You should read the following management's discussion and analysis of financial condition and results of operations ("MD&A") in conjunction with our audited consolidated financial statements for the years ended December 31, 2021, and 2020, and unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022, and 2021, which are included in the Form 10, which was filed with the SEC on June 29, 2022 and on SEDAR at www.sedar.com. Additionally, you should read our unaudited consolidated condensed financial statements for the three and six months ended June 30, 2022, included elsewhere in this Quarterly Report on Form 10-Q. This MD&A contains statements that are forward-looking. Please refer to the discussion of forward-looking statements and information set out under the heading "Disclosure Regarding Forward-Looking Statements" identified in this Quarterly Report on Form 10-Q. These statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors. Actual results could differ materially because of the factors discussed below or elsewhere in this Quarterly Report on Form 10-Q. See Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q, and Item 1A. "Risk Factors" of the Form 10. Unless otherwise indicated or the context otherwise requires, references herein to "we," "us," "our," and the "Company" refers to TILT Holdings Inc., and its subsidiaries.
All dollar amounts presented in this MD&A are presented in thousands of U.S. dollars ("USD$", "$", or "US$"), except per share amounts, unless otherwise indicated.
The Company was incorporated under the laws of Nevada pursuant to NRS Chapter 78 on June 22, 2018. The Company was continued under the Business Corporations Act (British Columbia) ("BCBCA") pursuant to a Certificate of Continuance dated November 14, 2018. The Company's head office is located in Phoenix, Arizona and its registered office is located in Vancouver, British Columbia.
The Company operates through two business divisions: inhalation technology and cannabis. The inhalation technology division encompasses the Jupiter Research LLC ("Jupiter") business, through which the Company sells vape and accessory products and services across 37 states in the United States, as well as Canada, Israel, South America and the European Union. The cannabis division includes operations in Massachusetts at Commonwealth Alternative Care ("CAC"), in Pennsylvania at Standard Farms LLC ("Standard Farms PA") and in Ohio at Standard Farms Ohio, LLC ("Standard Farms OH").
Through the Company's CAC operations, the Company operates a vertically integrated marijuana facility in Taunton, Massachusetts, dually licensed for both medical and adult-use cultivation, manufacturing and retail sales and a dispensary, also dually licensed for both medical and adult-use retail sales, in Brockton, Massachusetts. CAC has another dispensary built out but not yet operating in Cambridge, Massachusetts. Through these operating facilities the Company produces, packages, and sells a variety of cannabis flower, vape cartridge, concentrate, edible and topical products via wholesale and retail to Massachusetts customers.
Through the Company's Standard Farms PA operations in White Haven, Pennsylvania, the Company produces medical cannabis products including vape cartridges, flower, capsules, oil syringes and tinctures, which are sold via wholesale to Pennsylvania customers.
Through the Company's Standard Farms OH facility outside Cleveland, Ohio, the Company produces high-quality medical cannabis products from cannabis biomass including tinctures, vape cartridges, syringes, topicals, concentrates and edibles, which are then sold and distributed throughout Ohio via wholesale to other licensed cannabis businesses.
On May 16, 2022, through its subsidiary CAC, the Company completed the previously announced acquisition of the Taunton Facility. Concurrent with the acquisition, CAC closed on the sale of the Taunton Facility (the "Massachusetts Sale" and, with the Taunton Purchase, the "Massachusetts Transaction") to Innovative Industrial Properties, Inc. ("IIP"). The purchase price for the property in the Massachusetts Sale was $40,000. The all-cash net proceeds of the Massachusetts Transaction of $25,466 will be used by the Company to pay down the outstanding corporate debt. Concurrent with the closing of the Massachusetts Sale, IIP entered into a long-term, triple-net lease agreement for the property with CAC for a term of 20 years, with two 5-year extensions exercisable at the tenant's discretion. CAC anticipates no disruption to its operations as a result of the transaction. In addition to the Massachusetts Transaction, the Company entered into a definitive purchase and sale agreement between TILT's subsidiary, White Haven RE, LLC, and an affiliate of IIP, providing for the sale and leaseback of TILT's cultivation and production facility in White Haven, PA (the "Pennsylvania Transaction") in exchange for $15,000 cash. In accordance with the terms of the Pennsylvania Transaction, TILT's subsidiary, Standard Farms PA, will also execute a long-term, triple-net lease agreement. The term lease agreement will be 20 years, with two 5-year extensions exercisable at the tenant's discretion. Standard Farms PA anticipates no disruption to its operations as a result of the transaction. The Pennsylvania Transaction is subject to various closing conditions, including standard property/title inspections and appraisals. On May 26, 2022, the Company signed an amendment to the agreement to allow the Company and IIP to extend the end of the investigational period of the transaction contemplated to a date that was on or before June 17, 2022. On June 17, 2022, the Company signed a second amendment to allow the Company and IIP to extend the end of the investigational period of the transaction contemplated to a date that is on or before September 30, 2022.
