LOWELL FARMS INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
This management's discussion and analysis ("MD&A") of the financial condition
and results of operations of the Company is for the three and nine months ended
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. In some
cases, you can identify these statements by forward-looking words such as "may",
"will", "would", "could", "should", "believes", "estimates", "projects",
"potential", "expects", "plans", "intends", "anticipates", "targeted",
"continues", "forecasts", "designed", "goal", or the negative of those words or
other similar or comparable words. Any statements contained in this Quarterly
Report on Form 10-Q that are not statements of historical facts may be deemed to
be forward-looking statements. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends that we believe may affect our business, financial condition,
results of operations and future growth prospects. The forward-looking
statements contained herein are based on certain key expectations and
assumptions, including, but not limited to, with respect to expectations and
assumptions concerning receipt and/or maintenance of required licenses and third
party consents and the success of our operations, are based on estimates
prepared by us using data from publicly available governmental sources, as well
as from market research and industry analysis, and on assumptions based on data
and knowledge of this industry that we believe to be reasonable. These
forward-looking statements are not guarantees of future performance or
development and involve known and unknown risks, uncertainties and other factors
that are in some cases beyond our control. As a result, any or all of our
forward- looking statements in this Quarterly Report on Form 10-Q may turn out
to be inaccurate. Factors that may cause actual results to differ materially
from current expectations include, among other things, those listed under "Risk
Factors" in our Form 10-K for the year ended
OVERVIEW OF THE COMPANY
We are a
On
The Lowell Acquisition also substantially broadened our customer base by adding
highly developed direct-to-consumer channels to complement our pre-existing
network of retail dispensary customers. This addition to our customer base has
resulted in broader geographic coverage in
On
In addition to the processing facility acquired in the C Quadrant Acquisition,
we operate a 225,000 square foot greenhouse cultivation facility in
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Product Offerings
Our product offerings include flower, vape pens, oils, extracts, chocolate edibles, mints, gummies, tinctures and pre-rolls, including our automated pre-roll line called 35's. We sell our products under owned and third-party brands.
Brands we own include the following:
o Lowell Herb Co. and Lowell Smokes - premium packaged flower, pre-roll,
concentrates, and vape products.
o House Weed - a value driven flower, vape and concentrates offering,
delivering a flavorful and potent experience with dependable quality.
o Kaizen - a premium brand offering a full spectrum of cannabis
concentrates.
o Moon - offers a range of cannabis bars, bites and fruit chews in a variety
of flavors, focusing on high- potency, high-quality and high-value.
o Original Pot Company - infuses its baked edibles with high quality
cannabis.
o Cypress Reserve - a premium flower brand reserved for the Company's
highest potency harvests from its greenhouses.
o Flavor Extracts - provides crumble and terp sugar (which is an edible
cannabis product with isolated and enhanced flavor and aromas) products
that are hand-selected for optimum flavor and premium color.
We exclusively manufacture and distribute
Cultivation
We conduct cannabis cultivation operations located in
The first harvest was in the third quarter of calendar year 2017. In 2021 we
completed a series of facility upgrades to our greenhouses and supporting
infrastructure, which increases facility output approximately four times from
that generated in 2019. These facility improvements include separate grow rooms
configured with drop-shades, supplemental lighting, upgraded electrical
capability with environmental controls and automated fertigation, and raised
gutter height in two of the greenhouses. We harvested approximately 9,000,
17,000 and 32,000 pounds of flower in 2019, 2020 and 2021, respectively, and are
currently projecting to harvest between 40,000 and 42,000 pounds in 2022 as a
result of these facility upgrades and improvements. We have invested
approximately
We maintain a strict quality control process which facilitates a predictable output yield of pesticide-free products.
Extraction
Extraction operations were first launched by us in the third quarter of 2017
with the commissioning of our 5,000 square foot licensed laboratory within our
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We currently own and operate five closed loop volatile extraction machines, each housed in a separate room, and each having the capacity to process approximately 100 pounds of dry product per day yielding approximately 5 kilograms of cannabis concentrates. We also currently own and operate 14 purge ovens to work in conjunction with the 5 extraction units in the laboratory. Purge ovens, also known as vacuum ovens, are used after the processing by the extraction units to remove the solvents from the end-product in a low pressure and high heat environment.
