Flora Growth (FLGC) 20-F2021 FY Annual report (foreign)

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

Commission file number 001-40397

Flora Growth Corp.

(Exact name of Registrant as specified in its charter)

Province of Ontario

(Jurisdiction of incorporation or organization)

365 Bay Street, Suite 800, Toronto, Ontario, M5H 2V1

(Address of principal executive offices)

Matthew Cohen

General Counsel

Tel: (954) 842-4989

Facsimile: (954) 212-0808

3406 SW 26th Terrace, Suite C-1, Fort Lauderdale, FL 33312

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

65,517,418 Common Shares, no par value per share, as of December 31, 2021

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))by the registered public accounting firm that prepared or issued its audit report.

Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)     Yes  ☐    No  ☒

TABLE OF CONTENTS

INTRODUCTION

 As used in this Annual Report on Form 20-F (this “Annual Report”), unless the context otherwise requires or otherwise states, references to the “Company,” “Flora,” “we,” “us,” “our,” and similar references refer to Flora Growth Corp., a corporation formed under the laws of the Province of Ontario, and its subsidiaries.

Our functional currency and reporting currency is the U.S. dollar, the legal currency of the United States (which we refer to as “USD”, “US$” or “$”).

INTERNATIONAL FINANCIAL REPORTING STANDARDS

Our financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Our fiscal year ends on December 31 of each year as does our reporting year. Our most recent fiscal year ended on December 31, 2021. See Notes 2 and 3 to our audited consolidated financial statements as of and for the year ended December 31, 2021 for a discussion of the basis of presentation, functional currency, and translation of financial statements.

We have made rounding adjustments to some of the figures included in this Annual Report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them.

TRADEMARKS AND SERVICE MARKS

We rely on a combination of trademark, patent, copyright and trade secret protection laws in Colombia, the United States and other jurisdictions to protect our intellectual property and our brands. We have applied for, and we have received approvals from the Superintendency of Industry and Commerce and the Instituto Nacional de Vigilancia de Medicamentos y Alimentos, for our beauty and skincare, pharmaceutical, loungewear, and food and beverage products.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and other U.S. Federal securities laws. These forward-looking statements may include projections and estimates concerning our possible or assumed future results of operations, financial condition, business strategies and plans, market opportunity, competitive position, industry environment, and potential growth opportunities. In some cases, you can identify forward- looking statements by terms such as “may”, “will”, “should”, “believe”, “expect”, “could”, “intend”, “plan”, “anticipate”, “estimate”, “continue”, “predict”, “project”, “potential”, “target,” “goal” or other words that convey the uncertainty of future events or outcomes. You can also identify forward-looking statements by discussions of strategy, plans or intentions. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, because forward-looking statements relate to matters that have not yet occurred, they are inherently subject to significant business, competitive, economic, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These and other important factors, including, among others, those discussed in this Annual Report, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by the forward-looking statements in this Annual Report. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements in this Annual Report include:

Given the foregoing risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements in this Annual Report. The forward-looking statements contained in this Annual Report are not guarantees of future performance and our actual results of operations and financial condition may differ materially from such forward- looking statements. In addition, even if our results of operations and financial condition are consistent with the forward-looking statements in this Annual Report, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this Annual Report speaks only as of the date of this Annual Report. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements in this Annual Report, whether as a result of new information, future events or otherwise, after the date of this Annual Report.

PART ONE

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 

Not applicable.

ITEM 3. KEY INFORMATION 

3.A. [Reserved].

3.B. Capitalization and indebtedness

Not applicable.

3.C. Reasons for the offer and use of proceeds

Not applicable.

3.D. Risk factors

Summary of Risk Factors

There are a number of risks that you should carefully consider before making an investment in our business. These risks are discussed more fully in the sections below. If any of these risks actually occur, our business, financial condition, operating results and cash flows could be materially adversely affected. These risk factors include, but are not limited to:

There are a number of risks and uncertainties that could affect our business and cause our actual results to differ from past performance or expected results. We consider the following risks and uncertainties to be those material to our business. If any of these risks actually occur, our business, financial condition and results of operations could suffer, and the trading price of our Common Shares could decline. We urge investors to consider carefully the risk factors described below in evaluating any investment in our Common Shares and the information contained in this Annual Report.

Risks Related to our Business and Industry      

We are an early-stage company with limited operating history and may never become profitable.

We are an early-stage company focused on cultivating, processing and supplying natural, medicinal-grade cannabis oil and high-quality cannabis derived medical and wellness products to large channel distributors and retailers globally. Newly-formed in March 2019, we have limited operating history. Flora has only started full commercial cannabis cultivation with the passage of the latest Colombian cannabis resolution after two successful years cultivating and harvesting cannabidiol (“CBD”) and Tetrahydrocannabinol (“THC”) for derivatives, while investigating cultivars with the Instituto Colombiano Agropecuario (“ICA”). We have produced oil extracts, however only on a smaller scale, and we will require time to maximize production and refine operating procedures. We are currently in discussions with distributors with whom we intend to engage although no definitive agreements have been signed until the import requirements are met with local jurisdictions. We have limited financial resources and minimal operating cash flow.  For the year ended December 31, 2021, we had losses of $21.4 million and as of December 31, 2021 an accumulated deficit of $38.5 million.

Additionally, there can be no assurance that additional funding will be available to us for the development of our business, which will require the commitment of substantial resources. Accordingly, you should consider our prospects in light of the costs, uncertainties, delays and difficulties frequently encountered by companies in the early stages of development. Potential investors should carefully consider the risks and uncertainties that a company with a limited operating history will face. In particular, potential investors should consider that we may be unable to:

The Coronavirus (“COVID-19”) outbreak or similar pandemics could adversely affect our operations.

The Company’s operations could be significantly adversely affected by the effects of a widespread global outbreak of a contagious disease and other unforeseen events, including the outbreak of respiratory illness caused by COVID-19 and the related economic repercussions. We cannot accurately predict the effects COVID-19 will have on our operations and the ability of others to meet their obligations with the Company, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length of travel and quarantine restrictions imposed by governments of affected countries. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could further affect the Company’s operations and ability to finance its operations.

Agricultural activity has been declared as an essential activity in Colombia. Our cultivation and processing facility in Colombia is operating under a protocol authorized by the Colombian government. At the site, all employees receive a new mask and a new set of surgical gloves daily. Hand sanitizer is provided and hand washing protocols are in place. The employees are also provided a transparent face protection mask, which is replaced every 30 days. Our employees frequently have their temperature taken and must report to the Health and Safety office if they are experiencing any symptoms, including diarrhea, cough, runny nose, or headache. If an employee reports any of these symptoms, the employee is sent home to isolate for 10 days and, if the symptoms persist for 72 hours, the employee is required to go to a hospital.

Recent and future acquisitions and strategic investments could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute shareholder value, may subject us to liability, and harm our results of operations and financial condition.

We have recently acquired the businesses of Vessel Brand, Inc. (“VBI”), Just Brands LLC (“JBL”) and High Roller Private Label LLC (“HRPL”), and we may in the future seek to acquire or invest in businesses, products, or technologies that we believe could complement our operations or expand our breadth, enhance our capabilities, or otherwise offer growth opportunities.  Our diversity of product offerings may not be successful. While our growth strategy includes broadening our service and product offerings, implementing an aggressive marketing plan and employing product diversification, there can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand.  We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of our planned growth and diversified product offerings, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems. Additionally, the integration of our acquisitions and pursuit of potential future acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In addition, we have limited experience in acquiring other businesses. Specifically, we may not successfully evaluate or utilize the acquired products, assets or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges.

We may not be able to find and identify desirable acquisition targets or we may not be successful in entering into an agreement with any one target. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business, results of operations, and financial condition may suffer.  In some cases, minority shareholders may exist in certain of our non-wholly-owned acquisitions (for businesses we do not purchase as an 100% owned subsidiary) and may retain minority shareholder rights which could make a future change of control or corporate approvals for actions more difficult to achieve and/or more costly.

We also make strategic investments in early-stage companies developing products or technologies that we believe could complement our business or expand our breadth, enhance our technical capabilities, or otherwise offer growth opportunities. These investments may be in early-stage private companies for restricted stock. Such investments are generally illiquid and may never generate value. Further, the companies in which we invest may not succeed, and our investments would lose their value.

Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized, or we may be exposed to unknown risks or liabilities of our acquisitions. Furthermore, we may be subject to unknown liabilities of the businesses we acquire. In addition, we may become subject to legal proceedings in connection with the businesses of, or resulting from, our acquisitions. For example, we received a letter from an attorney representing an undisclosed group of former pre-acquisition shareholders of VBI seeking to engage in settlement discussions on the basis of certain allegations. While no formal litigation has been initiated, we believe that any potential claims as alleged in the letter are without merit and we intend to defend vigorously against them in connection with any future potential legal proceedings. For more information, see Item 4.B. “Business overview—Legal Proceedings.”

Certain conditions or events could disrupt the Company’s supply chains, disrupt operations, and increase operating expenses.

Conditions or events including, but not limited to, the following could disrupt the Company’s supply chains and in particular its ability to deliver its products, interrupt operations at its facilities, increase operating expenses, resulting in loss of sales, delayed performance of contractual obligations or require additional expenditures to be incurred: (i) extraordinary weather conditions or natural disasters such as hurricanes, tornadoes, floods, fires, extreme heat, earthquakes, etc.; (ii) a local, regional, national or international outbreak of a contagious disease, including the COVID-19 coronavirus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, or any other similar illness could result in a general or acute decline in economic activity; (iii) political instability, social and labor unrest, war or terrorism, including the current conflict between Russia and Ukraine; or (iv) interruptions in the availability of basic commercial and social services and infrastructure including power and water shortages, and shipping and freight forwarding services including via air, sea, rail and road.

Cannabis laws, regulations, and guidelines are dynamic and subject to changes.

Cannabis laws and regulations are dynamic and subject to evolving interpretations which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan. It is also possible that regulations may be enacted in the future that will be directly applicable to certain aspects of our businesses. We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business. Management expects that the legislative and regulatory environment in the cannabis industry in Colombia and internationally will continue to be dynamic and will require innovative solutions to try to comply with this changing legal landscape in this nascent industry for the foreseeable future. Compliance with any such legislation may have a material adverse effect on our business, financial condition and results of operations.

Public opinion can also exert a significant influence over the regulation of the cannabis industry. A negative shift in the public’s perception of the cannabis industry could affect future legislation or regulation in different jurisdictions.

Demand for cannabis and derivative products could be adversely affected and significantly influenced by scientific research or findings, regulatory proceedings, litigation, media attention or other research findings.

The legal cannabis industry is at an early stage of its development. Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of medicinal cannabis are mixed and evolving and can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of medicinal cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the medicinal cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity, could have a material adverse effect on the demand for medicinal cannabis and on our business, results of operations, financial condition and cash flows. Further, adverse publicity reports or other media attention regarding cannabis in general or associating the consumption of medicinal cannabis with illness or other negative effects or events, could have such a material adverse effect. Public opinion and support for medicinal cannabis use has traditionally been inconsistent and varies from jurisdiction to jurisdiction. Our ability to gain and increase market acceptance of our business may require substantial expenditures on investor relations, strategic relationships and marketing initiatives. There can be no assurance that such initiatives will be successful and their failure to materialize into significant demand may have an adverse effect on our financial condition.

Damage to the Company’s reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether such publicity is accurate or not.

The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views regarding the Company and its activities, whether true or not. Although the Company believes that it operates in a manner that is respectful to all stakeholders and that it takes pride in protecting its image and reputation, it does not ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased ability to enter into new customer, distributor or supplier relationships, retain existing customers, distributors or suppliers, reduced investor confidence and access to capital, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our projects, thereby having a material adverse effect on our financial performance, financial condition, cash flows and growth prospects.

We are subject to the inherent risk of exposure to product liability claims, actions and litigation.

As a distributor of products designed to be ingested by humans, we face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused bodily harm or injury. In addition, the sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that our products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning health risks, possible side effects or interactions with other substances. Product liability claims or regulatory actions against us could result in increased costs, could adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our potential products.

We are subject to the inherent risks involved with product recalls.

Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of our products are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin, or at all. In addition, a product recall may require significant management attention. There can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if our products are subject to recall, our reputation could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for our products and could have a material adverse effect on our results of operations and financial condition. Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies, requiring further management attention, potential loss of applicable licenses, and potential legal fees and other expenses.

The Company’s products could have unknown side effects.

If the products the Company sells are not perceived to have the effects intended by the end user, its business may suffer and the business may be subject to products liability or other legal actions. Many of the Company’s products contain innovative ingredients or combinations of ingredients. There is little long-term data available with respect to efficacy, unknown side effects and/or interaction with individual human biochemistry, or interaction with other drugs. Moreover, there is little long-term data available with respect to efficacy, unknown side effects and/or its interaction with individual animal biochemistry. As a result, the Company’s products could have certain side effects if not taken as directed or if taken by an end user that has certain known or unknown medical conditions.

The Company may be unable to anticipate changes in its potential client requirements that could make the Company’s existing products and services obsolete. The Company’s success will depend, in part, on its ability to continue to enhance its product and service offerings so as to address the increasing sophistication and varied needs of the market and respond to technological and regulatory changes and emerging industry standards and practices on a timely and cost-effective basis.

Research regarding the medical benefits, viability, safety, efficacy, use and social acceptance of cannabis or isolated cannabinoids (such as CBD and tetrahydrocannabinol (“THC”)) remains in early stages.

There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, investors should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated herein or reach negative conclusions related to medical cannabis, which could have a material adverse effect on the demand for the Company’s products, which could result in a material adverse effect on our business, financial condition and results of operations or prospects.

Our growth depends, in part, on expanding into additional consumer markets, and we may not be successful in doing so.

We believe that our future growth depends not only on continuing to provide our current customers with new products, but also continuing to enlarge our customer base. The growth of our business will depend, in part, on our ability to continue to expand in the United States, as well as into international markets. We are investing significant resources in these areas, and although we hope that our products will gain popularity, we may face challenges that are different from those we currently encounter, including competitive merchandising, distribution, hiring, and other difficulties. We may also encounter difficulties in attracting customers due to a lack of consumer familiarity with or acceptance of our brand, or a resistance to paying for premium products, particularly in international markets. In addition, although we are investing in sales and marketing activities to further penetrate newer regions, including expansion of our dedicated sales force, we may not be successful. If we are not successful, our business and results of operations may be harmed.

Fluctuations in the cost and availability of raw materials, equipment, labor, and transportation could cause manufacturing delays or increase our costs.

The price and availability of key components used to manufacture our products has been increasing and may continue to fluctuate significantly. In addition, the cost of labor within our company or at our third-party manufacturers could increase significantly due to regulation or inflationary pressures. Additionally, the cost of logistics and transportation fluctuates in large part due to the price of oil, and availability can be limited due to political and economic issues. Any fluctuations in the cost and availability of any of our raw materials, packaging, or other sourcing or transportation costs could harm our gross margins and our ability to meet customer demand. If we are unable to successfully mitigate a significant portion of these product cost increases or fluctuations, our results of operations could be harmed.

We rely on third-parties for raw materials and to manufacture and compound some of our products. We have no control over these third parties and if these relationships are disrupted our results of operations in future periods will be adversely impacted.

We currently hold short term supply contracts with unaffiliated third-party vendors for our critical raw materials. In addition, some of our products are manufactured or compounded by unaffiliated third parties and the use of these third-party co-packers changes from time to time due to customer demand and the composition of our product mix and product portfolio. We do not have any long-term contracts with any of these third parties, and we expect to compete with other companies for raw materials, production and imported packaging material capacity. If we experience significant increased demand or need to replace an existing raw material supplier or third-party manufacturer, there can be no assurances that replacements for these third-party vendors will be available when required on terms that are acceptable to us, or at all, or that any manufacturer or compounder would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new sources, we may encounter delays in production and added costs as a result of the time it takes to engage third parties. Any delays, interruption or increased costs in raw materials and/or the manufacturing or compounding of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.

The Company’s inventory has a shelf life and may reach its expiration and not be sold.

The Company holds finished goods in inventory and its inventory has a shelf life. Finished goods in the Company’s inventory may include cannabis flower, cannabis oil products and cosmeceuticals. The Company’s inventory may reach its expiration and not be sold. Although management regularly reviews the quantity and remaining shelf life of inventory on hand, and estimates manufacturing and sales lead times in order to manage its inventory, write-downs of inventory may still be required. Any such write-down of inventory could have a material adverse effect on the Company’s business, financial condition, and results of operations.

The Company may not be able to maintain effective quality control systems.

The Company may not be able to maintain an effective quality control system. The Company ascribes its early successes, in part, on its commitment to product quality and its effective quality control system. The effectiveness of the Company’s quality control system and its ability to obtain or maintain good manufacturing practice (“GMP”) certification with respect to its manufacturing, processing and testing facilities depend on a number of factors, including the design of its quality control procedures, training programs, and its ability to ensure that its employees adhere to the Company’s policies and procedures. The Company also depends on service providers such as toll manufacturers and contract laboratories to manufacture, process or test its products that are subject to GMP certification requirements.

We expect that regulatory agencies will periodically inspect our and our service providers’ facilities to evaluate compliance with applicable GMP requirements. Failure to comply with these requirements may subject us or our service providers to possible regulatory enforcement actions. Any failure or deterioration of the Company’s or its service providers’ quality control systems, including loss of GMP certification, may have a material adverse effect on the Company’s business, results of operations and financial condition.

Energy prices and supply may be subject to change or curtailment due to new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, imposition of restrictions on energy supply by government, worldwide price levels and market conditions.

The Company requires diesel and electric energy and other resources for its cultivation and harvest activities and for transportation of cannabis. The Company relies upon third parties for its supply of energy resources used in its operations. The prices for and availability of energy resources may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, imposition of restrictions on energy supply by government, worldwide price levels and market conditions. Although the Company attempts to mitigate the effects of fuel shortages, electricity outages and cost increases, the Company’s operations will continue to depend on external suppliers of fuel and electricity. If energy supply is cut for an extended period and the Company is unable to find replacement sources at comparable prices, or at all, the Company’s business, financial condition and results of operations could be materially and adversely affected.

The cannabinoid industry faces strong opposition and may face similar opposition in other jurisdictions in which we operate.

Many political and social organizations oppose hemp and cannabis and their legalization, and many people, even those who support legalization, oppose the sale of hemp and cannabis in their geographies. Our business will need support from local governments, industry participants, consumers and residents to be successful. Additionally, there are large, well-funded businesses that may have a strong opposition to the cannabis industry. For example, the pharmaceutical and alcohol industries have traditionally opposed cannabis legalization. Any efforts by these or other industries to halt or impede the cannabis industry could have detrimental effects on our business.

We are subject to the risks inherent in an agricultural business.

Our business involves the growing of cannabis, which is an agricultural product. The occurrence of severe adverse weather conditions, especially droughts, fires, storms or floods is unpredictable and may have a potentially devastating impact on agricultural production and may otherwise adversely affect the supply of cannabis. Adverse weather conditions may be exacerbated by the effects of climate change and may result in the introduction and increased frequency of pests and diseases. The effects of severe adverse weather conditions may reduce our yields or require us to increase our level of investment to maintain yields. Additionally, higher than average temperatures and rainfall can contribute to an increased presence of insects and pests, which could negatively affect cannabis crops. Future droughts might reduce the yield and quality of our cannabis production, which could materially and adversely affect our business, financial condition and results of operations.

The occurrence and effects of plant disease, insects and pests can be unpredictable and devastating to agricultural production, potentially rendering all or a substantial portion of the affected harvests unsuitable for sale. Even when only a portion of the production is damaged, our results of operations could be adversely affected because all or a substantial portion of the production costs may have been incurred. Although some plant diseases are treatable, the cost of treatment can be high and such events could adversely affect our operating results and financial condition. Furthermore, if we fail to control a given plant disease and the production is threatened, we may be unable to adequately supply our customers, which could adversely affect our business, financial condition and results of operations. There can be no assurance that natural elements will not have a material adverse effect on production.

Our operations could be materially and adversely affected if the supply of cannabis seeds is ceased or delayed and we do not find replacement suppliers and obtain all necessary authorizations.

If for any reason the supply of cannabis seeds is ceased or delayed, we would have to seek alternate suppliers for a number of our current cultivars and obtain all necessary authorization for the new seeds. If replacement seeds cannot be obtained at comparable prices, or at all, or if the necessary authorizations are not obtained, our business, financial condition and results of operations would be materially and adversely affected.

Many of our competitors have greater resources that may enable them to compete more effectively than us in the cannabis industry.

The industry in which we operate is subject to intense and increasing competition. Some of our competitors have a longer operating history and greater capital resources and facilities, which may enable them to compete more effectively in this market. We expect to face additional competition from existing licensees and new market entrants who are granted licenses in Colombia, who are not yet active in the industry. If a significant number of new licenses are granted in the near term, we may experience increased competition for market share and may experience downward pricing pressure on our products as new entrants increase production. Such competition may cause us to encounter difficulties in generating revenues and market share, and in positioning our products in the market. If we are unable to successfully compete with existing companies and new entrants to the market, our lack of competitive advantage will have a negative effect on our business and financial condition.

The Company could face competitive risks from the development and distribution of synthetic cannabis.

The pharmaceutical industry and others may attempt to enter the cannabis industry and, in particular, the medical cannabis industry through the development and distribution of synthetic products that emulate the effects of and treatment provided by naturally occurring cannabis. If synthetic cannabis products are widely adopted, the widespread popularity of such synthetic cannabis products could change the demand, volume and profitability of the botanical cannabinoid industry. This could adversely affect our ability to secure long-term profitability and success through the sustainable and profitable operation of our business.

The Company is reliant on third party transportation services and importation services to deliver its products to customers.

The Company relies on third party transportation services and importation services to deliver its products to its customers. The Company is exposed to the inherent risks associated with relying on third party transportation service-providers, including logistical problems, delays, loss or theft of product and increased shipping and insurance costs. Any delay in transporting the product, breach of security or loss of product, could have a material adverse effect on the Company’s business, financial performance and results of operations. Further, any breach of security and loss of product during transport could affect the Company’s status as a licensed producer in Colombia.

The Company is dependent on suppliers to supply equipment, parts and components for the operation of its business.

The Company’s ability to compete and grow will be dependent upon having access, at a reasonable cost and in a timely manner, to equipment, parts and components. No assurances can be given that the Company will be successful in maintaining the required supply of equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by capital expenditure programs may be significantly greater than anticipated or available, in which circumstance there could be a materially adverse effect on the Company’s financial results.

We may not be able to establish and maintain bank accounts in certain countries.

There is a risk that banking institutions in countries where we operate will not open accounts for us or will not accept payments or deposits from proceeds related to the cannabis industry. Such risks could increase our costs or prevent us from expanding into certain jurisdictions.

The Company may be subject to cyber-security and privacy risks that could disrupt its operations and expose the Company to financial losses, contractual losses, liability, reputational damage and additional expense.

