Company Quick10K Filing
Quick10K
Alliance One
10-K 2019-03-31 Annual: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2018-03-31 Annual: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-06-14 Earnings, Exhibits
8-K 2019-05-16 Regulation FD, Exhibits
8-K 2019-02-12 Officers, Amend Bylaw, Exhibits
8-K 2019-02-11 Earnings, Exhibits
8-K 2018-11-15 Officers
8-K 2018-11-14 Officers, Amend Bylaw, Exhibits
8-K 2018-11-08 Earnings, Exhibits
8-K 2018-11-05 Exit Costs
8-K 2018-09-12 Amend Bylaw, Regulation FD, Other Events, Exhibits
8-K 2018-08-16 Shareholder Vote
8-K 2018-08-02 Earnings, Exhibits
8-K 2018-06-20 Officers, Amend Bylaw, Exhibits
8-K 2018-06-07 Earnings, Exhibits
SWKS Skyworks Solutions 14,440
TI TIM 10,950
LPX Louisiana-Pacific 3,080
AIN Albany International 2,470
WASH Washington Trust Bancorp 913
BNED Barnes & Noble Education 186
IRIX Iridex 70
FMHI Fah Mai Holdings 52
OFFLP Ceres Orion 0
DTST Data Storage 0
AOI 2019-03-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Significant Accounting Policies
Note 2 - Inventories
Note 3 - Variable Interest Entities
Note 4 - Restructuring and Asset Impairment Charges
Note 5 - Goodwill and Other Intangibles
Note 6 - Related Party Transactions
Note 7 - Short-Term Borrowing Arrangements
Note 8 - Long-Term Debt
Note 9 - Long-Term Leases
Note 10 - Equity in Net Assets of Investee Companies
Note 11 - Stock-Based Compensation
Note 12 - Income Taxes
Note 13 - Employee Benefits
Note 14 - Segment Information
Note 15 - Foreign Currency Translation
Note 16 - Contingencies and Other Information
Note 17 - Sale of Receivables
Note 18 - Fair Value Measurements
Note 19 - Selected Quarterly Financial Data (Unaudited)
Note 20 - Acquisitions
Note 21 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
EX-10.14 pyx-20190331xex1014.htm
EX-21 pyx-20190331xex21.htm
EX-23.01 pyx-20190331xex231.htm
EX-31.01 pyx-20190331xex3101.htm
EX-31.02 pyx-20190331xex3102.htm
EX-32 pyx-20190331xex320.htm

Alliance One Earnings 2019-03-31

AOI 10K Annual Report

Balance SheetIncome StatementCash Flow

Document
false--03-31FY20190000939930YesfalseAccelerated FilerfalsetrueNoNo7850000.1000.0260.1000.0240.3500.1500.7000.150P111DP76DP80DP67D0.0500.0440.0650.050P6YP6YP3YP3Y5000000040000000P7D022.352225000000025000000098080009881000980800098810000.0150.0250.09875P0DP60DP0DP60D0000P8YP3YP8YP10Y0.0050.003750.00567000099000348000P20YP3Y249000497000P3YP2YP3YP3Y0000<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;text-align:justify;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The following table summarizes the fair values of the assets acquired and liabilities assumed as of January 25, 2018 (in thousands, except per share data):</font></div><div style="line-height:120%;text-align:center;font-size:10pt;"><div style="padding-left:0px;text-indent:0px;line-height:normal;padding-top:10px;"><table cellpadding="0" cellspacing="0" style="font-family:Times New Roman;font-size:10pt;margin-left:auto;margin-right:auto;width:300px;border-collapse:collapse;text-align:left;"><tr><td colspan="4" rowspan="1"></td></tr><tr><td style="width:204px;" rowspan="1" colspan="1"></td><td style="width:9px;" rowspan="1" colspan="1"></td><td style="width:83px;" rowspan="1" colspan="1"></td><td style="width:4px;" rowspan="1" colspan="1"></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Cash and cash equivalents</font></div></td><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">$</font></div></td><td style="vertical-align:bottom;padding-top:2px;padding-bottom:2px;" rowspan="1" colspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">436</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Other receivables</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">442</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Inventories</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">2,221</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Other current assets</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">64</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Property, plant and equipment</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">5,378</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Goodwill</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">11,597</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Other intangible assets</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">30,520</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:12px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Total assets acquired</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">50,658</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Accounts payable</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">725</font></div></td><td style="vertical-align:bottom;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Deferred income tax liabilities</font></div></td><td colspan="2" style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">9,348</font></div></td><td style="vertical-align:bottom;background-color:#cceeff;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;padding-left:12px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Total liabilities</font></div></td><td colspan="2" style="vertical-align:bottom;padding-left:2px;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">10,073</font></div></td><td style="vertical-align:bottom;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr><tr><td style="vertical-align:bottom;background-color:#cceeff;padding-left:2px;padding-top:2px;padding-bottom:2px;padding-right:2px;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">Fair value of equity interest</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;padding-left:2px;padding-top:2px;padding-bottom:2px;background-color:#cceeff;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">$</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;background-color:#cceeff;padding-top:2px;padding-bottom:2px;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:right;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">40,585</font></div></td><td style="vertical-align:bottom;border-bottom:1px solid #000000;background-color:#cceeff;border-top:1px solid #000000;" rowspan="1" colspan="1"><div style="text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;"><br clear="none"/></font></div></td></tr></table></div></div></div> 0000939930 2018-04-01 2019-03-31 0000939930 2018-09-28 0000939930 2019-05-31 0000939930 2016-04-01 2017-03-31 0000939930 2017-04-01 2018-03-31 0000939930 2018-03-31 0000939930 2019-03-31 0000939930 us-gaap:AccumulatedTranslationAdjustmentMember 2018-09-30 0000939930 us-gaap:NoncontrollingInterestMember 2018-09-30 0000939930 us-gaap:NoncontrollingInterestMember 2018-04-01 2018-06-30 0000939930 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-07-01 2018-09-30 0000939930 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2018-07-01 2018-09-30 0000939930 us-gaap:AccumulatedGainLossNetCashFlowHedgeParentMember 2018-06-30 0000939930 us-gaap:NoncontrollingInterestMember 2019-01-01 2019-03-31 0000939930 us-gaap:AccumulatedTranslationAdjustmentMember 2018-03-31 0000939930 2018-10-01 2018-12-31 0000939930 us-gaap:NoncontrollingInterestMember 2018-10-01 2018-12-31 0000939930 us-gaap:CommonStockMember 2019-01-01 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UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED March 31, 2019

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______.
001-13684
(Commission File Number)
rgblogopyxusa12.jpg
PYXUS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Virginia
8001 Aerial Center Parkway
54-1746567
(State or other jurisdiction
of incorporation)
Morrisville, North Carolina 27560-8417
(Address of principal executive offices)

(I.R.S. Employer
Identification No.)
Telephone Number (919) 379-4300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Exchange On Which Registered
Common Stock (no par value)
PYX
New York Stock Exchange

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No[X]                                                             
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act.                                                                  Yes [ ] No [X]

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 [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):           
                                                                
Large Accelerated Filer   []    Accelerated Filer   [X]    Non-Accelerated filer   []
Smaller Reporting Company   [X]    Emerging Growth Company   [] 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction 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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [ ] No [X]

As of September 28, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $190.7 million based on the closing sale price of the common stock as reported on the New York Stock Exchange.

As of May 31, 2019, there were 9,095,872 shares of Common Stock outstanding (no par value) excluding 785,313 shares owned by a wholly owned subsidiary.

DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Proxy Statement for the Annual Meeting of Shareholders (to be held August 15, 2019) of the registrant is incorporated by reference into Part III hereof.



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Table of Contents
Part I
 
Page No.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
 
 
 
 
 
 
Item 9.
Item 9A.
Item 9B.
 
 
 
Part III
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
Item 15.
Item 16.

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Part I

Item 1. Business

Our company changed its name from Alliance One International, Inc. to Pyxus International, Inc. on September 12, 2018. Pyxus International, Inc. ("we," "Pyxus" or the "Company") is a Virginia corporation with consolidated revenues of approximately $1.8 billion for the year ended March 31, 2019. Our common stock has been traded on the New York Stock Exchange since 1995. As the context requires, "we" or the "Company" also includes the consolidated subsidiaries of Pyxus International, Inc.

Additional Information
We are required to file annual, quarterly and current reports, proxy statements and other information with the U.S. Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC at http://www.sec.gov.

Our website address is http://www.pyxus.com. We make available, free of charge through our website, a variety of information that includes, but is not limited to, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The information contained on our website shall not be deemed part of this annual report on Form 10-K.

Company Overview
At Pyxus, we believe everything we do is to transform people’s lives so that together we can grow a better world. Pyxus provides responsibly produced, independently verified, and traceable agricultural products, ingredients and services to businesses and customers. Headquartered in the Research Triangle Park region of North Carolina, we contract with growers across five continents to help them produce sustainable, compliant crops.

Historically, Pyxus’ core business has been as a tobacco leaf merchant, purchasing, processing, packing, storing and shipping tobacco to manufacturers of cigarettes and other consumer tobacco products throughout the world. Through our predecessor companies, we have a long operating history in the leaf tobacco industry with some customer relationships beginning in the early 1900s. In an increasing number of markets, we also provide agronomy expertise for growing leaf tobacco. Our contracted tobacco grower base often produces a significant volume of non-tobacco crop utilizing the agronomic assistance that our team provides. Pyxus is working to find markets for these crops as part of our ongoing efforts to improve farmer livelihoods and the communities in which they live.

We are committed to responsible crop production which supports economic viability for the grower, provides a safe working atmosphere for those involved in crop production and minimizes negative environmental impact. Our agronomists maintain frequent contact with growers prior to and during the growing and curing seasons to provide technical assistance to improve the quality and yield of the crop. Throughout the entire production process, from seed through processing and final shipment, our SENTRISM traceability system provides clear visibility into how products are produced throughout the supply chain, supporting product integrity.

As we announced in February 2018, we began a transformation process designed to diversify the Company's products and services by leveraging our core strengths in agronomy and traceability. In general, our diversification focuses on products that are value-added, require some degree of processing and play well to our strengths as well as offering higher margin potential than our core tobacco leaf business. In addition to our existing 50% interest in Purilum, LLC ("Purilum"), a U.S. company that develops, produces, and sells consumable e-liquids to manufacturers and distributors of vapable products, on August 21, 2017, the Company completed a purchase of a 40% interest in Nicotine River, LLC ("Nicotine River"), a manufacturer, retailer and wholesale supplier of compounds used for e-liquid production. On April 2, 2018, we purchased a 51% interest in Humble Juice, LLC ("Humble Juice"), a manufacturer and distributor of e-liquids. On December 18, 2017, a subsidiary of the Company completed a purchase of a 40% interest in Criticality LLC ("Criticality"), a North Carolina-based industrial hemp company to engage in cannabidiol ("CBD") extraction and other applications for industrial hemp in accordance with a pilot program authorized under the federal Agriculture Act of 2014 and applicable North Carolina law. On January 25, 2018, a Canadian subsidiary of the Company acquired a 75% equity position in Canada’s Island Garden Inc. (“FIGR East”). FIGR East is fully licensed to produce and sell medicinal cannabis in the Canadian province of Prince Edward Island. We acquired an additional 18% equity interest in FIGR East on March 22, 2019. FIGR East sells its products in Canada directly to patients and through distributors. In January 2018, FIGR East signed a Memorandum of Understanding with the province of Prince Edward Island to be one of three suppliers under the provincial Cannabis Board. On January 29, 2018, the same Canadian subsidiary of the Company acquired an 80% equity position in FIGR Norfolk, Inc. ("FIGR Norfolk"), formerly known as Goldleaf Pharm Inc., which is licensed to produce cannabis in the Canadian province of Ontario.

To support these business lines, we have broad geographic processing capabilities, a diversified product offering, an established customer base for our core leaf tobacco business and a growing customer base for our new business lines. We intend to focus on the expansion of our consumer-driven agricultural products. Because certain of these diversification investments are accounted

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for under the equity method and others were made only recently and involve early-stage businesses, our core leaf tobacco operations continued to account for almost all of our revenues for the fiscal year ended March 31, 2019.

Our consolidated operations are managed and reported in ten operating segments that are organized by product category and geographic area and aggregated into three reportable segments for financial reporting purposes: Leaf - North America, Leaf - Other Regions, and Other Products and Services. The Other Products and Services segment includes Global Specialty Products ("GSP") - Cannabis, GSP - E-liquids, GSP - Hemp, GSP - Other, and Value-Added Agriculture Products.

Because we do not have a controlling interest in Criticality, Purilum, and Nicotine River, their results are not consolidated in our financial results and we account for our respective interests in these businesses under the equity method of accounting. Accordingly, our interest in their financial results, along with our interests in the financial results of several unconsolidated joint ventures with leaf tobacco operations, are reflected as “Equity in net income (loss) of investee companies” in our Statement of Consolidated Operations.

Leaf Tobacco Operations
Our leaf tobacco revenues are primarily comprised of sales of processed leaf tobacco and fees charged for processing and related services to these manufacturers of tobacco products. Processing and other revenues are approximately 5% of our total revenues. Our leaf tobacco operations deal primarily in flue-cured, burley, and oriental tobaccos that are used in international brand cigarettes. Pyxus has developed an extensive international network through which we purchase, process, and sell tobacco and we hold a leading position in most tobacco growing regions in the world.

Leaf tobacco merchants purchase, process, pack, store, and ship tobacco to manufacturers of cigarettes and other consumer tobacco products throughout the world. In an increasing number of markets, we also provide agronomy expertise for growing leaf tobacco. Our leaf tobacco revenues are primarily comprised of sales of processed tobacco and fees charged for processing and related services to these manufacturers of tobacco products. We do not manufacture cigarettes or other consumer tobacco products.

We purchase tobacco in more than 35 countries and ship to approximately 90 countries. Tobacco is primarily purchased directly from suppliers with small quantities still purchased at auction. We purchase tobacco directly from suppliers and we assume the risk of matching the quantities and grades required by our customers to the entire crop we must purchase under contract. In some markets, we buy tobacco from local entities that have purchased tobacco from suppliers and supervise the processing of that tobacco by those local entities. Auction markets and our network of tobacco operations and buyers allows us to cover the major auctions of flue-cured and burley tobacco throughout the world. A number of our customers purchase tobacco directly from the suppliers in addition to the leaf merchants. Although our facilities process the tobacco purchased directly from suppliers by these customers, we do not take ownership of that tobacco and do not record sales revenues associated with its resale. Our arrangements with suppliers vary from locale to locale depending on our predictions of future supply and demand, local historical practice and availability of capital. We purchase seeds, fertilizer, pesticides, and other products related to growing tobacco, which we are contractually obligated to purchase. We advance these inputs to suppliers, which represents prepaid inventory. The advances of inputs for the current crop generally include the original cost of the inputs plus a mark-up and interest as it is earned. Where contractually permitted, we charge interest to the suppliers during the period the current crop advance is outstanding. We generally advance inputs at a price greater than our cost, which results in a mark-up on the inputs. We account for our advances to tobacco suppliers using a cost accumulation model, which results in us reporting our advances at the lower of cost or recoverable amounts excluding the mark-up and interest. The mark-up and interest on our advances are recognized when the tobacco is delivered as a decrease in our cost of the current crop. Upon delivery of tobacco, part of the purchase price paid to the supplier is paid in cash and part through a reduction of the advance balance. The advances applied to the delivery are reclassified out of advances and into unprocessed inventory. We advance inputs only to suppliers with whom we have purchase contracts. Under longer-term arrangements with suppliers, we may advance or guarantee financing on suppliers' capital assets, which are also recovered through the delivery of tobacco to us by our suppliers.

Our agronomists maintain frequent contact with suppliers prior to and during the growing and curing seasons to provide technical assistance to improve the quality and yield of the crop. As a result of various factors including weather, not all suppliers are able to settle the entire amount of advances through delivery of tobacco in a given crop year. Throughout the crop cycle, we monitor events that may impact the suppliers’ ability to deliver tobacco. If we determine we will not be able to recover the original cost of the advances with deliveries of the current crop, or future crop deliveries, the unit cost of tobacco actually received is increased when unrecoverable costs are within a normal range which is based on our historical results or expensed immediately when they are above a normal range based on our historical results. We account for the unrecoverable costs in this manner to ensure only costs within a normal range are capitalized in inventory and costs that are above a normal range are expensed immediately as current period charges.

During the three years ended March 31, 2019, 2018, and 2017, approximately 17%, 25%, and 24%, respectively, of our purchases of leaf tobacco were from the Leaf - North America operating segment and approximately 83%, 75%, and 76%, respectively, were from the Leaf - Other Regions operating segment. Within the Leaf - Other Regions operating segment, approximately 67%, 61%,

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and 60% of our total purchases for the three years ended March 31, 2019, 2018, and 2017, respectively, were from China, Brazil, Turkey, and the Africa Region. We have entered into contracts, joint ventures and other arrangements for the purchase of tobacco grown in substantially all other countries that produce export-quality flue-cured and burley tobacco.

We process tobacco to meet each customer's specifications as to quality, yield, chemistry, particle size, moisture content and other characteristics. Unprocessed tobacco is a semi-perishable commodity. The processing of leaf tobacco facilitates shipping and prevents spoilage and is an essential service to our customers because the quality of processed leaf tobacco substantially affects the quality of the manufacturer’s end product. Accordingly, we have located our production facilities in proximity to our principal sources of tobacco.

We process tobacco in Company-owned and third-party facilities around the world, including Argentina, Brazil, China, Zimbabwe, Jordan, Guatemala, India, Tanzania, the United States, Malawi, Thailand, Indonesia, Macedonia, Kenya, and Turkey. These facilities encompass all leading export locations of flue-cured, burley and oriental tobaccos. In addition, we have entered into contracts, joint ventures and other arrangements for the purchase of tobacco grown in substantially all other countries that produce export-quality flue-cured and burley tobacco.

Upon arrival at our processing plants, flue-cured and burley tobacco is first reclassified according to grade. Tobacco is then blended to meet customer specifications regarding color, body and chemistry, threshed to remove the stem from the leaf and further processed to produce strips of tobacco and sieve out small scrap. We also sell a small amount of processed but unthreshed flue-cured and burley tobacco in loose-leaf and bundle form to certain customers. Tobacco is redried to remove excess moisture so that it can be held in storage by customers or us for long periods of time. After redrying, whole leaves, bundles, strips or stems and scrap where applicable are separately packed in cases, bales, cartons or hogsheads for storage and shipment. Packed tobacco generally is transported in the country of origin by truck or rail, and exports are moved by ship. Prior to and during processing, steps are taken to ensure consistent quality of the tobacco, including the regrading and removal of undesirable leaves, dirt and other non-tobacco related material. Customer representatives are frequently present at our facilities to monitor the processing of their particular orders. Throughout the processing, our technicians use quality control laboratory test equipment to ensure that the product meets all customer specifications.

Key Customers
In our leaf tobacco business, our primary customers are major consumer tobacco product manufacturers. The consumer tobacco business is dominated by a relatively small number of large multinational cigarette manufacturers and by government controlled entities. Including their respective affiliates, accounting for more than 10% of our revenues were each of Philip Morris International, Inc. ("PMI"), China Tobacco International, Inc. and Imperial Brands, PLC for the years ended March 31, 2019 and 2018 and PMI and China Tobacco International, Inc. for the year ended March 31, 2017. In the 2019 fiscal year, Pyxus delivered approximately 38% of its tobacco sales to customers in Europe and approximately 14% to customers in the United States. The remaining sales of leaf tobacco are to customers located in Asia, Africa, and other geographic regions of the world.

Competition
The Company is one of only two global, publicly held leaf tobacco merchants. We hold a leading position in most major tobacco growing regions in the world, including the principal export markets for flue-cured, burley and oriental tobacco and, as a result of our scale, global reach, and financial resources, we believe we are well-suited to serve the needs of all manufacturers of cigarettes and other consumer tobacco products. The leaf tobacco industry is highly competitive and competition is based primarily on the price charged for products and services as well as the merchant's ability to meet customer specifications in the buying, processing, residue compliance and financing of tobacco. In addition to the primary global independent leaf tobacco merchants, there are a number of other independent global, regional or national competitors. Local independent leaf merchants with low fixed costs and overhead also supply cigarette manufacturers. Recent vertical integration initiatives and other changes in customer buying patterns have resulted in a more dynamic and competitive operating environment. There is also competition in all countries to buy the available leaf tobacco and, in many areas, total leaf tobacco processing capacity exceeds demand.

Seasonality
The purchasing and processing activities of our leaf tobacco business are seasonal. Tobacco purchases vary by market and tobacco variety. Flue-cured tobacco grown in the United States is purchased, processed, and marketed generally during the five-month period beginning in July and ending in November. U.S. grown burley tobacco is purchased, processed, and marketed usually from late November through January or February. Tobacco grown in Brazil is usually purchased, processed, and marketed from January through July and in Africa from April through September.

Other tobacco markets around the world have similar purchasing periods, although at different times of the year. During the purchasing, processing and marketing seasons, inventories of unprocessed tobacco, inventories of redried tobacco and trade accounts receivable normally reach peak levels in succession. Current liabilities, particularly advances from customers and short-term notes payable to banks, normally reach their peak in this period as a means of financing the seasonal expansion of current

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assets. At March 31, the end of our fiscal year, the seasonal components of our working capital reflect primarily the operations related to foreign-grown tobacco.

Research and Development
We routinely cooperate with both our customers and the manufacturers of the equipment used in our leaf processing facilities to improve processing technologies. However, no material amounts are expended for research and development, and we hold no material patents, franchises, or concessions.

Track and Trace Technology
In connection with its leaf tobacco operations, the Company uses a proprietary “track and trace” system, which we have branded as the SENTRISM platform, which we believe provides transparency into the lifecycle of agricultural products by monitoring information and obtaining data related to the growth, cultivation, harvest, processing, formulation, testing, and release of individual batches of products. By obtaining data on products at each stage of the supply chain, SENTRISM permits proactive decision-making for both the Company and its leaf tobacco customers. The key features of the SENTRISM platform include:

Product Tracking: Data collection and tracking at various stages in the product lifecycle permits customers and consumers to gain an understanding of where products originate from, how they were produced, and the product testing data in order to understand ingredients and the product journey.

Control and Visibility: With access to increased data regarding the supply chain, we are able to monitor quality control at various points in the product route to market.

Sustainability Commitments: SENTRISM incorporates visibility into the practices and procedures of the product supply chain.

Lot Number Tracking: We are able to track specific products through the manufacturing process by lot number with full visibility to our customers. This permits us and our customers to discover more about the product, its origin and other information relevant to quality control and product transparency.

Agronomic Services: SENTRISM utilizes an experienced team of agronomists to track data and insights regarding growing practices.

New Business Lines
The new business lines encompass both consolidated operations and investments that are accounted for under the equity method, and generally are early-stage businesses. It is our plan that, as these new businesses further develop and we pursue other diversification opportunities, these business lines will begin to meaningfully contribute to future years’ revenues with a more significant impact toward profitability.

Canadian Cannabis Businesses
On October 17, 2018, legislation in Canada legalizing recreational adult use of cannabis nationwide came into effect. We refer to this legislation as the “Canadian Cannabis Act.” Pursuant to the Canadian Cannabis Act, the production and sale of cannabis products for medical or adult recreational use is subject to licensing by Health Canada and by various provincial authorities. Currently applicable Canadian regulations permit the sale of only dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as “pre-rolled” and capsule products. Pursuant to the Canadian Cannabis Act, certain classes of cannabis products, such as edibles, concentrates and other ingestibles are currently prohibited from sale, but it is contemplated under the Canadian Cannabis Act that such products will be permitted for sale in the future.

FIGR East and FIGR Norfolk operate cannabinoid businesses from their facilities in Charlottetown, Prince Edward Island, and Simcoe, Ontario, respectively. FIGR East is licensed to produce, package and label dried cannabis, fresh cannabis, cannabis seeds, cannabis plants and cannabis oil, and to sell such cannabis products for recreational and medical purposes within Canada in accordance with Canadian regulatory provisions. FIGR Norfolk is licensed to produce dried cannabis, fresh cannabis, cannabis plants and cannabis seeds, and to sell produced cannabis plants and cannabis seeds within Canada in accordance with Canadian regulatory provisions and to sell dried cannabis only in bulk transfers to other licensed producers.

FIGR East
FIGR East currently offers a line of legal cannabinoid consumer products, branded “FIGR”, for sale to the medical and adult-use market, with premium product offerings of dried cannabis flowers, pre-rolls, and cannabis oils containing varying levels of tetrahydrocannabinol (“THC”), the psychoactive compound in cannabis, and CBD intended to appeal to a range of consumer segments. FIGR East has further segmented its consumer products into several product lines, which FIGR East believes offers differentiated benefits to appeal to a broader range of consumer segments and improve price realization.


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FIGR East's existing 24,000 square feet production facility (the “FIGR East Facility”) is a purpose-built indoor cannabis production and hydroponic cultivation facility located on a portion of 13 acres of property owned by FIGR East. The square footage of the FIGR East Facility is allocated as follows:

Cultivation: 10,000 square feet

Other (vault, trim room, drying room, mechanical room, locker rooms): 12,000 square feet

Administrative/office space: 2,000 square feet

The FIGR East Facility’s current annual production capacity is capable of yielding approximately 1,300 kilograms (or approximately 2,800 pounds) of dried cannabis and dried cannabis equivalent products. Being purpose-built for cannabis growing, the FIGR East Facility’s average yield per harvest has improved from 31.35 kilograms (or 69.11 pounds) in 2017 to 50.21 kilograms (or 110.69 pounds) in 2018. FIGR East expects the capacity to further expand as it continues to improve yields through operational improvements.

FIGR East has successfully grown three different varieties of cannabis, with varying levels of THC and CBD. With the contemplated expansion described below, FIGR East intends to grow new varieties of cannabis obtained from FIGR Norfolk to add to the breadth of its consumer product portfolio.