In 2021 we commenced solventless extraction activities with the capacity to process approximately 120 pounds of biomass daily yielding approximately 4 kilograms of cannabis concentrates. We currently own and operate one extraction unit which works in conjunction with 5 freeze dryers, 2 ice machines, 3 water filtration systems, 1 UV sterilizer, 2 rosin presses and an 80 square foot walk-in freezer. The solventless process yields a superior product to the volatile extraction process and is the fastest growing category in concentrates.
The extraction operations utilize cannabis feedstocks from our cultivation site, supplemented with feedstock acquired from multiple third-party cultivations. Concentrate production is packaged as branded extracts, such as crumble, shatter, wax and sugar for distribution, incorporated into its manufactured edible products and sold in bulk to other licensed enterprises. In addition, extraction is provided on a fee-based service on third-party material.
Manufacturing
Our manufacturing facility is located in
We also operate an automated flower filling and packaging line and an automated
pre-roll assembly line for making finished goods in those respective categories
with feedstock grown by the
Processing
On
Distribution and Distribution Services
We have a primary distribution center, warehouse and packing facility located in
Technology Platform
We maintain an automated, on-demand supply chain logistics platform, utilizing e-commerce, enterprise resource planning and other technology to manage product movement, order taking and logistics needs.
Inventory Management
We have comprehensive inventory management procedures, which are compliant with
the rules set forth by the
Sources, Pricing and Availability of Raw Materials, Component Parts or Finished Products
We presently source flower feedstock for sale primarily from our cultivation
facility. We have developed relationships with local cannabis growers whereby
flower quantities are readily available at competitive prices should the
sourcing need arise. We source our biomass needs in extraction from our
cultivation facility and from third-party suppliers. Remaining biomass material
is readily available from multiple sources at competitive prices.
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Reconciliations of Non-GAAP Financial and Performance Measures
The Company has provided certain supplemental non-GAAP financial measures in this MD&A. Where the Company has provided such non-GAAP financial measures, we have also provided a reconciliation below to the most comparable GAAP financial measure, see "Reconciliations of Non-GAAP Financial and Performance Measures" in this MD&A. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the GAAP financial measures presented herein.
In this MD&A, reference is made to adjusted EBITDA and working capital which are not measures of financial performance under GAAP. The Company calculates each as follows:
EBITDA is net income (loss), excluding the effects of income taxes (recovery)? net interest expense? depreciation and amortization? and adjusted EBITDA also includes non-cash fair value adjustments on investments? unrealized foreign currency gains/losses? share-based compensation expense? and other transactional and special expenses, such as out-of-period insurance and tax recoveries and acquisition costs and expenses related to the markup of acquired finished goods inventory, which are inconsistent in amount and frequency and are not what we consider as typical of our continuing operations. Management believes this measure provides useful information as it is a commonly used measure in the capital markets and as it is a close proxy for repeatable cash generated by operations. We use adjusted EBITDA internally to understand, manage, make operating decisions related to cash flow generated from operations and evaluate our business. In addition, we use adjusted EBITDA to help plan and forecast future periods.
Working capital is current assets less current liabilities. Management believes the calculation of working capital provides additional information to investors about the Company's liquidity. We use working capital internally to understand, manage, make operating decisions related to cash flow required to fund operational activity and evaluate our business cash flow needs. In addition, we use working capital to help plan and forecast future periods.
These measures are not necessarily comparable to similarly titled measures used by other companies.
The table below reconciles Net income (loss) to Adjusted EBITDA for the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
(in thousands) 2022 2021 2022 2021
Net loss $ (4,779 ) $ (8,700 ) $ (13,450 ) $ (14,685 )
Interest expense 1,355 1,365 4,002 3,019
Provision for
income taxes 90 75 225 213
Depreciation and
amortization in
cost of goods
sold 1,528 584 4,416 1,752
Depreciation and
amortization in
operating
expenses 110 260 340 751
Depreciation and
amortization in
other income
(expense) 104 196 419 391
EBITDA(1) (1,592 ) (6,220 ) (4,048 ) (8,559 )
Investment and
currency
(gains)/ losses 16 90 122 (35 )
Goodwill
impairment - 357 - 357
Share-based
compensation 109 361 427 986
Net effect of
cost of goods on
mark-up of
acquired
finished goods
inventory - - - 662
Transaction and
other special
charges(2) (2,014 ) 225 (1,984 ) (2,424 )
Adjusted $ (3,481 ) $ (5,187 ) $ (5,483 ) $ (9,013 )
EBITDA(1)
__________________
(1)Non-GAAP measure
(2) For the three and nine months ended
RESULTS OF OPERATIONS
Three Months Ended
Revenue
We derive our revenue from sales of extracts, distillates, branded and packaged
cannabis flower, pre-rolls, concentrates and edible products to retail licensed
dispensaries and bulk flower, biomass and concentrates to licensed manufacturers
and distributors in the state of
The Company classifies its revenues into the following major categories: Consumer Packaged Goods ("CPG") revenue, Bulk revenue, Lowell Farm Services ("LFS") revenue, and Licensing revenue.