On June 9, 2022, the Company announced its subsidiary, CAC, had been approved by the CCC to receive a Final License at its forthcoming Cambridge dispensary, for the medical use of marijuana. The Company expects to receive post final inspection approval from the CCC to commence medical cannabis retail sales in August 2022.
The Company's business, financial condition, and results of operations may be unfavorably impacted by the following trends and uncertainties. See also Item 1A. "Risk Factors" of the Form 10 filed with the SEC and on SEDAR at www.sedar.com, for discussions of other risks that may affect the Company.
COVID-19 Pandemic and Global Conflicts
In March 2020, the World Health Organization categorized COVID-19 as a global pandemic. The Company continues to implement and evaluate actions to strengthen its financial position and support the continuity of its business and operations in response to the COVID-19 pandemic.
The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, have created much uncertainty in the global marketplace. The Company is closely monitoring the ongoing impact of such events on all aspects of its business, including how it will impact its services, customers, employees, vendors, and business partners now and in the future. While the COVID-19 pandemic and recent geopolitical conflicts did not materially adversely affect the Company's financial results and business operations in the six months ended June 30, 2022, the Company is unable to predict the impact that these events will have on its future financial position and operating results due to numerous uncertainties.
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
Revenue represents the amount the Company expects to receive for goods and services in its contracts with customers, net of discounts and sales taxes. The Company's revenue is derived from the following:
Sale of Goods - Vaporization and Inhalation Devices:
Revenue from the wholesale sales of accessories is recognized when the Company transfers control and satisfies its performance obligations on wholesale sales of accessories. Revenue is recognized from product sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery, depending on the terms of sale with the customer.
Sale of Goods - Cannabis:
Revenue from the direct sale of goods to customers for a fixed price is recognized when the Company transfers control of the goods to the customer. The Company transfers control and satisfies its performance obligations on retail sales upon delivery and acceptance from the customer. For dispensary sales, this occurs at the point of sale at the dispensary. The Company satisfies its performance obligation on wholesale sales when goods are delivered to the customer.
Revenue for the three months ended June 30, 2022 was $47,055, down from $48,469 for the three months ended June 30, 2021, reflecting a year-over-year decrease of $1,414 or 3%. The decrease was primarily attributable to Jupiter which decreased revenue by $3,632 or 9%, mainly driven by lower sales volume as slowdowns in retail vaporizer sales in major markets has affected the cadence of repurchases by certain larger Jupiter customers. Price decreases in certain product lines relative to the prior year also impacted year-over-year revenue in the inhalation technology division. Partially offsetting Jupiter's revenue decrease, revenue in cannabis operations for the three months ended June 30, 2022 increased by $2,218 or 22% year-over-year, primarily in Massachusetts operations driven mainly by retail sales, following the activation of two adult-use licenses in November and December 2021. Additionally, brand partner revenue in Massachusetts, Pennsylvania and Ohio cannabis operations grew year-over-year, as the Company continues its strategy of introducing and supporting partner brands in the cannabis markets in which it operates.
Cost of Goods Sold, Gross Profit and Gross Margin
Gross profit reflects revenue less production costs primarily consisting of labor, materials, rent and facilities, supplies, overhead, and amortization on production equipment, shipping, packaging and other expenses required to grow and manufacture cannabis products. Gross margin represents gross profit as a percentage of revenue.
Cost of goods sold for the three months ended June 30, 2022 was $36,110, up from $35,580 for the three months ended June 30, 2021 reflecting a year-over-year increase of $530 or 1%, driven by increased sales volume in cannabis operations, partially offset by decreased sales volume at Jupiter.
