “Regulatory Framework – Compliance Summary”.
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The following table is intended to assist readers in identifying those parts of this Prospectus that address the disclosure expectations outlined in Staff Notice 51-352 for issuers that currently have marijuana-related activities in U.S. States where such activity has been authorized within a state regulatory framework.
| Industry Involvement | Specific Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties<br><br> <br>**** | Prospectus Cross Reference |
|---|---|---|
| All issuers with U.S. Marijuana-Related Activities | Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table. | Corporate<br> Structure; General Development of the Business; and United States Regulatory Framework; and Summary Description of the Business. |
| Prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk. | Cover<br> page (disclosure in bold typeface); United States Regulatory Framework | |
| Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. | Cover<br> page (disclosure in bold typeface); United States Regulatory Framework | |
| Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. | Risk<br> Factors | |
| Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations. | Risk<br> Factors | |
| Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities. | The<br> Corporation’s assets are almost entirely exposed to U.S. marijuana-related activities. | |
| Disclose<br> if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable<br> state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. | A<br>legal opinion (i) Michigan regarding the existence of Canopy Management and Golden Harvests, and the licenses held by Golden Harvests<br>and (ii) Oregon; with respect to the existence of Grown Rogue Gardens, LLC and the licenses held by it. The Corporation has not<br>received a legal opinion regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications<br>arising from U.S. federal law. Legal advice has been obtained by the Corporation from external US counsel in the States of Oregon<br>and Michigan regarding the matters referred to in (a) and (b) above. |
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| U.S. Marijuana issuers with direct involvement in cultivation or distribution | Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | United<br> States Regulatory Framework |
|---|---|---|
| Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licence, business activities or operations. | United<br> States Regulatory Framework | |
| U.S. Marijuana Issuers with indirect involvement in cultivation or distribution | Outline the regulations for U.S. states in which the issuer’s investee(s) operate. | United<br> States Regulatory Framework |
| Provide reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee’s licence, business activities or operations. | United<br> States Regulatory Framework | |
| U.S. Marijuana Issuers with material ancillary involvement | Provide reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | Not<br> applicable. |
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U.S.Footprint of Grown Rogue’s Business
The following chart summarizes the U.S. States in which the Corporation has operates, directly or indirectly, in the cultivation or distribution of marijuana in the United States, as more specifically described below.
| State | Entity with Licence | Nature of Industry Involvement^(1)^ | Brief Description of Operations |
|---|---|---|---|
| Oregon | Grown<br> Rogue Gardens, LLC | ● <br> Direct adult use cannabis cultivation, processing and wholesale distribution | ● <br> Indoor and Outdoor cultivation and distribution at three cultivation facilities: “Manzanita Glen” (sun grown),<br> “Trail’s End” (sun grown), and “Warehouse 1” (indoor)<br><br> <br>● <br>US Corporate Headquarters (Medford, Oregon) |
| Grown<br> Rogue Distribution, LLC^(2)^ | ● <br> Indirect adult use cultivation, processing and wholesale distribution | ● <br> Indoor cultivation and distribution at “Warehouse 2” (indoor) | |
| Michigan | Golden<br> Harvests, LLC^(3)^ | ● <br> Indirect adult use and medical cannabis cultivation, distribution | ● <br> Indoor cultivation and distribution |
Notes*:*
| (1) | Asdefined in Staff Notice 51-352, direct industry involvement arises when an issuer, or a subsidiary that it controls, is directlyengaged in the cultivation or distribution of marijuana in accordance with a U.S. state license. Indirect industry involvementarises when an issuer has a non-controlling investment in an entity who is directly involved in the U.S. marijuana industry. | |
|---|---|---|
| (2) | Untilthe consummation of the HSCP Transaction, pursuant to which GR Distribution intends to acquire (subject to regulatory approvaland other conditions) the operating assets of HSCP Oregon, LLC, GR Distribution a subsidiary of the Corporation has been managingthe operations of HSCP Oregon, LLC, pursuant to the Management Agreement. | |
| --- | --- | |
| (3) | GRUnlimited holds the Canopy Purchase Option to acquire the 87% Canopy Management Equity Interest in Canopy Management, and CanopyManagement in turn holds the Golden Harvests Purchase Option to acquire the 60% Golden Harvests Equity Interest. Until these optionsare exercised, GR Michigan, a subsidiary of the Corporation, has been managing the operations. See “Summary Descriptionof the Business - Canopy Purchase Option”. | |
| --- | --- | |
| License Holder | License Type | License Number |
| --- | --- | --- |
| Grown<br> Rogue Gardens, LLC | Marijuana<br> Producer License - Outdoor Tier II | 1006166A33A |
| Marijuana<br> Producer License - Outdoor Tier II | 10063940AA8 | |
| Marijuana<br> Processor License, endorsed for Concentrates | 1009512285E | |
| Marijuana<br> Producer License - Indoor Tier II | 1006168AB1B | |
| Marijuana<br> Wholesaler License | 1006219C093 | |
| Golden<br> Harvests, LLC | Medical<br> Marijuana Facility License (Grower License C) | GR-C-000025 |
| Medical<br> Marihuana Facility Operating License (MM Grower Class C Operating Lic) | GR-C-000426 | |
| Adult<br> Use Facility License (AU Grower Class C Operating Lic) | AU-G-C-000226 | |
| Adult<br> Use Facility License (AU Grower Class C Operating Lic) | AU-GA-C-000309 |
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UnitedStates Federal Overview
The United States federal government regulates drugs through the CSA which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I controlled substance. The U.S. Department of Justice (the “DOJ”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The FDA has not approved cannabis as a safe and effective drug for any condition.
State laws that permit and regulate the production, distribution and use of cannabis for adult-use or medical purposes are in direct conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories of the U.S. authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal and any such acts are criminal acts under federal law under any and all circumstances under the CSA. Although the Corporation’s activities are believed to be compliant with applicable United States state and local law, strict compliance with state and local laws with respect to cannabis may neither absolve the Corporation of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against the Corporation.
As of the date of this Prospectus, 35 U.S. states, and the District of Columbia and the territories of Guam, Puerto Rico, the U.S. Virgin Islands, and the Northern Mariana Islands have legalized the cultivation and sale of full strength cannabis for medical purposes. In 11 U.S. states, the sale and possession of cannabis is legal for both medical and adult-use, and the District of Columbia has legalized adult-use but not commercial sale. Thirteen states have also enacted low-tetrahydrocannabinol (“THC”)/ high-cannabidiol (“CBD”) only laws for medical cannabis patients. All considered, approximately 95% of Americans now live in states where some form of medical cannabis is legal.
The prior U.S. administration attempted to address the inconsistencies between federal and state regulation of cannabis in a memorandum which then-Deputy Attorney General James Cole sent to all United States Attorneys in August 2013 (the “Cole Memorandum”) outlining certain priorities for the DOJ relating to the prosecution of cannabis offenses. The Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. The DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memorandum. In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis.
On January 4, 2018, U.S. Attorney General Jeff Sessions formally issued a new memorandum (the “Sessions Memorandum”), which rescinded the Cole Memorandum. The Sessions Memorandum stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress by following well-established principles when pursuing prosecutions related to cannabis activities. There can be no assurance that the federal government will not enforce federal laws relating to cannabis in the future. As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of State-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active U.S. federal prosecutors will be in relation to such activities.
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The Corporation believes it is too soon to determine what prosecutorial effects will be created by the rescission of the Cole Memorandum. The sheer size of the cannabis industry, in addition to participation by state and local governments and investors, suggests that a large-scale enforcement operation would more than likely create unwanted political backlash for the DOJ and the Trump administration. It is also possible that the revocation of the Cole Memorandum could motivate Congress to reconcile federal and state laws. Regardless, cannabis remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor its rescission has altered that fact. The federal government of the United States has always reserved the right to enforce federal law in regard to the sale and disbursement of medical or adult-use cannabis, even if state law sanctioned such sale and disbursement. The Corporation believes, from a purely legal perspective, that the criminal risk today remains identical to the risk on January 3, 2018. It remains unclear whether the risk of enforcement has been altered. Additionally, under United States federal law, it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of cannabis or any other Schedule I controlled substance. Canadian banks are likewise hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions, particularly those that are federally chartered in the United States, could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. While Congress is considering legislation that may address these issues, there can be no assurance that such legislation passes.
Despite these laws, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a memorandum on February 14, 2014 (the “FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the Cole Memorandum and states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a Suspicious Activity Report (“SAR”) in connection with all cannabis-related banking activities by any client of such financial institution, in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories – cannabis limited, cannabis priority, and cannabis terminated – based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. On the same day that the FinCEN Memorandum was published, the DOJ issued a memorandum (the “2014 Cole Memorandum”) directing prosecutors to apply the enforcement priorities of the Cole Memorandum in determining whether to charge individuals or institutions with crimes related to financial transactions involving the proceeds of cannabis-related conduct. The 2014 Cole Memorandum has been rescinded as of January 4, 2018, along with the Cole Memorandum, removing guidance that enforcement of applicable financial crimes against state-compliant actors was not a DOJ priority.
However, former Attorney General Sessions’ revocation of the Cole Memorandum and the 2014 Cole Memorandum has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memorandum and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum is a standalone document which explicitly lists the eight enforcement priorities originally cited in the Cole Memorandum. As such, the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance. However, in the United States, it is difficult for cannabis-based businesses to open and maintain a bank account with any bank or other financial institution.
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Although the Cole Memorandum has been rescinded, one legislative safeguard for the medical cannabis industry remains in place: Congress adopted a so-called “rider” provision to the fiscal years 2015, 2016, 2017 and 2018 Consolidated Appropriations Acts (formerly referred to as the “Rohrabacher-Blumenauer Amendment” and now known as the “Blumenauer-FarrAmendment”) to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law. The Blumenauer-Farr Amendment was included in the fiscal year 2018 budget passed on March 23, 2018 and the consolidated appropriations bill signed into legislation in February 2019. The Blumenauer- Farr Amendment was also included in the consolidated appropriations bill signed into legislation by President Trump on December 20, 2019 and remained in effect until September 30, 2020. On October 1, 2020, the Amendment was renewed through the signing of a stopgap spending bill, effective through December 11, 2020. On December 11, 2020, the Blumenauer-Farr Amendment expired, but was included in the 2021 Appropriations Act, HR 133, which then- President Trump signed into law on December 27, 2020. Accordingly, the Blumenauer-Farr Amendment protections are part of the 2021 Appropriations Act through the end of September 2021, barring any additional Congressional action.
In signing the Blumenauer-Farr Amendment, President Trump issued a signing statement noting that the Blumenauer- Farr Amendment “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States”. While the signing statement can fairly be read to mean that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical marijuana, the president did issue a similar signing statement in 2017 and in 2019, and no major federal enforcement actions followed. At such time, it may or may not be included in the omnibus appropriations package or a continuing budget resolution once the current continuing resolution expires.
Despite the legal, regulatory, and political obstacles the cannabis industry currently faces, the industry has continued to grow. It was anticipated that the federal government would eventually repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco.
Given current political trends, however, these developments are considered unlikely in the near-term. As an industry best practice, despite the recent rescission of the Cole Memorandum, the Corporation takes steps to ensure that each of its licensed subsidiaries and Golden Harvests and the Seller (each a “Managed Operator”) abide by the following to ensure compliance with the guidance provided by the Cole Memorandum:
| ● | ensure<br> that operations are compliant with all licensing requirements as established by the applicable<br> state, county, municipality, town, township, borough, and other political/administrative<br> divisions; |
|---|---|
| ● | ensure<br> that cannabis related activities adhere to the scope of the licensing obtained (for example:<br> in the states where cannabis is permitted only for adult-use, the products are only sold<br> to individuals who meet the requisite age requirements); |
| --- | --- |
| ● | implement<br> policies and procedures to ensure that cannabis products are not distributed to minors; |
| --- | --- |
| ● | implement<br> policies and procedures in place to ensure that funds are not distributed to criminal<br> enterprises, gangs or cartels; |
| --- | --- |
| ● | implement<br> an inventory tracking system and necessary procedures to ensure that such compliance<br> system is effective in tracking inventory and preventing diversion of cannabis or cannabis<br> products into those states where cannabis is not permitted by state law, or cross any<br> state lines in general; |
| --- | --- |
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| ● | ensure<br> that state-authorized cannabis business activity is not used as a cover or pretense for<br> trafficking of other illegal drugs, and is not engaged in any other illegal activity,<br> or any activities that are contrary to any applicable anti-money laundering statutes;<br> and |
|---|---|
| ● | ensure<br> that products comply with applicable regulations and contain necessary disclaimers about<br> the contents of the products to prevent adverse public health consequences from cannabis<br> use and prevent impaired driving. |
| --- | --- |
In addition, the Corporation may conduct background checks to ensure that the principals and management of its operating subsidiaries and the Managed Operators are of good character, and have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or distribution of cannabis. The Corporation will also conduct ongoing reviews of the activities of the Managed Operators’ cannabis businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of the licensed premises, including the cases where such possession is permitted by regulation. See “Risk Factors”.
The Cole Memorandum and the Blumenauer-Farr Amendment gave medical cannabis operators and investors in states with legal regimes greater certainty regarding federal enforcement as to establish cannabis businesses in those states. While the Sessions Memorandum has introduced some uncertainty regarding federal enforcement, the cannabis industry continues to experience growth in legal medical and adult-use markets across the U.S. U.S. Attorney General Jeff Sessions resigned on November 7, 2018. On February 14, 2019, William Barr was confirmed as U.S. Attorney General. Following the resignation of Mr. Barr on December 14, 2020, Jeffery Rosen was appointed as Attorney General. On January 14, 2021, President Joseph Biden appointed Merrick Garland to succeed Mr. Rosen as the U.S. Attorney General. It is unclear what further impact, if any, the new administration will have on U.S. federal government enforcement policy on cannabis.
Adding to the uncertainty, on December 20, 2019, President Donald Trump signed H.R. 1158, the “Consolidated Appropriations Act, 2020,” which states in relevant part that “None of the funds made available under this Act to the Department of Justice may be used, with respect to any of the States of Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming, or with respect to the District of Columbia, the Commonwealth of the Northern Mariana Islands, the United States Virgin Islands, Guam, or Puerto Rico, to prevent any of them from implementing their own laws that authorize the use, distribution, possession, or cultivation of medical marijuana.” See, Division B, Section 531.
President Biden’s presidential campaign position on cannabis falls short of full legalization. According to the Biden campaign website: “A Biden Administration will support the legalization of cannabis for medical purposes and reschedule cannabis as a CSA schedule II drug so researchers can study its positive and negative impacts. This will include allowing the VA (the United States Department of Veteran Affairs) to research the use of medical cannabis to treat veteran-specific health needs.” He has pledged to “decriminalize” cannabis, which may be reasonably interpreted to mean that the U.S. Attorney General under his administration will order U.S. Attorneys not to enforce federal cannabis prohibition against state law compliant entities and others legally transacting business with them. Indeed, the Biden-Sanders Unity Platform, which was released at the time President Biden won the Democratic Party nomination for President, affirmed that his administration would seek to “[d]ecriminalize marijuana use and legalize marijuana for medical purposes at the federal level;” “allow states to make their own decisions about legalizing recreational use;” and “automatically expunge all past marijuana convictions for use and possession.”
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While President Biden’s promise to decriminalize likely would mean that the federal government would not criminally enforce the schedule II status against state legal entities, the implications are not entirely clear. Although the U.S. Attorney General could order federal prosecutors not to interfere with cannabis businesses operating in compliance with states’ laws, the President alone cannot legalize medical cannabis, and as states have demonstrated, legalizing medical cannabis can take many different forms. While rescheduling cannabis to CSA schedule II would ease certain research restrictions, it would not make the state medical or adult-use programs federally legal. Additionally, President Biden has not appointed any known proponents of cannabis legalization to the Office of National Drug Control Policy transition team. Furthermore, while industry observers are hopeful that changes in Congress, along with a Biden presidency, will increase the chances of banking reform, such as the SAFE Banking Act, we cannot provide assurances that a bill legalizing cannabis would be approved by Congress.
State-LevelOverview
The Corporation holds licenses through its subsidiary, Grown Rogue Gardens, which is directly engaged in the cultivation or distribution of marijuana in Oregon. Neither the Corporation nor its subsidiaries own or hold any cannabis licenses for its indirect industry involvement, but through various agreements with the Managed Operators, are directly involved in the U.S. marijuana industry. While the Corporation believes that its affiliated cannabis license-holder and the Managed Operators are in compliance with the rules, regulations and license requirements governing each state in which they operate, there are significant risks associated with their business. Further, the rules and regulations as outlined below are not a full complement of all the rules that the affiliated cannabis license-holders are required to follow in each applicable state.
Although each state has its own laws and regulations regarding the operation of cannabis businesses, certain of the laws and regulations are consistent across jurisdictions. As a general matter, to operate legally under state law, cannabis operators must obtain a license from the state and in certain states must also obtain local approval. In those states where local approval is required, local authorization is a prerequisite to obtaining state licenses, and local governments are permitted to prohibit or otherwise regulate the types and number of cannabis businesses allowed in their locality. The license application process and license renewal process is unique to each state. However, each state’s application process requires a comprehensive criminal history, regulatory history, financial and personal disclosures, coupled with stringent monitoring and continuous reporting requirements designed to ensure only good actors are granted licenses and that licensees continue to operate in compliance with the state regulatory program.
License applicants for each state must submit standard operating procedures describing how the operator will, among other requirements, secure the facility, manage inventory, comply with the state’s seed-to-sale tracking requirements, dispense cannabis, and handle waste, as applicable to the license sought. Once the standard operating procedures are determined compliant and approved by the applicable state regulatory agency, the licensee is required to abide by the processes described and seek regulatory agency approval before any changes to such procedures may be made. Licensees are additionally required to train their employees on compliant operations and are only permitted to transact with other legal and licensed businesses.
As a condition of each state’s licensure, operators must consent to inspections of the commercial cannabis facility as well as the facility’s books and records to monitor and enforce compliance with state law. Many localities have also enacted similar standards for inspections and have already commenced both site-visits and compliance inspections for operators who have received state temporary or annual licensure.
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ComplianceSummary
The Corporation monitors the applicable rules and regulations of the State of Oregon, where it has a licensed subsidiary and indirect involvement in the marijuana industry through the Asset Purchase Agreement and the Management Agreement. In addition, the Corporation monitors the applicable rules and regulations of the State of Michigan, where it has indirect involvement in the marijuana industry through the Canopy Purchase Option. The Corporation maintains a database and tracks each license or permit held by its licensed subsidiary or the Managed Operators, showing the renewal date, inspection schedules, and the results of any regulatory inspection reports. The Corporation will also monitor any action taken by its licensed subsidiary or the Managed Operators in response to a change of governing regulations or suggestions from regulators.
The Corporation has employed an experienced team of professionals knowledgeable in regulatory and corporate compliance to oversee its activities. The Corporation has obtained legal advice from U.S. legal counsel regarding: (a) compliance with applicable state regulatory frameworks; and (b) potential exposure and implications arising from U.S. federal law, but does not have a formal legal opinion on such matters. The Corporation’s management continually monitors and reviews correspondence and changes to, and updates of, rules or regulatory policies impacting the operation of the businesses carried on by its affiliated license-holder and the Seller in Oregon and Golden Harvests in Michigan and seeks related legal advice from its counsel in these jurisdictions to facilitate compliance with relevant laws and regulations.
The Corporation is in compliance with the laws of the States of Oregon and Michigan and their related cannabis licensing frameworks. There are no current incidences of non-compliance, citations or notices of violation which are outstanding or may have an impact on the Corporation’s licenses, business activities or operations in these States. The Corporation is not aware of any incidence of non-compliance, citations or notices of violation received by the licensed Managed Operators that are operated by the Corporation pursuant to the applicable management services agreement or the failure of the Managed Operators to comply with applicable licensing requirements and the regulatory framework enacted by the States of Oregon and Michigan, as applicable. Notwithstanding the foregoing, like most businesses, the Corporation may from time-to-time experience incidences of non-compliance with applicable rules and regulations in the States of Oregon and Michigan, and such non-compliance may have an impact on the Corporation’s licenses, business activities or operations in such applicable states. However, the Corporation takes steps to minimize, disclose and remedy all incidences of non-compliance which may have an impact on the Corporation’s licenses, business activities or operations in the States of Oregon and Michigan.
TheRegulatory Landscape in Michigan and Oregon
Michigan
Michigan Regulatory Overview
Michigan’s medical marijuana market is considered one of the largest in the United States. While the exact figure is in constant flux, there are roughly 245,000 (as of August 2020) medical marijuana patients registered under the Michigan Medical Marihuana Act, MCL 333.26421 et seq. (the “MMMA”), which became effective on December 04, 2008. On September 21, 2016, Governor Snyder signed a package of bills (2016 PA 281-283) that significantly expanded and commercialized the State of Michigan’s medical marijuana industry. The centerpiece of this new legislation, the Medical Marihuana Facilities Licensing Act, allows for medical marijuana facilities to be licensed in the State of Michigan pursuant to a system overseen by what is presently referred to as the Michigan Marijuana Regulatory Agency, which is a division of the Michigan’s Department of Licensing and Regulatory Affairs (the “Regulator”).
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The Medical Marihuana Facilities Licensing Act (the MMFLA) became effective on December 20, 2016, and required the Regulator to begin accepting licenses for such facilities by no later than December 15, 2017. In order to meet that deadline, the Regulator employed an emergency rule making procedure, meaning the regulations so crafted were not prepared in accordance with the “complete” process of the Administrative Procedures Act of 1969. That formal rule making procedure was completed roughly a year later, with the resultant permanent rules being published on November 27, 2018 (together with all former versions, the “Rules”). The Rules expound upon the provisions of the MMFLA and set forth a regulatory structure with rigorous licensing requirements for the following five types of medical marijuana facilities (each a “Facility” and collectively, “Facilities”):
| 1. | Growers,<br> meaning licensees that cultivate, dry, trim, or cure and package marijuana for sale to<br> a processor or provisioning center in quantities of 500 – “Class A,”<br> 1,000 – “Class B,” or 1,500 – “Class C” at a time; |
|---|---|
| 2. | Processors,<br> meaning licensees that purchase marijuana from a grower and extract resin from the marijuana<br> or create a marijuana-infused product for sale and transfer in packaged form to a provisioning<br> center; |
| --- | --- |
| 3. | Provisioning<br> centers, meaning licensees that purchase marijuana from a grower or processor and sell,<br> supply, or provide marijuana to patients, directly or through the patient’s caregiver; |
| --- | --- |
| 4. | Secure<br> transporters, meaning licensees that store marijuana and transport marijuana between<br> Facilities for a fee; and |
| --- | --- |
| 5. | Safety<br> compliance facilities, meaning licensees that receive marijuana from a marijuana facility<br> or primary caregiver and test it for contaminants and other substances. |
| --- | --- |
The MMFLA allows municipalities to pick and choose the types and quantity of Facilities allowed within their jurisdictions, if any. A municipality that wishes to allow Facilities must enact an ordinance explicitly authorizing them. To compensate the immediate cost imposed upon municipalities who “opt in,” the MMFLA authorizes them to charge an annual fee of up to US$5,000 per license. The Rules also confirm that there is no deadline to opt in, meaning that communities who have been silent on the subject, as well as those that have expressly “opted out,” have not waived their ability to opt in at any point in the future.
The MRTMA modified these limits for certain “excess marihuana growers”. “Excess marihuana grower” means a license issued to a person holding 5 Class C marihuana grower licenses and licensed to cultivate marihuana and sell or otherwise transfer marihuana to marihuana establishments. An excess marihuana grower license shall only be issued to a person who holds 5 Class C marihuana grower licenses under the MRTMA, and at least 2 Class C grower licenses under the MMFLA. The number of MMFLA Class C grower licenses held determines the number of excess marijuana plants allowed by the Regulator. Based on the medical marijuana plant count, a licensee may grow in increments of 2,000 plants under the excess marijuana grower license, up to what is allowed under the MMFLA. The Regulator set the total marihuana plant count for an excess marihuana grower license as follows: (a) Class A – 100 marihuana plants; (b) Class B – 500 marihuana plants; and (c) Class C – 2,000 marihuana plants.
