What changed in this filing

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Item 1A. Risk Factors

2023-02-28 compared with 2022-03-01 · 206 added, 227 removed, 874 unchanged (33% of the section changed)

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Risk Factor Summary

• We have a limited operating history and our growth strategy may not be successful.

• Certain of our subsidiaries and joint ventures have limited operating histories and our growth strategy may not be successful.

• We may not be able to achieve or maintain profitability and may continue to incur losses in the future.

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• We are subject to extensive regulation and licensing and may not successfully comply with all applicable laws and regulations.

• Our business has been and will likely continue to be adversely affected by the COVID-19 pandemic.

• Our businesses face highly competitive conditions.

• Altria has significant influence over us and may acquire over 50% of our common shares.

• Altria has significant influence over us.

• The price of our common shares has been and may continue to be highly volatile.

• We have had two restatements and six material weaknesses in our internal control over financial reporting over the last three years, and two material weaknesses remain unremediated at December 31, 2021.

• We have had two restatements and seven material weaknesses in our internal control over financial reporting over the last four years, and one material weakness remains unremediated at December 31, 2022.

• We are subject to other risks generally applicable to our industry and the conduct of our businesses.

Risks Relating to Our Growth Strategy.

We and certain of our subsidiaries have limited operating history and therefore we are subject to many of the risks common to early-stage enterprises.

Certain of our subsidiaries have limited operating histories and therefore we are subject to many of the risks common to early-stage enterprises.

We began carrying on business in 2013;

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We are therefore subject to many of the risks common to early-stage enterprises, including limitations with respect to personnel, financial, and other resources and lack of revenues.

Effective as of December 31, 2021, we dissolved MedMen Canada Inc., our joint venture established in March 2018 with MedMen Enterprises, Inc.

with the objective of the retail sale and marketing of cannabis products in Canada, due to its prolonged inactivity and a lack of business operations.

We may not be able to achieve or maintain profitability and may continue to incur losses in the future.

We have incurred significant losses in recent periods.

We had negative operating cash flow for the fiscal years ending December 31, 2021, December 31, 2020, December 31, 2019, December 31, 2018, December 31, 2017, December 31, 2016, December 31, 2015 and December 31, 2014.

We may not be able to achieve or maintain profitability and may continue to incur significant losses in the future even in light of our Realignment and our planned exit from the Stayner Facility.

We had negative operating cash flow for the last five fiscal years.

We may not be able to achieve or maintain profitability and may continue to incur significant losses in the future even in light of our Realignment and the change in the nature of operations at the Peace Naturals Campus and the exit of the wholesale beauty category in the U.S.

In addition, we expect to continue to incur significant operating expenses as we implement initiatives to continue to grow our business.

If our revenues do not increase to offset these expected costs and operating expenses, we will not be profitable.

If our revenue declines or fails to grow at a rate faster than our operating expenses, and we are unable to secure funding under terms that are favorable or acceptable to us, or at all, we will not be able to achieve and maintain profitability in future periods.

If our revenue declines or fails to grow at a rate faster than our operating expenses, we will not be able to achieve and maintain profitability in future periods.

As a result, we may continue to generate losses.

We may not achieve profitability in the future and, even if we do become profitable, we might not be able to sustain that profitability.

Table of Con tents

We may not be able to successfully manage our growth.

We are currently in an early development stage and may be subject to growth-related risks, including capacity constraints and pressure on our internal systems and controls, which may place significant strain on our operational and managerial resources.

While our revenue has grown in recent years, our ability to manage and sustain revenue growth will depend on a number of factors, many of which are beyond our control, including, but not limited to, changes in laws and regulations respecting the production of U.S.

While our revenue has generally grown in recent years, our ability to manage and sustain revenue growth will depend on a number of factors, many of which are beyond our control, including, but not limited to, changes in laws and regulations respecting the production of U.S.

hemp and cannabis products, competition from other license holders, the size of the illegal market and the adult-use market in Canada, and our ability to produce sufficient volumes of our products to meet customer demand.

In addition, we are subject to a variety of business risks generally associated with developing companies.

Our ability to manage growth effectively will require us to continue to implement and improve our operational and financial systems and to expand, train and manage our employee base.

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Any inability to manage growth successfully could have a material adverse effect on our business, financial condition and results of operations.

Our use of joint ventures may expose us to risks associated with jointly owned investments.

We currently operate parts of our business through joint ventures with other companies, and we may enter into additional joint ventures and strategic alliances in the future.

Joint venture investments may involve risks not otherwise present for investments made solely by us, including:

(i) we may not control the joint ventures, either by virtue of our economic or legal ownership share, or our ability to influence day-to-day operational decision-making;

(ii) our joint venture partners may not agree to distributions that we believe are appropriate;

(iii) where we do not have substantial decision-making authority, we may experience impasses or disputes with our joint venture partners on certain decisions, which could require us to expend additional resources to resolve such impasses or disputes, including litigation or arbitration;

(iv) our joint venture partners may become insolvent or bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner;

(v) the arrangements governing our joint ventures may contain certain conditions or milestone events that may never be satisfied or achieved;

(vi) our joint venture partners may have business or economic interests that are inconsistent with ours and may take actions contrary to our interests;

(vii) we may suffer losses as a result of actions taken by our joint venture partners with respect to our joint venture investments;

(viii) it may be difficult for us to exit a joint venture if an impasse arises or if we desire to sell our interest for any reason;

(ix) our joint venture partners may exercise termination rights under the relevant agreements and (x) conflicts of interest may arise between our joint ventures and Company personnel who are directors of our joint ventures because of the fact that such directors are employed by us.