The Company's gross profit for the three months ended June 30, 2022 was $10,945, down from $12,889 for the three months ended June 30, 2021, which reflects a year-over-year decrease of $1,944 or 15%. Gross margin was 23% and 27% for the three months ended June 30, 2022 and 2021, respectively. The decrease in gross profit was mainly due to decreased revenue year-over-year at Jupiter, while the contraction in gross margin was primarily due to a difference in pricing in certain Jupiter product lines and in wholesale cannabis operations.
Total operating expenses primarily consists of costs incurred at the Company's corporate offices, share-based compensation, personnel costs including wages and employee benefits, professional service costs including accounting and legal expenses, rental costs associated with certain of the Company's offices and facilities, insurance expenses, costs associated with advertising and marketing the Company's products and other general and administrative expenses which support the Company's business.
Total operating expenses for the three months ended June 30, 2022 was $24,521, an increase of $10,098 or 70% year-over-year from $14,423. The increase was primarily driven by impairment of goodwill at Jupiter. Additionally, increases in wages and benefits expense, general and administrative expense and sales and marketing expense were driven by the expansion of retail cannabis operations and brand partnerships relative to the prior year.
The Company incurred impairment losses in the three months ended June 30, 2022 of $6,669 in goodwill impairment. Due to a decline in revenue relative to forecasts at Jupiter during the period, interim goodwill testing was conducted as of June 30, 2022. Based on the test results, an impairment loss of $6,669 was recorded against goodwill at Jupiter.
Other income (expense) for the three months ended June 30, 2022 was ($376), a decrease of $3,840 from the prior year primarily driven by the $2,017 decrease in non-cash income due to the change in fair value of warrant liabilities. The decrease is driven by the revaluation at each reporting date of the fair value of the Company's warrant liabilities, which is primarily based on changes to the share price input to the Black-Scholes option pricing model. Additionally impacting other income, interest expense increased $1,476 year-over-year and loan receivable losses increased $504 driven by the Company's current expected credit losses ("CECL") analysis of loans receivable. CECL are measured by the Company on a probability-weighted basis based on historical experience, current conditions and reasonable and supportable forecasts.
The Company recorded net loss of $7,051 for the three months ended June 30, 2022 compared to net income of $1,034 for the prior year, for a reduction in net income of $8,085 as a result of the factors noted above.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
Revenue for the six months ended June 30, 2022 was $89,407, down from $95,286 for the six months ended June 30, 2021, reflecting a year-over-year decrease of $5,879 or 6%. The decrease was primarily attributable to decreased sales volume at Jupiter which decreased revenue by $7,622 or 10% mainly driven by slower cadence of reorders from major customers following their high inventory position taken during the three months ended December 31, 2021, leading to longer inventory cycles as vaporizer sales at retail in major markets experience a slowdown during the current period. Partially offsetting this decrease, revenue in cannabis operations for the six months ended June 30, 2022 increased $1,743 or 8% year-over-year, primarily in the Company's Massachusetts operations driven by adult-use retail sales following the expansion of retail operations described above and by a broader portfolio of partner brand products as the Company continues to bring partner cannabis brands to market throughout retail and wholesale cannabis operations.
Cost of Goods Sold, Gross Profit and Gross Margin
Cost of goods sold for the six months ended June 30, 2022 was $69,109, up from $68,852 for the six months ended June 30, 2021 reflecting a year-over-year increase of $257 or 0.4%, driven mainly by increased year-over-year sales volume in cannabis operations, partially offset by decreased cost of goods sold at Jupiter due to decreased sales volume of vaporizer products.
The Company's gross profit for the six months ended June 30, 2022 was $20,298, down from $26,434 for the six months ended June 30, 2021, which reflects a year-over-year decrease of $6,136 or 23%, mainly due to the decreased revenue in the inhalation technology division. Gross margin was 23% and 28% in the six months ended June 30, 2022 and 2021, respectively. The contraction in gross margin was mainly driven by pricing changes at Jupiter and in cannabis operations compared to the prior year period.
Total operating expenses for the six months ended June 30, 2022 was $41,356 an increase of $13,064 or 46% from $28,292 for the prior year period. The increase was primarily due to impairment losses, primarily driven by impairment of goodwill at Jupiter. Additionally, there were year-over-year increases in wages and benefits expense, general and administrative expense and sales and marketing expense driven by the expansion of retail operations and brand partnerships within the cannabis division relative to the prior year period.