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To date, more than 100 municipalities have agreed to allow Facilities within their borders. Some have allowed an unlimited number of all Facilities. Others have imposed caps on each category of Facility, and in many cases have chosen not to allow a certain category altogether (e.g., 5 Class C Grows, 5 Class B Grows, 5 Class A Grows, 2 Processors, 1 Transporter, 1 Testing Facility and No Provisioning Centers). Those municipalities have employed an array of different zoning and code ordinance approaches to manage the location of allowed Facilities, as well as the selection process for local approval in cases where licenses are limited. On that point, even in municipalities with purportedly unlimited licenses, strict setback restrictions and a resultant absence of available real estate make finding suitable “green zone” location for Facilities a highly competitive and expensive process.
The MMFLA provided certain incentives for municipalities who allow Facilities within their jurisdiction. In particular, the State of Michigan currently charges a 6% sales tax on adult-use marijuana along with a 10% excise tax. The 10% excise tax on sales of adult-use marihuana under the Michigan Regulation and Taxation of Marihuana Act (discussed below) is levied “in addition to all other taxes.” (MCL 333.27963(1))^1^. Marijuana constitutes “tangible personal property” under Michigan’s General Sales Tax Act (MCL 205.51 et seq.). Accordingly, in addition to the 10% excise tax and absent a valid claim of exemption, retail sales of adult-use marijuana under the MRTMA are also subject to the state’s 6% sales tax, based upon the “sales price” of the property. Similarly, the use, storage, and consumption of adult-use marijuana in Michigan are subject to the Use Tax Act (MCL 205.91 et seq.). The “sales price” of marijuana subject to the 6 percent sales tax includes the 10% excise tax levied under the MRTMA.
Concurrent with the passage of the MMFLA, Public Act 282 of 2016 (“The Marijuana Tracking Act”) creates a statewide monitoring, tracking, inventory and verification system. At this time the State of Michigan has contracted to use Franwell’s “METRC” tracking system for this purpose. Each Facility licensee is required to provide information regarding each plant, product, package, batch, test, transfer, conversion, sale, recall or disposition of medical marijuana through this system. The intention being to track each and every single marijuana plant in the state from the time the seed is planted until the time the plant or its byproducts are used or destroyed. Doing so will help the Regulator guard against Facilities integrating with the black market, and provide the State of Michigan a metric by which to assess a provisioning center’s compliance with the aforementioned taxation requirements.
Licensesand Regulations
Operation of multiple license types under the MMFLA at the same location (commonly referred to as co-location) is allowed for grower, processor, and provisioning centers, subject to certain requirements, and a licensee may apply for and be granted multiple (“stacked”) Class C grow licenses — each authorizing the grower to grow up to 1,500 marihuana plants — in a single location, subject to certain conditions including the availability of same under the municipality’s opt in ordinance. In determining the type and number of licenses sought, a prospective MMFLA Facilities operator must consider the following capitalization requirements: Grower: Class A - US$150,000; Grower: Class B - US$300,000; Grower: Class C - US$500,000; Processor: US$300,000; Provisioning Center: US$300,000; Secure Transporter: US$200,000; Safety Compliance Facility: US$200,000. Whatever the combination of Facility licenses sought, the applicant must demonstrate that resultant capitalization requirement, at least 25% of which must be in liquid assets such as cash, marihuana inventory (in compliance with the administrative rules), certificates of deposit, 401(k), stocks, and bonds. The remaining value may be evidenced in additional liquid assets or non-liquid forms, for example equity in real property, supplies, equipment, and fixtures. All capitalization amounts and sources must be validated by certified public accountant-attested financial statements included with the Phase-I application.
^1^The MMFLA imposed a 3 percent excise tax on the gross retail receipts of licensed medical marijuana “provisioning centers”. (MCL 333.27601). However, the Michigan Marihuana Facilities Licensing Act also provided that the 3 percent excise tax would be repealed by operation of law beginning 90 days after the effective date of a law “authorizing the recreational or nonmedical use of marihuana in this state.” (MCL 333.27601). The MRTMA authorizes the recreational or nonmedical use of marijuana in Michigan. Accordingly, the 3 percent excise tax on medical marijuana provisioning centers imposed by the Marihuana Facilities Act was repealed as of March 6, 2019, 90 days following the effective date of the MRTMA.
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The Regulator utilizes a two-step application process for Facility licensing for both the MMFLA and the MRTMA: (i) Pre-Qualification (“Phase-I”) and (ii) License Qualification (“Phase-II”). This two-step process allows applicants to begin the Phase-I process before a location for their prospective Facility is established. Phase-I includes a full background check of the applicant and all supplemental applicants. As to the latter, all officers, directors and other persons in “control” of the applicant must submit a supplemental application and undergo the aforementioned background check, which is intended to evaluate the integrity, moral character, and reputation; personal and business probity; financial ability and experience; and responsibility or means of the applicant and all supplemental applications to own, operate and/or maintain a Facility. Until recently, that was also the case for anyone holding a financial interest of 1% or greater in a state-licensed Facility, whether directly or through a multi-level organization. But, on December 28, 2018, then-departing Governor Snyder signed 2018 PA 582 into law. That Act amended the MMFLA’s supplemental application requirement such that only persons owning a 10% or greater financial interest in the state- licensed Facility need to submit to the Phase-I background check (presuming they do not otherwise “control” the entity). Unfortunately, that favorable revision to the MMFLA’s definition of “applicant” was unintentionally written out of the MMFLA by the Hemp Act (defined below), thus forcing the Michigan Legislature to correct the issue by way of Senate Bill 203, which was enacted by the Michigan Legislator on April 16, 2019. Importantly, and irrespective of the modifications to the term “applicant” in the MMFLA, a person or entity receiving reasonable payment for rent on a fixed basis under a bona fide lease or rental obligation need not be included in the Phase-I application process unless the lessor or property owner exercises control over the business. Similarly, a fixed wage or salaried employee who receives a bonus of not more than 25% of his or her pre-bonus annual compensation under a written incentive/bonus program need not be included.
Disclosures required of the applicant and all supplemental applicants under Phase-I include, but are not limited to, (i) entity information documents, such as governing documents, a certificate of good standing, approval to conduct business in the state and a copy of organizational structure, (ii) capitalization documents, including a CPA Attestation, statement of money lender form and any promissory note or line of credit document, and (iii) a criminal background check. Regarding the latter, applicants and supplemental applicants are categorically barred from owning or exercising control over a licensed Facility if any of the following are true:
| ● | They<br> have been convicted of or released from incarceration for a felony under the laws of<br> Michigan, any other state, or the United States (federal law) within the past ten (10)<br> years or have been convicted of a controlled substance-related felony within the past<br> ten (10) years; |
|---|---|
| ● | They<br> have been convicted of a misdemeanor involving a controlled substance, theft, dishonesty,<br> or fraud in any state within the past five (5) years; or |
| --- | --- |
| ● | They<br> have been found responsible for violating a local ordinance in any state involving a<br> controlled substance, dishonesty, theft, or fraud that substantially corresponds to a<br> misdemeanor in that state within the past five (5) years. |
| --- | --- |
Aside from the above, in deciding whether or not to grant a given applicant Phase-I approval, the Regulator may also consider the applicant or supplemental applicant’s prior criminal history outside of those express disqualifiers noted above and regardless of whether the offense or offenses have been expunged, pardoned, or reversed on appeal or otherwise. Additionally, (i) the sources and extent of the applicant’s capitalization (including whether or not those funds were generated from prior illegal activity under the MMMA), (ii) bankruptcy filings within the past seven (7) years, (iii) the existence and extent of any tax deficiencies, (iv) issues in other regulated industries and (v) any litigation history concerning business practices will also be considered.
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For those who pass the Phase-I screening process, Phase-II requires information specific to the physical location of the prospective Facility. Aside from confirming that the Facility or Facilities’ physical location complies with the applicable opt in ordinance, Phase-II applications additionally require business plans addressing the use of third-party technology, marketing strategies, inventory and record keeping procedures, and staffing and employee training, among other things. If the Phase-II application is granted, a Facility license will be issued for a 1-year period and will need to be renewed annually, subject to the regulatory assessment fee for that fiscal year. With the exception of Safety Compliance Facilities, successful applicants must pay a regulatory assessment for each license issued. Fees for Class A grow licenses regulatory assessments are capped at US$10,000. For all other Facility licenses, the present assessment ranges from US$24,000 to US$67,000.
Notably, the MRTMA, was passed by the voters of the State of Michigan on November 6, 2018. The MRTMA took effect on December 6, 2018 and, among other things, made Michigan the 10th state to legalize, regulate and tax marijuana for all adults twenty-one (21) years and older (MCL 333.27959(6)). Additionally, for the first twenty-four (24) months following implementation of that recreational system, only those applicants already holding a prior Facilities licenses under the MMFLA may apply for recreational licenses (Id). Additionally, a license under the MMFLA must first be obtained before applying to certain license types under the MRTMA, including Class A, B and C grower licenses, processor licenses and retailer licenses. On July 3, 2019, the Regulator released its first rendition of emergency rules implementing the MRTMA, which remained remain in place for six (6) months while the Regulator worked through the formal administrative process for the creation of the final administrative rules for the program. The Regulator began accepting applications for state licenses under the MRTMA on November 1, 2019. The most recent Rules governing licenses issued under both the MRTMA and MMFLA were filed with the Michigan Secretary of State, and became effective on June 22, 2020.
Also relevant to the Michigan cannabis regulatory landscape, on December 20, 2018, President Donald Trump signed the 2018 Federal Agriculture Improvement Act (the “Farm Bill”), thereby legalizing industrial hemp under U.S. federal law and appointing the United States Department of Agriculture (the “USDA”) as the federal agency with regulatory oversight. The Farm Bill provides a framework for the states to regulate industrial hemp provided there is a USDA approved “state plan” in place to monitor and regulate the production of the crop. In concert with that federal legislative development, on December 28, 2018, Michigan House Bills 6330, 6331 and 6380 (Public Acts 641, 642, and 648 of 2018) were signed into law. Those bills amend the Industrial Hemp Research Act to create the new Industrial Hemp Research and Development Act (the “Hemp Act”). Under the Hemp Act, the Michigan Department of Agriculture and Rural Development (the “MDARD”) is tasked with the regulation of Michigan’s hemp industry and pursuant to notice published on its website, MDARD is actively working on developing its state industrial hemp plan. MDARD is prohibited by federal law from issuing registrations or licenses thereunder until after the plan is submitted and approved by USDA. Under the Farm Bill, the USDA has sixty (60) days after submittal for review and approval.
To the knowledge of management of the Corporation, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the state of Michigan. For more information on federal enforcement and the risks associated with the U.S. cannabis regulatory environment generally, see, without limitation, “Risk Factors– Risks Related to the Regulatory Environment – Risks Related to the Cannabis Industry”.
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Michigan License Renewals
Under both the MMFLA and MRTMA, operating licenses for marijuana businesses have a one (1) year term and are annually renewable if certain conditions are met: (a) the renewal application is submitted prior to the date the license expires, or within sixty (60) days of expiration if all other conditions are met and a late fee is paid, (b) the licensee pays the regulatory assessment fee set by the Regulator and (c) the licensee continues to meet the requirements to be a licensee under the applicable regulations. Each renewal application is reviewed by the Regulator, but there is no guarantee of a timely renewal. There is no ultimate expiry after which no renewals are permitted.
Michigan Medical Marijuana Patients
Under the MMFLA, products may be purchased in a retail setting from a provisioning center by registered qualified patients, or registered primary caregivers connected to a registered qualifying patient, under the MMMA (each, a “Michigan Qualified Purchaser”); in each case, Michigan Qualified Purchasers must present a valid, unexpired registry identification card issued by Michigan Licensing and Regulatory Affairs (a “Michigan Registry ID”). For a Michigan Qualified Purchaser to receive Products, provision centers must deploy an inventory control and tracking system that is capable of interfacing with the statewide monitoring system to determine (a) whether a Michigan Qualified Purchaser holds a Michigan Registry ID and (b) whether the sale or transfer will exceed the then-current daily and monthly (30-day rolling) purchasing limit for the holder of the Michigan Registry ID.
In order to receive a Michigan Registry ID under the MMMA, an applicant must provide: a completed application dated within one year of submission, a written certification from a physician with a bona-fide physician-patient relationship to the underlying patient, the application or renewal fee, contact information for the patient, caregiver (if applicable) and physician, as well as proof of Michigan residency.
For registered qualifying patients, the daily purchasing limit is 2.5 ounces, and for registered primary caregivers, the daily purchasing limit is 2.5 ounces per underlying registered qualifying patient that the registered primary caregiver is connected with through the registration process. Finally, the licensee shall verify in the statewide monitoring system that the sale or transfer does not exceed the monthly (30-day monthly) purchasing limit of ten (10) ounces of marijuana product per month to a qualifying patient, either directly or through the qualifying patient’s registered primary caregiver.
Allowable forms of medical marijuana includes smokable dried flower, dried flower for vaporizing and marijuana infused products, which are defined to include topical formulations, tinctures, beverages, edible substances or similar products containing usable marijuana that is intended for human consumption in a matter other than smoke inhalation.
Qualifying conditions for the medical marijuana program in Michigan are the following:
| ● | Cancer,<br> glaucoma, positive status for human immunodeficiency virus, acquired immune deficiency<br> syndrome, hepatitis C, amyotrophic lateral sclerosis, Crohn’s disease, agitation<br> of Alzheimer’s disease, nail patella or the treatment of these conditions; |
|---|---|
| ● | A<br> chronic or debilitating disease or medical condition or its treatment that produces 1<br> or more of the following: cachexia or wasting syndrome; severe and chronic pain; severe<br> nausea; seizures, including but not limited to those characteristic of epilepsy; or severe<br> and persistent muscle spasms, including but not limited to those characteristic of multiple<br> sclerosis; |
| --- | --- |
| ● | Post-traumatic<br> stress disorder; and/or |
| --- | --- |
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| ● | Any<br> other medical condition or its treatment approved by the department under the Michigan<br> cannabis regulations. In the state of Michigan, only cannabis that is grown and manufactured<br> in the state can be sold in the state. |
|---|
Reporting Requirements
Pursuant to the requirements of the Michigan Marijuana Regulatory Agency (“MRA”), Michigan selected Franwell’s METRC software (“METRC”) as the state’s third-party solution for integrated marijuana industry verification. Using METRC, regulators are able to track third party inventory, permissible sales and seed-to-sale information. Additionally, provisioning centers can use the METRC API to connect their own inventory management and/or point- of-sale systems to verify the identity as well as permissible sales for Michigan Qualified Purchasers.
To the knowledge of management of the Corporation, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the state of Michigan. For more information on federal enforcement and the risks associated with the U.S. cannabis regulatory environment generally, see, without limitation, “Risk Factors– Certain Risks Related to the Cannabis Industry”.
The Corporation maintains compliance with Michigan state law and its related licensing framework. The Corporation works closely with its legal counsel, operating partners and regulatory officials to maintain compliance with applicable state and local regulatory requirements. The Corporation will continue to do so to develop and improve its internal compliance programs to ensure ongoing regulatory compliance. While the Corporation’s Michigan operations are compliant with state and local cannabis laws, its cannabis- related activities remain illegal under U.S. federal law. See “Risk Factors”.
Oregon
Oregon Regulatory Overview
Oregon has both medical and adult-use cannabis programs. In 1998, Oregon voters passed a limited noncommercial medical marijuana law that designated the Oregon Health Authority (the “OHA”) to regulate an Oregon Medical Marijuana Program (the “OMMP”). Under the OMMP, patients who, through a licensed physician, could demonstrate the existence of one or more qualifying conditions, could possess and grow marijuana. Under the OMMP, a patient could also designate a grower to grow marijuana for the patient and/or designate a caregiver to possess and deliver medical marijuana to the patient. In 2013, the legislature passed, and the governor signed, House Bill 3460 that modified the OMMP to create a regulatory structure for existing unlicensed medical marijuana dispensaries. However, the original regulations created by the OHA after the passage of House Bill 3460 were minimal and left medical marijuana growers and dispensaries in a largely underregulated system. Additionally, the OHA did not provide for the inclusion of medical marijuana processors in the OMMP system.
In November 2014, Oregon voters passed Measure 91, eventually known as the “Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act,” which created an adult-use regulatory system for individuals 21 years of age or older to purchase cannabis for personal use from licensed cannabis businesses (the “Adult-Use Cannabis Program”). In June 2015, Oregon Governor Kate Brown signed House Bill 3400 into law, which modified Measure 91 and improved the existing regulatory structure for medical cannabis businesses, in part by creating a registration process for medical growers and processors. The OHA registers and regulates OMMP participants while the OLCC licenses and regulates the Adult-Use Cannabis Program. Since the implementation of Measure 91, however, the number of medical cannabis businesses has precipitously decreased. As of January 2020 (the most recent month for which OHA published numbers), there were three (3) registered medical marijuana dispensaries, zero (0) medical marijuana processing sites, and 8,812 medical grow sites. Under the Adult-Use Cannabis Program, the OLCC issues six (6) distinct license types: producer (cultivation), processor (manufacture), wholesaler, retailer (dispensary), laboratory (testing), and research.
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The laws and rules that govern the Adult-Use Cannabis Program do not impose a limit on the number of licenses an entity can hold, though a single entity may not own more than one licensed producer on the same tax lot. Local governments may regulate cannabis businesses through reasonable time, place, and manner restrictions – or, under certain conditions, wholly prohibit the establishment of medical dispensaries or processing sites or any adult-use cannabis business within their borders. There are currently no residency requirements for medical registrations or adult-use licenses in Oregon.
Until recently, Oregon did not limit the number of adult-use licenses. That changed with the passage of SB 218 in 2019. SB 218 immediately prohibited the issuance of producer licenses for new applications submitted after June 15, 2018. SB 218 sunsets on January 2, 2022. Also, in late May 2018, the OLCC announced a moratorium on the processing of new applications for all license types submitted after June 15, 2018 – purportedly until the OLCC fully processes the backlog of applications submitted up to and including on June 15, 2018 – although it continues to accept new applications (except for producers pursuant to SB 218). The OLCC has not stated how long it expects this moratorium to continue. License renewals, changes of license ownerships, and changes in financial interests in licenses remain unaffected by SB 218 or the moratorium.
In response to the emerging health crisis tied to nicotine and cannabis vaping products, the OHA issued a public health advisory warning all Oregonians not to use vaping products or e-cigarettes. On October 4, 2019, Governor Brown issued an executive order directing the OHA and OLCC to immediately ban flavoured vaping products (i.e. vaping products containing flavours not derived from cannabis terpenes for 180 days). Effective October 15, 2019, the OHA and OLCC prohibited the manufacture and sale of flavored cannabis derived vaping products in Oregon for 180 days. According to that prohibition, licensed retailers could not sell, offer for sale, or transfer any cannabinoid vaping product containing a flavor other than from cannabis derived terpenes. Furthermore, licensed processors could not manufacture such products. However, on November 14, 2019, the Oregon Court of Appeals placed a temporary hold on Governor Brown’s ban. In response, the OLCC affirmed its existing authority to ban “adulterants” from inclusion in marijuana products and determined that Vitamin E acetate – a suspected cause of the health crisis – was such a banned adulterant.
Licensesand Regulations
In Oregon, the OHA registers and regulates medical cannabis businesses through the OMMP and the OLCC licenses and regulates adult-use cannabis businesses. There are six distinct license types available for adult-use businesses: producer (cultivation), processor (manufacturing), wholesaler, retailer (dispensary), laboratory (testing), and research. For medical cannabis businesses, there are three registration types available: grower, processor, and dispensary. OLCC retailers may also sell cannabis or cannabinoid products (including “medical grade” products) to OMMP patients tax-free and at a discount or for no cost. Oregon law permits, but does not require, vertical integration of all commercial license types.
Oregon law permits cannabis possession and home cultivation by adults at least 21 years old within certain limits. Public sales of cannabis and cannabis products may occur only through OLCC-licensed retailers or OHA-registered dispensaries. The OLCC may disqualify adult-use cannabis license applicants for various reasons, including, but not limited to, lack of good moral character, insufficient financial resources or responsibility, convictions of certain crimes, and using cannabis, alcohol, or drugs “to excess.”
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Under its producer licenses, the Corporation may cultivate usable cannabis (dried leaves and flower), which the producer may transfer to any OLCC licensed processor, wholesaler, or retailer for further processing, packaging, or distribution. Producer licensees may apply for additional privileges such as propagation endorsements to grow additional immature canopy or medical canopy registration to dedicate additional canopy space for supply to OMMP patients free of charge.
Under its processor license, the Corporation may procure cannabis from OLCC licensed producers, industrial hemp from certain Oregon Department of Agriculture registered growers and handlers, or cannabinoid or hemp concentrates or extracts from other processors, for processing hemp and cannabis extracts and concentrates. The processor may then transfer finished products to any OLCC licensed processor (with the appropriate product endorsement(s)), wholesaler, retailer, non-profit dispensary, or research certificate holder. Presently, the Corporation’s processor license carries extract, concentrate, and hemp endorsements.
Under its wholesaler license, the Corporation may procure cannabis from any OLCC licensed producer, as well as cannabinoid extract, concentrate, or other product from any OLCC licensed processor or wholesaler. The Corporation may also obtain hemp and hemp items from OLCC-certified Oregon Department of Agriculture hemp growers or handlers. The wholesaler license includes authorization to package – including cartridge filling – and label products for retail sale. The wholesaler license also provides for distribution of products to any OLCC licensed retailer.
RegulatoryFramework
Oregon Revised Statutes Chapter 475B provides the regulatory framework for both the adult-use and medical cannabis industries in Oregon. OHA medical cannabis regulations are in Oregon Administrative Rules (“OAR”) Chapter 333, Division 7 and 8, and OAR Chapter 333, Division 64 governs the accreditation of laboratories for testing medical and adult-use cannabis products. The OLCC regulates adult-use cannabis through OAR Chapter 845, Division 25.
Both the OLCC and OHA rules include licensing requirements and license denial and approval criteria.
LicensingRequirements
Among other things, OLCC license applicants and licensees must demonstrate that: (i) they are registered with the Oregon Secretary of State to do business in Oregon, (ii) they have an appropriate operating plan, (iii) they have the legal right to occupy the premises necessary to operate the licensed business, (iv) they track all cannabis and cannabinoid products and waste via the state mandated seed-to-sale tracking system, (v) they have sufficient start-up capital, (vi) all applicable owners have passed background screening, and (vii) the licensed premises is not prohibited for the use under local regulations.
Licensees must renew OLCC licenses annually. The OLCC may conduct announced and unannounced inspections of any licensed facilities to assess compliance with laws and rules. The OLCC may also inspect a licensed premises upon receiving a complaint alleging that the licensee violated one or more rules. The OLCC may also conduct an annual license renewal inspection prior to approval. Inspections may cover the entire physical premises, business records, personnel, equipment, security, and operational procedures.
The Corporation maintains compliance with Oregon state law and its related licensing framework. The Corporation works closely with its legal counsel, operating partners and regulatory officials to maintain compliance with applicable state and local regulatory requirements. The Corporation will continue to do so to develop and improve its internal compliance programs to ensure ongoing regulatory compliance.
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While the Corporation’s Oregon operations are compliant with state and local cannabis laws, its cannabis- related activities remain illegal under U.S. federal law. See “Risk Factors”.
To the knowledge of management of the Corporation, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the state of Oregon. For more information on federal enforcement and the risks associated with the U.S. cannabis regulatory environment generally, see, without limitation, “Risk Factors– Certain Risks Related to the Cannabis Industry”.
CONSOLIDATEDCAPITALIZATION
Except as otherwise noted herein, there have been no material changes in the consolidated share capitalization or in the indebtedness of the Corporation since January 31, 2021, the date of the Corporation’s most recently filed financial statements.