FIGR East’s regulatory license permits it to produce cannabis oil with on-site extraction. The FIGR East Facility has an approximate 4,000 kilogram (or approximate 8,800 pound) maximum annual extraction capacity. FIGR East employs supercritical carbon dioxide extraction equipment at the FIGR East Facility.

FIGR East tests its product for potency, microbiological, heavy metal, and pesticide contamination using third party labs, as well as internal testing processes. These data points are logged and made available to consumers through the SENTRISM platform. FIGR East currently has in-house quality control testing capabilities and employs quality assurance personnel with extensive training, experience, and technical knowledge to monitor the quality of FIGR East products.

A portion of FIGR East’s harvested crop is used for premium dried cannabis flowers and pre-roll consumer products, while additional portions of the harvested crop are processed to extract cannabinoid oils. These oils are currently bottled into oil consumer products, and, as regulations permit, can be further processed into additional consumer products, including vapable products. FIGR East packages and labels its current products, being premium dried cannabis flowers, pre-rolls, and cannabis oils, at the FIGR East Facility.

Once product has been processed and packaged, it is stored in a vault at the FIGR East Facility. The FIGR East Facility has a level 7 vault, which meets Health Canada’s mandated minimum security requirements for Canadian licensed cannabis producers. The FIGR East Facility’s level 7 vault contains various layers of security mechanisms to prevent unauthorized entry, exit and product access, as well as further mechanisms that ensure the safety of the product contained inside the vault. These features include locking mechanisms, smoke detectors, entrance triggers, proximity detectors, alarm systems, guarded ventilation and sufficiently reinforced vault surfaces.

FIGR East is in the process of expanding to add an additional 252,628 square feet of hydroponic cultivation space through the construction of a purpose-built greenhouse on land owned by FIGR East adjacent to the FIGR East Facility (the “Charlottetown Expansion”). In addition, there is an existing 53,574 square foot processing warehouse. FIGR East expects the Charlottetown Expansion to be operational beginning in October 2019, subject to applicable regulatory approvals. The square footage of the Charlottetown Expansion is expected to be allocated as follows:

Phase 1 Greenhouse: 165,772 square feet

Phase 2 Greenhouse: 86,856 square feet

FIGR East expects that the Charlottetown Expansion will become operational in phases so as to provide incremental increases in cultivation capacity until the Charlottetown Expansion is fully operational.

FIGR Norfolk
FIGR Norfolk’s existing facility (the “FIGR Norfolk Facility”) consists of approximately 16,000 square feet of indoor cultivation and processing space owned by FIGR Norfolk. FIGR Norfolk’s license does not currently permit sale to the medical or adult-use market or the extraction and sale of cannabis oil. The existing FIGR Norfolk Facility was previously a metal manufacturing facility. In November 2017, FIGR Norfolk began the process of retrofitting the FIGR Norfolk Facility for cannabis cultivation and processing

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as well as to make the FIGR Norfolk Facility compliant with Health Canada requirements for licensing. The approximate square footage of the FIGR Norfolk Facility is allocated as follows:

Cultivation: 7,034 square feet

Processing area (packaging, extraction, drying, curing, vault): 9,282 square feet

Administrative/office space: 2,746 square feet

The FIGR Norfolk Facility’s current production capacity is capable of yielding approximately 1,100 kilograms (or approximately 2,400 pounds) of dried cannabis and dried cannabis equivalent products. FIGR Norfolk employs hydroponic cultivation methods at the FIGR Norfolk Facility. FIGR Norfolk recently applied for an amendment to Health Canada for its license to permit the production of cannabis oil.

FIGR Norfolk tests its products for potency, microbiological, heavy metal, and pesticide contamination using third party labs, as well as internal testing processes. Upon receiving a license enabling it to sell branded dried cannabis products for sale to consumers, FIGR Norfolk plans to log relevant production data to be made available to consumers through the SENTRISM platform. FIGR Norfolk currently has in-house quality control testing capabilities and employs quality assurance personnel with extensive training, experience, and technical knowledge to monitor the quality of FIGR Norfolk products.

FIGR Norfolk has successfully grown two different varieties of cannabis at the FIGR Norfolk Facility, with varying levels of THC and CBD.

Once product has been processed and packaged, it is stored in a vault at the FIGR Norfolk Facility. The FIGR Norfolk Facility has a level 9 vault, which exceeds Health Canada’s mandated minimum security requirements for Canadian licensed cannabis producers. The FIGR Norfolk Facility’s level 9 vault contains various layers of security mechanisms to prevent unauthorized entry, exit and product access, and further mechanisms that ensure the safety of the product contained inside the vault. Such mechanisms include, without limitation, all of the features implemented at the FIGR East Facility, as well as additional layers of security and/or mechanisms possessing a higher degree of sensitivity to events that they are designed to prevent and/or detect.

Upon receipt of applicable regulatory approvals, FIGR Norfolk anticipates that a portion of its harvested crop will be used for premium dried cannabis flowers and pre-roll consumer products, while additional portions of the harvested crop will be processed to extract cannabinoid oils. Upon receipt of an amendment to its license to permit sales, FIGR Norfolk expects to package and label its product offerings at the FIGR Norfolk Facility.

FIGR Norfolk is planning to construct an additional purpose-built cannabis cultivation and extraction facility (the “Norfolk Expansion”) on a portion of the vacant land adjacent to the existing FIGR Norfolk Facility purchased by FIGR Norfolk in parcels in July 2018 and March 2019. The Norfolk Expansion design includes areas for cultivation, processing, oil production, extract production, edible production, and office space. The Norfolk Expansion design is modular in nature and is intended to accommodate the addition of subsequent phased expansions. FIGR Norfolk plans to break ground on the initial phase of the Norfolk Expansion in the current fiscal year.

FIGR Norfolk intends to rezone the acquired land as appropriate to satisfy the requirements of applicable municipal requirements. The construction of the Norfolk Expansion cannot begin until such rezoning is completed. Subject to successful rezoning and FIGR Norfolk obtaining necessary financing, construction of the Norfolk Expansion is planned to commence in the fourth quarter of 2019, and is expected to be completed in the third quarter of 2021. Subject to receipt of a license from Health Canada, the Norfolk Expansion is expected to be able to begin production in late 2021, with the ability to operate at full capacity by 2022. FIGR Norfolk expects that the licensing process for the Norfolk Expansion will consist of an amendment to its existing license rather than a new license application.

Market and Competition
The current market for the Canadian cannabis businesses of FIGR East and FIGR Norfolk is Canada. Health Canada has issued a limited number of licenses under the Canadian Cannabis Act to produce and sell medical cannabis. As of May 31, 2019, there were limited licensed producers approved by Health Canada. As the demand in Canada for lawfully distributed cannabis products increases, the Company believes that new competitors will continue to attempt to enter the market, some of which may have greater resources than FIGR East and FIGR Norfolk. Additionally, Health Canada may accelerate its processing of applications, which may result in an acceleration in the rate at which applicants become licensed producers.

Subsidiaries of the Company are exploring further international cannabis opportunities as other jurisdictions move towards establishing new or improved medical and/or recreational cannabis systems. As Canada has developed an early regulatory model, companies familiar with that framework have expertise and knowledge that may be useful in expanding to countries adopting

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similar regulatory frameworks. Company subsidiaries will conduct cannabis business activities only in jurisdictions where such activities are permitted by applicable law.

Marketing
The Canadian Cannabis Act places a general ban on promotion of cannabis, cannabis accessories or any service related to cannabis, unless the promotional activity is specifically authorized under the Canadian Cannabis Act. Cannabis products may be promoted at their point of sale if the promotion indicates only its availability and/or price. Further, brand preference and informational promotion is permitted if such promotion is:

in a communication that is addressed and sent to an individual who is 18 years of age or older and is identified by name;

in a place where young persons are not permitted; or

communicated by means of a telecommunication, where the person responsible for the content of the promotion has taken reasonable steps to ensure that the promotion cannot be accessed by a young person.

As a result of the general prohibition against cannabis advertising under the Canadian Cannabis Act, investments in branding and other marketing activities may have limited effect on consumer perception of the products of FIGR East and FIGR Norfolk. FIGR East’s products are marketed under the brand “FIGR”. Subject to applicable regulatory approvals, it is expected that FIGR Norfolk will also market its products under the “FIGR” brand.

The products sold by FIGR East, whether dried flower, pre-roll or cannabis oil, are identified with a production lot number. FIGR East intends to use the SENTRISM platform to permit retailers and consumers to enter the lot number into FIGR East’s website and obtain access to information regarding the production of that specific lot number, including where the product was grown, when it was harvested, the mother plant, terpene profile, cannabinoid content, and third-party testing data. FIGR East believes this commitment to production transparency will differentiate it in the Canadian cannabinoid market. FIGR Norfolk intends to use the same platform for its products following receipt of regulatory approvals permitting it to sell branded dried flower and other cannabis products to retailers for sale to consumers.

Regulation
The Canadian Cannabis Act and the regulations thereunder (the “Canadian Cannabis Regulations”) became effective on October 17, 2018, thereby legalizing the production, distribution, and sale of cannabis for adult non-medicinal (i.e., recreational) purpose, as well as incorporating the existing medical cannabis regulatory scheme under one complete framework. The Canadian Cannabis Regulations, among other things, provide more detailed rules and standards that apply to the legal cultivation, processing, research, testing, distribution, sale, importation, and exportation of cannabis in Canada by federal license holders under the Canadian Cannabis Act.

Pursuant to the federal regulatory framework in Canada, each province and territory may adopt its own laws governing the distribution, sale and consumption of cannabis and cannabis accessories within the province or territory. All Canadian provinces and territories have enacted their own legislation to regulate the distribution and sale of cannabis for recreational purposes within those jurisdictions, and retail models vary between jurisdictions.

The Canadian Cannabis Regulations establish the following different classes of licenses that are required depending on the nature of the activity being undertaken:

Cultivation licenses-standard cultivation, micro-cultivation and nursery cultivation;

Processing licenses-standard processing and micro-processing;

Licenses for sale for medical purposes;

Analytical testing licenses;

Research licenses; and

Cannabis drug licenses.

Each class and subclass of license carries different rules and requirements that are intended to be proportional to the public health and safety risks posed by each license category and subclass. A license, once issued, identifies the specific activities that the licensee is authorized to conduct.


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Licenses that were issued under the predecessor Canadian legislation are deemed to be licenses issued under the Canadian Cannabis Act. Licenses issued under the Canadian Cannabis Act have associated expiry dates and are subject to renewal requirements.

The Canadian Cannabis Act requires that certain individuals associated with a licensee, such as directors, officers, large shareholders and individuals identified by the Canadian Minister of Health (the "Health Minister”) obtain security clearances with Health Canada. The Health Minister will grant a security clearance if the Health Minister determines that the applicant does not pose an unacceptable risk to public health or public safety. The Health Minister may refuse to grant security clearance to individuals with associations to organized crime or with past criminal convictions for, or an association with, drug trafficking, corruption or violent offenses. Under the Canadian Cannabis Act, the Health Minister is also authorized to establish and maintain a national cannabis tracking system, and the Cannabis Tracking and Licensing System (the "CTLS") came into effect on October 17, 2018. The purpose of the CTLS is to track cannabis throughout the supply chain to help prevent diversion of cannabis into, and out of, the legal market. Each license holders are required to submit monthly reports to the Health Minister relating to inventory of its recreational and medical cannabis products under the CTLS.

The Canadian Cannabis Regulations set out the product categories that are permitted for sale. Currently, the Canadian Cannabis Regulations permit the sale of dried cannabis, cannabis oil, fresh cannabis, cannabis plants, and cannabis seeds, including in such forms as "pre-rolled" and capsule products. The THC content and serving size of cannabis products is limited by the Cannabis Regulations. Edibles, cannabis extracts and cannabis topicals are currently not permitted for sale. The Canadian federal government has published proposed amendments to the Canadian Cannabis Regulations, which are not yet in force, to permit the production and sale of these additional classes of cannabis by holders of federal licenses specific for these product classes. The Canadian federal government has communicated its intention to bring the proposed amendments into force by October 17, 2019.

For medical cannabis patients, Health Canada requires that medical documents be written to include the amount of dried cannabis in grams per day a patient may consume. This requirement applies equally to oils.

The Canadian Cannabis Regulations set out strict requirements pertaining to the packaging and labelling of cannabis products. Vendors must package cannabis in a way that is tamper-proof, child-resistant, prevents contamination and ensures dryness. The Canadian Cannabis Regulations also require plain packaging, with strict requirements for logos, colors and branding. For example, all-over packaging wraps must be clear, and the interior surface and exterior surface of any container in which a cannabis product is packaged must be one uniform color. The packaging must also contain the following product information:

product source information, including the class of cannabis and the name, phone number and email address of the cultivator;

a mandatory health warning, rotating between Heath Canada's list of standard health warnings;

the Health Canada standardized cannabis symbol; and

information specifying THC and CBD content.

As described above, the Canadian Cannabis Act places a general ban on promotion of cannabis, cannabis accessories or any service related to cannabis, unless the promotional activity is specifically authorized under the Canadian Cannabis Act. Cannabis products may be promoted at their point of sale if the promotion indicates only their availability and/or price.

The Canadian Cannabis Act provides that the provinces and territories of Canada have authority to regulate certain aspects of recreational cannabis, such as sale and distribution, minimum age requirements, places where cannabis can be consumed, and a range of other matters. All Canadian provinces and territories have enacted regulatory regimes for the distribution and sale of cannabis for recreational purposes within those jurisdictions. There are three general frameworks that the provinces and territories have followed: (i) private cannabis retailers licensed by the province; (ii) government-run retail stores; or (iii) a combination of both frameworks (e.g., privately licensed retail stores, while online retailers are operated by the applicable provincial government).

Regardless of the provincial or territorial framework, the recreational cannabis market in Canada is required to be supplied by federally licensed producers. In many cases, provinces that follow the licensed private retailer model will still have a government-run wholesale distributor. Such licensed private retail stores are or will be required to obtain their cannabis products from the wholesalers, and the wholesalers in turn, are or will be required to obtain the cannabis products from the federally licensed producers. The minimum age for purchase and possession of cannabis in each Canadian jurisdiction is 19 years old, except for Quebec and Alberta, where it is 18.

E-liquids
The Company conducts an e-liquids business through its majority-owned, consolidated subsidiary, Humble Juice, and has investments in unconsolidated joint ventures with involvement in e-liquids businesses, Nicotine River and Purilum. Humble Juice sells branded, flavored e-liquids (that is, the liquid containing tobacco-derived nicotine used in vaporizers, electronic cigarettes,

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and other vaping hardware and accessories) to retailers for sale to consumers. Nicotine River supplies liquid tobacco-derived nicotine to commercial e-liquid producers nationwide and also retails online the materials necessary to permit the home manufacture of e-liquids, including lab equipment, vegetable glycerin, liquid nicotine, propylene glycol, polyethylene glycol, flavor extracts, titration kits and do-it-yourself kits. Purilum develops and manufactures flavors and vapable products.

Nicotine River
Nicotine River is a liquid nicotine supplier to e-liquid manufacturers and do-it-yourself consumers that includes nicotine, flavors, and other components. Nicotine River also provides e-liquid manufacturing and bottling services to business-to-business customers. Nicotine River is registered with the U.S. Food and Drug Administration (“FDA”) as a manufacturer of tobacco products (nicotine containing vaping products). Nicotine River operates out of a 45,000 square foot shared-facility in Thousand Oaks, California. Nicotine River shares this facility with Humble Juice.

Humble Juice
Humble Juice offers consumer flavored e-liquid products under the Humble Juice Co. brand name. Humble Juice is registered with the FDA as a manufacturer of tobacco products (nicotine containing vaping products).Humble Juice operates out of a 45,000 square foot share-facility in Thousand Oaks, California. Humble shares this facility with Nicotine River. Nicotine River performs bottling services for Humble Juice.

Purilum
Purilum offers flavor formulation and development for vaping products, including e-liquids. In addition to creating original flavors for customers, Purilum replicates formulations and flavors, matching brand requirements. In addition, Purilum develops and manufactures vaping products, including vapable oils and nicotine salts, for direct sale, as well as for business-to-business commerce. Purilum has developed a fully-automated bottling and filling service using filling machines. Using in-house developed vapable oil blends and original flavors, cartomizers, bottles and pods are filled and assembled in high volume to meet client demands. Every product manufactured by Purilum is identified with a specific lot number, and Purilum uses the SENTRISM platform for select brands. Historically, Purilum has produced flavors and e-liquid products. Recently, Purilum has been focusing its efforts on expanding its product offering with respect to hemp-derived CBD products and other cannabinoids, as regulations permit.

Purilum operates an 18,000 square foot leased facility located in Greenville, North Carolina (the "Purilum Facility"), which includes on-site research and development capabilities for the design from the molecular level of new flavors and vaping products. Purilum is registered with the FDA as a manufacturer of tobacco products (nicotine containing vaping products).

Competition
The market for the e-liquid products is highly competitive and subject to rapid change and regulatory requirements. While historically the e-liquids niche of the vaping industry had low barriers to entry, recent regulatory requirements in the U.S. have created regulatory hurdles and approvals for new entrants to those markets. The e-liquids market is currently intensifying with continual innovations and upgrades being the primary characteristics of the market. The e-liquids market is highly fragmented, and many of the competitors of each of Humble Juice, Nicotine River and Purilum have significantly greater resources than it does. Each of Humble Juice, Nicotine River and Purilum competes primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price.

Regulation
The U.S. Food and Drug Administration (the “FDA”) has authority to regulate e-liquids, e-cigarettes and other vaping products that contain (or are used to consume e-liquid containing) tobacco-derived ingredients (e.g., nicotine) as "tobacco products" under the federal Food, Drug and Cosmetic Act (the "Food, Drug and Cosmetic Act"), as amended by Family Smoking Prevention and Tobacco Control Act of 2009 (the "Tobacco Control Act"). Based on the December 2010 U.S. Court of Appeals for the D.C. Circuit's decision in Sottera, Inc. v. Food & Drug Administration, the FDA cannot regulate such e-liquids, e-cigarettes and other vaping products as "drugs" or "devices" or "combination products" under the Food, Drug and Cosmetic Act unless they are marketed for therapeutic purposes. Since Humble Juice, Nicotine River and Purilum do not market their respective products for therapeutic purposes, their products that contain tobacco-derived nicotine are subject to regulation as "tobacco products" under the Tobacco Control Act.

Although the FDA is prohibited from issuing regulations banning all cigarettes or all smokeless tobacco products, or requiring the reduction of nicotine yields of a tobacco product to zero, the Food, Drug and Cosmetic Act grants the FDA broad authority to impose restrictions on the design, manufacture, distribution, sale, marketing and packaging of tobacco products. Furthermore, the FDA may be required to issue future regulations regarding the promotion and marketing of tobacco products sold or distributed over the internet, by mail order or through other non-face-to-face transactions in order to prevent the sale of tobacco products to minors. The Food, Drug and Cosmetic Act also required the FDA to establish a Tobacco Products Scientific Advisory Committee to provide advice, information and recommendations with respect to the safety, dependence or health issues related to tobacco products. The FDA's implementation of authorities granted by the Tobacco Control Act could result in a decrease in tobacco product sales in the United States, including the sales of the e-liquid products.

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Following the Sottera decision, the FDA indicated that it intended to regulate e-cigarettes under the Food, Drug and Cosmetic Act through the issuance of "Deeming Regulations" that would subject e-liquids, e-cigarettes, and other vaping products that qualify as "tobacco products" to the Food, Drug and Cosmetic Act's requirements added by the Tobacco Control Act and the FDA's jurisdiction. On May 10, 2016, the FDA issued the "Deeming Regulations," which came into effect August 8, 2016. The Deeming Regulations extended the FDA's "tobacco products" authorities to apply to most previously unregulated products that meet the statutory definition of "tobacco product," including e-liquids, e-cigarettes and other vaping products that contain (or are used to consume e-liquid containing) tobacco-derived ingredients. Deemed tobacco products in this segment include, but are not limited to, e-liquids, atomizers, batteries, cartomizers, clearomisers, tank systems, flavors, bottles that contain e-liquids and programmable software ("Deemed Tobacco Products"). Beginning August 8, 2016, Deemed Tobacco Products became subject to all existing statutory controls initially applicable only to cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco as well as some existing and some new FDA regulations related to the sale and distribution of Deemed Tobacco Products. As a result, Deemed Tobacco Products are now subject to various federal restrictions and requirements, including without limitation:

a prohibition on sales to those younger than 18 years of age and requirements for verification by means of photographic identification by purchasers under 27;

requirements to include addictiveness warnings on product packages and in advertisements;

a ban on vending machine sales unless the vending machines are located in a facility where the retailer ensures that individuals under 18 years of age are prohibited from entering at any time;

requirements for owners and operators of domestic tobacco product manufacturing establishments to register their establishments with the FDA and submit listings of products manufactured at those establishments to the FDA;

requirements for submission of health documents, ingredient listings, and listings of the quantities of harmful and potentially harmful constituents in products and their emissions;

a prohibition on marketing of "new tobacco products" (i.e., products not commercially marketed in the United States "as of" February 15, 2007, or modified in any physical respect since) without prior FDA authorization;

a prohibition on making direct and implied claims of reduced risk such as "light", "low" and "mild" descriptors unless FDA confirms (a) that scientific evidence supports the claim and (b) that marketing the product will benefit public health; and

a ban on the distribution of free samples.

As noted above, the Food, Drug and Cosmetic Act requires that any Deemed Tobacco Product that was not commercially marketed as of the "grandfathering" date of February 15, 2007, obtain premarket approval before it can be marketed in the United States. However, the FDA has announced a compliance policy for such Deemed Tobacco Products that qualify as "new tobacco products" and that the agency will not enforce these requirements for non-finished products (i.e., those intended solely for use in future manufacturing), which include certain products manufactured by Purilum. The current compliance policy allows companies to market finished non-combusted Deemed Tobacco Products that qualify as "new tobacco products" that were on the U.S. market on August 8, 2016, until August 8, 2022, and continued marketing of such products during the FDA's review of a pending marketing application submitted by August 8, 2022. In the absence of this policy, Humble Juice, Nicotine River and Purilum would have had to obtain prior authorization from FDA to market these products after August 8, 2016. Accordingly, such finished e-liquid products all are marketed pursuant to FDA's current compliance policy based on evidence that they were on the U.S. market on August 8, 2016, and have not been physically modified since.

On March 13, 2019, the FDA issued draft guidance to modify the current compliance policy for certain Deemed Tobacco Products that qualify as “new tobacco products,” have not received a marketing authorization from the FDA, and were on the U.S. market on August 8, 2016. Relevant to vaping products (e.g., e-liquids), the guidance proposes to change the deadline for submitting a marketing application for flavored products (other than tobacco-, mint-, and menthol-flavored products) from August 8, 2022, to August 8, 2021. The guidance also proposes that, even during the compliance policy period, the FDA would prioritize enforcement of the premarket review requirements for such flavored products when offered for sale in ways that pose a greater risk for minors to access such products. This includes enforcement against such flavored products sold: (1) in locations that minors may enter at any time; (2) through retailers (including online retailers) that have sold to minors after the FDA finalizes the document, (3) through online retailers lacking sufficient third-party age- and identity-verification services, and (4) through online retailers with no limit on the quantity that a customer may purchase within a given time period. The guidance also proposes that, even during the compliance policy period, the FDA similarly would enforce the premarket review requirements against all vaping products promoted to minors or marketed in a manner likely to promote use by minors. It remains unclear whether or when the FDA will issue a final

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version of the draft guidance document, whether the FDA will finalize the document in the form proposed, precisely how the FDA will implement the proposed policy changes, or whether, in response to potential legal challenges to any final version of the document, the FDA could implement the policies during the pendency of such litigation.

On May 15, 2019, the U.S. District Court for the District of Maryland issued a decision that may have a future impact on the FDA’s compliance policy for deemed “new tobacco products” on the market on the August 8, 2016 effective date of the Deeming Regulations. In response to a complaint filed by public health groups and individual physicians, the court issued an order vacating the guidance document announcing the FDA’s compliance policy described above. The court has ordered briefing on the potential remedy. The court’s decision could ultimately result in the FDA’s establishing a substantially earlier deadline for filing marketing applications for finished, nicotine-containing vaping products than even the August 8, 2021, revised deadline proposed by the FDA in its March 13, 2019 draft guidance. The ultimate outcome of this decision, including any appeals, remains uncertain.

FDA authorization to introduce a "new tobacco product" (or to continue marketing a "new tobacco product" covered by the current or potentially modified compliance policy for Deemed Tobacco Products on the U.S. market on August 8, 2016) could be obtained via any of the following three authorization pathways: (1) submission of a premarket tobacco product application ("PMTA") and receipt of a marketing authorization order; (2) submission of a substantial equivalence report and receipt of a substantial equivalence order; or (3) submission of a request for an exemption from substantial equivalence requirements and receipt of a substantial equivalence exemption determination. The Company cannot predict if the finished, nicotine-containing e-liquid products of Humble Juice, Nicotine River and Purilum, all of which would be considered "new tobacco products," will receive the required premarket approval from the FDA if they were to seek premarket approval through an available authorization pathway.

Since there were few, if any, e-liquid, e-cigarette or other vaping products on the market as of February 15, 2007, there is no way to utilize the less onerous substantial equivalence or substantial equivalence exemption pathways that traditional tobacco corporations can utilize for cigarettes, smokeless tobacco, and other traditional tobacco products. In order to obtain premarket approval, manufacturers of practically all e-liquid, e-cigarette or other vaping products would have to use the PMTA pathway, which could potentially cost hundreds of thousands of dollars or even millions of dollars per application. Furthermore, the Deeming Regulations created a significant barrier to entry for any new e-liquid, e-cigarette or other vaping product seeking to enter the market after August 8, 2016, since any such product would require an FDA marketing authorization through one of the aforementioned pathways.
 
