EDGAR 10-K Filing

Company CIK: 1876945
Filing Year: 2022
Filename: 1876945_10-K_2022_0001193125-22-092094.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS.
CORPORATE STRUCTURE
Name, Address and Incorporation
The Company was incorporated under the Business Corporations Act
(British Columbia) (the “BCBCA
”) on June 17, 2019 under the name Subversive Capital Acquisition Corp. (“SCAC
”) as a special purpose acquisition corporation for the purpose of effecting an acquisition of one or more businesses or assets, by way of a merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization or any other similar business combination. On July 15, 2019, SCAC amended its notice of articles and articles (the “Articles
”) to increase the authorized capital to create an unlimited number of Class A restricted voting shares, an unlimited number of common shares and an unlimited number of proportionate voting shares.
On November 24, 2020, the Company announced that it had entered into definitive transaction agreements to acquire all of the equity of each of CMG Partners, Inc. (“Caliva
”) and Left Coast Ventures, Inc. (“LCV
”). The acquisition of Caliva and LCV constituted the Company’s qualifying transaction (the “Qualifying Transaction
”). The Qualifying Transaction was completed on January 15, 2021, at which point each of Caliva and LCV became wholly-owned subsidiaries of the Company. In connection with the closing of the Qualifying Transaction, the Company amended its Articles to change its name to “TPCO Holding Corp.”
Concurrent with the completion of the Qualifying Transaction, LCV acquired SISU Extraction, LLC (“SISU
”) pursuant to an agreement and plan of merger dated November 24, 2020.
The Company’s head office is located at 1550 Leigh Avenue, San Jose, CA 95125
and the registered office is located at
595 Burrard Street, Suite 2600, Three Bentall Centre, Vancouver, BC, V7X 1L3, Canada.
The Company’s common shares (“Common Shares
”) and share purchase warrants (“Warrants
”) are listed on the Neo Exchange Inc. (the “Exchange
”) under the trading symbols “GRAM.U” and “GRAM.WT.U”, respectively. The Common Shares and Warrants also trade over the counter in the United States on the OTCQX Best Market tier of the electronic over-the-counter
marketplace operated by OTC Markets Group Inc. under the trading symbols “GRAMF” and “GRMWF”, respectively.
Intercorporate Relationships
The following chart illustrates certain of the Company’s subsidiaries, including their respective jurisdictions of incorporation and the percentage of voting securities of each that are beneficially owned, controlled or directed by the Company. Because the Company is a holding company with no operations of its own, it is wholly dependent on the operations of its subsidiaries to fund its operations. See “Item 1A. Risk Factors-Risks Relating to the Company’s Business Structure-The Company is a holding company.”
Notes:
(1) Other than these subsidiaries, no other subsidiary of the Company has total assets that exceed 10% of the consolidated assets of the Company or revenue that exceeds 10% of the consolidated revenue of the Company or is otherwise considered a “significant subsidiary” within the meaning of Item 1 - 02(w)
of Regulation S-X.
GENERAL DEVELOPMENT OF THE BUSINESS OF EACH OF THE COMPANY, CALIVA, LCV AND
Brand Strategy Agreement
On November 24, 2020, the Company also entered into a brand strategy agreement with SC Branding, LLC (the “Brand Strategy Agreement
”) for the services of Shawn C. Carter p/k/a JAY-Z
pursuant to which, during the BSA Term (as defined below), (a) SC Branding, LLC grants the Company the right and license to use JAY-Z’s
approved name, image and likeness rights in approved content for the purposes of advertising, promoting, marketing, publicizing and otherwise commercializing the Company’s products and brands, (b) JAY-Z
will serve as the Chief Visionary Officer of the Company and (c) SC Branding, LLC and JAY-Z
will promote the Company’s brand portfolio and provide the various services specifically described therein, which include certain enhanced obligations with respect to the Company’s “MonoGram” brand. The license of rights and services to be provided by SC Branding, LLC and JAY-Z
will be provided to the Company on an exclusive basis with respect to the market for cannabis and related products and include obligations of SC Branding, LLC and JAY-Z
to present any business opportunities within the categories of cannabis and related products to the Company on the terms specifically described therein.
As part of this arrangement, the Company has organized a new social equity fund with a planned $10,000,000 investment and a planned annual contribution of at least 2% of net income from the Company, which will invest as a wholly integrated division of the Company under management of employees of the Company, with a goal of supporting efforts to dismantle structural racism in corporate America.
The Brand Strategy Agreement (a) became effective as of consummation of the Qualifying Transaction and shall remain in effect for a period of ten (10) years therefrom (the “BSA Term
”); provided, that either the Company or SC Branding, LLC shall be permitted to terminate the Brand Strategy Agreement without any further liability to either party at any time after the date that is six (6) years after the consummation of the Qualifying Transaction and (b) includes customary representations and warranties and indemnification obligations of the parties.
Roc Nation Agreement
On November 24, 2020, the Company entered into a binding heads of terms agreement (the “Roc Binding Heads of Terms
”) with Roc Nation, LLC (“Roc Nation
”), pursuant to which, during the Roc Term (as defined below), (a) the Company shall become Roc Nation’s “Official Cannabis Partner,” and (b) Roc Nation will provide strategic and promotional services to the Company and its brands including the promotion of the Company’s brand portfolio, and the provision of artist and influencer relationship services, as well as various other services specifically described therein. Roc Nation’s services and obligations under the Roc Binding Heads of Terms will be provided to the Company on an exclusive and non-competition
basis with respect to the market for cannabis and related products and include the obligation of Roc Nation to present any business opportunities within the categories of cannabis and related products to the Company, certain rights of negotiation with respect to Roc Nation’s roster of talent and other rights on the terms specifically described therein.
The Roc Binding Heads of Terms became effective as of consummation of the Qualifying Transaction and shall remain in effect for an initial period of three (3) years therefrom (the “Roc Term
”); provided, that following the expiration of the Roc Term, Roc Nation’s exclusivity and non-competition
obligations shall continue to remain in effect for a period of six (6) months (the “Roc Tail Period”) during which period the parties may elect to extend the period of the Roc Binding Heads of Terms upon terms to be mutually agreed.
Pursuant to the terms of the Roc Binding Heads of Terms, the Company issued to Roc Nation $25,000,000 in Common Shares following consummation of the Qualifying Transaction based on the average of the volume-weighted average prices of the Common Shares for each of the 15 trading days up to and including the last trading day of the effective date of the Roc Agreement and will pay Roc Nation additional consideration of $15,000,000 in Common Shares, payable in quarterly issuances over the second and third years of the Roc Term. The price to be paid for these additional Common Shares will be the average of the volume-weighted average prices of the Common Shares for each of the 15 days in advance of the applicable date of issuance of the Common Shares. However, the Company shall not be required to pay Roc Nation in Common Shares (and instead shall pay Roc Nation in cash), unless, among other things, the Common Shares may be issued without a vote of Company’s stockholders pursuant to the rules of the trading market on which the Common Shares are listed.
Additional Information Incorporated by Reference
For a full discussion of the general development of the businesses of each of the Company, Caliva, LCV and SISU, see the information under the headings, “General Development of the Business-The Parent Company,” “General Development of the Business-Caliva,” “General Development of the Business-LCV,” and “General Development of the Business-SISU” in Item 1 (Business) of Amendment No. 4 to the Company’s Form 10 registration statement, filed with the SEC on December 9, 2021 (the “Form 10
”), which information is incorporated herein by reference and can be found at: https://www.sec.gov/Archives/edgar/data/1876945/000119312521352682/d250720d1012ga.htm#toc
Updates to Information Incorporated by Reference
Updates to the information incorporated by reference above from the Form 10 consist of the following:
TPCO successfully integrated LCV’s wholesale THC business post acquisition into its existing operations during 2021. The non-THC
businesses were divested during the second quarter of 2021 as described below.
The Company entered into agreements to dispose of the assets of Eko Holdings, LLC, Lief Holdings, LLC and Live Zola, LLC (the “Non-THC
Subsidiaries”) through a series of transactions resulting in cumulative consideration of $7.35 million. The Company entered into an agreement to sell the hemp-derived cannabidiol (“CBD”) business assets of the Non-THC
Subsidiaries to Arcadia Biosciences, Inc. (“Arcadia”) for total consideration of $7,363,733 payable by way of $4,318,537 cash and $2,159,514 in Arcadia’s common stock and $885,722 of a promissory note (the “Arcadia Transaction”). The Arcadia common stock value is based on the 20-day
volume weighted average trading price on the Nasdaq stock exchange. This transaction was signed on May 17, 2021. On April 27, 2021, the Company sold the Non-THC
Subsidiaries’ assets, being the Acai Puree business line, to a third-party for gross proceeds of $1,100,000 in cash payable in equal instalments over six quarters.
DESCRIPTION OF THE BUSINESS
The Company is a consumer-focused cannabis company based in the United States focused on the recreational and wellness markets. The Company’s high quality integrated seed-to-sale
operations in California are focused on building winning brands supported by its direct-to-consumer
ecosystem. The Company’s platform was designed to create the most socially responsible and culturally impactful company in the United States, producing consistent, well-priced products and culturally relevant brands that are distributed to third-party retailers as well as direct-to-consumer
via the Company’s delivery service and strategically located storefront retail locations across California. A full portfolio of products and brands that appeals to a broad range of user groups, need-states and occasions, offered at all price points, and with unique brand value propositions, are produced at low cost and high caliber of quality through integrated cultivation and manufacturing. The Company believes its wholly-owned delivery and storefront retail outlets will allow it to achieve high gross-margins on many of its products, forge one-on-one
relationships between its brands and consumers and collect proprietary consumer data and insights.
While the Company is focused on the recreational and wellness markets, a small portion (estimated to be less than 1%) of its revenues is derived from cannabis and products containing cannabis used by medical cannabis patients in accordance with applicable state law, but for which no drug approval has been granted by the United States Food and Drug Administration (where use may include inhalation, consumption, or application).
The Company’s operational footprint spans cultivation, extraction, manufacturing, distribution, brands, retail and delivery. The management team and directors of the Company bring together deep expertise in cannabis, consumer packaged goods, investing and finance from start-ups
to publicly traded companies. The Company aims to leverage its collective industry experience to ensure a highly synergistic and strategic transaction is executed.
At December 31, 2021, the Company viewed its business as having the following two sales channels:
1) Direct to Consumer (in-store
retail, pick up and delivery): the Company currently operates eleven omni channel retail locations, three in Northern California, three in Central California, and five in Southern California along with six delivery hubs (including the Coastal Holding Company, LLC acquisition as described in this 10-K).
2) Wholesale: the Company sells first-party and selected third-party products into 450 dispensaries across California. Additional wholesale revenue comes from sales of sourced bulk flower and oil produced in house.
Revenues from these sales channels are as follows:
Year ended
December 31, 2021
Direct to consumer
$ 54,238,607
Wholesale
119,176,274
$ 173,414,881
As the Company continues to scale and integrate its business it is incurring operating losses. Its operating losses for the years ended December 31, 2021 and December 31, 2020 totaled $818,518,013, (including impairment losses of $654,317,300) and $8,813,918 respectively. The Company is focused on reducing operating losses as it scales and integrates its businesses.
Through a combination of professional leadership, technology and data driven practices, brand and product expertise, as well as social justice and equity advocacy, the Company intends to set the example globally as a best-in-class
cannabis operation. In addition, the Company plans to pursue an opportunistic M&A strategy to accelerate growth, market share gains and profitability.
Recent Developments
On October 1, 2021, the Company entered into definitive agreements (the “Coastal Agreements
”) to acquire 100% of the equity securities of Coastal Holding Company, LLC (“Coastal
”), a California retail dispensary and delivery operator, for aggregate consideration, subject to adjustments, of up to US$56.2 million (the “Coastal Transaction
”), comprised of up to (i) US$16.2 million in cash, (ii) US$20 million in Common Shares, the issuance of which is contingent upon the signing of management services agreements (“Coastal MSAs
”) at each Coastal location and (iii) US$20 million in Common Shares, the issuance of which is contingent upon the successful transfer of Coastal’s cannabis licenses. The Company entered into Coastal MSAs related to six of Coastal’s dispensaries/deliver locations concurrently with the signing of the Coastal Agreements and is in the process of obtaining approval for two additional MSAs, which are subject to regulatory review by the applicable local municipalities. The US$16.2 million cash portion of the consideration was paid to Coastal at signing and is secured by a promissory note forgivable upon Coastal satisfying certain closing conditions. The price of the Common Shares forming a portion of the consideration will be determined based on the market price of the Common Shares on the dates such MSAs are executed or regulatory approval milestones are achieved before closing (each, a “Pricing Date
”). Common Shares issued in connection with the Transaction will be subject to lock-up
provisions that will release upon the later of (i) six months from the applicable Pricing Date; and (ii) satisfaction of certain closing conditions.
Coastal is a retail dispensary license holder and operator with six retail licensed locations, five of which are currently operating, and two delivery depots. Coastal’s operating dispensaries are located in Santa Barbara, Pasadena, West Los Angeles, Stockton and Vallejo. Coastal is also engaged in the construction of another retail license location in Northern California and operating delivery depots in Santa Barbara and San Luis Obispo. Coastal serves over 1,000 people per day, in their stores and online.
As part of the Coastal Transaction the Company will also inherit a minority stake in a southern California dispensary and an option to purchase the remainder of that dispensary for US$9 million in cash (the “Coastal Option
”). The Coastal Option may be exercised by the Company following receipt of certain regulatory approvals. US$4.5 million of the exercise price of the Coastal Option was prepaid upon execution of the Coastal Agreements.
Taking into account retail locations and delivery depots operated pursuant to MSAs, the Company’s currently operates 11 retail stores and six delivery depots footprints. Upon completion, the acquisition of Coastal is expected to result in the Company having the capacity to reach over 80% of California’s population. The Coastal Transaction is expected to legally close in 2022, subject to standard closing conditions and regulatory approvals, including approval of the Exchange.
In addition to the Coastal Transaction, on October 1, 2021, the Company closed the first tranche of the previously announced acquisition of the Calma dispensary, located in West Hollywood, with the acquisition of 85% of Calma’s equity securities. The transfer of the remaining 15% equity of Calma is expected to occur in 2022.
Cultivation
The Company operates over 35,000 square feet of indoor cultivation space producing premium flower for product lines on the higher-end
of the price spectrum - Monogram, Caliva and others, as well as potential new brands developed in-house,
new brands developed as part of the transactions contemplated by the Brand Strategy Agreement, and new brands that will come into the portfolio via future acquisitions. The Company has a procurement network of over 500 cultivators throughout California to purchase everything from low-cost
outdoor, high-quality mid-priced
greenhouse, and premium indoor flower as required by its portfolio of brands.
On May 16, 2021, the Company entered into a membership interest purchase agreement (the “Membership Interest Purchase Agreement
”) to obtain leasehold interests of approximately 10 years duration in each of four one-acre
parcels of land that are licensed for outdoor cannabis grow (collectively, the “Outdoor Grow Properties
”). On May 21, 2021 (the “Effective Date
”), the Company entered into series of cultivation and supply agreements with each of the leaseholders of the Outdoor Grow Properties and Mosaic. AG, Inc. (“Mosaic.Ag
”), pursuant to which Mosaic.Ag agreed to cultivate cannabis on each of the Outdoor Grow Properties on the Company’s behalf for a period commencing on the Effective Date of and ending at least three years from the closing of the transactions contemplated by the Membership Interest Purchase Agreement, with options to extend for up to five years (the “Cultivation and Supply Agreements
”). Under the terms of the Membership Interest Purchase Agreement, as of the Effective Date, the Company and Mosaic.Ag obtained access to the Outdoor Grow Properties and began to commence cannabis cultivation activities under the Cultivation and Supply Agreements. The purchase price under the Membership Interest Purchase Agreement is $6,000,000 in cash, $2,500,000 in Common Shares payable on the closing date (with the number of shares issued based on the volume-weighted average price per Common Share for the ten consecutive trading days prior to the closing date) and up to 1,309,263 shares subject to an earnout based on the production value of cannabis grown on the Outdoor Grow Properties over the twenty-four months following the Effective Date. The closing of the transactions contemplated by the Membership Interest Purchase Agreement are dependent on the satisfaction of various closing conditions, which have not been met to date and are not expected to be met by the end of the second quarter of 2022 as required by the Membership Interest Purchase Agreement. Further, Mosaic.Ag was unable to produce sufficient quantities of biomass according to Company quality standards and pursuant to the Cultivation Supply Agreements. For the foregoing reasons, the parties are currently in dialogue and may restructure the transaction. Pursuant to the terms of the Membership Interest Purchase Agreement, on the Effective Date, the Company advanced to the seller $5,650,000 secured by a promissory note. In the event that the transaction does not close, the promissory note is contractually obligated to be repaid to the Company. The transactions contemplated by the Membership Interest Purchase Agreement and the Cultivation and Supply Agreements are collectively referred to in this Annual Report as the “Mosaic.Ag Transaction
”).
The Company both purchases and sells flower. California’s price compression on bulk and wholesale flower continued in the fourth quarter of 2021. According to Cannabis Benchmarks, the pricing of indoor flower, which is the principal product the Company sells at wholesale, dropped approximately 9% from October 15, 2021 to December 17, 2021.
Extraction
The Company
operates two extraction facilities in the Eureka/Arcata area with Type-6
extraction licenses that are currently capable of producing 3,400 kg of crude and 2,700 kg of distillate per month. Distillate is a refined product from crude. Crude is a full-spectrum oil that contains all the cannabinoids, terpenes and other constituents extracted from the plant. Distillate is a pure THC product, produced by refining the crude and removing the terpenes and other constituents to isolate only the THC. This extraction capacity is utilized for both the production and sale of bulk crude and distillate as well as the production of the Company’s finished goods in the vaporizer and ingestible categories. The Company estimates its extraction business supplies approximately 20% of the distillate sold legally in California. Extraction (oil) markets are also subject to price fluctuations based on pricing of cultivation, which serves as the input material for extraction process. As cultivation pricing drops, pricing of oil from extraction also decreases. Pricing swings have the greatest effect on sales of bulk oil.
Manufacturing
The Company operates three cannabis manufacturing facilities with a total footprint of 20,500 licensed square feet throughout the State of California that are currently producing many form-factors, including jarred and bagged whole flower, pre-rolls,
bulk extracts, vape cartridges, ready-to-use
vapes, gummies, chocolate and capsules. The Company’s estimates that its manufacturing facilities have the operating capacity to meet 20% of California market demand for distillate cannabis oil. These facilities enable the Company to produce a wide range of form-factors for a wide range of differentiated brands, addressing all consumer groups, needs occasions and price points. Having diverse manufacturing capabilities supports a broad range of product and brand strategies including the Company’s relationships with JAY-Z
and Roc Nation.
Quality Testing
Prior to release to the commercial market, each batch of packaged cannabis biomass and/or manufactured cannabis products (collectively “cannabis goods
”) must have a batch-specific Certificate of Analysis (“COA
”) from a testing laboratory (“lab
”). Labs are independent, third-party entities licensed by the California’s Department of Cannabis Control (“DCC
”). A COA is a legally binding document created by the lab that shows the analytical quality test results of each batch of cannabis goods indicating whether the batch is safe for human consumption. Upon issuance, COAs are uploaded by the lab into the State’s track-and-trace
system, METRC, for version control and may not be amended. As reflected on each COA, a lab tests each batch of cannabis goods for
cannabinoid content, presence of foreign materials, heavy metals, microbial impurities, mycotoxins, moisture content and water activity, residual pesticides, and residual solvents and processing chemicals. State regulations stipulate “passing” and “failing” criteria within each of the elements tested and indicated on the COA.
In compliance with applicable regulations, the Company must allow a lab to enter its licensed premises to conduct batch-sampling of cannabis goods. The lab removes a representative sample of each batch of cannabis goods to quality test the elements listed above. Once a representative sample of a batch of cannabis goods is submitted for COA testing, the Company cannot conduct any further manufacturing, packaging, or other activity that may impact the quality, form, or purity of the overall batch. Batches that receive a “failing” COA must be remediated or destroyed in compliance with applicable regulations. Batches that receive a “passing” COA are cleared for entry into the commercial market.
Brands
The Company
has a portfolio of over eight owned and licensed brands offering over 250 stock keeping units (“SKUs
”) covering key consumer form-factors such as whole flower, pre-rolls,
infused pre-rolls,
vaporizer cartridges in both distillate and live resin format, concentrates, gummies, chocolate and capsules, tinctures and topicals. The Company strives to produce high quality products and brands that appeal to both new and experienced cannabis users - such as the High Times Cup-winning
Caliva brand of flower. Monogram, a brand developed in partnership with JAY-Z,
was announced in October 2020 and addresses the ultra-premium price point for flower and pre-rolls.
The Company’s brand portfolio addresses a wide range of consumers, need-states and occasions with its variety of brands and form-factors, and we believe there are additional opportunities to expand the portfolio through innovation, partnerships and acquisitions. The Company has appointed JAY-Z,
a leading voice in music, culture, entertainment, and business, as its Chief Visionary Officer to oversee the development and promotion of brands that leverage the vision, influence, and social impact mission of the Company. Amidst challenging marketing restrictions in cannabis that bar brands from leveraging traditional advertising and media channels, the brands developed in collaboration with JAY-Z
and Roc Nation are expected to benefit from the significant consumer following and influence of JAY-Z
and Roc Nation. The Company’s work with JAY-Z
will initially focus on products sold at a premium price point but will not be restricted to that price point.
Distribution
The Company’s distribution footprint is comprised of two distribution hubs located in California. From these hubs, the Company currently sells 1st party and 3rd party product into 450 dispensaries across California. The Company anticipates its number of active dispensary accounts to increase as the number of operating dispensaries in the state continues to grow.
Delivery
The Company offers direct-to-consumer
delivery of owned brands as well as third-party brands out eight locations; three in Southern California, three in Central California and two in the San Francisco Bay Area. The Company operates its own delivery depots and directly employs its delivery drivers. The Company estimates that its direct-to-consumer
delivery is able to reach approximately 80% of Californians when including the Coastal transaction. The Company’s delivery business is subject to state regulatory changes, including as to case pack limits relating to how much product that drivers can carry at one time.
The Company’s direct-to-consumer
offerings include an integrated e-commerce
platform offering in-store
pickup, curbside pick-up,
express delivery, and scheduled delivery, allowing the Company to extend its reach beyond physical retail locations and expand interactions with its customers, while beating the illicit market on convenience and safety. The omni channel e-commerce
platform generates proprietary consumer data which informs product and brand development, corporate development, distribution and personalization. The Company leverages this consumer data and data-driven inventory management practices to refine its menu and inventory management, including offering a menu that is dynamic based on user location. Offering direct-to-consumer
delivery allows consumers to access the Company’s selection of owned and third-party brands conveniently across a significant portion of Northern, Central and Southern California. The Company strives to prioritize the merchandising and maximize sales of its own portfolio of brands and products on the delivery platform as a means of maximizing overall gross margins. The Company expects a significant portion of delivery sales to be of owned brands, in addition to planned product innovations, consisting of many form-factors across multiple price points that address a wide variety of consumer segments and occasions. The Company will leverage a mix of express and scheduled delivery offerings as a means to maximize the value of product delivered per driver shift and minimize the overall cost-per-delivery.
Retail
After signing the Coastal transaction, the Company operates eleven retail dispensaries strategically located across the state of California. These retail locations offer consumers a wide variety of owned and third-party brands and products via walk-in,
in-store
pick-up,
and curbside pick-up.
The Company plans to add additional retail locations both organically and through acquisition. For example, on October 1, 2021, the Company acquired 100% of the equity of Calma West Hollywood (“Calma
”), an operating dispensary located in West Hollywood, California, for a total consideration of $11,500,000, consisting of $8,500,000 in cash and $3,000,000 of in Common Shares (the “Calma Agreement
”). On October 1, 2021, the Company closed the first tranche under the Calma Agreement, with the acquisition of 85% of Calma’s equity securities. The transfer of the remaining 15% equity of Calma is expected to occur in 2022. In accordance with the agreement, the Company transferred $1,500,000 in cash into escrow, which will be released to the Company when the remaining 15% is acquired and the Company issues the related common shares to the seller. The Company strives to prioritize the merchandising and maximize sales of its own portfolio of brands and products in retail as a means of maximizing overall gross margins. The Company expects a significant portion of retail sales to be of owned brands, in addition to planned product innovations, consisting of many form-factors across multiple price points that address a wide variety of consumer segments, need-states and occasions.
In addition, pursuant to the Coastal MSAs, the Company operates five additional retail locations in Santa Barbara, Pasadena, West Los Angeles, Stockton and Vallejo.
E-Commerce
The Company’s e-commerce
offerings are centered on Caliva.com, a centralized user-centric e-commerce
platform. In addition to accessing online pickup and delivery of our products through Caliva.com, customers can access online pickup and delivery through the Caliva App in Apple’s App Store. This is a differentiated online platform in cannabis, an industry in which most shopping interactions occur in simple brick-and-mortar
retail environments. This platform facilitates seamless orders for in-store
or curbside pickup at our retail locations, as well as for delivery to our customers throughout the delivery radius of the Company’s delivery depots, which covers approximately 80% of the adult population in California when including Coastal assets.
The Company’s e-commerce
platform offers a wide range of both owned brands and products as well as third-party brands and products. Owned brands and products are prioritized in merchandising and therefore it is anticipated they will make up a substantial portion of total sales, resulting in increased profit margins. The Company’s e-commerce
platform also enables it to use consumer data to drive personalization and product recommendations to customers, thereby encouraging loyalty and re-orders.
Integration
The Parent Company’s operational footprint spans cultivation, extraction, manufacturing, distribution, brands, retail and delivery. Our three manufacturing facilities combined with our distribution footprint of strategically-placed distribution hubs delivering to over 450 dispensaries, support the growth of our diverse and growing portfolio of owned brands, with the ability to fulfill most dispensary orders within 72 hours. Our direct-to-consumer
delivery reaches approximately 80% of the adult population in California when including Coastal assets.
Management Team and Employees
The Company’s management team consists of experienced professionals with significant experience as California cannabis market operators but also bringing extensive experience in consumer packaged goods, technology, retail, finance, and venture capital. Members of the Company’s management team have previously held positions at firms such as 8VC, Silicon Valley Bank, Uber, Driscoll’s, E&J Gallo, Clorox, Dannon and Lagunitas/Heineken.
The Company employs over 650 people across our cultivation, production, retail, distribution, delivery and corporate office facilities across the State of California.
The Company is committed to promoting a culture of inclusion and equal opportunity for employees and in recruiting efforts. Its workforce is comprised of qualified, hardworking, and committed employees, who represent the racial, cultural, and ethnic composition of the communities it serves, including people of color, veterans, older workers and persons with disabilities. The Company and its subsidiaries have partnered with local organizations in the communities in which it operates to gain access to underserved talent and particularly those who have been unfairly impacted by non-violent
cannabis convictions.
The Company is further committed to:
•
A policy and practice of providing equal employment opportunities to all applicants and employees and administering all personnel actions without regard to race, color, creed, religion, sex, sexual orientation, gender identity, marital status, citizenship status, age, national origin, ancestry, disability, veteran status, or any other legally protected status and to affirmatively seek to advance the principles of equal employment opportunity;
•
The career advancement of all employees, prioritizing promoting from within whenever possible and investing in its workforce to encourage mobility within the organization;
•
Providing a work environment that is free of unlawful harassment, discrimination or retaliation based on any protected characteristics; and
•
Providing and maintaining a safe and healthy workplace through ongoing training programs and communication to ensure employees are informed, knowledgeable and able to ensure the safety of themselves and those around them.
The Company is able to tap into some of the most coveted talent pools in the locations that it operates throughout California, allowing a strong mix of cannabis, consumer product, business and technology backgrounds. The Company’s employees are highly talented individuals with distinct professional and educational achievements in a wide range of disciplines, as well as staff who have been trained on the job to uphold the highest standards as set by the Company.
As of December 31, 2021, the Company had 513 full-time employees and 143 part-time employees.
Ongoing Compliance
Overview
The Company is subject to the general licensing and regulatory framework in California set out under the heading “-United States Regulatory Environment
- California
”. The Company has developed a compliance program designed to achieve its strategic business goals while protecting the organization and operations. The Company’s compliance program integrates external regulations with internal rules and procedures to effectively lay out expectations for employee duties and behaviors; this aligns the goals of its employees with those of the Company and helps the Company’s operations run smoothly. The Company focuses on upholding policies and procedures that ensure the organization and its employees comply with applicable laws and regulations.
Employee Training
The Company is in process of training employees, and in completing development of and instituting a robust online training center for employees, in connection with its compliance program’s objectives, relevant policies and procedures, and the basic components of the compliance program. Such training includes additional specialized training for various policies and procedures that are applicable to specific job functions and/or departments where needed to properly perform their jobs. Training is tracked, attested to, and documented.
Inventory and Security Policies
Maintaining security and inventory control is important to the Company and it has adopted a number of policies, procedures, and practices in these areas:
Security: The Company has taken extensive security measures including implementing professionally vetted policies, procedures, and systems to provide comprehensive protection, not only for its physical plant and inventory, but also for its employees, customers, and the surrounding public. Every licensed facility has strict access controls, thorough video surveillance coverage, and burglar alarms linked directly to local police departments. These controls are supported by professionally certified on-site
security personnel in certain instances.
Inventory: The Company maintains inventory control and reporting systems that document the present location, amount, and a description of all cannabis and cannabis products at all facilities. The traceability of cannabis goods is maintained using the California’s “Track-and-Trace”
system, METRC, and the Company’s integrated enterprise resource planning system (“ERP
”). The Company conducts regular continuous cycle counts in addition to both quarterly and annual manual inventory reconciliations, in accordance with regulations and best practices.
Operational Compliance
Internal audits are conducted quarterly in the normal course. These audits allow us to identify and monitor the Company’s strengths and weaknesses, highlighting continuous opportunities for improvement. These internal audits also provide us an opportunity to reinforce best practices and to institute changes in areas that are identified as opportunities for improvement. The information discovered and obtained during these internal audits is used to improve the compliance programs, when necessary, by revising policies, strengthening training, and establishing better reporting processes. The focus of the Company’s internal compliance audit is to ensure it is compliant with both state and local laws and regulations and internal policies and procedures. Internal audits may be delayed or completed remotely by video from time to time as a result of COVID-19
precautions.
Big Data Analysis
The Company has invested in a highly scalable data architecture and platform built using leading technologies and tools. By extracting data from its ERP software and the California METRC track and trace system and subsequently organizing it in its data warehouse, the Company has enabled critical data and insights for its compliance efforts. The Company’s data warehouse secures and stores all data and transactions at frequent intervals, allowing extensive access and analysis to information that is current. The Company has the ability to understand precise movement of inventory or dollars, past or present, required for review or due diligence as related to compliance requirements or inquiries. The Company is using this data infrastructure proactively to track, monitor and reconcile inventory levels and for ongoing reconciliation with METRC.