Issuanceof Securities for Services
On or around November 18, 2020, the Corporation issued a total of 240,908 Common Shares to certain directors and employees of the Corporation relating to amounts owed for services rendered. In addition, the Corporation issued 25,000 Common Shares to an existing member of Golden Harvests in connection with the extension of the next payment of cash and shares payable under the terms of the Original Golden Harvests Option Agreement (as defined in the AIF). The abovementioned Common Shares were issued at a price of $0.11 per share. See “Prior Sales”.
Investmentsin Subsidiaries
On or around December 8, 2020, the Corporation announced debt and equity investments in its indirectly held subsidiary, GR Distribution, combined with a further equity investment in February 2021, in the aggregate amount of US$850,000. The Corporation sold 11.875 units of this non-operating subsidiary at a price of US$40,000 per unit for total proceeds of US$475,000. The unit holders have the future right to convert their units in the subsidiary into Common Shares of the Corporation at the greater of $0.20 or the maximum permitted discount under the policies of the CSE at the time of conversion. GR Distribution issued unsecured promissory notes in the amount of US$375,000, which bear interest at a rate of 10% per annum, payable monthly and have a three-year maturity date. In addition, the subsidiary will make payments in months 39, 42, 45, and 48 that will double the principal investment (minus any interest paid).
Issuanceof Promissory Note by GR Gardens
On December 2, 2020, GR Gardens issued an unsecured promissory note to a member of its operational management in the principal amount of US$150,000 in exchange for a loan of such amount. The note bears interest at a rate of 10% per annum, accruing monthly with a 12-month maturity. The Corporation has the right to extend up to 50% of the principal amount under the note for up to six months by paying a one-time cash extension fee of 10% of the amount extended.
Non-BrokeredOffering of Common Shares and Units
On January 19, 2021, the Corporation completed the first or two tranches of a non-brokered private placement offering, pursuant to which it issued an aggregate of 2,031,784 Common Shares at a price of $0.125 per share for gross proceeds of $253,973. On February 5, 2021, the Corporation completed the second tranche of the offering, pursuant to which it issued an aggregate of 8,200,000 units of the Corporation at a price of $0.16 per unit for gross proceeds of $1,312,000. Each unit was comprised of one Common Share and one common share purchase warrant, each warrant entitling the holder to purchase one Common Share at an exercise price of $0.20 per share for a period of two years. The Corporation has the right to accelerate the expiry date of the warrants to be thirty (30) days following written notice to the holder if during the term the Common Shares close at, or above, $0.32 on each trading day for a period of ten (10) consecutive trading days. See “Prior Sales”.
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Conversionof Outstanding Debt
On March 2, 2021 the Corporation issued 3,933,328 Common Shares at deemed price of $0.125 per Common Share on the conversion and settlement of an aggregate of $491,666 of outstanding debt owed by the Corporation.
TheOffering
On March 5, 2021, the Corporation completed the Offering. After giving effect to the Offering, the number of (i) Special Warrants increased by 21,056,890, (ii) Broker Warrants increased by 1,127,758, and (iii) Advisory Warrants increased by 113,500.
Upon completion of the Offering and the exercise of the Special Warrants, an additional 23,162,579 Common Shares, 23,162,579 Warrants and 1,241,258 Compensation Options will be issued.
SUMMARYDESCRIPTION OF THE BUSINESS
The Corporation was amalgamated under the Business Corporations Act (Ontario) on November 30, 2009 under the name “Eagleford Energy Inc.” The Corporation filed articles of amendment effective August 25, 2014 and changed its name to “Eagleford Energy Corp.” The Corporation filed articles of amendment effective February 1, 2016 and changed its name from “Eagleford Energy Corp.” to “Intelligent Content Enterprises Inc.”, and consolidated its common shares on the basis of one new share for every ten old shares. The Corporation filed articles of amendment effective May 26, 2017 and changed its name from “Intelligent Content Enterprises Inc.” to “Novicius Corp.” and consolidated its common shares on the basis of one new share for every ten old shares. On November 1, 2018, in preparation for the reverse take-over of Novicius by Grown Rogue Unlimited, LLC and related transactions, the Corporation completed a consolidation of its common shares on the basis of 1.4 pre-consolidated common shares for one post-consolidated common share and changed its name to its current name, “Grown Rogue International Inc.”.
The Corporation, headquartered in Medford, Oregon, is a multi-state cannabis Corporation curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies its products based on “Mind, Body & Mood” effects which resonates with consumers from the “canna-curious” through the “canna-serious”. The Corporation aims to educate, inspire and empower consumers with information about cannabis so they can “enhance experiences” by selecting the appropriate product for individual needs. The Corporation is focused on high quality, low-cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates.
The Corporation, through its wholly owned subsidiary, Grown Rogue Gardens, LLC (“GR Gardens”), operates four cultivation facilities in Oregon comprising approximately 130,000 square feet of cultivation area, that currently service the Oregon recreational marijuana market: “Manzanita Glen” (sun grown), “Trail’s End” (sun grown), and two indoor facilities, “Warehouse 1” and “Warehouse 2”. GR Gardens currently holds three producer licenses in Oregon from the Oregon Liquor Control Commission (the “OLCC”), for its Oregon properties, one wholesaler license, and one processor license. GR Gardens is currently not operating the processor license.
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GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. “Manzanita Glen” and “Trails End” are both outdoor, sun grown farms, with 40,000 square feet of flowering canopy, for a total of 80,000 square feet, sitting on a combined land package of approximately 45 acres.
The Corporation’s Oregon business is head-quartered in the world-renowned Emerald Triangle, which is known world-wide for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. The Corporation is able to capitalize on an outdoor growing environment where it can produce high-quality, low-cost cannabis flower. The two sun-grown farms produce one crop per year, which is planted in June and harvested in October.
GR Gardens operates Warehouse 1, consisting of an approximately 17,000 square feet of indoor growing facility, where it is able to produce high-quality indoor flower in a controlled atmosphere. By carefully controlling temperature, humidity, carbon dioxide levels, and other criteria, GR Gardens is able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. In addition, the Corporation, through its wholly owned subsidiary, Grown Rogue Distribution, LLC (“GR Distribution”), operates Warehouse 2, through a management services agreement, which is a short distance from Warehouse 1 and contributes an additional 30,000 square feet of indoor productive space to its operations. The Corporation has agreed to acquire Warehouse 2 in accordance with the terms of the Asset Purchase Agreement (as defined below) and intends to close this acquisition, upon the satisfaction of certain conditions to closing, including the receipt of all necessary regulatory approvals, at which time GR Distribution will become the beneficial owner of Warehouse 2 and its current Management Agreement (as defined below) for the facility will terminate. See “HSCP Transaction” below.
Pursuant to the terms of an option agreement (the “Canopy Purchase Option Agreement”) dated February 4, 2021, between the Corporation’s subsidiary, Grown Rogue Unlimited, LLC (“GR Unlimited”) and J. Obie Strickler, the President and Chief Executive Officer of the Corporation, GR Unlimited has an option (the “Canopy Purchase Option”) to acquire 87% of the outstanding membership interests (the “87% Canopy Management Equity Interest”) in Canopy Management, LLC (“Canopy Management”), subject to the terms of the Canopy Purchase Option Agreement. Canopy Management in turn holds an option (the “Golden Harvests Purchase Option”) to acquire a 60% equity interest (the “60% Golden Harvests Equity Interest”) in Golden Harvests, LLC (“Golden Harvests”), subject to the terms of an option agreement (the “Golden Harvests Purchase Option Agreement”) dated February 4, 2021 between David Pleitner and Allan Pleitner (collectively, the “Golden Harvests Optionors”) and Canopy Management. Golden Harvests has an approximately 80,000 square foot cultivation facility located in Bay City, Michigan, of which approximately 25,500 square feet is currently operational. See “Canopy Purchase Option” below. The Corporation is currently engaged in cannabis cultivation and production operations in Michigan pursuant to a master services agreement between GR Michigan, LLC (“GR Michigan”), which is an 87% owned subsidiary of the Corporation, and Golden Harvests, which is not currently a subsidiary of the Corporation.
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RecentDevelopments
HSCPTransaction
AssetPurchase Agreement
On February 5, 2021 (the “Effective Date”), GR Distribution entered into an asset purchase agreement (the “AssetPurchase Agreement”) with HSCP Oregon, LLC, an Oregon limited liability company (the “Seller”), and High Street Capital Partners, LLC, a Delaware limited liability company (“HSCP” and together with Seller, the “Seller Parties”), in connection with an asset purchase and sale transaction (the “HSCP Transaction”). Pursuant to the Asset Purchase Agreement, the Seller agreed to sell to GR Distribution and GR Distribution agreed to purchase from the Seller, all of the assets (the “Purchased Assets”) used or held for use in connection with the following businesses (collectively, the “Business”): (a) recreational cannabis production operations and related business activities (the “Producer Business”) at 550 Airport Road, Medford, Oregon 97504 (the “Producer Premises”) pursuant to OLCC producer license number 020-1003642197C (the “Producer License”), OLCC wholesale license number 060-1013984A526 (the “Wholesale License”), and OLCC processor license number 030-1013975ABC8 (the “ProcessorLicense”), and (b) a retail recreational cannabis dispensary and related business activities (the “Retail Business”) at 8701 SE Powell Boulevard, Portland, Oregon 97266 (together with the Producer Premises, the “Premises”) pursuant to OLCC retailer license number 050- 10026747951.
The completion of the purchase and sale of the Purchased Assets (the “Closing”) has not yet occurred. Closing is subject to the satisfaction of certain conditions, as described below. Some of these conditions, in particular with respect to the License Transfers and the OLCC Approval discussed below, are not within the Corporation’s control. As a result, the Corporation cannot control or predict with certainty when and if these conditions will be satisfied at all. The Corporation plans to cause GR Distribution to pay for the remaining consideration for the Purchased Assets (as described below) at such time or times as the conditions to Closing have been satisfied or waived and when due, with respect to the purchase and sale of the Retail Business and the Producer Business, as the case may be. In addition, the Corporation plans to source the funds needed to pay such remaining consideration for (i) the Retail Business from the Corporation’s unallocated working capital, and (ii) the Producer Business, from cash generated from the operation of the Producer Business pursuant to the Management Agreement.
However, notwithstanding that the Closing has not yet occurred, under the terms of the Management Agreement described below, on the Effective Date, GR Distribution acquired operational control over the Producer Business and the right to transfer all cannabis product produced through the operation of the Producer Business at the Producer Premises to its own OLCC wholesaler licensed facility for sale and distribution for GR Distribution’s own account, in each case, for the Term (as defined below) of the Management Agreement. In addition, during the Term, GR Distribution is responsible for corresponding operating expenses of the Producer Business. As a result, the economic benefit and cost of operating the Producer Business was transferred to GR Distribution by the Seller as at and from the Effective Date, subject to any termination of the Management Agreement prior to Closing pursuant to its terms.
A summary of certain key terms and conditions of the Asset Purchase Agreement is as follows:
PurchasePrice. The aggregate purchase price (the “Purchase Price”) for the Purchased Assets is US$3,000,000 plus the assumption of certain liabilities of the Business, provided that, if prior to the Closing, the Asset Purchase Agreement is terminated with respect to the Retail Business or the Producer Business, then the Purchase Price shall be reduced by the amount of US$1,000,000 or US$2,000,000, respectively, as the case may be.
Paymentof Purchase Price. The Purchase Price is payable as follows:
| (a) | as<br> to US$750,000 (the “Deposit”), upon the execution of the Asset Purchase<br> Agreement (paid); |
|---|---|
| (b) | as<br> to US$250,000, on Closing, which shall, together with the Deposit, constitute payment<br> in full for the purchase of the Retail Business; and |
| --- | --- |
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| (c) | as<br> to the remaining US$2,000,000: |
|---|---|
| (i) | if<br> the Closing occurs before the 12-month anniversary of the Effective Date, by the delivery<br> to the Seller of non-interest bearing secured promissory note in the principal amount<br> of US$2,000,000, with a such principal amount becoming due and payable on the date (the<br> “Maturity Date”) that is the 18-month anniversary of the Effective<br> Date; |
| --- | --- |
| (ii) | if<br> the Closing occurs on or after the 12-month anniversary of the Effective Date, but before<br> the 18-month anniversary of the Effective Date, by paying to the Seller US$750,000 on<br> the Closing and by the delivery to the Seller of non-interest bearing secured promissory<br> note in the principal amount of the remaining US$1,250,000, with a such principal amount<br> becoming due and payable on the Maturity Date; and |
| --- | --- |
| (iii) | if<br> the Closing occurs after the 18-month anniversary of the Effective Date, by paying US$2,000,000<br> on such Closing. |
| --- | --- |
The amounts outstanding under any promissory note to be delivered on Closing will be secured by the Purchased Assets related to the Producer Business and any proceeds from the disposition thereof.
RegulatoryMatters.
| (a) | License Transfers: As of the Effective Date, each of the Processor License and the Wholesale<br> License is held by Gesundheit Foods, LLC, an indirect subsidiary of HSPC, for the facility<br> located at the Producer Premises, and Gesundheit Foods, LLC has applied to transfer each<br> of the Processor License and the Wholesaler License to Seller at the Producer Premises<br> (together, the “License Transfers”). If the OLCC denies Seller’s<br> pending transfer of location for either of the Processor License or Wholesaler License,<br> or both, then the parties will cooperate with each other, and take all steps reasonably<br> necessary, to secure an alternative location or approval process that results in the<br> transfer of the Processor License and/or Wholesaler License (as applicable). |
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| (b) | OLCC Approval: Applicable Oregon Law prohibits GR Distribution from owning the Business<br> until it has itself been approved by the OLCC as a cannabis producer, processor, wholesaler,<br> and retailer at the applicable Premises and the OLCC has approved the change in ownership<br> of the Purchased Assets from Seller to GR Distribution (collectively, the “OLCC Approval”). |
| --- | --- |
ClosingConditions. The obligations of the parties to complete the purchase and sale of the Purchased Assets is subject to certain typical mutual conditions, including there being no action by a governmental authority to prevent the transaction; the truth of the representations of warranties of the other parties at Closing; the performance of covenants; obtaining necessary approvals; and the delivery of typical closing items. In addition, the obligation of GR Distribution to effect the Closing is subject to the satisfaction or waiver of the following conditions at or prior to Closing:
| (a) | the<br> License Transfers shall have occurred or, alternatively, the parties shall have mutually<br> agreed in writing to an alternative location or approval process that results in the<br> transfer of the Processor License and/or Wholesaler License (as applicable); and |
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| (b) | GR<br> Distribution shall have received the OLCC Approval. |
| --- | --- |
Closing. The Closing shall take place on the date or dates mutually selected by the parties following the date or dates on which the OLCC Approval is issued and all of the other conditions to the Closing in the Asset Purchase Agreement have been satisfied or waived. If the OLCC Approval with respect to the Retail Business and the Producer Business is issued by the OLCC on different dates, the parties may elect to consummate the closing of the purchase and sale of the Purchased Assets associated with the Retail Business and the Producer Business on different dates.
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See “Risk Factors – HSCP Transaction” below.
ManagementAgreement
As a result of the required OLCC Approval, the Seller will continue to own the Business until Closing has occurred. However, on the Effective Date, GR Distribution and the Seller entered into a management services agreement (the “Management Agreement”), with respect to the Producer Business at the Producer Premises, whereby GR Distribution agreed, on behalf of Seller, to provide services to, and have operational control over, the Producer Business, on the terms and subject to the conditions set forth in the Management Agreement. A summary of certain key terms and conditions of the Management Agreement is as follows:
Termof Management. The term (the “Term”) of the Management Agreement began on the Effective Date and terminates on the earlier of (a) the Closing and (b) immediately following either written notice from (i) the Seller to GR Distribution of a material breach of the terms of the Management Agreement, including any material violation of OLCC rules and regulations relating to the operation of the Producer Business under the OLCC Licenses at the Producer Premises that is not cured within 30 days after the Seller delivers written notice of such breach or violation to GR Distribution; or (ii) GR Distribution to the Seller at any time after the Purchase Agreement is terminated.
Natureof Management Service. During the Term, GR Distribution agreed to act as the exclusive manager for, and the exclusive operator of, the Producer Business on the Producer Premises. In this connection, GR Distribution agreed to supervise, care for, and maintain the Producer Premises and provide all services, labour, materials, and equipment necessary to operate the Producer Business on the Producer Premises. During the Term, the Seller agreed not to sublease the Producer Premises or contract with any other person or entity to manage or operate the Producer Business, and to continue to process the change of location applications related to the Processor License and the Wholesale License at its cost.
Paymentof Expenses. GR Distribution is responsible for all of the operating expenses of the Producer Business that it incurs during the Term and certain other specific expenses related to the Purchased Business set out in the Management Agreement. If the Seller incurs or becomes obligated to pay any other expenses with respect to the Producer Business, all such other expenses will be the sole responsibility of the Seller.
ManagerCompensation. As compensation for its services, GR Distribution is entitled to transfer all cannabis product produced through the operation of the Producer Business at the Producer Premises to its own OLCC wholesaler licensed facility for sale and distribution for GR Distribution’s own account.
The Corporation expects that expenses paid by GR Distribution under the Management Agreement will be accounted for as operating expenses and production from the operation of the Producer Business will be accounted for as inventory as produced. Further, the Corporation expects to recognize revenue and costs of goods sold in accordance with its revenue recognition policy and International Financial Reporting Standards.
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CanopyPurchase Option
Background
On February 6, 2020, GR Michigan entered into an option to purchase controlling interest agreement (the “Original GoldenHarvests Option Agreement”) with the Golden Harvests Optionors, pursuant to which the Golden Harvests Optionors granted to GR Michigan the option (the “Original Golden Harvests Option”) to acquire the 60% Golden Harvests Equity Interest. GR Michigan also entered into an exclusive management services agreement with Golden Harvests on such date to provide consulting services to it for a variety of business functions primarily focused on cultivation, sales, branding and marketing, and compliance.
Restructuringof the Original Golden Harvests Option
Subsequently, the transaction as initially contemplated by the Original Golden Harvests Option Agreement was restructured by the Corporation and the parties thereto for the purpose of expediting the process to obtain the regulatory approvals necessary for the Corporation to secure effective control of the 60% Golden Harvests Equity Interest and reduce the completion risks of the transaction provided for under the Original Golden Harvests Option Agreement.
To this end, on February 4, 2021 (the “Original Golden Harvests Option Termination Date”), the parties to the Original Golden Harvests Option Agreement entered into an agreement (the “Termination Agreement”) terminating such agreement. On the same date, the Golden Harvests Optionors and Canopy Management entered into the Golden Harvests Option Agreement, pursuant to which the Golden Harvests Optionors granted to Canopy Management the Golden Harvests Purchase Option to acquire the 60% Golden Harvests Equity Interest. Also, on February 4, 2021, Obie Strickler and GR Unlimited entered into the Canopy Purchase Option Agreement, pursuant to which Mr. Strickler granted to GR Unlimited the Canopy Purchase Option to acquire the 87% Canopy Management Equity Interest. The Corporation’s aim of the restructured transaction was for it to provide substantially the same economic terms to the Corporation as contained in the Original Golden Harvests Option Agreement, while allowing the Corporation to secure greater control over the 60% Golden Harvests Equity Interest during the period prior to obtaining the necessary regulatory approvals for the Corporation to indirectly control such interest.
In consideration for the Canopy Purchase Option, upon any exercise of the Canopy Purchase Option pursuant to the terms of the Canopy Purchase Option Agreement, GR Unlimited agreed to pay to Mr. Strickler all amounts payable by Canopy Management to the Golden Harvests Optionors to exercise the Golden Harvests Option and acquire the 60% Golden Harvests Equity Interest, when and as such amounts are due and payable under the Golden Harvests Purchase Option Agreement. Mr. Strickler has in turn agreed that any such amounts paid to him by GR Unlimited will be paid to the Golden Harvests Optionors to satisfy the consideration for the exercise by Canopy Management of the Golden Harvests Purchase Option.
OptionConsideration Paid
Under the Termination Agreement, GR Michigan and the Golden Harvests Optionors agreed that the Golden Harvest Optionors have received all payments and issuances of Common Shares due and owing to them under the Original Golden Harvests Option Agreement as of the Golden Harvests Option Termination Date, including, without limitation, the payment of US$150,000 and 200,000 Common Shares. Canopy Management has paid to the Golden Harvest Optionors all amounts that have been required to be paid to date for it to maintain the Golden Harvests Purchase Option, including a payment of US$100,000 and 200,000 Common Shares.
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RemainingOption Consideration Payable
In order for (i) GR Unlimited to exercise the Canopy Purchase Option and acquire the 87% Canopy Management Equity Interest, and (ii) Canopy Management to exercise the Golden Harvests Purchase Option and acquire the 60% Golden Harvests Equity Interest, GR Unlimited must provide to Canopy Management and Canopy Management must provide to the Golden Harvests Optionors, respectively, the cash and Common Share consideration in the following amounts on or before the dates specified below:
| (a) | US$260,000<br> cash and 200,000 Common Shares, on or before August 6, 2021; |
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| (b) | US$100,000<br> cash and 200,000 Common Shares, on or before February 6, 2022; |
| --- | --- |
| (c) | US$2,000<br> payable monthly until the amount owing in (b) above is paid; and |
| --- | --- |
| (d) | US$200,000<br> and 200,000 Common Shares on the closing of the purchase and sale of the 87% Canopy Management<br> Equity Interest/60% Golden Harvests Equity Interest, as applicable. |
| --- | --- |
Exerciseof Options
Canopy Management may exercise the Golden Harvests Purchase Option by paying the above-noted consideration and acquire the 60% Golden Harvests Equity Interest at any time during the period beginning on the date on which Golden Harvests has received both (i) all licensing and other regulatory or governmental approvals from the State of Michigan necessary to operate a cannabis business in that state and (ii) approval of Canopy Management’s acquisition of the 60% Golden Harvests Equity Interest, and ending on February 4, 2023.
GR Unlimited may exercise the Canopy Purchase Option by paying the above-noted consideration and acquire the 87% Canopy Management Equity Interest at any time after GR Unlimited has received all licensing and other regulatory or governmental approvals from the State of Michigan necessary to operate, or to own and equity interest in an entity that operates, a cannabis business in the State of Michigan.
Management of the Corporation expects that Canopy Management will exercise the Golden Harvests Purchase Option within approximately 60 days following the date of this Prospectus. Canopy Management has informed the Corporation that it has received the required state and local approvals for it to exercise the Golden Harvests Purchase Option. Until such time as Canopy Management exercises the Golden Harvests Purchase Option, Golden Harvests is restricted from utilizing any cash flow from its operations outside the normal course of business unless approved in writing by Canopy Management. Upon any exercise by Canopy Management of the Golden Harvests Purchase Option, Canopy Management will assume operating control of Golden Harvests. Management of the Corporation expects that, from and after such time as Canopy Management assumes control of Golden Harvests and prior to the exercise by GR Unlimited of its right to acquire 87% of the outstanding membership interests in Canopy Management, the Golden Harvests operations will be operated for the benefit of its members, Canopy Management and the Golden Harvests Optionors. During this period, the Corporation anticipates that all operating profits from Golden Harvests will be distributed to its members, including its majority member, Canopy Management. Management of the Corporation expects that all operating profits of Golden Harvests that are distributed to Canopy Management will in turn be conveyed by Canopy Management to GR Unlimited through one or more management agreements and/or licensing agreements to be entered into by such parties. These arrangements are expected to be finalized on or before any exercise by Canopy Management of the Golden Harvests Purchase Option and remain in place until such time as GR Unlimited acquires its 87% interest in Canopy Management through its exercise of the Canopy Purchase Option. Management of the Corporation anticipates that GR Unlimited will exercise the Canopy Purchase Option and acquire an 87% interest in Canopy Management within the next eight months following the date of this Prospectus, subject to its receipt of all regulatory approvals required to do so. See “RiskFactors - Canopy Purchase Option”.