In addition, we may, in certain circumstances, be liable for the actions of our joint ventures or joint venture partners.

Any of the foregoing risks could have a material adverse effect on our business, financial condition and results of operations, and the magnitude of these material adverse effects could be greater to the extent we decide to rely on such joint ventures for certain goods or services, such as the receipt of raw materials from Cronos GrowCo, or decide to outsource certain operating activities to such joint ventures.

There can be no assurance of continued growth in Israel and our performance in Israel depends on, among other things, our ability to continue to import cannabis into Israel and our joint venture partners.

While our revenue in Israel has experienced a recent period of significant growth, our prior performance is not indicative of any potential future results in Israel.

There can be no assurance that our recent growth in the Israeli market can be sustained or will continue.

Our ability to manage and sustain revenue growth in Israel will depend on a number of factors, many of which are beyond our control, including, but not limited to, our ability to continue to import cannabis into Israel, changes in laws and regulations respecting the cultivation, production and marketing of dried flower, pre-rolls and oils in Israel, increased competition, our ability to produce sufficient volumes of our products to meet customer demand and our ability to maintain or grow our market share in Israel.

Any of these factors could materially and negatively impact our growth in Israel.

In connection with the Realignment, we have begun to further leverage our strategic joint venture with Cronos GrowCo.

Our current efforts to wind-down the cultivation and certain production activities at the Peace Naturals Campus have increased the importance of Cronos GrowCo to our business and operations.

Once the cultivation and certain production activities at the Peace Naturals Campus have ceased, Cronos GrowCo’s production facilities will be our principal source of raw materials.

Therefore, our performance in Israel is reliant on our ability to acquire such raw materials on a timely and cost-effective basis from Cronos GrowCo and to continue to import such raw materials and cannabis products to Israel from Cronos GrowCo’s production facilities.

There is no guarantee that we will be able to successfully execute our strategy to expand production at Cronos GrowCo or that we will be able to obtain the regulatory approvals, licenses and permits required for both the export of cannabis from Canada and the import of cannabis into Israel.

Our acquisition strategy may not be successful, and we have in the past, and may in the future, need to write down the goodwill and indefinite-lived intangible assets recognized upon the acquisitions.

In the second quarter of 2021, we wrote off all of the goodwill and substantially all of the indefinite-lived intangible assets recognized upon the Redwood Acquisition.

In the second quarter of 2021, we wrote off all of the goodwill and substantially all of the indefinite-lived intangible assets recognized upon the acquisition of Redwood.

Acquisitions of companies, or equity interests of companies operating in new markets, such as the U.S.

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strategy in part depends on the success of the PharmaCann Investment and there is no guarantee that we will exercise the PharmaCann Option in the near term, or at all, and, even if exercised, that the PharmaCann Investment will achieve the expected benefits of the transaction .”

We have had two restatements and six material weaknesses in our internal control over financial reporting over the last three years, and two material weaknesses remain unremediated at December 31, 2021.

We have a material weakness in our control environment, and in 2021, we experienced significant turnover, both voluntary and involuntary, in our accounting and financial reporting functions.

If we are unable to remediate our existing material weaknesses and create an appropriate control environment, our business, results of operations, financial condition, cash flows and reputation will be adversely affected.

We have had two restatements and seven material weaknesses in our internal control over financial reporting over the last four years, and one material weakness remains unremediated at December 31, 2022.

We had a material weakness in our control environment, and in 2021 and 2022, we experienced significant turnover, both voluntary and involuntary, in our accounting and financial reporting functions.

If we are unable to remediate our existing material weakness and create an appropriate control environment, our business, results of operations, financial condition, cash flows and reputation will be adversely affected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) and for evaluating and reporting on the effectiveness of our system of internal control.

Effective internal control is necessary for us to provide timely, reliable and accurate financial reports, identify and proactively correct any deficiencies, material weaknesses or fraud and meet our reporting obligations.

We had two restatements and six material weaknesses in the last three years, have two material weaknesses existing as of December 31, 2021 and have had significant turnover, both voluntary and involuntary, in our accounting and financial reporting functions.

Moreover, we have a material weakness in our control environment.

We had two restatements and seven material weaknesses in the last four years, have one material weakness existing as of December 31, 2022, and have had significant turnover, both voluntary and involuntary, in our accounting and financial reporting functions.

Moreover, we had a material weakness in our control environment.

Remediation efforts have placed, and will continue to place, a significant burden on management and add increased pressure on our financial reporting resources and processes.

The accuracy of our financial reporting and our ability to timely file with the SEC and the applicable securities regulatory authorities in Canada has in the past been, and may in the future be, adversely impacted if we are unable to successfully remediate these material weaknesses in a timely manner, or if any additional material weaknesses in our internal control over financial reporting are identified.

The accuracy of our financial reporting and our ability to timely file with the SEC and the applicable securities regulatory authorities in Canada have in the past been, and may in the future be, adversely impacted if we are unable to successfully remediate material weaknesses in a timely manner, or if any additional material weaknesses in our internal control over financial reporting are identified.

In addition, if our remedial efforts are insufficient, or if additional material weaknesses or significant deficiencies in our internal control occur in the future, we could be required to restate our financial statements again, which could materially and adversely affect our business, results of operations and financial condition, restrict our ability to access the capital markets, require us to expend significant resources to correct the material weaknesses or deficiencies, subject us to regulatory investigations and penalties, harm our reputation, cause a decline in investor confidence or otherwise cause a decline in our stock price.

We are subject to regulatory investigations relating to our two prior restatements as well as civil lawsuits.