Ongoing Compliance
The Company prides itself on a robust internal compliance program encompassing both the compliance measures described above as well as monitoring compliance with U.S. state law on an ongoing basis. Key to those compliance efforts is the employment of individuals dedicated to monitoring California law for changes and updates to statutes and regulations, both at the state level and the local level, that impact business operations. Currently, the Company employs six individuals whose job function includes some aspect of compliance. Further, the Company employs a government relations employee whose primary job function is to monitor the changing landscape of state and local law while employing an external consultant and two external law firms that assist in the monitoring, notification, and interpretation of any changes. Additionally, the Company currently implements and maintains standard operating procedures (“SOPs
”) that are designed for monitoring compliance with California law on an ongoing basis. These SOPs include ongoing review of current and anticipated statutes, regulations, and ordinances and the training of employees to maintain compliance with California law.
In addition to the internal compliance team and the consultants and law firms described above, the Company also engages local regulatory compliance counsel and consultants in the jurisdictions in which it operates. Such counsel regularly provides legal advice to the Company regarding compliance with state and local laws and regulation and the Company’s legal and compliance exposures under United States federal law.
Social Equity
The Company believes in the paramount importance of promoting social equity in the cannabis industry as a core part of its business operations. As such, concurrent with the closing of the Qualifying Transaction, the Company launched a new social equity fund focused on investing in Black and other people-of-color
cannabis entrepreneurs. The social equity venture fund identifies, conducts diligence on, and invests in such entrepreneurs as a means of directly impacting the issues of social equity and diversity in the cannabis industry. The social equity venture fund was initially seeded with $10,000,000 from the Company’s balance sheet, with a planned annual contribution of at least 2% of the Company’s net income. The social equity venture fund invests as a wholly integrated division of the Company under management of employees of the Company. The social equity fund, where possible, will leverage existing social equity programs as well as not-for-profit
organizations engaged in social equity license application support, entrepreneur mentorship, workforce development, and entrepreneurial community-building. On May 27, 2021, the Company created a Social Equity Advisory Committee comprised of thought leaders across cannabis, civil rights activism, criminal justice reform, policy advocacy and impact investing. Subsequently, the Company announced its first two investments from the social equity fund being Stanton Brands (dba Josephine & Billie’s) and Peakz LLC.
Intellectual Property
As part of the Company’s brand strategy, it strives to protect its proprietary products and brand elements and its brand. Intellectual property (“IP
”) protection is pursued both in its ability to sell products and brands through first “Freedom to Operate” searches and subsequently, reviewing proprietary and protectable claims, branding, technology, or design assets. The Company evaluates opportunities for IP protection from cultivation and strain development, in manufacturing and processes, and for its portfolio of finished goods. The Company’s IP protection ranges from trademarks to patents to trade secrets and covers anything from cultivation, genetics, product development, packaging development, claims, operations, information technology, and branding. Additionally, the Company from time to time partners with other companies and pursues further IP protection through licensing and collaboration with those partners.
The Company seeks to protect its proprietary information, in part, by executing confidentiality agreements with third parties and partners and non-disclosure
and invention assignment agreements with its employees and consultants. These agreements are designed to protect its proprietary information and ensure ownership of technologies that are developed through its relationship with the respective counterparty. The Company cannot guarantee, however, that these agreements will afford it adequate protection of its intellectual property and proprietary information rights.
The Company has at least six registered federal trademarks with the United States Patent and Trademark Office and 38 California state trademark registrations. In addition, the Company has at least 56 federal trademark applications and one New York state application
pending. The Company owns several trademarks in connection with its branded products and its retail, direct-to-consumer
business, including branded dispensaries and its branded commerce website and mobile app. Specifically, the Company considers Monogram, Caliva, Deli, Deli by Caliva, and Fun Uncle to comprise its core products and services trademark portfolio, and each of these marks is subject to issued registrations or pending applications both federally and in California, and the Company will promptly file for registration of such marks in additional states as the Company’s business expands to such states. The federal illegality of cannabis currently prevents the Company from obtaining federal trademark registrations covering cannabis-touching goods or services, which means the Company must rely on state registrations, common law uses, and federal registrations for ancillary, non-cannabis
goods and services, a reliance that has been validated by U.S. Courts in trademark cases between cannabis companies (none of which the Company has been a party to). The risk remains that a third party may adopt one of the Company’s trademarks in a different territory where the Company has made no use of the trademark, and therefore potentially has limited common law or state rights to protect the mark.
Competitive Conditions
As the Company is integrated it competes on multiple fronts, from manufacturing to retail to delivery, and experiences competition in each of these areas. The Company competes on the basis of the price, the quality of its products and its omni channel direct to consumer platform. From a retail perspective, the Company competes with other licensed retailers and delivery companies in the geographies where retail and delivery services are located. These other retailers range from small local operators to more significant operators with a presence throughout the State of California and other states in the United States. From a product perspective, the Company competes with other manufactures of brands for shelf space in third-party owned dispensaries throughout California. Similar to certain competitors in the retail space, the Company competes with manufacturers ranging in size from small local operators to significant operators with a larger presence. Indirectly, the Company competes with the illicit market, including many illegal dispensaries that continue to exist in the state of California.
The Company’s platform has been designed with the intention to combine leading operations across the supply chain with a scalable omni channel e-commerce
platform to create a large and scalable integrated platforms in the single largest market, California. The Company believes there may be strategic opportunities to leverage its omnichannel platform and balance sheet to further expand its market share and accelerate profitability in California through mergers and acquisitions.
Specialized Knowledge, Skills, Resources & Equipment
Knowledge with respect to cultivating and growing cannabis is important in the cannabis industry. The nature of growing cannabis is not substantially different from the nature of growing other agricultural products. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are meticulously defined and controlled to produce consistent product and to avoid contamination.
The Company grows or procures the primary component of its finished products, namely cannabis. The Company’s cultivation operations are dependent on a number of key inputs and their related costs including raw materials and supplies related to its growing operations, as well as electricity, water and other utilities. See “Item 1A.
Risk Factors -Risks Related to the Company’s Products and Services - The Company
is reliant on key inputs
”.
Staff with suitable horticultural and quality assurance expertise are generally available on the open market. The Company also requires client care staff, which will grow as its business grows. Customer care staff are also generally available on the open market.
Equipment used is specialized but is readily available and not specific to the cultivation of cannabis. Subject to available funding, the Company does not anticipate any difficulty in obtaining equipment.
The Company anticipates an increased demand for skilled manpower, energy resources and equipment in connection with the Company’s expected continued growth.
The Company anticipates an increased demand for skilled manpower, energy resources and equipment in connection with the Company’s expected continued growth. Because of this anticipation, the Company has entered into a series of arrangements to obtain the rights to four acres of land that is licensed for outdoor grow (“Mosaic.Ag
”). In addition, the Company entered into a cultivation and supply agreement with a cultivator to cultivate cannabis on its behalf for a period of at least three years, with options to extend up to five years. The purchase price for Mosaic.Ag is $6,000,000 in cash, $2,500,000 in Common Shares when the transaction closes and up to 1,309,263 Common Shares subject to earnouts. The upfront payment of $5,650,000, net of holdbacks of $350,000, is secured by a promissory note. The closing of the transaction is dependent on the satisfaction of various closing conditions, which have not been met to date and are not expected to be met by the end of the second quarter of 2022 as required by the Membership Interest Purchase Agreement. Further, Mosaic.Ag was unable to produce sufficient quantities of biomass according to Company quality standards and pursuant to the Cultivation Supply Agreements. For the foregoing reasons, the parties are currently in dialogue and may restructure the transaction. In the event that the transaction does not close, the promissory note is contractually obligated to be repaid to the Company.
UNITED STATES REGULATORY ENVIRONMENT
Cannabis Industry Regulation
On February 8, 2018, the Canadian Securities Administrators revised their previously released Staff Notice 51-352
- Issuers with U.S. Marijuana-Related Activities
(“Staff Notice 51-352
”), which provides specific disclosure expectations for issuers that currently have, or are in the process of developing, cannabis-related activities in the United States as permitted within a particular state’s regulatory framework. All issuers with U.S. cannabis-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings and other required disclosure documents. As a result of the Company’s existing operations in California, the Company is providing the following disclosure pursuant to Staff Notice 51-352.
The Company derives a substantial portion of its revenues from state legalized: (i) cannabis, and products containing cannabis, used by someone 21 or older that is not a medical cannabis patient (where use may include inhalation, consumption, or application) (“Adult-Use
Cannabis
”) and (ii) to a lesser extent, cannabis and products containing cannabis used by medical cannabis patients in accordance with applicable state law, but for which no drug approval has been granted by the United States Food and Drug Administration (where use may include inhalation, consumption, or application) (“Medical-Use
Cannabis
”) ((i) and (ii) collectively “Regulated Cannabis
”). The Regulated Cannabis industry is illegal under U.S. Federal Law. The Parent Company is directly involved (through its licensed subsidiaries) in both the Adult-Use
Cannabis and Medical-Use
Cannabis industry in the State of California which has legalized and regulated such industries.
The United States federal government regulates certain drugs through the Controlled Substances Act (21 U.S.C. §§ 801-971)
(the “CSA
”) and through the Food, Drug & Cosmetic Act (21 U.S.C. §§ 301-392)
(the “FDCA
”). The CSA schedules controlled substances, including “marihuana” (defined as all parts of the plant cannabis sativa L.
containing more than 0.3 percent THC), based on their approved medical use and potential for abuse. Marihuana (also referred to as cannabis) and THC (“except for tetrahydrocannabinols in hemp”) are each classified as Schedule I controlled substances (21 U.S.C. § 812(c)). The Drug Enforcement Administration (“DEA
”), an agency of the U.S. Department of Justice (the “DOJ
”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The United States Food and Drug Administration (the “FDA
”), which implements and enforces the FDCA, regulates, among other things, drugs used for the diagnosis or treatment of diseases. The FDA has not approved cannabis as a safe and effective treatment for any medical condition, and regularly issues cease-and-desist
letters to manufacturers of CBD products making health claims to consumers in contravention of the FDCA. The FDA has approved drugs containing THC and CBD, individual cannabinoids in the plant cannabis sativa L.
, for a narrow segment of medical conditions.
State laws that permit and regulate the production, distribution and use of Medical-Use
Cannabis or Adult-Use
Cannabis are in direct conflict with the CSA, which makes cannabis and THC distribution and possession federally illegal. Although certain states and territories of the U.S. authorize Medical-Use
Cannabis or Adult-Use
Cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, cultivation, and/or transfer of cannabis and THC is illegal and any such acts are criminal acts under any and all circumstances under the CSA. Additionally, any manufacture, possession, distribution and/or sale of cannabis accessories, in states without laws expressly permitting such activity, are also federally illegal activity under the CSA. Although the Company’s activities are believed to be compliant with applicable California state and local law, strict compliance with state and local laws with respect to cannabis does not absolve the Company of liability under United States federal law, nor does it provide a defense to any federal proceeding which may be brought against the Company.
As of the filing of March 1, 2022, 37 U.S. states, and the District of Columbia and the territories of Guam, Puerto Rico, the U.S. Virgin Islands, and the Northern Mariana Islands have legalized the cultivation and sale of Medical-Use
Cannabis, with at least six of the remaining states expected to pass such legalization measures within the next 12 months. In 18 U.S. states, the sale and possession of both Medical-Use
Cannabis and Adult-Use
Cannabis has been legalized, though due to the time period between a state’s legalization of commercial cannabis activities and the completion of its regulatory framework and marketplace launch, the purchase of Adult-Use
Cannabis is currently possible in 12 states, with the remainder of the currently-legal states to commence sales activities in 2022 or 2023. The District of Columbia has legalized Adult-Use
Cannabis but has not yet permitted the commercial sale of Adult Use Cannabis, however, Adult-Use
sales are expected to commence in 2022. Eleven states have also enacted low-THC
/ high-CBD
only laws for medical cannabis patients. The sale and possession of both Medical-Use
Cannabis and Adult-Use
Cannabis is legal in the State of California, subject to applicable licensing requirements and compliance with applicable conditions. Included in the numbers above are ballot initiatives to legalize Adult-Use
Cannabis which passed in November 2020, with Arizona commencing Adult-Use
sales in January 2021, New Jersey and Montana to commence Adult-Use
sales in 2022, South Dakota to commence Adult-Use
sales in 2023, and Mississippi enacting Medical-Use
cannabis legislation in January 2022, following a successful ballot initiative and subsequent invalidation on technical grounds by the Mississippi State Supreme Court.
Under President Barack Obama, the U.S. administration attempted to address the inconsistencies between federal and state regulation of cannabis in a memorandum which then-Deputy Attorney General James Cole sent to all United States Attorneys on August 29, 2013 (the “2013
Cole Memorandum
”) outlining certain priorities for the DOJ relating to the prosecution of cannabis offenses. The
2013 Cole Memorandum noted that in jurisdictions that have enacted laws legalizing or decriminalizing Regulated Cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of Regulated Cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. The DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the 2013 Cole Memorandum. In light of limited investigative and prosecutorial resources, the 2013 Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis, a non-exhaustive
list of which was enumerated therein.
On January 4, 2018, U.S. Attorney General Jeff Sessions formally issued a new memorandum (the “Sessions Memorandum
”), which rescinded all “previous nationwide guidance specific to marijuana enforcement,” including the 2013 Cole Memorandum. The Sessions Memorandum stated, in part, that current law reflects “Congress’ determination that Cannabis is a dangerous drug and Cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress by following well-established principles when pursuing prosecutions related to cannabis activities. There can be no assurance that the federal government will not enforce federal laws relating to cannabis in the future. As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of State-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active U.S. federal prosecutors will be in relation to such activities.
The Company believes it is still unclear what prosecutorial effects will be created by the rescission of the 2013 Cole Memorandum. The Company believes that the sheer size of the Regulated Cannabis industry, in addition to participation by state and local governments and investors, suggests that a large-scale enforcement operation would more than likely create unwanted political backlash for the DOJ and the Biden administration in certain states that heavily favor decriminalization and/or legalization. Regardless, cannabis and THC remain Schedule I controlled substances at the federal level, and neither the 2013 Cole Memorandum nor its rescission has altered that fact. The federal government of the United States has always reserved the right to enforce federal law in regard to the manufacture, distribution, sale and disbursement of Medical-Use
Cannabis or Adult-Use
Cannabis, even if state law permits such manufacture, distribution, sale and disbursement. The Company believes, from a purely legal perspective, that the criminal risk today remains similar to the risk on January 3, 2018. It remains unclear whether the risk of enforcement has been altered. Additionally, under United States federal law, it is a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of Regulated Cannabis or any other Schedule I controlled substance. Canadian banks are likewise hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions, particularly those that are federally chartered in the United States, could be prosecuted and possibly convicted of money laundering for providing services to Regulated Cannabis businesses. While Congress is considering legislation that may address these issues, there can be no assurance that such legislation passes.
Despite these laws, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN
”) issued a memorandum on February 14, 2014 (the “FinCEN Memorandum
”) outlining the pathways for financial institutions to bank state-sanctioned Regulated Cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the 2013 Cole Memorandum and stated that in some circumstances, it is possible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a Suspicious Activity Report (“SAR
”) in connection with all cannabis-related banking activities by any client of such financial institution, in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories-cannabis limited, cannabis priority, and cannabis terminated-based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. On the same day that the FinCEN Memorandum was published, the DOJ issued a memorandum (the “2014 Cole Memorandum
”) directing prosecutors to apply the enforcement priorities of the 2013 Cole Memorandum in determining whether to charge individuals or institutions with crimes related to financial transactions involving the proceeds of cannabis-related conduct. The 2014 Cole Memorandum has been rescinded as of January 4, 2018, along with the 2013 Cole Memorandum, removing guidance that enforcement of applicable financial crimes against state-compliant actors was not a DOJ priority.
However, former Attorney General Sessions’ rescission of the 2013 Cole Memorandum and the 2014 Cole Memorandum has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memorandum and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum is a standalone document which explicitly lists the eight enforcement priorities originally cited in the 2013 Cole Memorandum. As such, the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance. However, FinCEN issued further guidance on December 3, 2019, in which it acknowledged that the Agricultural Improvement Act of 2018 (the “Farm Bill
”) removed hemp as a Schedule I controlled substance and authorized the United States Department of Agriculture (“USDA
”) to issue regulations governing, among other things, domestic hemp production. The guidance states that because hemp is no longer a controlled substance under federal law,
banks are not required to file SARs on these businesses solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. The guidance further notes that for hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants. FinCEN noted in its December 2019 guidance that the 2014 SAR reporting structure for cannabis remains in place even with the passage of the Farm Bill and this additional guidance related to hemp. FinCEN confirmed this point in guidance issued on June 29, 2020, and clarified that, if proceeds from cannabis-related activities are kept separate, a SAR filing is only required for the cannabis-related part of a business that engages in both cannabis and hemp activity.
Although the 2013 Cole Memorandum has been rescinded, one legislative safeguard for the Medical-Use
Cannabis industry has historically remained in place: Congress adopted a so-called
“rider” provision to the fiscal years 2015, 2016, 2017, and 2018, 2019 and 2020 and 2021. Consolidated Appropriations Acts (currently referred to as the “Rohrabacher/Blumenauer Amendment
”) to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated Medical-Use
Cannabis actors operating in compliance with state and local law. On March 15, 2022, the Rohrabacher/Blumenauer Amendment was renewed through the signing of the fiscal year 2022 omnibus bill, which extended the protections of the Amendment through September 30, 2022. The Rohrabacher/Blumenauer Amendment may or may not be included in a subsequent omnibus appropriations package or a continuing budget resolution. Should the Rohrabacher/Blumenauer Amendment not be renewed upon expiration in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Company.
The United States Congress has passed appropriations bills each of the last four years that have not appropriated funds for prosecution of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the U.S. federal government from prosecuting individuals when those individuals comply with state law relating to approved medical uses. However, because this conduct continues to violate U.S. federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business - even those that have fully complied with state law - could be prosecuted for violations of U.S. federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law that took place before received funding under the CSA’s five-year statute of limitations.
In recent years, certain temporary federal legislative enactments that protect the Medical-Use
Cannabis and industry have also been in effect. For instance, cannabis businesses that are in strict compliance with state law receive a measure of protection from federal prosecution by operation of a temporary appropriations measures that has been enacted into law as an amendment (or “rider
”) to federal spending bills passed by Congress and signed by Presidents Obama, Trump and Biden. First adopted in the Appropriations Act of 2015, Congress has included in successive budgets since a “rider” that prohibits the DOJ from expending any funds to enforce any law that interferes with a state’s implementation of its own medical cannabis laws. The rider, discussed above, is known as the “Rohrbacher-Blumenauer
” Amendment, and now known colloquially as the “Joyce-Amendment
” after its most recent sponsors. The rider was renewed on March 15, 2022 through the signing of the FY 2022 omnibus spending bill, which extended the protections of the Amendment through September 30, 2022.
Despite the legal, regulatory, and political obstacles the Regulated Cannabis industry currently faces, the industry has continued to grow. Under certain circumstances, the federal government may repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit Regulated Cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Until that happens, the Company faces the risk of federal enforcement and other risks associated with the Company’s business.
To the knowledge of management of the Company, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action in California.
The Company’s objective is to capitalize on the opportunities presented as a result of the changing regulatory environment governing the cannabis industry in the United States. Accordingly, there are a number of significant risks associated with the business of the Company. Unless and until the United States Congress amends the CSA with respect to Medical-Use
Cannabis or Adult-Use
Cannabis, there is a risk that federal authorities may enforce current federal law, and the business of the Company may be deemed to be producing, cultivating, extracting, or dispensing “marihuana” or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of U.S. federal law.
The Company has received and continues to receive legal input, in verbal and written form (including opinions when required), regarding (a) compliance with applicable state and local regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law in certain respects.
The 2013 Cole Memorandum and the Rohrabacher/Blumenauer Amendment gave Medical-Use
Cannabis operators and investors in states with legal regimes greater certainty regarding federal enforcement as to establish Regulated Cannabis businesses in those states. While the Sessions Memorandum has introduced some uncertainty regarding federal enforcement, the Regulated Cannabis industry continues to experience growth in legal Medical-Use
Cannabis and Adult-Use
Cannabis markets across the United States. U.S. Attorney General Jeff Sessions resigned on November 7, 2018. Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, even under a Biden Administration’s DOJ or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to cannabis and THC (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law.
Despite the expanding market for Regulated Cannabis, traditional sources of financing, including bank lending or private equity capital, are lacking which can be attributable to the fact that cannabis remains a Schedule I substance under the CSA. These traditional sources of financing are expected to remain scarce unless and until the federal government legalizes cannabis cultivation and sales.
The following table is intended to assist readers in identifying those parts of this Annual Report that address the disclosure expectations outlined in Staff Notice 51-352
issued by the Canadian Securities Administrators for issuers that currently have marijuana-related activities in U.S. states where such activity has been authorized within a state regulatory framework.
Industry
Involvement
Specific Disclosure Necessary to Fairly Present all Material
Facts, Risks and Uncertainties
Prospectus Cross-Reference
All Issuers with U.S. Marijuana-Related Activities
Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table.
•   “Description of the Business
”
Prominently state that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk.
•   “United States Regulatory Environment - Cannabis Industry Regulation
”
•   “Risk Factors - Risks Related to the Industry and the Company’s Business’ - Cannabis continues to be a controlled substance under the CSA
”
•   “Risk Factors-Risks Related to the Industry and the Company’s Business - The approach to the enforcement of Regulated Cannabis laws may be subject to change or may not proceed as previously outlined
”
Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities.
Outline related risks including, among others, the risk that third-party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.
•   “United States Regulatory Environment - Cannabis Industry Regulation
”
•   “Risk Factors-Risks Related to the Industry and the Company’s Business - Cannabis continues to be a controlled substance under the CSA”
•   “Risk Factors - Risks Related to the Company’s Products and Services - Service providers could suspend or withdraw service
”
•   “Risk Factors-Risks Related to the Industry and the Company’s Business - The Company’s operations in the U.S. cannabis market may be subject to heightened scrutiny by regulatory authorities”
Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations.
•   “Risk Factors-Risks Related to the Industry and the Company’s Business - The Company may have difficulty accessing public and private capitaI”
•   “Risk Factors - Risks Related to the Industry and the Company’s Business - The Company may be subject to applicable anti-money laundering laws and regulations
”
•   “Risk Factors-Risks Related to the Industry and the Company’s Business - The Company may have difficulty accessing the services of banks, which may make it difficult to operate its business
”
•   “United States Regulatory Environment - Cannabis Industry Regulation-Laws Applicable to Financial Services for Regulated Cannabis Industry
”
Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities.
•   “Exposure to U.S. Marijuana Related Activities’“
Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.
The Company has received and continues to receive legal input, in verbal and written form (including opinions when required), regarding (a) compliance with applicable state and local regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law in certain respects.
U.S. Marijuana Issuers with direct involvement in cultivation or distribution
Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.
Discuss the issuer’s program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance,
citations or notices of violation which may have an impact on the issuer’s license, business activities or operations.
•   “United States Regulatory Environment - Cannabis Industry Regulation
-California”
•   “Description of the Business - Ongoing Compliance”
•   “Description of the Business - Ongoing Compliance
”
The Company is in compliance with U.S. state law and the related licensing framework.
The Company will promptly disclose any noncompliance, citations or notices of violation which may have an impact on their licenses, business activities or operations.
In accordance with Staff Notice 51-352,
below is a discussion of U.S. state-level regulatory regimes in those jurisdictions where the Company is, and will be, directly or indirectly involved through its subsidiaries. A discussion of the U.S. federal regulatory regime can be found above under the heading “-United States Regulatory Environment
- Cannabis Industry Regulation.
” The Company and its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis and/or hold licenses in the Adult-Use
Cannabis and/or Medical-Use
Cannabis marketplace in the State of California. In accordance with Staff Notice 51-352,
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 cannabis regulation. The Company intends to cause its businesses to promptly remedy any known occurrences of non-compliance
with applicable State and local cannabis rules and regulations, and intends to publicly disclose any non-compliance,
citations or notices of violation which may have an impact on its licenses, business activities or operations.
Exposure to U.S. Marijuana Related Activities
The Company operates in the United States through various subsidiaries and other entities pursuant to arrangements with third-parties on arm’s length terms as more specifically described herein. As of the closing of the Qualifying Transaction, a majority of the
Company’s business was directly derived from U.S. cannabis-related activities. As such, a majority of the Company’s balance sheet and operating statement for periods following closing of the Qualifying Transaction will reflects exposure to U.S. cannabis related activities. See “Description of the Business”
for further details.
California
California Regulatory Landscape
In 1996, California was the first state to legalize Medical-Use
Cannabis through Proposition 215, the Compassionate Use Act of 1996. This legislation legalized the use, possession and cultivation of cannabis by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which cannabis provides relief.
In 2003, Senate Bill 420 was signed into law establishing not-for-profit
medical cannabis collectives and dispensaries, and an optional identification card system for Medical-Use
Cannabis patients.
In September 2015, the California legislature passed three bills collectively known as the Medical Cannabis Regulation and Safety Act (“MCRSA
”). The MCRSA established a licensing and regulatory framework for Medical-Use
Cannabis businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies, and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile
solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California passed Proposition 64, the Adult Use of Marijuana Act (“AUMA
”), creating an Adult-Use
Cannabis program for adults 21 years of age or older. In June 2017, the California State Legislature passed Senate Bill No. 94, known as Medicinal and Adult-Use
Cannabis Regulation and Safety Act (“MAUCRSA
”), which amalgamated MCRSA and AUMA and provided for a set of regulations to govern a medical and adult-use
licensing regime for cannabis businesses in the State of California. The four agencies that regulate cannabis at the state level are the Bureau of Cannabis Control (“BCC
”), CalCannabis at the California Department of Food and Agriculture (“CalCannabis
”), and the Manufactured Cannabis Safety Branch California Department of Public Health (“MCSB
”), and California Department of Tax and Fee Administration. MAUCRSA went into effect on January 1, 2018. MAUCRSA was then amended and restated in July 2021 through the annual budget trailer bill process to, among other things, consolidate the three state licensing agencies-BCC, CalCannabis and MCSB-into a single licensing authority known as the Department of Cannabis Control (“DCC
”). Subsequent to the agency consolidation, the newly formed DCC consolidated the three separate sets of BCC, CalCannabis, and MCSB regulations into a single set of state regulations, which regulations went into effect as of September 27, 2021.
To legally operate a Medical-Use
Cannabis or Adult-Use
Cannabis business in California, the operator must generally have both a local and state license. This requires license holders to operate in cities with cannabis licensing programs. Therefore, counties and cities in California are allowed to determine the number of licenses they will issue to cannabis operators, or can choose to outright ban the siting of cannabis operations in their jurisdictions.
California Licensing Requirements
A storefront retailer license with an “M-designation”
permits (i) the purchase of cannabis goods that are “For Medical Use Only” from licensed distributors (ii) the sale of such medicinal cannabis goods to medicinal cannabis patients in California who possesses a physician’s recommendation. Only certified physicians may provide medicinal cannabis recommendations. A storefront retailer license with an “A-designation”
permits the sale of cannabis and cannabis products to any individual age 21 years of age or older regardless of whether they possess a physician’s recommendation. A storefront retailer license with both the M-
and A-designations
is permitted to do all of the above described in this paragraph. Where the local jurisdiction permits, a state storefront retailer license allows the retailer to engage in delivery of cannabis goods to retail customers. A non-storefront
license permits the same delivery activity, but does not permit the licensee to operate a retail storefront.
A distribution license permits the license holder to engage in the procurement, sale, and transport of cannabis and cannabis products between licensees.
An adult-use
or medicinal cultivation license permits cannabis cultivation which means any activity involving the planting, growing, harvesting, drying, curing, grading or trimming of cannabis. Such licenses further permit the production of a limited number of “non-manufactured
cannabis products” and the sales of cannabis to certain licensed entities within the State of California for resale or manufacturing purposes.
An adult-use
or medical manufacturing license permits the manufacturing of “manufactured cannabis products”. Manufacturing includes the compounding, blending, extracting, infusion, packaging or repackaging, labeling or relabeling, or other preparation of a cannabis product in the State of California, only cannabis that is grown in the state by a licensed operator can be sold in the state. California neither mandates or prohibits integration, and the state allows licensees to make wholesale purchase of cannabis from, or a distribution of cannabis and cannabis product to, another licensed entity within the state.
Holders of cannabis licenses in California are subject to a detailed regulatory scheme encompassing security, staffing, transport, sales, manufacturing standards, testing, inspections, inventory, advertising and marketing, product packaging and labeling, white labeling, records and reporting, and more. As with all jurisdictions, the full regulations, as promulgated by each applicable state agency, should be consulted for further information about any particular operational area.
California Reporting Requirements
The State of California uses METRC as the state’s track-and-trace
system used to track commercial cannabis activity and movement across the distribution chain for all state-issued licensees. The system allows for other third-party system integration via application programming interface. Only licensees have access to METRC.
California Storage and Security
To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, California’s retail cannabis businesses are generally required to do the following:
•
limit access to dispensary premises to medical cannabis patients at least 18 years and older, and adults 21 and over;
•
maintain a fully operational security alarm system;
•
contract for professionally-certified security guard services;
•
maintain a video surveillance system that records continuously 24 hours a day;
•
ensure that the facility’s outdoor premises have sufficient lighting;
•
not dispense from its premises outside of permissible hours of operation;
•
limit the amount of cannabis goods dispensed to individual customers to prevent diversion;
•
store cannabis and cannabis product only in limited-access areas per the premises diagram submitted to the State of California during the licensing process;
•
store all cannabis and cannabis products in a secured, locked room or a vault with limited-access areas;
•
report to local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis; and
•
ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a delivery manifest in any vehicle transporting cannabis and cannabis products. Only vehicles that meet DCC distribution requirements are to be used to transport cannabis and cannabis products.
California Home Delivery Requirements
California law allows certain licensed retailers to deliver cannabis to adult customers at any private address within the state, including within those jurisdictions that have land use and zoning ordinances prohibiting the establishment of commercial cannabis businesses. At least 25 local jurisdictions where cannabis sales are banned sued the state, seeking to overturn the rule allowing home deliveries statewide. As of the date hereof, the suit was dismissed on procedural grounds, and the state regulation stands. To the knowledge of management, there have been no significant enforcement efforts mounted by local governments.
The State of California requires the satisfaction of various regulatory compliance obligations in order to operate a cannabis delivery service. The cannabis license that permits the operation of a storefront dispensary in the State of California (also referred to as a retail license) currently permits that entity to also establish a delivery operation. If an entity does not wish to set up and operate a storefront dispensary location at which it can sell products to customers in person, California has established a separate license which allows for a retail delivery operation (also referred to as a non-storefront
retail license). California regulations regarding the delivery of cannabis products include the following requirements:
•
All deliveries of cannabis goods must be performed by a delivery employee (at least 21 years of age) who is directly employed by a licensed retailer.
•
All deliveries of cannabis goods must be made in person to a physical address that is not on public land.
•
Prior to providing cannabis goods to a delivery customer, a delivery employee must confirm the identity and age of the delivery customer (as is required if such customer was purchasing the product in the physical dispensary) and ensure that all cannabis goods sold comply with the regulatory requirements.