State and local governments also currently regulate tobacco products, including nicotine-containing vaping products. Certain municipalities have enacted local ordinances that prohibit the use of e-liquid, e-cigarette and other vaping products where traditional tobacco-burning cigarettes cannot be used, and certain local jurisdictions have enacted total or partial bans on the sale of flavored tobacco products, including e-liquid, e-cigarette and other vaping products. A growing number of states have imposed excise taxes on e-liquids, e-cigarettes, and other vaping products. Other states and local jurisdictions have increased the minimum age to purchase such products to 19 or 21, have imposed restrictions or prohibitions on internet sales of such products, and have challenged the marketing of such products under consumer protection statutes (e.g., on the basis that certain marketers unlawfully target underage consumers or make unsubstantiated or misleading claims about their products).

On June 7, 2019, Humble Juice received a warning letter from the FDA asserting violations of nicotine-warning-label requirements with respect to certain social media posting regarding Humble Juice’s e-liquid products and potential violations in social media postings requiring the disclosure of connections, if any, with product endorsers. In its warning letter, the FDA requested that Humble Juice respond to the FDA with respect to these matters, with a description of corrective actions and its plan to maintain compliance with the specified regulatory requirements. Humble Juice intends to promptly investigate the matters identified in the warning letter, respond to the FDA as requested and take all necessary corrective actions to maintain compliance with such requirements.

Industrial Hemp
In addition, the Company has an investment in an unconsolidated joint venture, Criticality, which produces a line of industrial hemp-derived CBD products. The Company sources industrial hemp from growers to supply Criticality.

Industrial Hemp Sourcing
The Company contracts with growers on an annual basis to purchase their crop for supply to Criticality. The Company provides growers with growing expertise, best practices, and a dependable route-to-market for their hemp crops. The Company procures industrial hemp from farmers in North Carolina, South Carolina, Virginia, Colorado and New York. Company representatives regularly visit grow locations to provide grower assistance, agronomic expertise, and ensure compliance with quality and regulatory requirements. Criticality’s in-house hemp specialists also visit farmers and supports the Company’s agricultural teams. The Company uses its SENTRISM platform to track products from cultivation and provides that data to Criticality to allow continuous tracking through to extraction, consumer product formulation and packaging, providing consumers of Criticality’s products with transparent insight throughout the supply chain.


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Criticality
Criticality offers a line of industrial hemp-derived CBD products through its consumer brand, "Korent". In May 2019, Criticality launched its "Korent Select" brand of hemp-derived CBD products. The various product classifications are designed to appeal to a range of consumers with varying preferences as to delivery method and CBD concentration. "Korent" currently includes products delivering hemp-derived CBD in vapable oils and oil drops. "Korent Select" includes products delivering hemp-derived CBD in multiple formats, including oil drops and topicals.

Hemp-derived CBD used in Criticality's products is extracted from industrial hemp plant material using Criticality's high pressure carbon dioxide extraction process. Every "Korent" branded product sold by Criticality is identified with a production lot number. Criticality intends to use the SENTRISM platform to enable retailers and consumers to enter the lot number into Korent's website, and view where the product was grown, learn about the farmer behind the product, when it was harvested, its cannabinoid content, and testing and release data. Criticality is currently developing its SENTRISM customer interface, and is offering an alternative customer interface while the SENTRISM interface is being developed.

Criticality operates a CBD extraction facility located in Wilson, North Carolina (the "Criticality Facility"). Criticality currently uses 55,000 square feet of the Criticality Facility, which is leased, while the total square footage of the Criticality Facility is approximately 85,000 square feet, allowing for potential expansion although Criticality does not expect to expand operations at the Criticality Facility in the near-term. CBD extraction operations at the Criticality Facility commenced in April 2019, while Criticality initiated its hemp processing research and development efforts in 2017 at a pilot-scale extraction facility in Hobgood, North Carolina. At the Criticality Facility, Criticality employs its carbon-dioxide based supercritical fluid extraction process to extract CBD oil from industrial hemp plant material. Criticality's products are subject to testing and analysis at multiple points throughout the manufacturing process, which Criticality believes enhances safety, purity, and consistency in its products.

In the case of vapable products and oil drops, Criticality engages with Purilum to prepare such products from the CBD oil provided by Criticality. Criticality places orders with Purilum individually as consumer demands merit, and does not have a fixed contractual arrangement with Purilum. In the case of ingestibles and topical products, Criticality outsources manufacturing to third-party contract manufacturers to prepare finished products for consumers. Purilum and applicable third-party contract manufacturers label and package the finished products according to Criticality's specifications. Following final validation testing of samples, the finished products are released for distribution. Criticality's "Korent" branded products are currently sold in the United States through its website and at select retail locations.

Criticality also offers bulk CBD oil on a business-to-business, direct fulfillment basis.

The market for CBD products is highly competitive and highly fragmented. Many of the Criticality’s competitors have significantly greater resources than it does, access to more retail distribution channels and a longer operating history. Criticality competes primarily on the basis of product quality, brand recognition, brand loyalty, production chain transparency, marketing, advertising and price.

Regulation
In 2014, Congress enacted section 7606 of the Agriculture Act of 2014 (the "2014 Farm Bill"), which provides for the domestic cultivation of industrial hemp as part of agricultural pilot programs adopted by individual states for the purposes of research by state departments of agriculture and institutions of higher education. The 2014 Farm Bill provides for the domestic cultivation of industrial hemp, in those pilot programs, notwithstanding other federal laws such as the Controlled Substances Act. The 2014 Farm Bill governs any current domestic production of industrial hemp.

The 2014 Farm Bill's provisions require states that choose to adopt agricultural pilot programs to do so in order to study the growth, cultivation or marketing of industrial hemp in a manner that (i) ensures that only institutions of higher education and state agriculture departments are used to grow or cultivate industrial hemp; (ii) requires that sites used for growing or cultivating industrial hemp be certified with, and registered by, the states; and (iii) authorizes state agriculture departments to regulate the pilot programs. Within those parameters, the 2014 Farm Bill gives significant discretion to states to determine whether or not to adopt an industrial hemp pilot program, and to adopt regulations governing industrial hemp (including marketing research involving products derived from industrial hemp) under those pilot programs. Many of the states that have adopted pilot programs have registered private companies to participate in the pilot programs. Criticality is a registered processor of industrial hemp under North Carolina’s agricultural pilot program.

Under the 2014 Farm Bill, any cannabis plant, plant part or plant product that contains a higher concentration of THC than permitted in industrial hemp is considered a Schedule I substance under the Controlled Substances Act (i.e., marihuana) and is not protected by the 2014 Farm Bill. In addition, as of the date of this report, any industrial hemp plant, plant part or plant product that is produced outside of a state agricultural pilot program may be considered unlawful but not a controlled substance.


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On December 20, 2018, the Agricultural Improvement Act of 2018 (the "2018 Farm Bill") was enacted. When fully implemented, the 2018 Farm Bill will permit broad commercial production of hemp outside of the current state agricultural pilot programs for industrial hemp. The 2018 Farm Bill, among other things, removes hemp and its derivatives (including cannabinoids such as CBD), from the Controlled Substances Act and amends the Agricultural Marketing Act of 1946 to allow for hemp production and sale in the United States, subject to other laws, including those of the individual states. Most notably, the 2018 Farm Bill did not amend the Food, Drug and Cosmetic Act, which remains applicable to any hemp-derived products, including those containing CBD, sold in interstate commerce.

In place of agricultural pilot programs, the 2018 Farm Bill provides for commercial production of hemp and permits states to assert primary regulatory authority over hemp production, if they choose to do so. States choosing to assert such authority may adopt their own plans for regulating hemp production, which must comply with specified statutory criteria (e.g., that the states identify land where hemp is grown, test hemp for the appropriate THC concentration, adopt procedures to destroy non-conforming plants, and follow the federal enforcement scheme). Those state plans must be approved by the United States Department of Agriculture (the “USDA”), which must promulgate implementing regulations that the agency has indicated will, among other things, establish more-detailed procedures regarding submission and approval of state hemp plans. For hemp production in states without approved plans, producers must comply with an umbrella hemp plan established by the USDA and obtain licenses from the USDA. The USDA is expected to establish the terms of its umbrella hemp plan and the licensure procedures in the same implementing regulations.

The USDA has deferred review and approval of state plans, establishing its umbrella plan for hemp production in states without approved plans, and issuance of federal licenses to producers in such states until the agency promulgates final implementing regulations. Until such time as the USDA issues such final regulations, commercial hemp production under the 2018 Farm Bill cannot legally begin. However, research-related activities involving industrial hemp under the more-restrictive 2014 Farm Bill, such as those permitted by the North Carolina agricultural pilot program, may continue. The USDA has expressed an intention to issue such final regulations in time for producers to cultivate hemp for commercial purposes during the 2020 growing season specifically by August 2019. However, the timing and content of the USDA’s final implementing regulations cannot be assured. Moreover, the 2018 Farm Bill permits states to establish additional restrictions on hemp production and hemp products than required under federal law, although states may not interfere with the interstate transportation of hemp or hemp products produced in compliance with the 2018 Farm Bill. Further, in May 2019, the USDA issued a legal opinion asserting its view that states may not interfere with the interstate transportation of industrial hemp or products derived from industrial hemp produced in compliance with the 2014 Farm Bill, although whether the individual states will heed and reviewing courts will defer to this opinion remains uncertain.

Under the 2018 Farm Bill, any cannabis plant, plant part or plant product that contains a higher concentration of THC than permitted in hemp is still considered a Schedule I substance under the Controlled Substances Act (i.e., marihuana) and is not protected by the 2018 Farm Bill. Further, the 2018 Farm Bill specifies certain consequences for domestic production of hemp in violation of the applicable state or USDA hemp plan. These include potential disqualification from hemp production for a five-year period beginning on the date of a third violation.

Further, under the 2018 Farm Bill, the FDA has retained authority over hemp, including CBD derived from hemp, in products that qualify as regulated articles under the Food, Drug and Cosmetic Act, including foods, drugs, dietary supplements, and cosmetics. The statutory text of that law expressly did not alter authority of the FDA over hemp-derived products, including hemp-derived CBD products, under the Food, Drug and Cosmetic Act. The FDA has committed to regulating hemp-derived products sold in interstate commerce to the extent that they qualify as regulated articles under the Food, Drug, and Cosmetic Act-i.e., they meet the statutory definition of “food,” “drug,” “cosmetic,” etc.

In particular, the FDA has continued to assert its view that the Food, Drug and Cosmetic Act prohibits the marketing of CBD dietary supplements, regardless of whether the CBD is hemp-derived, because CBD was not marketed as a food or dietary supplement prior to the authorization of substantial clinical investigations of CBD-containing drug products. Further, the FDA has continued to assert that CBD cannot be added to conventional food sold in interstate commerce because CBD was not marketed in food prior to the initiation of substantial clinical investigations of CBD-containing drug products. Stakeholders have questioned the validity of the FDA’s stated positions as applied to some or all CBD-containing food or dietary supplement products (e.g., those containing full- or broad-spectrum hemp extracts containing naturally occurring quantities of CBD). Regardless, the FDA has express statutory authority to issue regulations permitting the marketing of CBD dietary supplements and use of CBD as a conventional food additive, although the FDA has never previously used these authorities to promulgate regulations permitting use of active drug ingredients in dietary supplements and conventional foods.

While the FDA has taken preliminary steps to explore the possibility of using these authorities and continues to invite submission of evidence establishing the prior marketing of CBD dietary supplements and CBD-containing foods, there can be no assurance that the FDA will change its current positions or proceed with issuing regulations overriding the statutory provisions on which the agency relies in asserting its current positions. Even if the FDA chooses to proceed with rulemaking, the timing and content of

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any final regulations cannot be assured. In addition, even if FDA ultimately permits the marketing of CBD dietary supplements or CBD-containing conventional foods, such products must otherwise comply with all applicable requirements of the Food, Drug and Cosmetic Act and the FDA’s implementing regulations and policies for these categories of products, including restrictions on the types of claims that marketers may make for them. Additionally, the Federal Trade Commission ("FTC") regulates advertising of all products, including for FDA-regulated articles made from hemp and CBD derived from hemp.

Under the 2014 Farm Bill, many states have adopted agricultural pilot programs to study the growth, cultivation or marketing of industrial hemp. The 2014 Farm Bill provided that “only institutions of higher education and State departments of agriculture are used to grow or cultivate industrial hemp.” States that have chosen to adopt agricultural pilot programs have varied in the extent to which private entities are permitted to participate in those pilot programs and the mechanisms for those commercial entities to do so. A common requirement for those programs is that all sites must be certified by, and registered with, the state agriculture departments. The registration mechanisms vary from state to state.

In North Carolina, where Criticality is based, the state general assembly passed Senate Bill 313 (as amended, the “NC Hemp Act”) on October 31, 2015, establishing a state pilot program to research the cultivation of industrial hemp. Consistent with the 2014 Farm Bill, the NC Hemp Act defined industrial hemp to include any part of the cannabis plant, whether growing or not, with a delta-9 THC concentration of not more than 0.3% on a dry weight basis. The NC Hemp Act further created a North Carolina Industrial Hemp Commission (the “NC Hemp Commission”) to oversee the state’s pilot program. The NC Hemp Commission was charged with, among other things, issuing licenses allowing persons, firms or corporations to cultivate industrial hemp for research purposes. The NC Hemp Act provided that those licensed to grow and cultivate industrial hemp under the pilot program could engage in any of eleven authorized research-related activities, including, among others, studying and investigating marketplace opportunities for hemp products; studying and investigating methods of industrial hemp cultivation; studying the economic feasibility of developing an industrial hemp market in various types of industrial hemp that can be grown in the state, including by commercial marketing and sale of industrial hemp; researching and promoting on the world market industrial hemp and hemp seed that can be grown in the state; and promoting research into the development of industrial hemp and commercial markets for North Carolina industrial hemp and hemp products. The NC Hemp Act also provides for civil and criminal penalties for, among others, those who violate the terms of the act or NC Hemp Commission rules or attempt to disguise marijuana by growing it in close proximity to industrial hemp. The North Carolina Department of Agriculture provides administrative support to the NC Hemp Commission and the research program is managed by State of North Carolina land grant universities. Criticality is a registered processor of industrial hemp under North Carolina’s agricultural pilot program.

In July 2017, the North Carolina Hemp Commission passed a resolution providing guidance to licensed growers, registered processors, registered farm aggregators, and others participants in the North Carolina industrial hemp pilot program. It noted that processed industrial hemp products, specifically excluding viable seeds and/or plants, may be imported into the United States and then freely bought and sold in commerce to the same extent as other like-kind goods. Interpreting the “plain language” of the 2014 Farm Bill, the North Carolina Hemp Commission found that the “marketing of industrial hemp products is part and parcel of what Congress authorized in connection with state pilot programs” and further that the 2014 Farm Bill “placed no restriction upon the marketing of hemp.” The North Carolina Hemp Commission thus reached the “inexorable conclusion that products flowing from lawfully established pilot programs are accorded the same badges of legitimacy and legality as are the imported hemp products specifically protected by the federal court’s decision in Hemp Industries Association,” a Ninth Circuit U.S. Court of Appeals decision which enjoined the enforcement of an FDA rule that would have banned non-hallucinogenic hemp products for human consumption. Based on these findings and an advisory opinion from the North Carolina Department of Justice that “Congress intended to allow industrial hemp grown for research purposes to be transported outside the state of origin,” in order to place North Carolina pilot program participants on the same footing as international growers, processors, wholesalers, and retailers, the North Carolina Hemp Commission resolved that licensed farmers, registered farm aggregators, and processors operating under the North Carolina industrial hemp pilot program may purchase from or sell live industrial hemp plants or seeds or propagules to both international and United States-based suppliers, and further resolved that licensed farmers may sell their industrial hemp crops, including seeds, propagules, plants and plant parts, to local, out of state, and international buyers and processors.

Under the 2018 Farm Bill, states may adopt plans for broader commercial production of hemp outside of agricultural pilot programs and for purposes other than research. The 2018 Farm Bill sets certain broad statutory guidelines for state plans (e.g., that the states identify land where industrial hemp is grown, test industrial hemp for the appropriate THC concentration, adopt procedures to destroy non-conforming plants, and follow the federal enforcement scheme). As discussed above, until the USDA promulgates its final regulations implementing the 2018 Farm Bill’s hemp production provisions, the agency does not plan to approve state plans, authorize commercial hemp production in states without approved state hemp plans under the terms of its umbrella hemp plan, or issue licenses to hemp producers in such states. Thus, industrial hemp production will generally continue to be governed by current state agricultural pilot program regulations, including in North Carolina.

In addition to regulating hemp and industrial hemp under the aegis of the 2014 and 2018 Farm Bills, states regulate hemp and industrial hemp in other ways. States, including North Carolina, have retained regulatory authority through their own analogs to the Food, Drug, and Cosmetic Act and have the authority to regulate the marketing of hemp and industrial hemp products, including

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CBD products, in food, drugs, dietary supplements and cosmetics, as well as the claims made about them. Some states have adopted the FDA’s positions regarding CBD dietary supplements and CBD in conventional foods. Other states have not established industrial hemp pilot programs or otherwise prohibit the sale of all or certain hemp and industrial hemp products, including CBD products, under state controlled substances laws that do include the same exceptions for excluded parts and hemp found in the federal Controlled Substances Act, as amended by the 2018 Farm Bill, or that restrict the sale of such products only for certain limited medical uses. Some states’ industrial hemp pilot programs restrict or prohibit the marketing of all or certain industrial hemp products. In addition, the sales and marketing of hemp and industrial hemp products, including CBD products, are subject to regulation by state consumer regulatory and health agencies, and are subject to enforcement actions by state attorneys general.

Criticality currently processes industrial hemp sourced from and grown by licensed growers operating under North Carolina’s agricultural pilot program. It may in the future source industrial hemp from growers located in and operating under the agricultural pilot programs of other states. It also may in the future source hemp cultivated under the 2018 Farm Bill from growers operating under approved state plans or under the USDA’s umbrella plan. Further, consistent with the research purposes articulated in the North Carolina Hemp Act and North Carolina Hemp Commission guidance, Criticality sells industrial hemp-derived products, including CBD products, to consumers in other states. Accordingly, Criticality’s industrial hemp activities are and likely will continue to be governed by a complex fabric of rapidly evolving and sometimes-conflicting federal and state laws and regulations, including among others the unique and varied laws of the states from which Criticality sources its hemp and industrial hemp and to which Criticality ships its products. The Company cannot provide assurance that all states will amend their laws to mirror the federal Controlled Substances Act’s exclusions for hemp or otherwise permit the broad commercial distribution of hemp-derived products, including CBD products.

Pyxus Employees
Pyxus' consolidated entities employed approximately 3,347 persons, excluding seasonal employees, in our worldwide operations at March 31, 2019. In the Leaf - Other Regions operating segment, Pyxus' consolidated entities employed approximately 2,753 employees at March 31, 2019, excluding approximately 6,039 seasonal employees. Most seasonal employees are covered by collective bargaining agreements. In the Leaf - North America operating segment, Pyxus' consolidated entities employed approximately 462 employees at March 31, 2019, excluding approximately 90 seasonal employees. Most seasonal employees, as well as approximately 159 full-time factory personnel in the United States, are covered by collective bargaining agreements. In the Other Products and Services operating segment, Pyxus' consolidated entities employed approximately 132 employees at March 31, 2019. We consider the Company's employee relations to be satisfactory.

Government Regulation and Environmental Compliance
See Item 1A. “Risk Factors - Risks Relating to the Tobacco Industry” for a discussion of additional government regulation. Currently, there are no material estimated capital expenditures related to environmental control facilities. In addition, there is no material effect on capital expenditures, results of operations or competitive position anticipated as a result of compliance with current or pending federal or state laws and regulations relating to protection of the environment.

Executive Officers of Pyxus International, Inc.
The following information is furnished with respect to the Company's executive officers as of April 1, 2019, and the capacities in which they serve. These officers serve at the pleasure of the Board of Directors and are elected at each annual organizational meeting of the Board.

Name
Age
Title
J. Pieter Sikkel
55
President and Chief Executive Officer
Tracy G. Purvis
56
Executive Vice President - Business Services
Joel L. Thomas
52
Executive Vice President - Chief Financial Officer
Laura D. Jones
51
Senior Vice President - Human Resources
William L. O’Quinn, Jr.
50
Senior Vice President - Chief Legal Officer and Secretary

The business experience summaries provided below for the Company's executive officers describe positions held by the named individuals during the last five years.

J. Pieter Sikkel has served as President and Chief Executive Officer of Pyxus International, Inc., since March 2013, having previously served as President from December 14, 2010 through February 2013, Executive Vice President - Business Strategy and Relationship Management from May 2007 through December 13, 2010, and as Regional Director of Asia from May 2005 through April 2007.

Tracy G. Purvis has served as Executive Vice President - Business Services since February 2019, having previously served as Senior Vice President - Business Services from September 2018 through January 2019, Vice President - Global Information Services

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from January 2011 through August 2018, Vice President - Chief Application Architect from April 2009 through December 2010, and as Vice President - Chief Technology Officer from May 2005 through March 2009.

Joel L. Thomas has served as Executive Vice President - Chief Financial Officer since January 2014, having previously served as Vice President - Treasurer from December 2005 through December 2013.

Laura D. Jones has served as Senior Vice President - Human Resources since September 2018, having previously served as Vice President - Human Resources from January 2011 through August 2018, Vice President - Human Capital from August 2009 through December 2010, and as Vice President - Compensation and Benefits from May 2005 through July 2009.

William L. O’Quinn, Jr. has served as Senior Vice President - Chief Legal Officer and Secretary since April 2011, having previously served as Senior Vice President - Assistant General Counsel and Secretary from January 2011 through March 2011, and as Assistant General Counsel and Assistant Secretary from August 2005 through December 2010.


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Item 1A. Risk Factors

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report on Form 10-K. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report.

We may from time to time make written or oral forward-looking statements, including statements contained in filings with the SEC, in reports to stockholders and in press releases and investor calls and webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in Pyxus International, Inc. securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important risk factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time.

Risks Relating to Our Capital Structure

We may not continue to have access to the capital markets to obtain long-term and short-term financing on acceptable terms and conditions.
We access the short-term capital markets and, from time to time, the long-term markets to obtain financing. Our access to, and the availability of acceptable terms and conditions of, such financing are impacted by many factors, including: (i) our credit ratings; (ii) the liquidity and volatility of the overall capital markets; and (iii) the current state of the economy, including the tobacco industry. There can be no assurances that we will continue to have access to the capital markets on terms acceptable to us.

We may not have access to available capital to finance our local operations in non-U.S. jurisdictions.
We have typically financed our non-U.S. local operations with uncommitted short-term operating credit lines at the local level. These operating lines are typically seasonal in nature, normally extending for a term of 180 to 270 days corresponding to the tobacco crop cycle in that location. These facilities are typically uncommitted in that the lenders have the right to cease making loans or demand payment of outstanding loans at any time. In addition, each of these operating lines must be renewed with each tobacco crop season in that jurisdiction. Although our foreign subsidiaries are the borrowers under these lines, many of them are guaranteed by us.

As of March 31, 2019, we had approximately $429.0 million drawn and outstanding on short-term seasonal lines with maximum capacity totaling $795.9 million, subject to limitations under our asset-based revolving credit facility (the "ABL Facility"). Additionally against these lines there was $10.7 million available in unused letter of credit capacity with $5.4 million issued but unfunded.

Because the lenders under these operating lines typically have the right to cancel the loan at any time and each line must be renewed with each crop season, there can be no assurance that this capital will be available to our subsidiaries. If a number of these lenders cease lending to our subsidiaries or dramatically decrease such lending, it could have a material adverse effect on our liquidity.

Failure of foreign banks in which our subsidiaries deposit funds or the failure to transfer funds or honor withdrawals may affect our results of operations.
Funds held by our foreign subsidiaries are often deposited in their local banks. Banks in certain foreign jurisdictions may be subject to a higher rate of failure or may not honor withdrawals of deposited funds. In addition, the countries in which these local banks operate may lack sufficient regulatory oversight or suffer from structural weaknesses in the local banking system. Due to uncertainties and risks relating to the political stability of certain foreign governments, these local banks also may be subject to exchange controls and therefore unable to perform transfers of certain currencies. If our ability to gain access to these funds was impaired, it could have a material adverse effect on our results of operations.


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We may not be able to satisfy the covenants included in our financing arrangements, which could result in the default of our outstanding debt obligations.
The agreement governing the ABL Facility includes certain restrictive covenants and a springing covenant requiring that our fixed charge coverage ratio be no less than 1.00 to 1.00 during any period commencing at any time that the excess borrowing availability under the ABL Facility is less than a specified amount and ending on the first date after excess borrowing availability has been equal to or greater than such specified amount for a period of 30 consecutive days. The agreements governing our other indebtedness and the indentures governing our 8.500% senior secured first lien notes due 2021 (the “senior secured first lien notes”) and our 9.875% senior secured second lien notes due 2021 (the “senior secured second lien notes," and, together with the senior secured first lien notes, the "senior notes") also include restrictive covenants. Prior to the establishment of the ABL Facility, we sought and obtained waivers and amendments under our existing financing arrangements to avoid future non-compliance with financial covenants and cure past defaults under restrictive covenants. We also paid significant fees to obtain these waivers and consents. You should consider this in evaluating our ability to comply with financial and restrictive covenants in our debt instruments and the financial costs of our ability to do so. Any future defaults for which we do not obtain waivers or amendments could result in the acceleration of a substantial portion of our indebtedness, much of which is cross-defaulted to other indebtedness.

We have substantial debt which may adversely affect us by limiting future sources of financing, interfering with our ability to pay interest and principal on the senior notes and subjecting us to additional risks.
We have a significant amount of indebtedness and debt service obligations. As of March 31, 2019, we had approximately $1,327.7 million. If we incur additional indebtedness to our current indebtedness levels, including borrowings under the ABL Facility or other short or long-term credit facilities, the related risks that we now face could increase.
   