The Company may be subject to risks related to our information technology systems, including cyber-attacks, malware, ransomware and phishing attacks that could target our intellectual property, trade secrets, financial information, personal information of our employees, customers and patients, including sensitive personal health information. The occurrence of such an attack could disrupt our operations and expose the Company to financial losses, contractual damages, liability under labor and privacy laws, reputational damage and additional expenses. We have implemented security measures to protect our data and information technology systems; however, such measures may not be effective in preventing cyber-attacks. We may be required to allocate additional resources to implement additional preventative measures including significant investments in information technology systems. A serious cyber-security breach could have a material adverse effect on our business, financial condition and results of operations.

The Company may collect and store certain personal information about customers and is responsible for protecting such information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. In addition, theft of data is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such privacy breach or theft could have a material adverse effect on the Company’s business, financial condition and results of operations. If the Company were found to be in violation of privacy or security rules or other laws protecting the confidentiality of information, the Company could be subject to sanctions and civil or criminal penalties, which could increase its liabilities, harm its reputation and have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company may incur significant costs to defend its intellectual property and other proprietary rights.

The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company's future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company's products and technology. Policing the unauthorized use of the Company's current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others.

In addition, other parties may claim that the Company's products infringe on their proprietary and perhaps patent protected rights. Such claims, regardless of their merit, may result in the expenditure of significant financial and managerial resources, legal fees, injunctions, temporary restraining orders and/or require the payment of damages. As well, the Company may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. Such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.

Risks Related to Operations in Colombia

We are reliant on certain licenses and authorizations to operate in Colombia.

Our ability to grow, store and sell cannabis in Colombia is dependent on our ability to sustain and/or obtain the necessary licenses and authorizations by certain authorities in Colombia. To date, we have received the Non-Psychoactive Cannabis Cultivation License, the Cannabis Derivatives Manufacturing License and the Psychoactive Cannabis Cultivation License including a quota for export of 43,500 kilograms in 2022. The effects of the compliance regime, any delays in obtaining, or failure to obtain or keep the regulatory approvals may significantly delay or impair the development of markets, products and sales initiatives and could have a material adverse effect on our business, results of operations and financial condition. In addition, the medical cannabis compliance process requires research phases to ensure both the cultivation process and subsequent derivatives are standardized and express the same or similar cannabinoid and terpene profiles while remaining free of pesticides, heavy metals and other microbial or external containments. Therefore any delay or changes in these conditions may significantly delay or impair products and sales initiatives and could have an adverse effect on our business.

The licenses and authorizations are subject to ongoing compliance and reporting requirements and our ability to obtain, sustain or renew any such licenses and authorizations on acceptable terms is subject to changes in regulations and policies and to the discretion of the applicable authorities or other governmental agencies in Colombia and potentially in other foreign jurisdictions. Failure to comply with the requirements of the licenses or authorizations or any failure to maintain the licenses or authorizations would have a material adverse effect on our business, financial condition and operating results. Specifically, the validity of the licenses for the cultivation of psychoactive cannabis, non-psychoactive and the manufacture of cannabis derivatives is ten (10) years pursuant to Article 8 of resolution 227 of 2022, in accordance with the provisions of article 2.8. 11 .2 .1.8. replacement by Decree 811 of 2021 and the Law 1787 of 2016 in relation to the medical and scientific use of cannabis. Such licenses may be renewed for an equal period as many times as requested by the licensee. The license will remain valid as long as it complies with the requirements established by law.

Although we believe that we will meet the requirements to obtain, sustain or renew the necessary licenses and authorizations, there can be no guarantee that the applicable authorities will issue these licenses or authorizations. Should the authorities fail to issue the necessary licenses or authorizations, we may be curtailed or prohibited from the production and/or distribution of cannabis or from proceeding with the development of our operations as currently proposed and our business, results of operations and financial condition may be materially adversely affected.

Restrictions or regulations concerning changes in corporate structure may discourage transactions that otherwise could involve payment of a premium over prevailing market processes for our securities.

Colombian cannabis licenses are granted on a non-transferable, non-exchangeable and non-assignable basis. Any breach of this restriction may result in the revocation of the license. While there are no specific regulations or restrictions regarding the effects of a change in control, modification of the corporate structure, issuance of shares, or any changes in holders or final beneficiaries on the cannabis licenses, these restrictions may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.

While we do not currently operate in protected areas established by the National System of Protected Areas, we cannot provide assurances that areas in which we operate will not be subject to risks associated therewith in the future.

Under Colombian laws, competent governmental authorities are not allowed to grant any type of cannabis licenses on properties that are located within areas registered as national parks or protected areas in the National System of Protected Areas (“SINAP”). Additionally, the Colombian government is entitled to create new protected areas based on their environmental relevance, which might result in the prohibition to conduct any type of activities on those areas or the need to obtain specific environmental authorizations or permits.

We do not operate in a protected area and we believe that we are not currently at risk of expropriation pursuant to the SINAP, but we cannot assure you that the areas in which we operate will not be subject to such risks in the future.

Economic and political conditions in Colombia may have an adverse effect on our financial condition and results of operations.

Many of our operations are located in Colombia. Consequently, a portion of our financial condition and results of operations depend significantly on macroeconomic and political conditions prevailing in Colombia. Decreases in the growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, adversely affect our financial condition and results of operations in the future. The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and regulatory policy. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia. We cannot predict what policies the Colombian government will adopt and whether those policies would have a negative effect on the Colombian economy or on our business and financial performance in the future.

We cannot assure you whether current stability in the Colombian economy will be sustained. If the condition of the Colombian economy were to deteriorate, we would likely be adversely affected.

Certain of the Company’s key documents are in Spanish, and translations may not exist or be readily available.

As a result of the Company conducting its operations in Colombia, certain of the Company’s subsidiaries’ books and records, including key documents such as material contracts and financial documentation are principally negotiated and entered into in the Spanish language and English translations may not exist or be readily available. The Company relies on the use of professional translators for in person meetings with non-Spanish speakers where required, and for document translation. The Company does not foresee that significant additional accommodations will be required. The Company does not have a formal communication plan that sets out measures that will be taken to mitigate any potential communication-related issues as it does not consider one necessary. All material documents provided to the directors are in the English language. If any material documents are in an original language other than English, the documents are translated by certified translators. All members of the Company’s Board of Directors and its executive officers are fluent in English. Additionally, Luis Merchan, our Chairman and CEO and Juan Carlos Gomez Roa, a director, are fluent in the Spanish language.

The Colombian government and the Central Bank exercise significant influence on Colombia’s economy.

Although the Colombian government has not imposed foreign exchange restrictions since 1990, Colombia’s foreign currency markets have historically been extremely regulated. Colombian law permits the Central Bank of Colombia (the “Central Bank”) to impose foreign exchange controls to regulate the remittance of dividends and/or foreign investments in the event that the foreign currency reserves of the Central Bank fall below a level equal to the value of three months of imports of goods and services into Colombia. An intervention that precludes our Colombian subsidiary from possessing, utilizing or remitting U.S. Dollars would impair our financial condition and results of operations, and would impair the Colombian subsidiary’s ability to convert any dividend payments to U.S. dollars.

The Colombian government and the Central Bank may also seek to implement new policies aimed at controlling further fluctuation of the Colombian peso against the U.S. dollar and fostering domestic price stability. The Central Bank may impose certain mandatory deposit requirements in connection with foreign-currency denominated loans obtained by Colombian residents. We cannot predict or control future actions by the Central Bank in respect of such deposit requirements, which may involve the establishment of a different mandatory deposit percentage. The U.S. dollar/Colombian peso exchange rate has shown some instability in recent years.

Colombia has experienced several periods of violence and instability that could affect the economy and our Company.

Colombia has experienced periods of criminal violence over the past four decades, primarily due to the activities of guerilla groups and drug cartels. Despite the peace treaty between the Colombian government and the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia or FARC), a lasting decrease in violence or drug-related crime in Colombia or the successful integration of former guerilla members into Colombian society may not be achieved. In 2018, the Colombian government suspended the peace negotiations with the National Liberation Army (Ejército de Liberación Nacional or ELN) and, in 2019, a minority group of dissidents of the peace process with FARC announced their return to illegal activities. Violence incidents could create a security risk for our key employees in Colombia and require them to leave the country.

Allegations of corruption against the Colombian government, at the national or local level, politicians and private industry could create economic and political uncertainty should the investigations triggered by these cases reach conclusions or result in further allegations or findings of illicit conduct committed by the accused parties. Furthermore, proven or alleged wrongdoings could have adverse effects on the political stability in Colombia and the Colombian economy.

An escalation of violence, drug-related crime, or political instability may have a negative impact on the Colombian economy and on our business, financial condition and results of operations.

The Company is subject to risks from its construction projects.

The Company is subject to a number of risks in connection with the construction of facilities in Colombia and the United States, including the availability and performance of engineers and contractors, suppliers and consultants and the receipt of required governmental approvals, licenses and permits. Any delay in the performance of any one or more of the contractors, suppliers, consultants or other persons on which the Company is dependent in connection with its construction activities, a delay in or failure to receive the required governmental approvals, licenses and permits in a timely manner or on reasonable terms, or a delay in or failure in connection with the completion and successful operation of the operational elements in connection with any capital or construction project.

Any additional taxes resulting from changes to tax regulations or the interpretation thereof in Colombia or other countries where we operate, could adversely affect our consolidated results.

Uncertainty relating to tax legislation poses a constant risk to us.  Colombian national authorities have levied new taxes in recent years.  Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting stated expenses and deductions, and eliminating incentives and non-taxed income.

Additional tax regulations could be implemented that could require us to make additional tax payments, negatively affecting our financial condition, results of operation, and cash flow. In addition, either national or local taxing authorities may not interpret tax regulations in the same way that we do. Differing interpretations could result in future tax litigation and associated costs.

Risks Related to Our Regulatory Framework

Marijuana remains illegal under U.S. federal law, and the enforcement of U.S. cannabis laws could change.

There are significant legal restrictions and regulations that govern the cannabis industry in the United States. Marijuana remains a Schedule I drug under the Controlled Substances Act, making it illegal under federal law in the United States to, among other things, cultivate, distribute or possess cannabis in the United States. In those states in which the use of marijuana has been legalized, its use remains a violation of federal law pursuant to the Controlled Substances Act. The Controlled Substances Act classifies marijuana as a Schedule I controlled substance, and as such, medical and adult cannabis use is illegal under U.S. federal law. Unless and until the U.S. Congress amends the Controlled Substances Act with respect to marijuana (and the President approves such amendment), there is a risk that federal authorities may enforce current federal law. Financial transactions involving proceeds generated by, or intended to promote, cannabis-related business activities in the United States may form the basis for prosecution under applicable U.S. federal money laundering legislation. While the approach to enforcement of such laws by the federal government in the United States has trended toward non-enforcement against individuals and businesses that comply with medical or adult-use cannabis regulatory programs in states where such programs are legal, strict compliance with state laws with respect to cannabis will neither absolve us of liability under U.S. federal law, nor will it provide a defense to any federal proceeding which may be brought against us. Since U.S. federal law criminalizing the use of marijuana preempts state laws that legalize its use, enforcement of federal law regarding marijuana is a significant risk and would greatly harm our business, prospects, revenue, results of operation and financial condition. The enforcement of federal laws in the United States is a risk to our business and any proceedings brought against us thereunder may materially, adversely affect our operations and financial performance.

Our activities are, and will continue to be, subject to evolving regulation by governmental authorities. The legality of the production, cultivation, extraction, distribution, retail sales, transportation and use of cannabis differs among states in the United States. Due to the current regulatory environment in the United States, new risks may emerge; management may not be able to predict all such risks.

Due to the conflicting views between state legislatures and the federal government regarding cannabis, cannabis businesses are subject to inconsistent laws and regulations. There can be no assurance that the federal government will not enforce federal laws relating to marijuana and seek to prosecute cases involving marijuana businesses that are otherwise compliant with state laws in the future. The prior U.S. administration attempted to address the inconsistent treatment of cannabis under state and federal law in the Cole Memorandum that Deputy Attorney General James Cole sent to all U.S. Attorneys in August 2013, which outlined certain priorities for the U.S. Department of Justice (the “DOJ”) relating to the prosecution of cannabis offenses. The Cole Memorandum noted that, in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, production, distribution, sale and possession of cannabis, conduct in compliance with such laws and regulations was not a priority for the DOJ. However, the DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memorandum.

There can be no assurance that the federal government will not enforce federal laws relating to cannabis and seek to prosecute cases involving cannabis businesses that are otherwise compliant with state laws in the future.  Most states that have legalized cannabis continue to craft their regulations pursuant to the Cole Memorandum. Federal enforcement agencies have taken little or no action against state-compliant cannabis businesses. However, the DOJ may change its enforcement policies at any time, with or without advance notice.

The uncertainty of U.S. federal enforcement practices going forward and the inconsistency between U.S. federal and state laws and regulations present major risks for the Company.

Changes to federal or state laws pertaining to industrial hemp could slow the use of industrial hemp which would materially impact our revenues in future periods.

As of the date hereof, approximately 46 states have authorized industrial hemp programs pursuant to the United States of the Agricultural Improvement Act of 2018, commonly known as the “Farm Bill,” or under prior programs authorized under the 2014 Farm Bill or have plans under review by the United States Department of Agriculture (“USDA”). Effective January 1, 2022, several states without an approved plan under the Farm Bill, or a plan under review, will default to the USDA Hemp Producer License. Continued development of the industrial hemp industry will be dependent upon new legislative authorization of industrial hemp at the state level, and further amendment or supplementation of legislation at the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the industrial hemp industry is currently encouraging, growth is not assured. While there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(es) within the various states where we have business interests. Any one of these factors could slow or halt use of industrial hemp, which could negatively impact the business up to possibly causing us to discontinue operations as a whole. In addition, changes in Federal or state laws could require us to alter the way we conduct our business in order to remain compliant with applicable state laws in ways we are presently unable to foresee. These possible changes, if necessary, could be costly and may adversely impact our results of operations in future periods.

Uncertainty caused by potential changes to legal regulations could impact the use of CBD products.

There is substantial uncertainty and different interpretations among federal, state and local regulatory agencies, legislators, academics and businesses as to the scope of operation of Farm Bill-compliant hemp programs relative to the emerging regulation of cannabinoids. These different opinions include, but are not limited to, the regulation of cannabinoids by the U.S. Drug Enforcement Administration and/or the Food and Drug Administration (“FDA”) and the extent to which manufacturers of products containing Farm Bill-compliant cultivators and processors may engage in interstate commerce. The uncertainties cannot be resolved without further federal, and perhaps even state-level, legislation, regulation or a definitive judicial interpretation of existing legislation and rules. If these uncertainties continue, they may have an adverse effect upon the introduction of our products in different markets.

Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.

Our business activities are heavily regulated in all jurisdictions where we do business. Our operations are subject to various laws, regulations and guidelines by governmental authorities relating to the cultivation, processing, manufacture, marketing, management, distribution, transportation, storage, sale, packaging, labeling, pricing and disposal of cannabis and cannabis products. In addition, we are subject to laws and regulations relating to employee health and safety, insurance coverage and the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.

Any failure by us to comply with the applicable regulatory requirements could

There can be no assurance that any future regulatory or agency proceedings, investigations or audits will not result in substantial costs, a diversion of management’s attention and resources or other adverse consequences to our business.

Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all necessary regulatory approvals for the cultivation, processing, production, storage, distribution, transportation, sale, import and export, as applicable, of our products. Any failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions, including:

In addition, changes in regulations, government or judicial interpretation of regulations, or more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licenses and other permits. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely affect our ongoing regulatory compliance costs. There is no assurance that we will be able to comply or continue to comply with applicable regulations.

The FDA limits the ability to discuss the medical benefits of CBD.

Under FDA rules it is illegal for companies to make “health claims” or claim that a product has a specific medical benefit. The FDA has not recognized any medical benefits derived from CBD, which means that we are not legally permitted to advertise any potential health claims related to our CBD products. Because of the perception among many consumers that CBD is a health/medicinal product, the inability to make such health claims about its CBD products may limit our ability to market and sell products to consumers, which would negatively affect our revenues and profits.

The legal cannabis market is a relatively new industry. As a result, the size of our target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.

Because the cannabis industry is in a nascent stage, there is a lack of information about comparable companies available for potential investors to review and to decide whether to invest in us and, few, if any, established companies whose business model we can follow or upon whose success we can build. Accordingly, investors should rely on their own estimates regarding the potential size, economics and risks of the cannabis market in deciding whether to invest in our Common Shares. We are an early-stage company that has not generated net income. There can be no assurance that our growth estimates are accurate or that the cannabis market will be large enough for our business to grow as projected.

Although we are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets or products, if any, will be commercially viable or successfully produced and marketed. We must rely largely on our own market research to forecast sales and design products as detailed forecasts and consumer research are not generally obtainable from reliable third-party sources in Canada and in other international jurisdictions.

In addition, there is no assurance that the industry and market will continue to exist and grow as currently estimated or anticipated or function and evolve in the manner consistent with management’s expectations and assumptions. We could also be subject to other events or circumstances that adversely affect the cannabis industry, such as the imposition of further restrictions on sales and marketing or further restrictions on sales in certain areas and markets.

Risks Related to Financials and Accounting 

We may increase our foreign sales in the future, and such sales may be subject to unexpected regulatory requirements and other barriers.

Our functional currency is denominated in U.S. dollars. We currently expect that a portion of our sales will be denominated in Colombian pesos and we may, in the future, have sales denominated in the currencies of additional countries in which we establish operations or distribution. In addition, we incur a portion of our operating expenses in Colombian pesos. In the future, the proportion of our sales that are international may increase. Such sales may be subject to unexpected regulatory requirements and other barriers. Any fluctuation in the exchange rates of foreign currencies may negatively affect our business, financial condition and results of operations. We have not previously engaged in foreign currency hedging. If we decide to hedge our foreign currency exposure, we may not be able to hedge effectively due to lack of experience, unreasonable costs or illiquid markets. In addition, those activities may be limited in the protection they provide from foreign currency fluctuations and can themselves result in losses.

Assumptions, estimates and judgments related to critical accounting matters could significantly affect our reported financial results or financial condition.

The preparation of financial statements in conformity with International Financial Reporting Standards issued by the International Accounting Standards Board requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on limited historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the notes to our financial statements, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if the assumptions change or if actual circumstances differ from those in the assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Common Shares. Significant assumptions and estimates used in preparing the financial statements include those related to the credit quality of accounts receivable, income tax credits receivable, share based payments, impairment of non-financial assets, fair value of biological assets, as well as revenue and cost recognition.

There are tax risks the Company may be subject to in carrying on business in multiple jurisdictions.

We and our subsidiaries will operate and, accordingly, will be subject to income tax and other forms of taxation in multiple jurisdictions. We may be subject to income taxes and non-income taxes in a variety of jurisdictions and our tax structure may be subject to review by both domestic and foreign taxation authorities. Those tax authorities may disagree with our interpretation and/or application of relevant tax rules. A challenge by a tax authority in these circumstances might require us to incur costs in connection with litigation against the relevant tax authority or reaching a settlement with the tax authority and, if the tax authority’s challenge is successful, could result in additional taxes (perhaps together with interest and penalties) being assessed on us, and as a result an increase in the amount of tax payable by us. In addition, we may be subject to different taxes imposed by the Colombian government, and changes within such tax, legal and regulatory framework may have an adverse effect on our financial results.

Taxation laws and rates which determine taxation expenses may vary significantly in different jurisdictions, and legislation governing taxation laws and rates are also subject to change. Therefore, our earnings may be affected by changes in the proportion of earnings taxed in different jurisdictions, changes in taxation rates, changes in estimates of liabilities and changes in the amount of other forms of taxation. The determination of our provision for income taxes and other tax liabilities will require significant judgment (including based on external advice) as to the interpretation and application of these rules. We may have exposure to greater than anticipated tax liabilities or expenses.

Additionally, dividends and other intra-group payments made by our subsidiaries or international branches may expose the recipients of such payments to taxes in their jurisdictions of organization and operation and such dividends and other intra-group payments may also be subject to withholding taxes imposed by the jurisdiction in which the entity making the payment is organized or tax resident. Unless such withholding taxes are fully creditable or refundable, dividends and other intra-group payments may increase the amount of tax paid by us. Although the Company and its subsidiaries arrange themselves and their affairs with a view to minimizing the incurrence of such taxes, there can be no assurance that we will succeed.

Restrictions on Deduction of Certain Expenses for U.S. Federal Income Tax Purposes

Section 280E of the Internal Revenue Code of 1986, as amended (the “Code”), prohibits businesses from deducting certain expenses associated with trafficking-controlled substances for United States federal income tax purposes. The IRS has invoked Code Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Section 280E of the Code prohibits cannabis businesses that are deemed to be trafficking in controlled substances from deducting certain ordinary and necessary business expenses, forcing them to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.

Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative bodies and federal courts challenging these restrictions, there is no guarantee that these authorities will issue an interpretation of Code Section 280E favorable to cannabis businesses.

There is a risk that we will be a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for the current or any future taxable year, which could result in material adverse U.S. federal income tax consequences if you are a U.S. holder.

If we (or any of our non-U.S. subsidiaries) is a PFIC for any taxable year during which a U.S. holder owns Common Shares, certain adverse U.S. federal income tax consequences could apply to such U.S. holder. The determination of whether a corporation is a PFIC for a taxable year depends, in part, on the application of complex U.S. federal income tax rules that are subject to differing interpretations. In addition, the determination of whether a corporation will be a PFIC for any taxable year generally can only be made after the close of such a taxable year. Therefore, it is possible that we could be classified as a PFIC for our initial taxable year or in future years due to changes in the nature of our business, composition of our assets or income, as well as changes in our market capitalization. Based upon the foregoing, it is uncertain whether we will be a PFIC for our current taxable year or any future taxable year. We have not determined, if we (or any of our non-U.S. subsidiaries) were to be classified as a PFIC for a taxable year, whether we will provide information necessary for a U.S. Holder to make a “qualified electing fund” election which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs. Accordingly, U.S. holders should assume that they will not be able to make a qualified electing fund election with respect to the Common Shares. The PFIC rules are complex, and each U.S. holder should consult its tax advisor regarding the PFIC rules, the elections which may be available to it, and how the PFIC rules may affect the U.S. federal income tax consequences relating to the ownership and disposition of our Common Shares.

Failure to develop our internal controls over financial reporting as we grow could have an adverse effect on our operations.

