TILT HOLDINGS INC.
You should read the following management's discussion and analysis of financial
condition and results of operations ("MD&A") in conjunction with our unaudited
consolidated condensed financial statements for the three and nine months ended
September 30, 2022 , included elsewhere in this Quarterly Report on Form 10-Q.
This MD&A contains statements that are forward-looking. Please refer to the
discussion of forward-looking statements and information set out under the
heading "Disclosure Regarding Forward-Looking Statements" identified in this
Quarterly Report on Form 10-Q. These statements are based on current
expectations and assumptions that are subject to risks, uncertainties and other
factors. Actual results could differ materially because of the factors discussed
below or elsewhere in this Quarterly Report on Form 10-Q. See Part II, Item 1A.
"Risk Factors" of this Quarterly Report on Form 10-Q, and Item 1A. "Risk
Factors" of the Form 10. Unless otherwise indicated or the context otherwise
requires, references herein to "we," "us," "our," and the "Company" refers to
TILT Holdings Inc. , and its subsidiaries.
All dollar amounts presented in this MD&A are presented in thousands of
Overview The Company was incorporated under the laws ofNevada pursuant toNRS Chapter 78 onJune 22, 2018 . The Company was continued under the Business Corporations Act (British Columbia ) pursuant to a Certificate of Continuance datedNovember 14, 2018 . The Company's head office is located inPhoenix, Arizona and its registered office is located inVancouver, British Columbia . The Company operates through two business divisions: inhalation technology and cannabis. The inhalation technology division encompasses theJupiter Research LLC ("Jupiter") business, through which the Company sells vape and accessory products and services to regulated markets across 37 states inthe United States ("U.S."), as well asCanada ,Israel ,South America and theEuropean Union . The cannabis division includes operations inMassachusetts at Commonwealth Alternative Care ("CAC"), inPennsylvania atStandard Farms LLC ("Standard Farms PA") and inOhio atStandard Farms Ohio, LLC ("Standard Farms OH"). Through the Company's CAC operations, the Company operates a vertically integrated marijuana facility inTaunton, Massachusetts , dually licensed for both medical and adult-use cultivation, manufacturing and retail sales and a dispensary, also dually licensed for both medical and adult-use retail sales, inBrockton, Massachusetts . CAC also has another medical dispensary operating inCambridge, Massachusetts . Through these operating facilities the Company produces, packages, and sells a variety of cannabis flower, vape cartridge, concentrate, edible and topical products via wholesale and retail toMassachusetts customers. Through the Company's Standard Farms PA operations inWhite Haven, Pennsylvania , the Company produces medical cannabis products including vape cartridges, flower, capsules, oil syringes and tinctures, which are sold via wholesale toPennsylvania customers. Through the Company's Standard Farms OH facility outsideCleveland, Ohio , the Company produces high-quality medical cannabis products from cannabis biomass including tinctures, vape cartridges, syringes, topicals, concentrates and edibles, which are then sold and distributed throughoutOhio via wholesale to other licensed cannabis businesses.
Recent Developments in the Quarter
OnApril 19, 2022 , the Company entered into a definitive purchase and sale agreement (the "Purchase and Sale Agreement") between its subsidiary,White Haven RE, LLC , and an affiliate of Innovative Industrial Properties, Inc. ("IIP") contemplating the sale and leaseback of the Company's cultivation and production facility inWhite Haven, Pennsylvania (the "Pennsylvania Transaction") in exchange for$15,000 cash. In accordance with the terms of the Pennsylvania Transaction, the Company's subsidiary, Standard Farms PA, will also execute a long-term, triple-net lease All dollar amounts expressed in thousands, except per share amounts 29 Table of Contents agreement. The term lease agreement will be 20 years, with two 5-year extensions exercisable at the tenant's discretion. Standard Farms PA anticipates no disruption to its operations as a result of the transaction. ThePennsylvania Transaction is subject to various closing conditions, including standard property/title inspections and appraisals. OnSeptember 30, 2022 , the Company and IIP entered into a third amendment (the "Third Amendment") to the Purchase and Sale Agreement. The Third Amendment extended the investigational period under the Purchase and Sale Agreement to a date on or beforeNovember 1, 2022 . The Third Amendment also allowed for closing of the contemplated sale and leaseback to occur simultaneously with the expiration of the investigational period. See Note 20 - Subsequent Events for further details. OnJuly 11, 2022 , the Company announced that it began construction onLittle Beach Harvest , a 5,000 square-foot cannabis dispensary located on Shinnecock Indian Nation's ("Shinnecock Nation") tribal territory inSouthampton, New York . This wholly tribal-owned cannabis operation is the result of a partnership between the Company and the Shinnecock Nation. The dispensary is expected to be completed by early Q1 2023. OnAugust 30, 2022 , the Company announced its subsidiary, CAC, had passed its final inspection and received approval from theCannabis Control Commission ("CCC") to commence operations for the medical use of marijuana at its 5,100 square-footCambridge dispensary. The doors of the dispensary opened for medical retail sales onSeptember 2, 2022 .
Please refer to Note 20 - Subsequent Events for information regarding post-quarter developments.