· CPG products are primarily sales of proprietary brands of the Company.
· Bulk product includes revenue from flower, biomass and distillates sales.
· LFS revenue is related to our processing facility that provides drying,
bucking, trimming, sorting, grading, and packaging services.
· Licensing revenue includes fees from licensing the Lowell Smokes brand and
sales of packaging and support services associated with non-California
based activities.
Previously the Company categorized its revenues as owned, agency and distributed brands and has reclassified the prior period categorization to conform with current period presentation.
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Revenue by Category
Three Months Ended September 30, 2022 , Compared to Three Months Ended September
30, 2021 :
Three Months Ended
September 30, September 30,
(in thousands) 2022 2021 $ Change % Change
CPG $ 6,137 $ 8,937 $ (2,800 ) -31 %
Bulk 1,956 1,915 41 2 %
Lowell Farm Services 254 924 (670 ) -73 %
Licensing 310 691 (381 ) -55 %
Net revenue $ 8,657 $ 12,467 $ (3,810 ) -31 %
CPG revenues decreased for the three months ended
Bulk sales increased
LFS and licensing revenues were new activities initiated in the second half of
2021 generating
Cost of Sales, Gross Profit and Gross Margin
Cost of goods sold consist of direct and indirect costs of production processing and distribution, and includes amounts paid for direct labor, raw materials, packaging, operating supplies, and allocated overhead, which includes allocations of right of use asset depreciation, insurance, managerial salaries, utilities, and other expenses, such as employee training, cultivation taxes and product testing. The Company manufactures for a few brands and processes for cultivators that do not have the capability, licensing or capacity to process their own products. The fees earned for these activities absorbs fixed overhead in manufacturing and generates service revenue. Our focus in 2022 is expected to be on flower, pre-rolls and concentrates, on processing owned and third party product at our recently acquired processing facility, and on increased vertical integration utilizing greater internally sourced biomass for concentrates, edible and vape products. We are focusing on executing smaller, more frequent production runs to lower inventory working capital, optimize efficiencies and expedite product getting to the market faster, while continuing to decrease third party manufacturing activities.
Three Months EndedSeptember 30, 2022 , compared to Three Months EndedSeptember 30, 2021 : Three Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ % Net revenue $ 8,657$ 12,467 $ (3,810 ) -31 % Cost of goods sold 10,553 12,403$ (1,850 ) -15 % Gross profit (loss)$ (1,896 ) $ 64$ (1,960 ) -3,063 % Gross margin -21.9 % 0.5 %
Gross margin was -21.9% and 0.5% in the three months ended
We expect to realize improved gross margin throughout the remainder of 2022 and into 2023 as a result of the launch of Lowell 35 pre-rolls at the end of the current quarter and with improved operating leverage at production facilities. With new customers and an anticipated increase in LFS revenues, as well as an increase in licensing fees, we expect that performance will improve over future periods.
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Total Operating Expenses
Total operating expenses consist primarily of costs incurred at our corporate offices? personnel costs? selling, marketing, and other professional service costs including legal and accounting? and licensing costs. Sales and marketing expenses consist of selling costs to support our customer relationships, including investments in marketing and brand activities and corporate infrastructure required to support our ongoing business. We expect marketing expenses to decline from 2021 levels while we continue to invest in the development of our proprietary brands. Selling costs as a percentage of retail revenue are expected to decrease as our business continues to grow, due to efficiencies associated with scaling the business, and reduced focus on non-core brands.