Impairment loss and loss on disposal of assets 7,366 - Total operating expenses
The Company incurred impairment losses in the six months ended June 30, 2022 of $7,366, primarily in goodwill impairment. The goodwill impairment was related to interim impairment testing and based on the test results for Jupiter, the carrying amount of the reporting unit exceeded its estimated recoverable amount by $6,669. Consequently, an impairment loss was recorded against goodwill at Jupiter. In addition, in connection with management's ongoing multi-phase plans to produce high-quality flowers, during the six months ended June 30, 2022, the Company replaced existing lights with new market-standard LED lights. As a result, the Company recorded a loss on disposal in the amount of $697, which represented the carrying value of existing lights.
Other income (expense) for the six months ended June 30, 2022 was ($5,860), a decrease of $7,431 from the prior year period primarily due to the change in fair value of warrant liabilities and a decrease in unrealized loss on investments related to a one-time loss in the prior year period on the Company's 2018 investment in a cannabidiol ("CBD") startup, partially offset by increased interest expense, increased loan receivable losses and decreased interest income.
For the six months ended June 30, 2022, the Company recorded loan losses of $1,021 as a result of the analysis of CECL.
The Company recorded a net loss attributable to the Company of $18,680 for the six-month ended June 30, 2021 compared to a net loss attributable to the Company of $16,023 for the prior year period, for an increase in net loss of $2,657 or 17% as a result of the factors noted above.
The Company closely monitors and manages its capital resources to assess the liquidity required to fund fixed asset capital expenditures and operations.
The Company has experienced operating losses since its inception and expects to continue to incur losses in the development of its business. The Company incurred a comprehensive loss of $18,682 during the six months ended June 30, 2022 and has an accumulated deficit as of June 30, 2022 of $874,928. As of June 30, 2022, the Company had negative working capital of $16,512 (compared to positive working capital of $1,116 as of December 31, 2021). The negative working capital is related to the Company's Senior Notes and Junior Notes becoming due within the next 12 months.
On May 16, 2022, through its subsidiary Commonwealth Alternative Care, Inc. ("CAC"), the Company completed the previously announced acquisition of a facility in Taunton, MA (the "Taunton Facility"). Concurrent with the acquisition, CAC closed on the sale of the Taunton Facility (the "Massachusetts Sale" and, with the Taunton Purchase, the "Massachusetts Transaction") to Innovative Industrial Properties, Inc. ("IIP"). The purchase price for the property in the Massachusetts Sale was $40,000. The all-cash net proceeds of the Massachusetts Transaction of $25,466 will be used by the Company to pay down the outstanding corporate debt (Refer to Note 11 - Note Payable and Recent Developments above for further details).
In addition to the Massachusetts Transaction, the Company entered into a definitive purchase and sale agreement between TILT's subsidiary, White Haven RE, LLC, and an affiliate of IIP, providing for the sale and leaseback of TILT's cultivation and production facility in White Haven, PA (the "Pennsylvania Transaction") in exchange for $15,000 cash (Refer to Recent Developments above for further details).
The Company expects that the proceeds from the Massachusetts Transaction and Pennsylvania Transaction will be sufficient to completely address its debt maturities occurring in November 2022 and a portion of its April 2023 maturities and remains in discussions with senior and junior noteholders to finalize the future debt structure of the Company in order to achieve an improved capital structure with extended maturities. The Company's liquidity will depend, in large part, on its success with these discussions and/or its ability to raise additional capital to address its remaining April 2023 debt maturities, generate positive cash flow, and minimize the anticipated net loss during the 12 months from the date of this filing, all of which are uncertain and outside the control of the Company.
As of June 30, 2022 and December 31, 2021, the Company had total current assets of $120,187 and $100,613, respectively, which represents an increase of $19,574. The increase in total current assets is primarily due to an increase in cash and cash equivalents and restricted cash, partially offset by a decrease in inventory and in trade receivables and others.
Additionally, as of June 30, 2022 and December 31, 2021, the Company had total current liabilities of $136,699 and $99,497, respectively, which represents an increase of $37,202. The increase in total current liabilities is primarily related to the increases in the current portion of notes payable and income taxes payable. This was partially offset by decreases in warrant liability and deferred revenue.