Our substantial debt could have important consequences, including:
making it more difficult for us to satisfy our obligations with respect to the senior notes and our other obligations;
limiting our ability to obtain additional financing on satisfactory terms and to otherwise fund working capital, capital expenditures, debt refinancing, acquisitions and other general corporate requirements;
a significant portion of our cash flow from operations must be dedicated to paying interest on and the repayment of the principal of our indebtedness. This reduces the amount of cash we have available for making principal and interest payments under the senior notes and for other purposes and makes us more vulnerable to a decrease in demand for leaf tobacco, increases in our operating costs or general economic or industry conditions;
our ability to adjust to changing market conditions and to compete with other global leaf tobacco merchants may be hampered by the amount of debt we owe;
increasing our vulnerability to general adverse economic and industry conditions;
placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
restricting us from making strategic acquisitions or exploiting business opportunities.

In addition, the agreement governing the ABL Facility and the indentures governing the senior notes each contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with certain covenants within the ABL Facility could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debt. Also, a substantial portion of our debt, including any borrowings under the ABL Facility, bears interest at variable rates. If market interest rates increase, variable-rate debt will create higher debt service requirements, which would adversely affect our cash flow. While we may enter into agreements limiting our exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.

Despite current indebtedness levels, we may still be able to incur substantially more debt. This could exacerbate further the risks associated with our significant leverage.
We may be able to incur substantial additional indebtedness in the future under the terms of the indentures governing the senior notes and the agreement governing the ABL Facility. The ABL Facility provides for a revolving credit line of up to $60.0 million subject to a borrowing base of eligible inventory and accounts receivable, and under certain conditions, we may solicit the lenders under the ABL Facility or other prospective lenders to provide additional revolving loan commitments under the ABL Facility in an aggregate amount not to exceed $15.0 million (less the aggregate principal amount of any additional notes issued under the indenture governing the senior secured first lien notes). As of March 31, 2019, we had no outstanding borrowings under the ABL Facility and $60.0 million, subject to limitations under the ABL Facility, was available for borrowing under the ABL Facility and an additional $361.6 million was available for borrowing under other short and long-term credit facilities, including $5.3 million with respect to issued but unfunded letters of credit. If new debt is added to our current debt levels, the risks discussed above could intensify.

Our debt agreements will contain restrictions that limit our flexibility in operating our business.
The agreement governing the ABL Facility and the indentures governing the senior notes contain a number of significant covenants. These covenants limit our ability to, among other things:


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incur additional indebtedness or issue disqualified stock or preferred stock;
make investments;
pay dividends and make other restricted payments;
sell certain assets;
create liens;
enter into sale and leaseback transactions;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with our affiliates; and
designate our subsidiaries as unrestricted subsidiaries.

In addition, the ABL Facility requires us to periodically satisfy a fixed charge coverage ratio during any period commencing at any time that excess borrowing availability is less than a specified amount and ending on the first date after excess borrowing availability has been equal to or greater than such specified amount for a period of 30 consecutive days. Complying with these covenants and tests may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take. The failure to comply with these covenants and tests would cause a default under the ABL Facility and under the indentures governing the senior notes and would prevent us from taking certain actions, such as incurring additional debt, paying dividends or redeeming the senior secured first lien notes, the senior secured second lien notes or any subordinated debt. A default, if not waived, could result in the debt under the ABL Facility and the indentures governing the senior notes becoming immediately due and payable and could result in a default or acceleration of our other indebtedness with cross-default provisions. If this occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be on terms that are acceptable to us.

We will require a significant amount of cash to service our indebtedness. Our ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including the senior notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the ABL Facility or otherwise in an amount sufficient to enable us to pay our indebtedness, including the senior notes, or to fund our other liquidity needs.

We may not be able to refinance or renew our indebtedness, including the senior notes and the ABL Facility, or be able to borrow under the ABL Facility or other future credit facilities, which may have a material adverse effect on our financial condition.
Loans under the ABL Facility will mature on January 14, 2021. We may not be able to renew or refinance the ABL Facility or other indebtedness, including the senior secured notes, on substantially similar terms, or at all. We may have to pay additional fees and expenses that we might not have to pay under normal circumstances, and we may have to agree to terms that could increase the cost of our debt structure. If we are unable to renew or refinance the ABL Facility, the senior notes or our other indebtedness on terms which are not materially less favorable than the terms currently available to us or obtain alternative or additional financing arrangements, we may not be able to repay the ABL Facility, the senior notes or certain of our other indebtedness, which may result in a default under other indebtedness.

We may need to refinance all or a portion of our indebtedness, including the ABL Facility, the senior secured first lien notes and the senior secured second lien notes, on or before maturity. Additionally, to the extent permitted under the agreement governing the ABL Facility and indentures governing the senior secured first lien notes and the senior secured second lien notes, we may repurchase, repay or tender for our bank debt, senior secured first lien notes and the senior secured second lien notes or other debt, which may place pressure on future cash requirements to the extent that the debt repurchased, repaid or tendered cannot be redrawn.

Risks Relating to Our Tobacco Operations

Our reliance on a small number of significant customers may adversely affect our financial statements.
The customers of our leaf tobacco business are manufacturers of cigarette and other tobacco products. Several of these customers individually account for a significant portion of our sales in a normal year.

For the year ended March 31, 2019, each of Philip Morris International, Inc., China Tobacco International Inc. and Imperial Brands, PLC, including their respective affiliates, accounted for more than 10% of our revenues from continuing operations. In addition, tobacco product manufacturers have experienced consolidation and further consolidation among our customers could decrease such customers’ demand for our leaf tobacco or processing services. The loss of any one or more of our significant customers could have a material adverse effect on our financial statements.


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Continued vertical integration by our customers could materially adversely affect our financial statements.
Demand for our leaf tobacco or processing services could be materially reduced if cigarette manufacturers continue to significantly vertically integrate their operations, either through acquisition of our competitors, establishing new operations or contracting directly with suppliers. Japan Tobacco, Inc. has vertically integrated operations in Malawi, Brazil and the United States. In addition, Philip Morris International, Inc. acquired supplier contracts and related assets in Brazil in order to procure leaf directly. In general, our results of operations have been adversely affected by vertical integration initiatives. Although some customers have reversed certain aspects of their previous vertical integration of operations, further vertical integration by our customers could have a material adverse effect on our financial statements.

Global shifts in sourcing customer requirements may negatively affect our organizational structure and asset base.
The global leaf tobacco industry has experienced shifts in the sourcing of customer requirements for tobacco. For example, significant tobacco production volume decreases have occurred in the United States and Europe from historical levels. At the same time, production volumes in other sourcing origins have stabilized. Additional shifts in sourcing may occur as a result of currency fluctuations, including changes in currency exchange rates against the U.S. dollar, the imposition of tariffs and other changes in international trade policies. A shift in sourcing origins in Europe has been influenced by modifications to the tobacco price support system in the European Union (EU). Customer requirements have changed due to these variations in production, which could influence our ability to plan effectively for the longer term in the United States and Europe.

We may not be able to timely or efficiently adjust to shifts in sourcing origins, and adjusting to shifts may require changes in our production facilities in certain origins and changes in our fixed asset base. We have incurred, and may continue to incur, restructuring charges as we continue to adjust to shifts in sourcing. Adjusting our capacity and adjusting to shifts in sourcing may have an adverse impact on our ability to manage our costs, and could have an adverse effect on our financial performance.

Our financial results will vary according to growing conditions, customer indications and other factors, which reduces your ability to gauge our quarterly and annual financial performance.
Our financial results, particularly the quarterly financial results, may be significantly affected by fluctuations in tobacco growing seasons and crop sizes which affect the supply of tobacco. Crop sizes may be affected by, among other things, crop infestation and disease, the volume of annual tobacco plantings and yields realized by supplier and suppliers' elections to grow crops other than tobacco. The cultivation period for tobacco is dependent upon a number of factors, including the weather and other natural events, such as hurricanes or tropical storms, and our processing schedule and results of operations for any quarterly period can be significantly altered by these factors.

The cost of acquiring tobacco can fluctuate greatly due to crop sizes and increased competition in certain markets in which we purchase tobacco. For example, short crops in periods of high demand translate into higher average green prices, higher throughput costs and less volume to sell. Furthermore, large crops translate into lower average green prices, lower throughput costs and excess volume to sell.

The timing and unpredictability of customer indications, orders and shipments cause us to keep tobacco in inventory, increase our risk and result in variations in quarterly and annual financial results. The timing of shipments can be materially impacted by shortages of containers and vessels for shipping as well as infrastructure and accessibility issues in ports we use for shipment. We may, from time to time in the ordinary course of business, keep a significant amount of processed tobacco in inventory for our customers to accommodate their inventory management and other needs. Sales recognition by us and our subsidiaries is based on the passage of ownership, usually with shipment of product. Because individual shipments may represent significant amounts of revenue, our quarterly and annual financial results may vary significantly depending on our customers’ needs and shipping instructions. These fluctuations result in varying volumes and sales in given periods, which also reduces your ability to compare our financial results in different periods or in the same periods in different years.

Suppliers who have historically grown tobacco and from whom we have purchased tobacco may elect to grow other crops instead of tobacco, which affects the world supply of tobacco and may impact our quarterly and annual financial performance.
Increases in the prices for other crops have led and may in the future lead suppliers who have historically grown tobacco, and from whom we have purchased tobacco, to elect to grow these other, more profitable, items instead of tobacco. A decrease in the volume of tobacco available for purchase may increase the purchase price of such tobacco. As a result, we could experience an increase in tobacco crop acquisition costs which may impact our quarterly and annual financial performance.

Our advancement of inputs to tobacco suppliers could expose us to losses.
Advances to tobacco suppliers are settled as part of the consideration paid upon the suppliers delivering us unprocessed tobacco at market prices. Two primary factors determine the market value of the tobacco suppliers deliver to us: the quantity of tobacco delivered and the quality of the tobacco delivered. Unsatisfactory quantities or quality of the tobacco delivered could result in losses with respect to advances to our tobacco suppliers or the deferral of those advances.


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When we purchase tobacco directly from suppliers, we bear the risk that the tobacco will not meet our customers’ quality and quantity requirements.
In countries where we contract directly with tobacco suppliers, we bear the risk that the tobacco delivered will not meet quality and quantity requirements of our customers. If the tobacco does not meet such market requirements, we may not be able to sell the tobacco we agreed to buy and may not be able to meet all of our customers’ orders, which would have an adverse effect on our profitability and results of operations.

Weather and other conditions can affect the marketability of our inventory.
Like other agricultural products, the quality of tobacco is affected by weather and the environment, which can change the quality or size of the crop. If a weather event is particularly severe, such as a major drought or hurricane, the affected crop could be destroyed or damaged to an extent that it would be less desirable to our customers, which would result in a reduction in revenues. If such an event is also widespread, it could affect our ability to acquire the quantity of products required by customers. In addition, other items can affect the marketability of tobacco, including, among other things, the presence of:

non-tobacco related material;
genetically modified organisms; and
excess residues of pesticides, fungicides and herbicides.

A significant event impacting the condition or quality of a large amount of any of the tobacco crops we buy could make it difficult for us to sell such tobacco or to fill our customers’ orders. In addition, in the event of climate change, adverse weather patterns could develop in the growing regions in which we purchase tobacco. Such adverse weather patterns could result in more permanent disruptions in the quality and size of the available crop, which could adversely affect our business.

We face increased risks of doing business due to the extent of our international operations.
Some of the countries we do business in do not have stable economies or governments. Our international operations are subject to international business risks, including unsettled political conditions, uncertainty in the enforcement of legal obligations, including the collection of accounts receivable, fraud risks, expropriation, import and export restrictions, exchange controls, inflationary economies, currency risks and risks related to the restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries. These risks are exacerbated in countries where we have advanced substantial sums or guaranteed local loans or lines of credit for the purchase of tobacco from suppliers. For example, in 2006 as a result of the political environment, economic instability, foreign currency controls and governmental regulations in Zimbabwe, we deconsolidated our Zimbabwe subsidiary, Mashonaland Tobacco Company LTD ("MTC"). Subsequently, we determined that the significant doubt about our ability to control MTC was eliminated and reconsolidated MTC as of March 31, 2016.

Our international operations are in areas where the demand is for the export of lower priced tobacco. We have significant investments in our purchasing, processing and exporting operations in Argentina, Brazil, Malawi, Tanzania and Turkey.

In recent years, economic problems in certain African countries have received wide publicity related to devaluation and appreciation of the local currency and inflation, including the classification of Malawi's economy as highly inflationary, the shortage of U.S. dollars in Zimbabwe for exchange for local currency equivalents, and fluctuations in the Zimbabwe local currency equivalent exchange rate. Devaluation and appreciation of the local currency and inflation can affect our purchase costs of tobacco and our processing costs. In addition, we conduct business with suppliers and customers in countries that have relatively recently had or may be subject to dramatic political regime change. In the event of such dramatic changes in the government of such countries, we may be unable to continue to operate our business, or adequately enforce legal obligations, after the change in a manner consistent with prior practice. 

We are subject to the Foreign Corrupt Practices Act (the “FCPA”) and we operate in jurisdictions that pose a high risk of potential FCPA violations.
We are subject to the FCPA, which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations. Although our corporate policy prohibits foreign bribery and we have adopted procedures to promote compliance, there is no assurance that our policy or procedures will work effectively all of the time or protect us against liability under the FCPA for actions taken by our agents, employees and intermediaries with respect to our business or any businesses that we acquire. Failure to comply with the FCPA, other anti-corruption laws and other laws governing the conduct of business with government entities (including local laws) could lead to criminal and civil penalties and other remedial measures (including further changes or enhancements to our procedures, policies, and controls, the imposition of a compliance monitor at our expense and potential personnel changes and/or disciplinary actions), any of which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign authorities also could have an adverse impact on our business, financial condition, and results of operations.


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In 2010, we entered into settlements with the SEC and the U.S. Department of Justice to resolve their investigations regarding potential criminal and civil violations of the FCPA. The settlements resulted in the disgorgement in profits and fines totaling $19.45 million, which have been paid. Both settlements also required us to retain an independent compliance monitor for a three-year term that was completed September 30, 2013.

Our exposure to foreign tax regimes, and changes in U.S. or foreign tax regimes, could adversely affect our business.
We do business in countries that have tax regimes in which the rules are not clear, are not consistently applied and are subject to sudden change. This is especially true with regard to international transfer pricing. Our earnings could be reduced by the uncertain and changing nature of these tax regimes. Certain of our subsidiaries are and may in the future be involved in tax matters in foreign countries. While the outcome of any of these existing matters cannot be predicted with certainty, we are vigorously defending them and do not currently expect that any of them will have a material adverse effect on our business or financial position. However, should one or more of these matters be resolved in a manner adverse to our current expectation, the effect on our results of operations for a particular fiscal reporting period could be material.

We seek to optimize our tax footprint across all operations in U.S. and non-U.S. jurisdictions alike. These benefits are contingent upon existing tax laws and regulations in the U.S. and in the countries in which our international operations are located. Future changes in domestic or international tax laws and regulations could adversely affect our ability to continue to realize these tax benefits. The Tax Cuts and Jobs Act of 2017 (“Tax Act”) changed corporate tax rates, the taxation of foreign earnings and the deductibility of expenses, among other things. The Tax Act materially impacted the recoverability of our deferred tax assets, resulting in a significant one-time change in the quarter ended December 31, 2017, the period in which the Tax Act was is enacted. Other provisions of the Tax Act, including limitations on the deductibility of interest expense and tax on Global Intangible Low-Taxed Income (“GILTI”) will continue to materially affect the Company’s effective tax rate. The final impact of the Tax Act, including regulations to be adopted thereunder, changes in interpretations, and additional guidance that may be issued, unexpected negative changes in business and market conditions, may reduce certain tax benefits initially considered to be available.

Fluctuations in foreign currency exchange and interest rates could adversely affect our results of operations.
We conduct our business in many countries around the world. Our business is generally conducted in U.S. dollars, as is the business of the leaf tobacco industry as a whole. We generally must purchase tobacco in non-U.S. countries using local currency. As a result, local country operating costs, including the purchasing and processing costs for tobaccos, are subject to the effects of exchange fluctuations of the local currency against the U.S. dollar. When the U.S. dollar weakens against foreign currencies, our costs for purchasing and processing tobacco in such currencies increases. We attempt to minimize such currency risks by matching the timing of our working capital borrowing needs against the tobacco purchasing and processing funds requirements in the currency of the country where the tobacco is grown. Fluctuations in the value of foreign currencies can significantly affect our operating results.

In addition, the devaluation of foreign currencies has resulted and may in the future result in reduced purchasing power from customers whose capital resources are denominated in those currencies. We may incur a loss of business as a result of the devaluation of these currencies now or in the future. For example, there has been a recent widening of the effective exchange rate in the local currency equivalent in Zimbabwe. If this trend continues, our results of operations could be adversely affected.

Competition could erode our earnings.
The leaf tobacco industry is highly competitive. Competition is based primarily on the prices charged for products and services as well as the merchant’s ability to meet customer specifications in the buying, processing and financing of tobacco. In addition, there is competition in all countries to buy the available tobacco. The loss or substantial reduction of any large or significant customer could reduce our earnings.

In addition to the two primary global independent publicly held leaf tobacco merchants, the cigarette manufacturers increasingly buy tobacco directly from suppliers. We also face increasing competition from new local and regional independent leaf merchants with low fixed costs and overhead and good customer connections at the local level, where the new entrants have been able to capitalize in the global transition to those markets. Any of these sources of new competition may result in less tobacco available for us to purchase and process in the applicable markets.

Risks Related to New Business Lines

Our investments in new business lines as part of our expanded business strategy have been in companies with limited histories that are operating in newly developing markets and are subject to numerous risks and uncertainties.
Our investments, including indirect investments, in FIGR East, FIGR Norfolk, Criticality, Purilum, Nicotine River, and Humble Juice (collectively, the "new business lines") and the operation of these businesses, involve a high degree of risk. These investments are in businesses with limited operating histories and are dependent upon receipt of requisite licenses and approvals. We cannot assure you that as these operations further develop they will be profitable or otherwise sustainable. While certain of these businesses involve the cultivation and/or processing of agricultural products similar in certain ways to leaf tobacco, and accordingly share

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commonality with our agronomy, traceability and agricultural product processing expertise, they are subject to commercial and regulatory challenges different from our historical businesses and with respect to which we do not have the same level of experience. In addition, these businesses are subject to numerous additional risks and uncertainties, including those specified in the risk factors below.

Cannabis for adult use was only recently legalized in Canada. As a result, the industry and the regulations governing the industry are rapidly developing, and if they develop in ways that differ from the Company’s expectations, its business and results of operations may be adversely impacted.
The Canadian Cannabis Act federally legalized adult-use (non-medical) cannabis in Canada effective as of October 17, 2018. Under the Canadian Cannabis Act, each province and territory of Canada has the ability to separately regulate the distribution and sale of cannabis within such province or territory, and the laws (including associated regulations) adopted by each province and territory may vary significantly. Each Canadian province and territory has enacted and implemented regulatory regimes for the distribution and sale of cannabis for adult use; however, there is no guarantee that provincial and territorial legislation regulating the distribution and sale of cannabis for adult use, or the application and enforcement of such legislation, will not change in the future. Any such change could result in significant additional compliance or other costs and may make participation in such markets uneconomical. Since cannabis was only recently legalized in Canada, there may be inconsistencies in the interpretation and enforcement of the Canadian Cannabis Act and associated provincial and territorial rules and regulations. In addition, Health Canada has experienced delays in approving applications for new licenses, capacity expansions and employee security checks, including with respect to the Norfolk Expansion and the Charlottetown Expansion, and the approval of certain members of management to perform functions requiring regulatory approval. Additional inconsistencies, changes or delays could have a material adverse effect on the business, financial condition, and results of operations of FIGR East and FIGR Norfolk.

In addition, regulations are continuing to be developed for different aspects of the adult-use cannabis industry in Canada. For example, the Canadian federal government has published draft regulations governing the production and consumption of edible cannabis and cannabis-derived products (such as cannabis extracts and cannabis topicals), the sale of which is not currently permissible. If FIGR East and FIGR Norfolk begins to offer edible cannabis products once such products are legalized, they will need to assess the final rules and regulations. The regulations and market for such products and adult-use cannabis generally may not develop, or may not develop as the Company expects, which could have a material adverse effect on FIGR East and FIGR Norfolk’s business, financial condition, and results of operations.

In Canada, the federal and provincial or territorial legislation and regulatory regimes for cannabis products also include excise duties payable by licensed cannabis producers on adult-use cannabis products, in addition to goods and services tax or harmonized sales tax in certain provinces and territories. The rate of the excise duties for cannabis products varies by province and territory. Any significant increase in the rate of excise duties on cannabis products in the future could reduce consumer demands for cannabis products and adversely impact the adult-use cannabis industry and market in general. In addition, any increase in the rate of excise duties on cannabis products in the future could reduce the margins and profitability of FIGR East and FIGR Norfolk in the event that they could not, or chose not to, pass along such increases to consumers.

The cannabis industry and market are relatively new in Canada, and this industry and market may not continue to exist or grow as anticipated or the Company may ultimately be unable to succeed in this industry and market.
FIGR East and FIGR Norfolk are operating in a relatively new cannabis industry and market. They face inherent challenges associated with being in a new market, including establishing reliable agricultural supply chains and modernizing processing and manufacturing to compete with other market participants. In addition to being subject to general business risks associated with a business involving an agricultural product and regulated consumer products, these subsidiaries need to continue to build brand awareness in the Canadian adult-use cannabis industry and market through significant investments in strategy, production capacity, quality assurance and compliance with regulations. These activities may not promote their brands and products as effectively as intended, or at all. Competitive conditions, consumer tastes, patient requirements and spending patterns in this new industry and market are relatively unknown and may have unique circumstances that differ from existing industries and markets.

Accordingly, we cannot assure you that these industries and markets will continue to exist or grow as currently estimated or anticipated, or function and evolve in a manner consistent with management's expectations and assumptions. Any event or circumstance that affects the legal cannabis industry and markets could have a material adverse effect on the Company’s business, financial condition, and results of operations.

Further, the growth of the Canadian adult-use cannabis industry is restricted by limitations on sales and marketing activities imposed by Health Canada, various medical associations, and other governmental or quasi-governmental bodies or voluntary industry associations, which may adversely affect FIGR Norfolk and FIGR East’s ability to conduct sales and marketing activities and could have a material adverse effect on their businesses, operating results and financial conditions.



25


Pyxus and its U.S. subsidiaries may be unable to receive any funds generated by FIGR Norfolk and FIGR East and such funds may not be used to fund the payment of obligations of our U.S. based operations.
Pyxus does not currently intend to repatriate any funds generated by FIGR Norfolk or FIGR East’s operations into the United States and certain United States federal laws may restrict it from doing so. Accordingly, funds generated by these subsidiaries’ operations, or in certain circumstances the potential future sale of either or both of these subsidiaries, may not be available to fund the payment of obligations of the Company’s U.S. based operations, including the debt obligations of Pyxus.

The market for industrial hemp and CBD in the United States is relatively new and is subject to risks associated with an emerging industry. This industry and market may not continue to exist or grow as anticipated or Criticality may ultimately be unable to succeed in this industry or market.
The hemp and CBD industry in the United States is highly speculative and is a new industry which is rapidly expanding and may not be successful. Criticality faces inherent challenges associated with being in a new market, including establishing reliable agricultural supply chains and modernizing processing and manufacturing to compete with producers in other countries where industrial hemp cultivation has already been established. Therefore, Criticality is subject to all of the business risks associated with a new business in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of hemp products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors.

The market for e-liquids, vapable oils and other vaping products is a niche market and is relatively new and emerging. If the market develops more slowly or differently from the Company's expectations, the business, growth prospects and financial condition of the new business lines' vaping business lines could be adversely affected.
E-liquids, vapable oils and other vaping products, having recently been introduced to market, are at an early stage of development and represent a niche market that is evolving rapidly and is characterized by an increasing number of global market entrants. Future sales and any future profits are substantially dependent upon the widespread acceptance and use of vaping products. Rapid growth in the use of, and interest in, e-liquids, vapable oils and other vaping products is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, the new business lines' vaping products business line is subject to all of the business risks associated with a new business in a niche market, including risks of unforeseen capital requirements, failure of widespread market acceptance of e-liquids, vapable oils and other vaping products, failure to establish business relationships and competitive disadvantages as against larger and more established competitors. Results of operations may be adversely affected by decreases in the general level of economic activity and the demand for e-liquids, vapable oils and other vaping products. Furthermore, the market for e-liquids, vapable oils and other vaping products is relatively new and many products may not achieve or sustain high levels of demand and market acceptance. While traditional tobacco products are well established and revenue from traditional cigarette sales represents a substantial majority of total industry revenue, smokeless tobacco products and vaping products represent only a small portion of the industry. E-liquids, vapable oils and other vaping products may not become widely adopted, or the market for vaping products may not develop as the Company expects. If the market for e-liquids, vapable oils and other vaping products develops more slowly, or differently from expectations, the business, growth prospects and financial condition of these new business lines may be adversely affected.

FIGR East and FIGR Norfolk intend to target the premium segment of the Canadian adult-use cannabis market, which may not materialize, or in which they may not be able to develop or maintain a brand that attracts or retains customers.
FIGR East and FIGR Norfolk intends to target users of cannabis in the Canadian adult-use cannabis market who are looking for premium products. However, such a market may not materialize or be sustainable. If this premium market does materialize, they may not be successful in creating and maintaining consumer perceptions of the value of their premium products. The promotion of cannabis is strictly regulated in Canada. For example, promotion is largely restricted to the place of sale and subject to prescribed conditions set out in the Canadian Cannabis Act and the Canadian Cannabis Regulations. Among other restrictions, the Canadian Cannabis Act prohibits testimonials and endorsements, lifestyle branding and promotion that is appealing to young persons. Such restrictions on advertising, marketing and the use of logos and brand names, and other restrictions on advertising imposed by Canadian federal or provincial laws or regulations, or similar regulations imposed in other jurisdictions, may prevent FIGR East and FIGR Norfolk from creating and maintaining consumer perceptions in the value of their premium products and establishing themselves as premium producers. If FIGR East and FIGR Norfolk cannot successfully enter into or compete in the premium market, they may face significant challenges in gaining or maintaining a market share in Canada or they may be forced to sell their respective products at a lower price, which may materially adversely affect their respective revenues.