Three Months EndedSeptember 30, 2022 , Compared to Three Months EndedSeptember 30, 2021 : Three Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ % Total operating expenses $ 3,330$ 7,015 $ (3,685) -53 % % of net revenue 38 % 56 %
Total operating expenses decreased
Other Income (Expense) Three Months EndedSeptember 30, 2022 , Compared to Three Months EndedSeptember 30, 2021 : Three Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ % Total other income (expense) $ 537$ (1,674) $ 2,211 132 % % of net revenue -6 % -13 %
Other income (expense) changed
Net Income (Loss) Three Months EndedSeptember 30, 2022 , Compared to Three Months EndedSeptember 30, 2021 : Three Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ %
Net income (loss)$ (4,779) $ (8,700) $ 3,921 45 %
Net loss was
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Nine Months Ended
Revenue by Category Nine Months EndedSeptember 30, 2022 , Compared to Nine Months EndedSeptember 30, 2021 : Nine Months Ended September 30, September 30, (in thousands) 2022 2021 $ Change % Change CPG$ 22,658 $ 24,891 $ (2,233 ) -9 % Bulk 7,130 12,130 (5,000 ) -41 % Lowell Farm Services 3,151 927 2,224 239 % Licensing 1,308 705 603 86 % Net revenue$ 34,247 $ 38,653 $ (4,406 ) -11 %
CPG revenues decreased to
Bulk sales decreased by
LFS and licensing revenues were new activities initiated in the second half of
2021 generating
A strategic decision was made in 2021 to focus only on agency and distributed brands that realize a higher per order sales level.
Cost of Sales, Gross Profit and Gross Margin
Nine Months EndedSeptember 30, 2022 , Compared to Nine Months EndedSeptember 30, 2021 : Nine Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ % Net revenue$ 34,247 $ 38,653 $ (4,406) -11 % Cost of goods sold 33,075 34,317$ (1,242) -4 % Gross profit $ 1,172$ 4,336 $ (3,164) -73 % Gross margin 3.4 % 11.2 %
Gross margin was 3.4% and 11.2% in the nine months ended
We expect to realize improved gross margin throughout the remainder of 2022 and in 2023 as a result of the continuing growth of retail flower , the launch of new pre-roll products, an anticipated increase in LFS revenues as we pursue new customers, and an increase in licensing fees from out of state partners. We expect that pricing will remain soft in the remainder of 2022 and into the first quarter of 2023 and will maintain relatively stable throughout the remainder of the harvests during the year.
Total Operating Expenses Nine Months EndedSeptember 30, 2022 , Compared to Nine Months EndedSeptember 30, 2021 : Nine Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ % Total operating expenses$ 11,882 $ 17,457 $ (5,575) -32 % % of net revenue 35 % 45 %
Total operating expenses decreased
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Other Income (Expense)
Nine Months Ended September 30, 2022 , Compared to Nine Months Ended September
30, 2021 :
Nine Months Ended
September 30, September 30, Change
(in thousands) 2022 2021 $ %
Total other income (expense) $ (2,515) $ (1,351) $ (1,164) 86 %
% of net revenue -7 % -3 %
Other income (expense) changed
Net Income (Loss) Nine Months EndedSeptember 30, 2022 , Compared to Nine Months EndedSeptember 30, 2021 : Nine Months Ended September 30, September 30, Change (in thousands) 2022 2021 $ % Net income (loss)$ (13,450) $ (14,685) $ 1,235 8 %
Net loss was
LIQUIDITY AND CAPITAL RESOURCES
Our primary need for liquidity is to fund the working capital requirements of our business, capital expenditures, general corporate purposes, and debt service. Historically our primary source of liquidity has been funds generated by financing activities. Our ability to fund our operations, to make planned capital expenditures, to make scheduled debt payments and to repay or refinance indebtedness depends on our future operating performance and cash flows, and ability to obtain equity or debt financing, which are subject to prevailing economic conditions, as well as financial, business and other factors, some of which are beyond our control. Cash generated from operations, for the first nine months of 2022, were not sufficient to fund operations, capital expenditures and debt service. For the balance of 2022, we expect our primary source of liquidity will be funds generated by operations, supported in part by financing should it be available and economically feasible.
At
The Company is focused on improving its balance sheet by improving accounts receivable collections, right-sizing inventories and increasing gross profits. We have taken a number of steps to improve our ability to fund operations and capital expenditures including:
· Accelerated cultivation facility and operating assets renovations to
increase flower and trim output;
· Developed new cultivation genetics focused on increasing yields and
potency;
· Scaled back our investment in and support for non-core brands;
· Focused marketing and brand development activities on significantly
growing the Lowell brands acquired in the first quarter of 2021;
· Restructured our organization and identified operating, selling and
administrative expense cost efficiencies;
· Developed LFS, which commenced operations in the third quarter of 2021 to
add revenue and cash flow generation, and;
· Licensed the Lowell Smokes brand in Illinois and Massachusetts , with
Colorado and New Mexico expected to be added in the remainder of 2022.