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Closing
The Corporation intends to make payments under the Canopy Purchase Option Agreement to Canopy Management to permit it to exercise the Golden Harvests Purchase Option prior to February 4, 2022, subject to regulatory approval, and complete the acquisition of the 60% Golden Harvests Equity Interest within 120 days from such exercise. For this purpose, the Corporation plans to cause GR Unlimited to pay the remaining consideration for the exercise of the Canopy Purchase Option to Canopy Management when such payments are due, to facilitate its exercise of the Golden Harvests Purchase Option and its acquisition of the 60% Golden Harvests Equity Interest (see “Use of Proceeds”). The closing of the acquisition by GR Unlimited of the 87% Canopy Management Equity Interest is expected to occur as soon as practicable thereafter after all necessary regulatory approvals for such acquisition are received.
On closing of the acquisition of the 60% Golden Harvests Equity Interest by Canopy Management, the Golden Harvests Optionors and Canopy Management agreed to enter into a an amended and restated operating agreement for the operation of Golden Harvests, which will include, among other terms and conditions, an option for Canopy Management to purchase the Golden Harvests Optionors’ remaining membership interests at any time after the third anniversary of the closing.
RelatedParty Transaction
The Canopy Purchase Option Agreement constitutes a “related party transaction” as defined in Multilateral Instrument 61-101
- Protection of Minority Securityholders in Special Transactions (“MI 61-101”), as Mr. Strickler is a director of the Corporation. The Corporation is relying on the exemptions from the valuation and minority shareholder approval requirements of MI 61-101 contained in sections 5.5(a) and 5.7(1)(a) of MI 61-101, as neither the fair market value of the Canopy Purchase Option or the 87% Canopy Management Equity Interest, nor the fair market value of the consideration for, the transactions under the Canopy Purchase Option Agreement, insofar as it involves Mr. Strickler, exceeded 25% of the market capitalization of the Corporation at the time the transaction was agreed to, as determined in accordance with MI 61-101.
In connection with the Canopy Purchase Option Agreement, the Corporation’s board of directors followed its usual review and approval process for transactions. The material terms of the Canopy Purchase Option Agreement and the related agreements for restructuring the transaction under the Original Golden Harvests Option Agreement were presented to the directors by the Corporation’s management at a meeting of the board of directors held prior to the completion of the restructured transaction. The Corporation’s board of directors considered the terms of the restructured transaction and assessed the benefits and risks to the Corporation of the revised structure. As part of its review and approval process, the directors also considered Mr. Strickler’s interest in the proposed transaction. After completing their review, the directors unanimously concluded that the transaction was fair and in the best interests of the Corporation and unanimously passed a resolution (with Mr. Strickler abstaining) authorizing and approving the Canopy Purchase Option Agreement and the related transaction agreements.
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Useof Proceeds of Previous Offerings
In December and February 2021 the Corporation’s subsidiaries, GR Distribution and GR Gardens, received total gross proceeds of $1,269,865 from certain debt and equity financings, and on January 19, 2021 and February 5, 2021, the Corporation completed non-brokered private placement offerings for aggregate gross proceeds of $253,973 and $1,312,000, respectively (collectively, the “Prior Offerings”). The following table sets out a comparison of how the Corporation has used the proceeds from the Prior Offerings as of the date of this Prospectus, an explanation of variances and the impact of variances on the ability of the Corporation to achieve its business objectives and milestones.
| Intended Use of Proceeds and Amount of Prior Offerings | Actual Use of Proceeds from Prior Offerings<br><br> <br>**** | Variance (Over)/Under Expenditure | Explanation of Variance and impact on business objectives | |
|---|---|---|---|---|
| for<br>general corporate purposes and to complete the build out of the Warehouse 1 indoor facility located in Medford, Oregon | $1,269,865^(1)^<br><br> <br>(US$1,000,000) | $1,269,865^(1)(2)^<br><br> <br>(US$1,000,000) | None | N/A |
| to<br>satisfy certain option payments due to Golden Harvests and for general corporate purposes | $253,973<br><br> <br>(US$200,000) | $253,973^(1)(3)^<br><br> <br>(US$200,000) | None | N/A |
| for<br> strategic acquisitions, expansion into Michigan and for general corporate purposes | $1,312,000^(4)^<br><br> <br>(US$1,025,000) | $640,000^(4)(5)^<br><br> <br>(US$500,000) | $672,000<br><br> <br>(US$525,000) | Of<br> the under-expenditure variance amount of $672,000 (US$525,000) has or will be been used for general corporate purposes. A<br> total of $706,765 (US$560,000) remains payable in connection with the exercise of the Canopy Purchase Option and is expected<br> to be paid when due from the proceeds of the Offering. These variances had no material impact on the Corporation’s<br> business objectives. |
Notes:
| (1) | The actual amounts were received in United States dollars and converted to Canadian dollars at a rate of $1.26 equals US$1.00. |
|---|---|
| (2) | Of the total proceeds of approximately $1,269,865 (US$1,000,000), $1,079,385 (US$850,000) was used in connection with the payments due pursuant to the HSCP Transaction for the acquisition of a 30,000 square foot indoor growing facility and a retail dispensary, and the remainder of approximately $190,480 (US$150,000) was used to complete the build out of the existing Warehouse 1 indoor facility in Medford, Oregon. |
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| (3) | Of the total proceeds of approximately $253,973 (US$200,000), $126,987 (US$100,000) was paid toward the exercise price of the Canopy Purchase Option and the balance of $126,987 (US$100,000) was used for general corporate purposes. |
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| (4) | The actual amounts were received in United States dollars and converted to Canadian dollars at a rate of $1.28 equals US$1.00. |
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| (5) | Of the total proceeds used of approximately $640,000 (US$500,000), $128,000 (US$100,000) was used for expenses at the Golden Harvests indoor facility in connection with Corporation’s expansion into Michigan, under the terms of the Management Agreement, $256,000 (US$200,000) was used for operating expenses and capital improvements at the Warehouse 2 indoor facility, and the balance of approximately $256,000 (US$200,000) was used for general corporate purposes, including in respect of the payment of invoices and audit and tax costs. |
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DESCRIPTIONOF SECURITIES BEING DISTRIBUTED
This Prospectus is being filed for the purpose of qualifying the distribution of 23,162,579 Unit Shares and 23,162,579 Warrants, which are to be issued upon the exercise or deemed exercise of the Special Warrants.
Descriptionof Special Warrants
The Special Warrants are governed by the terms and conditions set forth in the Special Warrant Indenture. An aggregate of 21,056,890 Special Warrants are outstanding as of the date of this Prospectus. The material terms and conditions of the Special Warrants are summarized below:
| ● | each<br> of the Special Warrants entitles the holder thereof to acquire, for no additional consideration<br> to the Corporation, one Unit for each Special Warrant, subject to adjustment as provided<br> for in the Special Warrant Indenture; |
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| ● | the<br> Special Warrants will be deemed to be exercised on the Qualification Date; |
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| ● | the<br> Special Warrant Indenture provides for and contains provisions designed to keep the holders<br> of the Special Warrants unaffected by the possible occurrence of certain corporate events,<br> including the amalgamation, merger or corporate reorganization of the Corporation; |
| --- | --- |
| ● | the<br> holders of Special Warrants do not have any right or interest whatsoever as shareholders<br> of the Corporation, including but not limited to any right to vote at, to receive notice<br> of, or to attend, any meeting of shareholders or any other proceedings of the Corporation<br> or any right to receive any dividend or other distribution; |
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| ● | the<br> rights of holders of Special Warrants may be modified by extraordinary resolution at<br> a meeting of Special Warrant holders. The Special Warrant Indenture provides for meetings<br> by holders of Special Warrants and the passing of resolutions and extraordinary resolutions<br> by such holders which are binding on all holders of Special Warrants. Certain amendments<br> to the Special Warrant Indenture may only be made by “extraordinary resolution”,<br> which is defined in the Special Warrant Indenture as a resolution proposed at a meeting<br> of Special Warrant holders duly convened for that purpose at which there are present<br> in person or by proxy Special Warrant holders holding at least 25% of the aggregate number<br> of the then outstanding Special Warrants passed by the affirmative votes of Special Warrant<br> holders holding not less than 66⅔% of the aggregate number of the then outstanding<br> Special Warrants represented at the meeting and voted on the poll upon such resolution; |
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| ● | Capital<br> Transfer and the Corporation, without the consent of the holders of Special Warrants,<br> may be able to amend or supplement the Special Warrant Indenture for certain purposes,<br> including rectifying any ambiguities, defective provisions, clerical omissions or mistakes,<br> or other errors contained in the Special Warrant Indenture or in any deed or indenture<br> supplemental or ancillary to the Special Warrant Indenture, provided that, in the opinion<br> of Capital Transfer, relying on the opinion of legal counsel, the rights of the holders<br> of Special Warrants, as a group, are not prejudiced thereby; and |
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| ● | the<br> Corporation has agreed to provide to the holders of the Special Warrants a contractual<br> right of rescission. See “Contractual Rights of Rescission” below. |
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The foregoing is a summary description of certain material provisions of the Special Warrant Indenture, it does not purport to be a comprehensive summary and is qualified in its entirety by reference to the more detailed provisions of the Special Warrant Indenture between the Corporation and Capital Transfer, as Special Warrant Agent, a copy of which may be obtained on request without charge from the Corporation at its registered office or electronically on SEDAR at www.sedar.com.
CommonShares
Each Common Share carries the right to attend and vote at all general meetings of shareholders. Holders of Common Shares are entitled to receive on a pro rata basis such dividends, if any, as and when declared by the Corporation’s board of directors at its discretion from funds legally available for the payment of dividends and upon the liquidation, dissolution or winding up of the Corporation are entitled to receive on a pro rata basis the net assets of the Corporation after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching to any other series or class of shares ranking senior in priority to or on a pro rata basis with the holders of Common Shares with respect to dividends or liquidation. The Common Shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor do they contain any sinking or purchase fund provisions.
Warrants
The Warrants will be issued under and governed by the terms of the Warrant Indenture. The following summary of certain provisions of the Warrant Indenture does not purport to be complete and is subject in its entirety to the detailed provisions of the Warrant Indenture, which is available for review under the Corporation’s profile at www.sedar.com. A register of holders will be maintained at the principal offices of Capital Transfer in Toronto, Ontario.
Each Warrant will entitle the holder to acquire one Warrant Share at an exercise price of $0.30 until 5:00 p.m. (Toronto time) on March 5, 2023, after which time the Warrants will expire and become null and void. The exercise price and the number of Warrant Shares issuable upon exercise of Warrants are both subject to adjustment in certain circumstances as more fully described below.
The Warrant Indenture provides for adjustment in the number of Warrant Shares issuable upon the exercise of the Warrants and/or the exercise price per Warrant Share upon the occurrence of certain events, including:
| (a) | the<br> issuance of Common Shares or securities exchangeable or exercisable for or convertible<br> into Common Shares to all or substantially all of the holders of the Common Shares as<br> a stock dividend or other distribution (other than a distribution of Common Shares upon<br> the exercise of warrants or options of the Corporation); |
|---|---|
| (b) | the<br> subdivision, redivision or change of the Common Shares into a greater number of shares; |
| --- | --- |
| (c) | the<br> reduction, combination or consolidation of the Common Shares into a lesser number of<br> shares; |
| --- | --- |
| (d) | the<br> issuance to all or substantially all of the holders of the Common Shares of rights, options<br> or warrants under which such holders are entitled, during a period expiring not more<br> than 45 days after the record date for such issuance, to subscribe for or purchase Common<br> Shares, or securities exchangeable or exercisable for or convertible into Common Shares,<br> at a price per Common Share to the holder (or at an exchange, exercise or conversion<br> price per share) of less than 95% of the “current market price”, as defined<br> in the Warrant Indenture, for the Common Shares on such record date; and |
| --- | --- |
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| (e) | the<br> issuance or distribution to all or substantially all of the holders of Common Shares<br> of (i) securities, including rights, options or warrants to acquire shares of any class<br> or securities exchangeable, exercisable or convertible into any such shares or property<br> or assets or (ii) any property or assets, including evidences of indebtedness. |
|---|
The Warrant Indenture also provides for adjustments in the class and/or number of securities issuable upon exercise of the Warrants and/or exercise price per security in the event of the following additional events: (i) reclassifications of the Common Shares or exchange or change of the Common Shares into other shares, or capital reorganization of the Corporation (other than as described in clauses (b) or (c) above), (ii) consolidations, amalgamations, arrangements, mergers of the Corporation with or into another entity (other than a consolidation, amalgamation, arrangement, merger or other business combination which does not result in any reclassification of the Corporation’s outstanding Common Shares or an exchange or change of the Common Shares into other shares), or (ii) any sale or conveyance of the property and assets of the Corporation as an entirety or substantially as an entirety to any other body corporate, trust, partnership or other entity, in which case each holder of a Warrant which is thereafter exercised will receive, in lieu of Common Shares, the kind and number or amount of other securities or property which such holder would have been entitled to receive as a result of such event if such holder had exercised the Warrants prior to the event.
The Corporation also covenants in the Warrant Indenture that, during the period in which the Warrants are outstanding, it will give notice to holders of Warrants of certain stated events, including events that would result in an adjustment to the exercise price for the Warrants or the number of Warrant Shares issuable upon exercise of the Warrants, not less than 14 days prior to such applicable record date of such events.
No fractional Common Shares will be issuable to any holder of Warrants upon the exercise thereof, and no cash or other consideration will be paid in lieu of fractional shares. The holding of Warrants will not make the holder thereof a shareholder of the Corporation or entitle such holder to any right or interest in respect of the Warrants except as expressly provided in the Warrant Indenture. Holders of Warrants will not have any voting or pre-emptive rights or any other rights of a holder of Common Shares.
The Warrant Indenture provides that, from time to time, subject to CSE approval, if required, Capital Transfer and the Corporation, without the consent of the holders of Warrants, may amend or supplement the Warrant Indenture for certain purposes, including rectifying any ambiguities, defective provisions, clerical omissions or mistakes, or other errors contained in the Warrant Indenture or in any deed or indenture supplemental or ancillary to the Warrant Indenture, provided that, in the opinion of Capital Transfer, relying on the opinion of legal counsel, the rights of the holders of Warrants, as a group, are not prejudiced thereby.
The Warrant Indenture contains provisions making binding upon all holders of Warrants resolutions passed at meetings of such holders in accordance with such provisions or by instruments in writing signed by holders of Warrants holding a specified percentage of the Warrants. Any amendment or supplement to the Warrant Indenture that is prejudicial to the interests of the holders of Warrants, as a group, and certain other amendments or other actions, will be subject to approval by an “Extraordinary Resolution”, which will be defined in the Warrant Indenture as a resolution either: (i) passed at a meeting of the holders of Warrants at which there are holders of Warrants present in person or represented by proxy representing at least 25% of the aggregate number of the then outstanding Warrants and passed by the affirmative vote of holders of Warrants representing not less than 662⁄3% of the aggregate number of Warrants represented at the meeting in person or by proxy and voted on the poll upon such resolution; or (ii) adopted by an instrument in writing signed by the holders of Warrants representing not less than 662⁄3% of the number of all of the then outstanding Warrants.
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The principal transfer office of Capital Transfer in Toronto, Ontario is the location at which Warrants may be surrendered for exercise or transfer.
PRIORSALES
The following table summarizes issuances of Common Shares of the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Description of Transaction | Number of Common Shares Issued | Price per Common Share | ||
|---|---|---|---|---|---|
| March 26, 2020 | Shares for Services | 1,100,000 | $ | 0.10 | |
| May 4, 2020 | Shares for Services | 620,000 | $ | 0.10 | |
| May 4, 2020 | Option Payment | 200,000 | $ | 0.10 | |
| May 15, 2020 | Private Placement Offering | 10,000,000 | $ | 0.10 | |
| July 10, 2020 | Shares for Services | 320,636 | $ | 0.15 | |
| August 4, 2020 | Conversion of Convertible Debt | 800,000 | $ | 0.125 | |
| November 18, 2020 | Shares for Services | 240,908 | $ | 0.11 | |
| November 18, 2020 | Option Payment | 25,000 | $ | 0.11 | |
| January 19, 2021 | Private Placement Offering | 2,031,784 | $ | 0.125 | |
| February 5, 2021 | Private Placement Offering | 8,200,000 | $ | 0.16 | |
| March 2, 2021 | Conversion of Convertible Debt | 3,933,328 | $ | 0.125 |
The following table summarizes issuances of warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Warrants Issued | Exercise Price per Warrant | |||
|---|---|---|---|---|---|
| May 15, 2020 | Private Placement Offering | 10,000,000 | $ | 0.13 | |
| July 10, 2020 | Debt Restructuring | 8,409,091 | $ | 0.16 | |
| February 5, 2021 | Private Placement Offering | 8,200,000 | $ | 0.20 |
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The following table summarizes issuances of options within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Options Issued | Exercise Price per Option | ||
|---|---|---|---|---|
| July 9, 2020 | 3,475,000 | $ | 0.15 | |
| July 20, 2020 | 100,000 | $ | 0.15 | |
| December 1, 2020 | 500,000 | $ | 0.15 | |
| November 18, 2020 | 200,000 | $ | 0.15 |
The following table summarizes issuances of Special Warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Special Warrants Issued | Exercise Price per Special Warrant | ||
|---|---|---|---|---|
| March 5, 2021 | 21,056,890 | - |
The following table summarizes issuances of Broker Warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Broker Warrants Issued | Exercise Price per Broker Warrant | ||
|---|---|---|---|---|
| March 5, 2021 | 1,127,758 | - |
The following table summarizes issuances of Advisory Warrants by the Corporation within the 12 months prior to the date of this Prospectus.
| Date of Issuance | Number of Advisory Warrants Issued | Exercise Price per Advisory Warrant | ||
|---|---|---|---|---|
| March 5, 2021 | 113,500 | - |
TradingPrice and Volume
The Common Shares trade on the CSE under the symbol “GRIN”. The following table sets forth the price range and trading volumes for the Common Shares on the CSE as reported by the CSE for the periods indicated:
| Date | High () | Low () | Trading Volume | |
|---|---|---|---|---|
| 2020 | ||||
| April | 1,018,201 | |||
| May | 656,253 | |||
| June | 3,958,813 | |||
| July | 1,130,765 | |||
| August | 920,397 | |||
| September | 908,084 | |||
| October | 547,579 | |||
| November | 1,346,639 | |||
| December | 2,061,916 | |||
| 2021 | ||||
| January | 2,690,159 | |||
| February | 5,027,550 | |||
| March | 834,533 | |||
| April 1 - 22 | 558,358 |
All values are in US Dollars.
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USEOF PROCEEDS
The Corporation has received gross proceeds of $4,737,800.25 from the sale of the Special Warrants. The net proceeds to the Corporation from the Offering are approximately $4,158,554 after deducting the Agent’s Fee, the Advisory Fee and expenses in connection with the Offering and the estimated expenses of the Corporation in connection with the qualification for distribution of the Units. The Corporation intends to use the net proceeds from the Offering as set out in the table below:
| Milestone | Time period | Amount^(1)(2)^ | |
|---|---|---|---|
| **** | From | To | $ |
| Capital costs for facility upgrades and operating costs at Warehouse 2, HSCP Oregon, LLC’s 30,000 square foot indoor growing facility in Medford, Oregon operated by GR Distribution^(4)^ | March 2021 | June 30, 2021 | 504,832<br><br>(US$400,000) |
| Payment of a portion of amounts owing pursuant to outstanding convertible debentures | March 2021 | April 30, 2021 | 757,248^(3)^(US$600,000) |
| Capital costs to construct new outdoor farm in Medford Oregon^(5)^ | March 2021 | June 30 2021 | 631,040<br><br>(US$500,000) |
| Payment in connection with the exercise of the Canopy Purchase Option | March 2021 | August 6, 2021 | 327,600<br><br>(US$260,000) |
| Payment in connection with the exercise of the Canopy Purchase Option | March 2021 | February 6, 2022 | 126,000<br><br>(US$100,000) |
| Payment in connection with the exercise of the Canopy Purchase Option | March 2021 | February 6, 2022 | 252,000<br><br>(US$200,000) |
| General and administrative expenses, including office, banking, travel, and overheads, professional services, salaries and benefits | March 2021 | December 31, 2021 | $1,559,834<br><br>(US$1,235,923) |
| Total | $4,158,554(US$3,295,000) |
Notes:
| (1) | TheCorporation is not expecting the COVID-19 health crisis to have a material impact on the ability of the Corporation to completethe above listed business objectives and milestones within the expected time frame but if the health crisis significantly worsensunexpected delays could occur. |
|---|---|
| (2) | Theactual budgeted amounts are in United States dollars and converted to Canadian dollars at a rate of $1.26 equals US$1.00. |
| --- | --- |
| (3) | TheCorporation plans to use approximately $757,248 (US$600,000) of the net proceeds to reduce or retire indebtedness owing underconvertible debentures issued in August 2018. |
| --- | --- |
| (4) | Capitalcosts for facility upgrades are expected to include construction of a new dedicated vegetative room, which will include wall construction,lights, benches, HVAC, dehumidifiers, and other costs associated with constructing grow rooms. |
| --- | --- |
| (5) | Capitalcosts to construct a new outdoor farm are expected to include soil, pots, earthwork, fencing, security, labor, irrigation, andother capital costs. |
| --- | --- |
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Although the Corporation intends to expend the net proceeds from the Offering as set forth above, there may be circumstances where, for sound business reasons, a reallocation of funds may be deemed prudent or necessary and may vary materially from that set forth above. While actual expenditures may differ from the above amounts and allocations, the net proceeds will be used by the Corporation for facility upgrades and operating costs at Warehouse 2, repayment of outstanding indebtedness, constructing a new outdoor growing facility in Medford Oregon and for general corporate purposes.
The key business objectives of the Corporation in the near term are as follows:
| Objective | Time Period Event is to Occur | EstimatedCost($) |
|---|---|---|
| To complete facility upgrades (dehumidifiers, HVAC, etc.) and pay operating costs at Warehouse 2, HSCP Oregon, LLC’s 30,000 square foot indoor growing facility in Medford, Oregon operated by GR Distribution | Before the end of December 2021 | 504,832<br><br>(US$400,000)^(1)^ |
| To pay a portion of amounts owing pursuant to outstanding convertible debentures | Before April 30, 2021 | 757,248^(2)^(US$600,000) |
| To construct new outdoor farm in Medford Oregon | Before June 30 2021 | 631,040^(1)^(US$500,000) |
| Make payments in connection with the exercise of the Canopy Purchase Option when due. | Before February 6, 2022 | 706,765^(3)^(US$560,000) |
Notes:
| (1) | There are no significant events which must occur for the stated milestone to be completed, other than the completion of all critical activities in construction necessary for the completion of the overall construction milestone. |
|---|---|
| (2) | There are no significant events which must occur for the stated milestone to be completed. |
| --- | --- |
| (3) | The payments by GR Unlimited in respect of any exercise of the Canopy Purchase Option are dependent on the ability of Canopy Management to complete the acquisition of the 60% Golden Harvests Equity Interest, as discussed above. |
| --- | --- |
The key business objectives of the Corporation in the near term are as set out in the preceding table. While the Corporation believes that it has the skills and resources necessary to accomplish its stated business objectives, carrying on business in the cannabis sector has a number of inherent risks. See the risk factors described under “Risk Factors” herein and in the AIF for factors that may impact the timing and success of the Corporation’s planned activities.
Pending the expenditure described above, the Corporation intends to invest the net proceeds of the Offering in the Corporation’s bank accounts.
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FinancialResources and Estimates
The Corporation has had negative operating cash flows from operations for its financial reporting periods prior to its most recent three-month interim period ended on January 31, 2021. For such three-month period ended on January 31, 2021 and for its fiscal year ended October 31, 2020, the Corporation reported a total comprehensive loss of approximately $990,999 and $2.5 million, respectively. To the extent that the Corporation has negative cash flow in future periods, the Corporation may need to deploy a portion of its cash reserves to fund such negative cash flow. See “Risk Factors”.
As at March 22, 2021, the Corporation had working capital of approximately $324,599 (US$257,194) and cash on hand as at March 22, 2021 of approximately $5,042,676 (US$3,995,528), including the net proceeds from the Offering. Based on its currently planned use of its available funds, including the net proceeds of the Offering, as disclosed in this Prospectus, the Corporation expects to have sufficient available funds to continue operations for more than 12 months. Management of the Corporation has broad discretion in allocating the Corporation’s funds available to it from time to time, and the Corporation’s actual use of its available funds as disclosed in this Prospectus may vary depending on a number of factors, including the Corporation’s operating and capital needs from time to time and, in particular, as it deems appropriate to enable the Corporation to continue operations for such 12-month period and thereafter.