Certain Trends and Uncertainties
The Company's business, financial condition, and results of operations may be unfavorably impacted by the following trends and uncertainties. See also Item 1A. "Risk Factors" of the Form 10 filed with theSEC and on SEDAR at www.sedar.com, for discussions of other risks that may affect the Company.
COVID-19 Pandemic and Global Conflicts
InMarch 2020 , theWorld Health Organization categorized the coronavirus 2019 disease ("COVID-19") as a global pandemic. The Company continues to implement and evaluate actions to strengthen its financial position and support the continuity of its business and operations in response to the COVID-19 pandemic. The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war inUkraine , have created much uncertainty in the global marketplace. The Company is closely monitoring the ongoing impact of such events on all aspects of its business, including how it will impact its services, customers, employees, vendors, and business partners now and in the future. While the COVID-19 pandemic and recent geopolitical conflicts did not materially adversely affect the Company's financial results and business operations in the nine months endedSeptember 30, 2022 , the Company is unable to predict the impact that these events will have on its future financial position and operating results due to numerous uncertainties. All dollar amounts expressed in thousands, except per share amounts 30 Table of Contents Results of Operations The Company reports the results of operations of its affiliates and subsidiaries from the date that control commences, either through the purchase of the business or control through a management agreement. The following selected financial information includes only the results of operations after the Company established control of affiliates and subsidiaries. Accordingly, the information included below may not be representative of the results of operations of such affiliates or subsidiaries had their results of operations been included for the entire reporting period. Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2022 2021 2022 2021 Revenues, net $ 40,487 $ 53,362$ 129,894 $ 148,648 Cost of goods sold (30,950) (40,780) (100,059) (109,632) Gross profit 9,537 12,582 29,835 39,016 Operating loss (6,097) (3,493) (27,155) (5,351) Total other income (expense) (3,776) 2,425 (9,636) (10,866) Loss from operations before
income tax and non-controlling (9,873) (1,068)
(36,791) (16,217) interest Net (loss) income before (15,691) 1,026 (34,379) (14,997) non-controlling interest Net loss attributable - - 8 - non-controlling interest
Net (loss) income attributable (15,691) 1,026 (34,371) (14,997) toTILT Holdings Inc.
Three Months Ended
Revenue
Revenue represents the amount the Company expects to receive for goods and services in its contracts with customers, net of discounts and sales taxes. The Company's revenue is derived from the following:
Sale of Goods - Vaporization and Inhalation Devices:
Revenue from the wholesale sales of accessories is recognized when the Company transfers control and satisfies its performance obligations on wholesale sales of accessories. Revenue is recognized from product sales at a point in time following the transfer of control of such products to the customer, which typically occurs upon shipment or delivery, depending on the terms of sale
with the customer. Sale of Goods - Cannabis: Revenue from the direct sale of goods to customers for a fixed price is recognized when the Company transfers control of the goods to the customer. The Company transfers control and satisfies its performance obligations on retail sales upon delivery and acceptance from the customer. For dispensary sales, this occurs at the point of sale at the dispensary. The Company satisfies its performance obligation on wholesale sales when goods are delivered to the customer. Revenue for the three months endedSeptember 30, 2022 was$40,487 , down from$53,362 for the three months endedSeptember 30, 2021 , reflecting a year-over-year decrease of$12,875 or 24%. The decrease was primarily attributable to Jupiter which decreased revenue by$13,828 or 33%, mainly driven by lower sales volume due to the timing of bulk purchases by certain larger customers. Partially offsetting Jupiter's revenue decrease, revenue in cannabis operations for the three months endedSeptember 30, 2022 increased by$953 or 8% year-over-year, primarily inMassachusetts retail operations following the activation of two adult-use licenses in November andDecember 2021 and a further medical license inSeptember 2022 , partially offset by a decrease inMassachusetts wholesale revenue driven mainly by increased competition and the resulting price compression in that market. Additionally, revenue from bothOhio andPennsylvania wholesale cannabis operations increased year-over-year, driven by increased sales volume mainly as a result of increased in-house and brand partner product offerings. All dollar amounts expressed in thousands, except per share amounts 31 Table of Contents
Cost of Goods Sold, Gross Profit and Gross Margin
Gross profit reflects revenue less production costs primarily consisting of labor, materials, rent and facilities, supplies, overhead, and amortization on production equipment, shipping, packaging and other expenses required to grow and manufacture cannabis products. Gross margin represents gross profit as a percentage of revenue. Cost of goods sold for the three months endedSeptember 30, 2022 was$30,950 , down from$40,780 for the three months endedSeptember 30, 2021 reflecting a year-over-year decrease of$9,830 or 24%, driven by decreased sales volume at Jupiter, partially offset by increased sales volume across wholesale and retail cannabis operations. The Company's gross profit for the three months endedSeptember 30, 2022 was$9,537 , down from$12,582 for the three months endedSeptember 30, 2021 , which reflects a year-over-year decrease of$3,045 or 24%. Gross margin was 24% for both the three months endedSeptember 30, 2022 and 2021, respectively. The decrease in gross profit was mainly due to decreased revenue year-over-year at Jupiter and price compression inMassachusetts cannabis operations.