•
A licensed cannabis entity is permitted to contract with a service that provides a technology platform to facilitate the sale and delivery of cannabis goods, in accordance with all of the following: (1) the licensed cannabis entity does not allow for delivery of cannabis goods by the technology platform service provider; (2) the licensed entity does not share in the profits of the sale of cannabis goods with the technology platform service provider, or otherwise provide for a percentage or portion of the cannabis goods sales to the technology platform service provider; (3) the licensed cannabis entity does not advertise or market cannabis goods in conjunction with the technology platform service provider, outside of the technology platform, and ensures that the technology platform service provider does not use the licensed cannabis entity’s license number or legal business name on any advertisement or marketing that primarily promotes the services of the technology platform; and (4) provides various disclosures to customers about the source of the delivered cannabis goods.
Licenses
Caliva Licenses
Caliva, through its affiliated entities, currently owns and operates five licensed cultivation facilities in San Jose, California; two licensed manufacturing facilities in Brisbane and San Jose California; four licensed distribution facilities in the cities of Brisbane, Hanford, North Hollywood and San Jose, California; six licensed retail facilities, both storefront and non-storefront
in the cities of Bellflower, Brisbane, Culver City, Hanford and San Jose, California; and a microbusiness facility in San Jose, California permitted to engage in manufacturing, distribution and retail.
The below table summarizes the state licenses issued to Caliva in respect of its operations in California, as of March 31, 2022. These licenses were issued by the predecessor licensing agencies which existed prior to the creation of the DCC; future licenses will be issued by the DCC.
License
Entity w/DBA and
License Number
Address
Expiration /
Renewal Date
Description
State of California Retail license issued by BCC.
Caliva CARECE1, LLC dba Kase’s Journey, Inc.
License Number:
C10-
0000175-LIC
4030 Farm Supply Road, Ceres, CA 95307
06/11/2022
A retail license covers sales of cannabis goods to customers at its storefront premises or by delivery. A retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A retailer license may not engage in any packaging or labeling activities.
State of California Non-
Storefront Retail license issued by BCC.
Martian Delivery, LLC dba Martian Delivery
License Number: C9-0000133-LIC
8880 Elder Creek Road, Sacramento, CA 95828
06/25/2022
A non-storefront
retail license covers sales of cannabis goods to customers exclusively through delivery. A retailer non-storefront
must have a licensed premise to store the cannabis goods for delivery. The premises of a non-storefront
retailer shall not be open to the public. A non-storefront
retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A non-storefront
retailer license may not engage in any packaging or labeling activities.
State of California Medium Indoor Cultivation License issued by California Department of Food and Agriculture (“CDFA
”) - CalCannabis Cultivation Licensing (“CCL
”)
NC3 Systems dba Caliva
License Number:
CCL18-0000047
1695 S 7th St San Jose, CA 95112
5/24/2022
A medium cultivation license covers between 10,001 and 22,000 square feet of total canopy. Authorized activities include the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. Cultivators must use a licensed distributor to transfer product between licensees.
License
Entity w/DBA and
License Number
Address
Expiration /
Renewal Date
Description
State of California Small Indoor Cultivation License issued by CDFA- CCL
NC3 Systems dba Caliva
License Number:
CCL18-0000036
1695 S 7th St San Jose, CA 95112
5/24/2022
A small cultivation license covers between 5,001 and 10,000 square feet of total canopy. Authorized activities include the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. Cultivators must use a licensed distributor to transfer product between licensees.
State of California Small Indoor Cultivation License issued by CDFA- CCL
NC3 Systems dba Caliva
License Number:
CCL18-0000037
1695 S 7th St San Jose, CA 95112
5/24/2022
A small cultivation license covers between 5,001 and 10,000 square feet of total canopy. Authorized activities include the planting, growing, harvesting, drying, curing, grading, or trimming of cannabis. Cultivators must use a licensed distributor to transfer product between licensees.
State of California Processor License issued by CDFA-CCL
NC3 Systems dba Caliva
License Number:
CCL19-0000316
1695 S 7th St San Jose, CA 95112
5/13/2022
A processor license covers a cultivation site that conducts only trimming, drying, curing, grading, packaging, or labeling of cannabis and nonmanufactured cannabis products. Cultivators must use a licensed distributor to transfer product between licensees.
State of California - Nursery License issued by CDFA-CCL
NC3 Systems dba Caliva
License Number:
CCL18-0000038
1695 S 7th St San Jose, CA 95112
5/24/2022
A nursery license covers a cultivation site that conducts only cultivation of clones, immature plants, seeds, and other agricultural products used specifically for the propagation of cultivation of cannabis. Cultivators must use a licensed distributor to transfer product between licensees.
State of California Type 6 Manufacturing License issued by California Department of Public Health (“CDPH
”)- Manufactured Cannabis Safety Branch (“MCSB
”)
NC3 Systems dba Caliva
License Number:
CDPH-10002244
1695 S 7th St San Jose, CA 95112
4/2/2022
A Type 6 manufacturing licensee is authorized to engage in extractions using mechanical methods or nonvolatile solvents (i.e. CO2, ethanol, water or food-grade dry ice, cooking oils, or butter). A Type 6 licensee may also: conduct infusion operations and conduct packaging and labeling of cannabis products.
State of California Type 6 Manufacturing License issued by CDPH-MCSB
NC4 Systems Inc dba Caliva
License Number:
CDPH-10002455
101-111
South Hill Drive Brisbane, CA 94005
4/15/2022
A Type 6 manufacturing licensee is authorized to engage in extractions using mechanical methods or nonvolatile solvents (i.e. CO2, ethanol, water or food-grade dry ice, cooking oils, or butter). A Type 6 licensee may also: conduct infusion operations and conduct packaging and labeling of cannabis products.
License
Entity w/DBA and
License Number
Address
Expiration /
Renewal Date
Description
State of California Type 11 Distribution License issued by Bureau of Cannabis Control (“BCC
”)
NC3 Systems dba Caliva
License Number:
C11-
0000819-LIC
1695 S 7th St San Jose, CA 95112
7/15/2022
Distributor licensees are responsible for transporting cannabis goods between licensees, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all the packaging and labeling requirements, and distributing cannabis goods and accessories to retailers. A licensed distributor may package and label flower-only products and roll pre-rolls.
State of California Type 11 Distribution License issued by BCC
NC4 Systems Inc dba Caliva
License Number:
C11-
0000922-LIC
101-111
South Hill Drive Brisbane, CA 94005
7/28/2022
Distributor licensees are responsible for transporting cannabis goods between licensees, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all the packaging and labeling requirements, and distributing cannabis goods and accessories to retailers. A licensed distributor may package and label flower-only products and roll pre-rolls.
State of California Type 11 Distribution License issued by BCC
Caliva CADINH1, Inc dba Caliva North Hollywood
License Number:
C11-
0000489-LIC
7127 Vineland Ave North Hollywood, CA 91605
6/24/2022
Distributor licensees are responsible for transporting cannabis goods between licensees, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all the packaging and labeling requirements, and distributing cannabis goods and accessories to retailers. A licensed distributor may package and label flower-only products and roll pre-rolls.
State of California NonStorefront Retail License issued by BCC
NC3 Systems dba Caliva
License Number:
C9-
0000135-LIC
1695 S 7th St San Jose, CA 95112
6/25/2022
A non-storefront
retail license covers sales of cannabis goods to customers exclusively through delivery. A retailer non-storefront
must have a licensed premise to store the cannabis goods for delivery. The premises of a non-storefront
retailer shall not be open to the public. A non-storefront
retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A non-storefront
retailer license may not engage in any packaging or labeling activities.
License
Entity w/DBA and
License Number
Address
Expiration /
Renewal Date
Description
State of California Retail License issued by BCC
NC3 Systems dba Caliva
License Number:
C10-
0000441-LIC
1695 S 7th St San Jose, CA 95112
7/15/2022
A retail license covers sales of cannabis goods to customers at its storefront premises or by delivery. A retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A retailer license may not engage in any packaging or labeling activities.
State of California Retail License issued by BCC
NC3 Systems dba Deli by Caliva
License Number:
C10-
0000627-LIC
9535 Artesia Blvd Bellflower, CA 90706
10/7/2022
A retail license covers sales of cannabis goods to customers at its storefront premises or by delivery. A retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A retailer license may not engage in any packaging or labeling activities.
State of California Non-
Storefront Retail License issued by BCC
NC4 Systems Inc dba Caliva
License Number:
C9-
0000235-LIC
101-111
South Hill Drive Brisbane, CA 94005
7/28/2022
A non-storefront
retail license covers sales of cannabis goods to customers exclusively through delivery. A retailer non-storefront
must have a licensed premise to store the cannabis goods for delivery. The premises of a non-storefront
retailer shall not be open to the public. A non-storefront
retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A non-storefront
retailer license may not engage in any packaging or labeling activities.
State of California Retail License issued by BCC
Nc6 Systems dba Deli by Caliva Hanford
License Number:
C10-
0000840-LIC
104 N Douty St Hanford, CA 93230
7/12/2022
A retail license covers sales of cannabis goods to customers at its storefront premises or by delivery. A retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A retailer license may not engage in any packaging or labeling activities.
State of California Non-
Storefront Retail License issued by BCC
Caliva CADECC1, LLC dba Caliva Culver City
License Number:
C9-
0000034-LIC
5855 Green Valley Circle Culver City, CA 90230
5/22/2022
A non-storefront
retail license covers sales of c cannabis goods to customers exclusively through delivery. A retailer non-storefront
must have a licensed premise to store the cannabis goods for delivery. The premises of a non-storefront
retailer shall not be open to the public. A non-storefront
retailer may only purchase cannabis goods that have passed state testing requirements
License
Entity w/DBA and
License Number
Address
Expiration /
Renewal Date
Description
from a licensed distributor. A nonstorefront retailer license may not engage in any packaging or labeling activities.
State of California - Microbusiness License issued by BCC
Caliva CAMISJ2, Inc. dba Deli by Caliva San Jose
License Number:
C12-
0000216-LIC
92 Pullman Way San Jose, CA 95111
7/23/2022
A microbusiness license allows a licensee to engage in the cultivation of cannabis on an area less than 10,000 square feet and to act as a licensed distributor, type 6 manufacturer, and retailer, as specified in an application. In order to hold a microbusiness license, a licensee must engage in at least three (3) of the four (4) listed commercial cannabis activities. At this facility Caliva engages in retail, distribution and manufacturing.
State of California Non-
Storefront Retail License issued by BCC
Nc5 Systems, Inc. dba Caliva
License Number:
C9-
0000405-LIC
1664 Industrial Blvd.
Chula Vista, CA 91911
4/01/2022
A non-storefront
retail license covers sales of c cannabis goods to customers exclusively through delivery. A retailer non-storefront
must have a licensed premise to store the cannabis goods for delivery. The premises of a non-storefront
retailer shall not be open to the public. A non-storefront
retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A nonstorefront retailer license may not engage in any packaging or labeling activities.
State of California Retail License issued by BCC
Calma WeHo, LLC DBA Calma WeHo, LLC
License:
C10-0000338-LIC
1155 N La Brea, West Hollywood, CA 90038
06/27/2022
A retail license covers sales of cannabis goods to customers at its storefront premises or by delivery. A retailer may only purchase cannabis goods that have passed state testing requirements from a licensed distributor. A retailer license may not engage in any packaging or labeling activities.
Sturdivant Licenses
Sturdivant Ventures, LLC, (“Sturdivant
”) an indirect wholly-owned subsidiary of the Company, maintains two state licenses and local permits for its business for cannabis manufacturing and distribution allowing it to operate throughout the State of California. Currently, Sturdivant is licensed to operate one Type-N
Manufacturing facility and one Type-11
Distribution facility. Set out below are the state licenses issued to Sturdivant in respect of its operations in California as of December 31, 2021. These licenses were issued by the predecessor licensing agencies which existed prior to the creation of the DCC; future licenses will be issued by the DCC.
License
Entity w/ DBA and
License Number
Address
Expiration /
Renewal Date
Description
State of California Type- N Manufacturing
Sturdivant Ventures, LLC dba Landseye
975 Corporate Center Parkway,
5/16/2022
A Type N manufacturing licensee is authorized to produce infused manufactured cannabis products
License
Entity w/ DBA and
License Number
Address
Expiration /
Renewal Date
Description
License issued by CDPH-MCSB
License Number:
CDPH-10003210
Suite 120, Santa Rosa, CA 95407
5/16/2022
(e.g., infused pre-rolls,
edibles, topicals, other non-inhalable
ingestible products). A Type N licensee may also conduct packaging and labeling of manufactured and non-manufactured
cannabis products.
State of California Type- 11 Distribution License issued by BCC
Sturdivant Ventures, LLC dba Landseye
License Number:
C11-
0000753-LIC
975 Corporate Center Parkway, Suite 120, Santa Rosa, CA 95407
7/9/2022
Distributor licensees are responsible for transporting cannabis goods between licensees, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all the packaging and labeling requirements, and distributing cannabis goods and accessories to retailers. A licensed distributor may package and label flower-only products and roll pre-rolls.
Sol Distro Licenses
Fluid South, Inc. (“Sol Distro
”), an indirect wholly-owned subsidiary of the Company, maintain several licenses for their businesses, including state licenses for cannabis manufacturing and distribution. Sol Distro keeps local licenses for each of its operations allowing it to operate throughout the State of California. Currently, Sol Distro holds one Type-N
Manufacturing and one Type-11
Distribution licenses.
Below is a list of the state licenses issued to Sol Distro in respect of its operations in California. These licenses were issued by the predecessor licensing agencies which existed prior to the creation of the DCC; future licenses will be issued by the DCC.
License
Entity
Address Attached
to License
Expiration /
Renewal Date
Description
State of California Type- N Manufacturing License issued by CDPH-MCSB
Fluid South, Inc. dba SOL Distro
License Number:
CDPH-10003729
3560 Cadillac Ave., Costa Mesa, CA
7/19/2022
A Type N manufacturing licensee is authorized to produce infused manufactured cannabis products (e.g., infused pre-rolls,
edibles, topicals, other non-inhalable
ingestible products). A Type N licensee may also conduct packaging and labeling of manufactured and non-manufactured
cannabis products.
State of California Type- 11 Distribution License issued by BCC
Fluid South, Inc. dba SOL Distro
License Number:
C11-
0000826-LIC
3560 Cadillac Ave., Costa Mesa, CA
7/16/2022
Distributor licensees are responsible for transporting cannabis goods between licensees, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all the packaging and labeling requirements, and distributing cannabis goods and accessories to retailers. A licensed distributor may package and label flower-only products and roll pre-rolls.
SISU Licenses
SISU, an indirectly wholly-owned subsidiary of the Company, maintains several licenses for its business, including California State licenses for marijuana manufacturing, distribution, and processing. SISU keeps local jurisdictional licenses and cross-jurisdictional licenses allowing it to operate throughout the State of California. Currently, SISU is licensed to operate two Type-6
Manufacturing facilities, one Type-11
Distribution facility, and two processor facilities.
Below is a list of the state licenses issued to SISU in respect of its operations in California as of December 31, 2021. These licenses were issued by the predecessor licensing agencies which existed prior to the creation of the DCC; future licenses will be issued by the DCC.
License
Entity
Address Attached
to License
Expiration /
Renewal Date
Description
State of California Type- 6 Manufacturing License issued by CDPH-MCSB
SISU dba Sisu Extracts
License Number:
CDPH-10001876
4651 West End Road Arcata, CA
1/12/2022
A Type 6 manufacturing licensee is authorized to engage in extractions using mechanical methods or nonvolatile solvents (i.e., CO2, ethanol, water or food-grade dry ice, cooking oils, or butter). A Type 6 licensee may also: conduct infusion operations and conduct packaging and labeling of cannabis products.
State of California Type- 6 Manufacturing License issued by CDPH-MCSB
SISU dba Sisu Extracts
License Number:
CDPH-10003338
112 W. Third Street, Suites D, E, & F Eureka, CA
5/31/2022
A Type 6 manufacturing licensee is authorized to engage in extractions using mechanical methods or nonvolatile solvents (i.e. CO2, ethanol, water or food-grade dry ice, cooking oils, or butter). A Type 6 licensee may also: conduct infusion operations and conduct packaging and labeling of cannabis products.
State of California Type- 11 Distribution License issued by BCC
SISU dba Sisu Extracts
License Number:
C11-
0000379-LIC
112 W. Third Street, Suites C Eureka, CA
6/13/2022
Distributor licensees are responsible for transporting cannabis goods between licensees, arranging for testing of cannabis goods, conducting quality assurance review of cannabis goods to ensure they comply with all the packaging and labeling requirements, and distributing cannabis goods and accessories to retailers. A licensed distributor may package and label flower-only products and roll pre-rolls.
State of California Processor License issued by CDFA-CCL
SISU dba Sisu Extracts
License Number:
CCL20-0001586
112 W. Third Street, Suites B Eureka, CA
8/10/2022
A processor license covers a cultivation site that conducts only trimming, drying, curing, grading, packaging, or labeling of cannabis and nonmanufactured cannabis products. Cultivators must use a licensed distributor to transfer product between licensees.
State of California Processor License issued by CDFA-CCL
SISU dba Sisu Extracts
License Number:
CCL20-0002140
228 3rd St. Eureka, CA
12/17/2022
A processor license covers a cultivation site that conducts only trimming, drying, curing, grading, packaging, or labeling of cannabis and nonmanufactured cannabis products. Cultivators must use a licensed distributor to transfer product between licensees.
Laws Applicable to Financial Services for Regulated Cannabis Industry
All banks are subject to federal law, whether the bank is a national bank or state-chartered bank. At a minimum, most banks maintain federal deposit insurance which requires adherence to federal law. Violation of federal law could subject a bank to loss of its charter. Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Currency and Foreign Transactions Reporting Act of 1970
(31 U.S.C. § 5311 et seq
) (commonly known as the “Bank Secrecy Act
”). For example, under the Bank Secrecy Act, banks must report to the federal government any suspected illegal activity, which would include any transaction associated with a Regulated Cannabis-related business. These reports must be filed even though the business is operating in compliance with applicable state and local laws. Therefore, financial institutions that conduct transactions with money generated by Regulated Cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA.
FinCEN issued guidance in February 2014 which clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Concurrently with the FinCEN guidance, the DOJ issued supplemental guidance directing federal prosecutors to consider the federal enforcement priorities enumerated in the 2013 Cole Memorandum with respect to federal money laundering, unlicensed money transmitter and Bank Secrecy Act offenses based on cannabis-related violations of the CSA. The FinCEN guidance sets forth extensive requirements for financial institutions to meet if they want to offer bank accounts to cannabis-related businesses, including close monitoring of businesses to determine that they meet all of the requirements established by the DOJ, including those enumerated in the 2013 Cole Memorandum. This is a level of scrutiny that is far beyond what is expected of any normal banking relationship. Under the 2019 FinCEN guidance discussed above, banks are not required to file SARs on businesses solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. However, the 2014 guidance remains in place with respect to Regulated Cannabis businesses. FinCEN confirmed this point in guidance issued on June 29, 2020, and clarified that, if proceeds from cannabis-related activities are kept separate, a SAR filing is only required for the cannabis-related part of a business that engages in both cannabis and hemp activity.
As a result, many banks are hesitant to offer any banking services to Regulated Cannabis-related businesses, including opening bank accounts. While the Company currently has bank accounts, its inability to maintain these accounts or the lack of access to bank accounts or other banking services in the future, would make it difficult for the Company
to operate its business, increase its operating costs, and pose additional operational, logistical and security challenges. Furthermore, it remains unclear what impact the rescission of the 2013 Cole Memorandum and 2014 Cole Memorandum will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities.
The increased uncertainty surrounding financial transactions related to cannabis activities may also result in financial institutions discontinuing services to the cannabis industry. See “Risk Factors
”.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS.
RISK FACTOR SUMMARY
Our business is subject to a number of risks and uncertainties of which you should be aware before making a decision to invest in our Common Shares. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary; and other risks we face, can be found below under the heading “Risk Factors” and should be carefully considered, together with other information in this Annual Report and our other filings with the SEC, before making a decision to invest in our Common Shares. These risks include, among others, the following:
•
Cannabis continues to be a controlled substance under the CSA.
•
The approach to the enforcement of Regulated Cannabis laws may be subject to change or may not proceed as previously outlined.
•
The Company may be subject to applicable anti-money laundering laws and regulations.
•
The Company may have difficulty accessing the services of banks, which may make it difficult to operate its business.
•
The Company may have difficulty accessing public and private capital.
•
The Company may be subject to the risks associated with governmental approvals, permits and compliance with applicable laws.
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There may be a restriction on deduction of certain expenses.
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Certain jurisdictions currently prohibit public company and/or non-U.S.
company ownership of cannabis businesses.
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Political uncertainty may have an adverse impact on the Company’s operating performance and results of operations.
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Significant failure or deterioration of the Company’s quality control systems may adversely impact the Company.
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The Company may be subject to product liability claims.
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The Company is subject to risks inherent in an agricultural business.
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Ongoing controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer products and expose the Company to litigation and additional regulation.
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The Company faces competition from the illegal cannabis market.
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The Company may be subject to environmental regulations and risks.
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The Company is reliant on its management team.
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Potential future sales of shares could adversely affect prevailing market prices for the Common Shares.
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Limited market for our securities.
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If we fail to comply with the rules under Sarbanes-Oxley related to accounting controls and procedures in the future, or, if we discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.
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The Company may not be able to achieve sustainable revenues and profitable operations.
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Risks associated with recent or future acquisitions.
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Competition in the cannabis industry is intense and increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition and results of operations of the Company.
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The cannabis industry is difficult to forecast.
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The Company may be subject to the risk of litigation.
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Company may be subject to risks related to security breaches.
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The current outbreak of the novel Coronavirus, or COVID-19,
or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to the Company’s operations, performance, financial condition, results of operations and cash flows.
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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about the Company or its business, the Common Share trading price and volume could decline.
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The market price of the Common Shares may be highly volatile.
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The Company may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on the financial condition, results of operations and Common Share price, which could cause investors to lose some or all of their investment.
RISK FACTORS
An investment in the Company involves a number of risks. In addition to the other information contained in this Annual Report, investors should give careful consideration to the following risk factors. Any of the matters highlighted in these risk factors could adversely affect our business and financial condition, causing an investor to lose all, or part of, its, his or her investment. The risks and uncertainties described below are those we currently believe to be material, but they are not the only ones we face. If any of the following risks, or any other risks and uncertainties that we have not yet identified or that we currently consider not to be material, actually occur or become material risks, our business, prospects, financial condition, results of operations and cash flows and consequently the price of our securities could be materially and adversely affected.
Risks Related to the Industry and the Company’s Business
Cannabis continues to be a controlled substance under the CSA.
In addition to federal regulation, cannabis is also regulated at the state level in the United States. To the Company’s
knowledge, there are to date a total of 47 states, plus the District of Columbia, Puerto Rico and Guam that have legalized or decriminalized cannabis in some form (including hemp). Further, ballot initiatives to legalize Adult-Use
Cannabis recently passed in Arizona, New Jersey, South Dakota, and Montana, and ballot initiatives to legalize Medical-Use
Cannabis passed in South Dakota and Mississippi, with implementation of applicable regulations expected in those states in the near future. Notwithstanding the permissive regulatory environment of cannabis at the state level, cannabis and THC continue to be categorized as controlled substances under the CSA and as such, violate federal law in the United States.
The United States Congress has passed appropriations bills in recent years that have not appropriated funds for prosecution of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the U.S. federal government from prosecuting individuals when those individuals comply with state law relating to approved medical uses. However, because this conduct continues to violate U.S. federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business - even those that have fully complied with state law - could be prosecuted for violations of U.S. federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law that took place before received funding under the CSA’s five-year statute of limitations.
Violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the U.S. federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licences in the United States, the listing of its securities on the Exchange or other applicable exchanges, its financial position, operating results, profitability or liquidity or the market price of its Common Shares. In addition, it is difficult to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.
The approach to the enforcement of Regulated Cannabis laws may be subject to change or may not proceed as previously outlined.
As a result of the conflicting views between states and the federal government regarding cannabis, investments in Regulated Cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed on August 29, 2013 when then Deputy Attorney General, James Cole, authored the 2013 Cole Memorandum addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several U.S. states have enacted laws relating to cannabis for medical purposes.
The 2013 Cole Memorandum outlined certain priorities for the DOJ relating to the prosecution of cannabis offenses. In particular, the 2013 Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of Regulated Cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the DOJ has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the 2013 Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the 2013 Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis. States where Medical-Use
Cannabis had been legalized were not characterized as a high priority. In March 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the 2013 Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions authored the Sessions Memorandum, which rescinded all “previous nationwide guidance specific to marijuana enforcement,” including the 2013 Cole Memorandum. The Sessions Memorandum rescinded previous nationwide guidance specific to the prosecutorial authority of United States attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well-established principles governing federal prosecution that are already in place. Those principals are included in chapter 9.27.000 of the United States Attorneys’ Manual and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
As a result of the Sessions Memorandum, federal prosecutors will now be free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of Medical-Use
Cannabis by federal prosecutors.
Former U.S. Attorney General Jeff Sessions resigned on November 7, 2018. Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, even under a Biden Administration’s DOJ or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to cannabis and THC (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law.
In recent years, certain temporary federal legislative enactments that protect the Medical-Use
Cannabis and industry have also been in effect. For instance, cannabis businesses that are in strict compliance with state law receive a measure of protection from federal prosecution by operation of a temporary appropriations measures that has been enacted into law as an amendment (or “rider
”) to federal spending bills passed by Congress and signed by both Presidents Obama and Trump. First adopted in the Appropriations Act of 2015, Congress has included in successive budgets since a “rider” that prohibits the DOJ from expending any funds to enforce any law that interferes with a state’s implementation of its own medical cannabis laws. The rider, discussed above, is known as the “Rohrbacher-Blumenauer
” Amendment. The Rohrbacher-Blumenauer Amendment (now known colloquially as the “Joyce-Amendment
” after its most recent sponsors) was included in the Consolidated Appropriations Act of 2020, which was signed by President Trump on December 20, 2019 and funded the departments of the federal government through the fiscal year ending September 30, 2020. In signing the act, President Trump issued a signing statement noting that the Act “provides that the DOJ may not use any funds to prevent implementation of medical cannabis laws by various States and territories,” and further stating “I will treat this provision consistent with the President’s constitutional responsibility to faithfully execute the laws of the United States.” While the signing statement can fairly be read to mean that the executive branch intends to enforce the CSA and other federal laws prohibiting the sale and possession of medical cannabis, the President did issue a similar signing statement in May 2017 and February 2019 and no federal enforcement actions followed. On March 15, 2022, the Rohrabacher/Blumenauer Amendment was renewed through the signing of the FY 2022 omnibus spending bill, which extended the protections of the Amendment through September 30, 2022.
Should the Rohrabacher/Blumenauer Amendment not be renewed in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Company, while diverting the attention of executives. Such proceedings could have a material adverse effect on the Company’s business, revenues, operating results and financial condition as well as the Company’s reputation, even if such proceedings were concluded successfully in favor of the Company.
Moreover, unless and until the U.S. Congress amends the CSA with respect to Medical-Use
Cannabis and/or Adult-Use
Cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law. If the U.S. federal government begins to enforce U.S. federal laws relating to Regulated Cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, the Company’s business, assets, revenues, operating results and financial condition as well as the Company’s reputation may be material adversely effected. In the extreme case, such enforcement could ultimately involve the prosecution of key executives of the Company or the seizure of its assets.
U.S. state regulatory uncertainty may adversely impact the Company.
There is no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed, amended or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. If the U.S. federal government begins to enforce U.S. federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing state laws are repealed or curtailed, the Company’s business or operations in those states or under those laws would be materially and adversely affected. Federal actions against any individual or entity engaged in the cannabis industry or a substantial repeal of cannabis related legislation could adversely affect the Company, its business and its assets or investments.
Certain U.S. states where medical and/or Adult-Use
Cannabis is legal have or are considering special taxes or fees on the cannabis industry. It is uncertain at this time whether other states are in the process of reviewing such additional taxes and fees. The implementation of special taxes or fees could have a material adverse effect upon the businesses, results of operations and financial condition of the Company.
The Company may be subject to applicable anti-money laundering laws and regulations.
Given the nature of its business, the Company may be subject to a variety of laws and regulations in Canada and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including 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), as amended and the rules and regulations thereunder, the Criminal Code
(Canada) and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada. Banks often refuse to provide banking services to businesses involved in the U.S. cannabis industry due to the present state of the laws and regulations governing financial institutions in the United States. The lack of banking and financial services presents unique and significant challenges to businesses in the cannabis industry. The potential lack of a secure place in which to deposit and store cash, the inability to pay creditors through the issuance of cheques and the inability to secure traditional forms of operational financing, such as lines of credit, are some of the many challenges presented by the unavailability of traditional banking and financial services.
In February 2014, the FinCEN issued the FinCEN Memorandum, which states that in some circumstances, it is possible for banks to provide services to cannabis related businesses without risking prosecution for violation of U.S. federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to U.S. federal prosecutors relating to the prosecution of U.S. money laundering offenses predicated on cannabis-related violations of the CSA. It is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memorandum.
In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the United States 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. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, affect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there are no current intentions to declare or pay dividends on the Common Shares in the foreseeable future,
in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the United States) could reasonably be shown to constitute proceeds of crime, the Company
may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
FDA rulemaking related to Medical-Use
Cannabis and the possible registration of facilities where Medical-Use
Cannabis is grown could negatively affect the Medical-Use
Cannabis industry, which would directly affect our financial condition.
Should the federal government legalize Medical-Use
Cannabis, it is possible that the FDA would be tasked by Congress to regulate it under the FDCA. Additionally, the FDA may issue rules and regulations including current good manufacturing practices, or GMPs, related to the growth, cultivation, harvesting and processing of Medical-Use
Cannabis. Clinical trials may be needed to verify efficacy and safety. It is also possible that the FDA would require that facilities where Medical-Use
Cannabis is grown register with the FDA and comply with certain federal regulations. In the event that some or all of these regulations are imposed, we do not know what the impact would be on the Medical-Use
Cannabis industry, including what costs, requirements and possible prohibitions may be enforced. If we are unable to comply with the regulations or registration as prescribed by the FDA, we may be unable to continue to operate our business in its current form or at all.
U.S. border officials could deny entry into the U.S. to employees of, or investors in companies with cannabis operations in the United States.
Because cannabis remains illegal under U.S. federal law, those non-U.S.
citizens employed at or investing in legal and licensed cannabis companies could face detention, denial of entry or lifetime bans from the United States for their business associations with U.S. cannabis businesses. Entry of non-U.S.
citizens happens at the sole discretion of the U.S. Customs and Border Protection (“CBP
”) officers on duty, and these officers have wide latitude to ask questions to determine the admissibility of a foreign national.
The Government of Canada warns travelers on its website that previous use of cannabis, or any substance prohibited by U.S. federal laws, could mean denial of entry to the U.S. In addition, business or financial involvement in the legal cannabis industry in the United States could also be reason enough for U.S. border guards to deny entry. On September 21, 2018, CBP released a statement outlining its current position with respect to enforcement of the laws of the United States. It stated that CBP enforcement of United States laws regarding controlled substances has not changed and because cannabis continues to be a controlled substance under United States law, working in or facilitating the proliferation of the legal cannabis industry in U.S. states where it is deemed legal may affect admissibility to the U.S. As a result, CBP has affirmed that, a Canadian citizen coming to the U.S. for reasons related to the cannabis industry may be deemed inadmissible. While the CBP under the Biden Administration has archived its website page covering the September 21, 2018 statement, the Biden Administration has not officially rescinded the policy in question.
