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    TILT   CA88688R1047

TILT HOLDINGS INC.

(TILT)
  Report
End-of-day quote NEO EXCHANGE - NEO-L (MARKET BY ORDER)  -  2023-01-26
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01/12TILT Holdings Inc. Announces Appointment of Gary Santo to National Cannabis Roundtable Board of Directors
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01/12TILT Holdings Announces Appointment of Gary Santo to National Cannabis Roundtable Board of Directors
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01/12TILT Holdings Announces Appointment of Gary Santo to National Cannabis Roundtable Board of Directors
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TILT HOLDINGS INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/14/2022 | 05:40pm EST
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 U.S. dollars ("USD$", "$", or "US$"), except per share amounts, unless otherwise indicated.




Overview

The Company was incorporated under the laws of Nevada pursuant to NRS Chapter 78
on June 22, 2018. The Company was continued under the Business Corporations Act
(British Columbia) pursuant to a Certificate of Continuance dated November 14,
2018. The Company's head office is located in Phoenix, Arizona and its
registered office is located in Vancouver, British Columbia.

The Company operates through two business divisions: inhalation technology and
cannabis. The inhalation technology division encompasses the Jupiter Research
LLC ("Jupiter") business, through which the Company sells vape and accessory
products and services to regulated markets across 37 states in the United States
("U.S."), as well as Canada, Israel, South America and the European Union. The
cannabis division includes operations in Massachusetts at Commonwealth
Alternative Care ("CAC"), in Pennsylvania at Standard Farms LLC ("Standard Farms
PA") and in Ohio at Standard Farms Ohio, LLC ("Standard Farms OH").

Through the Company's CAC operations, the Company operates a vertically
integrated marijuana facility in Taunton, Massachusetts, dually licensed for
both medical and adult-use cultivation, manufacturing and retail sales and a
dispensary, also dually licensed for both medical and adult-use retail sales, in
Brockton, Massachusetts. CAC also has another medical dispensary operating in
Cambridge, Massachusetts. Through these operating facilities the Company
produces, packages, and sells a variety of cannabis flower, vape cartridge,
concentrate, edible and topical products via wholesale and retail to
Massachusetts customers.

Through the Company's Standard Farms PA operations in White Haven, Pennsylvania,
the Company produces medical cannabis products including vape cartridges,
flower, capsules, oil syringes and tinctures, which are sold via wholesale to
Pennsylvania customers.

Through the Company's Standard Farms OH facility outside Cleveland, Ohio, the
Company produces high-quality medical cannabis products from cannabis biomass
including tinctures, vape cartridges, syringes, topicals, concentrates and
edibles, which are then sold and distributed throughout Ohio via wholesale to
other licensed cannabis businesses.

Recent Developments in the Quarter

On April 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 in White 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

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agreement. The term lease agreement will be 20 years, with two 5-year extensions
exercisable at the tenant's discretion. Standard Farms PA anticipates no
disruption to its operations as a result of the transaction. The Pennsylvania
Transaction is subject to various closing conditions, including standard
property/title inspections and appraisals. On September 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 before November 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.

On July 11, 2022, the Company announced that it began construction on Little
Beach Harvest, a 5,000 square-foot cannabis dispensary located on Shinnecock
Indian Nation's ("Shinnecock Nation") tribal territory in Southampton, 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.

On August 30, 2022, the Company announced its subsidiary, CAC, had passed its
final inspection and received approval from the Cannabis Control Commission
("CCC") to commence operations for the medical use of marijuana at its 5,100
square-foot Cambridge dispensary. The doors of the dispensary opened for medical
retail sales on September 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 the SEC and on SEDAR at
www.sedar.com, for discussions of other risks that may affect the Company.

COVID-19 Pandemic and Global Conflicts


In March 2020, the World Health Organization categorized 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 in Ukraine, have created much uncertainty in the global marketplace.
The Company is closely monitoring the ongoing impact of such events on all
aspects of its business, including how it will impact its services, customers,
employees, vendors, and business partners now and in the future. While the
COVID-19 pandemic and recent geopolitical conflicts did not materially adversely
affect the Company's financial results and business operations in the nine
months ended September 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.