Total Operating Expenses
Total operating expenses primarily consists of costs incurred at the Company's corporate offices, share-based compensation, personnel costs including wages and employee benefits, professional service costs including accounting and legal expenses, rental costs associated with certain of the Company's offices and facilities, insurance expenses, costs associated with advertising and marketing the Company's products and other general and administrative expenses which support the Company's business. The following is a summary of the Company's operating expenses derived from the condensed consolidated financial statements of the Company for the three months endedSeptember 30, 2022 and 2021: Three Months Ended September 30, September 30, 2022 2021 Wages and benefits$ 4,881 $ 5,169 General and administrative 4,643 5,113 Sales and marketing 808 321 Share-based compensation 533 849 Depreciation and amortization 4,594 4,429
Impairment loss and loss on disposal of assets 175
194
Total operating expenses $ 15,634 $ 16,075 Total operating expenses for the three months endedSeptember 30, 2022 was$15,634 , a decrease of ($441 ) or 3% year-over-year from$16,075 . The decrease was primarily in general and administrative expense mainly driven by a one-time insurance reimbursement during the three months endedSeptember 30, 2022 related to certain prior litigation. This was partially offset by an increase in sales and marketing costs primarily due to increased marketing expenses to drive growth in expandedMassachusetts retail operations and increase support for the Company's various in-house cannabis brands.
Impairment Losses
During the three months endedSeptember 30, 2022 , it was determined that certain assets held for sale had a carrying value greater than their fair market value. As a result, the Company recorded an impairment loss of$175 to bring these assets held for sale to fair market value. All dollar amounts expressed in thousands, except per share amounts 32 Table of Contents Total Other Income (Expense) Other income (expense) for the three months endedSeptember 30, 2022 was ($3,776 ), a decrease of$6,201 from other income of$2,425 for the three months endedSeptember 30, 2021 primarily driven by the$4,594 decrease in non-cash income due to the change in fair value of warrant liabilities. The decrease is driven by the revaluation at each reporting date of the fair value of the Company's warrant liabilities, which is primarily based on changes to the share price input to the Black-Scholes option pricing model. Additionally impacting other income, interest expense increased$1,301 year-over-year primarily driven by finance expense related to the lease liability at the Company'sTaunton, Massachusetts cannabis facility, partially offset by decreased corporate interest expense as a result of principal payments made to holders of the Company's 2019 Senior Notes described in Note 11 - Notes Payable. Loan receivable losses increased$133 driven by the Company's current expected credit losses ("CECL") analysis of loans receivable. CECL are measured by the Company on a probability-weighted basis based on historical experience, current conditions and reasonable and supportable forecasts.
Net Income (Loss)
The Company recorded net loss of$15,691 for the three months endedSeptember 30, 2022 compared to net income of$1,026 for the prior year, for an increase in net loss of$16,717 as a result of the factors noted above.
Nine Months Ended
Revenue Revenue for the nine months endedSeptember 30, 2022 was$129,894 , down from$148,648 for the nine months endedSeptember 30, 2021 , reflecting a year-over-year decrease of$18,754 or 13%. The decrease was primarily attributable to decreased sales volume at Jupiter which decreased revenue by$21,450 or 19% mainly driven by the timing of purchases by certain larger customers. Partially offsetting this decrease, revenue in cannabis operations for the nine months endedSeptember 30, 2022 increased$2,696 or 8% year-over-year, primarily due to sales volume growth in the Company'sMassachusetts operations driven mainly by adult-use retail sales following the expansion of retail operations described above and by a broader portfolio of partner brand products. A broader portfolio of both in-house and partner brand products also drove an increase in revenue fromOhio cannabis operations, though this increase was partially offset by a decrease in revenue fromStandard Farms PA as a result of increased competition and lower sales volume.
Cost of Goods Sold, Gross Profit and Gross Margin
Cost of goods sold for the nine months endedSeptember 30, 2022 was$100,059 , down from$109,632 for the nine months endedSeptember 30, 2021 reflecting a year-over-year decrease of$9,573 or 8.7%, driven mainly by decreased year-over-year sales volume at Jupiter, partially offset by increased cost of goods sold in cannabis operations primarily attributable to increased sales volume. The Company's gross profit for the nine months endedSeptember 30, 2022 was$29,835 , down from$39,016 for the nine months endedSeptember 30, 2021 , which reflects a year-over-year decrease of$9,181 or 24%, mainly due to the decreased revenue in the inhalation technology division. Gross margin was 23% and 26% in the nine months endedSeptember 30, 2022 and 2021, respectively. The contraction in gross margin was mainly driven by price compression and product mix.
Total Operating Expenses
Total operating expenses for the nine months endedSeptember 30, 2022 was$56,990 an increase of$12,623 or 28% from$44,367 for the prior year period. The increase was primarily due to non-cash impairment losses, mainly driven by impairment of goodwill at Jupiter and replacement of lighting equipment at CAC. Additionally, there were year-over-year increases in wages and benefits expense, sales and marketing expense, and depreciation and amortization, primarily driven by the expansion of retail cannabis operations. Additionally, general and administrative expense increased due to the All dollar amounts expressed in thousands, except per share amounts 33 Table of Contents
expansion of CAC and related hiring costs as the Company centralizes certain functions in the corporate office, partially offset by a one-time insurance reimbursement related to certain past litigation.