The Company may have difficulty accessing the services of banks, which may make it difficult to operate its business.
The Company may have trouble accessing services of financial institutions. For example, in February 2014, FinCEN issued the FinCEN Memorandum (which is not law) that provides guidance with respect to financial institutions providing banking services to cannabis business, including burdensome due diligence expectations and reporting requirements. This guidance does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the DOJ, FinCEN or other federal regulators. Thus, most banks and other financial institutions in the United States do not appear to be comfortable providing banking services to cannabis-related businesses, or relying on this guidance, which can be amended or revoked at any time by the executive branch. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the United States. In addition, federal money laundering statutes and Bank Secrecy Act regulations discourage financial institutions from working with any organization that sells a controlled substance, regardless of whether the state it resides in permits cannabis sales. While the United States House of Representatives has passed the SAFE Banking Act, which would permit commercial banks to offer services to cannabis companies that are in compliance with state law, it remains under consideration by the Senate, and if Congress fails to pass the SAFE Banking Act, the Company’s inability, or limitations on the Company’s ability, to open or maintain bank accounts and/or obtain other banking services may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.
Since the use of cannabis is illegal under U.S. federal law, and in light of concerns in the banking industry regarding money laundering and other federal financial crime related to cannabis, businesses involved in the cannabis industry often have difficulty finding a bank willing to accept their business. Likewise, cannabis businesses have limited access, if any, to credit card processing services. As a result, cannabis businesses in the United States are to a significant degree cash-based. This complicates the implementation of financial controls and increases security issues.
The Company may have difficulty accessing public and private capital.
The Company expects to access public capital markets by virtue of its status as a reporting issuer in each of the provinces and territories of Canada (other than Quebec). In addition, on October 8, 2021, the Company became a reporting issuer under the Securities Exchange Act of 1934, as amended (the “Exchange Act
”), which will allow it to more easily access the U.S. public markets. However, there can be no assurances that the Company will be able to successfully obtain sufficient financing through such capital markets and, further, capital market uncertainty and volatility could impact the Company’s ability to obtain equity financing.
Caliva and LCV have historically, and the Company continues to have, access to equity and debt financing from the prospectus exempt (private placement) markets in the United States The Company
also has relationships with sources of private capital (such as funds and high net worth individuals) that might provide financing at a higher cost of capital.
Commercial banks, private equity firms and venture capital firms have approached the cannabis industry cautiously to date. However, there are increasing numbers of high net worth individuals and family offices that have made meaningful investments in companies and businesses similar to the Company. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep pool of institutional capital that is available to cannabis license holders and license applicants. There can be no assurance that additional financing, if raised privately, will be available to the Company when needed or on terms which are acceptable to the Company. The Company’s inability to raise financing to fund capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability.
There may be a restriction on deduction of certain expenses.
Section 280E of the United States Internal Revenue Code of 1986, as amended (the “Code
”) generally prohibits businesses from deducting or claiming tax credits with respect to expenses paid or incurred in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the CSA) which is prohibited by U.S. federal law or the law of any state in which such trade or business is conducted. Section 280E currently applies to businesses operating in the cannabis industry, irrespective of whether such businesses are licensed and operating in accordance with applicable state laws. The application of Code Section 280E generally causes such
businesses to pay higher effective U.S. federal income tax rates than similar businesses in other industries due to the loss of certain deductions and credits. The impact of Code Section 280E on the effective tax rate of a cannabis business generally depends on how large the ratio of non-deductible
expenses is to the business’s total revenues. The Company expects to continue to be subject to Code Section 280E. The application of Code Section 280E to the Company may adversely affect the Company’s profitability and, in fact, may cause the Company to operate at a loss when it would otherwise have a profit. While recent legislative proposals, if enacted into law, could eliminate or diminish the application of Code Section 280E to cannabis businesses, the enactment of any such law is uncertain. Accordingly, Code Section 280E may to apply to the Company indefinitely.
The Company may lack access to U.S. bankruptcy protections.
As discussed above, cannabis is illegal under U.S. federal law. Therefore, there is a compelling argument that the federal bankruptcy courts cannot provide relief for parties who engage in Regulated Cannabis businesses. Recent bankruptcy rulings have denied bankruptcies for dispensaries upon the justification that businesses cannot violate federal law and then claim the benefits of federal bankruptcy for the same activity and upon the justification that courts cannot ask a bankruptcy trustee to take possession of, and distribute Regulated Cannabis-related assets as such action would violate the CSA. Therefore, the Company
may not be able to seek the protection of the bankruptcy courts and this could materially affect our business or our ability to obtain credit.
The Company’s operations in the U.S. cannabis market
may be subject to heightened scrutiny by regulatory authorities.
For the reasons set forth above, the Company’s existing operations in the United States, and any future operations or investments, may become the subject of heightened scrutiny by securities regulators, stock exchanges and other authorities in Canada and the United States. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest or hold interests in other entities in the United States. or any other jurisdiction, or have consequences for its stock exchange listing or Canadian reporting obligations, in addition to those described herein. See “Risk Factors-Risks Related to the Industry and the Company’s Business - Cannabis continues to be a controlled substance under the CSA
”.
For example, to date, the New York Stock Exchange and the Nasdaq Stock Market have refused to list on their exchanges securities of companies, like the Company, that are in the business of cultivating and selling cannabis in the United States.
On February 8, 2018, the Canadian Securities Administrators published Staff Notice 51-352
describing the Canadian Securities Administrators’ disclosure expectations for specific risks facing issuers with cannabis-related activities in the U.S. Staff Notice 51-352
confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related activities. Staff Notice 51-352
includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry.
CDS Clearing and Depositary Services Inc. (“CDS
”) is Canada’s central securities depository, clearing and settling trades in the Canadian equity, fixed income and money markets. On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group, which is the owner and operator of CDS, announced the signing of a Memorandum of Understanding (“MOU
”) with the Exchange, the Canadian Securities Exchange and the Toronto Stock Exchange confirming that it relies on such exchanges to review the conduct of listed issuers. The MOU notes that securities regulation requires that the rules of each of the exchanges must not be contrary to the public interest and that the rules of each of the exchanges have been approved by the securities regulators. Pursuant to the MOU, CDS will not ban accepting deposits of or transactions for clearing and settlement of securities of issuers with cannabis-related activities in the United States.
Even though the MOU indicated that there are no plans of banning the settlement of securities of issuers with U.S. cannabis related activities through CDS, there can be no guarantee that the settlement of securities will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares
would become highly illiquid until an alternative (if available) was implemented, and investors would have no ability to effect a trade of the Common Shares through the facilities of a stock exchange.
The Company may be subject to the risk of civil asset forfeiture.
Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property was never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.
The laws and regulations affecting the cannabis industry are constantly changing.
The constant evolution of laws and regulations affecting the cannabis industry could detrimentally affect the Company. The current and proposed operations of the Company are subject to a variety of local, state and federal cannabis laws and regulations relating to the manufacture, management, transportation, storage and disposal of cannabis, as well as laws and regulations relating to consumable products health and safety, the conduct of operations and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations, which could require the Company
to incur substantial costs associated with compliance or alter certain aspects of its business plans. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the business plans of the Company
and result in a material adverse effect on certain aspects of their planned operations. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Company’s
profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, the SEC, the DOJ, the Financial Industry Regulatory Authority or other federal or applicable state or non-governmental
regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical or adult-use
purposes in the United States. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the industry may adversely affect the business and operations of the Company, including without limitation, the costs to remain compliant with applicable laws and the impairment of its business or the ability to raise additional capital. In addition, the Company is not be able to predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to its business.
The Company may be subject to the risks associated with governmental approvals, permits and compliance with applicable laws.
Government approvals and permits are currently, and may in the future be, required in connection with the operations of the Company. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its production, manufacture, and sale of Medical-Use
Cannabis and Adult-Use
Cannabis or from proceeding with the development of its operations as currently proposed.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of their operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
The Company may not be able to obtain or maintain the necessary licences, permits, certificates, authorizations or accreditations to operate its businesses, or may only be able to do so at great cost. In addition, the Company may not be able to comply fully with the wide variety of laws and regulations applicable to the cannabis industry. Failure to comply with or to obtain the necessary licences, permits, certificates, authorizations or accreditations could result in restrictions on the Company’s ability to operate in the cannabis industry, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
Amendments to current laws, regulations and permits governing the production of medical and adult-use
cannabis, or more stringent implementation thereof, could have a material adverse impact on the Company
and cause increases in expenses, capital expenditures or production costs, or reduction in levels of production, or require abandonment or delays in development.
There may be difficulty with the enforceability of contracts.
It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal in the United States at a federal level, judges in multiple U.S. states have on a number of occasions refused to enforce contracts for the repayment of money when the loan was used in connection with activities that violate federal law, even if there is no violation of state law. It is possible that the Company
may not be able to legally enforce contracts the Company
enters into if necessary, which means there can be no assurance that there will be a remedy for breach of contract, which would have a material adverse effect on the Company’s
business, assets, revenues, operating results, financial condition and prospects. For example, at least some federal courts have dismissed lawsuits seeking to enforce contracts involving the purchase or sale of Regulated Cannabis businesses.
The ability to grow a business with ties to cannabis operations in the United States depends on state laws pertaining to the cannabis industry.
Continued development of the Regulated Cannabis industry depends upon continued legislative authorization of cannabis at the state level. The status quo of, or progress in, the Regulated Cannabis industry is not assured and any number of factors could slow or halt further progress in this area. While there may be ample public support for legislative action permitting the manufacture and use of cannabis, numerous factors impact the legislative process. For example, many states that voted to legalize Medical-Use
Cannabis
and/or Adult-Use
Cannabis have seen significant delays in the drafting and implementation of regulations and issuance of licenses. In addition, burdensome regulation at the state level could slow or stop further development of the Regulated Cannabis industry, such as limiting the medical conditions for which medical cannabis can be recommended by physicians for treatment, restricting the form in which medical cannabis can be consumed, imposing significant registration requirements on physicians and patients or imposing significant taxes on the growth, processing and/or retail sales of cannabis, which could have the impact of dampening growth for cannabis businesses and making it difficult for cannabis businesses to operate profitably in those states. Any one of these factors could slow or halt additional legislative authorization of medical and/or recreational-use
cannabis, which could adversely affect the Company’s business prospects.
A revised statutory and regulatory framework implemented by a newly consolidated agency; cannabis tax relief under consideration in California.
In 2021, California consolidated the three state agencies licensing and regulating commercial cannabis activity in California, merging the Bureau of Cannabis Control, CalCannabis at the California Department of Food and Agriculture, and the Manufactured Cannabis Safety Branch at the Department of Public Health into a single Department of Cannabis Control (the “DCC”) effective July 1. The DCC in turn promulgated, consolidated and streamlined regulations, adopting the bulk of these on September 29, 2021. The consolidation of the three licensing divisions, development of a unified single licensing system for future cannabis business licenses and the transition of existing licensing data has yet to occur, but is contemplated in California Governor Gavin Newsom’s 2022-2023 Budget Proposal. Still, the enacted form of the uniform licensing protocols and regulatory clean-up
as part of a short-term and longer term strategy are unknown. The foregoing changes will continue to impact the processes, procedures, administration, and generally the operations of commercial cannabis licenses in California.
Governor Newsom also recently announced that he is also considering tax relief and/or simplification, in connection with releasing his 2022-2023 Budget Proposal: “It is my goal to look at tax policy to stabilize markets.” The Newsom administration, in addition to potentially adjusting tax rates, could elect to shift the responsibilities of tax collection from the final distributor to the first for cultivation, and for the retail excise tax from the distributor to the retailer. While the Company participates in DCC rule-makings and closely follows the Newsom administration’s budget proposals and revisions, the legislation, regulations and regulatory and tax impact on the licenses and operations therefrom is not currently known.
Certain jurisdictions currently prohibit public company ownership of cannabis businesses.
Certain jurisdictions in the United States prohibit persons that are declared unqualified to hold a cannabis establishment license, which can include any publicly traded company or non-U.S.
company. In such circumstances, the prohibition against the issuance of a cannabis establishment business license may not be limited to the direct licensee but extend to owners of such licensees including parent-companies. As such, a publicly-traded and/or non-U.S.
company may be denied the issuance of a cannabis establishment business license in such jurisdictions which could limit the Company’s ability to expand.
Political uncertainty may have an adverse impact on the Company’s operating performance and results of operations.
General political uncertainty may have an adverse impact on the Company’s operating performance and results of operations. In particular, the United States continues to experience significant political events that cast uncertainty on global financial and economic markets, especially in light of the recent presidential election. It is presently unclear exactly what actions the new administration in the United States will implement, and if implemented, how these actions may impact the cannabis industry in the United States. Any actions taken by the new United States administration may have a negative impact on the United States economies and on the businesses, financial conditions, results of operations and the valuation of United States cannabis companies, including the Company.
Risks Related to the Company’s Products and Services
Unfavorable publicity or consumer perception may affect the success of the Company’s business.
The legal cannabis industry in the U.S. is at an early stage of its development. Cannabis has been, and is expected to continue to be, a regulated substance for the foreseeable future. Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of cannabis are mixed and evolving. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, 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 earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question earlier research reports, findings or publicity could have a material adverse effect on the demand for cannabis and on the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity, reports or other media attention regarding cannabis in general, or associating the consumption of cannabis with illness or other negative effects or events, could have such a material adverse effect.
Public opinion and support for Medical-Use
Cannabis and Adult-Use
Cannabis use has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising for legalizing Medical-Use
Cannabis and Adult-Use
Cannabis, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical cannabis as opposed to legalization in general).
The ability to gain and increase market acceptance of the Company’s products may require the Company to establish and maintain its brand name and reputation. In order to do so, substantial expenditures on product development, strategic relationships and marketing initiatives may be required. There can be no assurance that these initiatives will be successful and their failure may have an adverse effect on the Company.
Further, a shift in public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the United States or elsewhere. A negative shift in the perception of the public with respect to cannabis in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize Adult-Use
Cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on its business, financial condition and results of operations.
The Company faces competition from the illegal cannabis market.
The Company
faces competition from illegal dispensaries and the illegal market that are unlicensed and unregulated, and that are selling cannabis and cannabis products, including products with higher concentrations of active ingredients, using flavors or other additives or engaging in advertising and promotion activities that the Company is not permitted to. As these illegal market participants do not comply with the regulations governing the cannabis industry, their operations may also have significantly lower costs. The illegal cannabis market within California and other markets across the United States continues to thrive. The perpetuation of the illegal market for cannabis may have a material adverse effect on the Company’s business, results of operations, as well as the perception of cannabis use.
Social media may impact the Company’s reputation.
The increased usage of social media and other web-based
tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views in regard to issuers and their activities, whether true or not and the cannabis industry in general, whether true or not. Negative posts or comments about the Company or its properties on any social networking website could damage the Company’s reputation. In addition, employees or others might disclose non-public
sensitive information relating to the Company’s business through external media channels. The continuing evolution of social media will present the Company with new challenges and risks.
Significant failure or deterioration of the Company’s quality control systems may adversely impact the Company.
The quality and safety of the Company’s products are critical to the success of its business and operations. As such, it is imperative that the Company’s quality control systems operate effectively and successfully. Quality control systems can be negatively impacted by the design of the quality control systems, the quality training program, and adherence by employees to quality control guidelines. Although the Company strives to ensure that it and any of its service providers have implemented and adhere to high caliber quality control systems, any significant failure or deterioration of such quality control systems could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
Service providers could suspend or withdraw service, which could adversely affect the Company’s business.
As a result of any adverse change to the approach in enforcement of U.S. cannabis laws, adverse regulatory or political changes, additional scrutiny by regulatory authorities, adverse changes in the public perception in respect of the consumption of cannabis or otherwise, third-party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the business, revenues, operating results, financial condition or prospects of the Company. In this regard, on July 19, 2021, we announced the launch of an updated Caliva app available through the Apple App Store, which allows California-based consumers to make cannabis purchases through the app and to receive rewards through our integrated loyalty program, Caliva CLUB. Previously, Apple had not allowed in-app
cannabis purchases on apps sold through the Apple App Store. There can be no assurance that Apple will not change its policy and determine not allow in-app
cannabis purchases, which would adversely affect our business.
The Company may be subject to product liability claims.
The Company
manufactures, processes and/or distributes products designed to be ingested by humans, and therefore faces an inherent risk of exposure to product liability claims, regulatory action and litigation if products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of cannabis products involve the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could occur. The Company may be subject to various
product liability claims, including, among others, that the products produced by them caused injury or illness, include inadequate instructions for use, or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action could result in increased costs, could adversely affect the reputation of the Company and could have a material adverse effect on the business, results of operations and financial condition of the Company. There can be no assurances that product liability insurance will be obtained or maintained on acceptable terms or with adequate coverage against potential liabilities.
The Company may be subject to product recalls.
Cultivators, 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 products produced by the Company are recalled due to an alleged product 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 and may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. Additionally, if one of the products produced by the Company were subject to recall, the image of that product and the Company could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for products produced by the Company and could have a material adverse effect on the business, results of operations and financial condition of the Company.
The Company is subject to risks inherent in an agricultural business.
Medical-Use
Cannabis and Adult-Use
Cannabis is an agricultural product. There are risks inherent in the cultivation business, such as insects, plant diseases and similar agricultural risks. Although the products are usually grown indoors or in green houses under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of the Company’s
products and, consequentially, on the business, financial condition and operating results of the Company.
The Company may be vulnerable to rising energy costs.
Cannabis growing operations consume considerable energy, making the Company potentially vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business, results of operations, financial condition or prospects of the Company.
The Company
is reliant on key inputs.
The cannabis business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs, including as a result of the COVID-19
pandemic or future pandemics, could materially impact the business, financial condition, results of operations or prospects of the Company. In this regard, California, where all of our growing operations are located, experienced droughts in 2021 and 2022, and may experience droughts in the future, which may increase our costs and adversely affect our growing operations. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure a replacement for such source in a timely manner or at all could have a material adverse effect on the business, financial condition, results of operations or prospects of the Company.
The pricing of raw materials used in our products and some of our products can be extremely volatile, which may have a material adverse effect on our financial result.
We both purchase and sell certain raw materials. The pricing of these raw materials has been extremely volatile. For example, the price of both flower and distilled cannabis (oil) has fluctuated significantly and, in particular, decreased significantly in the second half of 2021. This volatility may be disruptive to our supply chain and have an adverse effect on our financial results.
The Company
may be subject to the risk of competition from synthetic production and technological advances.
The pharmaceutical industry may attempt to dominate the cannabis industry, through the development and distribution of synthetic products which emulate the effects and treatment of organic cannabis. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the cannabis industry. This could materially adversely affect the ability of the Company to secure long-term profitability and success through the sustainable and profitable operation of its business.
Results of future clinical research may negatively impact the cannabis industry.
Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as CBD and THC), and associated terpenoids remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC). Although the Company believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, risks, efficacy, dosing and social acceptance of cannabis, future basic research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Future research studies and clinical trials may reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
Investments made by our social equity venture fund may result in losses for the Company.
As discussed above in “Item 1. Business-Description of the Business-Social Equity,” concurrent with the closing of the Qualifying Transaction, the Company launched a new social equity venture fund focused on investing in Black and other people-of-color
cannabis entrepreneurs. The social equity fund identifies, conducts diligence on, and invests in such entrepreneurs as a means of directly impacting the issues of social equity and diversity in the cannabis industry. The social equity fund was initially seeded with $10,000,000 from the Company’s balance sheet, with a planned annual contribution of at least 2% of the Company’s net income. While the Company makes social equity fund investments with the intent of making a profit, investments in businesses, particularly the smaller businesses in which the social equity fund has invested and expects to invest in future, is risky, and the Company could lose some or all of the capital it invests in these businesses.
Controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer products and expose the Company to litigation and additional regulation.
There have been a number of highly publicized cases involving lung and other illnesses and deaths that appear to be related to vaporizer devices and/or products used in such devices (such as vaporizer liquids). The controversy surrounds the vaporizer devices, the manner in which the devices were used and the related vaporizer device products-THC, nicotine, other substances in vaporizer liquids, possibly adulterated products and other illegal unlicensed cannabis vaporizer products. Some states and cities in the United States have already taken steps to prohibit the sale or distribution of vaporizers, restrict the sale and distribution of such products or impose restrictions on flavors or use of such vaporizers. This trend may continue, accelerate and expand.
This controversy could well extend to non-nicotine
vaporizer devices and other product formats. Any such extension could materially and adversely affect the Company’s business, financial condition, operating results, liquidity, cash flow and operational performance. Litigation pertaining to vaporizer products is accelerating and that litigation could potentially expand to include the Company’s products, which would materially and adversely affect the Company’s business, financial condition, operating results, liquidity, cash flow and operational performance.
Regulatory Risks
The Company may be subject to environmental regulations and risks.
The Company’s operations are subject to environmental regulation in the jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance,
more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.
Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its current or proposed production, manufacturing or sale of cannabis or from proceeding with the development of its operations as currently proposed. States mandate unique inventory tracking requirements and systems which may present implementation and adherence challenges for operators, such as California’s METRC track and trace inventory system, which requires integration with other systems and suffers frequent outages.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the production or manufacturing of cannabis, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production or manufacturing costs or reduction in levels of production or manufacturing or require abandonment or delays in development.
The Company
may be subject to constraints on the marketing of its products.
The development of the Company’s
business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the United States limits companies’ abilities to compete for market share in a manner similar to other industries. If the Company
is unable to effectively market its 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 its products, the Company’s
sales and results of operations could be adversely affected.
Risks Relating to the Company’s Business Structure
The Company
is reliant on its management team.
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements and equity incentives that vest over time are customarily used as a primary method of retaining the services of key employees, these agreements and equity incentives cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results, financial condition or prospects.
The Company
is a holding company.
We are a holding company and essentially all of our assets constitute the capital stock of the Company’s subsidiaries. As a result, investors are subject to the risks attributable to the Company’s subsidiaries. As a holding company, the Company will conduct substantially all of its business through subsidiaries, which generate substantially all of the Company’s revenues. Consequently, the Company’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of the Company’s subsidiaries and the distribution of those earnings to the Company. The ability of these entities to pay dividends and other distributions depends on their operating results and is subject to applicable laws and regulations, which require that solvency and capital standards be maintained by such subsidiaries and contractual restrictions are contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of the Company’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before the Company.
General Risks related to the Company including Capital Structure, Public Company and Tax Status and Capital Financing Policies
Limited market for our securities
The Common Shares and Warrants are listed on the Exchange and also trade over the counter in the United States on the OTCQX Best Market. However, there can be no assurance that an active and liquid market for the Common Shares or Warrants will develop or be maintained and an investor may find it difficult to resell any securities of the Company. The daily average trading volume of the Common Shares and Warrants has historically been extremely volatile. It is likely such volatility, and therefore risk to Company investors, will continue.
Potential future sales of shares could adversely affect prevailing market prices for the Common Shares.
We cannot predict the size of future issuances of Common Shares or the effect, if any, that future issuances and sales of Common Shares will have on the market price of the Common Shares. Sales of substantial amounts of Common Shares, or the perception that such sales could occur, may adversely affect prevailing market prices for the Common Shares.
Sales of a substantial number of the Common Shares may cause the price of the Common Shares to decline.
Any sales of substantial numbers of the Common Shares in the public market or the exercise of significant amounts of the Warrants or the perception that such sales or exercise might occur may cause the market price of the Common Shares to decline. On January 28, 2022, the Company entered into lock-up
agreements (collectively, the “Lock-Up
Agreements
”) with certain members of the Company’s leadership team and the entire board of directors (collectively, the “Stockholders
”) covering over approximately 35% of the total issued and outstanding Common Shares (the “Lock-Up
Shares
”). Pursuant to the Lock-Up
Agreements, each of the Stockholders has agreed that, subject to certain exceptions, until January 28, 2023, such Stockholder (and any entity or person controlled by Stockholder) will not without the written consent of the Company, among other things, sell, pledge, grant any option, right or warrant for the sale of, or otherwise lend, transfer, assign or dispose of any Locked-up
Shares, or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any such Locked-up
Shares. The Lock-Up
Agreements shall not apply to holders of the Lock-Up
Shares to the extent (i) any company with US cannabis operations (specifically operations that handle Tetrahydrocannabinol) is permitted to be listed on any senior US exchange, including the NYSE or Nasdaq, (ii) the trading price of the Common Shares on the Exchange, or any other applicable stock exchange, exceeds US$10.00 at the close of any trading day or (iii) the holder of the Lock-Up
Shares cease to be a director, officer or employee of the Company, as applicable. The market price of the Common Shares could be adversely affected upon the expiration of the Lock-Up
Agreements.
Further equity financing may dilute the interests of the Company’s
shareholders and depress the price of the Common Shares.
If the Company
raises additional financing through the issuance of equity securities (including securities convertible or exchangeable into equity securities) or completes an acquisition or merger by issuing additional equity securities, such issuance may substantially dilute the interests of shareholders of the Company
and reduce the value of their investment. The Company’s Articles permit the issuance of an unlimited number of Common Shares, and no shareholders of the Company have pre-emptive
rights in connection with a future issuance. The Board has the discretion to determine the price and the terms of issue of future issuances. Moreover, additional Common Shares may be issued by the Company on the exercise or vesting of awards under the Company’s equity incentive plan and upon the exercise of outstanding Warrants. The market price of the Common Shares could decline as a result of issuances of new shares or sales by shareholders of Common Shares in the market or the perception that such sales could occur. Sales by shareholders of the Company might also make it more difficult for the Company itself to sell equity securities at a time and price that it deems appropriate.
There is no guarantee that the Warrants will ever be in-the-money,
and the Warrants may expire worthless.
Pursuant to the terms of the warrant agency agreement between the Company and Odyssey Trust Company, as warrant agent, dated July 16, 2019 (the “Warrant Agreement
”), the Warrants became exercisable on March 22, 2021 at an exercise price of $11.50 per Common Share. There is no guarantee that the Warrants will ever be in-the-money
prior to their expiration, and as such, the Warrants may expire worthless.
Financial reporting obligations of being a public company in Canada and the United States are expensive and time-consuming, and our management will be required to devote substantial time to compliance matters.
As a public company, we are subject to the reporting requirements of applicable securities rules and regulations of Canadian securities regulators and other requirements in Canada. Complying with these rules and regulations increases our legal and financial compliance costs, makes some activities more difficult, time-consuming and costly, and increases demand on our systems and resources. In addition, the obligations of being a public company in the United States require significant expenditures and place significant demands on our management and other personnel, including costs resulting from public company reporting obligations under the Exchange Act and the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley
”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules require the establishment and maintenance of effective disclosure controls and procedures and internal control over financial reporting among many other complex rules that are often difficult to implement, monitor and maintain compliance with. Moreover, despite recent reforms made possible by the Jumpstart Our Business Startups Act of 2012 (“JOBS Act
”), the reporting requirements, rules and regulations will make some activities more time-consuming and costly, particularly after we are no longer deemed an “emerging growth company” or a “smaller reporting company.” In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. Our management and other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk becoming subject to litigation, among other potential problems. Compliance with these rules and regulations could also make it more difficult for us to attract and retain qualified members of our Board.
If we fail to comply with the rules under Sarbanes-Oxley related to accounting controls in the future, or, if we discover further material weaknesses or other deficiencies in our internal control over financial reporting or we fail to maintain effective disclosure controls and procedures, our stock price could decline significantly and raising capital could be more difficult.
Pursuant to Rule 13a-15(c)
under the Exchange Act, beginning with our 10-K
for the fiscal year ended December 31, 2022, we will be required to conduct annual management assessments of the effectiveness of our internal control over financial reporting. The term “internal control over financial reporting” is defined as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and (3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
In addition, under Rule 13a-15(b)
under the Exchange Act, we are required to evaluate the effectiveness of our disclosure controls and procedures each quarter. the term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
If we discover a significant deficiency or a material weaknesses in our internal control over financial reporting or determine that our disclosure controls or procedures are not effective, our stock price could decline significantly and raising capital could be more difficult. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
Moreover, effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial and other reports that we file with the SEC and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our Common Shares could drop significantly.
The Company is treated as a U.S. domestic corporation for U.S. federal income tax purposes.
The Company is treated as a U.S. domestic corporation for U.S. federal income tax purposes under Section 7874(b) of the Code as a result of the Qualifying Transaction. Consequently, we will be subject to U.S. federal income tax on its worldwide taxable income. Because the Company will be a resident of Canada for purposes of the Income Tax Act
(Canada) (the “Tax Act
”), the Company also will be subject to Canadian income tax. Consequently, the Company
will be liable for both U.S. and Canadian income tax, which could have a material adverse effect on its financial condition and results of operations.
The Company may not be able to achieve sustainable revenues and profitable operations.
The Company’s ability to carry out and implement its planned business objectives and strategies may be dependent upon, among other things, its ability to achieve sustainable revenues and profitable operations. Currently, the Company does not operate profitably and burns significant cash to run its business. Further, the capital markets are largely unhospitable to cannabis companies currently. There can be no assurance that the Company will be able to generate positive cash flow from its operations in the future, that additional capital or other types of financing will be available when needed, or that these financings will be on terms favorable to the Company. If the Company is unable to achieve positive cash flow from its operations, its ability to carry out and implement its planned business objectives and strategies may be significantly delayed, limited, or may not occur.
We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our Common shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, as an “emerging growth company” we intend to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act
”) for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We cannot predict if investors will find our Common Shares less attractive because we may rely on these exemptions. If some investors find our Common Shares less attractive as a result, there may be a less active trading market for our Common Shares and our share price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
The Company
may be subject to net operating loss limitations.
Section 382 of the Code contains rules that limit for U.S. federal income tax purposes the ability of a corporation that undergoes an “ownership change” to utilize its net operating losses (and certain other tax attributes) existing as of the date of such ownership change. Under these rules, a corporation is treated as having had an “ownership change” if there is more than a 50% increase in stock ownership by one or more “5 percent shareholders,” within the meaning of Section 382 of the Code, during a rolling three-year period. The Qualifying Transaction resulted in an ownership change for purposes of Section 382 of the Code. However, at the time of closing of the Qualifying Transaction SCAC did not have any material IRS eligible net operating loss carry forwards or other tax attribute carry forwards that would be subject to limitation under Section 382 of the Code.
Dividends paid on the Common Shares may be subject to withholding tax.
Dividends paid on the Common Shares to shareholders who are Canadian residents for the purposes of the Tax Act will be subject to U.S. withholding tax. A foreign tax credit under the Tax Act in respect of such U.S. withholding taxes may not be available to such holder. Dividends received on the Common Shares by shareholders who are not deemed to be resident in Canada for the purposes of the Tax Act and who are U.S. holders for U.S. federal income tax purposes will not be subject to U.S. withholding tax but will be subject to Canadian withholding tax. A U.S. foreign tax credit in respect of such Canadian withholding taxes may not be available to such holder.
A shareholder who is not deemed to be resident in Canada for purposes of the Tax Act and is a non-U.S.
holder for U.S. federal income tax purposes may be subject to Canadian withholding tax and U.S. withholding tax on dividends paid on the Common Shares. Such holders should consult their own tax advisors with respect to the availability of any foreign tax credits or deductions in respect of any Canadian or U.S. withholding tax applicable to dividends on the Common Shares.