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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)
to TILT Holdings Inc.


Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021


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 ended September 30, 2022 was $40,487, down from
$53,362 for the three months ended September 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 ended September 30, 2022 increased by $953 or
8% year-over-year, primarily in Massachusetts retail operations following the
activation of two adult-use licenses in November and December 2021 and a further
medical license in September 2022, partially offset by a decrease in
Massachusetts wholesale revenue driven mainly by increased competition and the
resulting price compression in that market. Additionally, revenue from both Ohio
and Pennsylvania 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

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Cost of Goods Sold, Gross Profit and Gross Margin

Gross profit reflects revenue less production costs primarily consisting of
labor, materials, rent and facilities, supplies, overhead, and amortization on
production equipment, shipping, packaging and other expenses required to grow
and manufacture cannabis products. Gross margin represents gross profit as
a percentage of revenue.

Cost of goods sold for the three months ended September 30, 2022 was $30,950,
down from $40,780 for the three months ended September 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 ended September 30, 2022 was
$9,537, down from $12,582 for the three months ended September 30, 2021, which
reflects a year-over-year decrease of $3,045 or 24%. Gross margin was 24% for
both the three months ended September 30, 2022 and 2021, respectively. The
decrease in gross profit was mainly due to decreased revenue year-over-year at
Jupiter and price compression in Massachusetts 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
ended September 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 ended September 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 ended September 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 expanded Massachusetts retail operations and increase support for the
Company's various in-house cannabis brands.

Impairment Losses


During the three months ended September 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

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Total Other Income (Expense)

Other income (expense) for the three months ended September 30, 2022 was
($3,776), a decrease of $6,201 from other income of $2,425 for the three months
ended September 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's Taunton,
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 ended September
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 September 30, 2022 Compared to Nine Months Ended September 30, 2021


Revenue

Revenue for the nine months ended September 30, 2022 was $129,894, down from
$148,648 for the nine months ended September 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 ended September 30, 2022 increased $2,696 or
8% year-over-year, primarily due to sales volume growth in the Company's
Massachusetts 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 from Ohio cannabis operations, though
this increase was partially offset by a decrease in revenue from Standard 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 ended September 30, 2022 was $100,059,
down from $109,632 for the nine months ended September 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 ended September 30, 2022 was
$29,835, down from $39,016 for the nine months ended September 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 ended September 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 ended September 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

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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
ended September 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 ended September 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 ended
September 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 ended September 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 September 30, 2022, the Company recorded loan losses of $1,154 as a result of the analysis of CECL.

Net Income (Loss)

The Company recorded a net loss attributable to the Company of $34,371 for
the nine months ended September 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.

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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.

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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 September 30, 2022, cash was provided by (used in):

Operating activities: $8,292. The cash provided by operating activities for the

? nine months ended September 30, 2022, increased $12,226 as compared to the nine

months ended September 30, 2021. The increase was primarily driven by the

reduction of accounts receivable and conversion of inventory.

Investing activities: ($15,962). The cash used in investing activities for the

? nine months ended September 30, 2022, decreased $17,103 as compared to the nine

months ended September 30, 2021. The decrease was mainly related to the Taunton

Facility Transactions described in Note 12 - Massachusetts Lease Liability.

Financing activities: $17,297. The cash provided by financing activities for

the nine months ended September 30, 2022 increased $15,208 as compared to the

? nine months ended September 30, 2021. The increase was mainly related to the

Taunton Facility Transactions described in Note 12 - Massachusetts Lease

Liability and Jupiter's asset-based revolving credit facility entered into in

July 2021 described in Note 11 - Notes Payable.

Critical Accounting Estimates

There were no significant changes in the Company's significant accounting judgements and estimates during the nine months ended September 30, 2022 from those previously disclosed in Item 2., "Financial Information" in our Form 10.