As we mature we will need to continue to develop and improve our current internal control systems and procedures to manage our growth. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish appropriate controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. For example, the re-audit of our financial statements for the period March 13, 2019 (inception) to December 31, 2019, under the Public Company Accounting Oversight Board (“PCAOB”) auditing standards, identified changes in expenditures that were not appropriately recorded and founders' warrants that were revalued. Additionally, during the 2020 audit, the Company’s auditors noted material weaknesses and made certain recommendations to management regarding material weaknesses related to goodwill impairment testing, financial reporting processes related to newly acquired subsidiaries in Colombia and intercompany and related party transactions (the “2020 Material Weaknesses”). Our management took steps to remediate the 2020 Material Weaknesses through our hiring of additional accounting personnel in Canada, the United States and Colombia and our engagement of a third-party expert with respect to, among other things, impairment testing. As a result, our management believes the weaknesses relating to financial reporting processes related to newly acquired subsidiaries in Colombia and intercompany and related party transactions have been remediated as of December 31, 2021 and the Company continues to allocate additional resources to remediate the material weakness related to goodwill impairment testing (as described below). During the 2021 audit, the Company’s auditors noted material weaknesses and made certain recommendations to management regarding material weaknesses related to goodwill impairment testing and purchase price allocations, contract receivables and corresponding revenue and inventory procedures (the “2021 Material Weaknesses”). In connection with the 2021 Material Weaknesses, the Company intends to allocate resources to its remediation plan, including (i) continuing to enhance our impairment testing procedures with the assistance of our third party experts (ii) implementing enhanced credit assessment over the creditworthiness of certain contract receivables and their corresponding revenue and (iii) implementing regularly scheduled physical inventory counts in all company locations and reconciling with internal accounting records. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse effect on the price of our Common Shares.

Risks Related to Our Common Shares

Investing in an emerging market poses a greater degree of risk than investing in more mature market economies.

Emerging market investment generally poses a greater degree of risk than investment in more mature market economies because the economies in the developing world are more susceptible to destabilization resulting from domestic and international developments. We conduct significant operations in Colombia. See “Risks Related to Operations in Colombia.”

We will need, but may be unable to, obtain additional funding on satisfactory terms, which could dilute our shareholders or impose burdensome financial restrictions on our business.

In the future, we hope to rely on revenues generated from operations to fund all of the cash requirements of our activities. However, there can be no assurance that we will be able to generate any significant cash from our operating activities in the future. Future financings may not be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the Common Shares will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operations because we could lose our existing sources of funding and impair our ability to secure new sources of funding. There can be no assurance that we will be able to generate any investor interest in our securities. If we do not obtain additional financing, our business may never commence, in which case you would likely lose the entirety of your investment in the Company.

Holders of our Common Shares are subject to dilution resulting from the issuance of equity-based compensation by us.

We have awarded stock options to our management to incentivize their performance and retention.  Any additional equity grants and any exercise of existing warrants will cause our shareholders to be diluted and may negatively affect the price of the Common Shares.

We continue to incur increased costs as a result of operating as a public company and our management is required to devote substantial time to new compliance initiatives.

As a public company, particularly after we are no longer an emerging growth company, we will continue to incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and rules implemented by the U.S. Securities and Exchange Commission, or the SEC, and Nasdaq, impose various requirements on public companies, including requirements to file annual, quarterly and event-driven reports with respect to our business and financial condition and operations and establish and maintain effective disclosure and financial controls and corporate governance practices. Our existing management team will continue to devote a substantial amount of time to these compliance initiatives, and we may need to hire additional personnel to assist us with complying with these requirements. Moreover, these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time consuming and costly.

Pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, we will be required to furnish a report by our management on our internal controls over financial reporting (“ICFR”), which, after we are no longer an emerging growth company, must be accompanied by an attestation report on ICFR issued by our independent registered public accounting firm. To achieve compliance with Section 404 within the prescribed period, we will document and evaluate our ICFR, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of our ICFR, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for ICFR. As an example, the re-audit of our financial statements for the period March 13, 2019 (inception) to December 31, 2019, under PCAOB auditing standards, identified changes in expenditures that were not appropriately recorded and founders' warrants that were revalued. Our management believes that such weakness in our recording has since been remedied; however, despite our efforts, there is a risk that neither we nor our independent registered public accounting firm will be able to conclude within the prescribed time frame that our ICFR is effective as required by Section 404. This could result in a determination that there are one or more material weaknesses in our ICFR, which could cause an adverse reaction in the financial markets due to a loss of confidence in the reliability of our consolidated financial statements.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some public company required activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and divert management’s time and attention from revenue generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies, regulatory authorities may initiate legal proceedings against us and our business may be harmed.

If we fail to meet applicable listing requirements, Nasdaq may delist our Common Shares from trading, in which case the liquidity and market price of our Common Shares could decline.

We cannot assure you that we will be able to meet the continued listing standards of Nasdaq in the future. If we fail to comply with the applicable listing standards and Nasdaq delists our Common Shares, we and our shareholders could face significant material adverse consequences, including:

Future sales, or the perception of future sales, by us or our existing shareholders in the public market could cause the market price for our Common Shares to decline.

The sale of substantial amounts of our Common Shares in the public market, or the perception that such sales could occur, could harm the prevailing market price of our Common Shares. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

In connection with our initial public offering (“IPO”), holders of approximately 8.8 million of our Common Shares, including certain of our officers and directors, agreed with the underwriters, subject to certain exceptions, not to offer, issue, sell, or otherwise dispose of, any of the Company’s securities for a period of 365 days following the date we began trading on the Nasdaq Capital Market, or May 11, 2022.

As restrictions on resale end, the market price of our Common Shares could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our Common Shares or other securities.

Ownership of our Common Shares may be considered unlawful in some jurisdictions and holders of our Common Shares may consequently be subject to liability in such jurisdictions.

Cannabis-related financial transactions, including investment in the securities of cannabis companies and receipt of any associated benefits, such as dividends, are currently subject to anti-money laundering and a variety of other laws that vary by jurisdiction, many of which are unsettled and still developing. While the interpretation of these laws is unclear, in some jurisdictions, financial benefit directly or indirectly arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of these laws, and persons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability under such laws. Each prospective investor should therefore contact his, her or its own legal advisor regarding the ownership of our Common Shares and any related potential liability.

Our executive officers and directors and their respective affiliates may continue to exercise significant control over our Company, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.

Our executive officers and directors currently represent beneficial ownership, in the aggregate, of approximately 8.4% of our outstanding Common Shares. As a result, these shareholders may be able to influence our management and affairs and control the outcome of matters submitted to our shareholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. These shareholders may have interests, with respect to their Common Shares, that are different from you, and the concentration of voting power among one or more of these shareholders may have an adverse effect on the price of our Common Shares. In addition, this concentration of ownership might adversely affect the market price of our Common Shares by:

The Company’s directors and officers may have a conflict of interest in conducting their duties.

We may be subject to various potential conflicts of interest because of the fact that some of our officers and directors may be engaged in a range of business activities. In addition, our executive officers and directors may devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to the Company. In some cases, our executive officers and directors may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to our business and affairs and that could adversely affect our operations. These business interests could require significant time and attention of our executive officers and directors.

We are a foreign private issuer and intend to take advantage of less frequent and detailed reporting obligations.

We are a “foreign private issuer”, as such term is defined in Rule 405 under the U.S. Securities Act of 1933, as amended, or the Securities Act, and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we will be subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we will not file the same reports that a U.S. domestic issuer would file with the SEC, although we will be required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws. In addition, our officers, directors, and principal shareholders are exempt from the reporting and “short swing” profit recovery provisions of Section 16 of the Exchange Act. Therefore, our shareholders may not know on as timely a basis when our officers, directors and principal shareholders purchase or sell shares, as the reporting deadlines under the corresponding Canadian insider reporting requirements are longer.

As a foreign private issuer, we will be exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements. We will also be exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. While we will comply with the corresponding requirements relating to proxy statements and disclosure of material non-public information under Canadian securities laws, these requirements differ from those under the Exchange Act and Regulation FD and shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, we will have more time than U.S. domestic companies after the end of each fiscal year to file our annual report with the SEC and will not be required under the Exchange Act to file quarterly reports with the SEC.

In addition, as a foreign private issuer, we have the option to follow certain Canadian corporate governance practices, except to the extent that such laws would be contrary to U.S. securities laws, and provided that we disclose the requirements we are not following and describe the Canadian practices we follow instead. We may in the future elect to follow home country practices in Canada with regard to certain corporate governance matters.

As a result, our shareholders may not have the same protections afforded to shareholders of U.S. domestic companies that are subject to all corporate governance requirements.

We may lose our status as a foreign private issuer in the United States, which would result in increased costs related to regulatory compliance under United States securities laws.

The Company will cease to qualify as a “foreign private issuer,” as defined in Rule 405 under the Securities Act and Rule 3b-4 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), if, as of the last business day of our second fiscal quarter, more than 50 percent of our outstanding Common Shares are directly or indirectly owned by residents of the United States and any of the following three circumstances applies: (i) the majority of our executive officers or directors are U.S. citizens or residents; (ii) more than 50% of our assets are located in the United States; or (iii) our business is administered principally in the United States. If we determine that we fail to qualify as a foreign private issuer, the Company will cease to be eligible to avail itself of the forms and rules designated for foreign private issuers beginning on the first day of the fiscal year following such determination. Among other things, this will result in loss of the exemption from registration under the Exchange Act provided by Rule 12g3-2(b) thereunder, and, if the Company is required to register our Common Shares under section 12(g) of the Exchange Act, we will have to do so as a domestic issuer.  Further, any securities that we issue in unregistered or unqualified offerings both within and outside the United States will be “restricted securities” (as defined in Rule 144(a)(3) under the Securities Act) and will continue to be subject to United States resale restrictions notwithstanding their resale in “offshore transactions” pursuant to Regulation S under the Securities Act.  As a practical matter, this will likely require us to register more offerings of our securities under the Securities Act on either a primary offering or resale basis, even if they take place entirely outside the United States.  The resulting legal and administrative costs of complying with the resulting regulatory requirements are anticipated to be substantial, and to subject the Company to additional exposure to liability for which we may not be able to obtain insurance coverage on favorable terms or at all. 

The regulated nature of our business may impede or discourage a takeover, which could reduce the market price of our Common Shares.

We require and hold various government licenses to operate our business. These licensing requirements could impede a merger, amalgamation, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our Common Shares, which, under certain circumstances, could reduce the market price of our Common Shares.

We do not intend to pay dividends on our Common Shares in the near future, and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our Common Shares.

We have never declared or paid any cash dividend on our Common Shares and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in the Common Shares will depend upon any future appreciation in their value. There is no guarantee that the Common Shares will appreciate in value or even maintain the price at which you purchased them.

Future issuances of debt securities, which would rank senior to our Common Shares upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior to our Common Shares for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able to achieve from an investment in our Common Shares.

In the future, we may attempt to increase our capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders of our Common Shares. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over holders of Common Shares in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any such future offerings or borrowings. Holders of our Common Shares must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return, if any, they may be able to achieve from an investment in our Common Shares.

General Risk Factors

The Company may become involved in legal proceedings from time to time, which could adversely affect the Company.

From time to time, we may be a party to legal and regulatory proceedings, including matters involving governmental agencies, entities with whom it does business and other proceedings arising in the ordinary course of business. We will evaluate our exposure to these legal and regulatory proceedings and establish reserves for the estimated liabilities in accordance with generally accepted accounting principles. For example, we received a letter from an attorney representing an undisclosed group of former pre-acquisition shareholders of VBI seeking to engage in settlement discussions on the basis of certain allegations. While no formal litigation has been initiated, we believe that any potential claims as alleged in the letter are without merit and we intend to defend vigorously against them in connection with any future potential legal proceedings. For more information, see Item 4.B. “Business overview—Legal Proceedings.” Assessing and predicting the outcome of these matters involves substantial uncertainties. Unexpected outcomes in these legal proceedings, or changes in management’s evaluations or predictions and accompanying changes in established reserves, could have an adverse impact on our financial results.

Our participation in the cannabis industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by third parties, other companies and/or various governmental authorities against us. Litigation, complaints, and enforcement actions involving us could consume considerable amounts of financial and other corporate resources, which could have an adverse effect on our future cash flows, earnings, results of operations and financial condition.

The Company’s success will depend, in part, on its ability to continue to enhance its product and service offerings to respond to technological and regulatory changes and emerging industry standards and practices.

Rapidly changing markets, technology, emerging industry and regulatory standards and frequent introduction of new products characterize the Company’s business. The introduction of new products embodying new technologies and regulatory developments may render the Company’s equipment obsolete and its products and services less competitive or less marketable. The process of developing the Company’s products and services is complex and requires significant continuing costs, development efforts, third-party commitments and regulatory approvals. The Company may not be successful in developing or effectively commercializing such new products and services, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of developing such products and services, may have a material adverse effect on the Company’s business, financial condition and operating results.

We are dependent upon our management and key employees, and the loss of any member of our management team or key employees could have a material adverse effect on our operations.

The Company’s success is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management and key employees. The loss of any member of our management team or key employees could have a material adverse effect on our business and results of operations. While employment agreements and incentive programs are customarily used as primary methods of retaining the services of key employees, these agreements and incentive programs cannot assure the continued services of such employees. Any loss of the services of such individuals, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s business, operating results or financial condition. We do not currently maintain key-person insurance on the lives of any of our key employees. Competition for qualified technical, sales and marketing staff, as well as officers and directors can be intense, and no assurance can be provided that the Company will be able to attract or retain key employees in the future, which may adversely affect the Company’s operations.

Our inability to retain and acquire skilled personnel could impair our business and operations.

The loss of any member of our management team could have a material adverse effect on our business and results of operations. In addition, the inability to hire or the increased costs of hiring new personnel, including members of executive management, could have a material adverse effect on our business and operating results. The expansion of marketing and sales of our products will require us to find, hire and retain additional capable employees who can understand, explain, market and sell our products. There is intense competition for capable personnel in all of these areas and we may not be successful in attracting, training, integrating, motivating, or retaining new personnel, vendors, or subcontractors for these required functions. New employees often require significant training and, in many cases, take a significant amount of time before they achieve full productivity. As a result, we may incur significant costs to attract and retain employees, including significant expenditures related to salaries and benefits and compensation expenses issued in connection to equity awards, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. In addition, as we move into new jurisdictions, we will need to attract and recruit skilled employees in those new areas.

We will need to grow the size of our organization, and we may experience difficulties in managing any growth we may achieve.

As our development and commercialization plans and strategies develop, we expect to need additional research, development, managerial, operational, sales, marketing, financial, accounting, legal and other resources. Future growth would impose significant added responsibilities on members of management. In order to manage growth and changes in strategy effectively, the Company must: (a) maintain adequate systems to meet customer demand; (b) expand sales and marketing, distribution capabilities, and administrative functions; (c) expand the skills and capabilities of its current management team; and (d) attract and retain qualified employees. Our management may not be able to accommodate those added responsibilities, and our failure to do so could prevent us from effectively managing future growth and successfully growing our Company.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our share price and trading volume could decline.

The trading market for our Common Shares will depend, in part, on the research and reports that securities or industry analysts publish about us or our operations. We do not have any control over these analysts and their research and reports. If one or more of the analysts who cover us downgrade our shares or publish inaccurate or unfavorable research about our business, our share price would likely decline.  In addition, if our operating results fail to meet the forecast of analysts, our share price would likely decline.  If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our shares could decrease, which might cause our share price and trading volume to decline.

We expect to incur significant ongoing costs and obligations related to our investment in infrastructure, growth, regulatory compliance and operations.

We expect to incur significant ongoing costs and obligations related to our investment in infrastructure and growth and regulatory compliance, which could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, future changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on our business, results of operations and financial condition. Our efforts to grow our business may be costlier than we expect, and we may not be able to generate sufficient revenue to offset such higher operating expenses. We may incur significant losses in the future for a number of reasons, including unforeseen expenses, difficulties, complications and delays, and other unknown events.

There is no assurance that the Company’s insurance coverage will be sufficient to cover all claims to which the Company may become subject.

Our production is, in general, subject to different risks and hazards, including adverse weather conditions, fires, plant diseases and pest infestations, other natural phenomena, industrial accidents, labor disputes, changes in the legal and regulatory framework applicable to us and environmental contingencies.

We are in the process of obtaining insurance coverage over our production and facilities. We may not be able to maintain or obtain insurance of the type and amount desired at a reasonable cost. If we were to incur significant liability for which we were not fully insured, it could have an adverse effect on our business, financial condition and results of operations.

We do not currently maintain key-person insurance on the lives of any of our key employees.

We may be unable to implement our business strategy, which could have negative financial and reputational effects on our business.

The growth and expansion of our business is heavily dependent upon the successful implementation of our business strategy. There can be no assurance that we will be successful in the implementation of our business strategy. A failure to do so could have negative financial and reputational effects on us. Future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis.

The Company could be subject to a security breach that could result in significant damage or theft of products and equipment.

Breaches of security at our facilities may occur and could result in damage to or theft of products and equipment. A security breach at our facilities could result in a significant loss of inventory or work in process, expose us to liability under applicable regulations and increase expenses relating to the investigation of the breach and implementation of additional preventative security measures, any of which could have an adverse effect on our business, financial condition and results of operations.

ITEM 4. INFORMATION ON THE COMPANY 

4.A. History and development

History

Flora Growth Corp. (the “Company,” “Flora,” “we,” “us,” “our”) was incorporated on March 13, 2019, under the laws of the Province of Ontario. We priced the initial public offering (“IPO”) of our Common Shares on May 10, 2021. We are an early-stage company with our registered office and mailing address located at 365 Bay Street, Suite 800, Toronto, Ontario, M5H 2V1. Our principal place of business in the United States is located at 3406 SW 26^th Terrace, Suite C-1, Fort Lauderdale, Florida 33312, and our phone number is (954) 842-4989. Our agricultural and processing operations are in Bucaramanga and Bogotá Colombia. Our Colombian-based offices are located at Calle 93B # 13-50, Oficina 101, Edificio Hernandez, Bogotá, Colombia and and Anillo vial Floridablanca – Giron km 2.176, Centro empresarial Ecoparque Natura, Torre 1 Oficina 317, Floridablanca, Santander, Colombia.  Our website address is www.floragrowth.com. The information contained on, or that can be accessed through, our website does not constitute a part of this form and is not incorporated by reference herein. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of this website is http://www.sec.gov and you can access our filings on that website.

To date, we have financed our operations and growth though short-term loans, a Regulation A Tier 2 offering which we completed in December 2020, where we raised gross proceeds of $30 million, our IPO in May 2021, where we raised gross proceeds of $19.2 million, and a follow-on public equity offering in November 2021, where we raised gross proceeds of $34.5 million.

We are an Emerging Growth Company. As such, we are eligible to, and intend to, take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not Emerging Growth Companies, such as not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We will remain an Emerging Growth Company until the earliest of: (i) the last day of our fiscal year during which we have total annual gross revenues of at least $1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the closing of our IPO; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; (iv) the date on which we are deemed to be a Large Accelerated Filer under the Exchange Act, with at least $700 million of equity securities held by non-affiliates.

Further, under the JOBS act, Emerging Growth Companies can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an Emerging Growth Company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. However, given that we currently report under IFRS as required by the IASB, we will not be able to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the IASB.

For information regarding our capital expenditures, see “Item 5.B.–Liquidity and Capital Resources.”

Strategy

We are an all-outdoor cultivator and manufacturer of global cannabis products and brands, building a connected, design-led collective of plant-based wellness and lifestyle brands. As the operator of an extensive outdoor cannabis cultivation facility, Flora leverages natural, cost-effective cultivation practices to supply cannabis derivatives to its diverse business units. The foundation of our business strategy is built on three core pillars: commercial/wholesale, house of brands, and life sciences. Below is a brief summary of these three key pillars:

Commercial & Wholesale

The Commercial and Wholesale pillar encompasses our cultivation, extraction, manufacturing and distribution of cannabis, its derivatives, plant-based extracts, and white-label or custom formulations with the intent to supply both domestic and international markets for both internal and third-party applications. This business is supported by existing cultivation on 249 acres and onsite laboratory facilities in Bucaramanga, Colombia, together with two manufacturing and processing laboratories in Bogotá, Colombia and one in Fort Lauderdale, Florida.

House of Brands

Flora’s “House of Brands” consists of a connected ecosystem of wellness and lifestyle consumer packaged goods that are designed to deliver unique experiences to its customers. These brands consist of a mix of products across multiple categories including food and beverage, nutraceuticals, cannabis accessories and technology, personal care, and pet wellness, that allow us to gain meaningful access to global markets. This brand strategy allows the Company to collect customer data through first-party relationships via each brand, creating an opportunity for customer acquisition, cross-promotion, consumer insights, and a database of opted-in consumers for new brand and product development opportunities.

Our House of Brands includes; 

Life Sciences

Flora’s Life Sciences pillar is focused on providing scientific-based research connected to molecules found in the cannabis plant. Through the Life Sciences pillar, the Company works to create education platforms as well as to initiate research studies, clinical trials, and the development of plant-based, medical-grade pharmaceuticals, phytotherapeutics, and dietary supplements for use in target and broad-based use cases leveraging multiple modalities. We are currently working on a study in conjunction with the University of Manchester in the United Kingdom to assess the benefits of a proprietary CBD formulation on patients suffering from fibromyalgia and pain-related illnesses. Additionally, Flora is seeking approval from INVIMA, Colombia’s equivalent to the FDA, for a patent-pending cannabinoid formulation for use as medicine.

Acquisitions and Investments

On February 24, 2022, our wholly-owned subsidiary Flora Growth U.S. Holdings Corp. completed the acquisition of 100% of the outstanding equity interests in each of (i) Just Brands LLC (“JBL”) and (ii) High Roller Private Label LLC (“HRPL”). JBL is based in Fort Lauderdale, Florida and is a leading distributor and retailer of cannabidiol (CBD) derived products through its widely recognized “JustCBD” brand, with HRPL manufacturing several of the leading products sold by JBL. As consideration for the acquisition, we delivered $16.0 million in cash and 9,500,000 of our privately issued Common Shares. For a more detailed description of our JustCBD brand, please see “Item 4.B.—Business overview—House of Brands,” and for more information on the terms of this acquisition, please see “Item 10.C.—Material Contracts.

On November 12, 2021, pursuant to a certain merger agreement between the Company, our wholly-owned subsidiary and certain related third parties, we acquired 100% of the capital stock of Vessel Brand Inc. (“VBI”) for consideration consisting of $8.0 million in cash and 4,557,318 privately issued Flora Common Shares.  Operating under “Vessel” as its flagship brand, VBI is a developer and retailer of high-end cannabis consumer technology and accessories. Headquartered in Carlsbad, California, VBI distributes its products throughout the United States, Canada and internationally.  

On August 24, 2021, we closed our previously announced €2 million investment in Hoshi International Inc. (“Hoshi”) while also increasing our fully-diluted investment in Hoshi through a securities swap with Hoshi.  Hoshi is a privately owned, European focused, fully integrated medical cannabis company led by a well-known team of cannabis entrepreneurs. Hoshi is focused on developing and operationalizing assets across the global cannabis industry with an emphasis on cultivating, manufacturing, and distributing cannabis products throughout the European Union (the “EU”). In connection with the securities swap, we received 2,000,000 warrants to acquire up to 2,000,000 common shares of Hoshi in exchange for 225,000 privately issued Flora Common Shares. 