The success of FIGR East and FIGR Norfolk depends, in part, on their ability to attract and retain customers who in turn sell to ultimate consumers of cannabis and cannabis-related products. To do this, FIGR East and FIGR Norfolk are dependent upon, among other things, continually producing desirable and effective products and the continued growth in the aggregate number of adult-use cannabis consumers. FIGR East and FIGR Norfolk have made significant investments in enhancing their brands to attract consumers. Subject to the applicable legal restrictions, the Company expects that they will continue to make significant investments to promote their current products to new consumers and new products to current and new consumers. Such campaigns can be expensive and may not result in increased sales. If FIGR East and FIGR Norfolk are unable to attract new consumers, they may not be able to increase their sales.

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Changes in laws, regulations and guidelines in Canada pertaining to cannabis may adversely affect FIGR Norfolk and FIGR East.
On October 17, 2018, the Canadian Cannabis Act legalizing recreational adult use of cannabis nationwide came into effect. Uncertainty remains, however, with respect to the implementation of regulations under the Canadian Cannabis Act that will govern the sale and use of cannabis-related products as well as the various provincial and territorial regimes governing the distribution and sale of cannabis for adult-use purposes. The impact of these laws, regulations and guidelines on the businesses of FIGR Norfolk and FIGR East, including increased costs of compliance and other potential risks remain uncertain and, accordingly, may cause FIGR Norfolk and FIGR East to experience adverse effects.

To date, only fresh cannabis, dried cannabis, cannabis plants, cannabis seeds, and cannabis oil products are permitted for sale in Canada. Pursuant to the Canadian Cannabis Act, certain classes of cannabis products, such as edibles, extracts, and topicals are currently prohibited from sale, but the federal government in Canada has expressed its intention to permit such products for sale by October 17, 2019. While draft regulations have been released, the impact of these regulatory changes on the business of FIGR Norfolk and FIGR East is unknown, and the proposed regulations may not be implemented at all or, if they are, may change significantly.

In addition, the Canadian Cannabis Act allows for licenses to be granted for outdoor cultivation and Health Canada commenced granting outdoor cultivation licenses in May 2019. The implications of permitting outdoor cultivation are not yet known, but outdoor cultivation could reduce start-up capital required for new entrants in the cannabis industry, or permit lower cost expansions by existing industry participants as capital expenditure requirements related to outdoor growing are typically much lower than those associated with indoor growing. Similarly, it may also ultimately lower prices. Accordingly, competition from firms holding outdoor cultivation licenses may have a material adverse impact on the business, financial condition, and results of operation of FIGR Norfolk and FIGR East.

As the Canadian cannabis industry continues to develop, competition from market participants may have a negative impact on FIGR Norfolk and FIGR East’s business and financial condition.
As the Canadian adult-use cannabis market continues to mature, consumers who once solely relied on the medical cannabis market may shift some, or all, of their consumption away from medical cannabis and towards adult-use cannabis, resulting in increased levels of competition in the adult-use cannabis market. As the adult-use cannabis market continues to mature, the entry of new competitors may also increase the level of competition in the cannabis market as a whole. This increase in competition may have a negative impact on FIGR East and FIGR Norfolk.

FIGR Norfolk and FIGR East face competition from existing license holders licensed under the Canadian Cannabis Act. Certain of these competitors may have significantly greater financial, production, marketing, R&D and technical, and human resources than the Company does. As a result, FIGR Norfolk and FIGR East’s competitors may be more successful in gaining market penetration and market share in the adult-use cannabis industry in than the Canada. FIGR Norfolk and FIGR East’s commercial opportunity in the adult-use cannabis market could be reduced or eliminated if its competitors produce and commercialize products for the adult-use market that, among other things, are safer, more effective, more convenient or less expensive than the products that FIGR Norfolk and FIGR East may produce, have greater sales, marketing and distribution support than FIGR Norfolk and FIGR East’s products, enjoy enhanced timing of market introduction and perceived effectiveness advantages over FIGR Norfolk and FIGR East’s products and receive more favorable publicity FIGR Norfolk and FIGR East’s products. If FIGR Norfolk and FIGR East’s adult-use cannabis products do not achieve an adequate level of acceptance by the adult-use cannabis market, FIGR Norfolk and FIGR East may not generate sufficient revenue from these products, and their businesses may not become profitable.

Further, the cannabis industry in Canada is undergoing rapid growth and substantial change, which has resulted in an increase in competitors, consolidation and formation in Canada of strategic relationships. Such acquisitions or other consolidating transactions could harm FIGR East and FIGR Norfolk in a number of ways, including by losing strategic partners if the partners are acquired by or enter into relationships with a competitor, losing customers, revenue and market share, or forcing them to expend greater resources to meet new or additional competitive threats, all of which could harm their operating results. As competitors enter the market and become increasingly sophisticated, competition in FIGR East and FIGR Norfolk’s industry may intensify and place downward pressure on retail prices for their products and services, which could negatively impact their profitability.

The Canadian Cannabis Act allows individuals in Canada to cultivate, propagate, harvest and distribute up to four cannabis plants per household, despite certain provincial restrictions, provided that each plant meets certain requirements. If FIGR Norfolk and FIGR East is unable to effectively compete with other suppliers to the adult-use cannabis market, or a significant number of individuals take advantage of the ability to cultivate and use their own cannabis, FIGR Norfolk and FIGR East’s success in the adult-use cannabis business in Canada may be limited and may not fulfill the expectations of management.

If the number of users of medical and/or adult-use cannabis in Canada increases, the demand for products will increase and the Company expects that competition will become more intense, as current and future competitors begin to offer an increasing number

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of diversified products. In addition, the legal landscape for medical and adult-use cannabis is changing internationally. More countries have passed laws that allow for the production and distribution of medical cannabis in some form or another, and some of these countries may pass laws allowing for the production and distribution of adult-use cannabis as well. Increased international competition could materially adversely affect FIGR Norfolk and FIGR East’s business, operations, or growth prospects.

FIGR Norfolk and FIGR East also face competition from licensed producers that may not fully comply with applicable regulations. Such producers may have lower operating costs, make impermissible claims and utilize other competitive advantages based on circumvention of regulatory requirements. Furthermore, FIGR East and FIGR Norfolk also face competition from the illicit cannabis market. Illegal dispensaries and “black market” operations and participants, despite not having a valid license under the Canadian Cannabis Regulations, may be able to (i) offer products with higher concentrations of active ingredients than FIGR East and FIGR Norfolk are authorized to produce and sell, (ii) use delivery methods, including edibles, concentrates and extract vaporizers, that the FIGR East and FIGR Norfolk are currently prohibited from offering to individuals in Canada, (iii) brand products more explicitly, (iv) sell products at lower prices and (v) market products in ways not permissible by law. As these illicit market participants do not comply with the regulations governing the cannabis industry in Canada, their operations may also have significantly lower costs.

To remain competitive while complying with regulatory requirements, FIGR Norfolk and FIGR East will require continued significant investment in research and development, marketing, sales and customer support. FIGR Norfolk and FIGR East may not have sufficient resources to maintain research and development, marketing, sales and customer support efforts on a competitive basis, which could materially and adversely affect the business, financial condition, and results of operations of FIGR Norfolk and FIGR East.

Given the rapid changes affecting global, national, and regional economies generally and the cannabis industry, in particular, FIGR East and FIGR Norfolk may not be able to create and maintain a competitive advantage in the marketplace. Their success will depend on their ability to respond to, among other things, changes in the economy, regulatory conditions, market conditions, and competitive pressures. Any failure by FIGR East and FIGR Norfolk to anticipate or respond adequately to such changes could have a material adverse effect on their respective financial condition, operating results, liquidity, cash flow, and operational performance.

The new business lines will be constrained by law in marketing certain of their respective products.
The development of the new business lines may be hindered by applicable regulatory restrictions on sales and marketing activities. For example, the Canadian federal regulatory regime includes plain packaging requirements. Among other things, the packaging of cannabis products may not include brand names or images, logos that promote cannabis, designs appealing to youth, testimonials or endorsements or lifestyle branding. The restriction on the use of logos and brand names on cannabis products could have a material adverse impact on the business, financial condition, and results of operations of FIGR Norfolk and FIGR East, as it may be difficult to establish brand loyalty.

If the new business lines are unable to effectively market their respective products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for their respective products, the Company’s results of operations could be adversely affected.

There are factors that may prevent FIGR Norfolk and FIGR East from realizing growth targets.
The adult-use cannabis industry and market are relatively new in Canada and this industry and market may not continue to exist or grow as anticipated or FIGR Norfolk and FIGR East may be ultimately unable to succeed in this new industry and market. In addition to being subject to general business risks, each of FIGR Norfolk and FIGR East must, subject to regulatory constraints, build brand awareness in this industry and market through significant investments in its strategy, its production capacity, quality assurance and compliance with regulations. Further, facilities expansions contemplated by FIGR Norfolk and FIGR East may not be completed on the schedule anticipated by the Company due to delays in construction, including delays in securing necessary funding, and may not receive necessary licenses and permits to permit operations to commence once construction is completed. In addition, FIGR Norfolk and FIGR East may not be able to attract and retain sufficiently qualified personnel to adequately staff the expanded facilities. It is also possible that the contemplated expansion plans may cost more than anticipated, in which circumstance FIGR Norfolk or FIGR East may curtail, or extend timeframes for completing, the expansion plans. Any of these circumstances could have a material adverse effect on the financial results of the Company.

In addition, there is no assurance that this 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. Any event or circumstance that adversely affects the cannabis industry and market in Canada could have a material adverse effect on the FIGR Norfolk and FIGR East’s respective business and growth opportunities.


28


The market for hemp in the United States is increasingly competitive.
The hemp market in the United States is competitive and evolving and Criticality faces strong competition from both existing and emerging companies that offer similar products. Some of Criticality’s current and potential competitors may have longer operating histories, greater financial, marketing and other resources and larger customer bases than Criticality.

Given the rapid changes affecting global, national, and regional economies generally and the hemp and CBD industries, in particular, Criticality may not be able to create and maintain a competitive advantage in the marketplace. Criticality’s success will depend on its ability to respond to, among other things, changes in the economy, regulatory conditions, market conditions, and competitive pressures. Any failure by Criticality to anticipate or respond adequately to such changes could have a material adverse effect on its financial condition, operating results, liquidity, cash flow and operational performance.

The number of competitors in the hemp and CBD markets is expected to increase, both in the United States and internationally, which could negatively affect Criticality’s market position and demand for its products. Additionally, the introduction of an adult-use model for non-hemp cannabis production and distribution in various jurisdictions may cause producers in those jurisdictions to develop cannabis-derived CBD products and compete with Criticality’s hemp and CBD products. The impact of this potential development may be negative for Criticality and could result in increased levels of competition in its existing market and/or the entry of new competitors in the overall hemp market in which Criticality operates.

The Company may experience intense competition in the e-liquid, vapable oil, and vaping products industries in which it and its joint ventures currently operate.
The Company’s subsidiaries and joint ventures operating in the e-liquid and vaping products industry may face intense competition from other companies in the vapable products and vapor products industry, some of which can be expected to have longer operating histories and more financial resources, market penetration and experience than these subsidiaries. Increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition, and results of operation of these subsidiaries. Because the e-liquid, vapable oil and vaping products industry has relatively low barriers to entry, the Company expects that its subsidiaries and joint ventures in these businesses to face additional competition from new entrants. To become and remain competitive in this industry, the Company and its joint ventures may require research and development, marketing, sales and support. The Company and its joint ventures may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis, which could materially and adversely affect the business, financial condition, and results of operations of this aspect of its business. The competitive environment and the Company's competitive position in this market can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, cigarette or e-liquid, vapable oil and other vaping products excise taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate products, restricts consumer access to certain products, such as certain flavored e-liquids, or limits the ability to market products in certain jurisdictions.

The Company currently sells, and expects to continue to sell, a significant share of its product to provincial governments through supply contracts that may not generate orders as expected or which may not be renewed.
Under the terms of their respective licenses and the Canadian Cannabis Act, FIGR East and FIGR Norfolk are restricted as to whom they can sell their respective cannabis products. They currently, and expects to continue to, derive a significant portion of their revenues from supply agreements with Canadian provincial and territorial governments, including particularly Prince Edward Island and Nova Scotia. Generally, none of their provincial or territorial supply agreements contain purchase commitments or otherwise obligates the purchaser to buy a minimum or fixed volume of products. As a result, the amount of cannabis that these purchasers may purchase under the supply agreements, or its price, may deviate significantly from the Company’s expectations. In addition, FIGR East and FIGR Norfolk’s revenues could fluctuate materially in the future and could be materially and disproportionately impacted by the purchasing decisions of existing government purchasers and any other future government purchasers. If any of these purchasers decides to purchase lower volumes of products from the amount FIGR East and FIGR Norfolk expect, insists on a price that is lower than FIGR East and FIGR Norfolk expect, alters its purchasing patterns at any time with limited notice, decides not to continue or begin to purchase FIGR East and FIGR Norfolk cannabis products at all or does not renew its agreement with FIGR East and FIGR Norfolk on similar terms or other terms acceptable to them, FIGR East and FIGR Norfolk’s revenues could be materially adversely affected.

The adult-use cannabis market in Canada has experienced, and may in the future experience, supply and demand fluctuations.
There has been a shortfall in supply in the Canadian adult-use cannabis market since legalization in October 2018. Such supply shortages have led to increased prices, increases in out-of-stocks and the consumers opting to buy cannabis on the illicit market. Although licensed producers have increased capacity, there is no guarantee that such entities will be able to produce enough cannabis to meet existing demand. Such demand, however, may not be sustained and the increase in production may result in over-supply and lower prices. If FIGR East and FIGR Norfolk’s inventory levels in the future become greater than consumer demand, they may have to engage in sale of excess inventory at discounted prices, which could significantly impair their brand image. Conversely, if they underestimate demand for their products, they may experience inventory shortages, which might delay shipments

29


to customers, reduce revenue, negatively impact customer relationships and diminish brand loyalty. In addition, demand for cannabis and cannabis products is dependent on a number of social, political and economic factors that are beyond their control, including the novelty of legalization, which may wear off. A material decline in the economic conditions affecting consumers can cause a reduction in disposable income for the average consumer, change consumption patterns and result in a reduction in spending on cannabis products or a switch to other products obtained through illicit channels. Market demand for cannabis may not continue to be sufficient to support the FIGR East and FIGR Norfolk’s current or future production levels, and FIGR East and FIGR Norfolk may not be able to generate sufficient revenue to be profitable.

Consumer perception and reputational risk associated with the cannabis industry may negatively affect FIGR Norfolk and FIGR East's business activities.
We believe that the Canadian cannabis legal use market is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception can be significantly influenced by scientific research or findings, regulatory proceedings, litigation, media attention and other publicity regarding the consumption of 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 cannabis market or any particular product, or consistent with currently held views. 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 cannabis industry and demand for its products and services, which could affect the business, results of operations and cash flows of FIGR Norfolk and FIGR East. FIGR Norfolk and FIGR East's dependence upon consumer perception means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on FIGR Norfolk and FIGR East and their respective business, financial condition, results of operations and cash flows. Further, adverse publicity, reports or other media attention regarding the safety, efficacy and quality of cannabis in general, or associating the consumption of cannabis with illness or other negative effects or events, could have a material adverse effect. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers' failure to consume such products legally, appropriately, or as directed.

In addition, parties outside of the cannabis industry in Canada with which the Company does business may perceive that they are exposed to reputational risk as a result of FIGR Norfolk and FIGR East's cannabis business activities. For example, the Company could receive a notification from a financial institution advising it that the financial institution would no longer maintain banking relationships with those in the cannabis industry, even though the Company’s involvement is through indirect, separately managed foreign subsidiaries. It is possible that the Company may in the future have difficulty establishing or maintaining bank accounts or other business relationships that it needs to operate its business. Failure to establish or maintain such business relationships could have a material adverse effect on the Company.

Future clinical research studies on the effects of cannabis, hemp, and vapable products, among others, may lead to conclusions that dispute or conflict with the Company's understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of such products.
Research in Canada, the United States, and internationally regarding the benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids, such as CBD and tetrahydrocannabinol (“THC”), remains in early stages. There have been relatively few studies conducted to determine the benefits, safety and side effects 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 benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such articles, reports and studies to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, undue reliance should not be placed on such articles and reports.

Future research studies and clinical trials may draw opposing conclusions, or reach negative conclusions, regarding the benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis use, which could have a material adverse effect on the demand for products containing THC or CBD with the potential to lead to a material adverse effect on the Company’s business, financial condition, results of operations and prospects.

The Company believes the hemp and CBD industries in the United States are highly dependent upon positive consumer perception regarding the safety, efficacy, and quality of hemp-derived products, as well as consumer views concerning regulatory compliance and perceived similarities or differences between hemp and marihuana. Consumers, vendors, landlords/lessors, industry partners or third-party service providers may incorrectly perceive hemp products as marihuana thereby confusing them for having the high THC content of marihuana or for being illegal under U.S. federal law.


30


If the Company chooses to engage in research, development, and marketing activities outside of Canada, controlled substance legislation may restrict or limit the Company's ability to research, manufacture and develop a commercial market for its products.
Approximately 250 substances, including cannabis, are listed in the Schedules annexed to the UN Single Convention, the Convention on Psychotropic Substances (Vienna, 1971) and the Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (introducing control on precursors) (Vienna, 1988). The purpose of these listings is to control and limit the use of these drugs according to a classification of their therapeutic value, risk of abuse and health dangers, and to minimize the diversion of precursor chemicals to illegal drug manufacturers. The 1961 UN Single Convention on Narcotic Drugs, as amended in 1972, classifies cannabis as Schedule I (“substances with addictive properties, presenting a serious risk of abuse”) and as Schedule IV (“the most dangerous substances, already listed in Schedule I, which are particularly harmful and of extremely limited medical or therapeutic value”) narcotic drug. The 1971 UN Convention on Psychotropic Substances classifies THC–the principal psychoactive cannabinoid of cannabis–as a Schedule I psychotropic substance (substances presenting a high risk of abuse, posing a particularly serious threat to public health which are of very little or no therapeutic value). Many countries are parties to these conventions, which govern international trade and domestic control of these substances, including cannabis. They may interpret and implement their obligations in a way that creates a legal obstacle to subsidiaries of the Company obtaining manufacturing and/or marketing approval for its products in those countries. These countries may not be willing or able to amend or otherwise modify their laws and regulations to permit such products to be manufactured, researched, and/or marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time.

There are limited long-term data with respect to the efficacy and side effects of the new business lines’ products.
If the products of the new business lines of the Company’s subsidiaries and joint ventures are not perceived to have the effects intended by the end user, the Company's business may suffer. Certain of these products contain hemp extract and other ingredients and may qualify in the United States as dietary supplements. Moreover, many of these products contain innovative ingredients or combinations of ingredients. There are limited long-term data with respect to efficacy, unknown side effects and/or interaction of these substances with human or animal biochemistry. As a result, these products could have unexpected side effects, the discovery of which could materially and adversely affect the Company's, business, financial condition, and results of operations.

In particular, the rapid development of e-liquids, vapable oils and other vaping products has not provided sufficient time for the medical profession to study the long-term health effects of using such products. Therefore, it is uncertain as to whether or not e-liquids, vapable oils and other vaping products are safe for their intended use. If the medical profession were to determine that using e-liquids, vapable oils and other vaping products posed a significant threat to long-term human health, consumption could decline rapidly and the Company’s subsidiaries and joint ventures may be forced to modify certain or all of their respective, e-liquids, vapable oils and other vaping products. Such an outcome may have material adverse effect on the Company's financial condition, and results of operations

Changing consumer preferences may adversely affect consumer retention and results of operations.
As a result of changing consumer preferences, many dietary supplements and other innovative products attain financial success for a limited period of time. Even if the products of the Company’s new business lines find retail success, there can be no assurance that any of these products will continue to see extended financial success. The Company's success will be significantly dependent upon its ability to develop new and improved product lines and to adapt to consumer preferences. Even if it is successful in introducing new products or developing current products, a failure to gain consumer acceptance or to update products with compelling content could cause a decline in popularity of these products that could reduce revenues and harm the Company's brands, business, financial condition, and results of operations.

Failure to introduce new features and product lines and to achieve and sustain market acceptance could result in the Company’s subsidiaries and joint ventures being unable to satisfy consumer preferences and generate revenue, which would have a material adverse effect on the Company’s profitability, financial condition, and results of operations.

The success of the Company’s new business lines depends on their ability to attract and retain consumers. There are many factors which could impact their ability to attract and retain consumers, including its ability to continually produce desirable and effective products, the successful implementation of consumer acquisition plans and the continued growth in the aggregate number of potential consumers. Failure of the Company’s new business lines to acquire and retain consumers could have a material adverse effect on the Company.

The Canadian legal adult-use cannabis industry is in its early stages of development and it is likely that FIGR East, FIGR Norfolk and their competitors, will seek to introduce new products in the future. In attempting to keep pace with any new market developments, FIGR East and FIGR Norfolk may need to spend significant amounts of capital in order to successfully develop and generate revenues from new products that they introduce. As well, they may be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. FIGR East and FIGR Norfolk may not be successful in developing effective and safe new products, anticipating shifts in social trends and consumer demands, bringing such products to market in time to be effectively commercialized, or obtaining any required

31


regulatory approvals, which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may have a material adverse effect on their business and results of operations and on the Company’s results of operations.

In addition, the patterns of cannabis consumption in Canada and elsewhere in the world may shift over time due to a variety of factors, including changes in demographics, social trends, public health polices and other leisure or consumption behaviors. If consumer preferences for FIGR East and FIGR Norfolk’s products or cannabis products in general do not develop, or if once developed they were to move away from FIGR East and FIGR Norfolk’s products or cannabis products in general, or if FIGR East and FIGR Norfolk is unable to anticipate and respond effectively to shifts in consumer behaviors, they and the Company may be adversely affected.

The Company’s subsidiaries and joint ventures are subject risks related to the retail distribution of their respective products.
Retail chains typically procure products in defined cycles depending on their internal procurement needs. If the Company’s subsidiaries and joint ventures engaged in the new business lines are successful in obtaining retail distribution for their products, they will be subject to the cyclical nature of the procurement strategies of their respective retail partners.

Further, in order to sell cannabis via retail outlets in certain provinces in Canada, FIGR Norfolk and FIGR East will have to be successful in obtaining government contracts. There can be no assurance that FIGR Norfolk and FIGR East will be successful in obtaining sufficient government contracts to satisfy the Company’s business plan.

Trade of cannabis for non-medical purposes within Canada may be restricted by the Canadian Free Trade Agreement.
FIGR East has entered into certain supply agreements for the supply of adult-use cannabis and cannabis derivative products. The Canadian Free Trade Agreement, which generally reduces or eliminates the barriers to the free movement of persons, goods, services, and investments within Canada, specifically excludes cannabis for non-medical purposes from its scope and instead leaves the intra-Canadian movement of non-medical cannabis to future negotiations among the provinces and territories. There is a risk that the outcome of the negotiations will result in the interprovincial and interterritorial trade of cannabis for non-medical purposes in Canada being entirely restricted or subject to conditions that will negatively impact the ability of FIGR East (and, when licensed, FIGR Norfolk) to sell cannabis in provinces and territories in which they do not have cultivation and production facilities, including those in which FIGR East has already executed agreements or been approved to supply cannabis to retailers.

The Company’s new business lines may be unable to maintain or promote the reputation of their respective brands or incur excessive expense in doing so.
Management believes that maintaining and promoting the respective brands of the new business lines is critical to expanding their respective customer bases. Maintaining and promoting such brands will depend largely on the ability of the Company’s subsidiaries and joint ventures engaged in the new business lines to continue to provide quality, reliable and innovative products, which they may not do successfully. Such subsidiaries and joint ventures may introduce new products or services that their respective customers do not like, which may negatively affect their respective brand and reputation. Maintaining and enhancing these brands may require substantial investments, and these investments may not achieve the desired goals. In addition, regulation restrictions in Canada mandating plain packaging and generally prohibiting promotional activities may inhibit FIGR Norfolk and FIGR East's ability to develop their brands and reputations If the Company’s subsidiaries and joint ventures fail to successfully promote and maintain their respective brands or incur excessive expenses in this effort, the Company’s business, financial condition, and results of operations could be materially adversely affected.

The industries in which the new business lines operate are highly regulated and the Company may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where the Company carries on business.
The Company's new business lines are heavily regulated in all jurisdictions where they carry on business. For example, the operations of FIGR Norfolk and FIGR East are subject to various laws, regulations and guidelines by governmental authorities (including Health Canada) relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of cannabis and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over such activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on these products and services.

Achievement of the Company's business objectives is contingent, in part, upon compliance with regulatory requirements enacted by all relevant governmental authorities and obtaining all necessary regulatory approvals for the production, storage, transportation, sale, import and export, as applicable, of the products of its subsidiaries and joint ventures. The commercial cannabis industry is still a new industry and, in Canada, in particular, the Canadian Cannabis Act is a new regime that has no close precedent in Canadian law. The effect of relevant governmental authorities' administration, application and enforcement of their respective regulatory regimes and delays in obtaining, or failure to obtain, applicable regulatory approvals which may be required may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on the Company's business, financial condition, and results of operations.