The following is a summary of the Company's operating expenses derived from the condensed consolidated financial statements of the Company for the nine months endedSeptember 30, 2022 and 2021: Nine Months Ended September 30, September 30, 2022 2021 Wages and benefits$ 16,384 $ 13,801 General and administrative 15,007 14,003 Sales and marketing 1,801 702 Share-based compensation 2,545 2,406 Depreciation and amortization 13,712 13,261
Impairment loss and loss on disposal of assets 7,541
194 Total operating expenses$ 56,990 $ 44,367 Impairment Losses The Company incurred impairment losses in the nine months endedSeptember 30, 2022 of$7,541 , primarily in goodwill impairment. The goodwill impairment was related to interim impairment testing and based on the test results for Jupiter, the carrying amount of the reporting unit exceeded its estimated recoverable amount by$6,668 . Consequently, an impairment loss was recorded against goodwill at Jupiter. In addition, in connection with management's ongoing multi-phase plans to produce high-quality flowers, during the nine months endedSeptember 30, 2022 , the Company replaced existing lights in its Taunton Facility (as defined below) with new market-standard LED lights. As a result, the Company recorded a loss on disposal in the amount of$697 , which represented the carrying value of existing lights. Additionally, based on the fair market value of certain assets as of the end of the period, an impairment loss of$175 was recorded against assets held for sale.
Total Other Income (Expense)
Other income (expense) for the nine months endedSeptember 30, 2022 was ($9,636 ), a decrease of$1,230 from the prior year period primarily due to the change in fair value of warrant liabilities and a decrease in unrealized loss on investments related to a one-time loss in the prior year period on the Company's 2018 investment in a cannabidiol startup, partially offset by increased interest expense mainly driven by the lease liability at the Company's Taunton Facility (as defined below), increased loan receivable losses and decreased interest income.
For the nine months ended
Net Income (Loss)
The Company recorded a net loss attributable to the Company of$34,371 for the nine months endedSeptember 30, 2022 compared to a net loss attributable to the Company of$14,997 for the prior year period, for an increase in net loss of$19,374 or 129% as a result of the factors noted above.
Liquidity and Capital Resources
The Company closely monitors and manages its capital resources to assess the liquidity required to fund fixed asset capital expenditures and operations.
All dollar amounts expressed in thousands, except per share amounts
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Liquidity
The Company has experienced operating losses since its inception and expects to
continue to incur losses in the development of its business. The Company
incurred a comprehensive loss of $34,381 during the nine months ended September
30, 2022 and has an accumulated deficit of $890,619 as of September 30, 2022 . As
of September 30, 2022 , the Company had negative working capital of $36,675
(compared to positive working capital of $1,116 as of December 31, 2021 ). The
negative working capital is related to the Company's senior secured promissory
notes issued on November 1, 2019 (the "2019 Senior Notes") and junior notes
becoming due within the next 12 months.
On May 16, 2022 , through its subsidiary CAC, the Company completed the
previously announced acquisition of a facility in Taunton, Massachusetts (the
"Taunton Facility"). Concurrent with the acquisition, CAC closed on the sale of
the Taunton Facility (the "Massachusetts Sale" and, with the purchase of the
Taunton Facility, the "Taunton Facility Transactions") to IIP. See Note 12 -
Massachusetts Lease Liability for further details.
During the three months ended September 30, 2022 , the Company used a portion of
the net proceeds from the Taunton Facility Transactions to pay $18,269 towards
the principal balance of the 2019 Senior Notes. The Company made a further
payment of $7,975 towards the 2019 Senior Notes subsequent to the end of the
reporting period. See Note 20 - Subsequent Events for further details.
On April 19, 2022 , the Company entered into the Purchase and Sale Agreement for
the contemplated Pennsylvania Transaction in exchange for $15,000 cash. On
September 30, 2022 , the Company and IIP entered into the Third Amendment
extending the investigational period under the Purchase and Sale Agreement to a
date on or before November 1, 2022 and allowing for closing of the Pennsylvania
Transaction to occur simultaneously with the expiration of the investigational
period. See Note 20 - Subsequent Events for details regarding other significant
events related to the Pennsylvania Transaction.
The Company expects that the proceeds from the Taunton Facility Transactions and
pending Pennsylvania Transaction will be sufficient to address a portion of its
debt maturities occurring in December 2022 and pay all obligations on maturities
occurring in April 2023 and remains in discussions with debt holders to finalize
the future debt structure of the Company in order to achieve an improved capital
structure with extended maturities. The Company's liquidity will depend, in
large part, on its success with these discussions and/or its ability to raise
additional capital to address its remaining debt maturities, generate positive
cash flow, and minimize the anticipated net loss during the 12 months from the
date of this filing, all of which are uncertain and outside the control of the
Company.
As of September 30, 2022 and December 31, 2021 , the Company had total current
assets of $92,993 and $100,613 , respectively, which represents a decrease of
$7,620 . The decrease in total current assets is primarily due to a decrease in
trade receivables and inventory, partially offset by an increase in restricted
cash and cash and cash equivalents.
Additionally, as of September 30, 2022 and December 31, 2021 , the Company had
total current liabilities of $129,668 and $99,497 , respectively, which
represents an increase of $30,171 . The increase in total current liabilities is
primarily related to the increases in the current portions of notes payable and
Massachusetts Lease Liability. This was partially offset by decreases in warrant
liability, deferred revenue and operating lease liabilities.