We cannot predict the outcome of these matters, but they may involve, among other things, cease and desist orders, significant fines, penalties and damages, as well as significant costs and expenses of responding to the investigations and defending the civil litigation.

For more information on these investigations and proceedings, see Part 1, Item 3, Legal Proceedings, of this Annual Report.

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We are subject to civil litigation relating to the restatements and we cannot predict the outcome of this litigation, but we have incurred and expect to continue to incur significant costs and expenses in defending against this civil litigation.

For more information on this civil litigation and proceedings, see Part 1, Item 3, Legal Proceedings, of this Annual Report.

We are subject to disabilities as a result of our settlement with the SEC that may expose us to increased future litigation and adversely affect our ability to raise capital.

As of the date of our settlement with the SEC (the “SEC Order”), October 24, 2022, and for a period of three years thereafter, we are unable to rely on the safe harbor provisions regarding forward-looking statements provided by the Securities Act and the Exchange Act.

Our inability to rely on these safe harbor provisions may expose us to increased future litigation in connection with forward-looking statements in our public disclosures.

Further, as of the date of the SEC Order, we have lost our status as a “well-known seasoned issuer” for a period of three years, which places limitations on the manner in which we can market our securities to the public, and we are unable to rely on the private offering exemptions provided by Regulations A and D under the Securities Act for a period of five years, which could impair our ability to raise additional capital in the private market quickly in response to changing requirements and market conditions.

There can be no assurance that our current and future strategic alliances or expansions of scope of existing relationships will have a beneficial impact on our business, financial condition and results of operations.

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There can be no assurance that Ginkgo will be able to develop microorganisms that we will be able to commercialize or to obtain patents relating to production of the target cannabinoids, or that third parties will not develop similar microorganisms or obtain patents that may restrict our ability to commercialize the microorganisms developed by Ginkgo, and, as a result, there can be no assurance that we will be able to realize the expected benefits of the Ginkgo Strategic Partnership.

Additionally, we have determined, and may determine in the future, that the production of certain cannabinoids is not economically feasible and in our best interests and we have abandoned, and may abandon in the future, the production efforts of Ginkgo with respect to certain target cannabinoids.

Even if we are able to commercialize cultured cannabinoids, we may not be able to generate satisfactory returns on them or on the products that incorporate them, and there may not be demand for such cultured cannabinoid products.

In addition, pursuant to the Ginkgo Collaboration Agreement, if we undergo a change of control that is approved by the Board, including a change of control resulting from the exercise of the Altria Warrant, Ginkgo may elect to receive cash payments, which, given the number of Equity Milestone Events (as defined in the Ginkgo Collaboration Agreement) that have occurred to date, could total up to $80 million, in lieu of the common shares that would otherwise become issuable in connection with any Equity Milestone Events achieved following such election (the “Milestone Cash Election”).

In addition, pursuant to the Ginkgo Collaboration Agreement, if we undergo a change of control that is approved by the Board, Ginkgo may elect to receive cash payments, which, given the number of Equity Milestone Events (as defined in the Ginkgo Collaboration Agreement) that have occurred to date, could total up to $17 million, in lieu of the common shares that would otherwise become issuable in connection with any Equity Milestone Events achieved following such election (the “Milestone Cash Election”).

If we undergo a change in control that has not been approved by the Board, then Ginkgo will have the ability to terminate the Ginkgo Collaboration Agreement immediately, in which case, among other things:

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For a discussion of our most recent impairments of the Ginkgo exclusive licenses, see Note 6 “ Goodwill and Intangible Assets, net ” to the consolidated financial statements in the Item 8 of this Annual Report.

With respect to the Technion Research Agreement, we will have access to the results of preclinical studies conducted by Technion over a three-year period, focusing on acne, psoriasis and skin repair.

However, there can be no assurance that the preclinical studies will provide any actionable findings.

As a result, there can be no assurance that we will be able to realize the expected benefits of the Technion Research Agreement.

Even if the results are actionable, and we are able to develop commercial products based on such research, there may not be demand for such products.

For a discussion on the Technion Research Agreement, See “ Description of the Business - Research and Development Activities and Intellectual Property - Technion Skin Health Research Partnership ” in Item 1.

We may not successfully execute our production capacity strategy.

We may not be successful in executing our strategy to expand production capacity at certain of our facilities and joint ventures and exit from the Stayner Facility.

Continuing and expanding operations at the production facilities of Cronos Israel and Natuera will be subject to obtaining and maintaining the appropriate licenses from the relevant regulatory agencies in those jurisdictions.

In addition, continuing and expanding operations at Cronos GrowCo’s production facilities will be subject to obtaining and maintaining the appropriate licenses from Health Canada.

We may not be successful in executing our strategy to expand production capacity at certain of our facilities and joint ventures and wind-down of cultivation and certain production activities at the Peace Naturals Campus.

Continuing and expanding operations at our facilities and joint ventures will be subject to obtaining and maintaining the appropriate licenses from the relevant regulatory agencies in those jurisdictions.

In particular, continuing and expanding operations at Cronos GrowCo’s production facilities will be subject to obtaining and maintaining the appropriate licenses from Health Canada.

Construction delays or cost over-runs in respect of such operations, howsoever caused, could have a material adverse effect on our business, financial condition and results of operations.

Moreover, with the planned exit of the Stayner Facility, the continued operations of the Cronos GrowCo production facilities will be more important to us.

Once the Stayner Facility is closed, these production facilities will be our principal source of raw materials.

Table of Con tents

Moreover, with the change in the nature of operations at the Peace Naturals Campus, the continued operations of the Cronos GrowCo production facilities will be more important to us.

Once cultivation and certain production activities at the Peace Naturals Campus have ceased, these production facilities will be our principal source of raw materials.