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Any failure to comply with the regulatory requirements applicable to the operations of the new business lines may lead to possible sanctions including the revocation or imposition of additional conditions on licenses to operate; the suspension or expulsion from a particular market or jurisdiction or of key personnel; the imposition of additional or more stringent inspection, testing and reporting requirements; and the imposition of fines and censures. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations, increase compliance costs or give rise to material liabilities or a revocation of licenses and other permits, which could have a material adverse effect on the Company's business, financial condition, and results of operations. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely impact the ongoing costs relating to regulatory compliance.

The new business lines are reliant on obtaining licenses, authorizations, approvals, and permits for each of its businesses.
Each of the new business lines is required to obtain and maintain certain licenses, approvals and permits in the jurisdictions where its products are produced, licensed or sold. There can be no assurance all necessary licenses, approvals and permits will be obtained and maintained. Failure to obtain such licenses, permits or approvals may have a material adverse effect on the Company's business, financial condition, and results of operations.

Each of FIGR Norfolk and FIGR East is reliant on obtaining licenses, authorizations, approvals, and permits for its ability to grow, store and sell cannabis and other products derived therefrom. Such licenses, if obtained, are subject to ongoing compliance, reporting and renewal requirements.
FIGR Norfolk and FIGR East operate their businesses pursuant to the licenses granted by applicable regulatory authorities, including Health Canada. FIGR Norfolk has applied to Health Canada to amend its licenses to: (i) permit sale of dried cannabis, and (ii) to include a standard processing license. FIGR Norfolk will also be required to apply to Health Canada for an amendment to its licenses in respect of the Norfolk Expansion. FIGR East will be required to apply to Health Canada in respect of the Charlottetown Expansion. The ability of each of FIGR Norfolk and FIGR East to grow, process, store, and sell cannabis in Canada is dependent on its licenses from Health Canada, and in particular sales and cultivation licenses. Failure to comply with the requirements of the licenses or failure to obtain or maintain the relevant licenses would have a material adverse impact on their respective business, financial condition, and results of operations. There can be no guarantee that Health Canada will issue or renew the licenses or, if they are issued or renewed, that they will be not be revoked or renewed on the same or similar terms. Should the FIGR Norfolk and FIGR East fail to obtain the licenses, or should FIGR Norfolk or FIGR East later renew its licenses on different terms or not allow for anticipated capacity increases, or should the licenses be revoked, their respective business, financial condition, and results of the operations may be materially adversely affected.

In the United States, despite cannabis possession and use having been legalized at the state level for medical use in many states and for adult-use in a number of states, most forms of cannabis (other than industrial hemp) continue to be categorized as Schedule I controlled substances under the Controlled Substances Act and subject to the Controlled Substances Import and Export Act ("CSIEA"). The Company does not intend to grow, cultivate, manufacture, or distribute non-hemp cannabis in the United States, or to export any cannabis grown or cannabis products in Canada to the United States, while such activities remain illegal under United States federal law. Violations of any U.S. federal laws and regulations, such as the Controlled Substances Act and the CSIEA, could result in civil, criminal and/or administrative enforcement actions, which could result in fines, penalties, and other sanctions, including but not limited to, cessation of business activities. While FIGR Norfolk and FIGR East have received confirmation from Health Canada that their intended method of cannabinoid production is permitted under the Canadian Cannabis Act, the Canadian Cannabis Act is new legislation and may be subject to changes in interpretation over time. In addition, while the Company intends to produce and distribute cannabinoids in additional jurisdictions as such production and distribution is or becomes lawful, there can be no guarantee that the Company’s operations in such jurisdictions will obtain the relevant licenses, permits and approvals to produce and distribute such products or derivative products in any jurisdiction.

Additional government licenses are currently, and in the future may be, required in connection with the operations of the new business lines or the further expansion of the new business lines. To the extent such permits and approvals are required and not obtained, the Company may be prevented from operating and/or expanding its business, which could have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company is subject to uncertainty regarding legal and regulatory status and changes.
Achievement of the Company's business objectives is contingent, in part, upon compliance by the new business lines with regulatory requirements enacted by governmental authorities and their obtaining required regulatory approvals. The Company cannot predict the timeline required for the new business lines to secure all appropriate regulatory approvals, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failing to obtain, required regulatory approvals may significantly delay or impact the development of markets, products and sales initiatives and could have a material adverse effect on the business, results of operations, and financial condition of the Company. The new business lines will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions on operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations, increased compliance costs or give rise to

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material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.

For example, while the production of cannabis in Canada is under the regulatory oversight of the Government of Canada, the distribution of adult-use cannabis in Canada is the responsibility of the provincial and territorial governments. The distribution and sale of adult-use cannabis in Ontario is primarily governed by the Cannabis Control Act, 2017, the Cannabis Licence Act, 2018 and the related regulations. The Ontario Cannabis Retail Corporation is the wholesale distributor of cannabis and conducts all online sales in the province. Private retail has been permitted since April 2019 and is regulated by the Alcohol and Gaming Commission of Ontario (“AGCO”). Initially, the number of private stores licensed by the AGCO will be limited to twenty-five as the initial cannabis supply stabilizes. The Ontario Cannabis Retail Corporation provides online sales of adult-use cannabis in the interim. The impact of this new legislative regime, and of the legislation regulating adult-use cannabis passed in other provinces and territories, on the cannabis industry and the Company's business plans and operations is uncertain. There is no guarantee that Canadian provincial legislation regulating the retail distribution and sale of cannabis for adult use purposes will remain unchanged or that it will be implemented in a way that is favorable to FIGR Norfolk and FIGR East. It is possible for significant legislative amendments to be enacted in each province to address any current or future regulatory issues or perceived inadequacies in the distribution of cannabis. There is no guarantee that Canadian provincial or territorial legislation regulating the distribution and sale of cannabis for adult-use purposes will create the growth opportunities that are currently anticipated by FIGR Norfolk and FIGR East.

Changes in the regulations governing medical cannabis outside of Canada may adversely impact the Company's prospects.
The Company's growth strategy with respect to international expansion of the new business lines continues to evolve as regulations governing the medical cannabis and industrial hemp industries in the foreign jurisdictions become more fully developed. Interpretation of these laws, rules and regulations and their application is ongoing. Amendments to current laws, regulations and guidelines, more stringent implementation or enforcement thereof, enactment of new laws, the adoption of new regulations, or other unanticipated events, including changes in political regimes and attitudes toward cannabis and industrial hemp, are beyond the Company's control and could material adverse effect on the Company's international growth prospects.

Furthermore, additional countries continue to pass laws that allow for the production and distribution of cannabis for medical purposes in one form or another. International competition and limitations placed on FIGR Norfolk and FIGR East by Canadian regulations might lower the demand for any future Company products on a global scale.

We cannot assure you that the Company will be able to expand cannabis operations into legal jurisdictions outside of Canada, and any such expansion will be subject to risks.
There can be no assurance that any market for cannabis products to be offered by subsidiaries of the Company will develop in any jurisdiction outside of Canada. Laws, regulations, and perceptions pertaining to cannabis vary widely internationally, and the scope or pace of legalization of medical and adult-use cannabis cannot be predicted or assured. If and when additional legal markets for cannabis develop, the Company’s pursuit of such markets may expose it to new or unexpected risks or significantly increase its exposure to one or more existing risk factors, including economic instability, changes in laws and regulations and the effects of competition. These factors may limit the Company's capability to successfully expand the operations of its subsidiaries into such jurisdictions and may have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company will become subject to further laws and regulations as it expands internationally.
The Company may expand the new business lines internationally. If such international expansion occurs, the Company would become subject to the laws and regulations of (as well as international treaties among) the foreign jurisdictions in which it operates or imports or exports products or materials. In addition, the Company may avail itself of proposed legislative changes in certain jurisdictions to expand its product portfolio, which expansion may include business and regulatory compliance risks as yet undetermined. Failure by the Company to comply with the current or evolving regulatory framework in any jurisdiction could have a material adverse effect on the Company's business, financial condition, and results of operations. There is the possibility that any such international jurisdiction could determine that the Company was not or is not compliant with applicable local regulations. If the Company's historical or current sales or operations were found to be in violation of such international regulations the Company may be subject to enforcement actions in such jurisdictions including, but not limited to civil and criminal penalties, damages, fines, the curtailment or restructuring of the Company's operations or asset seizures and the denial of regulatory applications, each of such circumstances could have a material adverse effect on the Company's business, financial condition, and results of operations.

Violations of applicable law by FIGR Norfolk or FIGR East, including an unlawful transfer of cannabis inventory to jurisdictions, including the United States, in which the sale of such product is unlawful or within Canada other than for permitted use, may subject Pyxus to potential criminal sanctions.
Each of FIGR Norfolk and FIGR East is required to comply concurrently with a variety of federal, state or provincial, and local laws in each jurisdiction where it operates, or to which it exports or propose to export its products, including laws and regulations relating to health and safety, conduct or operations and the production, management, transportation, storage and disposal of our

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products and of certain material used in our operations. Compliance with these laws and regulations requires concurrent compliance with complex federal, provincial or state and local laws. These laws change frequently and may be difficult to interpret and apply. Compliance with these laws and regulations requires the investment of significant financial and managerial resources, and a determination that we are not in compliance with these laws and regulations could harm our brand image and business. Moreover, it is impossible for the Company to predict the cost or effect of such laws, regulations or guidelines upon their future operations.

Under current U.S. federal law, it is unlawful to operate a business from the U.S. that engages in the possession, manufacture, distribution, and/or sale of a controlled substance, including cannabis, in a foreign country where such activities are illegal. Although the Company anticipates that FIGR Norfolk and FIGR East will take precautions to ensure that their operations remain in compliance with all Canadian laws that might apply to such operations, operational decisions of FIGR Norfolk and FIGR East will be made by personnel not located in the United States, and funding of FIGR Norfolk and FIGR East, to the extent any additional funding is required, would be made by subsidiaries not located in the United States, there is a risk that if FIGR Norfolk or FIGR East were to violate Canadian federal, provincial or local law with respect to the manufacture, distribution, and/or sale of cannabis, including an unlawful transfer of cannabis inventory to jurisdictions, including the United States, in which the sale of such product is unlawful or within Canada other than for permitted use, that may subject Pyxus, its officers, directors, and other parties to potential criminal sanctions, and civil fines, forfeitures, and penalties in the United States.

Further, under current U.S. law, it is unlawful to import controlled substances, including marihuana (that is, cannabis plants, plant parts, or derivatives that do not qualify as either hemp, the mature stalks of non-hemp plants, the sterilized seeds of non-hemp plants, or derivatives of such mature stalks or seeds), into the United States, or to transport controlled substances through U.S. territorial waters, on U.S. flagged vessels and U.S. registered aircraft, or accompanied by U.S. citizens or resident aliens. Accordingly, there is a risk that if FIGR Norfolk or FIGR East were to violate U.S. federal or state law with respect to the manufacture, distribution, sale and/or transport of cannabis, even outside the United States, that may subject Pyxus to potential criminal sanctions, civil fines, forfeitures, and other penalties in the United States.

In addition, United States federal and state laws applicable to the Company’s indirect investment in FIGR Norfolk and FIGR East is subject to evolving interpretations. Although the Company does not believe that the proposed activities of FIGR Norfolk and FIGR East would result in a violation of United States federal or state laws by the Company or our United States-based subsidiaries, the Company cannot provide assurance that United States federal or state law enforcement agencies may not adopt different interpretations of applicable law or that the Company’s view of prevailing applicable law will be upheld if challenged. For example, although the Company disagrees with the position of the Drug Enforcement Agency (the “DEA”) as to its investments in FIGR Norfolk and FIGR East, a spokesperson for the DEA has previously stated that an investment in Canadian cannabis businesses by U.S.-based companies and investors may violate U.S. federal law.

The industrial hemp industry in the United States is governed by various federal, state and local agencies and Criticality may not always succeed in complying fully with applicable regulatory requirements.
The production, labeling and distribution of hemp products are regulated by various federal, state and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of Criticality's marketing claims or its ability to sell its products in the future. The FDA regulates Criticality's products, without limitation, by ensuring that the products are not adulterated or misbranded and by regulating the marketing claims made about such products. Criticality could be subject to regulation by the DEA and other agencies depending on the manner in which it manufactures and sells hemp and CBD products. Federal agencies, including but not limited to the U.S. Department of Agriculture ("USDA") and U.S. Department of Justice, and state agencies charged with developing and implementing state hemp plans, also regulate the hemp products that Criticality distributes.

The 2018 Farm Bill provides that each state wishing to assert primary regulatory jurisdiction over the production of hemp in that state must submit a hemp plan to the USDA for approval. If a state does not elect to submit a hemp plan or does not obtain federal approval of one, hemp producers in that state must comply with USDA's umbrella hemp plan, under which hemp producers must obtain federal licenses. As of the date of this report, the USDA has not yet developed such a plan or begun to issue licenses. Until such time as the USDA develops its own hemp plan or approves a state hemp plan, hemp cultivation is governed by the more restrictive 2014 Farm Bill, and subject to further requirements imposed by federal law and applicable state industrial hemp pilot program requirements.

The compliance environment is rapidly developing and the need to build and maintain robust systems to comply with different regulations in multiple jurisdictions increases the possibility that Criticality may violate one or more of the requirements. If Criticality's operations are found to be in violation of any of such laws or any other governmental regulations, Criticality may be subject to negative consequences, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of Criticality’s operations, asset seizures, revocation or imposition of additional conditions on licenses to operate its business, the denial of regulatory applications (including by other regulatory regimes that rely on the positions of the DEA and FDA in the application of their respective regimes), the suspension or expulsion from a particular market or jurisdiction or of Criticality's key personnel, or the imposition of additional or more stringent inspection, testing and reporting requirements, any

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of which could adversely affect Criticality’s business and financial results. Failure to comply with FDA requirements may result in, among other things, injunctions, product withdrawals, recalls, product seizures, fines and criminal prosecutions. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to Criticality's operations, increase compliance costs or give rise to material liabilities or a revocation of Criticality's licenses and other permits, which could have a material adverse effect on Criticality's business, results of operations and financial condition. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely impact the Criticality's ongoing costs relating to regulatory compliance.

Additionally, Criticality’s advertising is subject to regulation by the FTC under the Federal Trade Commission Act as well as subject to regulation by the FDA under the Food, Drug and Cosmetic Act, including as amended by the Dietary Supplement Health and Education Act of 1994 ("DSHEA"), and by state agencies under analogous state laws. In recent years, the FTC, the FDA and state agencies have initiated numerous investigations of food and dietary supplement products both because of their CBD content and based on allegedly deceptive or misleading marketing claims that cannot be made for these categories of products (for example, disease prevention or treatment claims). At any point, enforcement strategies of a given agency can change as a result of other litigation in the space or changes in political landscapes, and could result in increased enforcement efforts, which would materially affect Criticality’s business. Additionally, some states also permit content, advertising and labeling laws to be enforced by state attorney generals, who may seek civil and criminal penalties, relief for consumers, class action certifications, class wide damages and recalls of products sold by Criticality. Private litigations may also seek relief for consumers, class action certifications, class-wide damages and recalls of products sold by Criticality. Any actions against Criticality by governmental authorities or private litigants could have a material adverse effect on the Company's profitability.

The regulations promulgated under the 2018 Farm Bill may not be favorable to Criticality’s business.
Federal regulations under the 2018 Farm Bill have not yet been promulgated. Similarly, North Carolina, where Criticality is based, has not yet proposed or submitted for USDA approval a hemp plan under the 2018 Farm Bill. There is no guarantee that such regulations will be on terms favorable to Criticality’s business. Should the regulations result in stricter requirements on Criticality than those of the 2014 Farm Bill, such changes could have a material adverse effect on its business, financial condition, and results of operations

Changes, regulations, and guidelines in the United States in federal and state laws pertaining to hemp may adversely affect Criticality.
Continued development of the hemp industry in the United States will be dependent upon new legislative authorization of hemp at the state level, the states' adoption and USDA approval of plans for hemp production, and further amendment or supplementation of legislation at the federal level. Various events or circumstances could slow or halt progress in the hemp industry and continued growth is not assured. The legislative process(es) related to hemp within the various states in which Criticality has a business interest may be adversely affected by negative public perception of the hemp industry, the pursuit of policy objectives that are inconsistent with the promotion of hemp usage, and any scientific evidence that hemp products are detrimental to human health. Any one of these factors could slow or halt use of hemp or CBD, which would negatively affect Criticality's business or growth, including possibly causing Criticality to discontinue operations in the hemp industry as a whole.

Criticality is subject to uncertainty regarding the legal and regulatory status of hemp, including with respect to U.S. federal and state implementation of the 2018 Farm Bill and related laws, and changes to such laws and regulations may have material adverse effects on the operations of Criticality.
The FDA is responsible for ensuring public health and safety through regulation of food, drugs, dietary supplements, and cosmetics, among other products, through its enforcement authority pursuant to the Food, Drug, and Cosmetic Act. The FDA's responsibilities include regulating ingredients in, as well as the marketing and labeling of, regulated articles sold in interstate commerce.

The DEA enforces the Controlled Substances Act, under which cannabis (including hemp and industrial hemp) has historically been controlled as a Schedule I substance as marihuana, with a limited exception for imported parts of the plant that typically contain only trace amounts of cannabinoids (i.e., mature stalks, sterilized seeds, and their derivatives). In 2014, Congress passed the 2014 Farm Bill, which allowed for the domestic cultivation of "industrial hemp" (i.e., cannabis plants, plant parts, and derivates with no more than 0.3% THC) as part of agricultural pilot programs adopted by individual states for the purposes of research by state departments of agriculture and institutions of higher education.

There is significant uncertainty concerning the permissible scope of commercial activity under the 2014 Farm Bill. The 2014 Farm Bill only authorized institutions of higher education and state agriculture departments to cultivate industrial hemp, and only to do so for research purposes. However, it also gave significant discretion to states to regulate industrial hemp pilot programs. Many states that have adopted pilot programs have registered private companies to cultivate and process industrial hemp. Additionally, many states, including North Carolina, where Criticality is based, have interpreted the 2014 Farm Bill to permit marketing research concerning industrial hemp through, among other things, commercial marketing and sale of industrial hemp and industrial hemp products. In contrast, the DEA, FDA, and USDA have taken the position that, under the 2014 Farm Bill, industrial hemp products may not be sold for the purpose of general commercial activity or in states without agricultural pilot programs that permit their

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sale for research marketing purposes; these agencies have also taken the position that, under the 2014 Farm Bill, industrial hemp plants and seeds may not be transported across state lines. There is evidence that Congress does not agree with these agencies’ interpretation of the 2014 Farm Bill, including through its insertion in various appropriations bills language prohibiting the DEA from using funds to impede state agricultural pilot programs. Such language was inserted in the most recent federal appropriations bill, and has been inserted in the draft appropriations bill being considered by Congress. However, there can be no assurance that the current draft appropriations bill will be passed with such language intact, or that such language will be inserted in future appropriations bills while industrial hemp cultivation continues to be governed by the 2014 Farm Bill. There also can be no assurance that these agencies will change their position concerning the permissible scope of commercial activity under the 2014 Farm Bill.

On December 20, 2018, the 2018 Farm Bill was signed into law. The 2018 Farm Bill, among other things, removes "hemp" and its derivatives (including its cannabinoids, such as CBD) from the Controlled Substances Act and amends the Agricultural Marketing Act of 1946 to provide for commercial production of hemp in the United States. The law defines "hemp" as "the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis."

The 2018 Farm Bill tasks the USDA with establishing a regulatory framework for the commercial hemp industry. These responsibilities include, among other things, reviewing and approving state-submitted hemp plans describing the state's regulation of certain aspects of hemp production and establishing requirements for hemp production in states without approved hemp plans (including a federal licensure system). Until such time as the USDA approves state hemp plans or promulgates regulations for hemp production in states without approved plans, hemp production is governed by the more restrictive 2014 Farm Bill, and commercial production of hemp may violate federal law. The timing of such Department of Agriculture actions cannot be assured.

There is uncertainty concerning the timing and manner of implementation of the 2018 Farm Bill. As of the date of this report, the USDA has neither approved any state hemp regulatory programs nor established its own umbrella program. Rather, the USDA has deferred review and approval of state plans, establishing its umbrella plan for hemp production in states without approved plans, and issuance of federal licenses to producers in such states until the agency promulgates final implementing regulations. Although the USDA has expressed an intention to issue such final regulations in time for producers to cultivate hemp for commercial purposes during the 2020 growing season and its intention to issue an interim final rule in August 2019, the timing and content of the USDA’s final implementing regulations cannot be assured. Until such time as the USDA issues such final regulations, commercial hemp production under the 2018 Farm Bill cannot legally begin.

Additionally, there is uncertainty created by the 2018 Farm Bill’s decision to leave the states as potential primary regulators of hemp production. States may adopt regulatory schemes that impose different levels of regulation and costs on the production of hemp. Because states have not yet adopted approved state plans for hemp production, and cannot do so until the USDA promulgates regulations to review those plans, the timing of the adoption of state plans cannot be assured. Moreover, the 2018 Farm Bill provides that its provisions do not preempt or limit state laws that regulate the production of hemp. Accordingly, some states may choose to restrict or prohibit some or all hemp production or sales.

Further, under the 2018 Farm Bill, the FDA has retained authority over Food, Drug, and Cosmetic Act-regulated products containing hemp and its derivatives, including CBD. Moreover, states have retained regulatory authority through their own analogues to the Food, Drug and Cosmetic Act, and the states may diverge from the federal treatment of the use of hemp as, or in, food or dietary supplements. There can be no assurance that the FDA or states (under their Controlled Substances Act and Food, Drug, and Cosmetic Act analogues) will ultimately permit the sale of non-pharmaceutical products containing hemp-derived CBD.

In light of recent changes in federal law concerning hemp and in many state laws concerning cannabis, it is possible that there could be future changes to the Controlled Substances Act or DEA policies implementing the Controlled Substances Act. Such changes, if they occurred, could improve the ability to conduct research on the medical benefits of cannabis. If, for example, Congress rescheduled non-hemp cannabis or THC under the Controlled Substances Act as legal but potentially controlled substances, that may materially alter enforcement policies across federal agencies, including the FDA. As federal law generally prohibits the production and sale of non-hemp cannabis and THC, the FDA has historically deferred enforcement related to cannabis to the DEA. However, the FDA has enforced the Food, Drug and Cosmetic Act with regard to hemp-derived products, particularly products containing CBD derived from hemp, sold in interstate commerce. If non-hemp cannabis or THC were to be rescheduled in such a way, the FDA could play a more-active regulatory role in enforcing the Food, Drug and Cosmetic Act against non-hemp cannabis and THC products, which the FDA could assert qualify as, for example, "drugs," even when not promoted for medical uses. Further, in the event that the pharmaceutical industry directly competes with cannabis businesses for market share, as could potentially occur with rescheduling or even under the current state-law systems, the pharmaceutical industry may urge the DEA, FDA, and others to enforce the Controlled Substances Act, the Food, Drug and Cosmetic Act, and related laws against businesses that comply with state but not federal law. Under various contingencies, the potential for multi-agency enforcement could threaten or have a materially adverse effect on the operations of Criticality.

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Criticality may be required to submit a New Dietary Ingredient notification to the FDA, which may not be accepted without objection.
Criticality could be required to submit a New Dietary Ingredient ("NDI") notification to the FDA with respect to hemp extracts. This could depend on whether Criticality can establish that a particular extract was marketed as a dietary ingredient in a dietary supplement prior to October 15, 1994, or is otherwise currently in the food supply in the same chemical form as used in its dietary supplement product. If FDA objects to Criticality's NDI notification, this would have a materially adverse effect upon Criticality and its business.

The FDA has issued a Warning Letter to Criticality related to the marketing of CBD as a dietary supplement.
The FDA has taken the position that CBD cannot be marketed as a dietary supplement because it has been the subject of investigation as a new drug. The FDA takes the position that a substance is precluded from being marketed as a dietary supplement as of the date on which the FDA authorized its investigation as a new drug (the "New Drug Preclusion"). There is evidence that GW Pharmaceuticals plc received authorization for an "investigation as a new drug" related to CBD in 2006.

The FDA has asserted its New Drug Preclusion position in a Warning Letter to Criticality. Criticality responded to the Warning Letter with its position that CBD was marketed in a dietary supplement or food prior to substantial clinical investigations being instituted and being made public. If the FDA were to enforce the New Drug Preclusion based on its interpretation of the legislation, this would materially and adversely affect Criticality's business and financial condition.

Criticality may be required to obtain various permits, licenses and approvals in connection with its industrial hemp and hemp business.
Criticality may be required to obtain and maintain certain permits, licenses and approvals in the jurisdictions where it sources, processes, or sells industrial hemp, hemp, and products derived therefrom. There can be no assurance that it will be able to obtain or maintain any necessary licenses, permits or approvals. Moreover, Criticality and/or third-party suppliers of CBD hemp oil products could be required to obtain a Controlled Substances Act permit, which would likely not be a feasible option for retail products. Failure to obtain such licenses, permits or approvals, or any material delay in receiving these items is likely to delay and/or inhibit Criticality's ability to conduct its business, and would have an adverse effect on its business, financial condition, and results of operations.

Criticality is licensed to process industrial hemp under North Carolina’s agricultural pilot program. Criticality’s license is subject to ongoing compliance, reporting and renewal requirements. Although Criticality believes it will continue to meet the requirements of North Carolina’s agricultural pilot program, there can be no guarantee that its license will be not be revoked. Should Criticality later renew the license on different terms or not allow for anticipated capacity increases, or should the license be revoked, Criticality's business, financial condition, and results of the operations will be materially adversely affected.

