MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three-month period ended February 28, 2023 and the three-month period ended February 28, 2022
(Expressed in Canadian Dollars)
Dated as of May 1, 2023
SOL Global Investments Corp
Management’s discussion and analysis for the three-month period ended February 28, 2023, and the three-month period ended February 28, 2022 (Expressed in Canadian Dollars)
INTRODUCTION
SOL Global Investments Corp. (the “Company” or “SOL Global”) was incorporated under the laws of the Province of Ontario, Canada on January 28, 2005. The common shares of the Company (the “Common Shares”) are listed on the Canadian Securities Exchange (the “CSE”) under the symbol “SOL”, the OTCPK in the United States of America under the symbol “SOLCF”, and on the Frankfurt Exchange under the symbol “9SB”. The Canadian dollar is the Company’s functional and reporting currency. Unless otherwise noted, all dollar amounts within this report are expressed in Canadian dollars. This management discussion and analysis (“MD&A”) is dated May 1, 2023, and should be read in conjunction with the unaudited interim condensed financial statements of the Company for the three-month period ended February 28, 2023 and the three-month period ended February 28, 2022 (the “Financial Statements”). Additional information about the Company is available on the Company’s SEDAR profile at www.sedar.com or the Company’s website at https://solglobal.com/.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking information and statements (“forward-looking statements”) within the meaning of applicable securities laws, which may include, but are not limited to, statements with respect to the future financial or operating performance of the Company. Forward-looking statements contained herein that are not clearly historical in nature may constitute forward-looking information. Forward-looking statements reflect the current expectations of management regarding the Company’s future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “will”, “expect”, “likely”, “should”, “would”, “plan, “anticipate”, “intend”, “potential”, “proposed”, “estimate”, “believe” or the negative of these terms, or other similar words, expressions and grammatical variations thereof, have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant risks, uncertainties and assumptions. Many factors could cause the actual results, performance or events to be materially different from any future results, performance or events that may be expressed or implied by such forward-looking statements, including, without limitation, those listed in the “Risk Factors” section of this MD&A. Although the Company has attempted to identify important factors that could cause actual results, performance or events to differ materially from those described in the forward-looking statements, there could be other factors unknown to management or which management believes are immaterial that could cause actual results, performance or events to differ from those anticipated, estimated or intended. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or events may vary materially from those expressed or implied by the forward-looking statements contained in this MD&A. These factors should be considered carefully, and readers should not place undue reliance on the forward-looking statements. Forward-looking statements contained herein are made as of the date of this MD&A and the Company assumes no responsibility to update forward looking statements, whether as a result of new information or otherwise, other than as may be required by applicable securities laws.
BUSINESS OVERVIEW
SOL Global is a diversified international investment and private equity holding company engaged in the small and mid- cap sectors. The Company’s investments range from minority positions to large strategic holdings with active advisory mandates with an objective of providing shareholders with a long term returns through capital appreciation, dividends and interest from its investments. The investment sectors are primarily Cannabis but also include Retail, Agriculture, QSR & Hospitality, Media Technology & Gaming, Clean Energy and New Age Wellness.
The Company’s investment objectives are to provide shareholders with long-term capital appreciation, dividends and interest by investing in an actively managed portfolio of securities of public and private companies. These companies may be operating in or derive a significant portion of their revenue from the cannabis and/or hemp industry. Notwithstanding the foregoing, the Company is not exclusively focused on investments in the cannabis industry. The Company continues to seek value investments and have invested significant capital in opportunities in other industries, with a view towards the Company’s investment objectives. The Company plans to reinvest any profits on its investments to further the growth and development of the Company’s investment portfolio.