Based on the Company's operating plans for the next 12 months which include
(i) revenue growth from the sale of existing products and the introduction of
new products across all operating segments; (ii) reducing production costs as a
result of maturing efficiencies in cannabis operations; (iii) reducing supply
chain costs; (iv) increasing cash inflows from the 2022 activation of a medical
dispensary license; (v) increasing cash inflows from the monetization of certain
assets; (vi) obtaining other financings as necessary; and (vii) refinancing of
debt obligations and extension of maturities with banking partners and note
holders, the Company believes that it has adequate resources to fund the
operations during the next 12 months from the date of filing of this Quarterly
Report on Form 10-Q.
All dollar amounts expressed in thousands, except per share amounts
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Cash Flows
The following table presents the Company's net cash inflows and outflows from the condensed consolidated financial statements:
Nine Months Ended
September 30, 2022 September 30, 2021
Net cash provided by (used in) $ 8,292 $ (3,934)
operating activities Net cash (used in) provided by (15,962)
1,141
investing activities Net cash provided by financing 17,297
2,089
activities
Effect of foreign exchange on cash and (6)
(5)
cash equivalents Net changes in cash and cash $ 9,621 $
(709)
equivalents
For the nine months ended
Operating activities:
? nine months ended
months ended
reduction of accounts receivable and conversion of inventory.
Investing activities: (
? nine months ended
months ended
Facility Transactions described in Note 12 - Massachusetts Lease Liability.
Financing activities:
the nine months ended
? nine months ended
Taunton Facility Transactions described in Note 12 - Massachusetts Lease
Liability and Jupiter's asset-based revolving credit facility entered into in
Critical Accounting Estimates
There were no significant changes in the Company's significant accounting
judgements and estimates during the nine months ended
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Item 15. Note 2 of our Audited Consolidated Financial Statements for the years endedDecember 31, 2021 and 2020 in our Form 10 and the "Recent Accounting Pronouncements" section of Note 2 - Basis of Presentation and Summary of Significant Accounting Policies in the notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. All dollar amounts expressed in thousands, except per share amounts 36 Table of Contents Legal and Regulatory Matters Regulatory Overview In accordance with Staff Notice 51-352 Issuers withU.S. Marijuana-Related Activities (the "Staff Notice"), below is a discussion of the federal and state-levelU.S. regulatory regimes in those jurisdictions where the Company is currently involved through its subsidiaries. The Company or its subsidiaries are, recently were or are expected to be directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the states ofMassachusetts ,Pennsylvania andOhio . The Company is in compliance with the applicable state regulatory framework and licensing requirements for each of the states ofMassachusetts ,Pennsylvania andOhio . The Company also has ancillary involvement in the marijuana industry through the products and services it provides to customers in the following states andU.S. territories:Alabama ,Alaska ,Arizona ,Arkansas ,California ,Colorado ,Connecticut ,Delaware ,District of Columbia , Florida,Georgia ,Hawaii ,Indiana ,Illinois ,Maine ,Maryland ,Massachusetts ,Michigan ,Minnesota ,Missouri ,Montana ,Nebraska ,Nevada ,New Hampshire ,New Jersey ,New Mexico , NewYork, North Carolina ,North Dakota ,Ohio ,Oklahoma ,Oregon, Pennsylvania ,Rhode Island ,Puerto Rico ,South Carolina ,Tennessee ,Texas ,Utah ,Vermont ,Virginia ,Washington ,Wisconsin andWest Virginia . The Company is not aware of any non-compliance by its customers with any applicable licensing requirements or regulatory framework enacted by each of these respective states. In accordance with the Staff Notice, the Company will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on the Company's licenses, business activities or operations will be promptly disclosed by the Company.
Regulation of Cannabis in the
TheU.S. federal government regulates drugs through the CSA (21 U.S.C. § 811). Pursuant to the CSA, cannabis is classified as a Schedule I controlled substance. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in theU.S. , lacks safety for use under medical supervision and has a high potential for abuse. TheDOJ defines Schedule I drugs, substances or chemicals as "drugs with no currently accepted medical use and a high potential for abuse." The FDA has not approved cannabis as a safe and effective drug for any use.Canada has federal legislation which uniformly governs the cultivation, processing, distribution, sale and possession of both medical and recreational cannabis under the Cannabis Act, as well as various provincial and territorial regulatory frameworks that further govern the distribution, sale and consumption of recreational cannabis within the applicable province or territory. In contrast, cannabis is only permissively regulated at the state level in theU.S. State laws in theU.S. regulating cannabis are in direct conflict with the CSA, which prohibits cannabis use and possession. Although certain states and territories of theU.S. authorize medical and/or recreational cannabis cultivation, manufacturing, production, distribution and sales by licensed or registered entities, underU.S. federal law, the cultivation, manufacture, distribution, possession, use, and transfer of cannabis and any related drug paraphernalia, unless specifically exempt, is illegal and any such acts are criminal acts under the CSA. Although the Company's activities are compliant with applicableU.S. state law, strict compliance with state laws with respect to cannabis may neither absolve the Company of liability underU.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company.