The Company anticipates continued improvement in the remainder of 2022 and in 2023 due in large part to yield improvements in cultivation, greater revenues from licensing operations and improved operational efficiency.
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Cash Flows
The following table presents the Company's net cash inflows and outflows from
the condensed interim consolidated financial statements of the Company for the
nine months ended
Nine Months Ended
September 30, September 30, Change
(in thousands) 2022 2021 $ %
Net cash used in operating (18,463) 12,149 -66
activities $ (6,314) $ $ %
Net cash used in investing (6,721) 3,820 -57
activities (2,901) %
Net cash provided by 16,428 (11,808) -72
financing activities 4,620 %
Change in cash and cash (8,756) 4,161 48
equivalents $ (4,595) $ $ %
Cash used in operating activities
Net cash used in operating activities was
Cash used in investing activities
Net cash used in investing activities was
Cash provided by financing activities
Net cash provided by financing activities was
We are evaluating cash on hand, cash flows from operations and potential new sources of funding to meet the operating needs of the organization. The Company's strategic alternatives committee will continue to evaluate these factors in conjunction with evaluating discussions with interested parties.
Working Capital and Cash on Hand
The following table presents the Company's cash on hand and working capital
position as of
September 30, December 31, Change
(in thousands) 2022 2021 $ %
Working capital(1) $ 15,131 $ 21,305 $ (6,174) -29 %
Cash and cash equivalents $ 3,292 $ 7,887 $ (4,595) -58 %
_________________
(1) Non-GAAP measure - see Non-GAAP Financial Measures in this MD&A. (Total current assets less total current liabilities)
At
The Company's future working capital is expected to be significantly impacted by the growth in operations, increased cultivation output, and continuing margin improvement.
CHANGES IN OR ADOPTION OF ACCOUNTING PRONOUNCEMENTS
This MD&A should be read in conjunction with the audited financial statements of
the Company for the year ended
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CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company's condensed consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements are described below.
· Estimated Useful Lives and Depreciation of Property and Equipment -
Depreciation of property and equipment is dependent upon estimates of
useful lives which are determined through the exercise of judgment. The
assessment of any impairment of these assets is dependent upon estimates
of recoverable amounts that take into account factors such as economic and
market conditions and the useful lives of assets.
· Estimated Useful Lives and Amortization of Intangible Assets -
Amortization of intangible assets is recorded on a straight-line basis
over their estimated useful lives, which do not exceed the contractual
period, if any.
· Fair Value of Investments in Private Entities - The Company uses a
discounted cash flow model to determine fair value of its investment in
private entities. In estimating fair value, management is required to make
certain assumptions and estimates such as discount rate, long term growth
rate and, estimated free cash flows.
· Share-Based Compensation - The Company uses the Black-Scholes
option-pricing model to determine the fair value of stock options and
warrants granted. In estimating fair value, management is required to make
certain assumptions and estimates such as the expected life of units,
volatility of the Company's future share price, risk free rates, future
dividend yields and estimated forfeitures at the initial grant date.
Changes in assumptions used to estimate fair value could result in
materially different results.
· Deferred Tax Asset and Valuation Allowance - Deferred tax assets,
including those arising from tax loss carry-forwards, requires management
to assess the likelihood that the Company will generate sufficient taxable
earnings in future periods in order to utilize recognized deferred tax
assets. Assumptions about the generation of future taxable profits depend
on management's estimates of future cash flows. In addition, future
changes in tax laws could limit the ability of the Company to obtain tax
deductions in future periods. To the extent that future cash flows and
taxable income differ significantly from estimates, the ability of the
Company to realize the net deferred tax assets recorded at the reporting
date could be impacted.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK
The Company's financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities? current portion of long-term debt? and long-term debt. The carrying values of these financial instruments approximate their fair values.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs used to make the measurements. The hierarchy is summarized as follows:
· Level 1 - Quoted prices (unadjusted) that are in active markets for
identical assets or liabilities
· Level 2 - Inputs that are observable for the asset or liability, either
directly (prices) for similar assets or liabilities in active markets or
indirectly (derived from prices) for identical assets or liabilities in
markets with insufficient volume or infrequent transactions
· Level 3 - Inputs for assets or liabilities that are not based upon
observable market data
The Company has exposure to the following risks from its use of financial instruments and other risks to which it is exposed and assess the impact and likelihood of those risks.