Based on the Company's operating plans for the next 12 months which include (i) revenue growth from the sale of existing products and the introduction of new products across all operating segments, (ii) reducing production costs as a result of maturing efficiencies in cannabis operations, (iii) reducing supply chain costs, (iv) increasing cash inflows from the 2022 activation of a medical dispensary license, (v) increasing cash inflows from the monetization of certain assets, (vi) obtaining other financings as necessary and (vii) refinancing of debt obligations and extension of maturities with banking partners and note holders, the Company believes that it has adequate resources to fund the operations during the next 12 months from the date of filing of this Quarterly Report on Form 10-Q.
The following table presents the Company's net cash inflows and outflows from the condensed consolidated financial statements:
For the six months ended June 30, 2022, cash was provided by (used in):
Operating activities: $3,763. The cash provided by operating activities for the
? six months ended June 30, 2022, increased $1,097 as compared to the six months
ended June 30, 2021. The increase was primarily driven by conversion of
Investing activities: ($14,802). The cash used in investing activities for the
? six months ended June 30, 2022, increased $16,075 as compared to the six months
ended June 30, 2021. The increase was mainly related to the Taunton Facility
transactions described in Note 12 - Leases.
Financing activities: $38,770. The cash provided by financing activities for
the six months ended June 30, 2022 increased $40,587 as compared to the six
? months ended June 30, 2021. The increase was mainly related to the Taunton
Facility transactions described in Note 12 - Leases and Jupiter's asset-based
revolving credit facility entered into in July 2021 described in Note 11 -
Significant Accounting Judgements and Estimates
There were no significant changes in the Company's significant accounting judgements and estimates during the six months ended June 30, 2022 from those previously disclosed in Item 2., "Financial Information" in our Form 10.
For a discussion of recent accounting pronouncements, see Item 15. Note 2 of our Audited Consolidated Financial Statements for the years ended December 31, 2021 and 2020 in our Form 10 and the "Recent Accounting Pronouncements" section of Note 2 - Basis of Presentation and Summary of Significant Accounting Policies in the notes to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
In accordance with Staff Notice 51-352 Issuers with U.S. Marijuana-Related Activities (the "Staff Notice"), below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where the Company is currently involved through its subsidiaries. The Company or its subsidiaries are, recently were or are expected to be directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the states of Massachusetts, Pennsylvania and Ohio. The Company is in compliance with the applicable state regulatory framework and licensing requirements for each of the states of Massachusetts, Pennsylvania and Ohio.
The Company also has ancillary involvement in the marijuana industry through the products and services it provides to customers in the following states and U.S. territories: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Indiana, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Puerto Rico, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wisconsin and West Virginia. The Company is not aware of any non-compliance by its customers with any applicable licensing requirements or regulatory framework enacted by each of these respective states.
In accordance with the Staff Notice, the Company will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on the Company's licenses, business activities or operations will be promptly disclosed by the Company.
Regulation of Cannabis in the U.S. Federally
The U.S. federal government regulates drugs through the CSA (21 U.S.C. § 811). Pursuant to the CSA, cannabis is classified as a Schedule I controlled substance. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the U.S., lacks safety for use under medical supervision and has a high potential for abuse. The U.S. Department of Justice ("DOJ") defines Schedule I drugs, substances or chemicals as "drugs with no currently accepted medical use and a high potential for abuse."
The FDA has not approved cannabis as a safe and effective drug for any use.
Canada has federal legislation which uniformly governs the cultivation, processing, distribution, sale and possession of both medical and recreational cannabis under the Cannabis Act, as well as various provincial and territorial regulatory frameworks that further govern the distribution, sale and consumption of recreational cannabis within the applicable province or territory. In contrast, cannabis is only permissively regulated at the state level in the U.S.
State laws in the U.S. regulating cannabis are in direct conflict with the CSA, which prohibits cannabis use and possession. Although certain states and territories of the U.S. authorize medical and/or recreational cannabis cultivation, manufacturing, production, distribution and sales by licensed or registered entities, under U.S. federal law, the cultivation, manufacture, distribution, possession, use, and transfer of cannabis and any related drug paraphernalia, unless specifically exempt, is illegal and any such acts are criminal acts under the CSA. Although the Company's activities are compliant with applicable U.S. state law, strict compliance with state laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company.
The risk of federal enforcement and other risks associated with the Company's business are described in Item 1A. "Risk Factors" of the Form 10.