Management of the Corporation has determined that the Corporation’s current financial resources are sufficient to permit it to meet its short-term liquidity requirements. In particular, the Corporation plans to fund its operations for the coming 12 months using cash on hand and cash flows from its ongoing, regular business activities at its owned and managed operations, and potentially from other sources of capital, including possible lease financing utilizing its existing equipment, sales of marketable securities owned by the Corporation, and debt or equity financings, in each case, only if and to the extent available to the Corporation and determined by its directors to be in its best interests. The Corporation’s planned use of its available funds is based on a number of assumptions and is subject to significant risks, including, without limitation, risks associated with the Canopy Purchase Option and the related Golden Harvests Purchase Option and the amount and timing of the receipt of any amounts from Golden Harvests’ operations. Readers should carefully review the Use of Proceeds section of this Prospectus and should also read the discussions under the headings “Cautionary Statement Regarding Forward Looking Information” and “RiskFactors”, including under the heading “Canopy Purchase Option”.
The Corporation had negative cash flow from operations of $293,844 in its fiscal year ended October 31, 2020 and positive cash flow from operations of $123,405 in the three month period ended January 31, 2021. For the Corporation to maintain or increase its cash flows at or above this amount in future periods, it will need to generate and sustain increased revenue levels in these periods and achieve similar or improved operating margins. To the extent that the Corporation has negative operating cash flow in future periods, it may need to deploy some or all of the proceeds raised from the Offering differently than as currently planned and stated above to fund such negative cash flow and may also be required to seek additional sources of funds from other sources, if and to the extent required. See “Risk Factors – Negative Operating Cash Flow”.
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The Corporation’s estimated sources and uses of funds for the period commencing on March 1, 2021 and ending on February 28, 2022 are as follows:
| Source of Funds | US 000s |
|---|---|
| Cash on hand as at March 22, 2021 | |
| Net Operating Cash Flow | |
| Total Sources of Funds | |
| Use of Funds | |
| Capital Expenditures^(1)^ | |
| Debt Payments^(2)^ | |
| Acquisition Payments^(3)^ | |
| New Projects^(4)^ | |
| Partner Distributions^(5)^ | |
| Accounts Payable^(6)^ | |
| Cash on Hand as at February 28, 2022 |
All values are in US Dollars.
Notes:
| (1) | The Corporation plans to make capital expenditures of approximately US$1,509,000 related to its planned expansion of the cultivation capacity at its Michigan operations and for improvements at Warehouse 1 and Warehouse 2 in Oregon. |
|---|---|
| (2) | The Corporation plans to pay a total of approximately US$2,342,000 to satisfy all amounts owing under its convertible debentures due on November 1, 2021 and in connection with certain amounts payable on behalf of Canopy Management, LLC. |
| --- | --- |
| (3) | The Corporation plans to pay a total of approximately US$1,560,000 relating to its planned exercise of the Canopy Purchase Option and the related exercise of the Golden Harvests Purchase Option and for payments in connection with the completion of the HSCP Transaction. |
| --- | --- |
| (4) | The Corporation plans to make approximately US$1,200,000 of expenditures for construction and operating costs with respect to the Corporation’s planned new outdoor farm in Medford, Oregon. |
| --- | --- |
| (5) | The Corporation estimates that approximately US$1,700,000 will be distributed by Golden Harvests to the Golden Harvests Optionors with respect to their 40% ownership interest to be retained by them after the expected exercise by Canopy Management of the Golden Harvests Purchase Option. |
| --- | --- |
| (6) | The Corporation expects to expend approximately US$865,000 to satisfy the total amount of accounts payable expenses estimated to be incurred and payable in such period. |
| --- | --- |
The Corporation’s forecasted operating cash flows for the period commencing on March 1, 2021 and ending on February 28, 2022 are as follows:
| US 000s | |
|---|---|
| Gross Profit on Sales | |
| General and Administrative | |
| Operating Cash Flow |
All values are in US Dollars.
In preparing the estimated sources and uses of funds and forecasted operating cash flows set out in the above tables, the Corporation has made certain assumptions relating to its planned operations and projected results therefrom, some of which are based in whole or in part on events or circumstances which the Corporation does not control (including, for example, with respect to GR Unlimited’s planned exercise of the Canopy Purchase Option and the completion of various related transactions and agreements with and between other parties related thereto and described elsewhere in this Prospectus). The actual funds available to the Corporation, its use thereof and its cash flows during the stated period may differ significantly from those currently expected, planned or forecasted by the Corporation as set out in the above tables and elsewhere in this Prospectus. In addition, there can be no assurance that the actual time periods and the Corporation’s actual costs with respect its stated plans and objectives will not be longer or higher than currently expected.
40
The above estimated sources and uses of funds and cash flows forecasts are based on assumptions which may prove to be incorrect, including, but not limited to, the following assumptions:
| ● | the<br> Corporation’s production yield will improve modestly compared to previous years; |
|---|---|
| ● | the<br> Corporation will sell a combined 11,500 pounds of flower from operations in Oregon and<br> Michigan; |
| --- | --- |
| ● | the<br> Corporation will continue to sell exclusively flower and trim from its operations; |
| --- | --- |
| ● | the<br> Corporation’s product will be sold at prices consistent with pricing obtained in<br> recent years, subject to seasonal market shifts; |
| --- | --- |
| ● | the<br> Corporation’s revenue will continue to grow as the Corporation adds planned additional<br> capacity to its existing facilities; |
| --- | --- |
| ● | the<br> Corporation’s market share will increase as additional product is produced and<br> sold into the respective markets; |
| --- | --- |
| ● | the<br> Corporation’s cost of sales per product will remain consistent with its current<br> cost of sales per product; |
| --- | --- |
| ● | the<br> Corporation and or its applicable affiliates will receive all regulatory approvals necessary<br> to complete the HSPC Transaction; |
| --- | --- |
| ● | the<br> Corporation and or its applicable affiliates will receive all regulatory approvals necessary<br> to, and will complete the exercise of Canopy Purchase Option, and that it will receive<br> its forecasted revenue from Golden Harvests’ operations prior to such time; and |
| --- | --- |
| ● | the<br> Corporation’s forecasted general and administrative expenses (including sales and<br> marketing costs) will, in the aggregate, be consistent with recent levels, although decreased<br> in proportion to the revenue expected to be achieved by the Corporation. |
| --- | --- |
In addition, the above estimates and forecasts are subject to the material assumptions and risks disclosed in elsewhere in this Prospectus, including the risk factors disclosed herein and in the documents incorporated by reference, including the Corporation’s AIF.
PLANOF DISTRIBUTION
This Prospectus is being filed in the Provinces of British Columbia, Alberta, Nova Scotia and Ontario to qualify the distribution of an aggregate of 23,162,579 Unit Shares and 23,162,579 Warrants (including the Unit Shares and Warrants issuable pursuant to the Penalty Provision, described below) issuable upon the exercise or deemed exercise of 21,056,890 Special Warrants.
On March 5, 2021, the Corporation completed the Offering of 21,056,890 Special Warrants pursuant to prospectus exemptions under applicable securities legislation in each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario (and in jurisdictions outside of Canada in compliance with laws applicable therein), on a private placement basis at the Offering Price per Special Warrant, a portion of which was sold through the Agent pursuant to the Agency Agreement. The gross proceeds of the Offering were $4,737,800. Pursuant to the Agency Agreement the Agent agreed to offer for sale Special Warrants in the Qualifying Jurisdictions, and in certain other jurisdictions outside Canada, on a commercially reasonable best efforts private placement basis at the Offering Price. The Offering Price was determined by arm’s length negotiation between the Corporation and the Agent.
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The Special Warrants were issued pursuant to the terms of the Special Warrant Indenture between the Corporation and Capital Transfer. Each Special Warrant initially entitled its holder to receive, upon exercise or deemed exercise, at no additional cost to the holder, one Unit, each Unit being comprised of one Unit Share and one Warrant. In accordance with the terms of the Special Warrants, since the Corporation did not receive a receipt for the final Prospectus on or before the Penalty Date, being April 4, 2021, each holder of a Special Warrant is now entitled to receive, without payment of additional consideration, an additional number of Units equal to 10% of the number of Units originally issuable upon the exercise or deemed exercise of the Special Warrants, resulting in each Special Warrant being exercisable for 1.10 Units (the “Penalty Provision”). Accordingly, this Prospectus qualifies the distribution of up to an aggregate of 21,056,890 Unit Shares and 21,056,890 Warrants originally issuable upon the exercise or deemed exercise of the Special Warrants, and 2,105,689 Unit Shares and 2,105,689 Warrants issuable pursuant to the Penalty Provision.
Each Special Warrant shall be deemed exercised on behalf of, and without any required action on the part of, the holder thereof, on the Qualification Date, being the earlier of: (i) July 6, 2021; and (ii) the third business day after a receipt is issued for a final short form prospectus qualifying the distribution of the Unit Shares and Warrants issuable upon the exercise of the Special Warrants by the Canadian securities regulatory authorities in each of the Qualifying Jurisdictions.
All transfers or exercises of Special Warrants issued in the Brokered Offering conducted through the non-certificated inventory system maintained by CDS shall occur in accordance with CDS’ rules and procedures. The rights of a holder of Special Warrants issued pursuant to the Brokered Offering shall be exercised only through CDS and the CDS participants and shall be limited to those established by law and agreements between such holders and CDS and the CDS participants upon instructions from the CDS participants. Each of Capital Transfer and the Corporation may deal with CDS for all purposes as the authorized representative of the respective holders of Special Warrants and such dealing with CDS shall constitute satisfaction or performance, as applicable, of their respective obligations under the Special Warrant Indenture.
The Special Warrant Indenture provides that in the event of certain alterations of the outstanding Common Shares, including any subdivision, consolidation or reclassification, an adjustment shall be made to the terms of the Special Warrants such that the holders shall, upon exercise of the Special Warrants following the occurrence of any of those events, be entitled to receive the same number and kind of securities that they would have been entitled to receive had they exercised their Special Warrants prior to the occurrence of those events. No fractional Unit Shares or Warrants will be issued upon the exercise of the Special Warrants. The holding of Special Warrants does not make the holder thereof a shareholder of the Corporation or entitle the holder to any right or interest granted to shareholders. The Special Warrant Indenture provides that all holders of Special Warrants shall be bound by any resolution passed at a meeting of the holders of Special Warrants held in accordance with the provisions of the Special Warrant Indenture. The foregoing summary of certain provisions of the Special Warrant Indenture is qualified in its entirety by reference to the provisions of the Special Warrant Indenture, which is available for review under the Corporation’s profile at www.sedar.com.
The Warrants will be created and issued pursuant to the Warrant Indenture between the Corporation and Capital Transfer, as warrant agent thereunder. Each Warrant will entitle the holder to acquire, subject to adjustment in certain circumstances, one Warrant Share at an exercise price of $0.30 per Warrant Share at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023 after which time the Warrants will expire and be void and of no value. The Corporation does not intend to apply to list the Warrants on the CSE. This may affect the trading price of the securities in the secondary market, the transparency and availability of trading prices, the liquidity of the securities and the extent of issuer regulation. See “Description of Securities Being Distributed”.
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Pursuant to the Agency Agreement, the Corporation paid to the Agent a cash fee of $253,745.63 (excluding the reimbursement for certain expenses incurred in connection with the Offering by the Agent), representing 7.0% of the gross proceeds of the Brokered Offering from purchasers in the Qualifying Jurisdictions, subject to a reduced fee of up to 3.5% for Special Warrants sold by the Agent to President’s List purchasers. In addition, the Corporation paid the Agent the Advisory Fee in the amount of $25,500. The Agent will receive no other fees in connection with the distribution of the Unit Shares or Warrants under this short form prospectus.
As additional compensation, the Corporation issued to the Agent (A) 1,127,758 Broker Warrants exercisable to acquire 1,127,758 Compensation Options for no additional consideration; and (B) 113,500 Advisory Warrants exercisable to acquire 113,500 Compensation Options for no additional consideration. Each Compensation Option will be exercisable to acquire one Compensation Unit, comprised of one Compensation Share and one Compensation Warrant at the Offering Price at any time prior to 5:00 p.m. (Toronto time) on March 5, 2023. Each Compensation Warrant shall entitle the holder thereof to purchase one Compensation Warrant Share at a price of $0.30 at any time before 5:00 p.m. (Toronto time) on March 5, 2023, subject to adjustment in certain events. This Prospectus qualifies the distribution of the Compensation Options.
The Corporation has agreed to reimburse the Agent for certain expenses related to the Offering. There are no payments in cash, securities or other consideration being made, or to be made, to a promoter, finder or any other person or company in connection with the Offering other than the payments to be made to the Agent in accordance with the terms of the Agency Agreement.
The Corporation has provided notice to the CSE to list the Unit Shares, the Warrant Shares, the Compensation Shares and the Compensation Warrant Shares on the CSE. Such listing will be subject to the fulfillment of all of the listing requirements of the CSE. On February 10, 2021, the last trading day before the announcement of the Offering, the closing price of the Common Shares on the CSE was $0.28 per Common Share. On April 22, 2021, the last trading day before the filing of this Prospectus, the closing price of the Common Shares on the CSE was $0.22 per Common Share.
The Brokered Offering was conducted through the non-certificated inventory system maintained by CDS Clearing and Depository Services Inc. (“CDS”) and the Special Warrants issued pursuant to the Brokered Offering were registered and deposited with CDS on the Closing Date in electronic form. Other than for Special Warrants sold pursuant to the non-brokered portion of the Offering, which will be represented by certificates, the Unit Shares and Warrants to be issued upon exercise or deemed exercise of the Special Warrants and the Warrant Shares to be issued upon exercise of the Warrants will be registered and deposited in the non-certificated inventory system of CDS and a purchaser of the Special Warrants will not receive a definitive certificate representing the Unit Shares, Warrants or Warrant Shares.
The Corporation has agreed that, during the period commencing on the Closing Date and ending 120 days after the Closing Date, it will not, directly or indirectly, without the prior written consent of the Agent, such consent not to be unreasonably withheld or delayed, sell, agree or offer to sell, authorize, issue, announce or grant any option for the sale of, or otherwise dispose of any Common Share or related financial instruments or securities convertible or exchangeable into Common Shares (including, without limitation, Special Warrants), other than in conjunction with: (i) the issuance of Common Shares in connection with the exercise of any convertible securities, options, warrants or performance share units of the Corporation outstanding as of the Closing Date, (ii) the issuance of options to acquire Common Shares pursuant to any stock option plan or other equity based compensation plan of the Corporation, as each such plan may be amended from time to time, and the issuance of Common Shares on the exercise or vesting thereof, (iii) the issuance of stock-based compensation arrangements of the Corporation pursuant to any stock based compensation plan of the Corporation, as each such plan may be amended from time to time, and (iv) the issuance of securities pursuant to the Offering and on any exercise of such securities, as applicable.
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Lock-up agreements were entered into on the Closing Date in favour of the Agent in connection with securities of the Corporation held by directors and officers of the Corporation, providing that until the earlier of 120 days following the First Closing Date, each will not, directly or indirectly, offer, sell, contract to sell, lend, swap, or enter into any other agreement to transfer the economic consequences of, or otherwise dispose of or deal with, or publicly announce any intention to offer, sell, contract to sell, grant or sell any option to purchase, hypothecate, pledge, transfer, assign, purchase any option or contract to sell, lend, swap or enter into any agreement to transfer the economic consequences of, or otherwise dispose of or deal with, whether through the facilities of a stock exchange, by private placement or otherwise, any Common Shares or other securities of the Corporation held by them, directly or indirectly, unless: (i) they obtain the prior written consent of the Agents such consent not to be unreasonably withheld or delayed; or (ii) there occurs a take-over bid, plan of arrangement, amalgamation or similar transaction involving a change of control of the Corporation.
The Unit Shares and Warrants have not been and will not be registered under the U.S. Securities Act or any state securities laws of the United States and, subject to certain exceptions, may not be offered or sold in the United States. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby within the United States or to, or for the account or benefit of, U.S. Persons (as such term is defined in the U.S. Securities Act). None of the Special Warrants, Unit Shares and Warrants have been or will be registered under the U.S. Securities Act or the securities laws of any state of the United States and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. Persons, except in transactions exempt from the registration requirements of the U.S. Securities Act and applicable state securities laws.
The Corporation has agreed, pursuant to the Agency Agreement, to indemnify the Agent and their affiliates and directors, officers, employees, shareholders, partners, advisors and agents and each other person, if any, controlling the Agent or their affiliates and against certain liabilities and expenses, including liabilities under Canadian securities legislation in certain circumstances or to contribute to payments the Agent may have to make because of such liabilities.
RISKFACTORS
Investment in securities of Grown Rogue involves a significant degree of risk and should be considered speculative due to the nature of Grown Rogue’s business and the present stage of its development. Prospective purchasers of Common Shares should carefully consider the risk factors set out under the heading “Risk Factors” starting on page 33 of the AIF incorporated herein by reference, as well as other risk factors relating to the Offering set out below and the other information contained in this Prospectus and documents incorporated by reference herein, including the historical financial statements of the Corporation and the notes thereto, before acquiring any of the securities distributed under this Prospectus. See “Documents Incorporated by Reference”. Such risk factors could materially affect the Corporation’s future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to the Corporation.
RisksRelated to the Corporation
NegativeOperating Cash Flow
The Corporation is an early-stage company and it had not generated positive cash flow from operations in any financial reporting period prior to its most recently completed interim period ended January 31, 2021. While the Corporation is devoting significant resources to its cannabis operations in the United States, there can be no assurance that it will generate positive cash flow from operations in the future. In addition, the Corporation has incurred losses from operations to date, and reported a total comprehensive loss of $990,999 and $2.5 million for the three month period ended on January 31, 2021 and for its fiscal year ended October 31, 2020, respectively. To the extent that the Corporation has negative cash flow in future periods, the Corporation may need to deploy a portion of its cash reserves to fund such negative cash flow and/or seek to obtain additional funds through one or more debt or equity financings or from other sources, which funds may not be available to the Corporation on favourable terms or at all.
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PriceFluctuations: Share Price Volatility
In recent years, the securities markets in the United States and Canada and throughout the world have experienced a high level of price and volume volatility, and the market prices of securities of many companies, including the Corporation, have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. Further, market prices for securities of cannabis companies historically have been volatile and future developments concerning the Corporation or its industry may have a significant impact on the market price of the Common Shares. There can be no assurance that continual fluctuations in the price of the Common Shares will not occur.
Discretionin the Use of Proceeds
The Corporation currently intends to allocate the net proceeds received from the Offering as described under “Use of Proceeds”. However, management of the Corporation will have discretion concerning the use of proceeds of the Offering as well as the timing of any expenditures. As a result, investors will be relying on the judgment of management as to the application of the proceeds of the Offering. Management may use the net proceeds of the Offering in ways that an investor may not consider desirable. The results and effectiveness of the application of the proceeds are uncertain. If the proceeds are not applied effectively, the Corporation’s results of operations may suffer.
Securitiesof the Corporation and Dilution
The Offering Price was determined by negotiation between the Corporation and the Agent and bears no relationship to earnings, book value or other valuation criteria. The Corporation plans to use the proceeds of the Offering to carry out its activities as described under “Use of Proceeds”, but to further such activities, the Corporation may require additional funds and it is likely that, to obtain the necessary funds, the Corporation will have to sell additional securities including, but not limited to, its Common Shares or securities convertible into Common Shares, the effect of which could result in a substantial dilution of the present equity interests of the Corporation’s shareholders.
Enforceabilityof Foreign Judgments
The Corporation’s material subsidiaries are incorporated, continued or otherwise organized under the laws of jurisdictions in the United States of America. Some or all of the officers and directors of the Corporation and these subsidiaries reside outside of Canada. Some or all of the assets of those persons and the Corporation’s material subsidiaries are located outside of Canada. It may not be possible for investors to collect from these persons and subsidiaries or enforce judgments obtained in Canada predicated on the civil liability provisions of Canadian securities legislation against the Corporation’s material subsidiaries and these officers and directors of the Corporation. In addition, it may not be possible for investors or any other person or entity to assert claims under Canadian securities laws or otherwise in original actions instituted in a foreign jurisdiction. Consequently, investors may be effectively prevented form pursing remedies against the Corporation under Canadian securities laws or otherwise.
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PublicHealth Crises such as the COVID-19 Pandemic and other Uninsurable Risks
Events in the financial markets have demonstrated that businesses and industries throughout the world are very tightly connected to each other. General global economic conditions seemingly unrelated to the Corporation or to the cannabis industry, including, without limitation, interest rates, general levels of economic activity, fluctuations in the market prices of securities, participation by other investors in the financial markets, economic uncertainty, national and international political circumstances, natural disasters, or other events outside of the Corporation’s control may affect the activities of the Corporation directly or indirectly. The Corporation’s business, operations and financial condition could also be materially adversely affected by the outbreak of epidemics or pandemics or other health crises. For example, in late December 2019, a novel coronavirus (“COVID-19”) originated, subsequently spread worldwide and on March 11, 2020, the World Health Organization declared it was a pandemic, which is ongoing and is expected to continue for an uncertain period. The risks of public health crises such as the COVID-19 pandemic to the Corporation’s business include without limitation, the ability to gain access to government officials, the ability to raise funds, employee health, workforce productivity, increased insurance premiums, limitations on travel, the availability of industry experts and personnel, disruption of the Corporation’s supply chains and other factors that will depend on future developments beyond the Corporation’s control. In particular, the continued spread of the coronavirus globally, prolonged restrictive measures put in place in order to control an outbreak of COVID-19 or other adverse public health developments could materially and adversely impact the Corporation’s business could materially slow down or the Corporation could be required to suspend its operations for an indeterminate period. There can be no assurance that the Corporation’s personnel will not ultimately see its workforce productivity reduced or that the Corporation will not incur increased medical costs or insurance premiums as a result of these health risks. In addition, the coronavirus pandemic or the fear thereof could adversely affect global economies and financial markets resulting in volatility or an economic downturn that could have an adverse effect on the Corporation’s future prospects. Epidemics such as COVID-19 could have a material adverse impact on capital markets and the Corporation’s ability to raise sufficient funds to finance the ongoing development of its business. All of these factors could have a material and adverse effect on the Corporation’s business, financial condition and results of operations. The extent to which COVID-19 impacts the Corporation’s business, including its operations and the market for its securities, will depend on future developments, which are highly uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the coronavirus outbreak. It is not always possible to fully insure against such risks, and the Corporation may decide not to insure such risks as a result of high premiums or other reasons. Should such liabilities arise, they could reduce or eliminate any future profitability and result in increasing costs and a decline in the value of the Common Shares of the Corporation. Even after the COVID-19 pandemic is over, the Corporation may continue to experience material adverse effects to its business, financial condition and prospects as a result of the continued disruption in the global economy and any resulting recession, the effects of which may persist beyond that time. The COVID-19 pandemic may also have the effect of heightening other risks and uncertainties disclosed and described in this Prospectus and the AIF. To date, the COVID-19 crisis has not materially impacted the Corporation’s operations, financial condition, cash flows and financial performance. In response to the outbreak, the Corporation has instituted operational and monitoring protocols to ensure the health and safety of its employees and stakeholders, which follow the advice of local governments and health authorities where it operates. The Corporation has adopted a work from home policy where possible. The Corporation continues to operate effectively working remotely. The Corporation will continue to monitor developments of the pandemic and continuously assess the pandemic’s potential further impact on the Corporation’s operations and business.
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NoMarket for Warrants
There is currently no market through which the Warrants may be sold. Accordingly, the purchasers may not be able to resell the securities qualified under this Prospectus. This may affect the pricing of the Warrants in the secondary market, the transparency and availability of trading prices, the liquidity of the Warrants, and the extent of issuer regulation.