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SOL Global Investments Corp
Management’s discussion and analysis for the three-month period ended February 28, 2023, and the three-month period ended February 28, 2022 (Expressed in Canadian Dollars)
UNITED STATES REGULATORY RISK AROUND THE CANNABIS INDUSTRY
In the United States of America, the possession and/or use of cannabis or cannabis related products remains in violation of federal law as cannabis continues to be categorized as a Schedule I controlled substance under the U.S. Controlled Substances Act (the “CSA”). However, medical and adult-use cannabis has been legalized and is regulated in certain states. Thirty-six states, four of five permanently inhabited U.S. territories andthe District of Columbia recognize, in some way medical use of cannabis. In addition, fifteen states plus the District of Columbia recognize, in some way adult recreational use of cannabis. As such, companies who are involved in the cannabis industry in the United States are subject to conflicting and inconsistent state and federal legislation, regulation, and enforcement. Presently, violations of federal laws and regulations in the United States of America may result in fines, penalties, administrative sanctions, convictions or settlements arising from either civil or criminal proceedings commenced by the United States federal government or private citizens. Finally, given the inconsistency in the laws at the federal and state level in the United States of America, the approach to the enforcement of cannabis laws may change at any time. For the reasons set forth above, the
Company’s existing interests and operations in the United States cannabis markets may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities due to the fact that the possession and/or use of cannabis or cannabis related products remains illegal under U.S. federal law, and that enforcement of relevant laws is uncertain and, therefore, a significant risk. Readers are also encouraged to review the following sections of this MD&A: “Regulatory Developments – Regulatory Developments in the United States”, “Issuers with U.S. Cannabis-RelatedAssets” and “Risk Factors”. As at February 28, 2023, the fair value of the Company’s investments in cannabis and related investments in the United States of America totaled $20.1 million (November 30, 2022: $20.5 million). The fair value of non-U.S.cannabis, cannabis related investments and non-cannabisinvestments totaled $112.9 million (November 30, 2022: $124.5 million). In all U.S. jurisdictions in which the Company or its subsidiaries, as applicable, carries out cannabis-relatedactivities, it (or the applicable subsidiaries) has obtained legal advice regarding compliance with applicable state regulatory frameworks, exposure and implication arising from U.S. federal laws in the states where it conducts operations. A As of the date hereof, neither the Company nor, to its knowledge, any of its subsidiaries in which the Company has “direct”, “indirect” or “material ancillary involvement” in the U.S. cannabis industry (as described under Staff Notice 51-352- Issuers with U.S. Marijuana Related Activities (“Staff Notice 51-352”)have received any notices of violation, denial or non-compliancefrom U.S. authorities, and the Company believes that the activities of its subsidiaries who are engaged in direct involvement of the cultivation or distribution of cannabis in the United States are being done in compliance with applicable state law, however strict compliance with state laws may not act as a shield to federal criminal liability. See “Risk Factors” and “Regulatory Developments” in this MD&A.
Notwithstanding the illegality of cannabis under U.S. federal law, the Company has historically had access to both public and private capital in Canada in order to continue to support its continuing operations, including public and/or private equity offerings of its Common Shares, warrants, convertible debentures and notes. The Company’s executive team and the board of directors of the Company (the” Board”) also have extensive relationships with sources of private capital (such as funds and high net worth individuals), that could potentially be available. Commercial banks, private equity firms and venture capital firms have approached the cannabis industry cautiously to date. However, there are increasing numbers of high-net-worth individuals and family offices that have made meaningful investments in companies and projects similar to the Company’s projects. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep pool of institutional capital that is available to issuers that are involved in the cannabis industry. There can be no assurance that additional financing will be available to the Company when needed or on terms which are acceptable. See “Risk Factors” in this MD&A.
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SOL Global Investments Corp
Management’s discussion and analysis for the three-month period ended February 28, 2023, and the three-month period ended February 28, 2022 (Expressed in Canadian Dollars)
FINANCINGS
Non-revolving loan term facility
On September 3, 2021, the Company entered into a secured loan from an arm’s length private lender (the “Lender”) in the principal amount of $50,000,000 (the “Loan”). The Loan has a term of 12 months, bears interest at the rate of 9% per annum and is secured by a general security agreement. The Loan was entered into for the sole purpose of facilitating its subsidiary’s acquisition of all of 1235 Fund LP’s rights under the Debenture. To secure the Loan, the Company pledged shares in SOL Verano Blocker 1 LLC, Blue Sky Holdings USA Inc. and other wholly-owned subsidiaries and limited partnerships of the Company. Pursuant to the Loan, the Lender is charging the Company a standby fee of 1.2% per annum until the drawdown date, 2% facility fee and 9% interest per annum calculated on an actual/360 basis. Due to company defaulting on the payments the rate of interest increased by five percent (5%) per annum to fourteen percent (14%). Interest will continue to accrue at default rate (14%) until all outstanding obligations, including unpaid interest are fully paid.
The Loan shall mature and be due and payable in full one year from the date of the advance of the Loan (the “Maturity Date”). The company amended the payment terms several which resulted in facility expense. As of February 28, 2023, the Company recorded $4.4 million in facility fees and $2.0 million in interest expense (November 30, 2022 – $3.9 million in facility fees, Accrued Interest – $2.4 million). On September 3, 2021, the Company drew down the entire Loan in the amount of $50 million to fund the settlement payment in connection with the settlement of litigation with 1235 Fund LP relating to the Debenture. The Company paid a facility fee of $1 million to the Lender and $0.1 million in legal fees. Pursuant to the Loan, commencing sixty days from the advance date and continuing until the earlier of the demand and the Maturity Date, 10% of the outstanding balance of the amount of the Loan shall be paid on the 7th day of each month along with interest. As of February 28, 2023, the Company has made principal payments totaling $45.5 million and $0.8M in interest payment towards the Loan (November 30, 2022 – Principal – $44.5 million and). The Company accrued $4,417,335 (November 30, 2022 – $3,894,636) in financing expenses related to facility fees which were incurred due to amending original payment terms several times.
Term Loan
On June 3, 2022, the Company entered into a loan agreement with a private lender for a secured loan in the principal amount of $10 million (the “June 2022 Loan”). The June 2022 Loan has a term of 12 months and bears interest at the rate of 9% per annum. The June 2022 Loan is guaranteed by Verano Blocker 1 LLC, a wholly owned subsidiary of SOL Global, and Blue-Sky Holdings USA Inc. (“Blue Sky”), an indirect subsidiary of SOL Global; and is secured with a general security agreement of Blue Sky, which consists primarily of an indirect interest in real estate located in Miami, Florida. The use of proceeds of the June 2022 Loan (net of fees and expenses of the lender) was to reduce the principal amount of an existing secured loan in the principal amount of $50,000,000 received from the Company from a separate arm’s length private lender on September 3, 2021. As of February 28, 2023, the Company has accrued interest of $246,822.