Legal Advice in Accordance with the Staff Notice
Legal advice has been obtained by the Company regarding applicable U.S. federal and state law.
Regulation of Cannabis at State Levels
Below is a summary of the licensing and regulatory framework in the markets where, as of June 30, 2022, the Company held licenses and had direct or indirect involvement with the U.S. cannabis industry, followed by outlines of the regulatory framework in each of the relevant states.
Massachusetts became the eighteenth state to legalize medical marijuana when voters passed a ballot measure in 2012. Adult-use (recreational) marijuana is legal in Massachusetts as of December 15, 2016, following the passage of a ballot initiative in November of that year. The Cannabis Control Commission ("CCC"), a regulatory body created in 2016, oversees both the Medical Use of Marijuana Program and the Adult Use of Marijuana Program.
Under the Medical Use of Marijuana Program, a Medical Marijuana Treatment Center ("MTC") is required to be vertically integrated, such that a single MTC license holder must cultivate, manufacture and dispense medical marijuana and marijuana products to registered, qualifying patients and personal caregivers. Pursuant to the CCC's regulations, no Person or Entity Having Direct or Indirect Control over the MTC's operations may be granted or hold more than three MTC Licenses.
Under the Adult Use of Marijuana Program, vertical integration is not required, and therefore multiple types of adult-use Marijuana Establishment ("ME") licenses exist. The Marijuana Cultivator (Indoor or Outdoor), Marijuana Product Manufacturer and Marijuana Retailer licenses cover the three main operational license types (cultivation, manufacturing and retail sales). ME licenses, subject to certain ownership requirements, are also available for Independent Testing Laboratories, Marijuana Research Facilities, Marijuana Transporters (Third-Party or Existing Licensee), Craft Marijuana Cooperatives, Marijuana Couriers, Marijuana Delivery Operators, Social Consumption Establishments (once authorized by municipalities and an application is released by the CCC) and Marijuana Microbusinesses. No Person or Entity Having Direct or Indirect Control over the ME's operations may be granted or hold more than three licenses in a particular class of license, except as otherwise specified in the applicable regulations. In addition, any Person or Entity Having Direct or Indirect Control, or Licensee, is limited to a total of 100,000 square feet of cultivation "canopy" distributed across no more than three adult-use Marijuana Cultivator licenses and three MTC licenses.
The Company, through its wholly owned subsidiary CAC, holds two operational vertically integrated MTC licenses, in Brockton and Taunton and one final MTC license, not yet operational, in Cambridge. CAC has also received final licenses (including authorization to commence operations) for its adult-use retailer operations in Taunton and Brockton, as well as its adult-use cultivator and product manufacturer operations in Taunton. The Company is currently seeking post final inspection approval from the CCC to commence medical cannabis retail sales in Cambridge. The Company is in compliance with Massachusetts state law and the related licensing framework.
On June 8, 2016, former Ohio Governor John Kasich signed HB 523 into law, sanctioning the use of marijuana for limited medical purposes and establishing a commercial marijuana regulatory regime. Qualifying conditions for access to medical marijuana under the program include, but are not limited to, chronic and severe pain, post-traumatic stress disorder and cancer. Ohio's medical cannabis program is regulated by both the Ohio Department of Commerce ("Department of Commerce") and the Ohio Board of Pharmacy ("Ohio Board"). The Department of Commerce is responsible for licensing cultivators, processors and testing laboratories, while the Ohio Board is responsible for registering patients and caregivers as well as licensing medical marijuana dispensaries. Final regulations governing the program, including applications for business licensure, the operation of commercial medical cannabis establishments, physician certifications and patient registration have been adopted.
Ohio's medical cannabis program allows businesses to be structured as for-profit entities and does not impose residency requirements for investment or ownership in a commercial cannabis license. Ohio's licensing structure permits, but does not require, vertical integration. Each license (cultivation, processor and dispensary) is issued on an individual basis for each facility type/function. There are three different types of processors - stand-alone, vertically integrated facilities and a plant-only processor, which is a cultivator who distributes plant material directly to dispensaries. Common ownership between cultivation, processing and dispensing licenses is permitted, but prohibited for cannabis testing licensees. However, no one entity or person may own, have a financial interest in or significantly influence or control the activities of more than one cultivation license, more than one processing license or more than five dispensary licenses at any given time.