Recent Accounting Pronouncements


For a discussion of recent accounting pronouncements, see Item 15. Note 2 of our
Audited Consolidated Financial Statements for the years ended December 31, 2021
and 2020 in our Form 10 and the "Recent Accounting Pronouncements" section of
Note 2 - Basis of Presentation and Summary of Significant Accounting Policies in
the notes to our condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q.

      All dollar amounts expressed in thousands, except per share amounts

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Legal and Regulatory Matters

Regulatory Overview

In accordance with Staff Notice 51-352 Issuers with U.S. Marijuana-Related
Activities (the "Staff Notice"), below is a discussion of the federal and
state-level U.S. regulatory regimes in those jurisdictions where the Company is
currently involved through its subsidiaries. The Company or its subsidiaries
are, recently were or are expected to be directly engaged in the manufacture,
possession, use, sale or distribution of cannabis in the states of
Massachusetts, Pennsylvania and Ohio. The Company is in compliance with the
applicable state regulatory framework and licensing requirements for each of the
states of Massachusetts, Pennsylvania and Ohio.

The Company also has ancillary involvement in the marijuana industry through the
products and services it provides to customers in the following states and U.S.
territories: Alabama, Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Indiana,
Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri,
Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode
Island, Puerto Rico, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia,
Washington, Wisconsin and West Virginia. The Company is not aware of any
non-compliance by its customers with any applicable licensing requirements or
regulatory framework enacted by each of these respective states.

In accordance with the Staff Notice, the Company will evaluate, monitor and
reassess this disclosure, and any related risks, on an ongoing basis and the
same will be supplemented and amended to investors in public filings, including
in the event of government policy changes or the introduction of new or amended
guidance, laws or regulations regarding marijuana regulation. Any
non-compliance, citations or notices of violation which may have an impact on
the Company's licenses, business activities or operations will be promptly
disclosed by the Company.

Regulation of Cannabis in the U.S. Federally


The U.S. federal government regulates drugs through the CSA (21 U.S.C. § 811).
Pursuant to the CSA, cannabis is classified as a Schedule I controlled
substance. A Schedule I controlled substance is defined as a substance that has
no currently accepted medical use in the U.S., lacks safety for use under
medical supervision and has a high potential for abuse. The DOJ defines
Schedule I drugs, substances or chemicals as "drugs with no currently accepted
medical use and a high potential for abuse."

The FDA has not approved cannabis as a safe and effective drug for any use.

Canada has federal legislation which uniformly governs the cultivation,
processing, distribution, sale and possession of both medical and recreational
cannabis under the Cannabis Act, as well as various provincial and territorial
regulatory frameworks that further govern the distribution, sale and consumption
of recreational cannabis within the applicable province or territory. In
contrast, cannabis is only permissively regulated at the state level in the U.S.

State laws in the U.S. regulating cannabis are in direct conflict with the CSA,
which prohibits cannabis use and possession. Although certain states and
territories of the U.S. authorize medical and/or recreational cannabis
cultivation, manufacturing, production, distribution and sales by licensed or
registered entities, under U.S. federal law, the cultivation, manufacture,
distribution, possession, use, and transfer of cannabis and any related drug
paraphernalia, unless specifically exempt, is illegal and any such acts are
criminal acts under the CSA. Although the Company's activities are compliant
with applicable U.S. state law, strict compliance with state laws with respect
to cannabis may neither absolve the Company of liability under U.S. federal law,
nor may it provide a defense to any federal proceeding which may be brought
against the Company.

The risk of federal enforcement and other risks associated with the Company's business are described in Item 1A. "Risk Factors" of the Form 10.

Legal Advice in Accordance with the Staff Notice

Legal advice has been obtained by the Company regarding applicable U.S. federal and state law.

      All dollar amounts expressed in thousands, except per share amounts

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  Table of Contents

Regulation of Cannabis at State Levels

Below is a summary of the licensing and regulatory framework in the markets
where, as of September 30, 2022, the Company held licenses and had direct or
indirect involvement with the U.S. cannabis industry, followed by outlines of
the regulatory framework in each of the relevant states.