On January 12, 2021, the Company acquired certain assets from Laboratorios Quipropharma SAS (“Quipropharma”), in exchange for $350,000. The assets included a Colombian-based laboratory (“Quipropharma”) that holds GMP certifications and can produce CBD-containing products. The Company also purchased certain real estate assets for total consideration of $1,143,000.

On December 29, 2020, we were assigned (i) a 10% membership interest in Flora Beauty LLC (“Flora Beauty”) (5% of which was owned by Luis Merchan, our current Chairman and CEO); (ii) a 10% membership interest in Hemp Textiles & Co LLC (“Hemp Textiles”) which was owned by Mr. Merchan; and (iii) a 20% membership interest in Hemp Textiles SAS (5% of which was owned by Mr. Merchan). As consideration for the assignment of such membership interests, we issued an aggregate of 148,333 Common Shares to the selling shareholders (other than Mr. Merchan) and paid $300 to Mr. Merchan. In January 2022, we completed the acquisition of the remaining 10% in Flora Beauty that we did not own from an unaffiliated third party for 100,000 of the Company’s Common Shares and a stock option, exercisable for up to 50,000 of our Common Shares at an exercise price of $1.70 per share.  Said stock option expires five years from the date of the grant. We now own 100% of Flora Beauty. Flora Beauty is hereinafter referred to as Flora’s personal care brand, Mind Naturals.

On December 29, 2020, we signed a share purchase agreement with certain shareholders of Kasa Wholefoods Company SAS Colombia (“Kasa”) to purchase 90% of Kasa for consideration of (i) $148,300 in cash and (ii) the discharge of $87,300 in liabilities of the Kasa shareholders.  Kasa is hereinafter referred to as Flora’s food and beverage brand, Mambe.

On December 29, 2020, we signed a share purchase agreement with certain shareholders of Breeze Laboratory SAS (“Breeze”) to purchase 90% of Breeze for consideration of (i) $147,300 in cash and (ii) the discharge of $58,900 in liabilities of the Breeze shareholders.  In January 2022, we completed the acquisition of the remaining 10% in Breeze for consideration of 30,282 of our Common Shares.  We now own 100% of Breeze which hereinafter shall be referred to as Flora Lab #4.

On December 18, 2020, we signed a share purchase agreement with certain shareholders of Grupo Farmaceutico Cronomed SAS (“Cronomed”) to purchase 100% of Cronomed for consideration of $992,000.

Quipropharma Lab and Cronomed, are hereinafter referred to collectively, as Flora Lab #2.

Effective October 15, 2019, we acquired 90% of the equity interests in Cosechemos YA SAS (“Cosechemos”) from various shareholders for consideration of $80,000 in cash.  We also issued such shareholders  a 10% non-dilutive, free carried interest in Cosechemos (the “Free Carry”). Pursuant to the shareholders agreement between the Cosechemos Vendors and us (the “Shareholders Agreement”), we are funding the operations of Cosechemos and the shareholders equity interest in Cosechemos cannot be diluted by such funding during the time that the Free Carry is in effect. The Free Carry will automatically terminate upon such time as we invest an aggregate of $25 million into Cosechemos.  Upon the termination of the Free Carry, the Cosechemos shareholders will be required, if needed by Cosechemos, to fund the operations of Cosechemos on a pro rata basis or risk having their equity interest in Cosechemos diluted.  Additionally, we are required to pay the Cosechemos shareholders, as a one-time payment, $750,000 within 60 days of Cosechemos earning a net income of $10 million.

4.B. Business overview

Our Mission

Flora’s mission is to build a design-led collective of plant-based wellness and lifestyle brands that delivers the most compelling customer experiences in the world, one community at a time.

Our Core Business

We are an all-outdoor cultivator and manufacturer of global cannabis products and brands, building a connected, design-led collective of plant-based wellness and lifestyle brands. As the operator of an extensive outdoor cannabis cultivation facility, Flora leverages natural, cost-effective cultivation practices to supply cannabis derivatives to its diverse business units. The foundation of our business strategy is built on three core pillars: commercial & wholesale, house of brands, and life sciences. Below is a brief summary of these three key pillars:

Commercial & Wholesale

The Company’s cultivation and extraction facility is located at Anillo vial Floridablanca – Giron km 2.176, Centro empresarial Ecoparque Natura, Torre 1 Oficina 317, Floridablanca, Santander, Colombia. Our cultivation farm and processing facility were designed for natural, organic outdoor grown legal cannabis and processing into commercial and medical-grade ingredients and related products. The primary business is commercial wholesale for export and includes THC and CBD dried flower and distillates and CBD isolates.

Flora currently has 4 strains of cannabis approved for commercial use and an additional 8 strains (cultivars) under evaluation with the Instituto Colombiano Agropecuario (“ICA”). We have also completed commercial arrangements to cultivate, process and sell an additional 5 strains previously registered with ICA for commercial use. We develop final (dried flower, distillate and isolate) products consistent with medical cannabis industry standards and pharmaceutical procedures. Our commercial and wholesale portfolio of products includes a variety of THC and CBD both dried flower and formulations designed to meet international and domestic standards as well as evolving legal market opportunities. The Company is licensed to grow, convert and export both non-psychoactive cannabis (less than 1% THC) and psychoactive cannabis (higher than 1% THC). Effective March 2022, the Colombian federal regulators granted the Company an export quota of 43,600kg of psychoactive cannabis and derivatives for the calendar year 2022.

Psychoactive Cannabis Cultivation License

On August 22, 2019, we applied to the Ministry of Justice for a psychoactive cannabis license (the “Psychoactive Cannabis License”), which authorizes the cultivation of psychoactive cannabis plants for (i) seeds and cuttings production;; (ii) the manufacture of derivatives; and (iii) scientific research purposes. Besides cultivation, licensees also have an authorization to store, commercialize, distribute and transport psychoactive cannabis plants, as well as dried cannabis flower.  Flora obtained this license on March 10, 2021 and received an updated export permit of 43,612.6 kilograms on March 11, 2022 for the calendar year 2022. See “—Regulatory Environment."

Cannabis Manufacturing License

On August 14, 2019, the Company applied to the Ministry of Health and Social Protection (the “Ministry of Health”) for its cannabis manufacturing license. This cannabis manufacturing license was granted as of November 9, 2020. See “—Regulatory Environment."

ICA Permit

Currently, the Company has 4 varieties of both THC and CBD medicinal cannabis registered with the ICA and has the registration as the producer of several additional selected seeds under review at ICA. Upon receiving an update to the ICA Permit (8 currently approved), the Company will commence with commercial investigation and cultivation of additional strains. See “—Regulatory Environment."

Non-Psychoactive Cannabis License

The Company applied for a non-psychoactive cannabis license (the “Non-Psychoactive Cannabis License”) on September 6, 2018 and the Ministry of Justice granted the Non-Psychoactive Cannabis License on May 15, 2019, through Resolution N° 484. The Non-Psychoactive Cultivation License grants us the right to cultivate non-psychoactive cannabis plants for: (a) grain and seeds production; (b) manufacturing of derivatives; and (c) industrial production. The Cannabis Non-Psychoactive Cultivation License does not require a quota. The license is valid for up to five (5) years and can be renewed for an additional five-year term. The Colombian government maintains the right to monitor the activities performed by the corresponding licensee. See “—Regulatory Environment."

Property, Plants and Equipment

Cultivation Operations

Our cultivation operations are conducted on our 361-acre farm located in Girón, Colombia, of which 249 acres are licensed for cannabis cultivation. Our farm is situated in a tropical rainforest climate throughout the year with limited temperature variation and precipitation that consistently receives approximately 12 hours of daylight, year-round, with very little seasonal variability. Consistent precipitation (rainfall) is ideal for controlling humidity and moisture levels within open-air grows and nursery greenhouses. Our farm’s location and infrastructure are further well-suited to supply international markets as it is only 6.2 miles from Palonegro International Airport in Lebrija. Flora’s cultivation farm includes:

Flora leases the farm pursuant to a lease agreement (the “Farm Lease”), dated May 2, 2018, as amended, with C.I. Gramaluz S.C.A.  The term of the Farm Lease is five (5) years effective since September 1, 2019 and Flora pays approximately $5,800 a month to lease the farm.  There is an option to extend the Farm Lease for an additional five-year term unless we or the lessor provides notice to terminate the Farm Lease at the end of the original term.  Pursuant to the Farm Lease, we have the right to purchase the farm at a price to be determined by an arm’s length third party appraiser from the real estate association of Bogotá, Colombia.

Flora constructed a helicopter pad that allows individuals or supplies to be moved to and from the farm. It takes approximately five minutes to fly by helicopter from the farm and Palonegro International Airport in Lebrija.

Flora Laboratories

Flora Lab #1

Flora Lab #1 is located on the premises of our farm is in Bucaramanga, Colombia. During the fourth quarter of 2021, we completed the construction of a research technology and processing center located on the farm, which includes a cryo-ethanol biomass extraction filtration and recovery system, isolation, drying and dehumidification, sterilization and storage in an area of approximately 11,500 square feet. Flora Lab #1 is comprised of: (i) flower automated drying machines, (ii) a grinding and milling area, (iii) extraction areas, and (iv) a phytocannabinoid quality control laboratory, a soil laboratory, a phytopathology laboratory and a beneficial microorganism multiplication laboratory. Flora Lab #1 is designed to be capable of processing the Company’s perpetual harvest cultivation and can currently process up to 600kg/day of biomass. The facility is also designed to be expandable and able to process cultivation up to the fully-licensed acreage. We may expand the processing capabilities of our lab over time as market demand increases.

Flora Lab #2 

The Company’s acquisitions of Quipropharma Lab and Cronomed in Bogotá, Colombia constitute our “Flora Lab #2.”  To date, Flora Lab #2 has focused on the design and development of dermo-cosmetic products to respond to the needs of consumers, health specialists, patients and therapists. Flora Lab #2 also manufactures custom formulas and premium personal care products for business to consumer (“B2C”) clients registered at the Instituto Nacional de Vigilancia de Medicamentos y Alimntos (“INVIMA").

Custom formulas may range in complexity from a single ingredient product to a product featuring multiple ingredients. The custom formulation process includes the modification of an existing product or the development of an entire new product to target a specific concern. Flora Lab #2 currently provides a variety of custom products for established customers and is involved in every phase of product development. Flora Lab #2’s portfolio of products and services include GMP-certified manufacturing of phytotherapeutics, dietary supplements and topical products.      

Flora Lab #2 also employs a business-to-business (“B2B”) model, selling its products to wholesalers, pharmacies and retailers. Flora Lab #2 is focused on the commercialization and distribution of over-the-counter products, including dietary supplements, phytotherapeutic and nutraceutical products, supplements and related products to large channel distributors, including pharmacies, medical clinics, and cosmetic companies.

Flora Lab #2 uses third-party white-label producers (including international suppliers Athena from France and Nyells from the United States, and domestic suppliers such as Coaspharma, Colompack, Syntofarma, Vital Hands, Nutripharma, among others) to manufacture its products under its various brands and has strong relationships with such producers and suppliers of raw materials.  In addition, Flora Lab #2 sources a majority of its raw materials within Colombia and the active pharmaceutical ingredients (API) are supplied by both Colombian and international companies from various countries including the United States, China and Germany.

Flora Lab #3

In February 2022, we acquired HRPL, a leading manufacturer, distributor, and retailer of cannabidiol (CBD) derived products. HRPL’s laboratory (hereinafter referred to as “Flora Lab #3”) is located in Fort Lauderdale, Florida, and can manufacture white label CBD solutions across 15 categories, including gummies, topicals, and tinctures. HRPL was founded in 2018 and has consistently expanded its footprint to meet demand. HRPL’s primary business model is to produce JustCBD branded goods, however, HRPL also manufactures CBD products for other third party customers and expects to continue to grow third party revenue opportunities. HRPL is currently operating in an 18,000 sq ft facility that contains a lab for R&D, formulating, testing, a drying room, storage area, automated packaging lines for gummies, and bottling lines for tinctures, topicals, and other bottled products. In addition, Flora Lab #3 can conduct in-house potency testing to test the efficacy of products produced. We currently lease Flora Lab #3 for $39,500 a month, pursuant to a lease agreement that expires on June 30, 2022. We are actively seeking to lease a larger facility for Flora Lab # 3 and expect to enter into a new lease prior to June 30, 2022.

Flora Lab #4

Flora Lab #4 is in Bogotá, Colombia and is comprised of the Breeze assets.  Flora Lab #4 is focused on the commercialization and distribution of pharmaceutical and custom phytotherapeutic formulations.

House of Brands

JustCBD

JustCBD is Flora’s leading consumer packaged goods brand. JustCBD was launched in 2017 with a mission to bring high-quality, trustworthy, and budget-friendly CBD products to market. JBL, together with HRPL, is a leading manufacturer, distributor, and retailer of cannabidiol (CBD) derived products. JustCBD currently offers over 350 products across 15 categories through its wholly-owned subsidiaries, including CBD gummies, topicals, tinctures, and vape products and ships to over 11,500 independent retailers worldwide. JustCBD is a lifestyle wellness brand with a wide array of product categories including edibles, bath and body, pets, sports recovery, and more. JustCBD is available for purchase in smoke and vape shops, clinics, spas and pet stores, as well as other independent non-traditional retail channels. JustCBD’s products are third-party lab-tested to ensure quality. These lab reports are accessible via a QR code on product labels and online. 

In JustCBD’s 26,000 sq ft facility, distribution, wholesale (B2B), and direct-to-consumer (D2C) orders are fulfilled and shipped worldwide. We lease this facility for $25,862 a month, pursuant to a lease agreement that expires in April 2024. JustCBD recently entered the South American market with both wholesale and retail operations along with active expansion efforts into the United Kingdom, France, and Germany. As of December 31, 2021, JustCBD shipped over 4.8 million products worldwide. In addition, JustCBD has a subscriber base of over 500,000 customers worldwide. We believe these existing customers have affirmed JustCBD’s product quality and experience, awarding over 30,000 five-star reviews to date. JustCBD has also recently deployed a subscription model where over 5,000 customers have signed up to receive recurring monthly orders. We expect the volume of subscribers to continue to grow throughout 2022 and beyond, which will be a meaningful component of our e-commerce strategy, further increasing the lifetime value of JustCBD’s customer base.

Vessel

Vessel is Flora’s cannabis accessory and technology brand currently servicing the United States and Canada through direct-to-consumer and retail sales. The products include cannabis consumption accessories, personal storage, and travel accessories for vape and dry herb categories, which are sold to dispensaries, smoke shops and cannabis brands. Vessel is a lifestyle brand, developing products for key consumer personas interested in “elevating” the consumption experience. The majority of revenue from Vessel is captured in the United States via its direct-to-consumer website.  Our VBI operations are headquartered at 2236 Rutherford Rd., Suite 103, Carlsbad, California 92008, where we lease 12,000 square feet of office and warehouse space for $30,000 a month, pursuant to a lease agreement that expires in July 2027.  Our acquisition of VBI in November 2021 affords Flora the opportunity to expand its fulfillment capabilities to both the west (Carlsbad, CA) and east coast (Fort Lauderdale, FL), which we believe provides several potential business synergies.

VBI was founded in 2017 by James Choe (Flora’s current Chief Strategy Officer) with the intent to design and build better cannabis accessories for the burgeoning market in the United States. The initial product mix was focused on the popular 510-thread compatible battery market. With 510 thread cartridges being the predominant form factor and delivery method in the vaping category, VBI sought to build a battery that would be compatible with the majority of cartridges in the market, agnostic to oil brands and producers. The launch of Vessel took place in October 2018 and featured six styles to address various segments of the consuming audience.

In late 2019, VBI began to introduce additional ancillary items that would complement the consumption experience including storage cases and charging stands compatible with the batteries. In the summer of 2021, VBI expanded the Vessel line to include dry-herb accessories to address the large cannabis flower consuming audience. Since the initial launch of four dry herb SKUs, Vessel has added an additional ten SKUs to better support the category. Since its inception, VBI has grown its customer database to 150,000 subscribers and optimized customer acquisition costs from an initial $200 per customer to a blended rate of $16 per customer acquisition.

Since its launch, VBI has broadened its Vessel product offering to include pen-style and palm-sized vape batteries, charging stands for its vape collection, storage cases, travel wallets, protective sleeves, patent-pending “one-hitter” all brass pipes, “one-hitter” glass pipes, storage jars, lighters, dry herb grinder, and ashtrays. VBI holds a number of patents and trademarks on its portfolio of products. See “Our Intellectual Property Portfolio,”

VBI uses a mix of owned and paid, on and offline channels for both brand awareness and customer acquisition. VBI engages in paid media buys, advertising, affiliate marketing, newsletter buys, influencer seeding, and content sponsorships. VBI also produces owned content in both written and video formats to support owned channels via the website, social media, and YouTube. In addition, VBI frequently participates in various industry events and tradeshows.

Vessel sells through three primary channels:

Mind Naturals

Mind Naturals is Flora’s clean beauty brand. Mind Naturals’ skincare and beauty products are made with innovative ingredients such as CBD oil extract, hemp seeds for exfoliators and other natural ingredients. Flora sources CBD, cosmetic ingredients and packaging components from the larger global supply chain for manufacturing and packaging of the Mind Naturals brand.

Mind Naturals entered the United States skincare market with sales commencing in September 2020. The Mind Naturals products represent a socially conscious approach to the industry by creating products that are paraben and phthalate free, vegan, and absent any ingredients that utilize animal-testing. The skincare brand is formulated with and without CBD oil as a key ingredient, alongside other natural ingredients, some of which are endemic to Colombia and the Amazon forest.

Mambe

Our Mambe brand of products includes juices, exotic fruits coated with chocolate, chocolate bars (with non-GMO and Kosher certified) as well as dried fruits, beans, and pulp from Amazonian fruits. Mambe products are made using organic and sustainable methods.  The Mambe brand operates primarily on a B2B model, where it sells to both distributors and retail businesses.

Over the last three years our Mambe juices have been distributed in Colombia, primarily in supermarkets, discount retailers, coffee shops, restaurants and airports in Bogotá, Colombia, including well-known Colombian retailers Tostao, Jumbo, Ara, Xue and Sipote Burrito.

In February 2022, the Colombian President Ivan Duque signed into effect Resolution 227, which provided the necessary framework for the use, distribution and export of cannabis derivatives, dried flower, and other non-psychoactive derivatives. This resolution expanded upon the law changes that were signed into effect in July 2021 by providing the technical requirements for companies to register and proceed with the commercialization of cannabis products, including non-psychoactive cannabinoid containing food and beverage products. Specifically, these changes to the law have allowed for the formation of a domestic market for the sales of cannabinoid containing food and beverage products in Colombia as well as permitted their development and manufacturing for international export.

During the first quarter of 2022, we launched a Mambe line of flavored dried habas (fava beans) in various size formats for the Colombian market. We will explore launching these Mambe products in the U.S. market in 2022.

Over the past year, we have focused our research and development efforts on creating CBD-containing versions of our existing Mambe products, including our existing juices and chocolates, as well as developing new products that contain CBD, potentially including sparkling seltzers, gummies, and healthy snack foods. In February 2022, after Resolution 227 was signed into effect, we filed to register twenty-three (23) cannabinoid-infused food and beverage products with the Instituto Nacional de Vigilancia de Medicamentos y Alimentos (INVIMA) (equivalent to the U.S. FDA).

To market our Mambe products, we are focusing on digital strategies, such as working with influencers, digital advertising, public relations firms, social media, and paid search and email marketing to widen reach of our products and brands through wholesale, retail and e-commerce.

Flora relies on a combination of trademark, patent, copyright and trade secret protection laws in Colombia to protect our intellectual property and our brands. With respect to the Mambe brand, we hold four sanitary registers of INVIMA for the production and export of its juices and botanicals, permitting eighteen recipes of juices for distribution. These registration expiration dates range from July 2022 to February 2031, with options to renew upon expiration.  We do not anticipate any difficulty renewing these registrations to the extent we choose to do so.  

Stardog Loungewear

In June 2020, we launched our inaugural lifestyle brand, Stardog Loungewear (“Stardog”), a consumer-facing apparel brand that designs and markets loungewear made from hemp-derived fabric and materials. We commercialize the brand through both e-commerce and brick and mortar retail locations. In December 2020, we opened our first brick and mortar retail store to sell our products in Bogotá, Colombia at the Parque la Colinas shopping center. In December 2021, we opened our first U.S.-based retail location in the Wynwood district of Miami, Florida. In January 2022, select Stardog Loungewear products became available for sale on Macys.com.

Stardog Loungewear markets itself as a lifestyle brand for consumers who are eco-conscious. We are able to distribute these products worldwide through e-commerce channels as hemp fabric is not regulated as a controlled material. Stardog products are currently manufactured in Colombia using hemp fabrics primarily from Turkey and China.

Initially, Stardog launched with an inaugural collection for men that included jogger pants, house shoes, crew neck sweaters, hoodies, t-shirts, henley shirts, robes and shorts. In the Spring of 2021, Stardog launched its inaugural women’s collection that included tank tops, shoes, pants, robes, pants, and jackets. On an ongoing basis, Stardog launches seasonal collections with updated designs and new colors and products.

Stardog products use eco-conscious materials wherever possible to appeal to its intended consumer. This includes design materials such as shoe soles that include recycled coffee, hemp-based tags, organic fabric inputs, among other initiatives.

We operate our Stardog brand through our subsidiaries Hemp Textiles & Co SAS and Hemp Textiles & Co LLC.

Tonino Lamborghini

On November 9, 2021, we entered into an exclusive license agreement with Tonino Lamborghini S.P.A. ("TL") for the manufacturing, promotion and distribution of Tonino Lamborghini branded beverages using CBD in North America and Colombia.

The initial product launch is expected in the late second quarter of 2022 and will include cold coffee beverages. Flora also retains the right of first refusal ("ROFR") on any or all additional Tonino Lamborghini products containing cannabinoids in North America and Colombia which may include, but are not limited to, beverages, edibles, wellness or other ingestibles and for the expansion or addition of new geographic regions or territories. The Flora/TL beverages will be all marketed with high-end positioning among competing fast-moving consumer goods of similar product quality.

The license agreement is based on an initial three-year term with a projected five million units (individual beverages) sold within that period. Flora, may at its option, cancel the agreement after one year with no penalty or additional charges. The license agreement includes a minimum guaranteed royalty of $250,000 USD in year one of the agreement that increases with the scope and size of the projected sales in each subsequent year.

KaLaya Naturals

On November 26, 2021 we entered into a definitive agreement with Canada-based Avaria Health & Beauty Corp. (“Avaria”) to form FloVaria Corp. (“FloVaria”), a joint venture company equally owned by the Company and Avaria.