The risk of federal enforcement and other risks associated with the Company's business are described in Item 1A. "Risk Factors" of the Form 10.
Legal Advice in Accordance with the Staff Notice
Legal advice has been obtained by the Company regarding applicable
All dollar amounts expressed in thousands, except per share amounts
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Regulation of Cannabis at State Levels
Below is a summary of the licensing and regulatory framework in the markets where, as ofSeptember 30, 2022 , the Company held licenses and had direct or indirect involvement with theU.S. cannabis industry, followed by outlines of the regulatory framework in each of the relevant states. Number of
Licenses/
License Type held Applications
Directly and Number of Licenses arising out of
Indirectly by Allowed by Company Direct and
State Company Law in State Indirect Involvement
Massachusetts Vertically A Person or Entity 3 Medical Marijuana
Integrated Medical Having Direct or Treatment Center
Marijuana Treatment Indirect Control may licenses with
Center not hold more than authorization to
Cultivator, Product three licenses of the commence operations
Manufacturer, same license type (all operational);
Retailer 4 adult-use
(Adult-Use) Marijuana
Establishment Final
licenses with
authorization to
commence operations
(1 cultivator
license;
1 product
manufacturer
license; and 2
retailer licenses;
all operational)
Ohio Stand Alone A person, entity or 1 license
Processor (Medical) subsidiary thereof
may only hold a
financial interest in
or be an owner of one
processor license
Pennsylvania Grower/Processor A person may only be 1 license
(Medical) issued one
grower/processor
license
Massachusetts
Massachusetts became the eighteenth state to legalize medical marijuana when
voters passed a ballot measure in 2012. Adult-use (recreational) marijuana is
legal in Massachusetts as of December 15, 2016 , following the passage of a
ballot initiative in November of that year. The CCC, a regulatory body created
in 2016, oversees both the Medical Use of Marijuana Program and the Adult Use of
Marijuana Program.
Under the Medical Use of Marijuana Program, a Medical Marijuana Treatment Center
("MTC") is required to be vertically integrated, such that a single MTC license
holder must cultivate, manufacture and dispense medical marijuana and marijuana
products to registered, qualifying patients and personal caregivers. Pursuant to
the CCC's regulations, no Person or Entity Having Direct or Indirect Control
over the MTC's operations may be granted or hold more than three MTC Licenses.
Under the Adult Use of Marijuana Program, vertical integration is not required,
and therefore multiple types of adult-use Marijuana Establishment ("ME")
licenses exist. The Marijuana Cultivator (Indoor or Outdoor), Marijuana Product
Manufacturer and Marijuana Retailer licenses cover the three main operational
license types (cultivation, manufacturing and retail sales). ME licenses,
subject to certain ownership requirements, are also available for Independent
Testing Laboratories , Marijuana Research Facilities, Marijuana Transporters
(Third-Party or Existing Licensee), Craft Marijuana Cooperatives, Marijuana
Couriers, Marijuana Delivery Operators, Social Consumption Establishments (once
authorized by municipalities and an application is released by the CCC) and
Marijuana Microbusinesses. No Person or Entity Having Direct or Indirect Control
over the ME's operations may be granted or hold more than three licenses in a
particular class of license, except as otherwise specified in the applicable
regulations. In addition, any Person or Entity Having Direct or
All dollar amounts expressed in thousands, except per share amounts
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Indirect Control, or Licensee, is limited to a total of 100,000 square feet of cultivation "canopy" distributed across no more than three adult-use Marijuana Cultivator licenses and three MTC licenses. The Company, through its wholly owned subsidiary CAC, holds three operational vertically integrated MTC licenses, with medical dispensary locations inBrockton ,Taunton andCambridge , and medical cultivation and product manufacturing operations inTaunton . CAC has also received final licenses (including authorization to commence operations) for its adult-use retailer operations inTaunton andBrockton , as well as its adult-use cultivator and product manufacturer operations inTaunton . The Company is in compliance withMassachusetts state law and the related licensing framework.
OnJune 8, 2016 , formerOhio GovernorJohn Kasich signed HB 523 into law, sanctioning the use of marijuana for limited medical purposes and establishing a commercial marijuana regulatory regime. Qualifying conditions for access to medical marijuana under the program include, but are not limited to, chronic and severe pain, post-traumatic stress disorder and cancer.Ohio's medical cannabis program is regulated by both theOhio Department of Commerce ("Department of Commerce ") and theOhio Board of Pharmacy ("Ohio Board").The Department of Commerce is responsible for licensing cultivators, processors and testing laboratories, while theOhio Board is responsible for registering patients and caregivers as well as licensing medical marijuana dispensaries. Final regulations governing the program, including applications for business licensure, the operation of commercial medical cannabis establishments, physician certifications and patient registration have been adopted.Ohio's medical cannabis program allows businesses to be structured as for-profit entities and does not impose residency requirements for investment or ownership in a commercial cannabis license.Ohio's licensing structure permits, but does not require, vertical integration. Each license (cultivation, processor and dispensary) is issued on an individual basis for each facility type/function. There are three different types of processors - stand-alone, vertically integrated facilities and a plant-only processor, which is a cultivatorwho distributes plant material directly to dispensaries. Common ownership between cultivation, processing and dispensing licenses is permitted, but prohibited for cannabis testing licensees. However, no one entity or person may own, have a financial interest in or significantly influence or control the activities of more than one cultivation license, more than one processing license or more than five dispensary licenses at any given time. InMarch 2021 , the Company completed its acquisition of Standard Farms OH, a licensed stand-alone processor inOhio . Standard Farms OH engages in the production, possession, use, sale and distribution of cannabis products inOhio's medicinal cannabis marketplace. The Company is in compliance withOhio state law and the related licensing framework.