These risks include: market, credit, liquidity, asset forfeiture, banking and interest rate risk.
Credit Risk
· Credit risk is the risk of a potential loss to the Company if a customer
or third party to a financial instrument fails to meet its contractual
obligations. The maximum credit exposure at September 30, 2022 and
December 31, 2021 is the carrying amount of cash and cash equivalents and
accounts receivable. All cash and cash equivalents are placed with U.S.
and Canadian financial institutions.
· The Company provides credit to its customers in the normal course of
business and has established credit evaluation and monitoring processes to
mitigate credit risk but has limited risk as a significant portion of its
sales are transacted with cash.
Liquidity Risk
· Liquidity risk is the risk that the Company will not be able to meet its
financial obligations associated with financial liabilities. The Company
manages liquidity risk through the management of its capital structure.
The Company's approach to managing liquidity is to ensure that it will
have sufficient liquidity to settle obligations and liabilities when due.
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In addition to the commitments outlined in Note 15, the Company has the
· following contractual obligations at September 30, 2022 and December 31,
2021 :
Maturity: < 1 Year Maturity: > 1 Year
September 30, December 31, September 30, December 31,
(in thousands) 2022 2021 2022 2021
Accounts
payable and
Other accrued
liabilities $ 6,910 $ 6,808 $ - $ -
Market Risk
· Strategic and operational risks arise if the Company fails to carry out
business operations and/or to raise sufficient equity and/or debt
financing. These strategic opportunities or threats arise from a range of
factors that might include changing economic and political circumstances
and regulatory approvals and competitor actions. The risk is mitigated by
consideration of other potential development opportunities and challenges
which management may undertake.
Interest Rate Risk
· Interest rate risk is the risk that the fair value or the future cash
flows of a financial instrument will fluctuate as a result of changes in
market interest rates. The Company's interest-bearing loans and borrowings
are all at fixed interest rates? therefore, the Company is not exposed to
interest rate risk on these financial liabilities. The Company considers
interest rate risk to be immaterial.
Price Risk
· Price risk is the risk of variability in fair value due to movements in
equity or market prices. Cannabis is a developing market and subject to
volatile and possibly declining prices year over year, including
volatility in bulk flower pricing, as a result of increased competition
and other factors. Because adult-use cannabis is a newly commercialized
and regulated industry in the State of California , historical price data
is either not available or not predictive of future price levels. There
may be downward pressure on the average price for cannabis. There can be
no assurance that price volatility will be favorable or in line with
expectations. Pricing will depend on general factors including, but not
limited to, the number of licenses granted by the local and state
governments, the supply such licensees are able to generate, activity by
unlicensed producers and sellers and consumer demand for cannabis. An
adverse change in cannabis prices, or in investors' beliefs about trends
in those prices, could have a material adverse outcome on the Company and
its valuation.
Asset Forfeiture Risk
· Because the cannabis industry remains illegal under U.S. federal law, any
property owned by participants in the cannabis industry which are either
used in the course of conducting such business, or are the proceeds of
such business, could be subject to seizure by law enforcement and
subsequent civil asset forfeiture. Even if the owner of the property were
never charged with a crime, the property in question could still be seized
and subject to an administrative proceeding by which, with minimal due
process, it could be subject to forfeiture.
Banking Risk
· Notwithstanding that a majority of states have legalized medical
marijuana, there has been no change in U.S. federal banking laws related
to the deposit and holding of funds derived from activities related to the
marijuana industry. Given that U.S. federal law provides that the
production and possession of cannabis is illegal, there are arguments that
financial institutions cannot accept for deposit funds from businesses
involved with the marijuana industry and legislative efforts to provide
greater certainty to financial institutions have not been successful.
Consequently, businesses involved in the marijuana industry often have
difficulty accessing the U.S. banking system and traditional financing
sources. The inability to open bank accounts with certain institutions may
make it difficult to operate the business of the Company, its subsidiaries
and investee companies, and leaves their cash holdings vulnerable.© Edgar Online, source