In addition, we may not be successful in obtaining the necessary approvals required to export or import our products to or from the jurisdictions in which we or our joint ventures operate.

If we are unable to secure necessary production licenses in respect of our facilities and those of our joint ventures, the expectations of management with respect to the increased future cultivation and growing capacity may not be borne out, which could have a material adverse effect on our business, financial condition and results of operations.

There can be no assurance that the Realignment and the exit from the Stayner Facility will have a beneficial impact on our business, financial condition and results of operations.

The timing, costs and benefits of the Realignment and our exit from the Stayner Facility cannot be guaranteed.

There can be no assurance that the Realignment and the change in the nature of operations at the Peace Naturals Campus will have a beneficial impact on our business, financial condition and results of operations.

The timing, costs and benefits of the Realignment and the change in the nature of operations at the Peace Naturals Campus cannot be guaranteed.

In the first quarter of 2022, we announced our Realignment to centralize functions under common leadership to increase efficient distribution of resources, improve strategic alignment and eliminate duplication of roles and costs;

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adult-use cannabis market entry in the future.

Additionally, we announced a plan to leverage our strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by exiting the Stayner Facility.

There can be no assurance that these initiatives will achieve the expected benefits to our business or reduce costs or grow our revenue as intended.

Additionally, we announced a plan to leverage our strategic partnerships to improve supply chain efficiencies and reduce manufacturing overhead by partially exiting the Peace Naturals Campus.

In the first quarter of 2023, we announced a shift in our strategic plans for the Realignment.

Our intent is to retain select components of our operations at the Peace Naturals Campus, namely distribution and warehousing, certain R&D activities and manufacturing of certain of our proprietary innovation products.

There can be no assurance that these initiatives will achieve the expected benefits to our business or reduce costs or grow our revenue as intended and, if achieved at all, the timing thereof.

The execution and implementation of these initiatives involve risk, including that significant amounts of management’s time and Company resources could be diverted from our core operations in order to complete such initiatives.

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We have and will continue to incur costs to implement these initiatives, and we could be subject to litigation risks and expenses.

Our projected costs and expenses to exit from the Stayner Facility may turn out to be too low by a material amount.

Our projected costs and expenses to change the nature of our operations at the Peace Naturals Campus may turn out to be too low by a material amount.

The industries and markets in which we operate are relatively new, and these industries and markets may not continue to exist or grow as anticipated or we may ultimately be unable to succeed in these industries and markets.

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We have entered into various supply arrangements for cannabis products with various provincial purchasers and have secured listings with various private retailers in those provinces.

We have entered into such supply arrangements with nine provinces in Canada (where the relevant provincial body is the sole wholesale distributor of cannabis and cannabis products in the province) and with private retailers in Saskatchewan.

Our supply arrangements with provincial purchasers, each of which we understand to be substantially similar in all material respects with the supply arrangements entered into with the other license holders in the Canadian cannabis industry, do not contain any binding minimum purchase obligations on the part of the relevant provincial purchaser.

We expect purchase orders to be primarily driven by end-consumer demand for our products and the relevant provincial purchaser supply at the relevant time.

Accordingly, we cannot predict the quantities of our products that will be purchased by the provincial purchasers, or if our products will be purchased at all.

Provincial purchasers may change the terms of the supply agreements at any time during the supply relationship including pricing, have broad rights of return of products and are under no obligation to purchase our products or maintain any listings of our products for sale.

As a result, provincial purchasers have a significant amount of control over the terms of the supply arrangements.

Table of Con tents

We have entered into such supply arrangements with all provinces in Canada and the Yukon territory (where the relevant provincial body is the sole wholesale distributor of cannabis products in the province) and with private retailers in Saskatchewan.

Our supply arrangements with provincial and territorial purchasers, each of which we understand to be substantially similar in all material respects with the supply arrangements entered into with the other license holders in the Canadian cannabis industry, do not contain any binding minimum purchase obligations on the part of the relevant provincial purchaser.

We expect purchase orders to be primarily driven by end-consumer demand for our products and the relevant provincial or territorial purchaser supply at the relevant time.

Accordingly, we cannot predict the quantities of our products that will be purchased by the provincial and territorial purchasers, or if our products will be purchased at all.

Provincial and territorial purchasers may change the terms of the supply agreements at any time during the supply relationship including pricing, have broad rights of return of products and are under no obligation to purchase our products or maintain any listings of our products for sale.

As a result, provincial and territorial purchasers have a significant amount of control over the terms of the supply arrangements.

The effect of the legalization of adult-use cannabis in Canada on the medical cannabis market in Canada is still uncertain, and it may have a significant negative effect upon our medical cannabis business if consumers decide to purchase products available in the adult-use market instead of purchasing our medical-use products.

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We and such other cannabis producers have in the past produced and may in the future produce more cannabis than is needed to satisfy the collective demand of the Canadian medical and adult-use markets, and we may be unable to export that over-supply into other markets.

As a result, the available supply of cannabis could exceed demand, which has in the past and could in the future result in a significant decline in the market price for cannabis, which could have a material adverse effect on our business, financial condition and results of operations.

As a result, the available supply of cannabis could exceed demand, which has in the past, and may in the future, result in significant inventory write downs.

We may be unsuccessful in competing in the legal adult-use cannabis market in Canada.

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It is not always possible for us to identify and deter misconduct by our employees and other third parties, and the precautions taken by us to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations.

If any such actions are brought against us, and we are not successful in defending the Company or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and the curtailment of our operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

If any such actions are brought against us, and we are not successful in defending them, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, loss or suspension of licenses and the curtailment of our operations, any of which could have a material adverse effect on our business, financial condition and results of operations.