Created by a Canadian medical doctor and pharmacist, KaLaya Naturals offers natural product formulations for pain relief. Through FloVaria, our various manufacturing and sales groups will provide distribution, supply chain, and marketing support of KaLaya Naturals’ therapeutic skin products in Colombia, Mexico, and potentially other Latin American (“LATAM”) or EU countries. Avaria will initially supply the finished product to FloVaria from Canada. In the event that manufacturing costs from Canada become materially higher than the cost to produce in Colombia, FloVaria will explore moving its supply chain activities of Avaria products to Flora Lab #2.

Flora is currently registering KaLaya products in Colombia and Mexico. Flora Lab #2 is currently working to produce FloVaria’s cannabinoid-infused products, with an emphasis on incorporating cannabidiol, using cannabis from our cultivation facility. These products are expected to be distributed across LATAM using Flora Lab #2’s established distribution channels, with the goal of exporting to the U.S. market, where Avaria recently launched its KaLaya brand.

Life Sciences

Led by Dr. Annabelle Manalo-Morgan, Ph.D, a member of our Board of Directors and our Lead Scientific Advisor, Flora’s research arm seeks to support leading scientists and research institutions such as Vanderbilt University and the University of Manchester to advance access to the research of cannabinoid-based medicine. We are looking to identify the most efficacious combination of plant-based compounds and derivatives to provide consumers with products that satisfy the commitment to better living through thoughtful and curated wellness.

Obtaining preclinical data is a complex multistep process that gathers information on the safety and efficacy of new drug formulations. Traditionally, preliminary work in cellular, tissue, and animal-based studies required for an FDA approval, or similar approval in countries outside the United States, are performed at academic institutions. We have completed the first phase in preclinical assignments with our University of Manchester partners and we are defining patient protocol for our anticipated study that will assess the benefits of a proprietary CBD formulation on patients from fibromyalgia and pain-related illnesses and, subject to positive feedback, seek approval from the National Health Service.

Separately, we have initiated preclinical studies to support a new pharmaceutical cannabinoid formula for the prevention of Sars-Cov-2 and to register dietary supplements with INVIMA to launch in the Colombian market in 2022.

In addition to research, the Life Sciences group works to produce comprehensive and interactive cannabinoid educational materials for a network of institutions and independent learners through online platforms. The goal is to demystify the cannabis sector and provide working knowledge to the academic and private sectors of the advancements in the cannabis market. The Company has already completed development on the first part of this educational content, by creating the “Business of Cannabis” educational course. Delivered in Spanish and primarily targeting LATAM markets, this course provides an extensive overview of the principles and requirements of a business in the cannabis industry and the principals of entering the international cannabis market. These paid courses are part of a network of online learning tools and available to the public, through specific partner educational institutions. 

We intend to continue to expand our education platform through our Life Sciences business to include:

The Company currently works with a network of institutions and design partners to build these programs and uses engaging video lectures, interactive dynamic graphics and data visualizations to create accessible digital content. The Life Sciences group together with these partner education institutions provide online programs for students who are looking to expand their capabilities during their education or even in the context of their current job or training.  

The Global Cannabis Industry

Expanding Cannabis Market

The global cannabis market is growing at approximately a 22% compounded annual growth rate (CAGR) and projected to reach approximately $50B by 2025 globally.  Flora’s initial focus is on selling products in Colombia, the United States (CBD only), the European Union (“EU”), Australia and Mexico in the short term, with expansion to other Latin American countries and Canada, subject to regulatory conditions and import requirements in such countries. Consumer products, cosmetics and food and beverage products with a shifting focus away from dried flower and onto derivatives (extractions, oils, isolates and finished products) presents the biggest opportunity in the cannabis market globally. Flora believes that the cannabis market presents a natural and underutilized opportunity to diversify revenue streams across business and consumer segments including wholesale, wellness, beauty, apparel, technology, and food and beverages.

Colombia

Serving Colombian local markets and certain countries in Latin America that have legalized medicinal cannabis and allow for the importation of CBD-based products, addresses the medicinal cannabis needs of prospective Colombian patients with conditions potentially suitable for treatment with medical cannabis. Colombia has more than 18 trade agreements worldwide, including with the United States, Canada, and the European Union, and is a founding member of the Pacific Alliance Regional trade block.  This gives Colombian-based companies access to more than 65 countries. 

In 2022, the Colombian government passed Resolution 227 and Resolution 539, completing the necessary guidelines for cannabis agriculture and manufacturing proposed in Decree 811. Resolution 227 provides the necessary framework for the use, distribution and export of cannabis, dried flower, and other non-psychoactive derivatives. On April 1, 2022, the Government of Colombia finalized the cannabis flower regulatory checklist under Resolution 539 permitting licensed cannabis cultivators with export quotas, including Flora, to pass a mandatory approval process for the export of both CBD and THC flower.

On January 1st, 2022 insurance providers in Colombia were mandated to cover the costs of both THC and CBD medical products which covers 97% of the countries over 55 million person population.

United States

The United States currently has 20 legal states providing for “adult use” of recreational cannabis and 37 states providing for some access to cannabis through a hybrid or medical program. In 2022 this is projected to produce a $26.5 billion market with a 22% CAGR. As Flora is listed on the Nasdaq Capital Market that maintains the U.S. federal prohibition on cannabis products containing THC, we operate exclusively today in the CBD-based or accessory business in the U.S. market. This includes importing cosmetic and beauty products, accessory and non-cannabinoid products and CBD products produced by our JustCBD brand in Florida. According to Brightfield Group, the U.S. hemp-derived CBD market reached $5.3 billion in retail sales in 2021 and is expected to grow to $16 billion in 2026. This would imply 15% growth over 2020 sales of $4.6 billion and a 23% CAGR from 2021 to 2026.

Europe

The European cannabis landscape continues to advance largely with Germany, Malta, Switzerland, Poland and the United Kingdom being the furthest ahead by means of establishing a legal cannabis framework. At the end of 2021, Germany announced it would begin the process of moving towards a fully legal cannabis industry, second only to Malta. Prohibition Partners, a leading market intelligence firm on the global cannabis industry, estimated that the European cannabis market will be worth €403.4 million by the end of 2021 and will grow at a CAGR of 67.4% from 2021 to reach €3.2 billion by 2025. Products like CBD edibles continue to be governed by the EU Novel Food Act and as a result provide near term upside for the Company.

Medicinal Cannabis Market

Flora Growth currently serves the domestic Colombian market and has entered into agreements with distributors in Latin America that have legalized medicinal cannabis and allow for the importation of CBD-based products. The CBD dominant cannabis products will mainly be focused on addressing the medicinal cannabis needs of prospective Colombian patients with conditions potentially suitable for treatment with medical cannabis. Such conditions include anxiety, insomnia, anorexia, chronic pain, epilepsy, chemotherapy-induced nausea and vomiting, post-traumatic stress disorder (PTSD), Parkinson’s disease, Tourette syndrome, irritable bowel syndrome (IBS) and spasticity associated with multiple sclerosis (MS) and spinal cord injury (SCI).

The market for medicinal cannabis in Colombia is evolving with limited supply and few authorized producers of THC dominant cannabis. There are comparatively more producers of CBD dominant cannabis as production of CBD cannabis is not subject to the quota system in Colombia. Although competition in the market is growing, management believes that we are competitively positioned to capitalize on our early mover status and to satisfy a significant portion of the market’s demand for medicinal cannabis.

The global cannabis industry is experiencing significant change as governments embrace regulatory reform, liberalizing the production and consumption of cannabis. It is possible that foreign corporations may enter the Colombian market as a result of Colombia’s regulatory regime, creating the prospect of Colombia becoming a hub for future industry development. In addition, we may face new competition with other licensed cannabis producers offering similar products to our products.

Pharmaceutical Market and Health Sector

According to the data reported to the Drug Price Information System, pharmaceutical sales have shown sustained growth in recent years, although in 2019 it grew at the lowest rate since 2015.  In turn, the units sold rose from 1.06 billion in 2018 to 1.08 billion in 2019, showing a 2% increase.  In 2020, drug makers raised prices on more than 860 drugs by around 5%, on average, according to 3 Axis. Drug price increases have slowed substantially since 2015, both in terms of the size of the hikes and the number of drugs affected. Drug increases come at a time where increased pharmaceutical engineering has moved to fight COVID-19, with many companies exploring CBD as a drug to combat COVID-19.

The health sector in Colombia offers various business opportunities in vaccine and biotechnological drug production centers, as well as in the medical cannabis market. Flora Lab #2’s research and development teams are exploring how its product line can incorporate CBD-oil to improve the effectiveness of its products and develop new products using CBD as an active ingredient. We believe that Colombia has become a benchmark in this industry as, to our knowledge, one of the first countries to structure a regulatory framework for the safe and informed access to the medical and scientific use of the plant and its derivatives. Furthermore, the chemical sector in Colombia has adopted several international regulations, such as the Good Laboratory Practices (GLP) and the Globally Harmonized System (GHS).  In addition, Colombia has implemented its own control system for substances that could be used for illegal purposes, and it is currently implementing environmental protection systems such as the Pollutant Release and Transfer Registry (PRTR).

Despite Colombia’s struggle with counterfeit medicines and restrictive pharmaceutical pricing environment, the country’s large and burgeoning population and recent legislative commitments to improving healthcare access will continue to offer growth opportunities to drug-makers.  Flora anticipates competing with other manufacturers and distributors of over-the-counter pharmaceutical products in Colombia, the United States and Canada as it moves forward with the execution of its international business plan. Flora Lab’s operations and ability to compete internationally have benefited from joining due to vertical integration synergies and access to our management team, board of directors and advisors as well as capital to grow its business.

Skincare and Beauty Market and the Cosmetics Sector

Some of Flora’s objectives are to compete in the CBD beauty and wellness markets in Colombia, North America and Europe, provide visibility to the quality of the products that are grown and developed in Colombia, and create skincare and beauty products that promote well-being and are part of the beauty routine of the more conscious women.

The focus is on selling Mind Naturals’ personal care products in the United States and Colombia in the short term, with expansion to other Latin American countries, Canada and Europe, subject to regulatory conditions in such countries.  Presently, the United States allows for the commercial production and distribution of skincare products containing CBD. Mind Naturals’ products are already being sold in Colombia at S.A.C. I. Falabella (“Falabella”) and online at www.mindskincare.com. Falabella has retail stores in large South American countries such as Mexico, Chile, Peru, Argentina and Colombia and is considered the largest and most valuable retail company in Latin America.

According to Prohibition Partners, the beauty industry worldwide generated $524 billion in revenue in 2019 and is projected to grow to over $800 billion by 2023, making it one of the fastest growing segments in retail. At the center of it is the United States, which represents $20 billion in sales in 2019 and leads the world in trends and brand adoption.  The global CBD skincare market was valued at $710 million in 2018 with projected sales of $959 million by 2024.

The cosmetics sector is a growing market in Colombia and in the world. The director of the Chamber of the Pharmaceutical and Toiletries Industry of the National Association of Business of Colombia (ANDI) reported that in 2019 the cosmetics industry represented sales of more than $3.57 billion in Colombia.

Lifestyle Apparel Market

According to Global Newswire, the global sleepwear and loungewear market are poised to grow by $19.5 billion during 2020-2024, progressing at a CAGR of 9%.  Moreover, according to Bloomberg, the loungewear market is expected to reach $47.8 billion by 2025, making it a very interesting market to focus on.  While apparel sells were down in 2020 by 52%, loungewear sales grew by 22.5%, representing a compound gap of 77.5% according to Forbes. This contrast has made many players turn their eyes to the loungewear subcategories, such as activewear, sleepwear and home comfort wear. Some companies in the sector, such as Alo Yoga, had 40 million in sales on cyber-Monday alone. Lululemon is expected to hit a $50 billion market cap this year and was listed by the Financial Times as one of the companies that has had the biggest growth during the COVID-19 pandemic.

While this indicates a strong interest for loungewear products by consumers, it also indicates the level of competition that there already is. The clothing and loungewear in Colombia and the United States is highly competitive with a few companies sharing a large share of the market, however, we believe that there is a need in the marketplace for hemp-based products specifically.

In addition, our loungewear and textiles business have a degree of seasonality due to the fact that the fabrics are warm and are designed to be loungewear.  To mitigate any seasonal risk, Hemp Textiles is designing a summer collection to be suitable for warmer seasons.  Nonetheless, in the retail sector, the e-commerce second semester is typically stronger than the first semester, in part, due to increased consumer buying during the holiday season.

Food and Beverages Market

Flora’s principal market over the last three years for its Mambe juices has been in Colombia, primarily in supermarkets, discount retailers, coffee shops, restaurants and airports in Bogotá, Colombia, including well-known Colombian retailers Tostao, Jumbo, Ara, Xue and Sipote Burrito. Flora’s products are not subject to strong seasonality concerns in Colombia.

We intend to expand Mambe’s offerings over the entire Colombia domestic territory over the next three years and export its portfolio of products to the United States and Canada. The Mambe chocolates and juices became available, without any cannabinoids, in the United States and Canada during the first quarter of 2021.  We intend to distribute Mambe’s juices, chocolates and botanicals with various cannabinoids in the North American market in 2022, subject to approval from the U.S Federal Food and Drug Administration.

With respect to the juice market, Mambe aims to penetrate the Canadian market and later into the United States in 2021.  According to Statista, global soft drink revenue amounted to a volume of $667.38 million in 2020. In global comparison, most revenue is generated in the United States ($280.51 million in 2020).

In addition, we aim to penetrate the Canadian market with our Mambe chocolates, initially targeting Toronto, Ottawa and Montreal, with its first buyer being Expod Services de Exportation (based in Montreal). According to Statista, Canada’s revenue in the confectionery segment amounts to $9.44 million in 2020. The market is expected to grow annually by 1.8% (CAGR 2020-2025).  In global comparison, most revenue is generated in the United States ($176.01 million in 2020).  The average per capita consumption stands at 24.9 kg in 2020.

Our Competitive Strengths

The market for medicinal cannabis in Colombia is characterized by a shortage of medical grade cannabis, with few authorized producers of tetrahydrocannabinol, or THC, dominant cannabis. There are comparatively more producers of CBD dominant cannabis as production of Cannabidiol, or CBD, cannabis is not subject to the quota system in Colombia, which is a system established by the Colombian government to limit the production volume of cannabis plants and derivatives. Although competition in the Colombian market is growing, Flora believes that it is competitively positioned to capitalize as an early mover and to satisfy a significant portion of the market’s demand for medicinal cannabis. Flora also sees a lack of Colombian extractors striving for EU GMP certification to allow for global distribution of finished isolates and distillates.

Due to the competitive and dynamic nature of the emerging cannabis products market and rapid changes in the regulatory environment, Flora does recognize the need to remain flexible, so it can react to opportunities and risks as they develop. Management will continue to re-evaluate and re-prioritize strategies to respond to these developments. We are actively fostering a culture of continued agility and exploration since the ability to pivot depending on market dynamics will deliver competitive advantage.

Flora’s experienced management team provides a competitive advantage in the emerging cannabis industry.

Management expects that its experience and strong understanding of Colombia’s regulatory framework, the agricultural and scientific processes necessary to develop high quality and consistent medicinal cannabis products, as well as the knowledge and expertise in go to market strategy for its portfolio of brands, provides the Company with a competitive advantage in the emerging cannabis industry.

The Colombian cultivation advantage for the operation of our business.

Outdoor cannabis cultivation in Colombia with environmental conditions that allow us to have five crop cycles (harvests) per year, compared to 1-2 in other outdoor growing countries.  This allows Flora to grow cannabis with a larger output per square foot. Further, according to Bloomberg, the strength of the U.S. dollar is projected to provide us with a cost advantage over our competitors, due to each dollar going further in Colombia as compared to other countries (1 USD = approximately 3,850 Colombian pesos). In addition, according to Digital Logistics Capacity Assessments, Colombia has a workforce highly-skilled in agriculture at only 1/10^th of the cost compared to the United States.

Production of natural cannabis and derivative products to capitalize on rapidly growing consumer segments.

Product categories such as food and beverage, nutraceuticals and pet wellness have lower barriers of entry in terms of regulation than medicinal cannabis and afford Flora the opportunity to expand distribution and increase revenues over the short term. Flora expects its consumer packaged goods division to be a key competitive advantage compared to its other international counterparts that have a less diversified strategy. Natural and sustainable products across food and beverage, cosmetics, and medicinal markets are projected to grow rapidly as consumers prioritize healthy and sustainable products that are good for themselves, their family, and their environment.

Integrated structure of synergy within growing operations.

Flora’s integrated structure provides synergies across its three pillars. The Wholesale and Commercial pillar provides raw materials and manufacturing capabilities for its House of Brands pillar. It also provides Flora’s Life Sciences pillar with manufacturing capabilities of pharmaceutical grade products. Conversely, Flora’s House of Brands pillar provides meaningful distribution channels for its wholesale operations. This integrated approach provides Flora with the opportunity to benefit from margins across the entire supply chain.

Commercial Growth Strategies

Flora’s goal is to become a market leader in the in the cultivation and processing of natural, medicinal-grade cannabis and high quality cannabis derived medical and wellness products for large channel distributors, including pharmacies, medical clinics, and cosmetic companies, by expanding our production capacity, creating sustainable and natural products, expanding our geographic footprint, continuing to explore strategic partnerships and pursuing accretive acquisitions to supplement our organic growth.  These key commercial growth strategies are set forth below.

Expanding production capacity.

In the near term, our primary strategy is to expand our production capacity and related infrastructure to meet existing demand.

Following the successful licensing of 249 acres at the farm, and subject to demand, Flora may seek to expand operations by cultivating non-psychoactive cannabis at the adjacent farmland or through partnerships with other licensed cannabis producing assets. The Company also expects to expand manufacturing, warehouse and distribution capacity for its Flora laboratories and brands in North America and Colombia to meet increasing demand for consumer packaged goods and pharmaceutical grade formulations.

Creating Sustainable and Natural Products.

Flora sees sustainable innovation as key to achieving production objectives, and the main driver to our product development approach.  All Mind Naturals packaging is designed to be sustainable (for example, utilizing sugar cane tubing) to help reduce the environmental impact and support sustainability goals. The Mind Naturals team is also in the process of achieving Environmental Working Group (“EWG”) certification for its two lines. EWG is a non-profit, non-partisan organization dedicated to protecting human health and the environment.

Regulatory Environment

Flora has obtained the necessary licenses to operate on a global scale including all governmental approvals, licenses and permits.  A summary of such governmental approvals, licenses and permits are set forth below.  Also see “—Our Intellectual Property Portfolio.”

Flora Cultivation

Import and Export Licenses

 Our cultivation farm has received the requisite licenses and permits for the farming, and manufacturing of both psychoactive and non-psychoactive Cannabis derivatives. Flora has also obtained a permit to export both psychoactive and non-psychoactive dry flower, becoming one of the first companies with operations in Colombia to do so. Flora’s cultivation is certified Good Agriculture and Collection Process (“GACP”) and follows organic cultivation methods. Flora expects to receive an Organic certification in Q1 2023.

Fuente Semillera License / Registration as a Selected Seed Producer

Prior to December 31, 2018, under article 2.8.11.11.1 of Decree 631 of 2018, licensed cannabis producers had the right to register before the Colombian Agricultural Institute (“ICA”) the genetics of any cannabis strain found in Colombia without having to declare or specify its origin. This right, known as “Fuente semillera”, works a mechanism to legalize the sources of cannabis genetics already existing in Colombia, by allowing licensees to initiate the formal proceedings before the ICA, required to register such genetics in the Colombian National Plants Registry or “Registro Nacional de Cultivares.”  In this sense, each strain registered as Fuente semillera belongs to each licensee, giving it the right to grow its own strands of cannabis as opposed to having to purchase registered strands from other licensed producers. Since December 31, 2018, we have registered 10 varieties as our own Fuente semillera. This registration enables Flora to grow its own strands of cannabis as opposed to having to purchase registered strands from other licensed producers.

Psychoactive Cannabis Cultivation License

On August 22, 2019, the Company applied to the Ministry of Justice for a psychoactive cannabis license (the “Psychoactive Cannabis License”), which authorizes the cultivation of psychoactive cannabis plants for (i) seeds and cuttings production;; (ii) the manufacture of derivatives; and (iii) scientific research purposes. Besides cultivation, licensees also have an authorization to store, commercialize, distribute and transport psychoactive cannabis plants, as well as dried cannabis flower.  Flora obtained this license on March 10, 2021 and received an updated export permit of 43,612.6 kilograms on March 11, 2022.

Cannabis Manufacturing License

On August 14, 2019, Flora applied to the Ministry of Health and Social Protection (the “Ministry of Health”) for its cannabis manufacturing license and received the cannabis manufacturing license as of November 9, 2020.

ICA Permit

Currently, Flora has 4 varieties of medicinal cannabis registered with the ICA and has the registration as a producer of selected seeds granted by the ICA. Upon receiving the ICA Permit (four currently approved), in the first quarter of 2022, Flora commenced commercial cultivation of both psychoactive and non-psychoactive cannabis.

Commercial planting has commenced and we have completed the planting of 12.3 acres of non-psychoactive cannabis at the Cosechemos Farm (the “Stage 1 Grow”). 

Non-Psychoactive Cannabis License

We applied for a non-psychoactive cannabis license (the “Non-Psychoactive Cannabis License”) on September 6, 2018, and the Ministry of Justice granted it on May 15, 2019, through Resolution N° 484. The Non-Psychoactive Cultivation License grants us the right to cultivate non-psychoactive cannabis plants for: (a) grain and seeds production; (b) manufacturing of derivatives; and (c) industrial production. The Cannabis Non-Psychoactive Cultivation License does not require a quota. The license is valid up to 5 years and can be renewed for an additional 5-year term. The Colombian government maintains the right to monitor the activities performed by the corresponding licensee.

Because the Non-Psychoactive Cannabis License allows Flora to cultivate, produce and distribute CBD dominant cannabis oils and derivative products, this provides a strong base for our operations as the recently established medicinal cannabis market in Colombia develops and matures, and opportunities in Colombia’s low THC non-psychoactive cannabis over-the-counter markets arise. In Colombia, there are approximately 500 companies with a Non-Psychoactive Cannabis Cultivation License. 

It is important to note that, in compliance with its international obligations, Colombia establishes an annual limit for the production volume of cannabis plants and derivatives, which is monitored by the International Narcotics Control Board. Based on this limit, the Colombian government established a quota system, in order to control the amount of psychoactive cannabis production per license. This means that for the Psychoactive Cannabis License, licensees must first apply for a specific crop or manufacturing quota, before beginning production. Such restriction is not applicable to non-psychoactive cannabis production, and therefore not applicable to the Non-Psychoactive Cannabis License.

Compliance and Registrations for our Skincare and Beauty Products

Mind Naturals manufactures products under strict international standards.  Pursuant to Colombian law, Mind Naturals is permitted to manufacture, sell and export beauty and cosmetics products made from CBD and other natural ingredients.  In addition, all of Mind Naturals’ products are compliant with FDA regulations and manufactured in an FDA registered lab.