Risk of U.S. tax classification as a USRPHC.
As noted above, as a result of the Qualifying Transaction, the Company is treated as a U.S. domestic corporation for U.S. federal income tax purposes under Section 7874(b) of the Code. As a result, the taxation of non-U.S.
shareholders of the Company for U.S. federal income tax purposes upon a disposition of Common Shares generally depends, in part, on whether the Company is classified as a United States real property holding corporation (a “USRPHC
”) under the Code. The Company
is not anticipated to be a USRPHC. However, the Company is not expected to seek formal confirmation of its status as a non-USRPHC
from the U.S. Internal Revenue Service (“IRS
”). If the Company were to be considered a USRPHC, non-U.S.
holders may be subject to U.S. federal income tax on any gain associated with the disposition of Common Shares.
Certain compliance provisions in our Articles may make the acquisition of significant amounts of our Common Shares more difficult and discourage takeover attempts for the Company, which could have a negative effect on the market price of our Common Shares.
The Articles contain certain compliance provisions (the “Compliance Provisions
”), including a combination of certain remedies such as a suspension of voting and/or dividend rights, a discretionary right to force a share transfer to a third party and/or a discretionary redemption right in favor of the Company, in each case to seek to ensure that the Company and its subsidiaries are able to comply with applicable regulatory and licensing regulations.
The purpose of the Compliance Provisions is to provide the Company with a means of protecting itself from having an unsuitable (from a regulatory perspective) shareholder or a group of shareholders acting jointly or in concert, with an ownership interest of, whether of record or beneficially (or having the power to exercise control or direction over) (“Owning or Controlling
”), five percent (5%) or more of the issued and outstanding shares of the Company, or such other number as is determined by the Board from time to time (the “Ownership Limit
”).
However, because the Compliance Provisions require any shareholder (or group of shareholders acting jointly or in concert) to provide 30 days’ advance written notice and to obtain all necessary regulatory approvals before exceeding the Ownership Limit or be subject to the remedies noted above, the Compliance Provisions may discourage takeover attempts for the Company and have a negative effect on the market price of our Common Shares. For more information, see the information under the heading “Capital Stock-Compliance Provisions” in Exhibit 4.3 (“Description of Securities”) to this Annual Report.
We identified a material weakness in our internal control over our financial reporting process. If we are unable to remediate this material weakness, we may not be able to accurately or timely report our financial condition or results of operations.
Prior to closing our Qualifying Transaction and various subsequent acquisitions, our acquired operating subsidiaries were private companies with limited accounting personnel to adequately execute our accounting processes and lacked other supervisory resources with which to address our internal control over financial reporting. While we and our independent registered public accounting firm did not and were not required to perform an audit of our internal control over financial reporting, in connection with the audit of our 2021 consolidated financial statements, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted a material weakness (See Item 9A. Controls and Procedures
). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. We identified a material weakness in our internal control over our financial statement close process specifically related to an insufficient complement of accounting and finance personnel with the necessary US GAAP technical expertise to timely identify and account for complex or non-routine transactions.
These control deficiencies could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our financial results that would not be prevented or detected, and accordingly, we determined that these control deficiencies constitute a material weakness.
We are working to remediate the material weakness and are taking steps to strengthen our internal control over financial reporting through the hiring of additional finance and accounting personnel with the requisite technical knowledge and skills. With additional personnel, we intend to take appropriate and reasonable steps to remediate this material weakness through the implementation of appropriate segregation of duties, formalization of accounting policies and controls and retention of appropriate expertise for complex accounting transactions. We will not be able to fully remediate these control deficiencies until these steps have been completed and have been operating effectively for a sufficient period of time. The hiring of additional finance and accounting personnel and the implementation of improvements to our accounting and proprietary systems and controls may be costly and time consuming.
We cannot assure you that the measures we have taken to date and those we expect to take in the future will be sufficient to remediate the material weakness we identified or avoid the identification of additional material weaknesses in the future. If the steps we take do not remediate the material weakness in a timely manner, there could continue to be a reasonable possibility that this material weakness or other control deficiencies could result in a material misstatement of our annual or interim financial statements that would not be prevented or detected on a timely basis, which could in turn cause our stock price to decline significantly and make raising capital more difficult. If we fail to remediate our material weakness, identify future material weaknesses in our internal control over financial reporting or fail to meet the demands that will be placed upon us as a public company, including the requirements of Sarbanes-Oxley, we may be unable to accurately report our financial results or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Section 404 of Sarbanes-Oxley could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If additional material weaknesses exist or are discovered in the future, and we are unable to remediate any such material weakness, our reputation, results of operations and financial condition could suffer.
General Risks
Risks associated with recent or future acquisitions.
As part of the Company’s overall business strategy, the Company intends to pursue strategic acquisitions which could provide additional product offerings, integrations, additional industry expertise or a stronger industry presence in both existing and new jurisdictions. Future acquisitions may expose the Company to potential risks, including risks associated with: (i) the integration of new operations, services and personnel; (ii) unforeseen or hidden liabilities; (iii) the diversion of resources from the Company’s existing interests and business; (iv) potential inability to generate sufficient revenue to offset new costs; (v) the expenses of
acquisitions; or (vi) the potential loss of or harm to relationships with both employees and existing users resulting from its integration of new businesses. In addition, any proposed acquisitions may be subject to regulatory approval. The foregoing is applicable to the Company’s proposed acquisition of Coastal Holding Company, LLC.
The Company may invest in cannabis companies, including pre-revenue
companies, that may not be able to meet anticipated revenue targets in the future.
The Company may make investments in companies with no significant sources of operating cash flow and no revenue from operations. Investments in such companies will be subject to risks and uncertainties that new companies with no operating history may face. In particular, there is a risk that the Company’s investment in these pre-revenue
companies will not be able to meet anticipated revenue targets or will generate no revenue at all. The risk is that underperforming pre-revenue
companies may lead to these businesses failing, which could have a material adverse effect on the Company’s business, prospects, revenue, results of operation and financial condition.
Financial projections may prove materially inaccurate or incorrect.
The Company does not currently provide any financial guidance or projections, but historically had done so as part of the Qualifying Transaction. The Company may elect to provide financial projections in the future. Any of the Company’s
financial estimates, projections and other forward-looking information or statements were prepared by the Company
without the benefit of reliable historical industry information or other information customarily used in preparing such estimates, projections and other forward-looking information or statements. Such forward-looking information or statements are based on assumptions of future events that may or may not occur. Investors should inquire of the Company
and become familiar with the assumptions underlying any estimates, projections or other forward-looking information or statements. Projections are inherently subject to varying degrees of uncertainty and their achievability depends on the timing and probability of a complex series of future events. There is no assurance that the assumptions upon which these projections are based will be realized. Accordingly, investors should not rely on any projections to indicate the actual results the Company
might achieve.
There can be no assurance that the Brand Strategy Agreement or the Roc Binding Heads of Terms will have a beneficial impact on the Company’s business, financial condition and results of operations.
There can be no assurance that the Brand Strategy Agreement or the Roc Binding Heads of Terms will provide the benefits expected by the Company. The Brand Strategy Agreement and the Roc Binding Heads of Terms are subject to the risks normally associated with the conduct of strategic business arrangements. These risks include potential disagreements among the parties thereto on how to develop, operate, market or otherwise commercialize a business opportunity; the risk of litigation between the Company and the counterparties to the Brand Strategy Agreement and the Roc Binding Heads of Terms regarding operational matters if a disagreement cannot be resolved; and the failure to reach the business milestones contemplated in entering into such agreements. The success of the Brand Strategy Agreement and the Roc Binding Heads of Terms will depend upon an effective working relationship between the Company and the counterparties thereto. Each of the Company and the counterparties to the Brand Strategy Agreement and the Roc Binding Heads of Terms has the right to terminate such agreements in accordance with their terms. The failure of the Brand Strategy Agreement or the Roc Binding Heads of Terms to provide the benefits expected by the Company, or the termination of the Brand Strategy Agreement and the Roc Binding Heads of Terms in accordance with their terms, could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s use of joint ventures, strategic partnerships and alliances may expose the Company to risks associated with jointly owned investments.
The Company may operate parts of the business through joint ventures and strategic partnerships and alliances with other companies. Joint venture investments may involve risks not otherwise present in investments made solely by the Company, including: (i) the Company may not control the joint ventures; (ii) the joint venture partners may not agree to distributions that the Company believes are appropriate; (iii) where the Company does not have substantial decision-making authority, the Company may experience impasses or disputes with such joint venture partners on certain decisions, which could require the Company to expend additional resources to resolve such impasses or disputes, including litigation or arbitration; (iv) the Company’s joint venture partners may become insolvent or bankrupt, fail to fund their share of required capital contributions or fail to fulfil their obligations as a joint venture partner; (v) the arrangements governing the Company’s joint ventures may contain certain conditions or milestone events that may never be satisfied or achieved; (vi) the Company’s joint venture partners may have business or economic interests that are inconsistent with the Company’s interests and may take actions contrary to the Company’s interests; (vii) the Company may suffer losses as a result of actions taken by the Company’s joint venture partners with respect to the Company’s joint venture investments; and (viii) it may be difficult for the Company to exit a joint venture if an impasse arises or if the Company desires to sell its interest for any reason. Any of the foregoing risks could have a material adverse effect on the Company’s business, financial condition and results of operations. In addition, the Company may, in certain circumstances, be liable for the actions of our joint venture partners.
There can be no assurance that the Company’s current and future strategic alliances or expansions of scope of existing relationships will have a beneficial impact on the Company’s business, financial condition and results of operations.
The Company expects to enter into, additional strategic alliances and partnerships with third parties that the Company believes will complement or augment the business. The Company’s ability to complete strategic alliances is dependent upon, and may be limited by, the availability of suitable candidates and capital. In addition, strategic alliances could present unforeseen integration obstacles or costs, may not enhance the Company’s business and may involve risks that could adversely affect the Company, including significant amounts of management time that may be diverted from operations in order to pursue and complete such transactions or maintain such strategic alliances. Future strategic alliances could result in the incurrence of additional debt, costs and contingent liabilities, and there can be no assurance that such strategic alliances will achieve the expected benefits to the Company’s business. Any of the foregoing could have a material adverse effect on the Company’s business, financial condition and results of operations.
Competition in the cannabis industry is intense and increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition and results of operations of the Company.
The Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the Company. Increased competition by larger and better financed competitors could materially and adversely affect the business, financial condition, results of operations or prospects of the Company. Because of the early stage of the industry in which the Company operates, the Company expects to face additional competition from new entrants. To become and remain competitive, the Company
will require research and development, marketing, sales and support. The Company 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, results of operations or prospects of the Company.
The Company
is dependent on equipment and skilled labor.
The ability of the Company to compete and grow will be dependent on it having access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts and components. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labor, equipment, parts and components, including as a result of the COVID-19
pandemic. It is also possible that the final costs of the major equipment contemplated by the Company’s capital expenditure plans may be significantly greater than anticipated by the Company’s management, and may be greater than the funds available to the Company, in which circumstance the Company may curtail, or extend the timeframes for completing, its capital expenditure plans. This could have an adverse effect on the business, financial condition, results of operations or prospects of the Company.
The cannabis industry is difficult to forecast.
The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the industry. The California cannabis industry experienced an unprecedented decline in the average price per pound of cannabis biomass throughout 2022, making historical data less reliable. Furthermore, mergers and acquisitions, which represent a material portion of the Company’s strategy, are particularly difficult to forecast. If the Company’s forecasts are not accurate as a result of competition, biomass commoditization, integration, deal-execution, technological change, change in the regulatory or legal landscape, change in consumer behavior, or other factors, including the impact of the COVID-19
pandemic, the business, results of operations, financial condition or prospects of the Company
may be adversely affected. See “General Risk Factors - Financial projections may prove material inaccurate or incorrect
”.
The Company may be subject to the risk of litigation.
The Company is a party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the Common Shares and other listed securities of the Company. Even if the Company is involved in litigation and wins, litigation can redirect significant company resources. Litigation may also create a negative perception of the Company’s brand.
The Company may be subject to risks related to information technology systems, including cyber-attacks.
The Company’s
operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, ransomware, hacking, computer viruses, vandalism and theft. The Company’s
operations also depend on the timely maintenance, upgrade and replacement of networks, equipment, information technology systems and software, as well as pre-emptive
expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays, theft and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s
reputation and results of operations. The Company has not experienced any material losses to date relating to cyber-attacks or other information security breaches, but there can be no assurance that the Company
will not incur such losses in the future. The Company’s
risk and
exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access is a priority. As cyber threats continue to evolve, the Company
may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.
The Company may be subject to risks related to security breaches.
Given the nature of the Company’s products and its lack of legal availability outside of channels approved by the United States federal government, as well as the concentration of inventory in its facilities, despite meeting or exceeding all legislative security requirements, there remains a risk of shrinkage as well as theft. A security breach at one of the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential customers from choosing the Company’s products. In addition, the Company collects and stores personal information about its customers and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly customer lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Company’s business, financial condition, results of operations and prospects.
The Company
may be subject to intellectual property risks.
The Company has certain proprietary intellectual property, including but not limited to brands, trademarks, trade names, copyright protected materials, trade secrets, and proprietary and/or confidential processes and know-how.
The Company will rely on this intellectual property, know-how
and other proprietary information, and require employees, consultants, partners and suppliers to sign confidentiality agreements as appropriate. However, confidentiality agreements may be breached, and the Company’s remedies under law may not have the effect of fully mitigating or preventing damage stemming from some breach. Furthermore, the Company may enter into agreements to license its intellectual property with third parties in states where the Company currently does not operate. In such instances, the Company will be reliant on third-party licensees to comply with trademark guidelines and otherwise be diligent stewards of the Company’s intellectual property. Third party licensees may not protect the Company’s intellectual property against counterfeit copies of Company brands or trademarks, for example.
Absent of breach, third parties may independently develop substantially equivalent proprietary information without infringing upon any proprietary technology. Third parties may otherwise gain access to the Company’s proprietary information and adopt it in a competitive manner. Any loss of intellectual property protection may have a material adverse effect on the Company’s business, results of operations or prospects.
As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the CSA, the benefit of certain U.S. federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to the Company. For example, in the United States, registered federal trademark protection is only available for goods and services that can be lawfully used in interstate commerce; the U.S. Patent and Trademark Office is not currently approving any trademark applications for cannabis, or certain goods containing U.S. hemp-derived CBD (such as dietary supplements and food) until the FDA and the USDA provide clearer guidance on the regulation of such products. As a result, the Company’s intellectual property may not be adequately or sufficiently protected against the use or misappropriation by third parties. In addition, since the regulatory framework of the cannabis industry is in a constant state of flux, the Company can provide no assurance that it will obtain any protection of its intellectual property, whether on a federal, provincial, state or local level, despite its diligent and consistent efforts to so do. While many states do offer the ability to protect and register trademarks independent of the federal government, and Courts have recognized the legal validity of common law rights in cannabis-business trademarks, such common law rights and state-registered trademarks provide a lower degree of protection than would federally registered marks as the rights provided are state-by-state
and not nationwide and are dependent on use rather than intent to use. Additionally, patent protection is wholly unavailable on a state level.
The Company’s intellectual property rights may be invalid or unenforceable under applicable laws, and the Company may be unable to have issued or registered, and unable to enforce, its intellectual property rights.
The laws and positions of intellectual property offices administering such laws regarding intellectual property rights relating to cannabis and cannabis-related products are constantly evolving, and there is uncertainty regarding which countries will permit the filing, prosecution, issuance, registration and enforcement of intellectual property rights relating to cannabis and cannabis-related products. The Company’s
ability to obtain registered trademark protection for cannabis and cannabis-related goods and services (including hemp and hemp-related goods and services), may be limited in certain countries, including the United States, where registered federal trademark protection is currently unavailable for trademarks covering the sale of cannabis products or certain goods containing U.S. hemp-derived CBD (such as dietary supplements and foods) until the FDA provides clearer guidance on the regulation of such products. Accordingly, the Company’s ability to obtain intellectual property rights or enforce intellectual property rights against third-party uses of similar trademarks may be limited.
Moreover, in any infringement proceeding, some or all of the Company’s
current or future trademarks, patents or other intellectual property rights or other proprietary know-how,
or arrangements or agreements seeking to protect the same for the Company’s
benefit, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s
current or future trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly and could put existing intellectual property applications at risk of not being issued. Any or all of these events could materially and adversely affect the Company’s
business, financial condition and results of operations.
The Company cannot offer any assurances about which, if any, patent applications will issue, the breadth of any such patent or whether any issued patents will be found invalid or unenforceable or which of the Company’s
products or processes will be found to infringe upon the patents or other proprietary rights of third parties. Any successful opposition to future issued patents could deprive the Company of rights necessary for the successful commercialization of any new products or processes that it may develop.
If some or all of the Company’s patents expire or are invalidated or are found to be unenforceable, or if some or all of its patent applications do not contain patentable subject matter because the claims are determined to lack utility, or, do not result in issued patents or result in patents with narrow, overbroad, or unenforceable claims, or claims that are not supported in regard to written description or enablement by the specification, or if the Company
is prevented from asserting that the claims of an issued patent cover a product of a third party, the Company may be subject to competition from third parties with products in the same class as its own products or devices, including in those jurisdictions in which the Company has no patent protection.
The Company may be subject to competition from third parties with products or devices in the same class as its products or devices in those jurisdictions in which it has no patent protection. Further, there is no assurance that the Company will find all potentially relevant prior art relating to any patent applications that it files, which may prevent a patent from issuing from a patent application or invalidate any patent that issues from such application. Even if patents are issued to the Company regarding its products, devices, and/or methods of using them, those patents can be challenged by its competitors who can argue such patents are invalid or unenforceable, lack of utility, lack sufficient written description or enablement, or that the claims of the issued patents should be limited or narrowly construed. Furthermore, even if they are unchallenged, any patent applications and future patents may not adequately protect the Company’s intellectual property rights, provide exclusivity for its products or processes or prevent others from designing around any issued patent claims, and patents also will not protect the Company’s product candidates if competitors devise other ways of making or using these product candidates without legally infringing the Company’s
patents.
The Company
also relies on trade secrets to protect its technology, especially where it does not believe that patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. The Company’s employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose its confidential information to competitors, and confidentiality agreements may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. Enforcing a claim that a third party illegally obtained and is using the Company’s trade secrets is expensive and time-consuming, and the outcome is unpredictable. Moreover, the Company’s competitors may independently develop equivalent knowledge, methods and know-how.
Failure to obtain or maintain trade secret protection could adversely affect the Company’s competitive business position.
Any of these outcomes could impair the Company’s ability to prevent competition from third parties, which could materially and adversely affect its business, financial condition and results of operations.
The Company
may be subject to allegations that it is in violation of third-party intellectual property rights, and the Company may be found to infringe third-party intellectual property rights, possibly without the ability to obtain licenses necessary to use such third-party intellectual property rights.
Other parties may claim that the Company’s
products infringe on their intellectual property rights, including with respect to patents, and the Company’s
operation of its business, including its development, manufacture and sale of its goods and services, may be found to infringe third-party intellectual property rights. There is a risk that the Company
is infringing the proprietary rights of third parties because numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields that are the focus of the Company’s
business, and which may cover the development, manufacturing, sale or use of the Company’s
products, processes or other aspects of its business operations. Others might have been the first to make the inventions covered by each of its pending patent applications and/or might have been the first to file patent applications for these inventions. In addition, because patent applications take many months to publish and patent applications can take many years to issue, there may be currently pending applications, unknown to the Company, which may later result in issued patents that cover the production, manufacture, synthesis, commercialization, formulation or use of the Company’s
products. As a result, there may be currently pending patent applications, some of which may still be confidential, that may later result in issued patents that the Company’s
products or processes may infringe. In addition, the production, manufacture, synthesis, commercialization, formulation or use of the Company’s
products may infringe existing patents of which the Company
is not aware. In addition, third parties may obtain patents in
the future and claim that use of the Company’s
inventions, trade secrets, technical know-how
and proprietary information, or the manufacture, use or sale of its products infringes upon those patents. Third parties may also claim that the Company’s
use of its trademarks infringes upon their trademark rights.
Defending itself against third-party claims, including litigation in particular, would be costly and time consuming and would divert management’s attention from its business, which could lead to delays in the Company’s
development or commercialization efforts. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders, other equitable relief, and/or require the payment of damages, any or all of which may have an adverse impact on the Company’s
business. If third parties are successful in their claims, the Company might have to pay substantial damages or take other actions that are adverse to the Company’s
business. In addition, the Company
may need to obtain licenses from third parties who allege that the Company
has infringed on their lawful rights. Such licenses may not be available on terms acceptable to the Company, and the Company
may be unable to obtain any licenses or other necessary or useful rights under third-party intellectual property.
The Company
receives licenses to use some third-party intellectual property rights, and the failure of the owner of such intellectual property to properly maintain or enforce the intellectual property underlying such licenses, or the Company’s
inability to maintain such licenses, could have a material adverse effect on Company’s
business, financial condition and performance.
The Company
is party to licenses granted by third parties, including the certain brands and trademarks, that give the Company
rights to use third-party intellectual property that is necessary or useful to the Company’s
business. The Company’s
success will depend, in part, on the ability of the applicable licensor to maintain and enforce its licensed intellectual property against other third parties, particularly intellectual property rights to which the Company has secured exclusive rights. Without protection for the intellectual property the Company has licensed, other companies might be able to offer substantially similar products for sale, or utilize substantially similar processes, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations.
Any of the Company’s
licensors may allege that the Company has breached its license agreements with those licensors, whether with or without merit, and accordingly seek to terminate the Company’s applicable licenses. If successful, this could result in the Company’s
loss of the right to use applicable licensed intellectual property, which could adversely affect its ability to commercialize its products or services, as well as have a material adverse effect on its business, financial condition and results of operations.
The Company may be subject to the risks associated with fraudulent or illegal activity by its employees, contractors and consultants.
The Company
is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent unauthorized conduct that violates: (i) government regulations, including regulations of the DCC; (ii) manufacturing standards; (iii) federal, state and provincial healthcare fraud and abuse laws and regulations; (iv) laws that require the true, complete and accurate reporting of financial information or data; or (v) contractual arrangements, including confidentiality requirements. It may not always be possible for the Company
to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company
to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company
from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with applicable laws or regulations or contractual requirements. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Company’s
business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s
operations, any of which could have a material adverse effect on the Company’s
business, financial condition, results of operations or prospects.
The Company may be subject to risks related to high bonding and insurance coverage.
There is a risk that a greater number of state regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal cannabis to post a bond or significant fees when, for example, applying for a dispensary license or renewal as a guarantee of payment of sales and franchise tax. The Company
is not able to quantify at this time the potential scope for such bonds or fees in the states in which it currently or may in the future operate. Any bonds or fees of material amounts could have a negative impact on the ultimate success of the Company’s
business.
The Company’s
business is subject to a number of risks and hazards generally, including adverse environmental conditions (such as droughts), accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability. Although the Company maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, insurance does not cover all the potential risks associated with its operations. The Company
may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any
resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in the operations of the Company
is not generally available on acceptable terms. The Company
might also become subject to liability for pollution, fire, explosion or other hazards which it may not be insured against or which the Company
may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company
to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.
The current outbreak of the Novel Coronavirus, or COVID-19,
or the future outbreak of any other highly infectious or contagious diseases, could materially and adversely impact or cause disruption to the Company’s operations, performance, financial condition, results of operations and cash flows.
A novel strain of coronavirus (COVID-19)
was reported to have surfaced in December 2019, and has since spread globally, including to every state in the United States. The outbreak of COVID-19
has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including Canada and the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. As a result, the COVID-19
pandemic is negatively impacting many industries directly or indirectly, including the regulated cannabis industry. The Company has developed policies and procedures to contain the spread of COVID-19,
but experienced multiple outbreaks at certain facilities during 2021. COVID-19
(or a future pandemic) could have material and adverse effects on the Company’s
operations, performance, financial condition, results of operations and cash flows due to, among other factors:
•
a complete or partial closure of, or other operational issues at, one or more of the Company’s
businesses resulting from government actions;
•
the temporary inability of consumers and patients to purchase the Company’s cannabis products due to a number of factors, including but limited to illness, dispensary closures or limitations on operations (including but not limited to shortened operating hours, social distancing requirements and mandated “curbside only” pickup), quarantine, financial hardship, and “stay at home” orders, could severely impact the Company’s businesses, financial condition and liquidity;
•
difficulty accessing equity and debt capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect the Company’s access to capital necessary to fund business operations;
•
workforce disruptions for the Company, as a result of infections, quarantines, stay at home orders or other factors, could result in a material reduction in the Company’s cannabis cultivation, manufacturing, distribution and/or sales capacity;
•
restrictions on public events for the regulated cannabis industry limit the opportunity for the Company to market and sell its products and promote its brands;
•
increased cyber security threats due to the increased volume of employees working remotely and using online video-conferencing and collaborative platforms; and
•
the potential negative impact on the health of the Company’s personnel, particularly if a significant number of them are impacted, would result in a deterioration in the Company’s ability to ensure business continuity during a disruption.
The extent to which COVID-19
impacts the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the outbreak, the impact of new variants of COVID-19,
the actions taken to contain the outbreak or mitigate its impact, and the direct and indirect economic effects of the outbreak and containment measures, among others.
Global financial conditions and future economic shocks may impair the Company’s financial condition.
Future economic shocks may be precipitated by a number of causes, including a rise in the price of oil, geopolitical instability, pandemics or outbreaks of new infectious diseases or viruses and natural disasters. Any sudden or rapid destabilization of global economic conditions, including as a result of the COVID-19
pandemic, could impact the Company’s ability to obtain equity or debt financing in the future on terms favorable to the Company’s. Additionally, any such occurrence could cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. In such an event, the Company’s operations and financial condition could be adversely impacted.
Furthermore, general market, political and economic conditions, including, for example, inflation, interest and currency exchange rates, structural changes in the cannabis industry, supply and demand for commodities, political developments, legislative or regulatory changes, social or labor unrest and stock market trends will affect the Company’s operating environment and its operating costs and profit margins and the price of its securities. Any negative events in the global economy could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
We are currently operating in a period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to the ongoing military conflict between Russia and Ukraine. Our business, financial condition, and results of operations may be materially adversely affected by the negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any other geopolitical tensions.
United States and global markets are experiencing volatility and disruption following the escalation of geopolitical tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine by Russian troops began. Although the length and impact of the ongoing military conflict is highly unpredictable, the conflict in Ukraine has led to market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply chain disruptions.
Additionally, various of Russia’s actions have led to sanctions and other penalties being levied by the U.S., the European Union, and other countries, as well as other public and private actors and companies, against Russia and certain other geographic areas, including agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication payment system and restrictions on imports of Russian oil, liquified natural gas and coal. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting sanctions could further adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds.
Any of the above-mentioned factors could affect our business, prospects, financial condition, and operating results. The extent and duration of the military action, sanctions, and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions may also magnify the impact of other risks described in this Annual Report.
The Company’s operations may be adversely affected by changes in the economic environment, including the rise in inflation due to, among other things, Russia’s invasion of Ukraine.
The Company’s
operations could be affected by the economic environment in which it operates should the unemployment level, interest rates or inflation reach levels that influence consumer trends and, consequently, impact the Company’s sales and profitability.
The Company has experienced inflationary impacts on key production inputs, wages and other costs of labor, equipment, services, and other business expenses. Commodity prices in particular have risen significantly over the past year. Inflation and its negative impacts could escalate in future periods.
Russia is one of the largest producers of natural gas and oil in the world. The commodity price impact of the war in Ukraine has been a sharp rise in energy prices, which may impact the Company’s ability to grow or deliver cannabis efficiently. In addition, the war in Ukraine has and may continue to adversely affect global supply chains resulting in further commodity price inflation for our production inputs.
We may not be able to include these additional costs in the prices of the products we sell. As a result, inflation may have a material adverse effect on our results of operations and financial condition.
Management of growth may prove to be difficult.
The Company
may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company
to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Company
to deal with this growth may have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.
The Company does not intend to pay dividends on the Common Shares, so any returns will be limited to increases, if any, in the value of the Common Shares. Your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our Common Shares.
The Company
currently anticipates that it will retain future earnings for the development, operation and expansion of our business and does not anticipate declaring or paying any cash dividends for the foreseeable future. Any future determination to declare dividends will be made at the discretion of the Board and will depend on, among other factors, the Company’s financial condition, operating results, capital requirements, general business conditions and other factors that the Board may deem relevant. Any return to stockholders will therefore be limited to the appreciation in the value of their Common Shares, if any.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about the Company
or its business, the Common Share trading price and volume could decline.
The trading market for Common Shares will depend in part on the research and reports that securities or industry analysts publish about the Company
or its business. If no securities or industry analysts commence covering the Company, the trading price for Common Shares would be negatively impacted. If the Company
obtains securities or industry analyst coverage and if one or more of
the analysts who cover the Company
downgrade Common Shares or publish inaccurate or unfavorable research about the Company’s
business, the Company’s
trading price may decline. If one or more of these analysts cease coverage of the Company
or fail to publish reports on the Company
regularly, demand for Common Shares could decrease, which could cause the Common Share trading price and volume to decline.
The Company
may be subject to
international or additional state regulatory risks.
While the Company
currently has no plans to expand internationally, it may in the future and, as a result, it would become further 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 outside of the state of California, 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 or state could determine that the Company
was not or is not compliant with applicable local regulations. If the Company’s
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.
The market price of the Common Shares may be highly volatile.
Market prices for cannabis companies have at times been volatile and subject to substantial fluctuations. The stock market, from time-to-time,
experiences significant price and volume fluctuations unrelated to the operating performance of particular companies, including as a result of the COVID-19
pandemic. Future announcements concerning the Company
or its competitors, including those pertaining to financing arrangements, government regulations, developments concerning regulatory actions affecting the Company, litigation, additions or departures of key personnel, cash flow, and economic conditions and political factors in the United States may have a significant impact on the market price of the Common Shares. In addition, there can be no assurance that the Common Shares will continue to be listed on the Exchange.
The market price of the Common Shares has fluctuated significantly. During the period from March 15, 2021 to March 14, 2022, the closing price of the Common Shares on the OTCQX ranged from a high of $9.28 to a low of $1.15. The price of the Common Shares may continue to fluctuate significantly due to the Company’s financial results and other reasons, including those unrelated to the Company’s
specific performance, such as reports by industry analysts, investor perceptions, regulatory developments (or lack thereof) or negative announcements by its competitors or suppliers regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other large companies within its industry experience declines in their stock price, the share price of the Common Shares may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders often institute securities class action lawsuits against the company. A lawsuit against the Company
could cause it to incur substantial costs and could divert the time and attention of its management and other resources.
The Company’s officers and directors may be engaged in other business ventures resulting in conflicts of interest.
Certain of the Company’s
directors and officers are, and may continue to be, or may become, involved in other business ventures through their direct and indirect participation in, among other things, corporations, partnerships and joint ventures, that are or may become competitors of the products and services the Company
provides or intends to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Company’s
interests. In accordance with applicable corporate law, directors who have a material interest in a contract or transaction or a proposed contract or transaction with the Company
that is material to the Company
are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the transaction. In addition, the directors and officers are required to act honestly and in good faith with a view to the Company’s
best interests.