In March 2021, the Company completed its acquisition of Standard Farms OH, a licensed stand-alone processor in Ohio. Standard Farms OH engages in the production, possession, use, sale and distribution of cannabis products in Ohio's medicinal cannabis marketplace. The Company is in compliance with Ohio state law and the related licensing framework.
In April 2016, Pennsylvania's Governor Tom Wolf signed the Commonwealth's first medical marijuana bill into law. The medical program created a commercial system for a limited number of businesses and permits physicians to recommend cannabis for a limited number of qualifying conditions. The Pennsylvania Department of Health ("PA DOH") regulates medical marijuana businesses in the Commonwealth and issues two types of primary permits: a medical marijuana grower/processor permit and a medical marijuana dispensary permit. The PA DOH also issues a third type of permit called a clinical registrant permit. The clinical registrant permit is a combination of a grower/processor permit and a dispensary permit that is limited to applicants who have established a partnership with an accredited medical school in Pennsylvania.
For licensing purposes, the PA DOH split the Commonwealth into six regions. The state initially limited the total number of medical marijuana organizations to twenty-five grower/processors and fifty dispensaries Commonwealth-wide. Each dispensary is permitted to have up to three dispensary sites, for a total of 150 potential dispensary locations throughout Pennsylvania. For each dispensary permit, the locations must be within the region where the permit was awarded. For medical marijuana grower/processors, the location is limited to the region where the permit was awarded, but distribution is permissible across all regions. The PA DOH may approve up to ten clinical registrants, with each eligible for only one grower/processor permit and one dispensary permit (each clinical registrant may provide medical marijuana at up to six dispensary locations). Residency is not required to operate a medical marijuana organization in Pennsylvania. Vertical integration is limited, as the PA DOH may not issue more than five grower/processor businesses dispensary permits. In addition, a single entity may not hold more than one grower/processor permit, nor more than five dispensary permits.
In June 2021, Governor Wolf signed House Bill ("HB") 1024 into law expanding the ability of patients to access medical cannabis and extending certain policies that were temporarily enacted during the beginning of the COVID-19 pandemic. Under HB 1024, the maximum number of clinical registrants was expanded from eight to ten. Additionally, dispensaries are allowed to offer cannabis curbside deliveries; patients can obtain a ninety day instead of the previous thirty-day supply for cannabis; and the five-person cap on the number of patients that a caregiver can serve was removed indefinitely. Patients can also now consult with authorizing physicians via video conferencing. The law also expanded the pool of eligible conditions to include cancer remission therapy and CNS-related neuropathy as well as eliminated provisions that previously required chronic pain patients to try conventional prescription pain medications prior to using cannabis. Additionally, the law makes it easier for grower/processors to process marijuana that failed tests for yeast and mold into products that are topical in form. The law also expands the number of research facilities that are studying patient response to medical marijuana.
In July 2022, Governor Wolf signed HB 311, which provides additional protections under Pennsylvania law for financial institutions and insurers providing services to, or for the benefit of, a "legitimate cannabis-related business." HB 311 also explicitly states that financial institutions and insurers are not obligated to provide services to cannabis businesses within the Commonwealth. Additionally, HB 311 requires cannabis businesses that are receiving financial or insurance services from a provider within Pennsylvania to disclose any suspension or revocation of cannabis-related permits, registrations, or certifications to the financial institution and/or insurer within five business days.
In Pennsylvania, the Company holds a medical marijuana grower/processor license through its wholly owned subsidiary, Standard Farms PA, which operates 33,500 square feet of greenhouse. The Company is in compliance with Pennsylvania state law and the related licensing framework.
The Company is classified as having direct, indirect and ancillary involvement in the U.S. marijuana industry and is in material compliance with applicable licensing requirements and the regulatory framework enacted by each U.S. state in which it operates. The Company is not subject to any citations or notices of violation with applicable licensing requirements or the regulatory framework enacted by each applicable U.S. state which may have an impact on its licenses, business activities or operations.
The Company's General Counsel or any other individual appointed by the General Counsel oversees, maintains, and implements the Company's compliance program and personnel. In addition to the Company's internal legal and compliance departments, the Company has state and local regulatory/compliance counsel engaged in every jurisdiction in which it operates.
The Company's General Counsel or any other individual appointed by the General Counsel oversees compliance training for all employees, such training includes, but is not limited to, on the following topics:
• compliance with state and local laws;
• security and safety policies and procedures;
• extensive ingredient and product testing, often beyond that required by law to
assure product safety and accuracy.