All Mind Naturals products are registered with INVIMA, Colombia’s food and drug regulatory agency. Currently, Mind Naturals has licenses from INVIMA for its products. We have also obtained all the approvals for the O brand products from INVIMA. Moreover, we are in the process of achieving certification for the two product lines from the EWG.

Operating License and Registrations for Dermo-Cosmetic Products

In 2012, Flora Lab #2 focused its efforts on the construction of its production facility and received an operating license from INVIMA in November 2012. This operating license allows Flora Lab #2 to produce cosmetic products. This license is still valid. In 2013, the manufacturing and commercialization of Flora Lab #2’s brand products and third-party products commenced. Each product requires an individual registration. Flora Lab #2 currently has over 20 of its own plus over an additional 50 registered products from third parties for which it provides bottling and packaging services.

Licenses for our Pharmaceutical Products

Flora Lab #2’s portfolio of products includes over thirty registered brands that position Flora and its brands with the Colombian consumer.   Currently, Flora Lab #2 has obtained over 40 licenses for its various products.

In addition, Flora Lab #4 intends to develop a new area at its current laboratory, or a new laboratory, if purchased, for drug compounding to obtain a BPE cannabis certification. This certification stands for sterile compounded drugs and non-sterile compounded drugs (topical, oral, among others). Flora Lab would be one of the first companies in Colombia with a BPE cannabis certification to prepare cannabis compounded drugs. This BPE cannabis certification would allow Flora Lab to develop and commercialize cannabis medicines in different pharmaceutical forms, such as drops, ointments, capsules, and suppositories. These products are already in development and distribution would begin upon Flora receiving BPE cannabis certification.

Sanitary Registers for our Food and Beverages Products

Mambe holds four sanitary registers of INVIMA for the production and export of its juices and botanicals, permitting eighteen recipes of juices and three natural erotic oils for distribution.

Our Intellectual Property Portfolio

We rely on a combination of trademark, patent, copyright and trade secret protection laws in Colombia, the United States and other jurisdictions to protect our intellectual property and our brands. We have applied for, and we have received approvals from INVIMA and other regulatory agencies in Colombia, for our beauty and skincare, pharmaceutical, loungewear, and food and beverage products.  See “—Regulation of our Industry.” As of December 31, 2021, we had an aggregate of 118 approvals and registrations for our various products and such registrations have expiration dates ranging from June 2022 to July 2031, with options to renew upon expiration.  We do not anticipate any difficulty renewing these registrations to the extent we choose to do so. 

Regulation of Our Industry

Regulatory Framework in the United States

Packaging, Labeling and Advertising

The processing, formulation, manufacturing, packaging, labeling, advertising and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the FTC, HHS, the USDA and the United States Environmental Protection Agency (the “EPA”). These activities are also regulated by various state, local and international laws and agencies of the states and localities in which our products are sold. Regulations may prevent or delay the introduction, or require the reformulation, of our products, which could result in lost sales and increased costs to the Company. A regulatory agency may not accept the evidence of safety for any new ingredients that we may want to market, or may determine that a particular product or product ingredient presents an unacceptable health risk. Regulatory agencies may also determine that a particular statement of nutritional support on our products, or a statement that we want to use on our products, is an unacceptable drug claim or an unauthorized version of a food “health claim,” or that particular claims are not adequately supported by available scientific evidence. Any such regulatory determination could prevent us from marketing particular products or using certain statements on those products, which could adversely affect our sales and results of operations.

Developments in the laws and regulations governing our products may result in a more stringent regulatory landscape, which could require reformulation of certain products to meet new standards, recalls or discontinuance of certain products that we are unable to reformulate, additional record-keeping requirements, increased documentation of the properties of certain products, additional or different labeling requirements, additional scientific substantiation requirements, and other requirements or restrictions. Such developments could increase our costs significantly, which could have a material adverse effect on our business, financial condition and results of operations.

Cannabis for Medical Purposes

The United States healthcare industry is heavily regulated and closely scrutinized by federal, state and local governments. Comprehensive statutes and regulations govern the manner in which we will provide and bill for telehealth services, our contractual relationships with our providers, vendors and clients, our marketing activities, and other aspects of our planned operations. Of particular importance are:

Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment, recoupment, imprisonment, loss of enrollment status and exclusion from the Medicare and Medicaid programs. The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with applicable regulatory requirements could impose liability on us and negatively affect our business. Any action against us for violation of these laws or regulations could cause us to incur significant legal expenses, divert our management’s attention from business operations, and result in adverse publicity.

The laws, regulations and standards governing the provision of healthcare services may change significantly in the future. We cannot assure you that any new or changed healthcare laws, regulations or standards will not materially adversely affect our planned telehealth services business.

Regulatory Framework in Colombia

Our cultivation operations are in Colombia and are carried out through Cosechemos. As a cultivator of non-psychoactive, psychoactive cannabis and manufacturer of cannabis derivatives, the Company is substantially dependent on the licenses for cultivation, production and other regulatory activities granted to Cosechemos.

Over the past 50 years, Colombia has developed comprehensive regulation that took a hardline approach to narcotics and trafficking in response to the growing influence of international treaties and the efforts of governments to coordinate their drug policies. In the mid-1990s, Colombia decriminalized the personal possession and consumption of cannabis under Constitutional Court Ruling C-221 of 1994. While this represented a shift in approach by Colombian lawmakers, a constitutional amendment through Legislative Act 02 of 2009 reversed the effects of Ruling C-221 of 1994 and reinstated the prohibition on personal possession and consumption of narcotic or psychotropic substances, even on a personal dose basis, unless supported by a medical prescription.

Despite the constitutional amendment in 2009, Colombian cannabis legislation trended towards a preventative and rehabilitative approach. The Constitutional Court of Colombia, through rulings SU-642 of 1998 and C-336 of 2008, among others, established that the right to the free development of personality, also known as the right to autonomy and personal identity, grants individuals the right to self-determination, the freedom and independence to govern his/her own existence and determine a lifestyle according to his/her own interests; provided, that the rights of others and the constitutional order are respected.

In January 2013, the Advisory Commission on Drug Policy (the “Drug Policy Commission”) was established to provide recommendations on how legislation should treat criminal networks and citizen drug users, as well as the quantities to be considered as suitable personal amounts. In July 2014, the Drug Policy Commission issued an initial report submitted to the Ministry of Justice analyzing the conditions of drug use in Colombia and proposing guidelines to update the policy.

In May 2015, the Drug Policy Commission published its final report, which proposed a review of the drug policy in the country and made important recommendations, such as: (i) the creation of an agency for drug policy; (ii) measures to help reduce the risk to consumers; (iii) to rethink the fumigation involved with cultivation; (iv) regulation of medicinal cannabis; (v) alternative means of measuring the success of policies against drugs; (vi) modernize the National Statute on Drugs and Psychoactive Substances; and (vii) to lead the global drug policy debate.

As a result of the final report of the Drug Policy Commission, the Colombian President  approved and sanctioned Law 1787 of 2016 to regulate the use of cannabis for therapeutic purposes. The law marked a new direction in the legislative approach to drugs. Law 1787 amended articles 375, 376 and 377 of the Colombian Penal Code (the "Penal Code") to eliminate penalties against the medical and scientific use of cannabis used under a license granted by the competent authorities. This amendment was necessary since the Penal Code expressly provided for a general prohibition on the cultivation, conservation or financing of marijuana plantations among other related activities.

The following table summarizes the regulations applicable to the cultivation, manufacture, import, export and use of cannabis in Colombia.

Licenses

The Ministries of Health, Justice and Agriculture issued Decree 613 of 2017 to define the licenses that can be granted with respect to permitted activities related to medical cannabis that include: (i) the  production of cannabis derivatives; ii) use of seeds for sowing; (iii) the planting of psychoactive cannabis plants; and (iv) plant non-psychoactive cannabis plants.

Apart from a psychoactive cannabis license, Cosechemos has obtained licenses in each of the above categories, necessary to carry out its operations. Licenses are not transferable, interchangeable or assignable and are valid for five years and may be renewed for additional periods of five years upon request. Each of the licenses is up-to-date and has not expired. None of the Licenses is subject to current, pending or committed regulatory action.

Magistral Preparations

We intend to produce a category of products known as cannabis extemporaneous (magistral) preparation, , previously regulated by Decree 613 of 2017 and now by Decree 811 of 2021 and Decree 2200 of 2005. Extemporaneous (magistral) preparations are personalized prescription products that do not require a sanitary license for the product but rather for the establishment that produces the product. As they are not mass market products, but exclusively for a patient, these must be prepared by a licensee in an establishment that complies with the standards of Good Manufacturing Practices (BPE). For the sale and distribution of these medicines in Colombia, it is necessary to comply with the Guidelines for GMP certification for Extemporaneous (Magistral) Preparations with Cannabis issued on October 25, 2019 by INVIMA. We are required to operate, or have an agreement with, a laboratory that is certified according to GMP for extemporaneous (magistral) preparations with cannabis.

Strains registration

Cosechemos has varieties of cannabis in various stages of the registration process. Each strain, whether high or low in THC, must undergo an agronomic evaluation by the agricultural health entity -  Colombian  Agricultural Institute  (ICA). In order for strains to be included in the National Cultivar Registry, the following steps must be completed:(i) Genetic Stabilization; (ii) Agronomic Test; (iii) Phase 1 strain registry (legal document that allows the license to enter a strain in the registry); and (iv) Strain registration phase 2 (registration that allows the licensee to market any cannabis product derived from the specific strain in the registry). The harvest is also in the process of agronomic evaluation of additional strains. Based on the yields of each strain, as determined by agronomic testing, "COSECHEMOS YA" may decide to register fewer strains than available. The decision to complete the registration process of a strain will depend on several factors, from biomass yields, cannabinoid profile, average cannabinoid content, resistance to pests among others as determined by agronomic tests, and the intended uses by the company.

Cosmetic Regulations

The Company's business also includes the manufacture and marketing of cosmetics, including some with Cannabidiol (CBD) in Colombia. Cosmetic products in Colombia are regulated by regulations issued by the Andean Community of Nations.

The relevant regulations in health regulatory matters for Cosmetic Products are the following:

In Colombia, cosmetics must undergo a registration process called Mandatory Sanitary Notification (NSO), which is supervised by INVIMA, prior to marketing. Applicable regulations establish requirements related to labeling, manufacturing facilities, and product composition. The general Colombian regulatory framework on specific cannabis issues limits the manufacture of products with cannabis derivatives with a maximum of 1% THC (psychoactive component) but that the product must demonstrate and comply with the respective international regulations with contents below 0.3% or 0.2% THC.

Ingredients in the list of accepted ingredients of the Personal Care Products Council (PCPC) in the United States, Cosmetic ingredient database CosIng in the European Commission database for information on cosmetic substances and Cosmetic products marketed in the Andean Subregion must comply with the international lists of ingredients below that may or may not be incorporated into cosmetic products and their corresponding functions and restrictions or conditions of use.

Legal Proceedings

Below is a summary of certain legal matters relating to the Company during fiscal year 2021. Other than the matters disclosed below, from time to time, we are involved in various routine legal proceedings incidental to the ordinary course of our business. We do not currently believe that the outcome of these legal matters have had in the recent past, or will have (with respect to any pending matters), significant effects on our financial position or profitability.

Settlement Agreement with Boustead Securities, LLC

On April 5, 2022 (the “Effective Date”), the Company entered into a settlement agreement (the “Settlement Agreement”) with Boustead Securities, LLC (“Boustead”) to resolve certain disputes arising under our underwriting agreement dated May 10, 2021, and our engagement letter dated September 8, 2020, as amended, each entered into between us and Boustead (collectively, the “Boustead Agreements”).  Pursuant to the terms of the Settlement Agreement, Flora (i) paid Boustead $400,000, (ii) issued and delivered 700,000 Common Shares to Boustead (iii) agreed to pay a transaction fee of 1.5% of the aggregate consideration delivered or received by Flora in any future merger or acquisition transaction involving Flora, provided that such definitive agreement with respect to the transaction is executed prior to May 11, 2022 and (iv) agreed to provide Boustead the right to participate as a co-manager in any future equity financings by Flora that are closed on or before May 11, 2022. Upon Flora’s payment of the consideration in clauses (i) and (ii) above on April 6, 2022, (x) the Boustead Agreements, and all operative provisions therein, were terminated as of the Effective Date other than certain provisions relating to indemnification and existing lock-up agreements and (y) Boustead and all of its affiliates released, waived and discharged Flora from any and all actions that Boustead has or may have against Flora up to and including the Effective Date for any damages arising out of or relating to (i) the Boustead Agreements, (ii) certain securities previously issued to Boustead and (iii) all other transactions, agreements, contracts, understandings, promises and representations between Boustead and Flora, except those provisions that were expressly intended as stated therein to survive.

VBI Acquisition

On March 18, 2022, the Company received a letter from a law firm representing an undisclosed group of former pre-acquisition shareholders of VBI (the “VBI Shareholders”) seeking to engage in settlement discussions on the basis that the Company was purportedly misleading in its intentions to engage in a capital raising transaction shortly after the completion of the VBI acquisition. We promptly responded in writing and denied the VBI Shareholders presentation of the facts and denied all allegations against the Company. We believe that any potential claims as alleged in the letter are without merit and we intend to defend vigorously against them in connection with any future potential legal proceedings. The VBI Shareholders have not commenced litigation against the Company and it is unknown whether the VBI Shareholders will do so and what their claims may be.

4.C.         Organizational Structure

The following chart reflects our organizational structure (including the jurisdiction of formation or incorporation of the various entities):

4.D.         Property, Plants and Equipment

Please see the sections titled “Business overview—Our Core Business—Commercial and Wholesale—Property, Plants and Equipment” and “Business overview—Our Core Business—House of Brands” in Item 4.B, which is incorporated by reference herein, for a description of the Company’s material property, plants and equipment.

ITEM 4A. UNRESOLVED STAFF COMMENTS 

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) of Flora Growth Corp. (the “Company” or “Flora”) should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, and the accompanying notes thereto (the “Financial Statements”) included in this Annual Report, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Amounts are expressed in United States dollars (“$” or “USD”) unless otherwise stated to be in Canadian dollars (“CAD”), Euro (“€” or “EUR”), or Colombia pesos (“COP”). Amounts stated in foreign currencies include approximate USD amounts based on exchange rates on December 31, 2021. Variance, ratio, and percentage changes in this MD&A are based on unrounded numbers.

This MD&A reports the Company’s activities through December 31, 2021, unless otherwise indicated.

Forward-looking statements are based on the Company’s current expectations and assumptions regarding its business, potential target businesses, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward-looking statements as a result of various factors, including, without limitation, changes in local, regional, national or global political, economic, business, competitive, market (supply and demand) and regulatory conditions. Please see “Special Note Regarding Forward Looking Statements” in this Annual Report for more information regarding forward-looking statements. 

Flora has a very limited operating history upon which to base an evaluation of its business and prospects. Flora’s short operating history may hinder its ability to successfully meet its objectives and makes it difficult for potential investors to evaluate its business or prospective operations.

A.      Operating Results Overview

Overview

We are an all-outdoor cultivator and manufacturer of global cannabis products and brands, building a connected, design-led collective of plant-based wellness and lifestyle brands. As the operator of an extensive outdoor cannabis cultivation facility, Flora leverages natural, cost-effective cultivation practices to supply cannabis derivatives to its diverse business units. The foundation of our business strategy is built on three core pillars: commercial/wholesale, house of brands, and life sciences.  Below is a brief summary of these three key pillars: 

Commercial & Wholesale

The Commercial and Wholesale pillar encompasses our cultivation, extraction, manufacturing and distribution of cannabis, its derivatives, plant-based extracts, and white-label or custom formulations with the intent to supply both domestic and international markets for both internal and third-party applications. This business is supported by existing cultivation on 249 acres and onsite laboratory facilities in Bucaramanga Colombia, together with two manufacturing and processing laboratories in Bogota, Colombia and one in Fort Lauderdale, Florida.

House of Brands

Flora’s “House of Brands” consists of a connected ecosystem of wellness and lifestyle consumer packaged goods that are designed to deliver unique experiences to its customers. These brands consist of a mix of products across multiple categories including food and beverage, nutraceuticals, cannabis accessories and technology, personal care, and pet wellness, that allow us to gain meaningful access to global markets. This brand strategy allows the Company to collect customer data through first-party relationships via each brand, creating an opportunity for customer acquisition, cross-promotion, consumer insights, and a database of opted-in consumers for new brand and product development opportunities.

Life Sciences

Flora’s Life Sciences pillar is focused on providing scientific based research connected to molecules found in the Cannabis plant. Through the Life Sciences pillar, the Company works to create education platforms as well as to initiate research studies, clinical trials, and the development of plant-based, medical-grade pharmaceuticals, phytotherapeutics, and dietary supplements for use in target and broad-based use cases leveraging multiple modalities. We are currently working on a study in conjunction with the University of Manchester in the United Kingdom to assess the benefits of a proprietary CBD formulation on patients suffering from fibromyalgia and pain-related illnesses. Additionally, Flora is seeking approval from INVIMA, Colombia’s equivalent to the FDA, for a patent-pending cannabinoid formulation for use as a dietary supplement.

Acquisition activities

                For information on our acquisition history, please see “Item 4.A. – History and development – Acquisitions and Investments.”

Dividends

Flora currently does not pay dividends, as it has been in a loss position since its inception.

Key Components of Results of Operations

Management has determined that the Company has five operating segments including cannabis growth and derivative production (at our farm in Bucaramanga), consumer products (through our Vessel, Hemp and Beauty brands), pharmaceuticals and nutraceuticals (through Flora Lab #2 and #4), food and beverage (through our Mambe and Tonino Lamborghini brands), and corporate, which reflects activities that do not directly influence business unit operations and includes the Company’s long-term investments.

Revenue

Revenue earned to date has been generated by the products in the food and beverage, consumer products and pharmaceuticals and nutraceuticals segments. In our food and beverage segment, the Company sells canned tuna, as well as natural, no additive-added, no sugar-added juices, chocolates and confectionary related products to large channel distributors, including wholesale distributors, pharmacies, supermarkets and online distributors.  In our consumer products segment, the Company sells high-end cannabis consumer technology, such as vape pens and associated accessories throughout the United States and internationally, skincare and beauty products made with innovative cannabis ingredients, and hemp-based textile products on a hybrid business-to-business and business-to-consumer model. In our pharmaceuticals and nutraceuticals segment, the Company sells dermo-cosmetic formulas and premium personal care products for business-to-consumer clients, as well as pharmaceutical and over-the-counter products to large channel distributors.

Cost of sales

Cost of sales are directly related to the services the Company provides and fluctuates in line with its revenues. The Company’s cost of sales primarily consists of materials and products for resale, direct labor and overhead expenses related to the development, manufacture, and distribution of its products

Operating expenses

Operating expenses consist primarily of consulting and management fees related to the Company’s management and Board of Directors; professional fees associated with legal and audit services as well as listing fees related to the Company’s initial public offering of common shares (“IPO”) and subsequent offerings; selling, general and administrative expenses consisting primarily of promotional expenses; travel expenses; stock based compensation; research and development; depreciation and amortization of certain long-lived assets; bad debt expense; and goodwill impairment.

Non-operating expense

Non-operating expense consists of interest expense, primarily from lease obligations, losses on foreign exchange transactions and unrealized losses on a long-term investment in an early-stage European cannabis company.

Results of Operations

The following table sets forth key components of Flora’s results of operations for the twelve-month period ended December 31, 2021, as compared with the twelve-month period ended December 31, 2020, and the period from March 13, 2019 (inception) to December 31, 2019.

For the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.

For the twelve months ended December 31, 2021, the Company reported a net loss of $21.4 million, or $0.48 per share, compared to a net loss of $14.3 million, or $0.47 per share, for the twelve months ended December 31, 2020. Net loss increased from 2020 to 2021 primarily due to increased staffing to support expanded and future operations, increased costs as part of the IPO and secondary offerings and an unrealized loss on the fair value of the Company’s long-term investment in an early-stage European cannabis company.  The net loss was partially offset by an increase in gross profit due to higher volume of sales and less share based compensation due to longer vesting periods for awards issued in 2021.

The Company had working capital of $41.8 million on December 31, 2021, compared to working capital of $14.9 million on December 31, 2020.

The Company historically has reported losses as it developed its cannabis cultivation program. The Company will continue to utilize proceeds from financing and equity issuances as well as the revenue generated from our other business segments following its recent acquisitions and diversification to fund its operations until it reaches profitability. 

Revenues

Flora reported $9.0 million and $0.1 million in revenues for the twelve months ended December 31, 2021, and December 31, 2020, respectively. Revenues generated for the twelve months ended December 31, 2021, by the food and beverage segment were $3.6 million primarily related to new sales agreements effective in the second half of 2021. Revenues generated for the twelve months ended December 31, 2021, and December 31, 2020, by the consumer products segment were $2.6 million and $0.1 million, respectively. The increase primarily related to having a full year of ownership in 2021 for Flora Beauty and Hemp Textiles, new sales agreements effective in the second half of 2021, and the results of VBI from the acquisition date of November 10, 2021, through December 31, 2021. Revenues generated for the twelve months ended December 31, 2021, by the pharmaceuticals and nutraceuticals division were $2.3 million due to having a full year of ownership in 2021 of the businesses acquired in late December 2020. The corporate segment generated a total of $0.4 million in revenues for the twelve months ended December 31, 2021, mainly driven by the sale of cannabis educational course content and materials to institutions in the Colombian market. To date, Flora has generated minimal revenues from its cannabis growth segment as the Company just completed its first commercial harvests in late 2021 and continues to build out its operations for further processing and ultimate sale.

Cost of sales and gross profit

Flora’s cost of sales were $6.6 million and for the twelve-month period ended December 31, 2021 compared to less than $0.1 million in the twelve-month period ended December 31, 2020. The increase is due to the increase in sales volume in 2021 compared to 2020 from having a full year of ownership of the businesses in 2021 and new sales agreements. Flora also reported $0.1 million in unrealized gains on changes in the fair value of biological assets in its cannabis growth and derivative production segment relating to the Company’s first commercial cannabis harvests in the second half of 2021.

Flora reported gross profit of $2.4 million and $0.1 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. Gross profit reported for the twelve months ended December 31, 2021, and December 31, 2020, by the consumer products segment was $0.9 million and $0.1 million, respectively. The increase primarily related to having a full year of ownership in 2021 for Flora Beauty and Hemp Textiles, new sales agreements effective in the second half of 2021, and the results of VBI from the acquisition date of November 10, 2021, through December 31, 2021. Gross profit reported for the twelve months ended December 31, 2021, by the pharmaceuticals and nutraceuticals segment was $0.8 million due to having a full year of ownership in 2021 of the businesses acquired in late December 2020. Gross profit reported for the twelve months ended December 31, 2021, by the food and beverage segment was $0.3 million due to new sales agreements effective in the second half of 2021. Gross profit reported for the twelve months ended December 31, 2021, by the corporate segment was $0.4 million due the sale of cannabis educational course content and materials to institutions in the Colombian market. The cannabis growth and derivative production segment reported a loss of ($0.1) million for the twelve months ended December 31, 2021, as it completed its first commercial harvest in late 2021 and has generated minimal revenue.