Criticality may not be able to expand its industrial hemp operations into states other than North Carolina or sell its products commercially or internationally, and any such expansion will be subject to risks.
Criticality currently processes industrial hemp sourced from and grown by licensed growers operating under North Carolina’s agricultural pilot program. There can be no assurance that it will be able to obtain the licenses, approvals and authorizations necessary to source industrial hemp from growers located in and operating under the agricultural pilot programs of other states, or to source hemp under the 2018 Farm Bill from growers operating under approved state plans or under the USDA’s umbrella plan. There is no guarantee that federal or state legislation regulating the distribution and sale of industrial hemp and hemp will remain unchanged, will be implemented in a way that is favorable to Criticality, or will permit the commercial sale of hemp and hemp products nationally or internationally. It is possible for significant legislative amendments to be enacted in each state to address any current or future regulatory issues or perceived inadequacies in the distribution of industrial hemp or hemp in the United States. There is no guarantee that federal or state legislation regulating the distribution and sale of industrial hemp and hemp will create the growth opportunities that are currently anticipated by Criticality

Criticality will become subject to further laws and regulations if and when it expands industrial hemp and hemp operations to other states outside of North Carolina.
Criticality intends to expand its hemp operations to states other than North Carolina. As a result, it is and will become further subject to the laws and regulations of the states from which it sources industrial hemp and hemp and to which it sells industrial hemp, hemp, and products derived therefrom. In addition, Criticality may avail itself of proposed legislative changes in other states to expand its product portfolio, which expansion may include business and regulatory compliance risks as yet undetermined. Failure by Criticality to comply with the current or evolving regulatory framework in any jurisdiction could have a material adverse effect on its business, financial condition, and results of operations. There is the possibility that any such jurisdiction could determine that Criticality was not or is not compliant with applicable local regulations. If Criticality's historical or current sales or operations were found to be in violation of such regulations, it may be subject to enforcement actions in such jurisdictions including, but not limited to civil and criminal penalties, damages, fines, the curtailment or restructuring of its operations or asset seizures and the denial of regulatory applications.

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The DEA could take action against Criticality or the CBD industry.
There is substantial uncertainty concerning the legal status of CBD and CBD products. The status of products, including CBD, derived from the cannabis plant under both federal and state law can depend on the THC content of the plant or derivative (including whether the plant meets the statutory definition of “industrial hemp” or “hemp”), the part of the plant from which an individual or entity produces the derivative (including whether the plant meets the statutory definition of “marihuana”), whether the cultivator, processor/manufacturer, or product marketer engages in cannabis-related activities for research versus purely commercial purposes, as well as the form and intended use of the cannabis-derived product. The mere presence of CBD is not dispositive as to whether the product is legal or illegal. For example, under U.S. law, products containing CBD may be unlawful if derived from cannabis not meeting the statutory definition of “industrial hemp” or “hemp,” or if derived from industrial hemp grown outside the parameters of an approved industrial hemp pilot program or hemp cultivated in violation of the 2018 Farm Bill. Because the chemical and molecular composition of the product itself does not determine its legality, there can be no assurance that Criticality will not be subject to enforcement action, even if based on a mistaken understanding of the facts, relating to its products.

Additionally, before enactment of the 2018 Farm Bill, the DEA had taken the position that it was not practical to produce extracts that contain more than trace amounts of CBD using parts of the plant that were excluded from the definition of marihuana. Even after enactment of the 2018 Farm Bill, there can be no assurance that the DEA will treat CBD products as exempt from the Controlled Substances Act. If the DEA takes action against Criticality or the CBD industry, this could have a material adverse effect on Criticality's business, financial condition, and results of operations including the cessation of operations entirely.

The presence of THC in Criticality’s CBD products may cause adverse consequences to users of such products that will expose it to the risk of liability and other consequences.
Criticality’s products are made from industrial hemp, which contains THC, though typically at a low level. As a result of the variability of agricultural products, certain of Criticality’s products contain varying levels of THC. THC is an illegal or controlled substance in many jurisdictions. Whether or not ingestion of THC (at low levels or otherwise) is permitted in a particular jurisdiction, there may be adverse consequences to end users who test positive for THC attributed to use of Criticality’s products through unintentional presence in its products of THC, even if only in trace amounts. In addition, certain metabolic processes in the body may negatively affect the results of drug tests. Positive tests may adversely affect the end user’s reputation, ability to obtain or retain employment and participation in certain athletic or other activities. A claim or regulatory action against Criticality based on such positive test results could materially adversely affect its reputation, potentially expose it to material liability and potentially require it to recall its products.

The increasing and evolving regulation of tobacco products by the federal, state, and local governments in the United States may adversely affect the Company.
The Company and Purilum’s nicotine-containing vaping products are subject to substantial and evolving regulation by the FDA and other federal agencies (e.g., the FTC, the Consumer Products Safety Commission and the Environmental Protection Agency). While each of the Company and Purilum believes that it has complied in all material respects with each currently applicable requirement by the applicable compliance date, it is possible that federal agencies may disagree and take enforcement action against the Company, Purilum or their respective nicotine-containing vaping products based on legal or factual determinations that differ from the those of the Company and Purilum, which could have a material adverse effect on the business, financial condition, and results of operations of the Company.

The FDA has proposed regulations specifically targeting the sale of flavored vapable products in the United States, which may impose additional restrictions on the Company’s and Purilum’s business or prevent the them from selling flavored vapable products altogether.

In addition, the Food, Drug, and Cosmetic Act, as amended by the Tobacco Control Act, requires that any tobacco product that was not commercially marketed as of the “grandfathering” date of February 15, 2007, receive premarket authorization from the FDA before it can be marketed in the United States. However, the FDA announced a compliance policy for “deemed” tobacco products (i.e., those products subjected to FDA regulation pursuant to the agency’s 2016 “deeming” regulation, including nicotine-containing vaping products) that qualify as “new tobacco products.” That compliance policy allows the Company and Purilum to market such vaping products that qualify as “new tobacco products” that were on the U.S. market on August 8, 2016, until August 8, 2022, and continued marketing of such products during the FDA’s review of a pending marketing application submitted by August 8, 2022. In the absence of this policy, each of the Company and Purilum would have had to obtain prior authorization from FDA to market its vaping products after August 8, 2016. Accordingly, the Company’s and Purilum’s nicotine-containing vaping products are marketed pursuant to this compliance policy based on evidence in the Company’s and Purilum’s possession that they were on the U.S. market on August 8, 2016, and have not been physically modified since.

On March 13, 2019, the FDA issued a draft guidance document entitled “Modifications to Compliance Policy for Certain Deemed New Tobacco Products.” The document proposes to modify the current compliance policy for certain deemed tobacco products that qualify as “new tobacco products.” Relevant to vaping products, the document proposes to change the deadline for submitting

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a marketing application for flavored products (other than tobacco-, mint-, and menthol-flavored products) from August 8, 2022 to August 8, 2021. The guidance document also proposes that, even during the compliance policy period, the FDA would prioritize enforcement of the premarket review requirements for such flavored products when offered for sale in ways that pose a greater risk for minors to access such products. This includes enforcement against such flavored products sold: (1) in locations that minors may enter at any time; (2) through retailers (including online retailers) that have sold to minors after the FDA finalizes the document, (3) through online retailers lacking sufficient third-party age- and identity-verification services, and (4) through online retailers with no limit on the quantity that a customer may purchase within a given time period. The guidance document also proposes that, even during the compliance policy period, the FDA similarly would enforce the premarket review requirements against all vaping products promoted to minors or marketed in a manner likely to promote use by minors. It remains unclear whether or when the FDA will issue a final version of the draft guidance document, whether the FDA will finalize the document in the form proposed, precisely how the FDA will implement the proposed policy changes, or whether, in response to potential legal challenges to any final version of the document, the FDA could implement the policies during the pendency of such litigation.

On May 15, 2019, the U.S. District Court for the District of Maryland issued a decision that may have a future impact on the FDA’s compliance policy for deemed “new tobacco products” on the market on the August 8, 2016, effective date of the Deeming Regulations. In response to a complaint filed by public health groups and individual physicians, the court issued an order vacating the draft guidance document described above. The court has ordered briefing on the potential remedy. The court’s decision could ultimately result in the FDA’s establishing a substantially earlier deadline for filing marketing applications for the Company’s and Purilum’s nicotine-containing vaping products than even the August 8, 2021 revised deadline proposed by the FDA in its March 13, 2019 draft guidance document. The ultimate outcome of this decision, including any appeals, remains uncertain.

Failure to complete the required marketing applications for nicotine-containing vaping products by the ultimately required deadline, an endeavor that would be extremely time consuming and financially costly, or failure to ultimately obtain FDA marketing authorizations in response to completed and timely filed marketing applications, could prevent the Company and Purilum from marketing and selling their respective vaping products in the United States and, thus, may have a material effect on the business, financial condition, and results of operations of the Company.

State and local governments also currently regulate tobacco products, including the Company’s and Purilum’s nicotine-containing vaping products. Certain municipalities have enacted local ordinances that prohibit the use of e-liquid, e-cigarette and other vaping products where traditional tobacco-burning cigarettes cannot be used, and certain local jurisdictions have enacted total or partial bans on the sale of flavored tobacco products, including e-liquid, e-cigarette and other vaping products. A growing number of states have imposed excise taxes on e-liquids, e-cigarettes, and other vaping products. Other states and local jurisdictions have increased the minimum age to purchase such products to 19 or 21, have imposed restrictions or prohibitions on internet sales of such products, and have challenged the marketing of such products under consumer protection statutes (e.g., on the basis that certain marketers unlawfully target underage consumers or make unsubstantiated or misleading claims about their products). State and local regulations that prohibit or restrict the sale of vaping products in their jurisdictions, or that decrease consumer demand for these products by prohibiting their use in public places, raising the minimum age for their purchase, or raising their prices to unattractive levels via taxation, could impact the financial condition, and results of operations of the Company.

There may be changes in the laws, regulations and guidelines in the United States applicable to e-liquid, vapable oils, or vaping products.
Laws, regulations, and guidelines relating to the manufacture, management, marketing and sale of e-liquids, vapable oils, and other vaping products are subject to change, including changes implemented by evolving interpretations of applicable regulatory agencies. Any changes to or the introduction of new or additional laws, regulations and guidelines, due to matters beyond the control of the Company, could have a material adverse effect on the business, results of operations, and financial condition of these new business lines.

The Company is subject to laws and regulations related to money laundering, financial record keeping and proceeds of crime.
The Company is subject to a variety of laws and regulations that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), the Criminal Code (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada. If any of the Company's investments, or any proceeds thereof, any dividends or distributions from its subsidiaries or joint ventures, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation.


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For example, under U.S. federal law, it is unlawful to engage in financial transactions involving the proceeds of unlawful activity, including the sale of controlled substances, which in the United States includes marihuana (i.e., cannabis plants, plant parts, or derivatives that do not qualify as either hemp, the mature stalks of non-hemp plants, the sterilized seeds of non-hemp plants, or derivatives or such mature stalks or seeds). Also under U.S. federal law, banks or other financial institutions that provide a marihuana-related business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting a violation of federal law (e.g., the Controlled Substances Act), or conspiracy (e.g., to violate the Controlled Substances Act).

The Company does not believe any of its activities implicate any applicable money laundering, conspiracy, or related statutes. However, if any of the Company's investments, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such investments in the United States or Canada were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation and any persons found to be aiding and abetting or conspiring to commit such violations could be subject to liability. This could restrict or otherwise jeopardize the ability of FIGR East and FIGR Norfolk to declare or pay dividends, effect other distributions or otherwise repatriate funds to Pyxus or any Pyxus subsidiary in the United States.

The success of the Company’s new business lines will depend in part on attracting and retaining skilled employees.
The ability of the Company’s new business lines to compete and grow will be dependent on having access, at a reasonable cost and in a timely manner, to skilled labor, including certain technical individuals and sales and marketing personnel. Competition for such personnel can be intense and the Company cannot provide assurance that the new business lines will be able to attract or retain the highly qualified personnel needed. The loss of key personnel could materially adversely affect the new business lines. The loss of any such personnel could harm or delay the plans of the new business lines either while management time is directed to finding suitable replacements (who, in any event, may not be available), or, if not, covering such vacancy until suitable replacements can be found. In either case, this may have a material adverse effect on the new business lines.

Reliance on third-party suppliers, service providers, manufacturers and distributors may result in disruption to the new business lines’ supply chains.
Suppliers, service providers and distributors to the Company’s new business lines may elect, at any time, to breach or otherwise cease to participate in supply, service or distribution agreements, or other relationships, on which the operations of the new business lines rely. The loss of suppliers, service providers, manufacturers or distributors would have a material adverse effect on the business and operational results of the new business lines.

FIGR East and FIGR Norfolk are vulnerable to rising energy costs.
FIGR East and FIGR Norfolk operate indoor growing facilities in Canada and consume considerable energy in their operations. Accordingly, they are vulnerable to rising energy costs. Rising or volatile energy costs may have a material adverse effect on their respective business, financial condition, and results of operations.

FIGR East and FIGR Norfolk may not be able to store or transport its cannabis products to customers in a safe, timely and cost-efficient manner, and may experience breaches of security at its facilities or loss as a result of theft of its products.
Because of the nature of the products of FIGR East and FIGR Norfolk and the limited legal channels for distribution, as well as the concentration of inventory in their respective facilities, they are subject to a heightened risk of theft of their product and other security breaches.

Canadian adult-use distribution rules take various forms on a jurisdiction-by-jurisdiction basis and often require licensed cannabis producers to employ third parties to deliver products to central government sites. Any prolonged disruption of third-party transportation services could have a material adverse effect on sales volumes or end users’ satisfaction with FIGR East’s and FIGR Norfolk’s products. Rising costs associated with third-party transportation services used by FIGR East and FIGR Norfolk to ship their respective products may also adversely impact profitability.

A breach of security at any of FIGR East’s and FIGR Norfolk’s facilities, or during transport or delivery, could result in the significant loss of product as well as customers and may expose the FIGR East and FIGR Norfolk to additional liability, including regulatory fines, litigation or increased expenses relating to the resolution and future prevention of similar events. Any failure to take steps necessary to ensure the safekeeping of its cannabis could also have an impact on each FIGR East’s and FIGR Norfolk’s ability to continue operating under its existing licenses, to renew or receive amendments to its existing licenses or to receive required new licenses.

The future growth and profitability of the new business lines will depend on the effectiveness and efficiency of advertising and promotional expenditures.
The future growth and profitability of the new business lines will depend on the effectiveness and efficiency of advertising and promotional expenditures with respect to their products, including the ability to (i) create greater awareness of the products; (ii) determine the appropriate creative message and media mix for future advertising expenditures; and (iii) effectively manage

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advertising and promotional costs in order to maintain acceptable operating margins. There can be no assurance that advertising and promotional expenditures will result in revenues in the future or will generate awareness of these products or services. In addition, the plain packaging requirements and restrictions or promotion of the Canadian cannabis regulatory regime combined with the oversight of the Criticality’s operations in the United States by the FTC and FDA may limit the ability to effectively advertise and promote these products. No assurance can be given that the Company’s subsidiaries and joint ventures will be able to manage their respective advertising and promotional expenditures on a cost-effective basis.

The results of operations and financial position of the new business lines may differ materially from the expectations of the Company's management.
Due to numerous uncertainties, the results of operations and financial position of the new business lines may differ materially from the expectations of the Company's management. The process for estimating the revenue, net income and cash flow of the new business lines requires the use of judgment in determining the appropriate assumptions and estimates. These estimates and assumptions may be revised as additional information becomes available and as additional analyses are performed. In addition, the assumptions used in planning may not prove to be accurate, and other factors may affect the financial condition or results of operations of the new business lines.

The Company expects to incur significant ongoing costs and obligations related to its investment in infrastructure, growth, regulatory compliance and operations.
The Company expects to incur significant ongoing costs and obligations related to its investment in infrastructure and growth and for regulatory compliance with respect to the new business lines, which could have a material adverse impact on the Company's results of operations, financial condition and cash flows. In addition, future changes in regulations, changes in the enforcement thereof or other unanticipated events could require extensive changes to the Company's operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company. Efforts to grow the business of the new business lines may be costlier than the Company expects, and the Company may not be able to increase its revenue enough to offset higher operating expenses. The new business lines may incur significant losses in the future for a number of reasons, including the other risks described in this Form 10-K, and unforeseen expenses, difficulties, complications and delays, and other unknown events.

The technologies, processes, and formulations the Company uses may face competition or become obsolete.
Rapidly changing markets, technology, emerging industry standards and frequent introduction of new products characterize the Company's new business lines. The introduction of new products embodying new technologies, including new manufacturing processes or formulations, and the emergence of new industry standards may render the new business lines’ products obsolete, less competitive or less marketable. The process of developing the new business lines’ products is complex and requires significant continuing costs, development efforts and third-party commitments, including from licensees, researchers, collaborators and lenders. The failure to develop new technologies and products and the obsolescence of existing technologies or processes could adversely affect the Company's business, financial condition, and results of operations. The new business lines may be unable to anticipate changes in their respective potential customers' requirements that could make their existing technologies, processes or formulations obsolete. The success of the new business lines will depend in part on their ability to continue to enhance their existing technologies, develop new technologies that address the increasing sophistication and varied news of the market, and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of the new business lines' proprietary technologies, processes and formulations entails significant technical and business risks. The new business lines may not be successful in using new technologies, exploiting niche markets effectively or adapting their respective businesses to evolving customer or medical requirements or preference or emerging industry standards.

Some of the e-liquids, vapable oils, and vaping products produced by the new business lines contain nicotine, which is highly addictive, and the use of e-liquids, vapable oils, and other vaping products may pose a health risk to users.
Some of the products produced by the new business lines contain nicotine, which is considered to be a highly addictive substance. Furthermore, e-liquids, vapable oils, and other vaping products may be more attractive to young individuals as a smoking alternative, perceived to be less damaging to health than traditional cigarettes. Additionally, some manufactures of e-liquids, vapable oil, and other vaping products may also use flavoring concentrates within their vaping products that contain other ingredients known to be toxic to humans. Any federal, state, or local agencies with competent authority to regulate e-liquids, vapable oil, and other vaping products in their respective jurisdictions could ban certain ingredients and/or force reformulations of certain products produced for the purposes of protecting the public's general health, which could require reformulation of products produced or sold by the new business lines. In particular, recent statements by the FDA indicate an intention to strengthen the FDA's policies against flavored e-liquids, vapable oil, and other vaping products containing tobacco-derived nicotine in order to decrease usage among young individuals. There have also been instances of vaping devices exploding during charging. Such instances can cause bodily harm and could jeopardize consumer sentiment. Any one or a combination of these considerations could have a negative impact on the new business lines' ability to effectively market and sell the e-liquids, vapable oils, and other vaping products, which could materially and adversely affect the Company's business, financial condition, and results of operations.


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A failure or deterioration in quality control systems could have a material adverse effect on the new business lines’ business and operating results.
The quality and safety of the products of the new business lines are critical to the success of their respective businesses. As such, it is imperative that their (and their service providers’) respective quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by, among other things, poor design, inadequate training and failure of employees to adhere to strict quality control guidelines. Any significant failure or deterioration of the quality control systems of a new business line could have a material adverse effect on its business and operating results.

Each of the new business lines faces inherent risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused significant loss, injury or death, which is exacerbated by the fact that cannabis use may increase the risk of serious adverse side effects.
As a manufacturer and distributor of products which are ingested or otherwise consumed by humans, each of the new business lines faces the risk of exposure to product liability claims, regulatory action and litigation if its products are alleged to have caused loss, injury or death. Each of the new business lines may be subject to these types of claims due to allegations that its products caused or contributed to injury, illness or death, made false, misleading or impermissible claims, failed to include adequate labelling and instructions for use or failed to include adequate warnings concerning possible side effects or interactions with other substances. This risk is exacerbated for FIGR East and FIGR Norfolk by the fact that cannabis use may increase the risk of developing schizophrenia and other psychoses, symptoms for individuals with bipolar disorder, and other side effects. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could also occur. In addition, the manufacture and sale of cannabis products, like the manufacture and sale of any ingested or consumable product, involves a risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Any of the new business lines may in the future have to recall certain of its products as a result of potential contamination and quality assurance concerns. A product liability claim or regulatory action against any of the new business lines could result in increased costs and could adversely affect its reputation and goodwill with its consumers. There can be no assurance that product liability insurance can be maintained 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 result in the Company becoming subject to significant liabilities that are uninsured and also could adversely affect commercial arrangements between the new business lines and third parties.

The Company could incur substantial liability that may not be covered by insurance.
The Company has insurance to protect its assets, operations and employees. While the Company believes its insurance coverage addresses all material risks to which it is exposed and is adequate and customary in its current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which the Company is exposed. In addition, no assurance can be given that such insurance will be adequate to cover the Company's liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable. If the Company were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if the Company were to incur such liability at a time when it is not able to obtain liability insurance, its business, results of operations and financial condition could be materially adversely affected.

In particular, due to the Company's involvement in the cannabis and hemp industries, it may have a difficult time obtaining the various insurances that are desired to operate its business, which may expose the Company to additional risk and financial liability. Insurance that is otherwise readily available, such as general liability, and directors and officer's insurance, may be more difficult to find, and more expensive, because of the regulatory regime applicable to the industry. There are no guarantees that the Company will be able to find such insurance coverage in the future, or that the cost will be affordable. If the Company is forced to go without such insurance coverage, it may prevent it from entering into certain business sectors, may inhibit growth, and may expose the Company to additional risk and financial liabilities.

If the Company is unable to obtain appropriate crop insurance at acceptable rates or at all, the Company may have excessive exposure in the event of crop failure.
The availability of crop insurance for the Canadian cannabis industry and the U.S. hemp industry is limited. The Company, including FIGR Norfolk and FIGR East, may not be able to obtain crop insurance with respect to cannabis and hemp at economically feasible rates, on acceptable terms or at all. As a result, we may have limited or no recourse in the event of a failed crop or other event against which standard crop insurance would typically insure. Such inability may adversely affect our business and operating results.

The Company could incur unexpected expenses due to product recalls and any legal proceedings that may arise in connection with the recall.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of the Company's products are recalled due to an alleged product

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defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant attention from management. Although the Company has detailed procedures in place for testing its products, there can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of the products produced by the Company were subject to recall, the image and reputation of that product and the Company as a whole could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for the Company's products and could have a material adverse effect on the results of operations, financial condition and reputation of the Company.

Additionally, product recalls may lead to increased scrutiny of the Company's operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.

The Company may be unable to obtain or maintain the farmland necessary to support operations of the new business lines.
The Company may not be able to maintain or obtain high quality farmland in sufficient acreage to support production levels or sustained accelerated growth of the new business lines. Moreover, where farmland is available in sufficient acreage, it may not be available at rental rates or otherwise on acceptable economic terms. Inability to obtain sufficient farmland for the operations of the new business lines (with or without significant product demand growth) could negatively affect the Company's operations and financial condition.

Certain of the new business lines involve growing agricultural products, which is subject to the risks inherent in the agricultural business, including but not limited to unusual or extreme weather patterns.
The growing of cannabis and industrial hemp, each of which is an agricultural product, is subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Although cannabis growing is currently anticipated to be completed indoors under climate-controlled conditions, there can be no assurance that natural elements will not have a material adverse effect on the production of the Company's cannabis products.

Further, the Company's business is dependent on the outdoor growth and production of hemp products to be purchased by the Company for supply to Criticality. As such, the risks inherent in engaging in outdoor agricultural businesses apply. Agricultural production by its nature contains elements of risk and uncertainty that may adversely affect the business and operations of the Company, including but not limited to the following: (i) any future climate change with a potential shift in weather patterns leading to droughts and associated crop losses; (ii) potential insect, fungal and weed infestations resulting in crop failure and reduced yields; (iii) wild and domestic animals damaging the crops; and (iv) crop-raiding, sabotage or vandalism. Accordingly, the Company may be unable to achieve its production targets for industrial hemp. The Company's ability to obtain adequate (or any) insurance relating to the foregoing risks may be limited.

There can be no guarantee that an agricultural event will not adversely affect the Company's business and operating results.

Hemp plants are vulnerable to specific agricultural risks that may have a material adverse effect on the Company's hemp-related operations.
Hemp plants can be vulnerable to various pathogens including bacteria, fungi, viruses and other miscellaneous pathogens. Such instances often lead to reduced crop quality, stunted growth and/or death of the plant. Moreover, hemp is phytoremediative meaning that it may extract toxins or other undesirable chemicals or compounds from the ground in which it is planted. Various regulatory agencies have established maximum limits for pathogens, toxins, chemicals and other compounds that may be present in agricultural materials. If the hemp acquired by the Company for supply to Criticality is found to have levels of pathogens, toxins, chemicals, or other undesirable compounds that exceed established limits, the Company may have to destroy the applicable portions of its hemp crop. Should the crops be lost due to pathogens, toxins, chemicals or other undesirable compounds, it may have a material adverse effect on the Company's business and financial condition.

FIGR East and FIGR Norfolk may not successfully execute their production capacity expansion strategies.
FIGR East is currently in the process of the Charlottetown and FIGR Norfolk has developed plans for the FIGR Norfolk Expansion. These expansion projects are subject to applicable regulatory approvals and may experience construction delays or cost over-runs. In addition, FIGR Norfolk has not yet secured financing necessary to fund the FIGR Norfolk Expansion, and may not be able to secure funding on acceptable terms, on a timely basis, or at all. In addition, the FIGR Norfolk Expansion is planned to be completed in phases, each of which is susceptible to further delays and cost over-runs.

If either FIGR East and FIGR Norfolk is unable to complete its expansion projects as planned, or is unable to secure necessary production licenses in respect of its facilities, or secure necessary financing, the expectations of management with respect to the increased future cultivation and growing capacity may not be realized, which could have a material adverse effect on the Company's business, financial condition, and results of operations.


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The Company's cannabis production estimates are based on assumptions that may prove to be inaccurate.
The Company's estimated future annual production of cannabis is based on estimated square footage of cultivation space and the amount of dried cannabis cultivated per plant, which is derived from the historical output of the existing facilities of FIGR Norfolk and FIGR East. If FIGR Norfolk and FIGR East are unable to develop the predicted cultivation space, cultivate the predicted amount of cannabis or obtain the necessary regulatory approvals, annual cannabis production may be less than predicted, which could have a material adverse effect on the Company's financial condition, and results of operations.