InApril 2016 ,Pennsylvania's GovernorTom Wolf signed the Commonwealth's first medical marijuana bill into law. The medical program created a commercial system for a limited number of businesses and permits physicians to recommend cannabis for a limited number of qualifying conditions.The Pennsylvania Department of Health ("PA DOH") regulates medical marijuana businesses in the Commonwealth and issues two types of primary permits: a medical marijuana grower/processor permit and a medical marijuana dispensary permit. The PA DOH also issues a third type of permit called a clinical registrant permit. The clinical registrant permit is a combination of a grower/processor permit and a dispensary permit that is limited to applicantswho have established a partnership with an accredited medical school inPennsylvania . For licensing purposes, the PA DOH split the Commonwealth into six regions. The state initially limited the total number of medical marijuana organizations to twenty-five grower/processors and fifty dispensaries Commonwealth-wide. Each dispensary is permitted to have up to three dispensary sites, for a total of 150 potential dispensary locations throughoutPennsylvania . For each dispensary permit, the locations must be within the region where the permit was awarded. For medical marijuana grower/processors, the location is limited to the region where the permit was awarded, but distribution is permissible across all regions. The PA DOH may approve up to ten clinical registrants, with each eligible for only one grower/processor permit and one dispensary permit (each clinical registrant may provide medical marijuana at up to six dispensary locations). Residency is not required to operate a medical marijuana organization inPennsylvania . Vertical integration is limited, as the PA DOH may not issue more than five grower/processor businesses dispensary permits. In addition, a single entity may not hold more than one grower/processor permit, nor more than five dispensary permits. All dollar amounts expressed in thousands, except per share amounts 39 Table of Contents InJune 2021 ,Governor Wolf signed House Bill ("HB") 1024 into law expanding the ability of patients to access medical cannabis and extending certain policies that were temporarily enacted during the beginning of the COVID-19 pandemic. Under HB 1024, the maximum number of clinical registrants was expanded from eight to ten. Additionally, dispensaries are allowed to offer cannabis curbside deliveries; patients can obtain a ninety day instead of the previous thirty-day supply for cannabis; and the five-person cap on the number of patients that a caregiver can serve was removed indefinitely. Patients can also now consult with authorizing physicians via video conferencing. The law also expanded the pool of eligible conditions to include cancer remission therapy and CNS-related neuropathy as well as eliminated provisions that previously required chronic pain patients to try conventional prescription pain medications prior to using cannabis. Additionally, the law makes it easier for grower/processors to process marijuana that failed tests for yeast and mold into products that are topical in form. The law also expands the number of research facilities that are studying patient response to medical marijuana. InJuly 2022 ,Governor Wolf signed HB 311, which provides additional protections underPennsylvania law for financial institutions and insurers providing services to, or for the benefit of, a "legitimate cannabis-related business." HB 311 also explicitly states that financial institutions and insurers are not obligated to provide services to cannabis businesses within the Commonwealth. Additionally, HB 311 requires cannabis businesses that are receiving financial or insurance services from a provider withinPennsylvania to disclose any suspension or revocation of cannabis-related permits, registrations, or certifications to the financial institution and/or insurer within five business days. InOctober 2022 , the PA DOH finalized its medical marijuana regulations. The final regulations did not take effect during this quarterly period, and a description of the changes to the medical marijuana program as a result of the final regulations will be included in the next quarterly report. InPennsylvania , the Company holds a medical marijuana grower/processor license through its wholly owned subsidiary, Standard Farms PA, which operates 33,500 square feet of greenhouse. The Company is in compliance withPennsylvania state law and the related licensing framework.
Company Compliance Program
The Company is classified as having direct, indirect and ancillary involvement in theU.S. marijuana industry and is in material compliance with applicable licensing requirements and the regulatory framework enacted by eachU.S. state in which it operates. The Company is not subject to any citations or notices of violation with applicable licensing requirements or the regulatory framework enacted by each applicableU.S. state which may have an impact on its licenses, business activities or operations. The Company's General Counsel or any other individual appointed by the General Counsel oversees, maintains, and implements the Company's compliance program and personnel. In addition to the Company's internal legal and compliance departments, the Company has state and local regulatory/compliance counsel engaged in every jurisdiction in which it operates. The Company's General Counsel or any other individual appointed by the General Counsel oversees compliance training for all employees, such training includes, but is not limited to, on the following topics:
• compliance with state and local laws;
• safe cannabis use; • dispensing procedures;
• security and safety policies and procedures;
• inventory control;
• seed-to-sale training sessions;
• recordkeeping;
• responsible vendor training;
• quality control;
• transportation procedures; and
All dollar amounts expressed in thousands, except per share amounts
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• extensive ingredient and product testing, often beyond that required by law to
assure product safety and accuracy.