However, in conflict of interest situations, the Company’s
directors and officers may owe the same duty to another company and will need to balance their competing interests with their duties to the Company. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavorable to the Company.
Certain remedies may be limited to the Company.
The Company’s
governing documents may provide that the liability of its members of the Board and its officers is eliminated to the fullest extent permitted under the laws of the Province of British Columbia. Thus, the Company
and its shareholders may be prevented from recovering damages for certain alleged errors or omissions made by the members of the Board and its officers. The Company’s
governing documents provide that the Company
will, to the fullest extent permitted by law, indemnify members (and former members) of its Board for certain liabilities incurred by them by virtue of their acts on behalf of Company. The Company may also indemnify its officers, subject to restrictions in the BCBCA.
The Company may have difficulty in enforcing judgments and effecting service of process on directors and officers.
All
of the directors and certain of the officers of the Company
reside outside of Canada. Some or all of the assets of such persons may be located outside of Canada. Therefore, it may not be possible for investors to collect or to enforce judgments obtained in Canadian courts predicated upon the civil liability provisions of applicable Canadian securities laws against such persons. Moreover, it may not be possible for investors to effect service of process within Canada upon such persons.
Past performance is not indicative of future results.
The prior operational performance of Caliva and LCV is not indicative of any potential future operating results of the Company. There can be no assurance that the historical operating results achieved by Caliva, LCV or their respective affiliates will be achieved by the Company, and the Company’s
performance may be materially different.
The Company may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on the financial condition, results of operations and Common Share price, which could cause investors to lose some or all of their investment.
Although the Company conducted due diligence on each of Caliva, OGE and LCV prior to closing of their respective acquisitions the Company cannot assure that this diligence revealed all material issues that may be present in the businesses of Caliva and LCV, that it would be possible to uncover all material issues through a customary amount of due diligence or that factors outside of either party’s control will not later arise. As a result, the Company may be forced in the future to write down or write-off
assets, restructure its operations or incur impairment or other charges that could result in losses. Even if due diligence successfully identified certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with the Company’s preliminary risk analysis. Even though these charges may be non-cash
items and not have an immediate impact on the Company’s liquidity, the fact that charges of this nature are reported could contribute to negative market perceptions. In addition, charges of this nature may cause the Company to be unable to obtain future financing on favorable terms or at all. In this regard, in February 2021, the Company became committed to a plan to sell its non-THC
business, which was acquired as part of the Caliva and OGE and LCV acquisitions on January 15, 2021. As described in Note 16 to the Company’s audited financial statements appearing elsewhere in this Annual Report, the decision to sell the non-THC
business resulted in an impairment loss of $5,555,437. Furthermore, as part of the Company’s impairment tests as of September 30, 2021, the Company determined that current market conditions have resulted in a downward revision to its future cash flow estimates. Accordingly, the Company recorded a non-cash
impairment charge of $570,300,047 during the three months ended September 30, 2021. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Non-Cash
Impairment” in Part I of this Form 10-K.
There can be no assurance that the Company will not have to take additional impairment charges in the future.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect the Company’s reported financial results or financial condition.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to the Company’s business, including but not limited to revenue recognition, impairment of goodwill and intangible assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation, or changes in underlying assumptions, estimates or judgments, could significantly change the Company’s reported financial performance or financial condition in accordance with generally accepted accounting principles.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES.
Our principal executive and administrative offices are located at 1550 Leigh Avenue, San Jose, CA 95125. As of December 31, 2021, we leased 27 facilities in the State of California. We currently own a single retail and distribution location at 92 Pullman Way, San Jose, CA 95111 but recently entered into a sale leaseback arrangement on March 14, 2022 (the “Sale Leaseback”). The Sale Leaseback is subject to standard real estate closing conditions, including a 35-day
diligence period for the buyer to complete environmental review and title searches among other things. Upon closing the Sale Leaseback, the Company will receive $6,000,000 net expenses and broker fees, along with a further $100,000 each year for the next five years so long as the Company remains a tenant under the Sale Leaseback.
The following table sets for the information about our properties. We believe that these facilities are generally suitable to meet our needs.
Location
Facilities Type
Approximate
Square
Footage
Lease
Expiration
Dates
Arcata, California (4651 W. End Rd., Ste# D, 95521)
Manufacturing
1,211
7/31/2022
Bellflower, California (9535 Artesia Blvd., 90706)
Dispensary/Retail Dispensary
4,000
9/30/2027
Bellflower, California (9571 Artesia Blvd, 90706)
Parking Spaces
8 Parking
Spaces
12/31/2021
Brisbane, California (101 South Hill Dr., 94005)
Retail Delivery/Administrative/Manufacturing/Distribution
19,150
9/30/2023
Ceres, California (4030 Farm Supply Drive, Ceres, CA 95307)
Dispensary/Retail Delivery
3,400
4/1/2024
Costa Mesa, California (3560 Cadillac Ave., 92626)
Manufacturing/Administrative/Distribution
20,000
8/31/2022
Costa Mesa, California (2800 Harbor Blvd., 92626)
Dispensary/Retail Delivery
4,800
5/31/2032
Chula Vista, California (1664 Industrial Blvd., 91911)
Retail Delivery
9,604
6/30/2025
Culver City, California (5855 Green Valley Circle, Ste# 105, 90230)
Retail Delivery
2,567
6/30/2023
Emeryville, California (5855 Beudry Street, 94608)
Retail Delivery
5,395
9/30/2028
Eureka, California (112 W. 3rd St., Ste# E & F, 95501)
Processing/Distribution/Manufacturing/Administrative
2,400(E);
3,600(F)
11/9/2022
Eureka, California (112 W. 3rd St., Ste# C & D, 95501)
(See above)
2,000(C);
2,000(D)
8/31/2022
Eureka, California (112 W. 3rd St., Ste# B, 95501)
(See above)
2,000
5/31/2023
Eureka, California (228 3rd St., 95501)
Processing
7/31/2022
Eureka, California (205 I St., 95501)
Administrative
3,271
12/31/2021
Eureka, California (1313 Broadway, 95501)
Parking Lot
Parking Lot
6/1/2022
Hanford, California (104 North Douty St., 93230)
Dispensary (Aug. 2021)/Retail Delivery/Administrative
7,370
9/30/2025
Hanford, California (10757 Energy Street, 93230)
Distribution
20,000
1/31/2028
Redwood City, California (820 Winslow Street, 94063)
Dispensary (*application filed/TBD)
1,500
12/31/2031
Sacramento, California (8880 Elder Creek Road, 95828)
Retail Delivery
1,400
2/4/2023
San Jose, California (1695 S. 7th St., 95112)
Dispensary/Retail Delivery/Processing/Cultivation/Distribution/Manufacturing
110,000
9/30/2027
San Jose, California (92 Pullman Way, 95111)
Dispensary/Manufacturing/Distribution
23,000
7/31/2022
San Jose, California (1550 Leigh Ave., 95125)
Headquarters
18,692
8/31/2023
San Jose, California (825 S. 5th St., 95112)
Storage
30,000
9/30/2027
San Francisco, California (601 Mission Bay Boulevard)
Event Space
6/30/2022
Santa Rosa, California (975 Corporate Center Parkway, Ste #120 & 125)
Manufacturing/ Distribution (non-operational/for
sale)
20,000
9/30/2026
West Hollywood, California (1155 N. La Brea Ave. 90038)
Dispensary/Retail Delivery
3,250
12/31/2023

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS.
To the knowledge of the Company, the Company is not a party to any material legal proceedings nor, to the Company’s knowledge, are any such proceedings contemplated by or against the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
. The Common Shares and Warrants are listed on the Neo Exchange Inc. (the “Exchange
”) under the trading symbols “GRAM.U” and “GRAM.WT.U”, respectively. The Common Shares and Warrants also trade-over-the
counter in the United States on the OTCQX Best Market tier of the electronic over-the-counter
marketplace operated by OTC Markets Group Inc. under the trading symbols “GRAMF” and “GRMWF”, respectively. Any over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
Shareholders
. We had 1,117 shareholders of record as of December 31, 2021. This does not include shares held in the name of a broker, bank or other nominees (typically referred to as being held in “street name”).
Dividends
. The Company has not declared any dividends or made any distributions. Furthermore, the Company has no current intention to declare dividends on its Common Shares in the foreseeable future. Any decision to pay dividends on its Common Shares in the future will be at the discretion of the Board and will depend on, among other things, the Company’s results of operations, current and anticipated cash requirements and surplus, financial condition, any future contractual restrictions and financing agreement covenants, solvency tests imposed by corporate law and other factors that the Board may deem relevant.
Securities Authorized For Issuance Under Equity Compensation Plans.
The table below indicates the number of securities issued under the Company’s Equity Incentive Plan, the weighted-average exercise price of outstanding securities issued under the Company’s Equity Incentive Plan and the number of securities remaining available for issuance under the Company’s Equity Incentive Plan, in each case as of December 31, 2021. In connection with the Qualifying Transaction, the Company agreed to maintain the CMG Partners, Inc. 2019 Stock Option and Grant Plan (the “Caliva EIP
”) and the Amended and Restated 2018 Equity Incentive Plan (the “LCV Equity Plan
”) and that outstanding awards thereunder will entitle holders to receive Common Shares. No further awards will be issued under the Caliva EIP or the LCV Equity Plan.
Plan Category
Number of
Securities to
be Issued
upon
Exercise of
Outstanding
Options,
Warrants
and Rights
Weighted-
Average
Exercise
Price of
Outstanding
Options,
Warrants
and Rights
Number of
Securities
Remaining
Available for
Future Issuance
under Equity
Compensation Plans
(excluding securities
reflected in Column
“(a)”)
(a)
(b)
(c)
Equity compensation plans approved by security holders(l)
Equity Incentive Plan
(1)
9,706,509 (1)
-
6,395,989 (2)
Equity compensation plans not approved by security holders
Caliva EIP
738,853 (3)
$ 7.34
-
LCV Equity Plan
16,815 (3)
$ 25.98
-
Total
10,462,177
6,395,989
Notes:
(1) Represents Common Shares that may be issued upon the vesting and settlement of outstanding restricted share units.
(2) The maximum number of Common Shares that may be issued under the Equity Incentive Plan is 10.0% of the Common Shares outstanding from time to time, subject to adjustment in accordance with the Equity Incentive Plan.
(3) Represents Common Shares that may be issued upon the exercise of outstanding options.
Recent Sales of Unregistered Securities
Acquisition of Caliva
On January 15, 2021, the Company acquired all of the issued and outstanding equity interests of Caliva and OGE (50% of the equity interests in OGE were not transferred until January 19, 2021) from the existing shareholders for up to 32,365,412 Common Shares in reliance on Section 4(a)(2) of the Securities Act and $466,140 of cash, with non-accredited
shareholder’s receiving cash at $10.00 per share in lieu of shares for regulatory purposes.
Acquisition of LCV
On January 15, 2021, the Company acquired all of the issued and outstanding equity interests of LCV from the existing shareholders of LCV for up to 5,010,077 Common Shares and in reliance on Section 4(a)(2) of the Securities Act $183,090 cash, with non-accredited
shareholder’s receiving cash at $10.00 per share in lieu of shares for regulatory purposes.
Acquisition of SISU
The Company acquired all of the issued and outstanding units of SISU from the existing members of SISU for 5,787,790 Common Shares in reliance on Section 4(a)(2) of the Securities Act and $11,089,535 in cash with non-accredited
shareholder’s receiving cash at $10.00 per share in lieu of shares for regulatory purposes.
Private Placement
On November 24, 2020, the Company announced that it had received executed subscription agreements in respect of private placement commitments for approximately $36,000,000 of Non-Voting
Shares and Subscription Receipts of SCAC Capital Acquisition Inc., a wholly-owned subsidiary of SCAC, at a price of $10.00 per Non-Voting
Share or Subscription Receipt. On January 8, 2021, the Company announced the upsize of the Private Placement resulting in aggregate commitments of approximately $63,000,000 in Subscription Receipts and Non-Voting
Shares.
Upon closing of the Qualifying Transaction, investors in the Private Placement received one Common Share in respect of each Subscription Receipt or Non-Voting
Share purchased under the Private Placement. The securities issued in the private placement were issued in reliance on Section 4(a)(2) of the Securities Act.
Brand Strategy Agreement
Pursuant to and subject to the terms of the Brand Strategy Agreement, the Company has issued to JAY-Z
2,000,000 Common Shares in respect of rights and services provided in the period prior to closing of the Qualifying Transaction and will pay SC Branding, LLC an aggregate amount of $26,500,000 over the full BSA Term, payable either in cash or, at SC Branding, LLC’s election with respect to any individual payment period, Common Shares. The Common Shares issued or to be issued pursuant to the Brand Strategy Agreement have been or will be issued in reliance on Section 4(a)(2) of the Securities Act.
Roc Nation Agreement
Pursuant to the terms of the Roc Binding Heads of Terms, the Company issued to Roc Nation $25,000,000 in Common Shares (or 2,376,425 Common Shares) on February 12, 2021 and, subject to the terms and conditions of the Roc Binding Head of Terms, will pay Roc Nation additional consideration of $15,000,000 in Common Shares, payable in quarterly issuances over the second and third years of the three-year term of the Roc Binding Heads of Terms (each an “Additional Roc Share Issuance
”). In January 2022, the Company made an Additional Roc Share Issuance of 1,348,921 Common Shares pursuant to the terms of the Roc Binding Head of Terms.
The Common Shares issued or to be issued pursuant to the Roc Binding Heads of Terms have been or will be issued in reliance on Section 4(a)(2) of the Securities Act.
Calma Agreement
Pursuant to the terms of the Calma Agreement, the Company agreed to issue $3,000,000 in Common Shares (with the number of shares issued based on the volume-weighted average price per Common Share for the ten consecutive trading days prior to each closing date). At the first closing under the Calma Agreement on October 1, 2021, we issued $1,468,474 of Common Shares (458,898 Common Shares) to the shareholders of Calma based on a price of $3.20 per share. See “Item 1. Business-Description of the Business-Retail” for a description of the Calma Agreement. The Common Shares issued or to be issued pursuant to the Calma Agreement have been or will be issued in reliance on Section 4(a)(2) of the Securities Act.
Equity Awards
On January 15, 2021, the Company issued 1,066,333 to replace stock options held by former Caliva employees who became employees of the Company in connection with the Qualifying Transaction. In between January 15, 2021 and November 12, 2021 (the date we filed our registration statement on Form S-8)
we have issued 5,039,186 RSUs to employees pursuant to the Equity Incentive Plan. The equity awards issued by the Company have been issued in reliance on either Rule 701 under the Securities Act or Section 4(a)(2) of the Securities Act.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. [RESERVED]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
This Management’s Discussion and Analysis (“MD&A
”) should be read together with other information, including the Company’s audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2021 and 2020 included elsewhere in this Annual Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed in Part 1, Item 1A, “Risk Factors” in this Annual Report.
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities, as modified by the JOBS Act, and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging
growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
The Company will remain an emerging growth company until the earlier of (1) the last day of the Company’s fiscal year following the fifth anniversary of the date of the first sale of common equity securities of the Company pursuant to an effective registration statement under the Securities Act, (2) the last day of the fiscal year in which the Company has total annual gross revenue of at least $1.07 billion, (3) the last day of the fiscal year in which the Company is deemed to be a “large accelerated filer,” as defined in Rule 12b-2
under the Exchange Act, and (4) the date on which the Company has, during the previous three year period, issued more than $1.0 billion in nonconvertible debt.
BUSINESS OVERVIEW
The Company is a integrated cannabis company based in the United States focused on the recreational and wellness markets. The Company’s portfolio consists of high quality integrated seed-to-sale
operations in California, with a focus on differentiated branded products and direct-to-consumer
distribution. The Company’s platform was designed to create one of the largest, most socially responsible and culturally impactful companies in California, producing consistently high quality, well-priced products and culturally relevant brands that are distributed to third-party retailers as well as direct-to-consumer
via a delivery service and strategically located retail locations. A full portfolio of products and brands that seek to appeal to a broad range of user groups, need-states and occasions, offered at all price points, and with unique brand value propositions, are produced at low cost and high caliber of quality through integrated cultivation, sourcing and manufacturing. The Company believes its wholly-owned delivery and retail outlets will allow it to achieve high gross-margins on many of its products, forge one-on-one
relationships between its brands and consumers and collect proprietary consumer data and insights. While the Company is focused on the recreational and wellness markets, a small portion (estimated to be less than 1%) of its revenues is derived from cannabis and products containing cannabis used by medical cannabis patients in accordance with applicable state law, but for which no drug approval has been granted by the United States Food and Drug Administration (where use may include inhalation, consumption, or application).
The Company’s operational footprint spans cultivation, extraction, manufacturing, distribution, brands, retail and delivery. The management team and directors of the Company bring together deep expertise in cannabis, consumer packaged goods, investing and finance from start-ups
to publicly traded companies. The Company aims to leverage its collective industry experience to ensure a highly synergistic and strategic transaction is executed.
As at December 31, 2021, the Company views its business as having the following two sales channels:
1) Direct to Consumer (in-store
retail, pick up and delivery): the Company currently operates eleven omni channel retail locations: three in northern California, three in central California, five in southern California and six delivery hubs. Further, on October 4, 2021, the Company announced that it had signed definitive agreements to acquire Coastal Holding Company, LLC (“Coastal
”). Coastal is a retail dispensary license holder and operator with six retail licensed locations, five of which are currently operating and two delivery depots.
2) Wholesale: the Company sells first party and selected third party products into 450 dispensaries across California. Additional wholesale revenue comes from sales of sourced bulk flower and oil produced in house.
Revenues from these two sales channels were as follows:
Year ended
December 31,
Year ended
December 31,
Direct to consumer
$ 54,238,607
$ -
Wholesale
119,176,274
-
$ 173,414,881
-
As the Company continues to scale and integrate its business, it is incurring operating losses. The Company’s loss from operations for the years ended December 31, 2021 and December 31, 2020 totaled $818,518,013 (including impairment charges of $654,317,300) and $8,813,918 respectively. Accordingly, the comparative period results represent only the operating losses of the Company while it was a special purpose acquisition corporation. The Company is focused on reducing operating losses as it scales and integrates its businesses.
Through a combination of (i) professional leadership, including the addition of Troy Datcher on September 8, 2021, (ii) omnichannel operations, (iii) technology and data driven practices, (iv) brand and product expertise, (v) as well as social justice and equity advocacy, the Company intends to set the example globally as a best-in-class
cannabis operation. In addition, the Company plans to pursue a opportunities M&A strategy to accelerate growth, market share gains and to achieve critical scale so that it can operate profitability. The Company is actively evaluating cost reductions and business optimization to reduce its cash burn in the near term.
Growth Strategy
Below is a summary of the key components of The Parent Company’s growth strategy:
• Consolidation and Integration
: With no clear market leader, we believe that the California cannabis market is ripe for consolidation. We believe there is an opportunity to leverage our platform and balance sheet to further expand our market share and accelerate profitability in California through mergers and acquisitions. We believe our combined operations, and strong capital position will attract best-in-class operators from all segments of the market seeking a strategic partner with the infrastructure and certainty of capital necessary to support future growth. We intend to use our capital position and platform to identify and, following careful diligence, to execute accretive acquisitions at the right valuations with operators and assets in every part of the supply chain, including in the areas of cultivation, distribution, brands, retail and delivery. After executing several acquisitions in 2021 to build-out the Company’s physical platform, future acquisitions will likely be more consumer or efficiency focused. The Company will be patient and opportunistic in its acquisition strategy going forward.
• Branded Product
: We believe there are additional opportunities to expand The Parent Company’s brand portfolio through innovation and acquisitions. We expect one such innovation opportunity to be developed through our partnerships with JAY-Z
and Roc Nation, which we expect will entail the continued development and promotion of brands that leverage their vision, cultural influence and social impact mission. Amidst challenging marketing restrictions in cannabis that bar brands from leveraging traditional advertising and media channels, the brands developed in collaboration with JAY-Z
and Roc Nation are expected to benefit from the significant consumer following and influence of JAY-Z
and Roc Nation.
• Omni-channel Access
: We believe that The Parent Company’s omni-channel platform is a rapidly and efficiently scalable way to directly reach cannabis consumers throughout California than brick-and-mortar
retail expansion alone. We also believe that an omnichannel platform, when coupled with a integrated supply chain such as The Parent Company’s, allows for greater product margins due to the full capture of the price to consumer as well as low input and production costs.
Factors Affecting Our Performance
The Company’s performance and future success depends on a number of factors. These factors are also subject to a number of inherent risks and challenges, some of which are discussed below.
Branding
We aspire to be the “Most Trusted Name in Cannabis”, and we have built our brand with a focus on the growing direct to consumer (“DTC
”) market. The development and recognition of our brand is and has been empowered by our full-spectrum integration. We understand that, to be the “Most Trusted Name in Cannabis,” it is critical to establish trust at all levels of our operations, starting with an executive team and board of directors that believe in “doing business the right way”, focusing on long-term shareholder value and creating trust with our various stakeholders. We strive to prioritize our consumers and our employees (who we refer to as “associates”). We establish trust with our consumers through their experience, which encompasses not only our award-winning products but the consumer’s full buying experience. At The Parent Company, we make information on the products that consumers choose readily available, including the ability to interact with our associates at not only our retail locations, but also
curbside as well as through phone and video consultations. The Parent Company’s brand strategy is a “House of Brands” strategy, providing the ability to expand our product lines to meet changing consumer tastes and preferences.
Regulation
The Company is subject to the local and federal laws in the jurisdictions in which it operates. Outside of the United States, the Company’s products may be subject to tariffs, treaties and various trade agreements as well as laws affecting the importation of consumer goods. The Parent Company holds all required licenses for the production and distribution of its products in the jurisdictions in which it operates and continuously monitors changes in laws, regulations, treaties and agreements. The Company is licensed to cultivate, manufacture, distribute and sell wholesale and retail cannabis and cannabis products. The Company operates in, and/or has ownership interests in businesses operating in, California, pursuant to the California Medicinal and Adult-Use
Cannabis Regulation and Safety Act.
Product Innovation and Consumer Trends
The Company’s business is subject to changing consumer trends and preferences, which is dependent, in part, on continued consumer interest in new products. The success of new product offerings depends upon a number of factors, including The Parent Company’s ability to: (i) accurately anticipate customer needs; (ii) develop new products that meet these needs; (iii) successfully commercialize new products; (iv) price products competitively; (v) produce and deliver products in sufficient volumes and on a timely basis; and (vi) differentiate product offerings from those of competitors.
COVID-19
In March 2020, the World Health Organization categorized coronavirus disease 2019 (“COVID-19
”) as a pandemic. COVID-19
continues to impact the United States and other countries across the world, and the duration and severity of its effects are currently unknown. While the impacts of COVID-19
have lessened in recent months, the Company continues to implement and evaluate actions to maintain its financial position and support the continuity of its business and operations in the face of this pandemic and other events.
The Company’s priorities during the COVID-19
pandemic are protecting the health and safety of its employees and its customers, following the recommended actions of government and health authorities. In the future a resurgence of COVID-19
in the United States may cause demand for the Company’s products and services if, for example, the pandemic results in a recessionary economic environment or potential new restrictions on business operations or the movement of individuals.
The COVID-19
outbreak in the United States has caused business disruption both to the Company and throughout its customer base and supply chain through mandated and voluntary closings of many businesses. We have taken and continue to take, important steps to protect our employees, customers and business operations since the beginning of the pandemic. In collaboration with our Compliance, Human Resources, Safety, Facilities and Operations teams, we take considerable precautions to maintain a safe workplace environment and adhere to city, county and state regulations and guidance.
We have took the following steps in response to the COVID-19
pandemic during 2021:
•
Issued a remote work directive for all non-essential
employees;
•
Instituted a mandatory face mask policy in all The Parent Company locations and for all customer deliveries;
•
Implemented staggered work schedules, employee breaks and redesigned workstations and processes to minimize employee interaction and ensure appropriate social distancing;
•
Minimized the number of essential employees moving between The Parent Company locations;
•
Banned all non-essential
contractors, vendors and visitors from our locations to reduce flow of traffic into and out of our facilities, as well as encouraged meetings with third parties to be virtual;
•
Enhanced sanitation of work areas, both in terms of breadth and depth of cleanings, including industrial cleaning and sanitizing protocols upon detection of a COVID-19
positive test;
•
Required employees to stay home if not feeling well, informing employees of government and health authority guidelines, and facilitating testing;
•
Implemented contact tracing system and mandatory 14-day
quarantines for all workers potentially exposed to someone testing positive for COVID-19
and any employees returning from out of country visits;
•
Issued directives to customer-facing teams in retail and delivery with regard to frequent cleaning, social distancing, and customer safety;
•
Suspended all but critical business travel;
•
Enhanced communication creating a 24-hour
Employee Hotline, a COVID-19
resource, policy and information page on The Parent Company’s intranet, frequent employee communications and training;
2021 HIGHLIGHTS
Acquisition of Coastal - (5) Operating Retail Locations, (1) Additional Retail License, and (2) Operating Delivery Depots
On October 4, 2021, the Company announced that it has signed definitive agreements to acquire 100% of the equity of Coastal, a California retail dispensary and delivery operator for $16.2 million in cash with contingent consideration of up to $40 million in equity of The Parent Company upon completion of milestone events and a $9 million option (the “Coastal Option
”) to acquire the remaining equity of a southern California dispensary in which Coastal currently holds a minority. The Company has pre-paid
$4.5 million of the Option. Completion of the transactions contemplated by the Coastal Agreements and the Coastal Option remain subject to regulatory approvals, including review by local municipalities relating to cannabis license transfers and NEO Exchange final approval, and are expected to close in 2022.
Founded in 2018 in Santa Barbara, Coastal is a retail dispensary license holder and operator with six retail licensed locations with five locations currently operating and two delivery depots. Coastal’s operating dispensaries are located in Santa Barbara, Pasadena, West Los Angeles, Stockton and Vallejo. Coastal is also engaged in construction for another retail license location in Northern California and operating delivery depots in Santa Barbara and San Luis Obispo. Coastal serves over 1,000 people per day, in their stores and online.
The acquisition of Coastal will increase The Parent Company’s current California retail store and delivery depot footprints to eleven and six, respectively, and positions the Company with one of the largest operating retail dispensary and delivery hubs in the State with an expanded reach to over 80% of California’s population.
Acquisition of Calma - A Premier Retail Location West Hollywood
The Company entered into a definitive agreement to acquire 100% of the equity of Calma West Hollywood, an operating dispensary located in West Hollywood, California for total consideration of $11,500,000 comprised of $8,500,000 in cash and $3,000,000 in equity of the Company. The effective date of the first closing was October 1, 2021 whereby the Company acquired 85% of Calma’s equity which is the maximum allowed by the City of West Hollywood. The Company expects to complete the second closing for the remaining 15% of Calma’s equity during 2022, as local regulations permit. In accordance with the agreement, the Company transferred $1,500,000 in cash into escrow, which will be released to the Company when the remaining 15% is acquired and the Company issues the related Common Shares to the seller.
Expansion of Fun Uncle Cruisers Value Vape Cartridge Line
In celebration of Green Wednesday, November 24, 2021, the Company announced the extension of its popular vape cartridge line, Fun Uncle Cruisers by introducing four new flavors - Blue Dream, Pineapple Express, Sunset Sherbet and Grandaddy Purple.
The product line expansion of convenient, reliable and affordable Fun Uncle Cruisers arrived on our omni-channel retail locations just in time for Green Wednesday and features four tasty new flavors- almost doubling the options available for fans of this popular product line. Consumers will have the opportunity to select from a broad range of effects, whether kick starting their day or winding it down. The flavors include: Blue Dream
, a Sativa cartridge which tastes like sweet mixed berries, blue raspberry and pine; Pineapple Express
,
a bright and tropical Hybrid option with notes of juicy pineapple; Sunset Sherbet
,
a chill sunset Indica companion, which tastes of sweet cherry and citrus sorbet; and Grandaddy Purple
,
a sweet, dessert-like Indica with juicy grape and berry flavor. Cruisers feature a full gram of quality oil for just $25, packaged in reliable Universal 510 cartridges, and available in a variety of popular strains.
Board and Executive Changes
On November 30, 2021, the Company reported that it appointed Tiffany McBride as Managing Director of Social Equity Ventures and Kerry Arnold as Chief People Officer. These two positions further the Company’s mission to elevate diversity, equity and inclusion efforts within the cannabis sector. McBride joins from Docstur LLC, where she previously served as Chief Operations Officer. She brings over 15 years of experience in results-driven strategy development to The Parent Company, where she will oversee the Social Equity Ventures program and operations that focus on discovering the industry’s future cannabis entrepreneurs of color. McBride intends to ensure the program offers the capital and mentorship necessary to build generational wealth and become part of a more equitable and diverse cannabis industry.
Arnold will head the Human Resources department, expanding employee resources, fostering an equitable company culture, and upholding The Parent Company’s values. He will oversee all aspects of human resources, including fair inclusion in the workplace, employee and workplace operations, learning and development, and talent acquisition. Previously, Arnold held the position of Chief People Officer at CANNDESCENT, a luxury cannabis brand.
On August 16, 2021, the Company announced that it had appointed Troy Datcher to serve as the Company’s new Chief Executive Officer, effective September 8, 2021. Mr. Datcher joined The Parent Company from The Clorox Company, where he most recently served as Senior Vice President and Chief Customer Officer responsible for the Clorox’s worldwide sales organization. During his tenure at Clorox, Mr. Datcher deployed global sales plans for over $6.7 billion in annual revenue across The Clorox Company’s vast portfolio of brands. Mr. Datcher’s historic appointment represents the first time a Black CEO will lead a major public U.S. cannabis organization.
On May 14, 2021, the Company announced the appointment of Desiree Perez to its board of directors (the “Board”) effective May 13, 2021. A multi-industry leader and a well-known advocate for social and criminal justice reform, Perez has developed her impressive reputation for cultural, creative and business acumen over her 20+ year career. Perez currently serves as Chief Executive Officer of Roc Nation.
Effectiveness of Form 10 Registration Statement
On October 11, 2021, the Company announced that its registration statement on Form 10 (the “Registration Statement
”) originally filed with the Securities and Exchange Commission (“SEC”) on August 9, 2021, became effective on October 8, 2021. The Registration Statement registered the Company’s common shares (the “Common Shares”) and share purchase warrants (the “Warrants” and, together with the Common Shares, the “Securities”) under Section 12(g) of the Exchange Act in advance of potentially being permitted to list the Common Shares and the Warrants on the New York Stock Exchange or the Nasdaq Stock Market. As a result of the registration of the Securities, the Company now, among other things, files periodic (Forms 10-K
and 10-Q)
and current (Form 8-K)
reports with the SEC and be subject to additional legal and financial compliance costs.
Share Repurchase Agreements
On July 29, 2021, the Company entered into automatic share repurchase agreements with certain employees to repurchase no more than 1,725,000 Common Shares that had been issued as part of the Qualifying Transaction. The Common Shares will be repurchased at market value over a three-month period beginning September 1, 2021, and then subsequently cancelled. The Company completed its repurchase program for an aggregate of 1,725,000 Common Shares during the fourth quarter of 2021.