Some jurisdictions may never develop markets for cannabis and U.S.

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federal law and may never become legal under U.S.

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Furthermore, until such time as we exercise the PharmaCann Option, we will not have the ability to vote on matters requiring the vote of PharmaCann’s shareholders and, until the exercise of the PharmaCann Option, will not have the right to appoint directors to the PharmaCann board of directors.

Even after exercising the PharmaCann Option, we are entitled to appoint a director of PharmaCann’s board only if we continue to own at least 10% of the outstanding capital stock of PharmaCann, and in any event may appoint no more than two directors.

Even after exercising the PharmaCann Option, we are entitled to appoint a director of PharmaCann’s board only if we own at least 10% of the outstanding capital stock of PharmaCann, and in any event may appoint no more than two directors.

In addition, we are subject to certain standstill restrictions, both prior to and after the exercise of the PharmaCann Option, which restrictions further limit our ability to influence decisions of PharmaCann.

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On February 28, 2022, PharmaCann closed the previously announced LivWell Transaction.

Based upon the terms of the definitive merger agreement, our best estimate is that our ownership percentage in PharmaCann on a fully-diluted basis decreased to approximately 6.7%.

As a result of the LivWell Transaction, the Company’s ownership percentage in PharmaCann on a fully diluted basis decreased to approximately 6.4%.

As of December 31, 2022, the Company’s ownership percentage in PharmaCann on a fully diluted basis was approximately 6.3%.

Under the terms of our investment in PharmaCann, Cronos’ rights to nominate an observer or a director to the PharmaCann board of directors could be lost if our ownership drops below 6% on a fully diluted basis and we sell or transfer all or any portion of the PharmaCann Option (subject to certain exceptions).

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For example, our forecasts for product demand and market conditions were impacted by a decline in market prices for cannabis products in the Canadian market, which contributed to our inventory write-down in the second and fourth quarters of 2020.

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We could have difficulty integrating the operations of businesses that we have acquired and will acquire.

The success of our acquisitions, including the Redwood Acquisition and the acquisition of Cronos Fermentation, depends upon our ability to integrate any businesses that we acquire.

The success of our acquisitions depends upon our ability to integrate any businesses that we acquire.

The integration of acquired business operations could disrupt our business by causing unforeseen operating difficulties, diverting management’s attention from day-to-day operations and requiring significant financial resources that would otherwise be used for the ongoing development of our business.

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For more information on the risks associated with acquisitions, see “ Risk Factors – Risks Relating to Our Growth Strategy – Our acquisition strategy may not be successful and we have in the past, and may in the future, need to write down the goodwill and indefinite-lived intangible assets recognized upon the acquisitions .”

We have been and may in the future be required to write down intangible assets, including goodwill, due to impairment, which could have a material adverse effect on our results of operations or financial position.

The Company has been and may in the future be required to write down intangible assets, including goodwill, due to impairment, which would reduce earnings.

Indefinite-lived intangible assets are reviewed annually or more frequently when events or changes in circumstances indicate that the fair value of the indefinite-lived intangible assets have been reduced to less than their carrying amount.

We periodically calculate the fair value of our reporting units and intangible assets to test for impairment.

This calculation may be affected by several factors, including general economic conditions, regulatory developments, changes in category growth rates as a result of changing adult consumer preferences, success of planned new product introductions, and competitive activity.

Certain events can also trigger an immediate review of goodwill and intangible assets.

If the carrying amount of our reporting unit and other intangible assets exceed their fair value, the goodwill and other intangible assets are considered impaired, which would result in impairment losses and could have a material adverse effect on our consolidated financial position or results of operations.

We cannot provide any assurance that the U.S.

segment will successfully execute its business plans and strategies.

For a discussion of previous write downs of indefinite-lived intangible assets and goodwill, see Note 6 “Goodwill and Intangible Assets, net” to the consolidated financial statements in Item 8 of this Annual Report.

Risks Relating to Our Products

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Given these risks, uncertainties and assumptions, undue reliance should not be placed on such literature.

In particular, the FDA has raised several questions regarding the safety of CBD and gaps in the public scientific literature supporting the use of CBD by the general population.

In particular, the FDA has raised several questions regarding the safety of CBD and other cannabinoids and gaps in the public scientific literature supporting the use of CBD and other cannabinoids by the general population.

Clinical trials of cannabis-based medical products and treatments are novel terrain with very limited or non-existent history, and any trials may not result in commercially viable products and treatments.

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• trial participants or investigators failing to comply with study protocols;

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• trial participants failing to return for post-treatment follow-up at the expected rate;

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• third party clinical investigators declining to participate in our clinical studies, not performing the clinical studies on the anticipated schedule, or acting in ways inconsistent with the established investigator agreement, clinical study protocol or good clinical practices.

Any of the foregoing could cause our products or treatments not to be commercially viable.

Any of the foregoing could cause our products or treatments not to be commercially viable, which could have a material adverse effect on our business, financial condition and results of operations.

The controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer products and expose us to litigation and additional regulation.

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Some states, provinces, territories and municipalities in the U.S.

and Canada have already taken steps to prohibit the sale or distribution of vaporizers, restrict the sale and distribution of such products or impose restrictions on flavors or use of such vaporizers.

and Canada have already taken steps to prohibit the sale or distribution of vaporizers, restrict the sale and distribution of such products or impose restrictions on flavors, substances and concentration of substances used, or use of such vaporizers.

This trend may continue, accelerate and expand.

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Although this legislation sets rules and standards for the manufacture, composition, packaging, and marketing of cannabis vaporizer products, these rules and standards predate the spate of vaporizer-related health issues that have recently arisen in the U.S.