Research and Development Expenses

Flora research and development expenses were $0.1 million for each of the twelve-month periods ended December 31, 2021, and December 31, 2020.  Research and development expenses to date consist primarily of contract research fees, manufacturing, consultant fees, and study related costs related to cultivation of cannabis in Colombia for the Cosechemos business.

Consulting and Management Fees

Flora recorded consulting and management fees of $7.3 million and $4.8 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. These fees are related to consulting contracts with most of the Company’s management, as well as directors, related parties and bonuses. The increase in 2021 primarily relates to increased staffing to support expanded and future operations.

Professional Fees

Flora recorded professional fees of $4.3 million and $0.8 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. The increase in 2021 is due to legal, audit and listing fees related to the Company’s IPO and subsequent offerings, as well as a legal settlement related to a contractual dispute between the Company and the underwriter for the Company’s IPO. See “Item 4.B.—Business overview—Legal Proceedings.”

General and Administrative Expenses

Flora recorded general and administrative expenses of $4.5 million and $1.4 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. The increase in 2021 is primarily due to promotional activities related to the Company’s IPO and subsequent offerings, as well as costs associated with the Company building its marketing strategy.

Travel Expenses

Flora recorded travel expenses of $0.6 million and $0.4 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. These expenses were for various trips related to the subsidiaries and the Company’s promotion.

 Share Based Compensation Expenses

Flora recorded share-based compensation expenses of $1.3 million and $4.9 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. These expenses represent the amortization of the fair value of share-based payments. The decrease in 2021 is primarily due to the 2021 stock options granted having a one-year vesting period that the expense is recognized over, compared to immediate vesting of options granted in 2020 and 2019. This decrease is partially offset by approximately 600,000 more options granted in 2021 compared to 2020, which also had a higher calculated value per option for 2021 grants compared to 2020 grants.

Goodwill

As a result of its annual impairment test in the fourth quarter of 2021, Flora recorded a $0.1 million goodwill impairment to its food and beverage cash generating unit for the year ended December 31, 2021. As a result of its annual impairment test, Flora recorded a $1.8 million goodwill impairment to a cash generating unit for each of the acquisitions of Cronomed, Breeze and Kasa for the year ended December 31, 2020.

Bad Debt and Other

Flora recorded bad debt expense of $1.3 million for the twelve-month period ended December 31, 2021, compared to nil in 2020, to reflect the Company’s estimate of lifetime expected losses related to outstanding trade receivables from 2021 sales.

Flora recorded other expenses (income), net of $1.0 million and $0.1 million for the twelve-month periods ended December 31, 2021, and December 31, 2020, respectively. These expenses consist mainly of insurance, repairs and maintenance, rent and royalties. The increase in 2021 is due to having a full year of ownership in 2021 for the Company’s businesses, the impact of acquiring VBI in November 2021, as well as increased costs to support the overall increased operations of the Company.

Unrealized (Gain) Loss on Fair Value of Investments

The Company’s 2021 investment in its European cannabis investee decreased approximately $2.3 million during 2021 compared to having no such investments in 2020. The decrease is due to decreases in observed marketplace valuation metrics affecting cannabis related companies during the second half of 2021.

For the twelve months ended December 30, 2020, compared to the period from March 13, 2019 (inception) to December 31, 2019.

For the twelve months ended December 31, 2020, the Company reported a net loss of $14.3 million, or $0.47 per share, compared to a net loss of $2.8 million, or $0.19 per share, for the period from March 13, 2019 (inception) to December 31, 2019. The Company had working capital of $14.9 million on December 31, 2020, compared to working capital of ($1.8) million on December 31, 2019.

Revenues

Flora reported $0.1 million in revenues for the twelve months ended December 31, 2020. As of December 31, 2020, Flora had a very limited operating history upon which to base an evaluation of its business and prospects.

Research and Development Expenses

Flora research and development expenses were $0.1 million for the twelve-month period ended December 31, 2020 compared to less than $0.1 million for the period from March 13, 2019 (inception) to December 31, 2019. Research and development expenses to date consist primarily of contract research fees, manufacturing, consultant fees, and study related costs related to cultivation of cannabis in Colombia.

Flora provided funding to Cosechemos for the research and development of producing medicinal CBD oil.

Consulting and Management Fees

Flora recorded consulting and management fees of $4.8 million and $2.0 million for the twelve-month period ended December 31, 2020, and the period from March 13, 2019 (inception) to December 31, 2019, respectively. These fees are related to consulting contracts with most of the Company’s management, as well as directors, related parties and bonuses.

Professional Fees

Flora recorded professional fees of $0.8 million and $0.2 million for the twelve-month period ended December 31, 2020, and the period from March 13, 2019 (inception) to December 31, 2019, respectively. Most of the fees relate to legal and audit fees to prepare the Regulation A+ Tier 2 materials related to the Regulation A Offering.

General and Administrative Expenses

Flora recorded general and administrative expenses of $1.4 million and $0.2 million for the twelve-month period ended December 31, 2020, and the period from March 13, 2019 (inception) to December 31, 2019, respectively. These expenses were mainly promotion costs, as the Company seeks to build its brand.

Travel Expenses

Flora recorded travel expenses of $0.4 million and $0.3 million for the twelve-month period ended December 31, 2020, and the period from March 13, 2019 (inception) to December 31, 2019, respectively. These expenses were for various trips related to the subsidiaries and the Company’s promotion.

Share Based Compensation Expenses

Flora recorded share-based compensation expenses of $4.9 million and $0.1 million for the twelve-month period ended December 31, 2020, and the period from March 13, 2019 (inception) to December 31, 2019, respectively. These expenses represent the amortization of the fair value of share-based payments.

Goodwill

As a result of its annual impairment test, Flora recorded a $1.8 million goodwill impairment to a cash generating unit for each of the acquisitions of Cronomed, Breeze and Kasa for the year ended December 31, 2020.

B. Liquidity and Capital Resources

The following table sets forth the major components of the Company’s statements and consolidated statements of cash flows for the periods presented.

Cash from Operating Activities

Net cash used in operating activities for the twelve-months ended December 31, 2021, December 31, 2020, and for the period from March 13, 2019 (inception) to December 31, 2019, totaled $20.6 million, $8.4 million and $0.5 million, respectively. Cash flows used in operating activities for the twelve months ended December 31, 2021, were due primarily to the increased operating expenses and net working capital requirements as operations increased in the second half of 2021 and having a full year impact of acquisitions in 2021 results. These increases in cash used in operating activities were partially offset by increased gross profit in 2021.

Cash flows used in operating activities for the twelve months ended December 31, 2020, were due primarily to the loss incurred for the year combined with changes in working capital, partially offset by non-cash share-based compensation of $4.9 million and impairment charges of $1.8 million.

Cash flows used in operating activities for the period from March 13, 2019 (inception) to December 31, 2019, were due primarily to the loss incurred for the year, partially offset by changes in working capital and non-cash share-based compensation of $1.5 million.

Cash from Financing Activities

Net cash provided in financing activities for the twelve-months ended December 31, 2021, December 31, 2020, and for the period from March 13, 2019 (inception) to December 31, 2019, totaled $58.1 million, $25.8 million and $1.0 million, respectively. Cash flows provided in financing activities for the twelve months ended December 31, 2021, were due primarily to the Company’s Regulation A Offering, the IPO, and a November 2021 Unit Offering, as well as proceeds received from warrant and stock option exercises. 

Cash flows provided in financing activities for the twelve months ended December 31, 2020, were due to primarily to the Regulation A Offering, partially offset by required loan repayments.

Cash flows provided in financing activities for the period from March 13, 2019 (inception) to December 31, 2019, were due primarily to proceeds from loans receivable.

Cash from Investing Activities

Net cash used in investing activities for the twelve-months ended December 31, 2021, December 31, 2020, and for the period from March 13, 2019 (inception) to December 31, 2019, totaled $14.6 million, $2.2 million and $0.4 million, respectively. Cash flows used in investing activities for the twelve months ended December 31, 2021, were due primarily to the acquisition of Vessel in November 2021, an investment in an early-stage European cannabis company, and capital expenditures primarily to construct the Cosechemos cannabis cultivation buildings and productions in Colombia.

Cash flows used in investing activities for the twelve months ended December 31, 2020, were due primarily to the repayment of loans provided, business and asset acquisitions and the purchases of property, plant and equipment.

Cash flows used in investing activities for the period from March 13, 2019 (inception) to December 31, 2019, were due primarily to the repayment of loans provided and the purchases of property, plant and equipment.

Working Capital

As of December 31, 2021, Flora had working capital of $41.8 million. The Company’s primary cash flow needs are for the development of its cannabis activities, administrative expenses and for general working capital to support growing sales and production with related receivables and payables. The Company also acquired 100% of the equity interests in Just Brands LLC and High Roller Private Label LLC (together “JustCBD”) on February 24, 2022 which included a $16.0 million payment from existing cash balances.

Funding Requirements

Flora’s continued existence is dependent on its ability to generate positive cash flows through synergies within its growing operations, expanding its production capacity and geographic footprint, exploring strategic partnerships, and pursuing accretive acquisitions to supplement our organic growth. Flora may be required in the future to raise additional capital through either equity or debt financings. To date, it has raised capital through multiple equity offerings described below.

November 2021 Unit Offering

In November 2021, the Company completed a public offering of 11,500,000 units (the “Units”), with each Unit consisting of one Common Share of the Company and one-half warrant (“Unit Warrant”); each whole Unit Warrant entitling the holder thereof to purchase one Common Share. The Company registered 10,000,000 Units in the offering and granted the underwriters a 30-day over-allotment option to purchase up to additional 1,500,000 Common Shares and/or Unit Warrants. The option was exercised in full in connection with the closing of the offering.

Pursuant to the offering, the Company sold a total of 11,500,000 Units at a price of $3.00 per unit. The aggregate offering price of the shares sold was approximately $34.5 million. The net proceeds the Company received from the offering were approximately $31.6 million. See Item 14.E of this Annual Report.

The Company paid $2.7 million in issuance costs relating to the November 2021 unit offering, and issued 460,000 warrants to the underwriters.

Initial Public Offering

On May 13, 2021, the Company closed its IPO upon which it issued 3,333,333 common shares of the Company at a price of $5.00 per common share for gross proceeds of $16.7 million. On May 11, 2021, the Company was listed on the NASDAQ stock exchange in the United States. In connection with the closing, the Company paid unit issuance costs of $1.8 million and issued 632,000 warrants to the underwriters of the IPO valued at $1.3 million.

Regulation A Offering

During the year ended December 31, 2020, the Company announced an offering up to 13,333,287 units (the “Reg A Units”) of the Company to be sold in a Regulation A offering circular under the Securities Act. Each Reg A Unit is comprised of one common share of the Company and one-half of one warrant to purchase one additional common share (a “Warrant Share”) at an exercise price of $3.00 per Warrant Share, subject to certain adjustments, over an 18-month exercise period following the date of issuance of the warrant. The Reg A Units were offered at a purchase price of $2.25 per Unit. Flora sold the Reg A Units through a Tier 2 offering pursuant to Regulation A (Regulation A+) under the Securities Act. During the year ended December 31, 2020, the Company issued 13,333,287 Reg A Units of the Company at a price of $2.25 per unit.  In connection with the closing, the Company paid unit issuance costs of $3.1 million in cash, which has been allocated $2.7 million to capital stock and $0.4 million to warrants.   

On January 20, 2021, the Company issued 26,000 units of the Company at a price of $2.25 per unit for gross proceeds of $0.1 million. Each unit is comprised of one common share in the capital of the Company and one-half of one common share purchase warrant to purchase one additional common share at an exercise price of $3.00 per warrant share, subject to certain adjustments, over an 18-month exercise period following the date of issuance of the warrant. The Company sold the units through a Tier 2 offering pursuant to Regulation A (Regulation A+) under the Securities Act. Additionally, the Company cancelled 28,000 units of the Company at a price of $2.25 per unit and valued at $0.1 million. The units were cancelled due to non-payment of the subscription price.

Loans Receivable and Advances

Koch and Gsell loan

                In 2021, the Company loaned Swiss Franc (“CHF”) 0.3 million ($0.3 million) to Koch and Gsell, a potential acquisition target of the Company, to provide Koch and Gsell with additional working capital. The loan is secured by a general security agreement, an interest rate at LIBOR plus 1.00% per annum and payable on the maturity date of August 28, 2021, and remains outstanding on December 31, 2021. The Company decided not to pursue the acquisition of Koch and Gsell.

Sanaty loan

                As of December 31, 2020, the Company had provided a loan of $0.2 million to Sanaty IPS S.A.S. (“Sanaty”). The purpose of making this loan was to provide working capital to Sanaty as a potential acquisition target. In 2021, the loan was repaid.

Quiprofarma Advance

                As of December 31, 2020, the Company had provided an advance of $0.1 million to Laboratorios Quiprofarma S.A.S. (“Quiprofarma”).  The purpose of making this advance was for a prepayment of the purchase price on the asset acquisition that was closed subsequent to December 31, 2020. The advance was settled in 2021 with no amount remaining as of December 31, 2021.

Sulliden Mining Capital Loan

                On November 6, 2019, the Company entered into a loan agreement with Sulliden Mining Capital Inc. for a loan of up to $0.5 million of which $0.5 million of principal was drawn down by the Company in borrowings prior to repayment (December 31, 2019 - $0.5 million). The loan was a United States dollar loan which bore interest at 12% annually, was unsecured, and was due on March 31, 2020. As of December 31, 2019, the interest payable on the loan was $3,681. Stan Bharti, the Company’s former Chairman and Deborah Battiston, its former Chief Financial Officer, served as Interim Chief Executive Officer and former Chief Financial Officer, respectively of Sulliden Mining. These funds were utilized at Cosechemos and to provide working capital for the Company. On January 31, 2020, the loan was repaid, including interest, in the amount of $0.5 million.

Q Gold Resources Loan

                On June 18, 2019, the Company entered into a loan agreement in favor of Q Gold Resources Ltd (“Q Gold”). The loan bore interest at 10% annually, was unsecured, and was payable on demand. Deborah Battiston is the former Chief Financial Officer and Fred Leigh is a former director of the Company. Deborah Battiston is the Chief Financial Officer and Fred Leigh is the former Chief Executive Officer and a former director of Q Gold. These funds were utilized at Cosechemos and to provide working capital for the Company. On March 6, 2020, the loan was repaid in full, including interest.

Kasa Loan

                On January 1, 2020, a loan was outstanding to Kasa. The loan accrues interest with an annual interest rate of 5%, is unsecured, and is payable on demand. As of December 31, 2021, and December 31, 2020, the Company had a loan receivable of $0.6 million and $0.2 million, respectively.  The purpose for the loan was to provide working capital prior to the completion of the acquisition.

Newdene Loan

                On February 12, 2020, the Company made a loan of $1.0 million to Newdene Gold Inc. The loan accrued interest with an annual interest rate of 6% and was payable six months following the closing date of February 12, 2020. The loan was secured by a securities pledge agreement in favor of the Company creating a security interest of 2,000,000 Common Shares (666,667 Common Shares on a post-split basis). On November 23, 2020, the loan of $1.0 million plus interest was repaid in full.

Consultancies Loan

                On April 17, 2020, the Company made a loan of $0.1 million to Consultancies and Consultancies of Latam by GM LLC. The loan accrued interest with an annual interest rate of 5% and was payable sixty days following the closing date of April 17, 2020. The loan to Consultancies and Consultancies of Latam by GM LLC of $0.1 million plus interest of has been repaid in full via services provided.

Other than the debt discussed above, Flora had no long-term debt or bank facilities, other than its lease liability.

Capital Expenditures

Flora does not have any contractual obligations for ongoing capital expenditures at this time.

Off-Balance Sheet Arrangements

Flora did not have, during the periods presented, and it does not currently have, any off-balance sheet arrangements.

Contractual Obligations, Commitments and Contingencies

The following table sets forth the amount of the Company’s contractual obligations as of December 31, 2021.

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company’s management, in consultation with its legal counsel as appropriate, assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company, in consultation with legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates a potentially material loss contingency is not probable, but is reasonably possible, or is probable, but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed. Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Other than the item noted below, the Company is not aware of any matters which result in a loss contingency.

The Company is not able to reasonably estimate the timing of payments associated with deferred tax liabilities and therefore, the preceding table excludes total deferred tax liabilities of $2.2 million. Refer to Note 21, Income Taxes, in the Company’s Financial Statements for a complete discussion of income taxes.

In April 2022, the Company entered into an agreement with its IPO underwriter, settling all disputes regarding compensation claimed by the underwriter.  In exchange for a release of claims, Flora delivered to the underwriter $0.4 million and 700,000 Common Shares.  See Item 4.B. “Business overview—Legal Proceedings” for a summary of certain legal matters.

C.      Research and Development Licenses

Flora believes that investment in research and development is essential for maintaining and expanding its cannabis cultivation and medicinal CBD oil production expertise. Flora’s customers provide significant feedback for product development and innovation.

Flora relies on a combination of trademark, patent, copyright and trade secret protection laws in Colombia and other jurisdictions to protect the Company’s intellectual property and brands. Flora has applied for and has received approvals from the Superintendency of Industry and Commerce and the Instituto Nacional de Vigilancia de Medicamentos y Alimentos, for its beauty and skincare, pharmaceutical, loungewear, and food and beverage products.  See Item 4.B.,“Business Overview—Our Intellectual Property Portfolio” for a summary of such approvals and certificates.

D.      Trend Information

For a discussion of trends, see “Item 4.B—Business Overview,” “Item 5.A—Operating Results Overview” and “Item 5.B—Liquidity and Capital Resources.”

Plan of Operations

As noted above, the continuation of the Company’s current plan of operations, and its ability to attain future probability, is dependent on its ability to execute its strategic plan, including the development of its cannabis operations and its other initiatives within its other business segments. As a result of raising capital through the sale of Common Shares offered for sale in the IPO and the November 2021 Unit Offering, Flora believes that it will have sufficient cash resources to fund its plan of operations through 2023.

Flora continually evaluates its plan of operations to determine the manner in which it can most effectively utilize its limited cash resources. The timing of completion of any aspect of its plan of operations is highly dependent upon the availability of cash to implement that aspect of the plan and other factors beyond the Company’s control. There is no assurance that the Company will successfully obtain the required capital or revenues, or, if obtained, that the amounts will be sufficient to fund its ongoing operations.

Emerging Growth Company Status

The Company is an “emerging growth company”, as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act. As such, it is eligible to take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to SEC reporting companies that are not emerging growth companies. For so long as the Company remains an emerging growth company, it will not be required to, among other things:

The Company will remain an emerging growth company until the earlier of (i) the last day of the fiscal year following the fifth anniversary of its initial public offering, (ii) the last day of the fiscal year during which it has total annual gross revenue of at least $1.07 billion, (iii) the date on which it is deemed to be a “large accelerated filer” under the Exchange Act, which means the market value of its Common Shares that are held by non-affiliates exceeds $700.0 million as of the last business day of its most recently completed second fiscal quarter, and (iv) the date on which it has issued more than $1.0 billion in non-convertible debt during the prior three-year period.

E.      Critical Accounting Policies and Estimates

Flora’s financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).  The preparation of interim financial statements in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting, requires the use of certain critical accounting estimates. It also requires management to exercise judgement in applying its accounting policies.

On a periodic basis, Flora evaluates its judgments, assumptions and estimates. The Company bases its estimates on historical experience, authoritative pronouncements and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from these estimates. However, the Company estimates have not materially changed over the periods presented in the financial statements included in this Annual Report.  For summary information about critical judgments, assumptions and estimation uncertainties in applying accounting policies that have the most significant effect on the amounts recognized in the financial statements, see Note 4. Critical Judgements and Estimation Uncertainties, in the notes to the consolidated financial statements for the years ended December 31, 2021, 2020 and 2019.

Recent Accounting Pronouncements

See Note 3. Significant Accounting Policies in the notes to the consolidated financial statements for the years ended December 31, 2021, 2020 and 2019.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 

6.A. Directors and executive officers

The following table lists the names and positions of the current executive officers and directors of the Company. The business address of all of persons identified below is 365 Bay Street, Suite 800, Toronto, Ontario, M5H 2V1.

Backgrounds of Current Executive Officers and Directors

Executive Officers

Luis Merchan, President, Chief Executive Officer and Chairman of the Board:  Mr. Merchan was appointed Chief Executive Officer of the Company in December 2020, and was appointed Chairman of the Board of Directors in March 2022.  He brings with him over a decade of experience in corporate strategy, enterprise sales management, merchandising, and executive management.  Prior to joining Flora, from June 2013 to July 2020, Mr. Merchan worked at Macy’s Inc. (NYSE: M) in various roles of increasing responsibility, most recently as Vice President of Workforce Strategy and Operations at Macy’s Inc. (NYSE: M) from January 2020 to July 2020. While at Macy’s, Mr. Merchan developed, implemented and oversaw a streamlined and efficient workforce strategy for Macy’s 540-store portfolio, distribution centers and credit card service centers.  During Mr. Merchan’s tenure at Macy’s, he also led various sales and marketing initiatives, including the B2B corporate sales team that was responsible for $160 million in annual revenue. Mr. Merchan was awarded the Macy’s Chairman Award in 2015, 2016, 2017 and 2018. Mr. Merchan graduated from the Pontifical Xavierian University in Bogotá, Colombia with a B.E. in Industrial Engineering, received his M.B.A. from McNeese State University and a Graduate Certificate in Marketing Management from the Harvard Extension School. Mr. Merchan also serves on the board of directors of Hoshi International, Inc, as an Advisory Council Member for both the Hispanic Scholarship Fund in New York City and the Mercy College Business School.  

James Choe, Chief Strategy Officer: Mr. Choe joined Flora in November 2021 following our acquisition of VBI, a company he co-founded and served as CEO since September 2017.  In March 2022, Mr. Choe was appointed our Chief Strategy Officer and brings over 20 years of proven leadership and experience, having consulted and advised over 100 brands to date, while he has also led the design, development and successful launch of more than 500+ products across many consumer categories. Prior to co-founding VBI, he was the founder and Managing Partner of DRVN Partners (June 2015 to December 2019), a go-to-market firm with extensive experience developing early-stage companies, specializing in supporting high-growth companies with brand, creative, e-commerce and retail strategy and execution. From June 2014 to December 2018, he served as Chief Strategy Officer, then as Strategic Advisor, at an early-stage venture in NYC, GuardLab, an emerging market disruptor leveraging 3D technology platforms in the development of neuromuscular mouthguards and appliances. From January 2010 to February 2014, Mr. Choe served as Vice President of Sports & Retail Marketing at SKLZ, a global leader in sports training and skill development products. Mr. Choe’s early experience with startups began as a Business Development and Field Support Engineer, with broadband pioneer ISP Channel, a subsidiary of Softnet Systems, Inc. in Mountain View, CA (January 1999 to May 2003). From 2006 through 2019, Mr. Choe represented athletes in the Olympics, NFL, MLB, NHL, Lacrosse and Action Sports in all marketing, licensing, endorsement-related endeavors. Originally from Saratoga, California, Choe graduated from San Diego State University with a BA in Economics and now resides in Carlsbad, CA. 