The Company's compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Only authorized and properly trained employees are allowed to access the Company's computerized seed-to-sale system.
The Company's General Counsel or anyone appointed by the General Counsel monitors all compliance notifications from the regulators and inspectors in each market, timely resolving any issues identified. The Company keeps records of all compliance notifications received from the state regulators or inspectors and how and when the issue was resolved.
Further, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for handling cash, performing inventory and cash reconciliation, ensuring the accuracy of inventory tracking and recordkeeping. The Company maintains accurate records of its inventory at all licensed facilities. Adherence to the Company's standard operating procedures is mandatory and ensures that the Company's operations are compliant with the applicable state and local laws, regulations, ordinances, licenses, rules and other requirements. The Company ensures adherence to standard operating procedures by regularly conducting internal inspections and ensures that any issues identified are resolved quickly and thoroughly.
In January 2018, U.S. Attorney General, Jeff Sessions rescinded the Cole Memorandum. The rescission of the Cole Memorandum and other Obama-era prosecutorial guidance did not create a change in federal law, as the Cole Memorandum was never legally binding; however, the revocation removed the DOJ's guidance to U.S. Attorneys that state-regulated cannabis industries operating substantively in compliance with the Cole Memorandum's guidelines should not be a prosecutorial priority. As an industry best practice, despite the rescission of the Cole Memorandum, the Company continues to do the following to ensure compliance with the guidance provided by the Cole Memorandum:
ensure the operations of its subsidiaries and business partners are compliant
with all licensing requirements that are set forth with regards to cannabis
operation by the applicable state, county, municipality, town, township,
• borough, and other political/administrative divisions. To this end, the Company
• the products are only sold to patients who hold the necessary documentation to
• requirements, adhere to strict business practice standards and be subjected to
• disclaimers about the contents of the products and provide requisite
educational material to mitigate adverse public health consequences from
cannabis use and prevent impaired driving.
On November 7, 2018, Jeff Sessions resigned from his position as Attorney General. The next Attorney General, William Barr, stated that he does not intend "go after" parties who are involved in the cannabis business and are compliant with state law in reliance on the Cole Memorandum. Under President Biden's administration and his appointed Attorney General, Merrick Garland, DOJ rhetoric around cannabis has largely returned to the Obama-era rhetoric even if a new prosecutorial guidance memorandum has not been re-issued. During his Senate confirmation, Merrick Garland told Senator Cory Booker (D-NJ) that, "It does not seem to me useful the use of limited resources that we have to be pursuing prosecutions in states that have legalized and are regulating the use of marijuana, either medically or otherwise." Such statements are not official declarations or policies of the DOJ and are not binding on the DOJ, on any U.S. Attorney or on the U.S. federal courts, and substantial uncertainty regarding U.S. federal enforcement remains. To date, there has been no new federal cannabis memorandums issued by the Biden Administration or any published change in federal enforcement policy. Regardless, the federal government of the U.S. has always reserved the right to enforce federal law regarding the sale and disbursement of medical or recreational marijuana, even if state law sanctioned such sale and disbursement. Although the rescission of the Cole Memorandum does not necessarily indicate that marijuana industry prosecutions are now affirmatively a priority for the DOJ, there can be no assurance that the U.S. federal government will not enforce such laws in the future.
In the absence of a uniform federal policy, as had been established by the Cole Memorandum, numerous U.S. Attorneys with state-legal marijuana programs within their jurisdictions have announced enforcement priorities for their respective offices. For instance, Andrew Lelling, former U.S. Attorney for the District of Massachusetts through February 2021, stated that while his office would not immunize any businesses from federal prosecution, he anticipated focusing the office's marijuana enforcement efforts on: (1) overproduction; (2) targeted sales to minors; and (3) organized crime and interstate transportation of drug proceeds. Other U.S. Attorneys provided less assurance, promising to enforce federal law, including the CSA in appropriate circumstances.
The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program and standard operating procedures. While the Company's operations are in full compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal under U.S. federal law. For the reasons described above and the risks further described in Item 1A "Risk Factors" in the Form 10, there are significant risks associated with the business of the Company. Readers are strongly encouraged to carefully read all of the risk factors contained in Item 1A. "Risk Factors" in the Form 10.
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