These issues and accompanying negative public sentiment may prompt Health Canada or individual provinces/territories to decide to further limit or defer the industry’s ability to sell cannabis vaporizer products, and may also diminish consumer demand for such products.

Currently, Québec, Newfoundland and Labrador and Prince Edward Island do not allow the sale of cannabis vaporizers in their respective jurisdictions and Health Canada is seeking to limit the flavors of inhaled cannabis extracts.

These issues and accompanying negative public sentiment may prompt Health Canada or individual provinces/territories or municipalities to decide to further limit or defer the industry’s ability to sell cannabis vaporizer products, and may also diminish consumer demand for such products.

Currently, Québec and Prince Edward Island do not allow the sale of cannabis vaporizers in their respective jurisdictions and Health Canada is seeking to limit the flavors of inhaled cannabis extracts.

In June 2021, Health Canada opened a consultation into the use of flavors in inhaled cannabis extracts as it claims that the availability of flavors is one of the factors that contributes to the increase in cannabis vaping in youth and young adults.

As part of this consultation, Health Canada released proposed regulations that contemplate prohibiting the production, sale, promotion, packaging and labelling of inhaled cannabis extracts from having a flavor, other than the flavor of cannabis.

As part of this consultation, Health Canada released proposed regulations that contemplate restricting the production, sale, promotion, packaging and labelling of inhaled cannabis extracts from having a flavor, other than the flavor of cannabis.

The proposed amendments would apply equally to inhaled cannabis extracts sold for medical and non-medical purposes.

The consultation period closed in September 2021 and the new regulations are expected to come into force in 2022.

The proposed amendments were pre-published in June 2021 and the consultation period closed in September 2021.

No expected in-force date has been publicly announced.

There can be no assurance that the jurisdictions in which we operate will allow the sale of cannabis vaporizers in the future, that other jurisdictions will not prohibit the sale of cannabis vaporizers, that we will be able to meet any additional compliance requirements or regulatory restrictions, or that we will remain competitive in face of unexpected changes in market conditions.

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Such a development could also lead to litigation, reputational harm and significant regulation.

Loss of demand for our product, product liability claims and increased regulation stemming from unfavorable scientific studies on vaporizer products could have a material adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.

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Loss of demand for our products, product liability claims and increased regulation stemming from unfavorable scientific studies on vaporizer products could have a material adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.

We, or the cannabis and U.S.

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Failure to establish or maintain business relationships could have a material adverse effect on our business, financial condition and results of operations.

Any third party service provider or supplier could suspend or withdraw its services to us if it perceives that the potential risks exceed the potential benefits to such services.

Any third party service provider or supplier could suspend or withdraw its services to us or require increased fees or compensation if it perceives that the potential risks exceed the potential benefits to such services.

For example, we face challenges making U.S.

dollar wire transfers or engaging any third party service provider or supplier with a substantial presence where cannabis is not federally legal (including the U.S.).

In these circumstances, while we believe that such services can be procured from other institutions, we may in the future have difficulty maintaining existing, or securing new, bank accounts or clearing services, service providers or other vendors.

Although we take care in protecting our image and reputation, we do not ultimately have control over how we or the U.S.

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Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our business strategy and realize on our growth prospects, thereby having a material adverse impact on our business, financial condition and results of operations.

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We may be subject to litigation in the ordinary course of our marketing, distribution and sale of our products.

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Litigation may also create a negative perception of our brands, which could have an adverse effect on our business, financial condition and results of operations.

See Item 3 in Part I of this Annual Report for more details on our legal proceedings.

See Part I, Item 3, Legal Proceedings , of this Annual Report for a discussion of our legal proceedings.

We may be subject to product liability claims.

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Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including, among other things, product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure.

For example, in July 2021, Peace Naturals announced a voluntary recall with the support of Health Canada of one lot of cannabis pre-rolls distributed in Ontario with an incorrect potency label.

Some of our products have been subject to recalls in the past.

If one or more of our products are recalled for any reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall.

We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin, or at all.

We may lose a significant number of sales and may not be able to replace those sales at an acceptable margin, or at all.

In addition, product recalls have in the past and may in the future require significant management attention.

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A recall of one of our products could lead to decreased demand for that product and our other products and could have a material adverse effect on our business, financial condition and results of operations.

Additionally, product recalls may lead to increased scrutiny of our operations by Health Canada, the FDA, the DEA or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

Additionally, product recalls may lead to increased scrutiny of our operations by Health Canada, the FDA, the California Department of Public Health (the “CDPH”), the DEA or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.

Furthermore, any product recall affecting the cannabis or U.S.

hemp industries more broadly could lead consumers to lose confidence in the safety and security of the products sold by participants in these industries generally, which could have a material adverse effect on our business, financial condition and results of operations.

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We rely on third party testing and analytical methods which are validated but still being standardized.

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hemp products therefore can differ depending on the laboratory and testing methods (analytical assays) used.

Variations in reported cannabinoid content will likely continue until the relevant regulatory agencies and independent certification bodies (e.g., ISO, USP) collaborate to develop, publish and implement standardized analytical assays and levels of detection for cannabis (including U.S.

hemp, cannabinoids and their derivative products.

Until such standardized analytical assays and levels of detection are developed, the existing differences could cause confusion with our consumers which could lead to a negative perception of us and our products, increase the risk of litigation regarding cannabinoid content and regulatory enforcement action and could make it more difficult for us to comply with regulatory requirements regarding contents of ingredients and packaging and labeling.