Lee Leiderman, Chief Financial Officer: Mr. Leiderman became our Chief Financial Officer in June 2021.  He started his career at PricewaterhouseCoopers and held several corporate positions within Philip Morris International, Caterpillar and RR Donnelley, gaining substantial financial management experience for U.S.-listed public companies.  From April 2016 to May 2019, Mr. Leiderman served as the Chief Accounting Officer at OSI Group, and from May 2020 to June 2021, he served as the CFO of Nurture Life Inc.  Mr. Leiderman has over 25 years of experience working with public and private companies in connection with accounting, mergers and acquisitions, transfer pricing, and investment analysis. Mr. Leiderman is a CPA with a BA in Accounting and International Business from Susquehanna University. 

Matthew Cohen, General Counsel:  Mr. Cohen joined Flora in August 2021 as our VP of Legal and was appointed as our General Counsel in March 2022.  He is a corporate and securities lawyer with 30 years’ experience representing both public and private companies throughout all phases of their corporate life cycle.  From October 2018 to January 2020, Mr. Cohen served as General Counsel, and from March 2018 to October 2018 he served as Corporate Counsel to Playa Hotels & Resorts, NV (Nasdaq: PLYA), the owner and operator of all-inclusive hotels throughout Mexico and the Caribbean.  Between August 2014 and August 2017, he served as General Counsel for companies engaged in the healthcare, technology and energy industries. From 2001 through 2014, Mr. Cohen served as a Partner/Shareholder in the following law firms: Buchanan Ingersoll & Rooney PC., (2012 to 2014), Thompson & Knight LLP (2008 to 2012) and Eaton & Van Winkle, LLP (2001 to 2008). Mr. Cohen graduated from Emory University with a Bachelor of Arts in Biology and earned his Juris Doctor from Brooklyn Law School.

Jason Warnock, Chief Commercial Officer: Mr. Warnock joined Flora in June 2021 as our Chief Revenue Officer and was appointed our Chief Commercial Officer in March 2022.  He is an accomplished global sales leader and executive, bringing more than 20 years of experience driving revenue growth and go-to-market strategy for high-profile, Fortune 500 brands. Mr. Warnock has spent the last 15 years in the cannabis, competitive advertising, communications, and emerging technology fields where his work focused on building companies and brands from the ground up, working on strategic mergers and acquisitions, and creating sustainable, resonant financing and marketing campaigns. Prior to joining Flora, From March 2017 to September 2019, Mr. Warnock served as the Chief Executive Officer of TheraCann International Benchmark Corporation, a global logistics, technology and cannabis management software company. From June 2007 to December 2016, he served as the Chief Executive Officer of Post+Beam, an international communications, innovation and marketing firm. Mr. Warnock has been a leader in sustainable practices and design from his earlier work as a Director with the architectural division of Hunter Douglas (January 2002 – June 2007) where he also chaired the Education and Events committee, Special Programs working group and Education Steering committee for the United States Green Building Council (USGBC).

Jessie Casner, Chief Marketing Officer: Ms. Casner joined the Company in November 2021 following our acquisition of VBI, where she led marketing and sales from September 2019 until the acquisition.  Ms. Casner was appointed our Chief Marketing Officer in March 2022 and brings over a decade of proven experience in omnichannel marketing and storytelling.  Prior to VBI, Ms. Casner operated her own marketing agency which developed and executed bespoke go-to-market plans and built over 300 marketing strategies for businesses in diverse sectors. As an early team member of The Active Network during its rapid growth phase (pre-IPO and acquisition), MOGL (now Figg, during series A + B funding), 2XU, and Total Gym, Ms. Casner brings a strong knowledge and background in the CPG, wellness and tech industries.

Non-Employee Directors

John Timothy (“Tim”) Leslie, Director:  Mr. Leslie joined our Board of Directors in March 2022.  He currently serves as an Executive in Residence at Beloit College as well as an independent management consultant to large technology and retail firms in Latin America and Europe. Previously, Mr. Leslie served as Chief Executive Officer of Leafly Inc., a cannabis information resource and technology company, from February 2019 to September 2020. Mr. Leslie also served as Leafly’s Chairman of the Board from February 2019 to August 2019.  Prior to his time at Leafly, Mr. Leslie held various roles at Amazon.com for over 20 years, most recently as Vice President, Prime Video International from August 2013 to January 2019. Mr. Leslie also currently serves on the Board of Directors of Endocanna Health, Inc., a cannabis health care company, and New Frontier Data, a cannabis business intelligence company. Mr. Leslie received a Bachelor of Arts in Economics from Beloit College in 1989 and a Juris Doctor from Yale Law School in 1992.

Dr. Beverley Richardson, Director:  Dr. Richardson joined our Board of Directors in March 2021 and is a renowned psychotherapeutic practitioner whose collaborative efforts and clinical influence are reflected in some of the most compelling and effective addiction and behavioral health programs in North America, which include: Sierra Tucson (Arizona), the Meadows (Arizona) and Betty Ford Center (California). She has a Doctorate Degree in Psychology and is a B.C. Registered Clinical Counselor, Internationally Certified Eating Disorders Specialist, and EMDR Level II Trauma Therapist. Dr. Richardson has integrated her extensive experience in health and wellness with her entrepreneurial spirit to form her nutraceutical and bioscience research and development enterprises.  From each of September 2020, March 2013, and October 2009 to the date hereof, Dr. Richardson respectively served as: (i) the Vice President of International Business at Phytorigins Botanicals Ltd., a Canadian biotech company, (ii) the Vice President of Science (Research and Development) at Phytology Nutraceuticals Ltd., a Canadian company focused on the manufacturing and sales of plant based medicines and psychoactive therapeutics, (iii) the managing director of Peyto Enterprises Ltd., a British Columbia company that Dr. Richardson founded operating in the lifestyle industry, and (iv) the managing director of Legacies Advisory Group Inc., a British Columbia consultant agency that Dr. Richardson founded which provides expertise in the planning, development and execution of addiction, behavioral health and wellness programs. Dr. Richardson obtained her Bachelor of Science from the University of Toronto, Master of Science from the University of Pennsylvania, and Doctor of Psychology from California Southern University, graduating magna cum laude.

Juan Carlos Gomez Roa, Director: Mr. Gomez joined our Board of Directors in March 2021 and has more than 20 years of experience working in Latin America in the gaming and entertainment industry.  Mr. Gomez has been the Chief Executive Officer of Winner Group CIRSA since January 2000 and participated in the acquisition of Winner Group CIRSA by the Blackstone Group in April 2018.  He earned his Bachelors Degree in Psychology from St. Thomas University in Colombia. Mr. Gomez is a director of several private companies in Colombia.

Dr. Annabelle Manalo-Morgan, Director: Dr. Manalo-Morgan joined our Board of Directors in June 2021 and is a scientist, educator, author, mother of five, and a respected key opinion leader. She is a cell and developmental biologist from Vanderbilt University in Nashville, Tennessee, with a background in neuroscience from Georgetown University. She earned her PhD in Cell and Developmental Biology with a focus in Cardio-Oncology and has since become a philanthropist and entrepreneur focused on pharmaceutical innovation and clinical trial research in medical cannabis. Currently, Dr. Manalo-Morgan has been the founder and Chief Scientific Officer at Masaya Medical, Inc. since 2019 and has served as the lead scientist at Medolife Rx since 2018. 

Marc Mastronardi, Director: Mr. Mastronardi joined our Board of Directors in May 2021.  He has been the Chief Stores Officer of Macy’s Inc. (NYSE: M) since February 2020.  Prior to his current role, Mr. Mastronardi held multiple roles at Macy’s since March 2014, including Macy’s Senior Vice President of Store Operations and Customer Experience, where he was responsible for enterprise-wide store operations, sales and customer service. Mr. Mastronardi has also led multiple functions within the organization responsible for the creation and expansion of new business concepts, leased partnerships and diverse, owner-led businesses. He currently serves on the board of Delivering Good, NYC, the executive committee of the Fashion Scholarship Fund, and is the executive sponsor of the Macy’s Working Families Employee Resource Group.  Mr. Mastronardi is a graduate of Boston College where he earned a Bachelors of Science in Finance and Accounting.

There are no family relationships among our executive officers and directors.

6.B. Compensation of Board Members and Executives

 Compensation of our Named Executive Officers and Directors

The following table sets forth information concerning the compensation for the 2021 fiscal year of our chief executive officer and our next two most highly compensated executive officers during the 2021 fiscal year, which we refer to collectively as our “Named Executive Officers” as well as our directors.

Director Compensation

As of December 31, 2021 we had six directors. During 2021, each independent board member received $5,000 per quarter for his or her services as board members and $2,000 per meeting attended.  In addition, the chairperson of the Company’s Audit, Compensation and Nominating and Corporate Governance committees, each received $25,000 for their services and the Chairman of the Board received $75,000 for his services.

                During the fourth fiscal quarter of 2021, the Company entered into an agreement with Dr. Manalo-Morgan, a member of our board of directors, to serve in the additional capacity as Medical Advisor to the Company.  In connection with this agreement, Dr. Manalo-Morgan will be responsible for developing and identifying medical applications of cannabinoids for the Company for the treatment of various ailments and (ii) supporting the Company’s public relations efforts and assisting the Company with its media engagements.  For these services, the Company paid Dr. Manalo-Morgan $100,000 in 2021 and will pay her $15,000 per month for so long as the agreement remains in place.  The foregoing was approved by the Company’s Audit Committee and, by virtue of the payments to Dr. Manalo-Morgan, our Nominating and Corporate Governance has determined that she no longer qualifies as an “independent” board member as such term is defined under Nasdaq Listing Rule 5605.    

                Please see “—Stock Options” below for a description of common share options granted to our directors during fiscal year 2021.

Employment and Consulting Agreements, Arrangements or Plans

The following describes the respective employment or consulting agreements entered into by the Company and its Named Executive Officers that are in effect as of the date hereof.

Luis Merchan

Effective March 1, 2022, Mr. Merchan and our subsidiary, Flora Growth Management Corp. (“Flora Management”), entered into an employment agreement, pursuant to which Mr. Merchan serves as the President of Flora Management and as the Company’s Chief Executive Officer.  The initial term of the agreement is for a period of three years, ending on February 28, 2025.  

Mr. Merchan’s employment agreement provides for a base salary of $385,000 (as may be increased by our Board), an annual discretionary bonus opportunity targeted at 100% of base salary and the opportunity to participate in any equity compensation plan, other incentive compensation programs and other health, benefit and incentive plans offered to other senior executives of the Company. Mr. Merchan is also entitled to paid time off and holiday pay in accordance with Flora Management’s policies. In addition, upon termination of Mr. Merchan’s employment agreement without “Cause” or resignation by Mr. Merchan for “Good Reason,” as those terms are defined in the employment agreement, Mr. Merchan will, conditioned upon his execution of a separation and release agreement, be eligible to receive the following payments:

In the event Mr. Merchan is terminated without “Cause” or Mr. Merchan resigns for “Good Reason” following a “Change in Control,” as those terms are defined in his employment agreement (a “Change in Control Termination”), Mr. Merchan will be eligible to receive the payments set forth above, provided however that the Merchan Severance Payment shall be increased to two and one half times (2.5X) Mr. Merchan’s base salary, payable as set forth above.

In the event that Mr. Merchan’s employment terminates as a result of “Disability,” as such term is defined in the employment agreement, or death, Mr. Merchan or his estate, as applicable, conditioned upon his or its execution of a separation and release agreement, will be eligible to receive (i) his pro rata share of his discretionary annual incentive bonus (at no less than target in the event of death) and (ii) payments of the Merchan Additional Amount for a period of 12 months following his termination of employment, provided, however, that in the case of termination due to “Disability,” as such term is defined in the employment agreement, if health insurance coverage becomes available to Mr. Merchan under another group insurance plan during the twelve-month period, payment of the Merchan Additional Amount shall cease. In addition, in the event of Mr. Merchan’s death, Mr. Merchan’s estate shall be entitled to the fully vested but unpaid rights as required by the terms of any bonus or other incentive pay plan or any other employee benefit plan.

Mr. Merchan’s employment agreement provides that he is obligated to devote a substantial majority of his business time, attention, skill and effort to the performance of his duties under the employment agreement, provided that, to the extent such activities do not impair the performance of his duties to Flora Management, us or our affiliates, Mr. Merchan is permitted to engage in the following other specified activities: (i) engaging in personal investments and charitable, professional and civic activities; (ii) serving on boards of directors of entities that do not compete with Flora Management, us or any of our affiliates; (iii) serving as Chairman of our Board; and (iv) certain other activities and director positions that our Board may approve.

Mr. Merchan’s employment agreement provides that during the term of his employment and for a period of 12 months following the expiration, resignation or termination of his employment, Mr. Merchan agrees not to (i) engage in any competing business in certain geographic regions, provided, however, that Mr. Merchan may own five percent or less of the outstanding stock of any publicly traded corporation or other entity that engages in a competing business, (ii) solicit for the purpose of conducting a competing business any customer or prospective customer of Flora Management, us or any of our affiliates in a line of business that we, Flora Management, or any of our affiliates conducts or plans to conduct as of the date of Mr. Merchan’s termination or (iii) solicit or employ any person who is, or was at any time during the two-year period prior to Mr. Merchan’s termination, an employee with a senior management position at Flora Management, us or any of our affiliates.

Lee Leiderman

On June 10, 2021, the Company entered into a consulting agreement with E&J Consulting LLC (“E&J”), an affiliated entity of Mr. Leiderman, for Mr. Leiderman to serve as our Chief Financial Officer. Through February 2021, E&J received base fees in the amount of US$20,833 per month.  Effective March 1, 2022, base fees payable to E&J were increased to $22,916 per month.  This agreement provides for a severance payment of 12 months’ base fees with respect to termination by the Company without cause.

Jason Warnock

Effective March 1, 2022, Mr. Warnock and our subsidiary, Flora Growth Management Corp. (“Flora Management”), entered into a consulting agreement, pursuant to which Mr. Warnock serves as the Company’s Chief Commercial Officer. 

Mr. Warnock’s consulting agreement provides for an annual base fee of $180,000 (as may be increased by our Board), an annual discretionary bonus opportunity targeted at 50% of his base fee and the opportunity to participate in any equity compensation plan, other incentive compensation programs and other health, benefit and incentive plans offered to other senior executives of the Company. Mr. Warnock is also entitled to paid time off and holiday pay in accordance with Flora Management’s policies. In addition, upon termination of Mr. Warnock’s consulting agreement without “Cause” or resignation by Mr. Warnock for “Good Reason,” as those terms are defined in the consulting agreement, Mr. Warnock will, conditioned upon his execution of a separation and release agreement, be eligible to receive the following payments:

In the event Mr. Warnock is terminated without “Cause” or Mr. Warnock resigns for “Good Reason” following a “Change in Control,” as those terms are defined in his consulting agreement (a “Change in Control Termination”), Mr. Warnock will be eligible to receive the payments set forth above, provided however that the Warnock Severance Payment shall be increased to Mr. Warnock’s base fee, payable as set forth above.

In the event that Mr. Warnock’s engagement terminates as a result of “Disability,” as such term is defined in the consulting agreement, or death, Mr. Warnock or his estate, as applicable, conditioned upon his or its execution of a separation and release agreement, will be eligible to receive his pro rata share of his discretionary annual incentive bonus (at no less than target in the event of death). In addition, in the event of Mr. Warnock’s death, Mr. Warnock’s estate shall be entitled to the fully vested but unpaid rights as required by the terms of any bonus or other incentive pay plan or any other employee benefit plan.

Mr. Warnock’s consulting agreement provides that during the term of his engagement and for a period of 12 months following the expiration, resignation or termination of his engagement, Mr. Warnock agrees not to (i) engage in any competing business in certain geographic regions, provided, however, that Mr. Warnock may own five percent or less of the outstanding stock of any publicly traded corporation or other entity that engages in a competing business, (ii) solicit for the purpose of conducting a competing business any customer or prospective customer of Flora Management, us or any of our affiliates in a line of business that we, Flora Management, or any of our affiliates conducts or plans to conduct as of the date of Mr. Warnock’s termination or (iii) solicit or employ any person who is, or was at any time during the two-year period prior to Mr. Warnock’s termination, an employee with a senior management position at Flora Management, us or any of our affiliates.

Stock Options

The following table summarizes the outstanding stock options with respect to our Common Shares that we have granted to our Named Executive Officers and directors during the fiscal year ended December 31, 2021. 

6.C. Board practices

Board of Directors

Our business and affairs are managed under the direction of our Board of Directors. Our Board of Directors is currently comprised of six directors. When considering whether directors have the experience, qualifications, attributes or skills, taken as a whole, to enable our Board of Directors to effectively satisfy its oversight responsibilities in light of our business and structure, the Board of Directors focuses primarily on each person’s background and experience as reflected in the information discussed in the directors’ respective biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.

Corporate Governance Practices

We are a “foreign private issuer” under the federal securities laws of the United States and the Nasdaq listing standards. Under the federal securities laws of the United States, foreign private issuers are subject to different disclosure requirements than U.S.-domiciled registrants. We intend to take all actions necessary for us to maintain compliance as a foreign private issuer under the applicable corporate governance requirements of the Sarbanes-Oxley Act, the rules adopted by the SEC and the Nasdaq listing standards.

Under the SEC rules and the Nasdaq listing standards, a foreign private issuer is subject to less stringent corporate governance requirements. Subject to certain exceptions, the SEC and the Nasdaq permit a foreign private issuer to follow its home country practice in lieu of their respective rules and listing standards. Following our home country governance practices, as opposed to the requirements that would otherwise apply to a company listed on Nasdaq, may provide less protection than is accorded to investors under the Nasdaq Rules applicable to U.S. domestic issuers.

The Canadian securities regulatory authorities have issued corporate governance guidelines pursuant to National Policy 58-201—Corporate Governance Guidelines (the “Corporate Governance Guidelines”), together with certain related disclosure requirements pursuant to National Instrument 58-101—Disclosure of Corporate Governance Practices. The Corporate Governance Guidelines are recommended as “best practices” for issuers to follow. We recognize that good corporate governance plays an important role in our overall success and in enhancing shareholder value and, accordingly, we have adopted certain corporate governance policies and practices which reflect our consideration of the recommended Corporate Governance Guidelines.

In particular, as a foreign private issuer, in accordance with and pursuant to the authority contained in Nasdaq Listing Rule 5615(a)(3), we  follow certain Canadian law and corporate practice in lieu of certain corporate governance provisions set out under the Nasdaq Rule 5600 Series and the requirement in Listing Rule 5250(d) to distribute annual and interim reports. Of particular note, the following rules under the Nasdaq Listing Rule 5600 Series differ from Canadian law requirements:

Role of Board in Risk Oversight Process

The Board oversees our business and considers the risks associated with our business strategy and decisions. The Board currently implements its risk oversight function as a whole. Each of the Board committees will also provide risk oversight in respect of its respective areas of concentration and report material risks to the Board for further consideration.

Board Committees

Audit Committee

 Our audit committee is responsible for, among other things:

The audit committee is composed of Mr. Tim Leslie, Dr. Beverley Richardson and Juan Carlos Gomez Roa, with Mr. Leslie serving as chair. Mr. Leslie qualifies as an “audit committee financial expert” as such term has been defined in Item 407(d)(5) of Regulation S-K and as “financially literate” within the meaning of NI 52-110. Our Board of Directors has affirmatively determined that Mr. Leslie, Dr. Richardson and Mr. Gomez each meet the definition of “independent director” for purposes of serving on the audit committee under the Nasdaq rules, the independence standards under Rule 10A-3 of the Exchange Act and under NI 52-110.

Both our independent registered public accounting firm and management personnel periodically meet privately with our audit committee.

Compensation Committee

Our compensation committee is responsible for, among other things:

The compensation committee is composed of  Dr. Beverley Richardson and Marc Mastronardi, with Dr. Richardson serving as chair.  Our Board of Directors has affirmatively determined that Dr. Richardson and Mr. Mastronardi each meet the definition of “independent director” for purposes of serving on the compensation committee under the Nasdaq rules, the independence standards under Rule 10A-3 of the Exchange Act and under NI 52-110.

Nominating Committee

Our nominating and corporate governance committee is responsible for, among other things:

The nominating and corporate governance committee is composed of Mr. Mastronardi, Mr. Gomez and Dr. Manalo-Morgan, with Mr. Mastronardi serving as chair.  Our Board of Directors has affirmatively determined that  Messrs. Mastronardi and Gomez meet the definition of “independent director” for purposes of serving on the nominating and corporate governance committee under the Nasdaq rules, the independence standards under Rule 10A-3 of the Exchange Act and under NI 52-110.

6.D. Employees

As of December 31, 2021, we had a total of 249 full time employees in Colombia and a total of 28 full time employees/consultants in North America.  None of our employees or consultants are represented by labor unions.

6.E. Share ownership

Company Stock Option Plan

The Company has a stock option plan whereby it may grant options for the purchase of Common Shares to any director, consultant, employee or officer of the Company or its subsidiaries.  The aggregate number of shares that may be issuable pursuant to options granted under the Company’s stock option plan will not exceed 10% of the issued Common Shares of the Company.  The options are non-transferable and non-assignable and may be granted for a term not exceeding five-years.  The exercise price of the options will be determined by the Board at the time of grant, but in the event that such shares are traded on any stock exchange, may not be less than the closing price of such shares on such exchange on the trading date immediately precedent the date of grant, subject to all applicable regulatory requirements. As of December 31, 2021, a total of 6,551,741 Common Shares were reserved for issuance under the stock option plan, of which 1,183,721 Common Shares had been issued pursuant to previous exercised options and 5,117,660 Common Shares were issuable under outstanding options. Of such outstanding options, options to purchase 3,144,043 Common Shares had vested and were exercisable as of that date, with a weighted average exercise price of $1.27 per Common Share.

See also Item 7A below.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 

7.A. Major shareholders

The following table and the related notes present information with respect the beneficial ownership of the Company’s Common Shares as of April 17, 2022 by:

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. The percentage of Common Shares beneficially owned is based on 76,345,651 Common Shares issued and outstanding as of April 17, 2022.

Common Shares of the Company that may be acquired by an individual or group within 60 days of April 17, 2022 pursuant to the exercise of the Company’s outstanding options or warrants, are deemed outstanding for the purposes of computing the percentage of Common Shares beneficially owned by such individual or group, but are not deemed outstanding for purposes of computing the percentage of Common Shares beneficially owned by any other individual or group shown in the table.