IFRS 10, DESIGNATION AS AN INVESTMENT COMPANY
The following criteria within IFRS 10, Financial Statements (“IFRS 10”), were assessed by the Company to determine whether it qualifies as an investment entity: (a) the Company obtains funds from one or more investors for the purpose of providing those investors with investment management services; (b) the Company commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and (c) the Company measures and evaluates the performance of substantially all its investments on a fair value basis. As at August 1, 2018 and up to the date of the Financial statements, the Company determined that it met the definition of an investment entity. As a result of this classification, effective August 1, 2018, the Company deconsolidated its subsidiaries and recognized the interests held as financial instruments classified at fair value through profit /loss.
NORMAL COURSE ISSUER BID
On March 2, 2021, the Company announced its intention to commence a normal course issuer bid (“NCIB”), which was completed on September 3, 2021, and under which the Company purchased 2,737,805 Common Shares representing approximately 5% of its issued and outstanding Common Shares. All Common Shares purchased under the NCIB were purchased on the open market through the facilities of the CSE at the prevailing CSE market price for the Common Shares
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SOL Global Investments Corp
Management’s discussion and analysis for the three-month period ended February 28, 2023, and the three-month period ended February 28, 2022 (Expressed in Canadian Dollars)
at the time of purchase. Common Shares acquired by the Company under the NCIB were purchased for cancellation. During the year-ended November 30, 2021, a total of 2,737,805 Common Shares were re-purchased through the NCIB.
SUBSTANTIAL ISSUER BID
On September 23, 2021, the Company announced the launch and terms of its substantial issuer bid, pursuant to which the Company offered to purchase for cancellation up to $30,000,000 of its outstanding Common Shares by way of a “Dutch auction” at a price of not less than $4.05 and not more than $4.25 per Common Share in increments of $0.05 per Common Share. The Company closed the substantial issuer bid on December 8, 2021, with the cancellation of 7,407,404 of the Company’s Common Shares for an aggregate purchase price of $30 million.
Income Statement Analysis Comparison for the Three-Month period ended February 28, 2023 and Three- month period ended February 28, 2022
| Three-month period ended February | Three-month period ended | Variance | |
| 28, 2023 | February 28, 2022 | ||
| $ | $ | $ | |
| Revenue | |||
| Net change in fair value of investments | (12,810,470) | (81,591,643) | 68,781,173 |
| Interest and other income | 680,712 | 525,367 | 155,345 |
| Foreign exchange gain (loss) | (15,027) | (43,712) | 28,685 |
| Total revenue | (12,144,785) | (81,109,988) | 68,965,203 |
| Expenses | |||
| Salaries and consulting fees | 679,109 | 1,377,134 | (698,025) |
| Share based compensation | – | 9,113 | (9,113) |
| General and administrative | 639,231 | 847,111 | (207,880) |
| Interest expense | 593,769 | 871,201 | (277,432) |
| Financing expense | 526,782 | 1,355,077 | (828,295) |
| Professional fees and transaction costs | 126,356 | 1,118,207 | (991,852) |
| Total expenses | 2,565,247 | 5,577,844 | (3,012,597) |
| Income (loss) from continuing | (14,710,212) | (86,687,832) | 71,977,800 |
| operations before taxes |
Comparison of Income Statement for the three-month period ended February 28, 2023, and the three-month period ended February 28, 2022
Net loss from continuing operations before income taxes totalled ($14.7) million for the three-month period ended February 28, 2023, compared to ($86.7) million for the three-month period ended February 28, 2022. This represents an increase of $72.0 million. Total revenue totalled ($12.1) million for the three-month period ended February 28, 2023, compared to revenue of ($81.1) million for the three-month period ended February 28, 2022. This represents an increase of $69.0 million between periods. Total expenses were $2.6 million for the three-month period ended February 28, 2023, compared to $5.6 million for the three-month period ended February 28, 2022, which represents an decrease of $3.0 million.
Significant reasons for the changes in income and loss from operations:
- The net change in fair value of investments of $69.0 million is primarily due to: As of February 28, 2023, the company recorded $nil in unrealized loss compared to February 28, 2022 when the company recorded unrealized loss of $26.2M.
- The company recorded unrealized gain of $2.5M in its public investments compared to loss of $33.8M in February 28, 2022.
- The remaining in losses suffered by Cannabis companies due to compressed valuations decline due to lack of institutional investment due to regulatory, legal and banking issues, as a result, the Company impaired the majority of its cannabis investments. In addition, interest and other income decreased by $0.2 million between periods.
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Disclaimer
SOL Global Investments Corp. published this content on 02 May 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 May 2023 08:22:02 UTC.
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