For example, on June 16, 2020, an alleged consumer filed a Statement of Claim on behalf of a class in the Court of Queen’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and distributors alleging claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018.

For example, on June 16, 2020, an alleged consumer filed a Statement of Claim, which has since been dismissed as against the Company, on behalf of a class in the Court of King’s Bench of Alberta in Alberta, Canada, against the Company and other Canadian cannabis manufacturers and distributors alleging claims related to the defendants’ advertised content of cannabinoids in cannabis products for medicinal use on or after June 16, 2010 and cannabis products for adult use on or after October 17, 2018.

See Part I, Item 3, Legal Proceedings , of this Annual Report.

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We may not be successful in developing effective and safe new products, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory approvals, and, in the event we are successful, it is possible that there may be little or no demand for the products we develop (including products containing cannabinoids other than THC and CBD with which consumers may not be familiar or have significant reservations), which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may have a material adverse effect on our business, financial condition and results of operations.

The Canadian excise duty framework may affect profitability.

The Canadian excise duty framework may affect our profitability.

Canada’s excise duty framework imposes an excise duty and various regulatory-like restrictions on certain cannabis products sold in Canada.

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Any change in the rates or application of excise duty to cannabis products sold by us in Canada, and any restrictive interpretations by the CRA or the courts of the provisions of the Excise Act, 2001 (which may be different than those contained in the Cannabis Act) may affect our profitability and ability to compete in the market.

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Our business may be impacted as a result of increased rates of inflation.

In the past year, the worldwide economy has experienced significant inflation and inflationary pressures, including, in particular, on wages.

Increased inflation could reduce our purchasing power and result in negative impacts on our ability to obtain goods and services required for the operation of our business, to hire and retain employees, or to pass on rising costs, including increased employee costs, to our customers.

To the extent that we are unable to offset such inflation through higher prices of our products or other cost savings, there could be a negative impact on our operating margins, net income, cash flows and the trading price of our common shares.

A period of sustained inflation across the markets in which we operate could result in higher operating costs.

Further rising inflation may negatively impact our business, raise cost and reduce profitability.

Despite efforts we may take to reduce the impact of inflation on our business across the markets in which we operate, it could become increasingly difficult to effectively mitigate the increases to our costs.

In addition, the effects of inflation on consumers’ budgets could result in the reduction of our customers’ spending habits.

If we are unable to take actions to effectively mitigate the effect of the resulting higher costs, our operating margins could be negatively impacted.

Risks Relating to Production and Distribution of Products

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Adverse changes or developments affecting our facilities and the facilities of our joint venture partners, including but not limited to a breach of security, an inability to successfully grow cannabis plants or produce finished goods, unanticipated cost overruns in growing or producing products, an outbreak of a communicable illness (such as COVID-19) or a force majeure event, could have a material and adverse effect on our business, financial condition and results of operations.

As we proceed to exit from the Stayner Facility, the production and manufacturing facilities that we continue to use will become increasingly important to our business.

As we proceed to wind-down cultivation and certain production activities at the Peace Naturals Campus, the production and manufacturing facilities that we continue to use will become increasingly important to our business.

Any breach of the security measures and other facility requirements, including any failure to comply with recommendations or requirements arising from inspections by regulatory agencies, could also have an impact on our ability to continue operating under our licenses or the prospect of renewing our licenses or could result in a revocation of our licenses.

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We have been, and expect to continue to be, subject to various cyberattacks and phishing schemes.

Additionally, we are undertaking an effort to modernize our information technology systems in conjunction with the planned exit from the Stayner Facility, which could expose us to additional risks relating to our collection, storage and use of certain data on our systems.

Additionally, we are undertaking an effort to modernize our information technology systems, which could expose us to additional risks relating to our collection, storage and use of certain data on our systems.

There have been many highly publicized attacks over the last several years and we expect those to continue.

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If we were to be found to be in violation of the privacy or security rules under PIPEDA or other applicable laws and regulations protecting the confidentiality of client health information in jurisdictions we operate in, we could be subject to sanctions and civil or criminal penalties, which could increase our liabilities, harm our reputation and have a material adverse effect on our business, results of operations and financial condition.

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The jurisdictions in which we operate or which we may enter also have data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal, and protection of personal information (such as the California Consumer Privacy Act (the “CCPA”) in California).

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GDPR, that will significantly impact data privacy and security requirements in the U.S.

The California Privacy Rights Act (“CPRA”), passed in November 2020 and effective starting on January 1, 2023, will impose broad new requirements on companies covered by the legislation.

The California Privacy Rights Act (“CPRA”) imposes broad new requirements on companies covered by the legislation.

Under the CPRA, California consumers (i.e., California residents) will have new and expanded rights, and businesses covered by the CPRA must disclose these rights to them.

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Lastly, the CPRA provides for an expanded private right of action in the context of cybersecurity breaches and creates a designated privacy agency, the California Privacy Protection Agency (“CPPA”), with authority to implement and enforce the CCPA and CPRA.

While uncertain, the effects of the CCPA, the CPRA and other new state laws and regulations, as well as analogous laws and regulations in Canada (e.g., Bill 64 in Quebec), are potentially significant and may require us to modify our data collection or processing practices and policies, incur substantial costs and expenses to comply with these laws and regulations, and increase our potential exposure to regulatory enforcement and/or litigation.

The interpretation and enforcement of such laws and regulations are uncertain and subject to change and may require substantial costs to monitor and implement compliance with any additional requirements.

processing practices and policies, incur substantial costs and expenses to comply with these laws and regulations, and increase our potential exposure to regulatory enforcement and/or litigation.

The interpretation and enforcement of such laws and regulations are uncertain and subject to change and may require substantial costs to monitor and implement compliance.