Martian Delivery
On August 16, 2021, the Company, through its wholly owned subsidiary TPCO US Holding LLC, acquired all of the issued and outstanding membership interests of Martian Delivery LLC, an operating retail dispensary located in the City of Sacramento, California, from the existing stockholders for $237,500 cash and $237,500 in promissory notes payable.
Kase’s Journey
On August 2, 2021, the Company, through its wholly owned subsidiary Caliva CARECE1 LLC, acquired all of the issued and outstanding equity interests of Kase’s Journey Inc., an operating retail dispensary located in Ceres, California, from the existing stockholders for $1,300,000 cash, subject to adjustments, and $1,221,902 of consideration payable.
Lock-up
Agreements
On July 28, 2021, the Company entered into lock-up
agreements with certain members of the Company’s leadership team and the entire board of directors who held approximately 34,000,000 issued and outstanding common shares of the Company (the “Common Shares
”). Pursuant to the lock-up
agreements, each counterparty has agreed that, subject to certain exceptions, they will not, without the written consent of the Company, sell, pledge, grant any option, right or warrant for the sale of or otherwise lend, transfer assign or dispose of any of their locked-up
shares until January 28, 2022. On January 28, 2022, the lock-up
agreements were renewed for a further 12-months.
New San Diego Location
On July 16, 2021 the Company announced the launch of a delivery hub in Chula Vista, California, to provide improved access to The Parent Company’s quality cannabis products through Caliva’s on-demand
direct-to-consumer
platform. The new hub services an area covering an additional 3.3 million residents of the greater San Diego area, expanded the reach of the Company to directly service an area covering approximately 60% of California’s population. Located in California’s second largest city, the Chula Vista delivery hub reinforces the Company’s omnichannel growth strategy and efforts to improve accessibility of high-quality cannabis products throughout California. The Chula Vista delivery hub services an area that extends from San Juan Capistrano, though Oceanside and onto San Ysidro.
New DELI by Caliva Location
On August 13, 2021, the Company announced the opening of its latest DELI by Caliva location in Hanford. The new store services the Central Valley in conjunction with the brand’s existing operational delivery hub, which increased the Company’s consumer reach to 65% of the largest legal cannabis market in the country. The opening of the new DELI by Caliva location marked the Company’s retail entrance into the Hanford community, which was previously supplied by the brand’s in-house
delivery service via Caliva.com or through Caliva’s App.
Expansion of Product Portfolio with Launch of “Well by Caliva” Lotions and Tinctures
On August 24, 2021, the Company announced the launch of a new line of wellness products, Well by Caliva. The line offers lotions and tinctures in three categories - Well Balanced, Well Rested and Well Relieved - allowing consumers to pick the products that best cater to their needs. Launched in August during National Wellness Month, The Parent Company’s new line of wellness focused products seeks to meet consumers and their desired effects head on. The launch of the wellness line marks The Parent Company’s first CBD-
and THC-based
line of self-branded wellness geared products under the Caliva label, Well By Caliva.
Normal Course Issuer Bid
On August 16, 2021, the Company announced that the Neo Exchange Inc. (the “Exchange”) had accepted the Company’s notice of intention to commence a Normal Course Issuer Bid (the “Common Share Bid”) for Common Shares and a Normal Course Issuer Bid (the “Warrant Share Bid” and, together with the Common Share Bid, the “Bids”) for the Company’s Share Purchase Warrants to acquire Common Shares (the “Warrants”).
Pursuant to the Bids, the Company may repurchase on the open market (or as otherwise permitted), up to 4,912,255 Common Shares and 1,791,875 Warrants, representing approximately 5% of the issued and outstanding of each of the Common Shares and the Warrants (within the meaning of the rules of the Exchange), subject to the normal terms and limitations of such bids. Notwithstanding the foregoing, the Bids are subject to an aggregate cap of $25,000,000. The Company may purchase its Common Shares and Warrants at its discretion during the period commencing on August 18, 2021, and ending on the earlier of (i) August 17, 2022, (ii) $25,000,000 of purchases under the Bids, and (iii) the completion of purchases under the applicable Bid. Notwithstanding the foregoing, the Company did not commence purchases under the Bids until the expiry of its regular self-imposed quarterly blackout period.
As of December 31, 2021, the Company repurchased 157,600 Common Shares for $603,165.
Launch of Shoppable Cannabis App on Apple
On July 19, 2021 the Company announced the launch of an upgraded, shoppable app available through Apple’s App Store, allowing California-based consumers to make cannabis purchases through the app and to receive rewards through the Company’s integrated loyalty program, Caliva CLUB. The shoppable Caliva app is available for download now through the Apple App store for consumers 21 and older throughout California.
Mercer Park Brand
On July 2, 2021, the Company announced that its previously disclosed conditional agreement to complete a $50,000,000 strategic investment in Glass House Group, Inc. through a private placement offering by Mercer Park Brand Acquisition Corp. had been terminated.
Mosaic.Ag
On May 17, 2021, the Company announced that it had entered into a series of arrangements to obtain the rights to four acres of land that is licensed for outdoor grow from a consortium of experienced cannabis farms affiliated with Mosaic.Ag, In addition, the Company entered into a cultivation and supply agreement with a cultivator to cultivate cannabis on its behalf for a period of at least three years, with options to extend up to five years.
The purchase price for Mosaic.Ag is $6,000,000 in cash, $2,500,000 in Common Shares when the transaction closes and up to 1,309,263 Common Shares subject to earnouts. The upfront payment of $5,650,000, net of a holdback amount of $350,000, is secured by a promissory note. The closing of the transaction is dependent on the satisfaction of various closing conditions, which have not been met to date and are not expected to be met by the second quarter of 2022 as required by the Membership Interest Purchase Agreement. Futher, Mosiac.Ag was unable to produce sufficient quantities of biomass according to Company quality standards and pursuant to the Cultivation Supply Agreements. For the foregoing reasons, the parties are currently in dialogue and may restructure the transaction. In the event the transaction does not close, the promissory note is contractually obligated to be repaid to the Company.
New Product: Caliva Flowersticks
On April 30, 2021, the Company announced its partnership with Omura, a first-of-its
kind whole flower vaporizer. The Parent Company entered Omura’s “heat-not-burn”
category with the launch of Caliva Flowersticks, a new line of 100% whole flower cannabis pre-filled
paper cartridges featuring three signature Caliva strains.
New Program: Caliva CLUB
On April 6, 2021, the Company announced the launch of testing for its first ever integrated loyalty program, Caliva CLUB. Based on record online customer transaction growth of +141% and an omnichannel platform that covered more than 70% of the population of California at the time, Caliva, The Parent Company’s direct-to-consumer
platform, is piloting its new loyalty program. The launch, which is a key strategic driver for The Parent Company’s broader digital innovation push, aims to enhance the consumer experience across the company’s integrated omnichannel platform. As one of the few companies in cannabis with a rewards program, we believe Caliva customers will enjoy an elevated shopping experience similar to their favorite non-cannabis
retailers.
Brand Rationalization
During the three months ended March 31, 2021, The Parent Company went through a brand rationalization exercise consolidating from seventeen (17) brands to eight (8) brands. Focusing on the largest categories of flower, vape, edible, and pre-rolls,
Caliva brand had two strains in January and February 2021 (Alien OG and Shotgun OG, respectively) that were in the Top 25 for all products regardless of product category according to BDS Analytics, Inc.
Extending the remaining product lines and taking advantage of our integration, the Company launched Fun Uncle Cruisers, which is a 1g vape cartridge. Launched on March 24, 2021, Fun Uncle Cruisers was the top selling brand in Caliva stores and delivery depots in April 2021.
Closing of the Qualifying Transaction / Business Combinations
On November 24, 2020, the Company announced that it had entered into definitive transaction agreements in respect of each of Caliva and LCV, pursuant to which the Company would acquire all of the equity of Caliva and LCV. Concurrent with the completion of the Qualifying Transaction, LCV acquired SISU. At the same time, the Company executed an agreement with Caliva, OGE, SC Branding, LLC and SC Vessel 1, LLC to acquire the remaining shareholdings of OGE and entered into a Brand Strategy Agreement with SC Branding, LLC for certain services of Shawn C. Carter p/k/a JAY-Z.
Additionally, concurrently with the completion of the LCV acquisition, LCV acquired SISU in accordance with the Agreement and Plan of Merger between LCV and SISU, dated November 24, 2020.
The above transactions closed on January 15, 2021, and the acquisition of SC Vessel 1, LLC’s interest in OGE closed on January 19, 2021. The acquisition of Caliva and LCV constitutes the Company’s Qualifying Transaction.
Each of the acquisitions is a business combination accounted for using the acquisition method in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 Business Combinations
(“ASC 805”).
Total acquisition-related transaction costs incurred by the Company in connection with the acquisitions was $493,584 (December 31, 2020 - $6,316,683).
In the year ended December 31, 2021, the Company finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. The fair values of the assets to be acquired and the liabilities to be assumed by the Company in connection with the acquisitions are as follows:
Caliva/OGE
LCV
SISU
Total
Total consideration transferred (i)
$ 619,766,731
$ 120,651,941
$ 92,188,146
$
832,606,818
Assets acquired
Cash, restricted cash and cash equivalents
11,164,957
3,022,262
976,906
15,164,125
Accounts receivable
2,006,699
1,090,811
1,022,532
4,120,042
Inventory
11,910,959
6,258,063
5,580,258
23,749,280
Prepaid expenses
3,589,808
215,938
82,701
3,888,447
Indemnification assets
2,199,029
2,000,000
-
4,199,029
Property and equipment
7,785,157
3,305,145
1,163,902
12,254,204
Intangible assets
187,600,000
20,740,000
46,200,000
254,540,000
Right-of-use
assets - operating
12,115,573
4,461,809
880,863
17,458,245
Right-of-use
assets - finance
26,176,837
-
-
26,176,837
Investment in associate
-
6,500,000
-
6,500,000
Investment in non-marketable
securities
591,545
-
-
591,545
Security deposits and other
869,238
137,051
34,175
1,040,464
Total assets acquired
266,009,802
47,731,079
55,941,337
369,682,218
Liabilities assumed
Accounts payable and accrued liabilities
26,130,222
14,817,802
8,242,144
49,190,168
Consideration payable
2,458,844
2,972,782
-
5,431,626
Loans payable
3,060,250
298,436
-
3,358,686
Line of credit
-
-
1,000,000
1,000,000
Deferred tax liability
35,483,327
4,199,766
-
39,683,093
Lease liabilities
49,746,261
4,461,809
1,183,451
55,391,521
Total liabilities assumed
116,878,904
26,750,595
10,425,595
154,055,094
Goodwill
$ 470,635,833
$ 99,671,457
$ 46,672,404
$
616,979,694
(i) Total consideration transferred is comprised of the following:
Caliva/OGE
LCV
SISU
Total
Upfront consideration
Cash
$ 465,140
$ 177,970
$ 11,089,535
$
11,732,645
Liabilities settled in cash as part of the Qualifying Transaction
12,614,773
15,400,000
3,560,593
31,575,366
Liabilities settled in shares as part of the Qualifying Transaction
-
-
4,264,597
4,264,597
Common shares
408,178,567
57,529,825
63,581,153
529,289,545
Common shares to be issued
1,567,549
5,897,750
9,692,268
17,157,567
Consideration payable
1,000
5,120
-
6,120
Contingent consideration (liability) - Trading price consideration
191,077,970
41,641,276
-
232,719,246
Contingent consideration (liability) - Other
-
-
-
-
Contingent consideration (equity)
2,372,231
-
-
2,372,231
Replacement options
3,489,501
-
-
3,489,501
Total consideration transferred
$
619,766,731
$
120,651,941
$
92,188,146
$
832,606,818
Each of the acquisitions is subject to specific terms relating to satisfaction of the purchase price by the Company and incorporates payments in cash and common stock as well as certain contingent consideration. Contingent consideration has been classified as either a financial liability or equity consistent with the principles in ASC 480 Distinguishing Liabilities from Equity
.
The table above summarizes the fair value of the consideration given and the fair values assigned to the assets acquired and liabilities assumed for each acquisition. Goodwill arose in these acquisitions because the cost of acquisition included a control premium. In addition, the consideration paid for the combination reflected the benefit of expected revenue growth and future market development. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.
The total consideration transferred for the acquisitions is summarized below:
Acquisition of Caliva and OGE
The acquisition of Caliva, including 50% interest in OGE, closed on January 15, 2021, and the acquisition of the additional 50% interest in OGE closed on January 19, 2021. However, the closing of the additional 50% interest in OGE was automatic and contingent on the closing of Caliva. As a result, the Company gained control of both Caliva and OGE on January 15, 2021.
The acquisitions of Caliva and OGE were accounted for as one transaction as the contracts were negotiated at the same time and in contemplation of one another in order to achieve the overall objective of obtaining control of both companies. The Company acquired all of the issued and outstanding equity interests of Caliva and OGE from the existing stockholders for up to 32,365,412 stock of the Company, of which 117,756 were stock to be issued as at December 31, 2021, and $466,140 of cash, with certain stockholders receiving cash at $10.00 per share in lieu of Common Shares for regulatory purposes. In addition, the consideration transferred includes contingent consideration and replacement stock options, as outlined below. The stock consideration was valued based on the Common Share price on the date of acquisition, January 15, 2021. As at December 31, 2021, the Company was in the process of settling the above issuance of Common Shares and cash.
The Company also issued the following contingent consideration:
a) Trading price consideration
- The Caliva and OGE stockholders received a contingent right for up to 18,356,299 additional Common Shares (the “pool of Common Shares”) in the event the 20-day
volume weighted average trading price (“VWAP”) of the Common Shares reaches $13.00, $17.00 and $21.00 within three years of closing, with one-third
issuable upon the achievement of each price threshold, respectively. The pool of Common Shares is to be shared with Caliva option holders who were employees of Caliva at the time of the transaction (“Caliva employee option holders”). In order to receive their stock of the contingent consideration, Caliva employee option holders must be employed by the Company at the time the contingent consideration is paid out. The portion of the pool of common stock that may be paid to Caliva employee option holders is being accounted for as employee stock-based compensation and is being expensed over the estimated vesting period. The portion of the pool of Common Shares that may be paid to former Caliva and OGE stockholders is being accounted for as contingent consideration in the amount of $191,077,970 and is included in the consideration transferred above.
b) Earn-out
stock
- The Caliva stockholders received a contingent right for up to 3,929,327 additional Common Shares if the aggregate consolidated cash of the Company at closing, net of short-term indebtedness, was less than $225,000,000. As the consolidated cash at the time of closing was above this amount, no additional Common Shares will be issued, and no value has been attributed to this in the transaction.
c) Other
- The Company held back 304,000 Common Shares related to U.S. Paycheck Protection Program (“PPP”) loans. The fair value associated with the contingent consideration at the transaction date was nil.
d) 187,380 Common Shares of TPCO have been placed into escrow and will be issued when subsidiaries of Caliva receive their licenses. This is presented as contingent stock to be issued in equity. If the licenses are not obtained, the stock will be issued to Caliva former stockholders, and therefore have been included as part of consideration.
The Company issued replacement stock options to Caliva employee option holders. The Company recognized $3,489,501 in consideration associated with these replacement stock options. This represents the fair value of the awards as at January 15, 2021 that relates to past service of those employees.
Lastly, as part of the Qualifying Transaction, certain liabilities of Caliva were extinguished. As a result, they have been included in consideration transferred and excluded from net assets acquired.
The goodwill acquired is associated with Caliva and OGE’s workforce and expected future growth potential and is not expected to be deductible for tax purposes.
Acquisition of LCV
The Company acquired all of the issued and outstanding equity interests of LCV from the existing stockholders of LCV for up to 5,010,077 Common Shares, of which 154,348 were Common Shares to be issued as at December 31, 2021, and $183,090 cash, with certain stockholders receiving cash at $10.00 per Common Shares in lieu of Common Shares for regulatory purposes. The share consideration was valued based on the share price on the date of acquisition, January 15, 2021. As at December 31, 2021, the Company is still in the process of settling the issuance of Common Shares and cash.
The Company also issued the following contingent consideration:
a) Trading price consideration
- The LCV stockholders will have a contingent right for up to 3,856,955 additional Common Shares in the event the 20-day
VWAP of the common stock reaches $13.00, $17.00 and $21.00 within three years of closing, with one-third
issuable upon the achievement of each price threshold, respectively. The fair value of the contingent consideration on January 15,
2021 was $41,641,276 and is included in consideration transferred above.
b) Other
- The Company held back 299,800 of Common Shares that are contingent on the outcome of certain events. The fair value associated with the contingent consideration at the transaction date is nil.
Lastly, as part of the Qualifying Transaction, certain liabilities of LCV were extinguished. As a result, they have been included in consideration transferred and excluded from net assets acquired.
The goodwill acquired is associated with LCV’s workforce and expected future growth potential and is not expected to be deductible for tax purposes.
Acquisition of SISU
The Company acquired all of the issued and outstanding units of SISU from the existing members of SISU for 5,787,790 Common Shares, of which 765,582 were Common Shares to be issued, and $11,089,535 in cash. The share consideration was valued based on the share price on the date of acquisition, January 15, 2021. The goodwill acquired is associated with SISU’s workforce and expected future growth potential and is expected to be fully deductible for tax purposes at the state level. The stock to be issued were issued in June 2021.
Lastly, as part of the Qualifying Transaction, certain liabilities of SISU were extinguished by issuing 336,856 common stock and cash. As a result, these have been included in consideration transferred and excluded from net assets acquired.
MANAGEMENT’S USE OF NON-GAAP
FINANCIAL MEASURES
This MD&A contains certain financial performance measures, including “EBITDA” and “Adjusted EBITDA,” that are not recognized under GAAP and do not have a standardized meaning prescribed by GAAP. As a result, these measures may not be comparable to similar measures presented by other companies. For a reconciliation of these measures to the most directly comparable financial information presented in the Financial Statements in accordance with GAAP, see the section entitled “Reconciliation of Non-GAAP
Measures” of this MD&A.
EBITDA
We believe EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time
or non-recurring
expenses. We define EBITDA as net income (loss) before (i) depreciation and amortization; (ii) income taxes; and (iii) interest expense and debt amortization.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time
or non-recurring
expenses. We define Adjusted EBITDA as EBITDA adjusted to exclude extraordinary items, non-recurring
items and, other non-cash
items, including, but not limited to (i) stock-based compensation expense, (ii) fair value change in contingent consideration
and investments measured at Fair Value Through Profit and Loss (“FVTPL”) (iii) non-recurring
legal and professional fees, human-resources, inventory and collections-related expenses, (iv) extra ordinary expenses related to COVID-19
(v) intangible and goodwill impairments and loss on disposal of assets, (vi) transaction costs related to merger and acquisition activities, and (vii) non-cash
sales and marketing expenses.
RESULTS OF OPERATIONS
Years ended
December 31,
December 31,
Sales
$ 173,414,881
-
Cost of sales
153,182,191
-
Gross profit
20,232,690
Impairment loss
654,317,300
Operating expenses
184,433,403
8,813,918
Loss from operations
(818,518,013 )
(8,813,918 )
Other
Interest income
1,244,606
2,350,312
Interest expense
(5,183,817 )
-
Gain on debt forgiveness
3,358,686
-
Loss on disposal of assets
(2,447,985 )
-
Change in fair value of investments at FVTPL
(1,250,990 )
-
Change in fair value of contingent consideration
229,819,070
-
Other income
3,573,557
-
229,113,127
2,350,312
Loss before income taxes
(589,404,886 )
(6,463,606 )
Income tax recovery
2,372,552
-
Loss and comprehensive loss
$ (587,032,334 )
$ (6,463,606 )
Loss and comprehensive loss attributable to shareholders of the company
$ (587,060,124 )
$ -
Loss and comprehensive loss attributable to redeemable non-controlling interest
27,790
(6,463,606 )
Loss and comprehensive loss
$ (587,032,334 )
$ (6,463,606 )
Loss per share
Basic and Diluted
$ (6.18 )
$ (1.90 )
Weighted average number of common shares
95,006,080
15,218,750
Basic and Diluted
Prior to the closing of the Qualifying Transaction on January 15, 2021, the Company was a special purpose acquisition company that did not conduct any commercial operations and had no revenues or significant operating expenses. The Company reminds readers that the operating results of Caliva and LCV included in the Company’s financial statements for the year ended December 31, 2021 are only from January 15, 2021 (the date of closing of the Qualifying Transaction).
Management focused its efforts during the year ended December 31, 2021 on integration activities for the Qualifying Transaction, sub-leasing
non-core
real estate properties, strategic acquisitions and the disposition of non-core
assets as well as the implementation of an approximate 10% head count reduction.
Sales Revenue
The Company’s sales revenues for the year ended December 31, 2021 was $173,414,881 compared to $Nil in the year ended December 31, 2020 as period when the Company had no meaningful operations as a SPAC.
Revenue by sales channel for the years ended December 31, 2021 and December 31, 2020 was as follows:
Year ended
December 31,
Year ended
December 31,
Direct to consumer
$ 54,238,607
$ -
Wholesale
119,176,274
-
$
173,414,881
$
-
Market Development Commentary
California’s price compression on bulk and wholesale flower and oil continued in the fourth quarter of 2021. According to Cannabis Benchmarks, the pricing of indoor flower, which is the principal product the Company sells at wholesale, dropped approximately 9% from October 15, 2021 to December 17, 2021. We saw a similar pricing trend in bulk oil as well.
These prices during the fourth quarter were the 2021 annual lows. As started by Cannabis Benchmarks “Fundamentally, oversupply is the biggest factor weighing on price. This situation is made worse by a relatively low number of retailers per capita in major population centers and a majority of municipalities continuing to ban adult use retailers altogether.
Direct to Consumer (Retail, Pick up, Delivery)
As of December 31, 2021, the Company operated eleven retail locations and six consumer delivery hubs. We have four store brands, Caliva, Deli by Caliva, Coastal and Calma. Our delivery hubs can be accessed through www.caliva.com and through www.coastalcalifornia.com.
On October 1, 2021, the Company became party to a definitive agreement to acquire 100% of the equity of Coastal, including its subsidiaries. At the same time the Company entered into management services agreements (“MSAs”) related to six of the Coastal dispensaries/delivery locations. The Company is in the process of obtaining approval for two additional MSAs. The Company has determined that the MSAs provide it with a controlling financial interest in Coastal and its subsidiaries and as such Coastal’s financial result for the fourth quarter of 2021 have been consolidated in the Company’s financial statements. The closing of the transaction is subject to closing conditions, most notably municipal regulatory review and approval in the geographies of each of Coastal’s dispensaries/delivery locations.
Revenues earned from direct to consumer sales in the year ended December 31, 2021 totaled $54,238,607 (year ended December 31, 2020: $Nil).
Wholesale
The Company directly sells first party and selected third party products into 450 dispensaries across California, leveraging a combined in-house
sales team from Caliva and LCV, as well as the two wholesale distribution centers in San Jose and Costa Mesa, respectively.
Our Wholesale segment also includes the bulk business and consists of distillate oil manufacturing, bulk flower sales, flower processing and white label services.
Revenues earned from Wholesale sales in the year ended December 31, 2021 totaled $119,176,274 (year ended December 31, 2020: $Nil).
Gross Profit
Gross Profit reflects our revenue less our production costs primarily consisting of labor, materials, consumable supplies, overhead, amortization on production equipment, shipping, packaging and other expenses required to produce cannabis products.
The Company’s gross profit for the year ended December 31, 2021 was $20,232,690, an increase of $20,232,690 from the year ended December 31, 2020, a period when the Company had no meaningful operations as a SPAC. This increase was due to the closing of the Qualifying Transaction on January 15, 2021.
Operating Expenses
Year ended
December 31,
December 31,
General and administrative
$
47,289,538
$ 8,813,918
Allowance for doubtful accounts
4,677,134
Sales and marketing
42,572,823
-
Salaries and benefits
36,864,880
-
Stock compensation expense
20,456,297
-
Lease expense
4,956,969
-
Depreciation
3,890,425
-
Amortization of intangible assets
23,725,337
-
184,433,403
$
8,813,918
Operating expenses primarily include salaries and benefits, professional fees, facilities expenses, travel-related expenses, advertising and promotion expenses, licenses, fees and taxes, office supplies and pursuit expenses related to outside services, stock-based compensation and other general and administrative expenses.
The Company recorded operating expenses of $184,443,403 in the year ended of December 31, 2021 compared to $8,813,918 in the year ended December 31, 2020. The increased operating expenses is due to the closing of the Qualifying Transaction on January 15, 2021, whereas during the year ended December 31, 2020, the Company was a special purpose acquisition company with expenses consisting primarily of professional fees associated with its public listing and with seeking a qualifying transaction.
General and administrative costs increased to $47,289,538 in the year ended December 31, 2021 from $8,813,918 due to the consolidation of businesses acquired in the Qualifying Transaction and our acquisitions during 2021. General and administrative expenses include: professional fees, insurance, office facilities and associated supplies, repairs and maintenance, travel, information technology, bank fees and other miscellaneous operating expenses. General and administrative in expenses in 2021 also includes a $2,243,441 one-time
Canadian tax due on the $10.13 per share value paid on the redemption of 26,092,664 Class A restricted voting units which were initially issued at $10 per unit consisting of a Class A restricted voting share and one-half
of a share purchase warrant with a strike price of $11.50.
The Company recorded an allowance for doubtful accounts of $4,677,134 compared to $Nil in the year ended December 31, 2020. Of the $4,677,134 allowance for doubtful accounts, $2,660,943 related to a $5,650,000 upfront payment the Company made to obtain the rights to four acres of land that is licensed for outdoor grow and $2,016,191 for all other doubtful accounts. The Company did not record an allowance for doubtful accounts in the year ended December 31, 2020.
The Company incurred sales and marketing expenses of $42,572,823 in the year ended December 31, 2021, compared to $Nil in the year ended December 31, 2020. Of the $42,572,823 of sales and marketing expenses, $30,166,666 related to our market services agreement with ROC Nation which is settled in common shares. The Company further recognized an expense of $4,183,565 related to its Brand Strategy Agreement during 2021 with Shawn C. Carter p/k/a JAY-Z.
$Nil for both agreements during the year ended December 31, 2020.
Salaries and benefits totaled $36,864,880 in the year ended December 31, 2021 compared to $Nil in the year ended December 31, 2020, also due to the first time consolidation of the businesses acquired in the Qualifying Transaction.
Stock based compensation of $20,456,297, lease expense of $4,956,969 and depreciation & amortization of $27,615,762 incurred during the year ended December 31, 2021, are all non-cash
expenses. There were no comparable amounts incurred in the year-ended December 31, 2020 when the Company was a special purpose acquisition company.
Non-Cash
Impairment
In accordance with Accounting Standard Codification (ASC) Topic 350, the Company is required to assess its goodwill and other indefinite-lived intangible assets for impairment annually or in between tests if events or changes in circumstances indicate the carrying value of its assets may not be recovered. Further, under ASC 360, the Company is required to asset definite lived-intangible assets and long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Based on the softening of the California cannabis market during Q3 2021, the Company determined that an impairment test was appropriate. As part of the impairment assessment, the Company’s future forecasts considered changes in cash flow estimates due to lower flower and oil prices realized during the third quarter of 2021. While the Company remains optimistic that cannabis legalization will occur, our expected future cash flows reflect the current tax and regulatory environment. The issues faced by the Company are not unique to our operations as the entire California cannabis market has been significantly impacted in the last quarter. The Company continues to focus on activities to create long term shareholder value with the signing of the Coastal and Calma transactions.
For the year ended December 31, 2021, the Company recorded impairment charges of $654,317,300. Impairment charges are an adjustment that do not affect the Company’s cash position or cash flow from operating activities. There is no guarantee as to whether further impairment charges will or will not occur in the future.
The following is a detailed summary of the impairment losses recorded by the Company:
Year ended
December 31,
December 31,
Non-THC
business (i)
5,555,437
-
Assets held for sale (ii)
1,995,945
-
Impairment
646,765,918
-
$
654,317,300
$ -
(i) In February 2021, the Company became committed to a plan to sell its non-THC
business, which was acquired as part of the Caliva and OGE and LCV acquisitions on January 15, 202. As a result of the decision to sell, the assets were tested for impairment and an impairment loss of $5,555,437 of goodwill was recognized. The disposal group did not represent a separate major line of business, and for that reason it has not been disclosed as discontinued operations for the year ended December 31, 2021. During year ended December 31, 2021, the Company disposed of the non-THC
business.
(ii) In May 2021, the Company became committed to a plan to sell three licenses and transfer the associated leases, which were acquired as part of the Caliva and OGE and LCV acquisitions on January 15, 2021. Prior to reclassification to assets held for sale, the assets were tested for impairment. As a result, an impairment loss of $237,431 was recognized on the licenses and $275,320 on the right-of-use
assets. One of the licenses was subsequently sold.
As at December 31, 2021, the Company determined that it was no longer committed to a plan to sell the remaining two licenses and transfer the associated lease, and as a result the Company has reclassified these assets and liabilities to held-for-use.
Prior to reclassification, the assets were written down to their fair value resulting in an impairment loss of $400,000 on the license and $1,083,194 on the right-of-use
asset.
Other Items
Interest (expense)
In the year ended December 31, 2021 the Company recorded interest expense of $5,183,817, the majority of which relates to interest expense on lease accounting for the Company’s right of use leases.
Gain on debt forgiveness
The Company recorded gain of $3,358,686 on the forgiveness of Payroll Protection Program (PPP) loans during the year ended December 31, 2021.
Contingent consideration
In the year ended December 31, 2021, the Company recorded a gain on the change in the fair value of contingent consideration of $229,819,070 due to a decline in its Common Share price from January 15, 2021 through to December 31, 2021 with no such item in the year ended December 31, 2020. The Company agreed to pay certain contingent consideration in connection with its Qualifying Transaction. This contingent consideration will be fair valued at each quarter-end
and the gain or loss recorded in the statement of operations and comprehensive income (loss) will be inversely related to the movement in the Company’s Common Share price.
Net Loss and Comprehensive Loss
In the year ended December 31 2021, the Company recorded net loss of $587,032,334 compared with a loss of $6,463,606 in the year ended December 31, 2020. The significant losses reported in the year ended December 31, 2021 is due to impairment losses $654,317,300. These impairment losses were offset to some extent by gains in changes in contingent consideration of $229,819,070 in the year ended December 31, 2021.
Excluding impairment losses, the Company has otherwise generated a loss from operations of $164,200,713 for the year ended December 31, 2021 (year ended December 31, 2020: $8,813,918 loss).
Reconciliation of Non-GAAP
Financial Measures
A reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable measure determined under GAAP is set out below.
Year ended
December 31,
December 31,
Net loss and comprehensive loss
$
(587,032,334
)
$
(6,463,606
)
Income tax
(2,372,552 )
-
Depreciation and amortization
27,615,762
-
Year ended
December 31,
December 31,
Interest expense and debt amortization
5,183,817
-
EBITDA
(556,605,307 )
(6,463,606 )
Adjustments:
Share based compensation expense
20,456,297
-
Other non-recurring
items:
-
Fair value change of contingent consideration
(229,819,070 )
-
Loss on disposal of assets
2,447,985
-
Change in fair value of investments at FVTPL
1,250,990
-
Impairment loss
654,317,300
-
Provision for notes receivable
2,660,943
Write-off of prepaid inventory
1,620,891
Canadian tax on SPAC share redemption
2,243,441
-
De-SPAC
costs
5,341,154
-
Restructuring costs
3,878,782
-
Non-cash
sales and marketing expense
30,166,667
-
Adjusted EBITDA
$ (62,039,927
)
$
(6,463,606
)
EBITDA
The Company’s EBITDA loss for the year ended December 31, 2021 was $556,605,307, a decrease of $550,141,701 from the year ended December 31, 2020, a period when the Company had no meaningful operations. This increase was due to the closing of the Qualifying Transaction and the impairment charges recognized during 2021.