Holdersof Warrants Have no Rights as a Shareholder
Until a holder of Warrants acquires Warrant Shares upon the due exercise of Warrants, such holder will have no rights with respect to the Warrant Shares underlying such Warrants. Upon due exercise of such Warrants, such holder will be entitled to exercise the rights of a holder of Common Shares only as to matters for which the record date occurs after the exercise date.
HSCPTransaction
The Corporation’s subsidiary, GR Distribution, proposes to complete the HSCP Transaction in accordance with the Asset Purchase Agreement as described elsewhere in this Prospectus. The Corporation cannot guarantee that the HSCP Transaction will close in the near future, or at all, and even if closed, that the Corporation will achieve the expected benefits of the transaction. See “Summary Description of the Business - Recent Developments - HSCP Transaction” for additional information regarding the HSCP Transaction.
The completion of the HSCP Transaction is subject to certain conditions, including, among other things, that the License Transfers shall have occurred and GR Distribution shall have received the OLCC Approval. There is no guarantee that the OLCC will approve the License Transfers or provide the OLCC Approval in the near future, or at all. Additionally, the regulatory approval processes may take a lengthy period of time to complete, which could delay closing of the HSCP Transaction.
Certain of these conditions, including with respect to the License Transfers and the OLCC Approval, are outside of the Corporation’s control. There can be no certainty, and the Corporation cannot provide any assurance, that all conditions precedent to the consummation of the HSCP Transaction will be satisfied or waived, or, if satisfied or waived, when they will be satisfied or waived and, accordingly, the HSCP Transaction may not be completed within the next 12-18 months as anticipated, or at all. If, for any reason, the HSCP Transaction is not completed or its completion is materially delayed and/or the Asset Purchase Agreement is terminated, the market price of the Common Shares may be materially adversely affected. In such events, the Corporation’s business, financial condition or results of operations could also be subject to various material adverse consequences.
Even if GR Distribution does close the HSCP Transaction, the intended benefits of the HSCP Transaction to the Corporation may not be realized. The HSCP Transaction poses risks for the Corporation’s ongoing operations, including, among others, that: (i) any funds used by the Corporation in connection with the HSCP Transaction or the Business (including the portion of the proceeds of the Offering planned to be used for facility upgrades and operating costs at Warehouse 2) will not otherwise be available for use in its other operations and may not be recoverable or produce any return on investment, especially if the completion of the HSCP Transaction is delayed or does not occur; (ii) there may be costs and expenses associated with any undisclosed or potential liabilities; (iii) the Business may not perform as the Corporation anticipates; and (iv) unforeseen difficulties may arise in integrating or operating the Business. The Corporation cannot assure that the HSCP Transaction will be accretive to it in the near term or at all. Furthermore, if the Corporation fails to realize the intended benefits of HSCP Transaction, the market price of the Common Shares could decline to the extent that the market price reflects those benefits.
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CanopyPurchase Option
The Corporation’s subsidiary, GR Unlimited, proposes to make the payments to exercise the Canopy Purchase Option when due and at such times as the payments are required to be made by Canopy Management to exercise the Golden Harvests Purchase Option and complete the acquisition of the 60% Golden Harvests Equity Interest as described elsewhere in this Prospectus. The Corporation cannot guarantee that GR Unlimited will make such payments to Canopy Management at such times or at all, and even if such payments are made, any closing of such acquisition and any closing of the related acquisition by GR Unlimited of the 87% Canopy Management Equity Interest would remain subject to obtaining all necessary regulatory approvals for such acquisitions. Further, even if such closings occur the Corporation cannot guarantee that it will achieve the expected benefits of the transactions. See “SummaryDescription of the, Business - Recent Developments - Canopy Purchase Option” for additional information regarding the Canopy Purchase Option.
The completion of the acquisition of the 87% Canopy Management Equity Interest by GR Unlimited is subject to certain conditions, including, among other things, regulatory approval. There is no guarantee that such approval will be obtained in a timely manner or at all. Such approval is outside of the Corporation’s control. Even if GR Unlimited does close the acquisition of the 87% Canopy Management Equity Interest, the intended benefits of the acquisition of the 87% Canopy Management Equity Interest to the Corporation may not be realized, particularly if Canopy Management does not complete the acquisition of the 60% Golden Harvests Equity Interest. In addition, even if Canopy Management completes the acquisition of the 60% Golden Harvests Equity Interest, the acquisition of the 87% Canopy Management Equity Interest poses risks for the Corporation’s ongoing operations, including, among others, that any funds used by the Corporation in connection with the acquisition of the 87% Canopy Management Equity Interest will not otherwise be available for use in the Corporation’s other operations and may not be recoverable or produce any return on investment, especially if the completion of the acquisition of the 87% Canopy Management Equity Interest is delayed or does not occur, including where GR Unlimited has made payments to Canopy Management to facilitate its exercise of the Golden Harvests Purchase Option and does not receive the benefits therefrom.
Further, even if Canopy Management exercises the Golden Harvests Purchase Option and assumes control of Golden Harvests, there is a risk that the amount and timing of any distributions by Golden Harvests of operating profits from Golden Harvests will be less and/or later than anticipated by the Corporation, and that such distributions may not be made at all. In addition, there is a risk that some or all of any operating profits of Golden Harvests that are distributed to Canopy Management prior to any exercise by GR Unlimited of the Canopy Purchase Option, will not in turn be conveyed by Canopy Management to GR Unlimited through one or more management agreements and/or licensing agreements to be entered into by such parties as expected. Given that such management agreements and/or licensing agreements have not been finalized and are planned to be entered into at a later date, there is a risk that these agreements will not be concluded and that the Corporation may not receive the amounts distributed to Canopy Management from the Golden Harvests operations prior to its exercise of the Canopy Purchase Option, as agreed by the Corporation and Obie Strickler and described elsewhere in this Prospectus.
CertainRisks Related to the Cannabis Industry
Cannabisremains illegal under U.S. federal law
Cannabis is illegal under federal law. Although the Corporation’s cannabis-related activities are permitted by state law in the states where the Corporation engages in and intends to engage in business, these activities remain illegal under federal law. Cannabis remains a Schedule 1 controlled substance under the federal law, and the penalties for violating the CSA are very serious and, depending on the quantity of cannabis involved, may include criminal penalties of up to twenty (20) years in prison and/or a fine of up to US$2 million. In addition, the federal government can seize and seek the civil forfeiture of the real or personal property used to facilitate the sale of cannabis as well as the money or other proceeds received in connection with such sale.
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The DOJ has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity. In the event the department of justice reverses stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to the Corporation and its revenue and profits.
Federalregulation of cannabis in the United States
Unlike in Canada which has federal legislation uniformly governing the cultivation, distribution, sale and possession of medical cannabis under the Cannabis Act (Canada), investors are cautioned that in the United States, cannabis is largely regulated at the state level. To date, a total of 35 states, in addition to Washington D.C., Puerto Rico, the U.S. Virgin Islands, the Northern Mariana Islands and Guam have legalized some form of whole-plant cannabis cultivation, sales, and use for certain medical and/or adult-use purposes. Thirteen (13) additional states have legalized low- THC/high-CBD extracts for select medical conditions.
Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis continues to be categorized as a Schedule 1 controlled substance under the CSA in the United States and as such, remains illegal under U.S. federal law.
As a result of the conflicting views between state legislatures and the federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum addressed to all United States district attorneys acknowledging that, notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several states had enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined the priorities for the DOJ relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the DOJ never provided specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard. In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority.
In 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit. However, in 2018, Mr. Sessions issued the Sessions Memorandum, which rescinded and superseded the Cole Memorandum. The Sessions Memorandum stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to cannabis activities as set out in chapter 9-27.000 of the U.S. Attorneys’ Manual. The inconsistency between federal and state laws and regulations is a major risk to the Corporation’s business.
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As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. However, the Cole Memorandum’s principles remain well respected, and the federal government under Sessions’ tenure prosecuted no state law compliant entities. Sessions resigned in late 2018. The new Attorney General William Barr testified in his confirmation hearing that he will not upset “settled expectations”, “investments”, or other “reliance interest[s]” arising as a result of the Cole Memorandum, and that he does not intend to use federal resources to enforce federal cannabis laws in states that have legalized cannabis “to the extent people are complying with the state laws.”^2^
Medical cannabis is currently further protected against enforcement by enacted legislation from United States Congress in the form of the Blumenauer-Farr Amendment, which similarly prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level, subject to Congress restoring such funding. If such funding were ever restored, actions which were previously protected could be subject to prosecution if they are within the statute of limitations.
Due to the dual sovereign nature of American government, the federal government can assert criminal violations of U.S. federal law despite state law. There have not been publicized instances of any state-legal cannabis operations being prosecuted absent claims that the operation is also violating state law. Nonetheless, the level of prosecutions of state-legal cannabis operations is entirely unknown, and the current administration is hostile to legal cannabis. If the DOJ policy under Attorney General William Barr were to change course and aggressively pursue financiers or equity owners of cannabis-related business, and United States Attorneys followed such DOJ policies through pursuing prosecutions, then the Corporation could face (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries, (ii) the arrest of its employees, directors, officers, managers and investors, and charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the CSA by virtue of providing financial support to cannabis companies that service or provide goods to state-licensed or permitted cultivators, processors, distributors, and/or retailers of cannabis; and/or (iii) barring employees, directors, officers, managers and investors who are not U.S. citizens from entry into the United States for life.
The DOJ under the current administration or an aggressive federal prosecutor could allege that the Corporation and its Board of Directors and, potentially its shareholders, “aided and abetted” violations of U.S. federal law by providing finances and services to its portfolio cannabis companies. Under these circumstances, it is possible that the federal prosecutor would seek to seize the assets of the Corporation, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing financing or services. In these circumstances, the Corporation’s operations would cease, shareholders may lose their entire investment and directors, officers and/or shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, may be sent to federal prison.
The Blumenauer-Farr Amendment was included in the fiscal year 2018 budget passed on March 23, 2018 and the consolidated appropriations bill signed into legislation in February 2019. The Blumenauer-Farr Amendment was also included in the consolidated appropriations bill signed into legislation by President Trump on December 20, 2019 and remains in effect until September 30, 2020. On October 1, 2020, the Amendment was renewed through the signing of a stopgap spending bill, effective through December 11, 2020. Should the Blumenauer-Farr Amendment not be renewed upon expiration in subsequent spending bills there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with state law. Such potential proceedings could involve significant restrictions being imposed upon the Corporation or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Corporation’s business, revenues, operating results and financial condition as well as the Corporation’s reputation, even if such proceedings were concluded successfully in favour of the Corporation.
^2^See Attorney General William Barr Confirmation Hearing, available at https://www.c-span.org/video/?456626-1/attorney- general-nominee-william-barr-confirmation-hearing.
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Additionally, there can be no assurance as to the position any new administration may take on cannabis and a new administration could decide to enforce the U.S. federal laws strongly. Any enforcement of current U.S. federal laws could cause significant financial damage to the Corporation and its shareholders. Further, future presidential administrations may want to treat cannabis differently and potentially enforce the U.S. federal laws more aggressively.
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 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 Corporation, including its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis 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.
Blumenauer-FarrAmendment
The Blumenauer-Farr Amendment, as discussed above, prohibits the DOJ from spending funds appropriated by Congress to enforce the tenets of the CSA against the medical cannabis industry in states which have legalized such activity. This amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. The Blumenauer-Farr Amendment will expire with the Fiscal Year 2021 on September 30, 2021. At such time, the Corporation expects it to be included in the Fiscal Year 2022 omnibus appropriations package or a continuing budget resolution, but its inclusion or non-inclusion, as applicable, is subject to political changes.
U.S.state regulatory uncertainty
The rulemaking process for cannabis operators at the state level in any state will be ongoing and result in frequent changes. As a result, a compliance program is essential to manage regulatory risk. All operating policies and procedures implemented in the operation will be compliance-based and derived from the state regulatory structure governing ancillary cannabis businesses and their relationships to state-licensed or permitted cannabis operators, if any. Notwithstanding the Corporation’s efforts, regulatory compliance and the process of obtaining regulatory approvals can be costly and time-consuming. No assurance can be given that the Corporation will receive the requisite licenses, permits or cards to operate its businesses.
In addition, local laws and ordinances could restrict the Corporation’s business activity. Although legal under the laws of the states in which the Corporation’s business will operate, local governments have the ability to limit, restrict, and ban cannabis businesses from operating within their jurisdiction. Land use, zoning, local ordinances, and similar laws could be adopted or changed, and have a material adverse effect on the Corporation’s business. It is possible that laws or regulations may be enacted in the future that will be directly applicable to the Corporation’s business. The Corporation predict the nature of any future laws, regulations, interpretations or applications, nor can the Corporation determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on the Corporation’s business
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The Corporation is aware that multiple states are considering special taxes or fees on businesses in the cannabis industry. It is a potential yet unknown risk at this time that other states are in the process of reviewing such additional fees and taxation. This could have a material adverse effect upon the Corporation’s business, results of operations, financial condition or prospects.
Potentialre-classification of Cannabis in the United States
If cannabis is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical benefits of cannabis would most likely be improved; however, rescheduling cannabis may materially alter enforcement policies across many federal agencies, primarily the FDA. The FDA is responsible for ensuring public health and safety through regulation of food, drugs, supplements, cosmetics and other similar products, pursuant to its enforcement authority set forth in the United States Federal Food Drug and Cosmetic Act (the “FDCA”). The FDA’s responsibilities include regulating the ingredients, as well as the marketing and labeling, of drugs sold in interstate commerce. Because cannabis is federally illegal to produce and sell, and because it has no federally recognized medical uses, the FDA has historically deferred enforcement related to cannabis to the Drug Enforcement Administration (“DEA”); however, the FDA has enforced the FDCA with regard to hemp-derived products, especially CBD, sold outside of state-regulated cannabis businesses.
If cannabis were to be rescheduled to a federally controlled, yet legal, substance, the FDA would likely play a more active regulatory role. In the event that cannabis becomes subject to FDA regulation, the pharmaceutical industry may directly compete with state-regulated cannabis businesses for market share, and the pharmaceutical industry may urge the DEA, the FDA, and others to enforce the CSA and FDCA against businesses that comply with state but not federal law. The potential for multi-agency enforcement could threaten or have a materially adverse effect on existing cannabis businesses whose operations are compliant with applicable state laws, including the Corporation.
Additionally, the FDA may issue rules and regulations including good manufacturing practices, related to the growth, cultivation, harvesting and processing of medical cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where medical-use cannabis is grown register with the FDA and comply with certain federally prescribed regulations. In the event that some or all of these regulations are imposed, the impact would be on the cannabis industry is unknown, including what costs, requirements and possible prohibitions may be enforced. If the Corporation is unable to comply with the regulations or registration as prescribed by the FDA it may have an adverse effect on the Corporation’s business, operating results and financial condition.
UnitedStates federal and state law inconsistencies
Ultimately, in the absence of an official policy statement from the Trump Administration, the position of the federal government on state-level legalization of adult-use and medical cannabis remains unclear. The U.S. Attorney General has the authority to instruct federal prosecutors to prosecute businesses and individuals engaged in the production, processing and sale of cannabis. However, on December 20, 2019, President Trump signed into law the “Consolidated Appropriations Act, 2020”, which provides that the Department of Justice may not use any funds made available under the Appropriations Act to prevent the implementation of medical marijuana laws by various states and territories. This provision is applicable only to medical marijuana laws, and not adult-use laws. This distinction, along with the absence of an official policy by the Trump Administration could result in the inability of the Corporation to conduct its business, as well as criminal and/or civil actions against the Corporation, its directors, officers, employees and investors, as well as other participants in the cannabis industry. Accordingly, these are substantial risks and there is no guarantee that the Corporation will be successful in operating without interference or prohibition by the federal government.
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Failureof cannabis legislation to pass in certain states
The Corporation’s business model depends on the legalization of cannabis, for medical and/or adult-use, at the state level. It is possible that legislation in certain states could fail to obtain the necessary votes and fail to pass. Such inability for the state to pass such legislation could materially impact the Corporation’s returns. If a state passes legislation to legalize cannabis for medical and/or adult-use, the state may subsequently pass legislation to implement the law and potentially address any details not addressed in the legalizing statute or constitutional amendment itself. It is possible that such implementing legislation could be drafted in such a way as to make the Corporation’s operations more challenging and costly.
Federalcannabis law pre-emption
It is possible that the federal government could pass legislation legalizing cannabis for medical and/or adult-use in the future. Such federal legislation would preempt similar legislation, and/or similar legalization efforts, including existing state laws. The Corporation’s operations could be subject to new federal laws and regulations, which are currently unknown and could have a material adverse effect upon the Corporation’s business, results of operations, financial condition or prospects.
Prosecutionof the Corporation’s directors, officers, employees and investors
The Corporation, directly or through subsidiary or affiliated business entities, is involved in the cannabis market. Cannabis is classified federally as a Schedule I narcotic. While cannabis could be re-scheduled under the CSA, no such action has been taken as of the date of this Prospectus. Accordingly, it is currently a felony to grow, cultivate, distribute, sell, or use cannabis. As a result, the Corporation may be deemed to be aiding and abetting illegal activities through its activities and the services that it provides. In addition, it is possible that investors of the Corporation could be subject to section 356 of the USA Patriot Act, which amended the Bank Secrecy Act to require broker-dealers to monitor for, and report, suspicious activity (also known as “SAR” reporting). As a result, the Corporation may be subject to actions by law enforcement authorities, which would materially and adversely affect its business.
Extensiveregulation and taxation
The Corporation’s services and customers are expected to continue to be subject to federal, state, county, local and other regulations that are subject to change without notice. In addition, there may be other legal, tax and/or regulatory changes that the Corporation may or may not be able to foresee that may materially affect the Corporation. The process of complying with any regulations that may be imposed could, among other unknown risks, take a significant period of time and require the expenditure of substantial resources.
Highapplication and registration fees
Licenses may be required for the Corporation to operate in regulated cannabis markets in certain states. Increasingly, states and many cities and counties are imposing costly application and licensing fees. These fees may prevent the Corporation from being able to operate in desirable locations. In addition, the costs may prevent other small businesses from opening and may reduce the Corporation’s customer base in those states.
53
Restrictedaccess to banking and ability to access public and private capital
In February 2014, FinCEN issued the FinCen Memorandum outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the Cole Memorandum and states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a SAR in connection with all cannabis- related banking activities by any client of such financial institution, in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories – cannabis limited, cannabis priority, and cannabis terminated – based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. Despite the foregoing, most banks do not accept deposit funds from state-sanctioned cannabis businesses. As a result, businesses involved in the cannabis industry in the U.S. often have difficulty accessing the U.S. banking system and traditional financing sources.
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 Corporation may have limited or no access to banking or other financial services in the United States. In addition, federal money laundering statutes and Bank Secrecy Act regulations discourage financial institutions from working with any organization that sells a controlled substance, regardless of whether the state it resides in permits cannabis sales. The inability or limitation in the Corporation’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 Corporation to operate and conduct its business as planned or to operate efficiently.
While the Corporation may not be able to obtain bank financing in the U.S. or financing from U.S. federally regulated entities, it does currently have access to equity financing through private markets in Canada and the US. The Corporation has, and expects to continue to have, access to equity and debt financing from the Prospectus exempt (private placement) markets in Canada and the U.S. The Corporation also has relationships with sources of private capital that could be investigated at a higher cost of capital.
Lackof access to U.S. bankruptcy protections
Because the use of cannabis is illegal under U.S. federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Corporation were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available, which would have a material adverse effect on the Corporation’s business, financial position or results of operations.
Regulatoryscrutiny of the Corporation’s interests in the United States
The Corporation’s existing operations in the United States, and any future operations or investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. In addition, it is possible that the Corporation will come under additional scrutiny by the United States Securities and Exchange Commission, the Financial Industry Regulatory Authority, state securities administrators, or other regulators, due to its status as a cannabis-related business.
As a result, the Corporation 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 Corporation’s ability to operate or invest in the United States or any other jurisdiction, in addition to those described herein.
54
MATERIALCONTRACTS
The Corporation entered into the following material contracts since its year ended October 31, 2020 that are still in effect as of the date of this Prospectus, each of which is described elsewhere in this Prospectus:
| (a) | the<br> Asset Purchase Agreement; and |
|---|---|
| (b) | Canopy<br> Purchase Option Agreement. |
| --- | --- |
To the extent that cannabis-related licenses held by the Corporation or its subsidiaries could also be considered to be material contracts, the following licenses are the material contracts of the Corporation:
| License Holder | License Type | License Number |
|---|---|---|
| Grown<br> Rogue Gardens, LLC | Marijuana<br> Producer License - Outdoor Tier II | 1006166A33A |
| Marijuana<br> Producer License - Outdoor Tier II | 10063940AA8 | |
| Marijuana<br> Processor License, endorsed for Concentrates | 1009512285E | |
| Marijuana<br> Producer License - Indoor Tier II | 1006168AB1B | |
| Marijuana<br> Wholesaler License | 1006219C093 |
Copies of the above-noted material contracts are available on the Corporation’s SEDAR profile at www.sedar.com.
AUDITORS,TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The auditors of the Corporation are Dale Matheson Carr-Hilton Labonte LLP, 1500 - 1140 West Pender St., Vancouver, BC V6E 4G1.
The registrar and transfer agent and Special Warrant Agent of the Corporation is Capital Transfer Agency, ULC, having an address of 390 Bay St Suite 920, Toronto, ON M5H 2Y2.
LEGALMATTERS
In connection with the Offering, certain legal matters have been or will be passed upon by Irwin Lowy LLP on behalf of the Corporation and Wildeboer Dellelce LLP on behalf of the Agent. As at the date hereof, each of the aforementioned partnerships (and their partners, associates and employees) beneficially own, directly or indirectly, in the aggregate, less than 1% of the outstanding securities of the Corporation.
55
PROMOTERS
Mr. J. Obie Strickler, a director and President and Chief Executive Officer of the Corporation, may be considered to be a promoter of the Corporation under applicable Canadian securities legislation given his initiative in reorganizing the Corporation. Mr. Strickler beneficially owns, or has control over, directly or indirectly, 31,018,766 Common Shares, representing approximately 25.4% of the issued and outstanding Common Shares on a non-diluted basis.
On March 5, 2020, a failure to file cease trade order was issued by the Ontario Securities Commission concerning the Corporation because the Corporation did not timely file its annual financial statements and related management’s discussion and analysis, and the related certifications of the annual filings for the year ended October 31, 2019. The cease trade order was revoked on March 23, 2020.
Other than as disclosed in this section or elsewhere in this Prospectus, no person who was a promoter of the Corporation within the last two years:
| 1. | received<br> anything of value directly or indirectly from the Corporation or a subsidiary; |
|---|---|
| 2. | sold<br> or otherwise transferred any asset to the Corporation or a subsidiary within the last<br> two years; |
| --- | --- |
| 3. | has<br> been a director, officer or promoter of any Corporation that during the past 10 years<br> was the subject of a cease trade order or similar order or an order that denied the Corporation<br> access to any exemptions under securities legislation for a period of more than 30 consecutive<br> days or became bankrupt, made a proposal under any legislation relating to bankruptcy<br> or insolvency or been subject to or instituted any proceedings, arrangement or compromise<br> with creditors or had a receiver or receiver manager or trustee appointed to hold its<br> assets; |
| --- | --- |
| 4. | has<br> been subject to any penalties or sanctions imposed by a court relating to Canadian securities<br> legislation or by a Canadian securities regulatory authority or has entered into a settlement<br> agreement with a Canadian securities regulatory authority; |
| --- | --- |
| 5. | has<br> been subject to any other penalties or sanctions imposed by a court or regulatory body<br> that would be likely to be considered important to a reasonable investor making an investment<br> decision; or |
| --- | --- |
| 6. | has<br> within the past 10 years become bankrupt, made a proposal under any legislation relating<br> to bankruptcy or insolvency or been subject to or instituted any proceedings, arrangement<br> or compromise with creditors or had a receiver or receiver manager or trustee appointed<br> to hold its assets. |
| --- | --- |
STATUTORYRIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in certain of the provinces of Canada provides purchasers with the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days after receipt or deemed receipt of a prospectus and any amendment. In several of the provinces of Canada, the securities legislation further provides a purchaser with remedies for rescission or, in some jurisdictions, revisions of the price or damages if the prospectus and any amendment contains a misrepresentation or is not delivered to the purchaser, provided that the remedies for rescission, revision of the price or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province. Any purchaser who acquired Special Warrants pursuant to the Offering directly from the Corporation will have the same rights and remedies for rescission and/or damages against the Corporation and the Agent, as the case may be, as purchasers who acquired Special Warrants through the Agent. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province in which the purchaser resides for the particulars of these rights or consult with a legal advisor.