Failure to comply with data privacy and protection laws and regulations could result in government enforcement actions (which could include substantial civil and/or criminal penalties), litigation, business disruption, the diversion of management’s attention and/or adverse publicity and could negatively affect our business, results of operations and financial condition.

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Although our current operational production facilities, and those of our joint venture partners, grow products indoors (including in greenhouses) under climate-controlled conditions and we and our joint venture partners carefully monitor the growing conditions with trained personnel, there can be no assurance that natural elements will not have a material adverse effect on the production of our products.

To the extent we rely on third parties or our joint venture partners to grow cannabis which we intend to commercialize, we are exposed to similar risks and there can be no assurance that such risks will not have a similarly material adverse effect on the production of our products.

To the extent we rely on third parties or our joint venture partners to grow cannabis that we intend to commercialize, we are exposed to similar risks and there can be no assurance that such risks will not have a similarly material adverse effect on the production of our products.

Our business also involves products containing U.S.

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hemp for use in our products on an ongoing basis, it may have a material and adverse effect on our business, financial condition, operating results, liquidity, cash flow and operational performance.

The inability of our customers to meet their financial or contractual obligations to us may result in disruption to our results of operations and could result in financial losses.

We have significant exposure to several customers and at least some of these customers are experiencing financial difficulties.

We have in the past, and may in the future, need to take allowances against and need to write off receivables due to the creditworthiness of these customers.

Further, the inability of these customers to purchase our products could materially adversely affect our results of operations.

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The inability of our suppliers to meet their financial or contractual obligations to us may result in disruption to our supply chain and could result in financial losses.

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The laws regarding intellectual property rights relating to cannabis and cannabis-related products, and the positions of intellectual property offices administering such laws, are constantly evolving, and there is uncertainty regarding which countries will permit the filing, prosecution, issuance, registration and enforcement of intellectual property rights relating to cannabis and cannabis-related products.

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Specifically, we have sought trademark protection in many countries, including Canada, the U.S.

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There is a risk that we will fail to protect such germplasm or that we will fail to register rights in relation to such germplasm.

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We also seek to protect our parental germplasm, hybrids and varieties from pests and diseases and enhance plant productivity and fertility, and we research products to protect against crop pests and fungus.

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the failure of the owner of such intellectual property to properly maintain or enforce the intellectual property underlying such licenses, or our inability to obtain or maintain such licenses, could have a material adverse effect on our business, financial condition and performance.

We are party to licenses granted by third parties, including with actress Kristen Bell and through the Ginkgo Strategic Partnership, that give us rights to use third party intellectual property that is necessary or useful to our business.

We are party to licenses granted by third parties, including through the Ginkgo Strategic Partnership, that give us rights to use third party intellectual property that is necessary or useful to our business.

Our success will depend, in part, on the ability of the applicable licensor to maintain and enforce its licensed intellectual property against other third parties, particularly intellectual property rights to which we have secured exclusive rights.

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The introduction of new products embodying new technologies, including new manufacturing processes or formulations, and the emergence of new industry standards may render our products obsolete, less competitive or less marketable.

The process of developing our products is complex and requires significant continuing costs, development efforts and third party commitments, including licensees, researchers, collaborators and lenders.

The process of developing our products is complex and requires significant continuing costs, development efforts and third-party commitments, including licensees, researchers, and collaborators.

Our failure to develop new technologies and products and the obsolescence of existing technologies or processes could adversely affect our business, financial condition and results of operations.

We may be unable to anticipate changes in our potential customer preferences or requirements that could make our existing technology, processes or formulations obsolete.

Our success will depend, in part, on our ability to continue to enhance our existing technologies, develop new technology that addresses the increasing sophistication and varied news of the market, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis.

Our success will depend, in part, on our ability to continue to enhance our existing technologies, develop new technology that addresses the increasing sophistication and varied views of the market, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis.

The development of our proprietary technology, processes and formulations entails significant technical and business risks.

We may not be successful in using our new technologies or exploiting our niche markets effectively or adapting our business to evolving customer requirements or preferences or emerging industry standards.

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Risks Relating to Entry into New Markets

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Other risks include the potential for fraud and corruption by suppliers or personnel or government officials which may implicate us, compliance with applicable anti-corruption laws and regulations, including the U.S.

Foreign Corrupt Practices Act and the Corruption of Foreign Public Officials Act (Canada), by virtue of our or our joint ventures operating in jurisdictions that may be vulnerable to the possibility of bribery, collusion, kickbacks, theft, improper commissions, facilitation payments, conflicts of interest and related party transactions and our or our joint ventures’ possible failure to identify, manage and mitigate instances of fraud, corruption or violations of our code of conduct and applicable regulatory requirements.

Foreign Corrupt Practices Act and the Corruption of Foreign Public Officials Act (Canada), by virtue of our or our joint ventures operating in jurisdictions that may be vulnerable to the possibility of bribery, collusion, kickbacks, theft, improper commissions, facilitation payments, conflicts of interest and related party transactions and our or our joint ventures’ possible failure to identify, manage and mitigate instances of fraud, corruption or violations of our Code of Business Conduct and Ethics and applicable regulatory requirements.

There is also the risk of increased disclosure requirements;

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In addition, the enforcement by us of our legal rights in foreign countries, including rights to exploit our properties or utilize our permits and licenses and contractual rights may not be recognized by the court systems in such foreign countries or enforced in accordance with the rule of law.

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We currently do, and may in the future, invest in companies, or engage in joint ventures, in countries with developing economies.

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Any political or economic instability in the countries in which we operate could have a material and adverse effect on our business, financial condition and results of operations.