The new business lines may be unable to renew or maintain its leases.
The new business lines may be unable to renew or maintain its leases (commercial, real property or farmland) on commercially acceptable terms or at all. An inability to renew leases, or a renewal of leases with a rental rate higher than the prevailing rate under the applicable lease prior to expiration, may have an adverse impact on the operations of the new business lines, including disruption of operations or an increase in the cost of operations. In addition, in the event of non-renewal of any of the leases, the new business lines may be unable to locate suitable replacement properties for their facilities or they may experience delays in relocation that could lead to a disruption in their operations. Any disruption in the new business lines' operations could have an adverse effect on the Company's financial condition, and results of operations.

The new business lines are heavily dependent on their respective intellectual property and trade secrets. If they are unable to effectively defend their respective intellectual property and trade secrets, their respective image, brand or competitive position may be harmed.
The success of the new business lines is heavily dependent upon their respective intangible property and technology. The Company relies upon copyrights, patents, trade secrets, unpatented proprietary know-how and continuing innovation to protect important intangible property, technology and information. The Company relies on various methods to protect its proprietary rights, including confidentiality agreements with consultants, service providers and management that contain terms and conditions prohibiting unauthorized use and disclosure of confidential information. However, despite efforts to protect intangible property rights, unauthorized parties may attempt to copy or replicate intangible property, technology or processes. There can be no assurances that the steps taken by the Company to protect its intangible property, technology and information will be adequate to prevent misappropriation or independent third-party development of the Company's intangible property, technology or processes. It is likely that other companies can duplicate a production process similar to the Company's. Other companies may also be able to materially duplicate the Company's proprietary plant strains.

With respect to any intangible property rights claim against the Company, the Company may have to pay damages or stop using intangible property found to be in violation of a third party's rights. The Company may have to seek a license for the intangible property, which may not be available on reasonable terms and may significantly increase operating expenses. The technology also may not be available for license at all. As a result, the Company may also be required to pursue alternative options, which could require significant effort and expense. If the Company cannot license or obtain an alternative for the infringing aspects of its business, it may be forced to limit product offerings and may be unable to compete effectively. Any of these results could harm the Company's brand and prevent it from generating sufficient revenue or achieving profitability.

To the extent that any of the above occur, revenue could be negatively affected, and in the future, the Company may have to litigate to enforce its intangible property rights, which could result in substantial costs and divert management's attention and other resources.

Each of the new business lines’ ability to successfully implement its business plan depends in part on its ability to obtain, maintain and build brand recognition using its trademarks, service marks, trade dress, domain names and other intellectual property rights. If their efforts to protect their intellectual property are unsuccessful or inadequate, or if any third-party misappropriates or infringes on their intellectual property, the value of its brands may be harmed, which could have a material adverse effect on their business and might prevent the brands from achieving or maintaining market acceptance.

The new business lines may be unable to obtain registrations for its intellectual property rights for various reasons, including refusal by regulatory authorities to register trademarks or other intellectual property protections, prior registrations of which it is not aware, or it may encounter claims from prior users of similar intellectual property in areas where it operates or intends to conduct operations. This could harm its image, brand or competitive position and cause the new business lines to incur significant penalties and costs.

The success of each of the new business lines depends upon the skills, knowledge and experience of its scientific and technical personnel, consultants and advisors, as well as contractors. Because the Company operates in a highly competitive industry, it relies in part on trade secrets to protect its proprietary products and processes. However, trade secrets are difficult to protect. The Company enters into confidentiality or non-disclosure agreements with its corporate partners, employees, consultants, outside scientific collaborators, developers and other advisors. These agreements generally require that the receiving party keep confidential, and not disclose to third parties, confidential information developed by the receiving party or made known to the receiving party by the Company during the course of the receiving party's relationship with the Company. These agreements also

45


generally provide that inventions conceived by the receiving party in the course of rendering services to the Company will be its exclusive property, and the Company enters into assignment agreements to perfect its rights. These confidentiality, inventions and assignment agreements, where in place, may be breached and may not effectively assign intellectual property rights to the Company. The Company's trade secrets also could be independently discovered by competitors, in which case the Company would not be able to prevent the use of such trade secrets by its competitors. The enforcement of a claim alleging that a party illegally obtained and was using the Company's trade secrets could be difficult, expensive and time consuming and the outcome could be unpredictable. The failure to obtain or maintain meaningful trade secret protection could adversely affect the Company's competitive position.

Risks Relating to Other Aspects of Our Operations

Low investment performance by our defined benefit pension plan assets may increase our pension expense, and may require us to fund a larger portion of our pension obligations, thus, diverting funds from other potential uses.
We sponsor defined benefit pension plans that cover certain eligible employees. Our pension expense and required contributions to our pension plans are directly affected by the value of plan assets, the projected rate of return on plan assets, the actual rate of return on plan assets, and the actuarial assumptions we use to measure the defined benefit pension plan obligations.

If plan assets perform below the assumed rate of return used to determine pension expense, future pension expense will increase. Further, as a result of the global economic instability or other economic market events, our pension plan investment portfolio may experience significant volatility.

The proportion of pension assets to liabilities, which is called the funded status, determines the level of contribution to the plan that is required by law. In recent years, we have funded the plan in amounts as required, but changes in the plan’s funded status related to the value of assets or liabilities could increase the amount required to be funded. We cannot predict whether changing market or economic conditions, regulatory changes or other factors will further increase our pension funding obligations, diverting funds that would otherwise be available for other uses.

We rely on internal and externally hosted information technology systems and disruption, failure or security breaches of these systems could adversely affect our business.
We rely on information technology (IT) systems, including systems hosted by service providers. The enterprise resource planning system (SAP) we have implemented throughout the Company, for example, is hosted by Capgemini and our domestic employee payroll system is hosted by Ceridian. Although we have disaster recovery plans and several intrusion preventive mitigating tools and services in place, which are active inline services or are tested routinely, our portfolio of hardware and software products, solutions and services and our enterprise IT systems, including those hosted by service providers, may be vulnerable to damage or disruption caused by circumstances beyond our control, such as catastrophic events, power outages, natural disasters, computer system or network failures, computer viruses or other malicious software programs and cyber-attacks, including system hacking and other cyber-security breaches. For example, in April 2019, the Company discovered that the email accounts of two Canadian employees had been compromised resulting in the unauthorized access of customer and vendor data. These incidents were neither material nor compromised the Company’s other IT systems. The failure or disruption of our IT systems to perform as anticipated for any reason could disrupt our business and result in decreased performance, significant remediation costs, transaction errors, loss of data, processing inefficiencies, downtime, litigation, and the loss of suppliers or customers. A significant disruption or failure could have a material adverse effect on our business operations, financial performance and financial condition.

There can be no assurance that material weaknesses will not be identified in the future.
We believe that our internal control over financial reporting was effective at March 31, 2019 as reported elsewhere in this Annual Report. Although we intend to continue to aggressively monitor and improve our internal controls, we cannot assure you that other material weaknesses will not occur in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations or result in misstatements in our financial statements in amounts that could be material. Ineffective internal controls could cause investors to lose confidence in our reported financial information, which could have a negative effect on the value of our common stock and could also require additional restatements of our prior reported financial information.

Regulations regarding environmental matters may affect the Company by substantially increasing the Company's costs and exposing it to potential liability.
The Company is subject to environmental, health and safety laws and regulations in each jurisdiction in which the Company operates. Such regulations govern, among other things, emissions of pollutants into the air, wastewater discharges, waste disposal, the investigation and remediation of soil and groundwater contamination, and the health and safety of the Company's employees. For example, the Company's products and the raw materials used in its production processes are subject to numerous environmental laws and regulations. The Company may be required to obtain environmental permits from governmental authorities for certain of its current or proposed operations. The Company may not have been, nor may it be able to be at all times, in full compliance with such laws, regulations and permits. If the Company violates or fails to comply with these laws, regulations or permits, the Company could be fined or otherwise sanctioned by regulators.

46



As with other companies engaged in similar activities or that own or operate real property, the Company faces inherent risks of environmental liability at its current and historical production sites. Certain environmental laws impose strict and, in certain circumstances, joint and several liability on current or previous owners or operators of real property for the cost of the investigation, removal or remediation of hazardous substances as well as liability for related damages to natural resources. In addition, the Company may discover new facts or conditions that may change its expectations or be faced with changes in environmental laws or their enforcement that would increase its liabilities. Furthermore, its costs of complying with current and future environmental and health and safety laws, or the Company's liabilities arising from past or future releases of, or exposure to, regulated materials, may have a material adverse effect on its business, financial condition, and results of operations.

Risks Related to Global Financial and Credit Markets

Volatility and disruption of global financial and credit markets may negatively impact our ability to access financing and expose us to unexpected risks.
Global financial and credit markets expose us to a variety of risks as we fund our business with a combination of cash from operations, short-term seasonal credit lines, the ABL Facility, long-term debt securities and customer advances. We have financed our non-U.S. operations with uncommitted unsecured short-term seasonal lines of credit at the local level. These local operating lines typically extend for a term of up to one year and are typically uncommitted in that the lenders have the right to cease making loans and demand repayment of loans at any time. As of March 31, 2019, we had approximately $429.0 million drawn and outstanding on short-term foreign seasonal lines and a maximum borrowing capacity under these lines and the ABL Facility totaling $855.9 million, subject to limitations under the ABL Facility. Changes in the global financial and credit markets could create uncertainty as to whether local seasonal lines will continue to be available to finance our non-U.S. operations to the extent or on terms similar to what has been available in the past and whether repayment of existing loans under these lines will be demanded prior to maturity.

To the extent that local seasonal lines cease to be available at levels necessary to finance our non-U.S. operations or we are required to repay loans under the lines prior to maturity, we may be required to seek alternative financing sources beyond our existing committed sources of funding. Based on the current financial and credit markets, we cannot assure you that such alternative funding will be available to us on terms and conditions acceptable to us, or at all. In the event that we may be required to support our non-U.S. operations by borrowing U.S. dollars under the ABL Facility, we may be exposed to additional currency exchange risk that we may be unable to successfully hedge. Further, there is additional risk that certain banks that are lenders under seasonal lines could be unable to meet contractually obligated borrowing requests in the future if their financial condition were to deteriorate. In addition, we maintain deposit accounts with numerous financial institutions around the world in amounts that exceed applicable governmental deposit insurance levels. While we actively monitor our deposit relationships, we are subject to risk of loss in the event of the unanticipated failure of a financial institution in which we maintain deposits, which loss could be material to our results of operations and financial condition.

Derivative transactions may expose us to potential losses and counterparty risk.
We may, from time to time, enter into certain derivative transactions, including interest rate swaps and foreign exchange contracts. Changes in the fair value of these derivative financial instruments that are not accounted for as cash flow hedges are reported as income, and accordingly could materially affect our reported income in any period. In addition, the counterparties to these derivative transactions may be financial institutions or affiliates of financial institutions, and we would be subject to risks that these counterparties default under these transactions. In some of these transactions, our exposure to counterparty credit risk may not be secured by any collateral. Global economic conditions over the last few years have resulted in the actual or perceived failure or financial difficulties of many financial institutions, including bankruptcy. If one or more of the counterparties to one or more of our derivative transactions not secured by any collateral becomes subject to insolvency proceedings, we would become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under those transactions. We can provide no assurances as to the financial stability or viability of any of our counterparties.

Risks Relating to the Tobacco Industry

Reductions in demand for consumer tobacco products could adversely affect our results of operations.
The tobacco industry, both in the United States and abroad, continues to face a number of issues that may reduce the consumption of cigarettes and adversely affect our business, sales volume, results of operations, cash flows and financial condition.

These issues, some of which are more fully discussed below, include:

governmental actions seeking to ascribe to tobacco product manufacturers liability for adverse health effects associated with smoking and exposure to environmental tobacco smoke;
smoking and health litigation against tobacco product manufacturers;
increased consumer acceptance of electronic cigarettes;

47


tax increases on consumer tobacco products;
current and potential actions by state attorneys general to enforce the terms of the Master Settlement Agreement, or MSA, between state governments in the United States and tobacco product manufacturers;
governmental and private bans and restrictions on smoking;
actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States;
restrictions on tobacco product manufacturing, marketing, advertising and sales;
the diminishing social acceptance of smoking;
increased pressure from anti-smoking groups;
other tobacco product legislation that may be considered by Congress, the states, municipalities and other countries; and
the impact of consolidation among multinational cigarette manufacturers.

Tobacco product manufacturer litigation may reduce demand for our products and services.
Our primary customers, the leading cigarette manufacturers, have faced thousands of lawsuits brought throughout the United States and, to a lesser extent, the rest of the world. These lawsuits have been brought by different types of plaintiffs, including: (1) individuals and classes of individuals alleging personal injury and/or misleading advertising; (2) governments (including governmental and quasi-governmental entities in the United States and abroad) seeking recovery of health care costs allegedly caused by cigarette smoking; and (3) other groups seeking recovery of health care expenditures allegedly caused by cigarette smoking, including third-party health care payors, such as unions and health maintenance organizations. Damages claimed in some of the smoking and health cases have ranged into the billions of dollars. There have been many jury verdicts for plaintiffs in tobacco product litigation over the past several years. Additional plaintiffs continue to file lawsuits. The effects of the previous and current lawsuits on our customers could reduce their demand for tobacco from us.

Legislation and regulatory and other governmental initiatives could impose burdensome restrictions on the tobacco industry and reduce consumption of consumer tobacco products and demand for our services.
The Family Smoking Prevention and Tobacco Control Act, which amended the FDCA, extends the authority of the FDA to regulate tobacco products. This act authorizes the FDA to adopt product standards for tobacco products, including the level of nicotine yield and the reduction or elimination of other constituents of the products, along with provisions for the testing of products against these standards. The act imposes further restrictions on advertising of tobacco products, authorizes the FDA to limit the sales of tobacco products to face-to-face transactions permitting the verification of the age of the purchaser, authorizes a study to determine whether the minimum age for the purchase of tobacco products should be increased and requires submission of reports from manufacturers of tobacco products to the FDA regarding product ingredients and other matters, including reports on health, toxicological, behavioral, or physiologic effects of tobacco products and their constituents. The act also mandates warning labels and requires packaging to indicate the percentage of domestically grown tobacco and foreign grown tobacco included in the product. The FDA has adopted regulations under the act establishing requirements for the sale, distribution and marketing of cigarettes, as well as package warnings and advertising limitations.

The act directs the FDA to promulgate regulations requiring that the methods used in, and the facilities and controls used for, the manufacture, preproduction design validation, packing, and storage of a tobacco product conform to current good manufacturing practice. Regulations under the act do not apply to tobacco leaf that is not in the possession of a manufacturer of tobacco products, or to the producers of tobacco leaf, including tobacco suppliers, tobacco warehouses, and tobacco supplier cooperatives unless those entities are controlled by a tobacco product manufacturer, but do apply to our U.S. cut rag processing facility with respect to covered tobacco products.

In May 2016, the FDA finalized regulations, which became effective in August 2016, that extend its regulatory authority under the act to tobacco products not previously covered by its regulations, including vaporizers, vape pens, hookah pens, electronic cigarettes (or, e-cigarettes), e-pipes, and other types of electronic nicotine delivery systems, including e-liquids used in these devices, as well as pipe tobacco and cigars (including little cigars and cigarillos), and future novel tobacco products. These regulations require manufacturers of these additional tobacco products to, among other things submit an application and obtain FDA authorization to market a new tobacco product (as noted above); register establishment(s) and submit product listing to FDA; submit listing of ingredients; submit information on harmful and potentially harmful constituents; submit tobacco health documents; not introduce into interstate commerce modified-risk tobacco products (e.g., products with label, labeling, or advertising representing that they reduce risk or are less harmful compared to other tobacco products on the market) without an FDA order; and include the required warning statement on packaging and advertisements. These regulations will extend to certain of our operations that had not previously been subject to the act, including the processing of pipe tobacco and tobacco for little cigars and cigarillos at our U.S. cut rag processing facility, and to joint ventures and subsidiaries that develop, produce and sell consumable e-liquids. In addition, the May 2016 regulations make these additional tobacco products subject to certain existing restrictions on the sale of cigarettes, including restrictions prohibiting sale to individuals under 18 years of age. In addition, recently federal legislators have proposed bills that would establish a national minimum purchase age of 21 for tobacco and tobacco-based products, including e-liquids.


48


The full impact of the act, including the May 2016 regulations and any future regulatory action to implement the act, is uncertain. However, if the effect of the act and FDA regulations under the act is a significant reduction in consumption of tobacco products, it could materially adversely affect our business, volume, results of operations, cash flows and financial condition.

Reports with respect to the harmful physical effects of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. More recent reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking in adolescence. Numerous state and municipal governments have taken and others may take actions to diminish the social acceptance of smoking of tobacco products, including banning smoking in certain public and private locations.

A number of foreign nations also have taken steps to restrict or prohibit cigarette advertising and promotion, to increase taxes on cigarettes and to discourage cigarette smoking. In some cases, such restrictions are more onerous than those in the United States. For example, advertising and promotion of cigarettes has been banned or severely restricted for a number of years in Australia, Canada, Finland, France, Italy, Singapore and other countries. Further, in February 2005, the World Health Organization (“WHO”) treaty, the Framework Convention for Tobacco Control (“FCTC”), entered into force. This treaty, which is binding on 181 nations as of March 31, 2019, requires signatory nations to enact legislation that would require, among other things, specific actions to prevent youth smoking; restrict or prohibit tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the content of tobacco products; impose new package warning requirements including the use of pictorial or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase and harmonize cigarette excise taxes; abolish duty-free tobacco sales; and permit and encourage litigation against tobacco product manufacturers.      

Due to the present regulatory and legislative environment, a substantial risk exists that past growth trends in tobacco product sales may not continue and that existing sales may decline. A significant decrease in worldwide tobacco consumption brought about by existing or future governmental laws and regulations would reduce demand for tobacco products and services and could have a material adverse effect on our results of operations.

Government actions can have a significant effect on the sourcing of tobacco. If some of the current efforts are successful, we could have difficulty obtaining sufficient tobacco to meet our customers’ requirements, which could have an adverse effect on our performance and results of operations.
The WHO, through the FCTC, created a formal study group to identify and assess crop diversification initiatives and alternatives to leaf tobacco growing in countries whose economies depend upon tobacco production. The study group began its work in February 2007. In its initial report published later that year, the study group indicated that the FCTC did not aim to phase out tobacco growing, but the study group's focus on alternatives to tobacco crops was in preparation for its anticipated eventual decrease in demand resulting from the FCTC's other tobacco control initiatives.

If the objective of the FCTC study group were to change to seek to eliminate or significantly reduce leaf tobacco production and certain countries were to partner with the study group in pursuing this objective, we could encounter difficulty in sourcing leaf tobacco to fill customer requirements, which could have an adverse effect on our results of operations.

In addition, continued government and public emphasis on environmental issues, including climate change, conservation, and natural resource management, could result in new or more stringent forms of regulatory oversight of industry activities, which may lead to increased levels of expenditures for environmental controls, land use restrictions affecting us or our suppliers, and other conditions that could have a material adverse effect on our business, financial condition, and results of operations. For example, certain aspects of our business generate carbon emissions. Regulatory restrictions on greenhouse gas emissions have been proposed in certain countries in which we operate. These may include limitations on such emissions, taxes or emission allowance fees on such emissions, various restrictions on industrial operations, and other measures that could affect land-use decisions, the cost of agricultural production, and the cost and means of processing and transporting our products. These actions could adversely affect our business, financial condition, and results of operations.

We have been, and continue to be, subject to governmental investigations into, and litigation concerning, leaf tobacco industry buying and other payment practices.
The leaf tobacco industry, from time to time, has been the subject of government investigations regarding trade practices. For example, we were the subject of an investigation by the Antitrust Division of the United States Department of Justice into certain
buying practices alleged to have occurred in the industry, we were named defendants in an antitrust class action litigation alleging a conspiracy to rig bids in the tobacco auction markets, and we were the subject of an administrative investigation into certain

49


tobacco buying and selling practices alleged to have occurred within the leaf tobacco industry in some countries within the European Union, including Spain, Italy, Greece and potentially other countries.


50


Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Following is a description of the Company’s material properties as of March 31, 2019.

Corporate
Our corporate headquarters are located in Morrisville, North Carolina and are leased under an agreement that expires in May 2021.

Facilities
We own a total of 12 production facilities in 8 countries. We operate each of our tobacco processing plants for seven to nine months during the year to correspond with the applicable harvesting season. While we believe our production facilities have been efficiently utilized, we continually compare our production capacity and organization with the transitions occurring in global sourcing of tobacco and other specialty products. We also believe our domestic production facilities and certain foreign production facilities have the capacity to process additional volumes of tobacco and other specialty products if required by customer demand.

The following is a listing of the various material properties used in operations all of which are owned by the Company:
Location
Use
Leaf - North America Segment
 
United States
 
Wilson, N.C.
Factory / Storage
Farmville, N.C.
Factory / Storage
Danville, V.A.
Storage
Leaf - Other Regions Segment
 
South America
 
Venancio Aires, Brazil
Factory / Storage
Ararangua, Brazil
Factory / Storage
El Carril, Argentina
Factory / Storage
Africa
 
Lilongwe, Malawi
Factory / Storage
Morogoro, Tanzania
Factory / Storage
Harare, Zimbabwe
Factory / Storage
Asia
 
Ngoro, Indonesia
Factory / Storage
 
 
Other Products and Services Segment
 
Charlottetown, Prince Edward Island, Canada
Factory / Storage
Simcoe, Ontario, Canada
Factory / Storage






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Item 3. Legal Proceedings

On June 7, 2019, the Company and certain of its officers were named as defendants in a complaint filed in the United States District Court for the Eastern District of North Carolina. The complaint was brought on behalf of a putative class of investors who purchased the Company's common stock between June 7, 2018 and November 8, 2018. The complaint alleges that the defendants violated federal securities laws provisions with respect to fraud and material misrepresentation, which purported misconduct was revealed by the Company’s November 8, 2018 announcement that sales and other operating revenues for the quarter ended September 30, 2018 had decreased approximately 12% over the prior year quarter and the announcement on November 9, 2018 by the Securities and Exchange Commission that the Company had settled charges that it had materially misstated its financial statements from 2011 through the second quarter of 2015 due to improper and sufficient accounting, processes and control activities, deferred crop costs and revenue transactions in Africa. The complaint alleges that members of the purported class were harmed by the decline in the trading price of the Company’s common stock on the dates of these announcements. The complaint seeks damages in an unspecified amount.

While the Company is continuing to evaluate the complaint, based on its current review, the Company does not believe the claims have merit. The Company intends to vigorously defend against the claims made in the complaint.

See "Note 16. Contingencies and Other Information" to the "Notes to Consolidated Financial Statements" for further information with respect to legal proceedings, which is incorporated by reference herein.


Item 4. Mine Safety Disclosures

Not applicable.


Part II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

Pyxus’ common stock is traded on the New York Stock Exchange, under the ticker symbol "PYX".

As of March 31, 2019, there were 12,969 shareholders, including 12,434 non-objecting beneficial holders of our common stock.

The payment of dividends by Pyxus is subject to the discretion of our board of directors and will depend on business conditions, compliance with debt agreements, achievement of anticipated cost savings, financial condition and earnings, regulatory considerations and other factors. The agreement governing the ABL Facility and the indentures governing our senior secured first lien notes and our senior secured second lien notes restrict our ability to pay dividends. See Note 8. "Long-Term Debt - Covenants Limiting Dividends" to the “Notes to Consolidated Financial Statements” for further information.





52


Pyxus International, Inc. Comparison of Cumulative Total Return to Shareholders

The following line graph and table presents the cumulative total shareholder return of a $100 investment including reinvestment of dividends and price appreciation over the last five years in each of the following: Pyxus International, Inc. (PYX) common stock, the S&P 500 Index, the S&P 600 Small Cap Index and an index of peer companies. The sole company in the peer group is Universal Corporation (UVV).
chart-927573b942bc5e569eba01.jpg
*$100 invested on 3/31/14 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.

Copyright ©2019 Standard & Poor's, a division of S&P Global. All rights reserved.

Cumulative Total Return
 
 
 
 
3/14

3/15

3/16

3/17

3/18

3/19

Pyxus International, Inc.
$
100.00

$
37.67

$
60.14

$
44.01

$
89.21

$
81.82

S&P 500
$
100.00

$
112.73

$
114.74

$
134.45

$
153.26

$
167.81

S&P Smallcap 600
$
100.00

$
108.72

$
105.24

$
131.11

$
147.74

$
150.05

Custom Peer Group
$
100.00

$
88.17

$
110.55

$
142.79

$
101.51

$
126.40



53


Item 6. Selected Financial Data

Five Year Financial Statements
Pyxus International, Inc. and Subsidiaries
 
Years Ending March 31,
(in thousands, except per share amount, ratio and number of stockholders)
2019
2018
2017
2016
2015
Summary of Operations
 
 
 
 
 
   Sales and other operating revenues
$
1,801,593

$
1,845,966

$
1,714,750

$
1,904,592

$
2,066,865

   Other income (expense) (1)
14,217

14,382

4,896

105,427

(66
)
   Restructuring and asset impairment charges
4,946

382

1,375

5,888

9,118

   Operating income (2)
87,254

111,904

87,342

206,220

99,584

   Net (loss) income
(71,168
)
51,906

(63,271
)
65,445

(28,034
)
   Net (loss) income attributable to
      Pyxus International, Inc.
(70,467
)
52,436

(62,928
)
65,532

(27,862
)
(Loss) Earnings Per Share Attributable to Pyxus International, Inc.:
 
 
 
 
 
   Basic (loss) earnings per share
$
(7.78
)
$
5.83

$
(7.05
)
$
7.38

$
(3.16
)
 
 
 
 
 
 
   Diluted (loss) earnings per share (3)
$
(7.78
)
$
5.81

$
(7.05
)
$
7.38

$
(3.16
)
 
 
 
 
 
 
   Cash dividends paid





 
 
 
 
 
 
Balance Sheet Data
 
 
 
 
 
   Working capital