56
In an offering of Warrants, investors are cautioned that the statutory right of action for damages for a misrepresentation contained in this short form prospectus is limited, in certain provincial securities legislation, to the price at which the Warrants are offered to the public under the Offering. This means that, under the securities legislation of certain provinces, if the purchaser pays additional amounts upon exercise of the Warrants, those amounts may not be recoverable under the statutory right of action for damages that applies in those provinces. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province for the particulars of this right of action for damages or consult with a legal adviser.
CONTRACTUALRIGHT OF RESCISSION
Pursuant to the terms of the Agency Agreement and the subscription agreements between the Corporation and the purchasers of Special Warrants, the Corporation has granted to each holder of a Special Warrant a contractual right of rescission of the prospectus-exempt transaction under which the Special Warrant was initially acquired. The contractual right of rescission provides that if a holder of a Special Warrant who acquires Units on the exercise or deemed exercise of the Special Warrant as provided for in this Prospectus is, or becomes, entitled under the securities legislation of a jurisdiction to the remedy of rescission because of this Prospectus or an amendment to this Prospectus containing a misrepresentation,
| (a) | the<br> holder is entitled to rescission of both the holder’s exercise or deemed exercise<br> of its Special Warrant and the private placement transaction under which the Special<br> Warrant was initially acquired, |
|---|---|
| (b) | the<br> holder is entitled in connection with the rescission to a full refund of all consideration<br> paid to the Corporation on the acquisition of the Special Warrant, and |
| --- | --- |
| (c) | if<br> the holder is a permitted assignee of the interest of the original Special Warrant subscriber,<br> the holder is entitled to exercise the rights of rescission and refund as if the holder<br> was the original subscriber. |
| --- | --- |
The contractual rights of action described above are in addition to and without derogation from any other right or remedy that a purchaser of Special Warrants may have at law.
57
CERTIFICATEOF THE CORPORATION
Dated: April 23, 2021
This Prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Prospectus as required by the securities legislation of each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario.
GROWNROGUE INTERNATIONAL INC.
| By:<br> “J. Obie Strickler”<br><br> <br><br><br> <br>Chief<br> Executive Officer and Director | By:<br> “Michael Johnston”<br><br> <br><br><br> <br>Chief<br> Financial Officer |
|---|
ONBEHALF OF THE BOARD OF DIRECTORS
| By:<br> “Stephen Gledhill”<br><br> <br><br><br> <br>Director | By:<br> “Sean Conacher”<br><br> <br><br><br> <br>Director |
|---|
C-1
CERTIFICATEOF THE AGENT
Dated: April 23, 2021
To the best of our knowledge, information and belief, this Prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Prospectus as required by the securities legislation of each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario.
| EIGHTCAPITAL |
|---|
| By:<br> “Elizabeth Staltari”<br><br> <br><br><br> <br>Principal,<br> Managing Director |
C-2
CERTIFICATE OF THE PROMOTER
Dated: April 23, 2021
This Prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this Prospectus as required by the securities legislation of each of the Provinces of British Columbia, Alberta, Nova Scotia and Ontario.
| By:<br>“J. Obie Strickler”<br><br> <br><br><br> <br>Chief<br> Executive Officer and Director |
|---|
C-3
Exhibit 22
| 217 Queen Street West, Suite 401<br><br> <br>Toronto, ON M5V 0R2<br><br> <br>T: 416-361-2515<br><br> <br>F: 416-361-2519<br><br> <br>www.irwinlowy.com<br><br> <br><br><br> <br>(416) 361-2512<br><br> <br>[email protected] |
|---|
APRIL 23, 2021
FILED VIA SEDAR
| To: | Ontario Securities Commission |
|---|---|
| And To: | Alberta Securities Commission |
| --- | --- |
British Columbia Securities Commission
Nova Scotia Securities Commission
Dear Sirs/Mesdames:
Re: Grown Rogue International Inc. - Final Short Form Prospectus– SEDAR Project No. 3191010
We refer to the (final) prospectus of the Company dated April 23, 2021 (the “Prospectus”).
We hereby consent to the reference in the Prospectus to our firm name within the cover page disclosure and under the headings “Eligibility for Investment” and “Interests of Experts”, and to the use of our opinion under the heading “Eligibility for Investment”.
We confirm that we have read the Prospectus, and the documents incorporated therein by reference, and have no reason to believe that there are any misrepresentations in the information contained in the Prospectus that are:
| (a) | derived from our opinion referred to above; or |
|---|---|
| (b) | within our knowledge as a result of the services we performed to render such opinion. |
| --- | --- |
Yours truly,
“IRWIN LOWY LLP”
Exhibit 23
April 23, 2021
FILED BY SEDAR
Alberta Securities Commission
British Columbia Securities Commission
Nova Scotia Securities Commission
Ontario Securities Commission
Dear Sirs/Mesdames:
| Re: | Grown Rogue International Inc. (the “Corporation”) |
|---|
Final Prospectus
We refer to the final short form prospectus of the Corporation dated April 23, 2021 (the “Prospectus”) in relation to the distribution of units of the Corporation issuable upon the exercise or deemed exercise of special warrants of the Corporation.
We hereby consent to the reference to our firm name on the cover page of the Prospectus. We hereby also consent to the reference to our firm name and opinion under the heading “Eligibility for Investment” in the Prospectus and to the reference to our firm name under the heading “Legal Matters” in the Prospectus.
We confirm that we have read the Prospectus and that we have no reason to believe that there are any misrepresentations in the information contained in the Prospectus that are derived from our opinion referred to under the heading “Eligibility for Investment” in the Prospectus or that are within our knowledge as a result of the services we performed in connection with such opinion.
Yours truly,
“Wildeboer Dellelce LLP”
Exhibit 24
APPENDIX C TO NATIONAL INSTRUMENT 41-101
GENERAL PROSPECTUS REQUIREMENTS
NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF
AGENT FOR SERVICE OF PROCESS
| 1. | Name of issuer (the “Issuer”): |
|---|
Grown Rogue International Inc.
| 2. | Jurisdiction of incorporation, or equivalent, of Issuer: |
|---|
Ontario
| 3. | Address of principal place of business of Issuer: |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 4. | Description of securities (the “Securities”): |
|---|
Common Shares and Common Share Purchase Warrants
| 5. | Date of the prospectus (the “Prospectus”) under which the Securities are offered: |
|---|
April 23, 2021
| 6. | Name of person filing this form (the “Filing Person”): |
|---|
Adam August
| 7. | Filing Person’s relationship to Issuer: |
|---|
Chief Financial Officer of the US subsidiary of theIssuer.
| 8. | Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person: |
|---|
Oregon, United States
| 9. | Address of principal place of business of Filing Person: |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 10. | Name of agent for service of process (the “Agent”): |
|---|
Grown Rogue International Inc.
| 11. | Address for service of process of Agent in Canada (the address may be anywhere in Canada): |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 12. | The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent<br>upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal,<br>quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of<br>the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding<br>any alleged lack of jurisdiction to bring the Proceeding. |
|---|---|
| 13. | The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of |
| --- | --- |
| (a) | the judicial, quasi-judicial and administrative tribunals of each of the provinces of Canada in which the securities are distributed<br>under the Prospectus; and |
| --- | --- |
| (b) | any administrative proceeding in any such province, |
| --- | --- |
in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.
| 14. | Until six years after completion of the distribution of the<br>Securities made under the Prospectus, the Filing Person shall file a new submission to jurisdiction and appointment of agent for service<br>of process in this form at least 30 days before termination of this submission to jurisdiction and appointment of agent for service of<br>process. |
|---|---|
| 15. | Until six years after completion of the distribution of the Securities under the Prospectus, the Filing<br>Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change<br>in the name or above address of the Agent. |
| --- | --- |
| 16. | This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with<br>the laws of the Province of Ontario. |
| --- | --- |
| Dated: April 23, 2021 | Signed: “Adam August” |
| --- | --- |
| Signature of Filing Person | |
| Adam August, CFO of US Subsidiary | |
| Print name of person signing and, if the Filing | |
| Person is not an individual, the title of the person |
AGENT
The undersigned accepts the appointment as agent for service of process of Grown Rogue International Inc. under the terms and conditions of the appointment of agent for service of process stated above.
| Dated: April 23, 2021 | Signed: “J. Obie Strickler” |
|---|---|
| Signature of Agent | |
| J. Obie Strickler, CEO | |
| Print name of person signing and, if Agent | |
| is not an individual, the title of the person |
Exhibit 25
APPENDIX C TO NATIONAL INSTRUMENT 41-101
GENERAL PROSPECTUS REQUIREMENTS
NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF
AGENT FOR SERVICE OF PROCESS
| 1. | Name of issuer (the “Issuer”): |
|---|
Grown Rogue International Inc.
| 2. | Jurisdiction of incorporation, or equivalent, of Issuer: |
|---|
Ontario
| 3. | Address of principal place of business of Issuer: |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 4. | Description of securities (the “Securities”): |
|---|
Common Shares and Common Share Purchase Warrants
| 5. | Date of the prospectus (the “Prospectus”) under which the Securities are offered: |
|---|
April 23, 2021
| 6. | Name of person filing this form (the “Filing Person”): |
|---|
Ryan Kee, Chief Accounting Officer of the Issuer
| 7. | Filing Person’s relationship to Issuer: |
|---|
Director of the Issuer.
| 8. | Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person: |
|---|
Washington, United States
| 9. | Address of principal place of business of Filing Person: |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 10. | Name of agent for service of process (the “Agent”): |
|---|
Grown Rogue International Inc.
| 11. | Address for service of process of Agent in Canada (the address may be anywhere in Canada): |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 12. | The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent<br>upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal,<br>quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of<br>the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding<br>any alleged lack of jurisdiction to bring the Proceeding. |
|---|---|
| 13. | The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of |
| --- | --- |
| (a) | the judicial, quasi-judicial and administrative tribunals of each of the provinces of Canada in which the securities are distributed<br>under the Prospectus; and |
| --- | --- |
| (b) | any administrative proceeding in any such province, |
| --- | --- |
in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.
| 14. | Until six years after completion of the distribution of the Securities made under the Prospectus, the<br>Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days<br>before termination of this submission to jurisdiction and appointment of agent for service of process. |
|---|---|
| 15. | Until six years after completion of the distribution of the Securities under the Prospectus, the Filing<br>Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change<br>in the name or above address of the Agent. |
| --- | --- |
| 16. | This submission to jurisdiction and appointment of agent for service of process shall be governed by and construed in accordance with<br>the laws of the Province of Ontario. |
| --- | --- |
| Dated: April 23, 2021 | Signed: “Ryan Kee” |
| --- | --- |
| Signature of Filing Person | |
| Ryan Kee, Chief Accounting Officer | |
| Print name of person signing and, if the Filing | |
| Person is not an individual, the title of the person |
AGENT
The undersigned accepts the appointment as agent for service of process of Grown Rogue International Inc. under the terms and conditions of the appointment of agent for service of process stated above.
| Dated: April 23, 2021 | Signed: “J. Obie Strickler” |
|---|---|
| Signature of Agent | |
| J. Obie Strickler, CEO | |
| Print name of person signing and, if Agent | |
| is not an individual, the title of the person |
Exhibit 26
APPENDIX C TO NATIONAL INSTRUMENT 41-101
GENERAL PROSPECTUS REQUIREMENTS
NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF
AGENT FOR SERVICE OF PROCESS
| 1. | Name of issuer (the “Issuer”): |
|---|
Grown Rogue International Inc.
| 2. | Jurisdiction of incorporation, or equivalent, of Issuer: |
|---|
Ontario
| 3. | Address of principal place of business of Issuer: |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 4. | Description of securities (the “Securities”): |
|---|
Common Shares and Common Share Purchase Warrants
| 5. | Date of the prospectus (the “Prospectus”) under which the Securities are offered: |
|---|
April 23, 2021
| 6. | Name of person filing this form (the “Filing Person”): |
|---|
Steven Lightman, Director
| 7. | Filing Person’s relationship to Issuer: |
|---|
Director of the Issuer.
| 8. | Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence of Filing Person: |
|---|
New York, United States
| 9. | Address of principal place of business of Filing Person: |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 10. | Name of agent for service of process (the “Agent”): |
|---|
Grown Rogue International Inc.
| 11. | Address for service of process of Agent in Canada (the address may be anywhere in Canada): |
|---|
340 Richmond Street West, Toronto, Ontario, M5V 1X2
| 12. | The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent<br>upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal,<br>quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of<br>the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding<br>any alleged lack of jurisdiction to bring the Proceeding. |
|---|---|
| 13. | The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of |
| --- | --- |
| (a) | the judicial, quasi-judicial and administrative tribunals of each of the provinces of Canada in which the securities are distributed<br>under the Prospectus; and |
| --- | --- |
| (b) | any administrative proceeding in any such province, |
| --- | --- |
in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.
| 14. | Until six years after completion of the distribution of the Securities made under the Prospectus, the<br>Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days<br>before termination of this submission to jurisdiction and appointment of agent for service of process. |
|---|---|
| 15. | Until six years after completion of the distribution of the Securities under the Prospectus, the Filing<br>Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change<br>in the name or above address of the Agent. |
| --- | --- |
| 16. | This submission to jurisdiction and appointment of agent for service of process shall be governed by and<br>construed in accordance with the laws of the Province of Ontario. |
| --- | --- |
| Dated: April 23, 2021 | Signed: “Steven Lightman” |
| --- | --- |
| Signature of Filing Person | |
| Steven Lightman, Director | |
| Print name of person signing and, if the Filing | |
| Person is not an individual, the title of the person |
AGENT
The undersigned accepts the appointment as agent for service of process of Grown Rogue International Inc. under the terms and conditions of the appointment of agent for service of process stated above.
| Dated: April 23, 2021 | Signed: “J. Obie Strickler” |
|---|---|
| Signature of Agent | |
| J. Obie Strickler, CEO | |
| Print name of person signing and, if Agent | |
| is not an individual, the title of the person |
Exhibit 27
APPENDIX C TO NATIONAL INSTRUMENT 41-101
GENERAL PROSPECTUS REQUIREMENTS
NON-ISSUER FORM OF SUBMISSION TO
JURISDICTION AND APPOINTMENT OF
AGENT FOR SERVICE OF PROCESS
| 1. | Name of issuer (the “Issuer”): |
|---|
Grown Rogue International Inc.
| 2. | Jurisdiction of incorporation, or equivalent, of Issuer: |
|---|
Ontario
| 3. | Address of principal place of business of Issuer: |
|---|
340 Richmond Street West, Toronto,Ontario, M5V 1X2
| 4. | Description of securities (the “Securities”): |
|---|
Common Shares and Common SharePurchase Warrants
| 5. | Date of the prospectus (the “Prospectus”) under which the Securities are offered: |
|---|
April 23, 2021
| 6. | Name of person filing this form (the “Filing Person”): |
|---|
Abhilash Patel
| 7. | Filing Person’s relationship to Issuer: |
|---|
Director of the Issuer.
| 8. | Jurisdiction of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of residence<br>of Filing Person: |
|---|
Illinois, United States
| 9. | Address of principal place of business of Filing Person: |
|---|
340 Richmond Street West, Toronto,Ontario, M5V 1X2
| 10. | Name of agent for service of process (the “Agent”): |
|---|
Grown Rogue International Inc.
| 11. | Address for service of process of Agent in Canada (the address may be anywhere in Canada): |
|---|
340 Richmond Street West, Toronto,Ontario, M5V 1X2
| 12. | The Filing Person designates and appoints the Agent at the address of the Agent stated above as its agent<br>upon whom may be served any notice, pleading, subpoena, summons or other process in any action, investigation or administrative, criminal,<br>quasi-criminal, penal or other proceeding (the “Proceeding”) arising out of, relating to or concerning the distribution of<br>the Securities made or purported to be made under the Prospectus, and irrevocably waives any right to raise as a defence in any such Proceeding<br>any alleged lack of jurisdiction to bring the Proceeding. |
|---|---|
| 13. | The Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction of |
| --- | --- |
| (a) | the judicial, quasi-judicial and administrative tribunals of each of the provinces of Canada in which<br>the securities are distributed under the Prospectus; and |
| --- | --- |
| (b) | any administrative proceeding in any such province, |
| --- | --- |
in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.
| 14. | Until six years after completion of the distribution of the Securities made under the Prospectus, the<br>Filing Person shall file a new submission to jurisdiction and appointment of agent for service of process in this form at least 30 days<br>before termination of this submission to jurisdiction and appointment of agent for service of process. |
|---|---|
| 15. | Until six years after completion of the distribution of the Securities under the Prospectus, the Filing<br>Person shall file an amended submission to jurisdiction and appointment of agent for service of process at least 30 days before a change<br>in the name or above address of the Agent. |
| --- | --- |
| 16. | This submission to jurisdiction and appointment of agent for service of process shall<br>be governed by and construed in accordance with the laws of the Province of Ontario. |
| --- | --- |
| Dated: April 23, 2021 | Signed: “Abhilash Patel” |
| --- | --- |
| Signature of Filing Person | |
| Abhilash Patel, Director | |
| Print name of person signing and, if the Filing | |
| Person is not an individual, the title of the person |
AGENT
The undersigned accepts the appointment as agent for service of process of Grown Rogue International Inc. under the terms and conditions of the appointment of agent for service of process stated above.
| Dated: April 23, 2021 | Signed: “J. Obie Strickler” |
|---|---|
| Signature of Agent | |
| J. Obie Strickler, CEO | |
| Print name of person signing and, if Agent | |
| is not an individual, the title of the person |
Exhibit 28
APPENDIXC TO NATIONAL INSTRUMENT 41-101
GENERALPROSPECTUS REQUIREMENTS
NON-ISSUERFORM OF SUBMISSION TO
JURISDICTIONAND APPOINTMENT OF
AGENTFOR SERVICE OF PROCESS
| 1. | Name<br> of issuer (the “Issuer”): |
|---|
GrownRogue International Inc.
| 2. | Jurisdiction<br> of incorporation, or equivalent, of Issuer: |
|---|
Ontario
| 3. | Address<br> of principal place of business of Issuer: |
|---|
340Richmond Street West, Toronto, Ontario, M5V 1X2
| 4. | Description<br> of securities (the “Securities”): |
|---|
CommonShares and Common Share Purchase Warrants
| 5. | Date<br> of the prospectus (the “Prospectus”) under which the Securities are<br> offered: |
|---|
April23, 2021
| 6. | Name<br> of person filing this form (the “Filing Person”): |
|---|
J.Obie Strickler, CEO and Director of the Issuer
| 7. | Filing<br> Person’s relationship to Issuer: |
|---|
Directorof the Issuer.
| 8. | Jurisdiction<br> of incorporation, or equivalent, of Filing Person, if applicable, or jurisdiction of<br> residence of Filing Person: |
|---|
Oregon,United States
| 9. | Address<br> of principal place of business of Filing Person: |
|---|
340Richmond Street West, Toronto, Ontario, M5V 1X2
| 10. | Name<br> of agent for service of process (the “Agent”): |
|---|
GrownRogue International Inc.
| 11. | Address<br> for service of process of Agent in Canada (the address may be anywhere in Canada): |
|---|
340Richmond Street West, Toronto, Ontario, M5V 1X2
| 12. | The<br> Filing Person designates and appoints the Agent at the address of the Agent stated above<br> as its agent upon whom may be served any notice, pleading, subpoena, summons or other<br> process in any action, investigation or administrative, criminal, quasi-criminal, penal<br> or other proceeding (the “Proceeding”) arising out of, relating to or concerning<br> the distribution of the Securities made or purported to be made under the Prospectus,<br> and irrevocably waives any right to raise as a defence in any such Proceeding any alleged<br> lack of jurisdiction to bring the Proceeding. |
|---|---|
| 13. | The<br> Filing Person irrevocably and unconditionally submits to the non-exclusive jurisdiction<br> of |
| --- | --- |
| (a) | the<br> judicial, quasi-judicial and administrative tribunals of each of the provinces of Canada<br> in which the securities are distributed under the Prospectus; and |
| --- | --- |
| (b) | any<br> administrative proceeding in any such province, |
| --- | --- |
in any Proceeding arising out of or related to or concerning the distribution of the Securities made or purported to be made under the Prospectus.
| 14. | Until<br> six years after completion of the distribution of the Securities made under the Prospectus,<br> the Filing Person shall file a new submission to jurisdiction and appointment of agent<br> for service of process in this form at least 30 days before termination of this submission<br> to jurisdiction and appointment of agent for service of process. |
|---|---|
| 15. | Until<br> six years after completion of the distribution of the Securities under the Prospectus,<br> the Filing Person shall file an amended submission to jurisdiction and appointment of<br> agent for service of process at least 30 days before a change in the name or above address<br> of the Agent. |
| --- | --- |
| 16. | This<br> submission to jurisdiction and appointment of agent for service of process shall be governed<br> by and construed in accordance with the laws of the Province of Ontario. |
| --- | --- |
| Dated:<br> April 23, 2021 | Signed: “J. Obie Strickler” |
| --- | --- |
| Signature<br> of Filing Person | |
| J. Obie Strickler, CEO and Director | |
| Print<br> name of person signing and, if the Filing | |
| Person<br> is not an individual, the title of the person |
AGENT
The undersigned accepts the appointment as agent for service of process of Grown Rogue International Inc. under the terms and conditions of the appointment of agent for service of process stated above.
| Dated:<br> April 23, 2021 | Signed: “Michael Johnston” |
|---|---|
| Signature<br> of Agent | |
| Michael Johnston, CFO | |
| Print<br> name of person signing and, if Agent | |
| is<br> not an individual, the title of the person |
Exhibit 29
UNDERTAKING
| To: | British Columbia Securities Commission |
|---|
Alberta Securities Commission
Ontario Securities Commission
Nova Scotia Securities Commission
The undersigned, for and on behalf of Grown Rogue International Inc. (the “Company”), undertakes, pursuant to Sections 4.2(a)(x) and (x.1) of National Instrument 44-101 – Short Form Prospectus Distributions, that the company will file with the Securities Administrators:
(i) any document affecting the rights of securityholders that relates to the securities being distributed pursuant to the Prospectus that are required to be filed under Section 12.1(1) of National Instrument 51-102 – Continuous Disclosure Obligations (“NI 51-102”); and
(ii) any material contract required to be filed under Section 12.2 of NI 51-102;
and, in each case if it has not been previously filed, it will be filed promptly and, in any event, no later than seven days after the document becomes effective or the after the execution of the material contract, as applicable.
DATED the 23^rd^ day of April, 2021.
| GROWN ROGUE INTERNATIONAL INC. | |
|---|---|
| Per: | “J.Obie Strickler” |
| J.Obie Strickler | |
| President and Chief Executive Officer |
Exhibit 30
April 23, 2021
British Columbia Securities Commission
Alberta Securities Commission
Ontario Securities Commission
Nova Scotia Securities Commission
Dear Sirs/Mesdames:
Re: Grown Rogue International Inc.
We refer to the short form prospectus of Grown Rogue International Inc. (the “Company”) dated April 23, 2021 relating to the qualifying of the distribution of 23,162,579 Units of the Company issuable upon the exercise or deemed exercise of 21,056,890 special warrants of the Company. Each unit consists of one common share and one common share purchase warrant.