The Company's compliance program emphasizes security and inventory control to ensure strict monitoring of cannabis and inventory from delivery by a licensed distributor to sale or disposal. Only authorized and properly trained employees are allowed to access the Company's computerized seed-to-sale system. The Company's General Counsel or anyone appointed by the General Counsel monitors all compliance notifications from the regulators and inspectors in each market, timely resolving any issues identified. The Company keeps records of all compliance notifications received from the state regulators or inspectors and how and when the issue was resolved. Further, the Company has created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for handling cash, performing inventory and cash reconciliation, ensuring the accuracy of inventory tracking and recordkeeping. The Company maintains accurate records of its inventory at all licensed facilities. Adherence to the Company's standard operating procedures is mandatory and ensures that the Company's operations are compliant with the applicable state and local laws, regulations, ordinances, licenses, rules and other requirements. The Company ensures adherence to standard operating procedures by regularly conducting internal inspections and ensures that any issues identified are resolved quickly and thoroughly. InJanuary 2018 ,U.S. Attorney General,Jeff Sessions rescinded the Cole Memorandum. The rescission of the Cole Memorandum and other Obama-era prosecutorial guidance did not create a change in federal law, as the Cole Memorandum was never legally binding; however, the revocation removed theDOJ 's guidance toU.S. Attorneys that state-regulated cannabis industries operating substantively in compliance with the Cole Memorandum's guidelines should not be a prosecutorial priority. As an industry best practice, despite the rescission of the Cole Memorandum, the Company continues to do the following to ensure compliance with the guidance provided by the Cole Memorandum:
ensure the operations of its subsidiaries and business partners are compliant
with all licensing requirements that are set forth with regards to cannabis
operation by the applicable state, county, municipality, town, township,
• borough, and other political/administrative divisions. To this end, the Company
retains appropriately experienced legal counsel to conduct the necessary due
diligence to ensure compliance of such operations with all applicable laws and
regulations;
the activities relating to cannabis business adhere to the scope of the license
obtained - for example, in the states where only medical cannabis is permitted,
• the products are only sold to patients
permit the possession of the cannabis; and in the states where cannabis is
permitted for adult recreational use, the products are only sold to individuals
the Company only works through licensed operators, which must pass a range of
• requirements, adhere to strict business practice standards and be subjected to
strict regulatory oversight whereby sufficient checks and balances ensure that
no revenue is distributed to criminal enterprises, gangs and cartels; and
the Company conducts reviews of products, product packaging and transactions to
ensure that the products comply with applicable regulations, contain necessary
• disclaimers about the contents of the products and provide requisite
educational material to mitigate adverse public health consequences from
cannabis use and prevent impaired driving.
OnNovember 7, 2018 ,Jeff Sessions resigned from his position as Attorney General. The next Attorney General,William Barr , stated that he does not intend "go after" partieswho are involved in the cannabis business and are compliant with state law in reliance on the Cole Memorandum. UnderPresident Biden's administration and his appointed Attorney General,Merrick Garland ,DOJ rhetoric around cannabis has largely returned to the Obama-era rhetoric even if a new prosecutorial guidance memorandum has not been re-issued. During hisSenate confirmation,Merrick Garland told SenatorCory Booker (D-NJ) that, "It does not seem to me useful the use of limited resources that we have to be pursuing prosecutions in states that have legalized and are regulating the use of marijuana, either medically or otherwise." Such statements are not official declarations or policies of theDOJ and are not binding on theDOJ , on anyU.S. Attorney or on theU.S. federal courts, and substantial uncertainty regardingU.S. federal enforcement remains. To date, there has been no new federal cannabis memorandums issued by theBiden Administration or any published change in federal enforcement policy. Regardless, the federal government of theU.S. has always reserved the right to enforce federal law regarding the sale and disbursement of medical or recreational marijuana, even if state law sanctioned such sale and disbursement. Although the rescission of the Cole Memorandum does not necessarily indicate that marijuana industry prosecutions are All dollar amounts expressed in thousands, except per share amounts 41 Table of Contents
now affirmatively a priority for the
In the absence of a uniform federal policy, as had been established by the Cole Memorandum, numerousU.S. Attorneys with state-legal marijuana programs within their jurisdictions have announced enforcement priorities for their respective offices. For instance,Andrew Lelling , formerU.S. Attorney for the District ofMassachusetts throughFebruary 2021 , stated that while his office would not immunize any businesses from federal prosecution, he anticipated focusing the office's marijuana enforcement efforts on: (1) overproduction; (2) targeted sales to minors; and (3) organized crime and interstate transportation of drug proceeds. OtherU.S. Attorneys provided less assurance, promising to enforce federal law, including the CSA in appropriate circumstances. The Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program and standard operating procedures. While the Company's operations are in full compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal underU.S. federal law. For the reasons described above and the risks further described in this Quarterly Report on Form 10-Q and in Item 1A "Risk Factors" in the Form 10, there are significant risks associated with the business of the Company. Readers are strongly encouraged to carefully read all of the risk factors contained in this Quarterly Report on Form 10-Q and in Item 1A. "Risk Factors" in the Form 10.
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