Adjusted EBITDA
The Company’s Adjusted EBITDA loss for the year ended December 31, 2021 was negative $53,969,865, a decrease of $47,506,259 from the year ended December 31, 2020, a period when the Company had no meaningful operations. The negative Adjusted EBITDA is due to the closing of the Qualifying Transaction and the integration initiatives undertaken since the closing. Adjusted EBITDA adjusts for non-cash
adjustments for share based compensation, changes in fair value of contingent consideration, and losses on disposals of assets and impairment losses. The Company also adjusted other items as itemized in the table above which management considered non-recurring
or non-cash
and not indicative of underlying operating performance. The Company’s management views Adjusted EBITDA as the best measure of its underlying operating performance.
LIQUIDITY AND CAPITAL RESOURCES
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. As of December 31, 2021, The Parent Company had cash and restricted cash equivalents of $174,892,298 (including $9,581,689 of restricted cash) compared with restricted cash and cash equivalents of $582,622,025 as of December 31, 2020. As of closing of the Qualifying Transaction on January 15, 2021, the Company had cash and cash equivalents of $381,438,338, comprised of (i) $318,303,338 of net proceeds from its initial public offering and interest received by the Company upon release of the net proceeds from the escrow on closing of the Qualifying Transaction after payments to redeeming holders of Class A Restricted Voting Shares in the aggregate amount of $264,318,686, including associated interest; and (ii) $63,135,000 in gross proceeds from the closing of the private placement prior to the closing of the Qualifying Transaction.
Cash and restricted cash equivalents are predominately invested in liquid securities issued by the United States government.
In evaluating our capital requirements, including the impact, if any, on our business from the COVID-19
pandemic, and our ability to fund the execution of our strategy, we believe we have adequate available liquidity to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities and repay scheduled principal and interest payments on debt for at least the next twelve months. The Company is actively evaluating cost reductions and business optimization to reduce its cash burn in the near term.
Our objective is to generate sufficient cash to fund our operating requirements and expansion plans. Since the closing of the Qualifying Transaction, we have incurred net operating losses. However, management is confident in the Company’s ability to grow revenue and reach long term profitability. We also expect to have access to public capital markets through our listing on the Exchange, and continue to review and pursue selected external financing sources to ensure adequate financial resources in the long-term. These potential sources include, but are not limited to (i) obtaining financing from traditional or non-traditional
investment capital organizations; (ii) obtaining funding from the sale of our Common Shares or other equity or debt instruments; and (iii) obtaining debt financing with lending terms that more closely match our business model and capital needs. There can be no assurance
that we will gain adequate market acceptance for our products or be able to generate sufficient positive cash flow to achieve our business plans, that additional capital or other types of financing will be available when needed, or that these financings will be on terms favorable to the Company or at all.
We expect to continue funding operating losses as we ramp up our operations with our available cash, cash equivalents and short-term investments. Therefore, we are subject to risks including, but not limited to, our inability to raise additional funds through debt and/or equity financing to support our continued development, including capital expenditure requirements, operating requirements and to meet our liabilities and commitments as they come due.
As of the date hereof the Company does not have any off-balance
sheet financing arrangements and has not guaranteed any debt or commitments of other entities or entered into any options on non-financial
assets.
Contractual Obligations
Lease Obligations
The Company leases real estate used for dispensaries, production plants, and corporate offices. Lease terms for real estate generally range from 1 to 16.5 years. Most leases include options to renew for varying terms at the Company’s sole discretion. Other leased assets include passenger vehicles. Lease terms for these assets generally range from 1 to 16.5 years. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities, or insurance and maintenance. Rent expense for leases with escalation clauses is accounted for on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Operating
Lease
Finance Lease
$ 6,774,561
$ 4,493,443
5,662,221
4,625,156
5,281,010
4,763,910
5,081,629
4,906,828
4,647,394
5,054,033
Thereafter
23,921,870
64,884,897
Total undiscounted lease liabilities
51,368,685
88,728,267
Roc Nation Agreement
On January 19, 2021, the Roc Binding Heads of Terms became effective whereby the Company engaged Roc Nation for strategic and promotional services. Over the Roc Term, which is an initial period of three years, the Company has or will pay the following consideration in Common Shares:
(i) $25,000,000 on the effective date; and
(ii) $1,875,000 payable quarterly over the second year and third year terms.
The transaction is considered a share-based transaction as it will be settled in Common Shares. During the year ended December 31, 2021 the Company issued 2,376,425 Common Shares in settlement of the initial $25,000,000. As the Common Shares vested immediately, the full amount of the $25,000,000 has been recognized as an expense in operating expenses.
The Company has accounted for the quarterly payments as a liability-settled share-based payment transaction, measured at the fair value of the Common Shares to be issued. The Company recognized an expense of $5,166,667 during the year ended December 31, 2021, in operating expenses as a sales and marketing expense. As of December 31, 2021, the cash-settled liability is $5,166,667 (December 31, 2020 -$nil).
The arrangement can be terminated by the counterparty in certain circumstances, one of which is any change of control of the Company. In that case, the Company is required to settle the agreement in a lump sum payment that consists of all unpaid amounts. As of December 31, 2021, the amount that the Company would be liable for if the contract is terminated is $15,000,000.
Brand Strategy Agreement
On January 15, 2021, the Brand Strategy Agreement became effective whereby the Company was granted the right and license to use Shawn C. Carter p/k/a JAY-Z’s
approved name, image and likeness for promoting and advertising for an initial non-cancellable
period of 6 years.
The Company is committed to settling $26,500,000 in either cash or Common Shares at the option of the counterparty over the non-cancellable
period of 6 years as follows:
(i) $2,000,000 within 30 days [of the effective date] (Year 1)
(ii) $3,000,000 - Year 2
(iii) $4,000,000 - Year 3
(iv) $5,000,000 - Year 4
(v) $6,000,000 - Year 5
(vi) $6,500,000 - Year 6
The transaction is accounted for as a cash-settled share-based transaction as it may be settled in either cash or Common Shares at the option of the counterparty. The Company is recognizing the cost associated with the arrangement over the same period it is receiving services, which is 6 years.
During the year ended December 31, 2021, the Company recognized an expense of $4,183,565, related to this arrangement and $2,183,565 accounts payable and accrued liabilities as of December 31, 2021.
The agreement can be terminated by the counterparty in certain circumstances, including a change in control of the Company or an involuntary de-listing.
In these circumstances, the Company will be obligated to pay damages equal to $18,500,000 less the amount already paid under the arrangement. As of December 31, 2021, the amount of damages that the Company would be liable for if the contract is terminated was $16,500,000.
Cash Flow
The table below highlights our cash flows for the periods indicated:
Year ended
December 31,
December 31,
Cash provided by (used in)
Operating activities
Net income (loss)
$
(587,032,334
)
(6,463,606 )
Adjustments for items not involving cash
Impairment loss
654,317,300
-
Loss on disposal of assets
2,447,985
-
Gain on debt forgiveness
(3,358,686 )
-
Change in fair value of investments at FVTPL
1,250,990
-
Interest expense
5,183,817
-
Provision for bad debt
2,016,191
-
Provision for note receivable
2,660,943
-
Non-cash interest income
(1,149,041 )
-
Depreciation and amortization
27,615,762
-
Shares issued for long-term strategic contracts
25,000,000
-
Stock compensation expense, net of withholding taxes
19,663,385
-
Non-cash
operating lease expense
4,956,969
Non-cash
marketing expense
5,166,666
-
Fair value change of contingent consideration
(229,819,070 )
-
Deferred income tax recovery
(5,590,409 )
-
Repayment of operating lease liabilities
(5,190,663 )
-
Net changes in non-cash
working capital items
(46,513,086 )
8,813,918
Total operating
(128,373,281 )
2,350,312
Financing activities
Proceeds from private placement
51,635,000
-
Redemption of Class A restricted voting shares
(264,318,686 )
-
Proceeds from exercise of options
12,972
-
Repayment of consideration payable
(1,034,417 )
-
Repayment of finance lease liabilities
(4,385,528 )
-
Repurchase of stock
(6,542,196 )
-
Repayment of line of credit
(1,000,000 )
-
Total financing
(225,632,855 )
-
Investing activities
Net cash paid in business combinations for Qualifying Transaction
(28,143,886 )
-
Net cash paid in business combinations
(20,612,867 )
Advances for note receivable
(5,650,000 )
-
Advances for investments at FVTPL
(1,000,0000 )
-
Purchases of property and equipment
(9,760,359 )
-
Proceeds from notes receivable
374,984
-
Proceeds from sale of net assets
11,068,537
Total investing
(53,723,591 )
-
Net change in cash during the year
(407,729,727 )
2,350,312
Cash, Restricted cash and restricted cash equivalents
Beginning of year
$
582,622,025
580,271,713
End of year
$
174,892,298
582,622,025
Cash
165,310,609
-
Restricted cash and restricted cash equivalents
9,581,689
582,622,025
Cash, restricted cash and restricted cash equivalents
$
174,892,298
$ 582,622,025
Operating Activities
Cash used in operating activities before working capital changes in the year ended December 31, 2021 totaled $128,373,281 as compared to cash provided by operating activities before working capital changes of $2,350,312 in the year ended December 31, 2020. The significant increase in
cash used in operating activities was due to the closing of the Qualifying Transaction on January 15, 2021 and financing our operating losses as we work to consolidate the California market and achieve critical scale. This represents an average operating cash burn rate before working capital changes of approximately $6,800,000 per month year to date to December 31, 2021 compared to average cash provided by operating activities of $2,350,312 the comparative period when the Company was a special purposes acquisition corporation. Cash used in working capital changes totaled $46,513,086 for the year ended December 31, 2021 compared to cash provided by working capital changes of $8,813,918. The Company as an operating business requires substantially more working capital for items such as inventory than it did as a special purpose acquisition corporation in the comparative period. Of the $46,513,086 cash used in working capital changes for the year ended December 31, 2021, $18,191,114 was for working capital items to support our operations and their growth and $28,321,972 was used to settle accrued underwriting commissions and other transaction costs related to the closing of its Qualifying Transaction.
Financing Activities
Cash used in financing activities totaled $225,632,855
in the year ended December 31, 2021, an increase of $225,632,855
from the year ended December 31, 2020. The large outflow for the year ended December 31, 2021 is primarily due to the $264,318,686 for redemptions of the Class A Restricted Voting Shares in connection with the Qualifying Transaction. From the proceeds of the Company’s initial public offering of $575,000,000, the Company netted $318,303,338 including $7,622,025 of interest income earned during the period such proceeds were held in escrow prior to the closing of the Qualifying Transaction. Concurrent with closing the Qualifying Transaction, the Company also raised net proceeds of $51,635,000 from a private placement financing of $51,635,000 leaving it with total available cash of $381,438,338 on closing of the Qualifying Transaction.
Investing Activities
Cash used in investing activities in the year ended December 31, 2021 totaled $53,723,591 as compared to $Nil in the year ended December 31, 2020. In the year ended December 31, 2021, the Company invested a total of $48,756,753 in various acquisitions the qualifying transactions, Martian and Kase, Calma and Coastal as described in the 2021 highlights section of this MD&A and $9,760,359 for property plant and equipment to support its operations ($Nil in the comparative period). This was offset by $11,068,537 of proceeds received from asset sales and $374,984 of proceeds of notes receivable.
Commitments and Contingencies
California Operating Licenses
The Company’s primary activity is the cultivation and sale of Adult-Use
Cannabis pursuant to California law. However, this activity is not in compliance with the United States Controlled Substances Act (the “CSA
”). The Company’s assets are potentially subject to seizure or confiscation by governmental agencies and the Company could face criminal and civil penalties for noncompliance with the CSA. Management of the Company believes the Company is in compliance with all California and local jurisdiction laws and monitor the regulatory environment on an ongoing basis along with counsel to ensure the continued compliance with all applicable laws and licensing agreements.
The Company’s operation is sanctioned by the State of California and local jurisdictions. Due to the uncertainty surrounding the Company’s noncompliance with the CSA, the potential liability from any non-compliance
cannot be reasonably estimated, and the Company may be subject to regulatory fines, penalties or restrictions in the future.
Effective January 1, 2018, the State of California allowed for Adult-Use
Cannabis sales. Beginning on January 1, 2018, the State began issuing temporary licenses that expired 120 days after issuance for retail, distribution, manufacturing and cultivation permits. Temporary licenses could be extended in 90-day
increments by the State upon submission of an annual license application. All temporary licenses had been granted extensions by the State during 2018.
In September 2019, Senate Bill 1459 (SB 1459) was enacted which enabled state licensing authorities to issue provisional licenses through 2021. A provisional license could be issued if an applicant submitted a completed annual license application to the California Bureau of Cannabis Control. A completed application for purposes of obtaining a provisional license is not the same as a sufficient application to obtain an annual license. The provisional cannabis license, which is valid for 12 months from the date issued, is said to be in between a temporary license and an annual license and allows a cannabis business to operate as they would under local and state regulations. Licensees issued a provisional license are expected to be diligently working toward completing all annual license requirements in order to maintain a provisional license. The Company obtained its provisional licenses in 2019 and continues to work with the State to obtain annual licensing.
The Company’s prior licenses obtained from the local jurisdictions it operated in have been continued by such jurisdictions and are necessary to obtain state licensing.
The Company has received annual licenses from its local jurisdiction in which it actively operates. Although the Company believes it will continue to receive the necessary licenses from the State of California to conduct its business in a timely fashion, there is no guarantee its clients will be able to do so and any failure to do so may have a negative effect on its business and results of operations.
Additional regulations relating to testing that came into effect on July 1, 2018 (Phase II testing requirements) required the clients to sell products that would be non-compliant
prior to that date, causing a loss of margin due to discounts that had to be provided to ensure that such products were sold prior to July 1. Due to the additional testing requirements effective July 1, 2018, the California market and the clients experienced a shortage in supply of compliant cannabis products.
Other Legal Matters
From time to time in the normal course of business, the Company may be subject to legal matters such as threatened or pending claims or proceedings. We are not currently a party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims that could have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation or claim be resolved unfavorably.
Social Equity Fund
The Company formed a new social equity fund during the first quarter, with an initial commitment of $10 million and planned annual contributions of at least 2% of the Company’s net income. During the year ended December 31, 2021, the Company invested $1,000,000 in two investments.
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make judgments, estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results may differ from those estimates. Estimates and judgments are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that management considers to be reasonable.
Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Variable interest entities
The Company assesses all variable interests in entities and uses judgment when determining if the Company is the primary beneficiary. Other qualitative factors that are considered include decision-making responsibilities, the VIE capital structure, risk and rewards sharing, contractual agreements with the VIE, voting rights and the level of involvement of other parties. .
Business combinations
In determining the fair value of net identifiable assets acquired in a business combination, including any acquisition-related contingent consideration, estimates including market based and appraisal values are used. One of the most significant areas of judgment and estimation relates to the determination of the fair value of these assets and liabilities, including the fair value of contingent consideration, if applicable. If any intangible assets are identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent external valuation expert may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. These valuations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. In addition, management applies judgment in determining the amount, if any, that leases acquired in a business combination are off-market
resulting in an adjustment to the right-of-use
assets. In particular, management’s judgment is used in determining the premium over basic market rents that would be applied by a lessor where the leased premise is being used for cannabis-related businesses. Finally, determining whether amounts should be included as part of consideration requires judgment.
Leases
The Company applies judgment in determining whether a contract contains a lease and whether a lease is classified as an operating lease or a finance lease. The Company determines the lease term as the non-cancellable
term of the lease, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The lease term is used in determining classification between operating lease and finance lease, calculating the lease liability and determining the incremental borrowing rate.
The Company has several lease contracts that include extension and termination options. The Company applies judgment in evaluating whether it is reasonably certain to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date of the lease, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customization to the leased asset).
The Company also applies judgment in allocating the consideration in a contract between lease and non-lease
components. It considers whether the Company can benefit from the right-of-use
asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another right-of-use
asset.
The Company is required to discount lease payments using the rate implicit in the lease if that rate is readily available. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate. The Company generally uses the incremental borrowing rate when initially recording real estate leases. Information from the lessor regarding the fair value of underlying assets and initial direct costs incurred by the lessor related to the leased assets is not available. The Company determines the incremental borrowing rate as the interest rate the Company would pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use
asset in a similar economic environment.
Stock-based compensation
In determining the fair value of stock-based payments, the Company makes assumptions, such as the expected life of the award, the volatility of the Company’s stock price, the risk-free interest rate, and the rate of forfeitures.
Goodwill
Goodwill is tested for impairment annually and whenever events or changes in circumstances indicate that the carrying amount of goodwill may have been impaired. In order to determine that the value of goodwill may have been impaired, the Company performs a qualitative assessment to determine whether it is more-likely-than-not
that the reporting unit’s fair value is less than its carrying value, indicating the potential for goodwill impairment. A number of factors, including historical results, business plans, forecasts and market data are used to determine the fair value of the reporting unit. Changes in the conditions for these judgments and estimates can significantly affect the assessed value of goodwill.
Long-lived assets
Depreciation and amortization of property and equipment, right-of-use
assets and intangible assets are dependent upon estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that consider factors such as economic and market conditions and the useful lives of assets. The Company uses judgment in: (i) assessing whether there are impairment triggers affecting long-lived assets, (ii) determining the asset groups and (iii) determining the recoverable amount and if necessary, estimating the fair value.
Fair value measurement
The Company uses valuation techniques to determine the fair value of financial instruments (where active market quotes are not available) and non-financial
assets. This involves developing estimates and assumptions consistent with how market participants would price the instrument. The Company bases its assumptions on observable data as far as possible, but this is not always available. In that case, the Company uses the best information available. Estimated fair values may vary from the actual prices that would be achieved in an arm’s length transaction at the reporting date.
Deferred tax assets and uncertain tax positions
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of its assets and liabilities. The Company measures deferred tax assets and liabilities using current enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. The Company routinely evaluates the likelihood of realizing the benefit of its deferred tax assets and may record a valuation allowance if, based on all available evidence, it determines that some portion of the tax benefit will not be realized.
In evaluating the ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning
strategies and results of operations. In projecting future taxable income, the Company considers historical results and incorporates assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The Company’s assumptions regarding future taxable income are consistent with the plans and estimates that are used to
manage its underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income/(loss). The income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect the Company’s best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and liabilities for unrecognized tax benefits require significant judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and the Company’s particular facts and circumstances. Although the Company believes that the judgments and estimates discussed herein are reasonable, actual results, including forecasted COVID-19
business recovery, could differ, and the Company may be exposed to losses or gains that could be material. To the extent the Company prevails in matters for which a liability has been established or is required to pay amounts in excess of the established liability, the effective income tax rate in a given financial statement period could be materially affected.
Principal versus agent
The Company enters into certain transactions with suppliers whereby the Company obtains title immediately before selling the product to customers. The Company has applied judgment in assessing whether the Company is acting as an agent or a principal in the transaction with the customer.
In management’s judgment, the Company is acting as the principal in these transactions. In applying its judgment, management has considered that the Company takes control (and title) to the product prior to sale to the end customer. In assessing the indicators that are laid out in ASC 606,
management has considered the following:
•
From the customer’s perspective, the only party they interact with is the Company. The customer does not know the origin of the product and there is no brand recognition associated with the product (i.e., the products do not carry a brand name, and instead the labels only carry information with respect to the contents of the package).
•
If the customer returns the product, the Company will decide whether to take the product back and refund the customer, and the Company will have no right to compensation from the supplier. As a result, the Company has back-end
inventory risk.
•
The Company has discretion in setting prices and in many cases the supplier does not know the amount the Company sold the products for.
SHARE CAPITAL AND CAPITAL MANAGEMENT
As of December 31, 2021, the Company had 97,065,092 Common Shares and 35,837,500 Warrants issued and outstanding. The Warrants are exercisable at an exercise price of $11.50 and will expire on January 15, 2026. The Company may accelerate the expiry date of the outstanding Warrants (excluding the Warrants held by the Subversive Capital Sponsor LLC in certain circumstances) by providing 30 days’ notice, if and only if, the closing price of the Common Shares equals or exceeds $18.00 per Common Share (as adjusted for stock splits or combinations, stock dividends, extraordinary dividends, reorganizations and recapitalizations) for any 20 trading days within a 30-trading
day period.
The Company has an equity incentive plan (the “Equity Incentive Plan”) that permits the grant of stock options, restricted share units (“RSUs”), deferred share units, performance share units and stock appreciation rights to non-employee
directors and any employee, officer, consultant, independent contractor or advisor providing services to the Company or any affiliate. As of December 31, 2021, a total of 3,310,520 restricted share units were granted and outstanding under the Equity Incentive Plan.
Prior to closing of the Qualifying Transaction, Caliva maintained the CMG Partners, Inc. 2019 Stock Option and Grant Plan (the “Caliva EIP
”), which permitted awards of common stock in Caliva. In connection with the Qualifying Transaction, Caliva and the Company agreed that the Company would maintain the Caliva EIP and that outstanding awards thereunder will entitle the holder to receive Common Shares. At December 31, 2021, there were 738,853 options to purchase up to 738,853 Common Shares under the Caliva EIP outstanding with a weighted average exercise price of $7.34 per share. No further awards will be granted under the Caliva EIP.
Prior to closing of the Qualifying Transaction, LCV maintained the Amended and Restated 2018 Equity Incentive Plan (the “LCV Equity Plan
”) which authorized LCV to grant to its employees, directors and consultants stock options and other equity-based awards. In connection with the Qualifying Transaction, LCV and the Company agreed that the Company would maintain the LCV Equity Plan and that outstanding awards thereunder will entitle the holder to receive Common Shares. At December 31, 2021, there were 16,815 options to purchase up to 16,815 Common Shares under the LCV Equity Plan outstanding at a weighted average exercise price of $25.98 per share. No further awards will be granted under the LCV Equity Plan.
The Company manages its capital with the following objectives:
•
To ensure sufficient financial flexibility to achieve the ongoing business objectives including of future growth opportunities, and pursuit of accretive acquisitions; and
•
To maximize shareholder return through enhancing the share value.
The Company considers its capital to be total equity. The Company manages capital through its financial and operational forecasting processes. The Company reviews its working capital and forecasts its future cash flows based on operating expenditures, and other investing and financing activities. Selected information is provided to the Board of Directors of the Company. The Company’s capital management objectives, policies and processes have remained unchanged during the year ended December 31, 2021 and year ended December 31, 2020. The Company is not subject to any external capital requirements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required by this item and the reports of the independent accountants thereon required by Item 15(a)(2) appear on pages
to. See accompanying Index to the Consolidated Financial Statements on page.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on an evaluation as of December 31, 2021, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were not effective to provide reasonable assurance because of a material weakness in our internal control over financial reporting described below.
While we and our independent registered public accounting firm did not and were not required to perform an audit of our internal control over financial reporting, in connection with the audit of our 2021 consolidated financial statements, we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted a material weakness.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected in a timely manner.
We did not design or maintain an effective control environment commensurate with financial reporting requirements. Specifically, we lack a sufficient number of adequately skilled professionals to appropriately analyze, record and disclose accounting matters timely and accurately while maintaining appropriate segregation of duties.
The above material weakness did not result in a material misstatement of our previously issued financial statements, however, it could result in a misstatement of our account balances or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected. See Risk Factors - We identified a material weakness in our internal control over our financial reporting process. If we are unable to remediate this material weakness, we may not be able to accurately or timely report our financial condition or results of operations
.
Remediation Activities
We are working to remediate the material weakness and are taking steps to strengthen our internal control over financial reporting through the continued hiring of additional appropriately skilled finance and accounting personnel with the requisite technical knowledge and skills. With the additional skilled personnel, we are taking appropriate and reasonable steps to remediate this material weakness through the implementation of appropriate segregation of duties, formalization of accounting policies and controls and retention of appropriate expertise for complex accounting transactions. We will not be able to fully remediate these control deficiencies until these steps have been completed and have been operating effectively for a sufficient period of time.
Management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
No Management’s Report or Auditor Attestation Regarding Internal Control Over Financial Reporting
This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.
Inherent Limitations on the Effectiveness Over Financial Reporting
The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable, not absolute assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but there can be no assurance that such improvements will be sufficient to provide us with effective internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION.
On March 25, 2022, TPCO Holding Corp. (the “Company”) received notice from Carol Bartz and Jeffry Allen that they will not stand for re-election at the Company’s 2022 annual general meeting of stockholders, which is expected to take place in June 2022 (the “AGM”). Neither Ms. Bartz’s nor Mr. Allen’s decision not to stand for re-election was the result of any dispute or disagreement with the Company on any matter relating to the operations, policies or practices of the Company, and both will remain directors of the Company until the AGM.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2021.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2021.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2021.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2021.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required under this Item is incorporated herein by reference to our definitive proxy statement to be filed with the SEC no later than 120 days after the close of our fiscal year ended December 31, 2021.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1)
Financial Statements
See the accompanying Index to Consolidated Financial Statement Schedule on page.
(a) (2)
Financial Statement Schedules
See the accompanying Index to Consolidated Financial Statement Schedule on page.
(a) (3)
Exhibits
Incorporated by Reference From
Exhibit No.
Title of Document
Form
Date
Filed
Exhibit
Number
Filed
Herewith
2.1*
Definitive Transaction Agreement, dated November 24, 2020 by and among Subversive Capital Acquisition Corp., Caliva, TPCO CMG Merger Sub, Inc. and GRHP Management, LLC, as shareholders’ representative for Caliva’s shareholders
10-12G
9/30/2021
2.1
2.2*
Definitive Agreement, dated November 24, 2020 by and among Subversive Capital Acquisition Corp., Left Coast Ventures, Inc., TPCO LCV Merger Sub Inc. and Shareholder Representative Services LLC, as shareholders’ representative for LCV’s shareholders
10-12G
9/30/2021
2.2
2.3*
Agreement and Plan of Merger dated November 24, 2020 by and among Left Coast Ventures, Inc., LCV Holdings 710, LLC, SISU Extraction, LLC and John Figueiredo
10-12G
9/30/2021
2.3
2.4*
Acquisition Agreement, dated November 24, 2020 among Subversive Capital Acquisition Corp., Caliva, OG Enterprises, SC Branding, LLC and SC Vessel 1, LLC
10-12G
9/30/2021
2.4
2.5*†
Unit Purchase Agreement, dated as of October 1, 2021, by and among Coast L Acquisition Corp., TPCO Holding Corp., the Members of Coastal Holding Company, LLC. Identified on the Signature Pages Thereto, Julian Michalowski, as Equityholders’ Representative and Coastal Holding Company, LLC.
10-12G/A
10/27/2021
2.5
3.1
Notice of Articles of Subversive Capital Acquisition Corp., dated July 15, 2019
10-12G
9/30/2021
3.1
3.2
Articles of Subversive Capital Acquisition Corp., dated July 15, 2019
10-12G/A
10/01/2021
3.2
3.3
Certificate of Change of Name, dated January 15, 2021 by Subversive Capital Acquisition Corp.
10-12G
9/30/2021
3.3
4.1
Specimen Common Share Certificate
10-12G
9/30/2021
4.1
4.2
Warrant Agency Agreement between the Company and Odyssey Trust Company dated July 16, 2019
10-12G
9/30/2021
4.2
4.3
Description of Securities
X
10.1
Nomination Rights Agreement, dated January 15 2021 between Subversive Capital Acquisition Corp. and Subversive Capital Sponsor LLC and GRHP Management, LLC, as Caliva shareholders’ representative
10-12G
9/30/2021
10.1
10.2
Sponsor Lockup and Forfeiture Agreement, dated January 15 2021 among Subversive Capital Acquisition Corp., Caliva, Left Coast Ventures, Inc., Subversive Capital Sponsor, LLC, and certain Founders
10-12G
9/30/2021
10.2
10.3+
Employment Letter Agreement, dated December 15, 2020 between TPCO Holding Corp. and Steve Allan
10-12G
9/30/2021
10.3
10.4+
Employment Letter Agreement, dated February 18, 2021, between TPCO Holding Corp. and Mike Batesole
10-12G
9/30/2021
10.4
10.5+
First Amendment to Employment Letter Agreement, dated March 30, 2021, between TPCO Holding Corp. and Mike Batesole
10-12G
9/30/2021
10.5
10.6+
Second Amendment to Employment Letter Agreement, dated May 20, 2021 between TPCO Holding Corp. and Mike Batesole
10-12G
9/30/2021
10.6
10.7+
Employment Letter Agreement, dated December 15, 2020, between Subversive Capital Acquisition Corp. and Dennis O’Malley
10-12G
9/30/2021
10.7
10.8
Registration Rights Agreement, dated January 15, 2021 by and among the Subversive Capital Acquisition Corp., Subversive Capital Sponsor LLC and the persons named therein
10-12G
9/30/2021
10.8
10.9+
TPCO Holding Corp. Equity Incentive Plan, dated January 19, 2021
10-12G
9/30/2021
10.9
10.10+
TPCO Holding Corp. Form of Award Agreements under Equity Incentive Plan
10-12G/A
10/01/2021
10.10
10.11+
Employment Letter Agreement, dated August 10, 2021 between TPCO Holding Corp. and Troy Datcher
10-12G/A
10/01/2021
10.11
10.12
Form of Indemnification Agreement with directors and executive officers
10-12G/A
10/01/2021
10.13
10.13††
Binding Heads of Terms, dated November 24, 2020, by and between Subversive Capital Acquisition Corp. and Roc Nation LLC
10-12G/A
12/09/2021
10.14
10.14††
Brand Strategy Agreement, dated as of November 24, 2020, by and between SC Branding, LLC and Subversive Capital Acquisition Corp.
10-12G/A
12/09/2021
10.15
10.15+
Separation Agreement, effective as of February 4, 2022, by and between TPCO Holding Corp. and Dennis O’Malley
8-K
2/7/2022
10.1
21.1
List of Subsidiaries of TPCO Holding Corp.
-
-
-
X
23.1
Consent of MNP LLP, Independent Registered Public Accounting Firm
-
-
-
X
24.1
Power of Attorney (included on signature page hereto)
-
-
-
X
31.1
Section 302 Certification of Principal Executive Officer
-
-
-
X
31.2
Section 302 Certification of Principal Financial Officer
-
-
-
X
32.1
Section 1350 Certification of Principal Executive Officer
-
-
-
X
32.2
Section 1350 Certification of Principal Financial Officer
-
-
-
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document
-
-
-
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
-
-
-
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
-
-
-
X
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
-
-
-
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
X
Cover Page Interactive Data File (embedded within the Inline XBRL document)
X
* Schedules and exhibits to this Exhibit omitted pursuant to Item 601(b)(2) of Regulation S-K.
The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request.
† Certain portions of this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
†† Certain portions of this Exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K.
+ Management contract or compensatory plan or arrangement.