We consent to being named and to the use, through incorporation by reference in the above-mentioned short form prospectus, of our report dated March 1, 2021 to the shareholders of the Company on the following financial statements:
| ● | Consolidated<br>Statements of financial position as at October 31, 2020 and October 31, 2019; |
|---|---|
| ● | Consolidated<br>Statements of comprehensive loss, changes in equity holders’ deficit and cash flows for the years ended October 31, 2020 and October<br>31, 2019, and a summary of significant accounting policies and other explanatory information. |
| --- | --- |
We report that we have read the short form prospectus and all information specifically incorporated by reference therein and have no reason to believe that there are any misrepresentations in the information contained therein that are derived from the financial statements upon which we have reported or that are within our knowledge as a result of our audit of such financial statements. We have complied with Canadian generally accepted standards for an auditor’s consent to the use of a report of the auditor included in an offering document, which does not constitute an audit or review of the prospectus as these terms are described in the CPA Canada Handbook – Assurance.
Yours very truly,
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Exhibit 31
| Ontario <br><br>Securities <br><br>Commission | Commission des <br><br>valeurs mobilières <br><br>de l’Ontario | 22nd Floor <br><br>20 Queen Street West <br><br>Toronto ON M5H 3S8 | 22e étage <br><br>20, rue Queen ouest <br><br>Toronto ON M5H 3S8 |
|---|
RECEIPT
Grown Rogue International Inc.
This is the receipt of the Ontario Securities Commission for the Short Form Prospectus of the above Issuer dated April 23, 2021 (the prospectus).
The prospectus has been filed under Multilateral Instrument 11-102 Passport System in British Columbia, Alberta and Nova Scotia. A receipt for the prospectus is deemed to be issued by the regulator in each of those jurisdictions, if the conditions of the Instrument have been satisfied.
April 26, 2021
| Sonny Randhawa |
|---|
| Sonny Randhawa |
| Director, Corporate Finance Branch |
| SEDAR Project # 3191010 |
Exhibit 32
GrownRogue Grants Options and Issues Shares
Medford, Oregon, April 30, 2021 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, has announced that it has issued a total of 385,000 common shares to certain directors, contractors and employees of the Company relating to amounts owed for services rendered. The Company also issued 400,000 common shares to certain investors in Golden Harvests, LLC (“Golden Harvests”) in exchange for a reduction of debt owed to Golden Harvests in the amount of $100,000. In addition, the Company issued 600,000 common shares in satisfaction of certain option payments owing to Canopy Management, LLC (“Canopy Management”) in accordance with the option agreement entered into on February 4, 2021 providing Grown Rogue Unlimited, LLC the right to acquire 87% of Canopy Management, which shares were directed to be issued to certain owners of Golden Harvests in accordance with the option agreement between Canopy Management and the owners of Golden Harvests entered into on February 4, 2021 providing Canopy Management the right to acquire 60% of Golden Harvests. All of the above mentioned common shares were issued at a price of $0.25 per share.
The Company has also granted options to purchase an aggregate of 585,000 common shares of the Company (the “Stock Options”) to employees. The Stock Options are exercisable at a price of $0.22 per share for a period of four years from the date of grant. The Company also granted options to purchase an aggregate of 500,000 common shares of the Company (the “Consultant Stock Options”) to a consultant. The Consultant Stock Options are exercisable at a price of $0.35 per share for a period of four years from the date of grant.
The common shares described above and the common shares underlying the Stock Options and Consultant Stock Options are subject to a four month and one day hold period expiring on August 31, 2021.
The aforementioned issuances of common shares resulted in certain directors and officers of the Company receiving an aggregate of 255,000 common shares of the Company. The Company has relied on the exemptions from the valuation and minority shareholder approval requirements of Multilateral Instrument 61-101 - Protectionof Minority Security Holders in Special Transactions (“MI 61-101”), contained in section 5.5(b) and 5.7(a) of MI 61-101 in respect of such insider participation.
About Grown Rogue
Grown Rogue International (CSE: GRIN |
OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARDLOOKING STATEMENTS
This press release contains statements whichconstitute “forward-looking information” within the meaning of applicable securities laws, including statements regardingthe plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking informationis often identified by the words “may,” “would,” “could,” “should,” “will,”“intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect”or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the abilityof the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan andsecuring applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors arecautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’sexpectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions,assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes thatthe expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, andundue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on futureresults, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materiallyfrom those projected in the forward-looking information are the following: changes in general economic, business and political conditions,including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amountsand at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabisand cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the applicationor enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’spublic disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertaintiesmaterialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially fromthose described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identifyimportant risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause resultsnot to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-lookinginformation except as otherwise required by applicable law.
SAFE HARBOR STATEMENT
This press release may contain forward-lookinginformation within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), includingall statements that are not statements of historical fact regarding the intent, belief or current expectations of the Company, its directorsor its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’sfinancial condition or results of operations; (iii) the Company’s growth strategy and operating strategy; and (iv) the declarationand payment of dividends. The words “may,” “would,” “will,” “expect,” “estimate,”“anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identifyforward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the datehereof. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasonsactual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes availablein the future. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risksand uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materially fromthose projected in the forward-looking statements as a result of various factors including the risk disclosed in the Company’s Form20-F and 6-K filings with the Securities and Exchange Commission.
The Company is indirectly involved in the manufacture,possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirectoperating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currentlyillegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company’sbusiness are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should oneor more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information orforward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated,believed, estimated or expected.
No stock exchange, securities commission orother regulatory authority has approved or disapproved the information contained herein.
For furtherinformation on Grown Rogue International please visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
Exhibit 33
Grown Rogue International Announces Receipt for Final Short Form Prospectus
Medford, Oregon--(Newsfile Corp. - April 30, 2021) - Grown Rogue International Inc. (CSE: GRIN) (OTC Pink: GRUSF) (“GrownRogue” or the “Company”) is pleased to announce that further to its press release of March 5, 2021, the Company has received a receipt (the “FinalReceipt”) for its final short form prospectus dated April 23, 2021 (the “Prospectus”). The Prospectus qualifies the distribution of an aggregate of 23,162,579 units of the Company (each a “Unit”), which are issuable for no additional consideration upon the deemed exercise of 21,056,890 special warrants (each a “SpecialWarrant”) which were sold pursuant to a brokered private placement offering completed by the Company on March 5, 2021 (the “Offering”). The Special Warrants were sold at a price of $0.225 per Special Warrant for aggregate gross proceeds of $4,737,800.25. The Offering was led by Eight Capital (the “Agent”), as sole agent and bookrunner.
Pursuant to a special warrant indenture dated March 5, 2021 between the Company and Capital Transfer Agency ULC, as special warrant agent, the Special Warrants were automatically exercised into Units, without payment of any additional consideration, effective today, being the third business day after the date on which the Final Receipt was received by the Company.
Each Unit is comprised of one common share in the capital of the Company (each, a “CommonShare”) and one Common Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $0.30 for a period of twenty-four (24) months following the closing date (the “ClosingDate”) of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants entered into among the Company and Capital Transfer Agency ULC, as warrant agent, on March 5, 2021.
For more information on the Offering, please refer to the Prospectus, as well as the Company’s press release dated March 5, 2021, available on the Company’s profile on SEDAR at www.sedar.com.
The securities issued and sold pursuant to the Offering have not been, nor will they be, registered under the United States Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable exemption from the registration requirements. This news release will not constitute an offer to sell or the solicitation of an offer to buy nor will there be any sale of the securities in any State in which such offer, solicitation or sale would be unlawful.
About Grown Rogue
Grown Rogue International (CSE: GRIN) (OTC Pink: GRUSF) is a multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight-based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sun grown and indoor premium flower, along with patented nitro sealed indoor and sun grown pre-rolls and jars.
For further information on Grown Rogue International please visit www.grownrogue.com or contact:
Obie Strickler
President & Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
FORWARD LOOKING STATEMENTS
This press release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking information is often identified by the words “may,” “would,” “could,” “should,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” or similar expressions and include, without limitation, information regarding the expected use of proceeds of the Offering. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of the combined company.
Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: changes in general economic, business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.
SAFE HARBOR STATEMENT
This press release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including all statements that are not statements of historical fact regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identify forward looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date hereof. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors including the risk disclosed in the Company’s Form 20-F and 6-K filings with the Securities and Exchange Commission. The Company is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currently illegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company’s business are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
To view the source version of this press release, please visit
https://www.newsfilecorp.com/release/82558
Exhibit 34
GrownRogue Partner Exercises Option and Acquires 60% Controlling Interest of Golden Harvests
Medford, Oregon, May 3, 2021 – GrownRogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, announced today that its partner, Canopy Management, LLC (“Canopy”), has acquired a 60% controlling interest in Golden Harvests, LLC (“Golden Harvests”). Canopy is controlled by Grown Rogue’s chief executive officer, Obie Strickler (“Strickler”). In order to expedite regulatory approvals, Canopy obtained the option to acquire 60% ownership of Golden Harvests and signed a new agreement under materially similar terms to the previous option agreement with GR Michigan, LLC. Simultaneously, Strickler provided Grown Rogue Unlimited, LLC (a wholly owned subsidiary of the Company) a right to acquire 87% of the membership units of Canopy pending state and regulatory approval. Canopy filed all of the necessary paperwork and has received both local and state approval to purchase the 60% controlling interest of Golden Harvests. It is expected that Grown Rogue Unlimited, LLC will exercise its option to acquire 87% of the membership units of Canopy by the end of 2021.
“The Michigan market has grown exponentially, and Golden Harvest remains an important strategic asset for us. Canopy exercising the option is an important milestone for Grown Rogue as we continue our successful expansion into this market,” said Obie Strickler, CEO of Grown Rogue. “We have implemented our best-in-class SOPs and leveraged over a decade of operational, grow, and sales experience, and have seen great results in Michigan as we gain market share. We are excited to finalize this transaction and continue providing consistent and quality flower to retailers and consumers alike.”
GOLDEN HARVESTS FACILITY
Approximately 25,000 sq. ft. of the facility is currently online and operating with seven separate flower rooms, vegetative, clone, packaging, trimming, and other infrastructure required to operate a best-in-class cultivation facility. Golden Harvests currently has four licenses, two medical and two adult use, allowing for production of 7,000 plants. Golden Harvests has applied for four additional licenses as they continue to expand, anticipating constructing 6 additional flower rooms in 2021 to meet the increasing demand for the Grown Rogue branded, proprietary, nitrogen sealed flower jars. Grown Rogue and Golden Harvests anticipate production in 2021 will exceed 3,500 lbs.
Golden Harvests was one of the first licensed Michigan operators receiving a Class C grow license in late 2018, with their first harvest in the spring of 2019. Building on the positive reputation and strong sell of Golden Harvests flower, Grown Rogue has already completed agreements with retail partners across the state and started building long-lasting relationships to drive the top line and profitability for all parties while inspiring, educating, and empowering consumers.
“During the past year, Grown Rogue has brought in a wealth of experience and accelerated our business growth in Michigan,” said Dave Pleitner, founder of Golden Harvests. “This acquisition by Canopy helps us get to the finish line and clears the way for new opportunities and focus in our growing market.”
As part of the acquisition of the 60% controlling interest in Golden Harvests, Canopy will pay the existing members of Golden Harvests an aggregate of USD$660,000 in cash and cause Grown Rogue to issue 600,000 common shares of Grown Rogue (“Shares”) in three tranches:
| ● | Tranche<br>1 – US$200,000 in cash and 200,000 Shares due February 6, 2021, which was extended for 12 months with US$100,000 cash having been<br>paid and 200,000 Shares issued; |
|---|---|
| ● | Tranche 2 – US$260,000 in cash and 200,000 Shares due February 6, 2021,<br>which was extended to August 6, 2021 for consideration of issuing 200,000 Shares; and |
| --- | --- |
| ● | Tranche 3 – US$200,000 is due at exercise of the option plus 200,000<br>Shares, which has been satisfied in full. |
| --- | --- |
For more information about Grown Rogue please visit www.grownrogue.com
About Grown Rogue
Grown Rogue International (CSE: GRIN |
OTC: GRUSF) is a multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight-based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with patented nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD LOOKING STATEMENTS
This press release contains statements whichconstitute “forward-looking information” within the meaning of applicable securities laws, including statements regardingthe plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking informationis often identified by the words “may,” “would,” “could,” “should,” “will,”“intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect”or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the abilityof the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan andsecuring applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors arecautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’sexpectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions,assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes thatthe expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, andundue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on futureresults, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materiallyfrom those projected in the forward-looking information are the following: changes in general economic, business and political conditions,including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amountsand at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabisand cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the applicationor enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’spublic disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertaintiesmaterialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially fromthose described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identifyimportant risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause resultsnot to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-lookinginformation except as otherwise required by applicable law.
SAFE HARBOR STATEMENT
Thispress release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, asamended (the “Exchange Act”), including all statements that are not statements of historical fact regarding the intent,belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) theCompany’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) theCompany’s growth strategy **** andoperating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,”“will,” “expect,” “estimate,” “anticipate,” “believe,”“intend” and similar expressions and variations thereof are intended to identify forward-looking statements. Also,forward-looking statements represent our management’s beliefs and assumptions only as of the date hereof. Except as requiredby law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results coulddiffer materially from those anticipated in these forward-looking statements, even if new information becomes available in thefuture. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risksand uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materiallyfrom those projected in the forward-looking statements as a result of various factors including the risk disclosed in theCompany’s Form 20-F and 6-K filings with the Securities and Exchange Commission.
The Company is indirectly involved in the manufacture,possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirectoperating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currentlyillegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company’sbusiness are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should oneor more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information orforward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated,believed, estimated or expected.
No stock exchange, securities commission orother regulatory authority has approved or disapproved the information contained herein.
For further information on Grown Rogue International please visitwww.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
Exhibit35
GrownRogue Retires Senior Secured Convertible Debentures
Medford,Oregon, May 10, 2021 - Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, today announced the retirement of the Company’s senior secured convertible debentures of CAD$2.36M that would have matured on November 1, 2021. The early retirement of the debt will save the Company CAD$100k in interest payments over 2021. The debt repayment also results in the removal of the general security agreement over all of the Company’s assets and leaves only $1.04M of term debt, of which $450k is current. Of the current amount of $450k, $100k will complete a payment contributing to an option payment to acquire Golden Harvests, LLC (“Golden Harvests”). This results in a debt to projected 2021 adjusted EBITDA^1^ ratio of 0.15.
The debt repayment included a cash payment of CAD$1.54M and the issuance of 6,555,556 common shares of the Company at a price of $0.125 per share in accordance with the terms of the debentures. The repayment of principal results in the elimination of a potential conversion of debt into 12.3M common shares or approximately 8% of the current issued and outstanding common shares of the Company.
“Retiring this senior secured convertible debt is an important step in Grown Rogue’s path to financial health and continues our goal of creating shareholder value with disciplined capital allocation,” said Obie Strickler, Chief Executive Officer of Grown Rogue. “With our industry leading cash margins of 65%+ and the recent capacity increase of over 500lbs per month of high quality indoor production we are excited to continue executing on our plant to become a top producer in the US cannabis markets.”
With the recent acquisition by Grown Rogue’s partner, Canopy Management, LLC, of the controlling interest of Golden Harvests, the Company now beneficially controls 127,000 sq ft of indoor production, which will yield more than 1,000 lbs per month in constructed capacity. With additional expansion already underway in Michigan, Grown Rogue expects to increase production to l,800lbs per month in 2022.
Formore information about Grown Rogue please visit www.grownrogue.com
NOTES:
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income (loss) for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance. The following is a reconciliation of the Company’s net income (loss) to Adjusted EBITDA.
****
AboutGrown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight-based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with patented nitro sealed indoor and sungrown pre-rolls and jars.
FORWARDLOOKING STATEMENTS
Thispress release contains statements which constitute “forward-looking information” within the meaning of applicablesecurities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respectto future business activities. Forward- looking information is often identified by the words “may,” “would,”“could,” “should,” “will,” “intend,” “plan,” “anticipate,”“believe,” “estimate,” “expect” or similar expressions and include information regarding:(i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieve its businessand financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatory approvals,and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking informationis not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projectionsconcerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of managementconsidered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in suchforward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not beplaced on such information, as unknown or unpredictable factors could have material adverse effects on future results, performanceor achievements of the combined company. Among the key factors that could cause actual results to differ materially from thoseprojected in the forward-looking information are the following: changes in general economic, business and political conditions,including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital inthe amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailingprices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; oradverse changes in the application or enforcement of current laws; compliance with extensive government regulation and relatedcosts, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Shouldone or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information proveincorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimatedor expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actualresults to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Companydoes not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required byapplicable law.
SAFEHARBOR STATEMENT
Thispress release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”), including all statements that are not statements of historical fact regarding theintent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i)the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii)the Company’s growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words “may,”“would,” “will,” “expect,” “estimate,” “anticipate,” “believe,”“intend” and similar expressions and variations thereof are intended to identify forward- looking statements. Also,forward-looking statements represent our management’s beliefs and assumptions only as of the date hereof. Except as requiredbylaw, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results coulddiffer materially from those anticipated in these forward-looking statements, even if new information becomes available in thefuture. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involverisks and uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materiallyfrom those projected in the forward-looking statements as a result of various factors including the risk disclosed in the Company’sForm 20-F and 6-K filings with the Securities and Exchange Commission.
TheCompany is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabismarketplace in the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operatepermit such activities however, these activities are currently illegal under United States federal law. Additional informationregarding this and other risks and uncertainties relating to the Company’s business are disclosed in the Company’sListing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or otherfactors materialize, or should assumptions underlying the forward-looking information or forward-looking statements prove incorrect,actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.
Nostock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
Forfurther information on Grown Rogue International please visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
Investor Relations Desk Inquiries
(458) 226-2100
Exhibit 36
Form51-102F3
Material Change Report
| Item 1 | Name and Address of Company |
|---|
Grown Rogue International Inc. (the “Company”)
340 Richmond Street West
Toronto, Ontario
M5V 1X2
| Item 2 | Date of Material Change |
|---|
April 30, 2021, May 3, 2021 and May 10, 2021
| Item 3 | News Release |
|---|
A news release was issued by the Company on April 30, 2021 through the facilities of Newsfile and was subsequently filed on SEDAR. A news release was issued by the Company on May 3, 2021 and May 10, 2021 through the facilities of Business Wire and were subsequently filed on SEDAR.
| Item 4 | Summary of Material Change |
|---|
On April 30, 2021, the Company announced that 23,162,579 Units were issued upon the automatic exercise of 21,056,890 Special Warrants.
On May 3, 2021, the Company announced that its partner Canopy Management, LLC exercised its option and acquired 60% controlling interest in Golden Harvests.
On May 10, 2021, the Company announced that it retired its senior secured convertible debentures.
| Item 5.1 | Full Description of Material Change |
|---|
On April 30, 2021, the Company announced that it received a receipt for its final short form prospectus dated April 23, 2021 (the “Prospectus”). The Prospectus qualifies the distribution of an aggregate of 23,162,579 units of the Company (each a “Unit”), which are issuable for no additional consideration upon the deemed exercise of 21,056,890 special warrants (each a “Special Warrant”) which were sold pursuant to a brokered private placement offering completed by the Company on March 5, 2021 (the “Offering”). The Special Warrants were sold at a price of $0.225 per Special Warrant for aggregate gross proceeds of $4,737,800.25. The Offering was led by Eight Capital, as sole agent and bookrunner.
Pursuant to a special warrant indenture dated March 5, 2021 between the Company and Capital Transfer Agency ULC, as special warrant agent, the Special Warrants were automatically exercised into 23,162,579 Units, without payment of any additional consideration, effective April 30, 2021.
Each Unit is comprised of one common share in the capital of the Company (each, a “Common Share”) and one Common Share purchase warrant (each, a “Warrant”). Each Warrant entitles the holder thereof to acquire one Common Share at an exercise price of $0.30 for a period of twenty-four (24) months following the closing date of the Offering, subject to adjustment in certain events set out in the indenture governing the Warrants entered into among the Company and Capital Transfer Agency ULC, as warrant agent, on March 5, 2021.
On May 3, 2021, the Company announced that its partner, Canopy Management, LLC (“Canopy”), acquired a 60% controlling interest in Golden Harvests, LLC (“Golden Harvests”). Canopy is controlled by Grown Rogue’s chief executive officer, Obie Strickler (“Strickler”). In order to expedite regulatory approvals, Canopy obtained the option to acquire 60% ownership of Golden Harvests and signed a new agreement under materially similar terms to the previous option agreement with GR Michigan, LLC. Simultaneously, Strickler provided Grown Rogue Unlimited, LLC (a wholly owned subsidiary of the Company) a right to acquire 87% of the membership units of Canopy pending state and regulatory approval. Canopy filed all of the necessary paperwork and has received both local and state approval to purchase the 60% controlling interest of Golden Harvests. It is expected that Grown Rogue Unlimited, LLC will exercise its option to acquire 87% of the membership units of Canopy by the end of 2021.
As part of the acquisition of the 60% controlling interest in Golden Harvests, Canopy will pay the existing members of Golden Harvests an aggregate of USD$660,000 in cash and cause Grown Rogue to issue 600,000 Common Shares in three tranches:
| ● | Tranche<br>1 - US$200,000 in cash and 200,000 Common Shares due February 6, 2021, which was extended for 12 months with US$100,000 cash having<br>been paid and 200,000 Common Shares issued; |
|---|---|
| ● | Tranche<br>2 - US$260,000 in cash and 200,000 Common Shares due February 6, 2021, which was extended to August 6, 2021 for consideration<br>of issuing 200,000 Common Shares; and |
| --- | --- |
| ● | Tranche<br>3 - US$200,000 is due at exercise of the option plus 200,000 Common Shares, which has been satisfied in full. |
| --- | --- |
On May 10, 2021, the Company announced that it retired its senior secured convertible debentures of $2.36M that would have matured on November 1, 2021. The early retirement of the debt will save the Company $100k in interest payments over 2021. The debt repayment also results in the removal of the general security agreement over all of the Company’s assets and leaves only US$1.04M of term debt, of which US$450k is current. Of the current amount of US$450k, US$100k will complete a payment contributing to an option payment to acquire Golden Harvests. This results in a debt to projected 2021 adjusted EBITDA1 ratio of 0.15.^1^
The debt repayment included a cash payment of $1.54M and the issuance of 6,555,556 Common Shares at a price of $0.125 per share in accordance with the terms of the debentures. The repayment of principal results in the elimination of a potential conversion of debt into 12.3M common shares or approximately 8% of the current issued and outstanding common shares of the Company.
With the recent acquisition by Grown Rogue’s partner, Canopy Management of the controlling interest of Golden Harvests, the Company now beneficially controls 127,000 sq ft of indoor production, which will yield more than 1,000 lbs per month in constructed capacity. With additional expansion already underway in Michigan, Grown Rogue expects to increase production to 1,800lbs per month in 2022.
^1^The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income (loss) for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance. The following is a reconciliation of the Company’s net income (loss) to Adjusted EBITDA.
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| Item 6 | Reliance on Subsection 7.1(2) of National Instrument 51-102 |
|---|
Not applicable.
| Item 7 | Omitted Information |
|---|
Not applicable.
| Item 8 | Executive Officer |
|---|
J. Obie Strickler
President and Chief Executive Officer
Tel: (503) 765-8108
| Item 9 | Date of Report |
|---|
May 10, 2021.
CautionaryNote Regarding Forward Looking Information
Thisreport contains statements which constitute “forward-looking information” within the meaning of applicablesecurities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respectto future business activities. Forward- looking information is often identified by the words “may,” “would,”“could,” “should,” “will,” “intend,” “plan,” “anticipate,”“believe,” “estimate,” “expect” or similar expressions and include, without limitation, informationregarding: (i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieveits business and financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatoryapprovals, and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations,estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptionsand estimates of management considered reasonable at the date the statements are made. Although the Company believes that theexpectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties,and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effectson future results, performance or achievements of the combined company. Among the key factors that could cause actual resultsto differ materially from those projected in the forward-looking information are the following: changes in general economic,business and political conditions, including changes in the financial markets; and in particular in the ability of the Companyto raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception ofcannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adversechanges in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive governmentregulation and related costs, and other risks described in the Company’s public disclosure documents filed on www. sedar.com.
Shouldone or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information proveincorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimatedor expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actualresults to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Companydoes not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required byapplicable law.
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