                                                              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

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                                       38

  Table of Contents
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 in
Brockton, Taunton and Cambridge, and medical cultivation and product
manufacturing operations in Taunton. CAC has also received final licenses
(including authorization to commence operations) for its adult-use retailer
operations in Taunton and Brockton, as well as its adult-use cultivator and
product manufacturer operations in Taunton. The Company is in compliance with
Massachusetts state law and the related licensing framework.

Ohio


On June 8, 2016, former Ohio Governor John Kasich signed HB 523 into law,
sanctioning the use of marijuana for limited medical purposes and establishing a
commercial marijuana regulatory regime. Qualifying conditions for access to
medical marijuana under the program include, but are not limited to, chronic and
severe pain, post-traumatic stress disorder and cancer. Ohio's medical cannabis
program is regulated by both the Ohio Department of Commerce ("Department of
Commerce") and the Ohio Board of Pharmacy ("Ohio Board"). The Department of
Commerce is responsible for licensing cultivators, processors and testing
laboratories, while the Ohio Board is responsible for registering patients and
caregivers as well as licensing medical marijuana dispensaries. Final
regulations governing the program, including applications for business
licensure, the operation of commercial medical cannabis establishments,
physician certifications and patient registration have been adopted.

Ohio's medical cannabis program allows businesses to be structured as for-profit
entities and does not impose residency requirements for investment or ownership
in a commercial cannabis license. Ohio's licensing structure permits, but does
not require, vertical integration. Each license (cultivation, processor and
dispensary) is issued on an individual basis for each facility type/function.
There are three different types of processors - stand-alone, vertically
integrated facilities and a plant-only processor, which is a cultivator who
distributes plant material directly to dispensaries. Common ownership between
cultivation, processing and dispensing licenses is permitted, but prohibited for
cannabis testing licensees. However, no one entity or person may own, have a
financial interest in or significantly influence or control the activities of
more than one cultivation license, more than one processing license or more than
five dispensary licenses at any given time.

In March 2021, the Company completed its acquisition of Standard Farms OH, a
licensed stand-alone processor in Ohio. Standard Farms OH engages in the
production, possession, use, sale and distribution of cannabis products in
Ohio's medicinal cannabis marketplace. The Company is in compliance with Ohio
state law and the related licensing framework.

Pennsylvania


In April 2016, Pennsylvania's Governor Tom Wolf signed the Commonwealth's first
medical marijuana bill into law. The medical program created a commercial system
for a limited number of businesses and permits physicians to recommend cannabis
for a limited number of qualifying conditions. The Pennsylvania Department of
Health ("PA DOH") regulates medical marijuana businesses in the Commonwealth and
issues two types of primary permits: a medical marijuana grower/processor permit
and a medical marijuana dispensary permit. The PA DOH also issues a third type
of permit called a clinical registrant permit. The clinical registrant permit is
a combination of a grower/processor permit and a dispensary permit that is
limited to applicants who have established a partnership with an accredited
medical school in Pennsylvania.

For licensing purposes, the PA DOH split the Commonwealth into six regions. The
state initially limited the total number of medical marijuana organizations to
twenty-five grower/processors and fifty dispensaries Commonwealth-wide. Each
dispensary is permitted to have up to three dispensary sites, for a total of 150
potential dispensary locations throughout Pennsylvania. For each dispensary
permit, the locations must be within the region where the permit was awarded.
For medical marijuana grower/processors, the location is limited to the region
where the permit was awarded, but distribution is permissible across all
regions. The PA DOH may approve up to ten clinical registrants, with each
eligible for only one grower/processor permit and one dispensary permit (each
clinical registrant may provide medical marijuana at up to six dispensary
locations). Residency is not required to operate a medical marijuana
organization in Pennsylvania. Vertical integration is limited, as the PA DOH may
not issue more than five grower/processor businesses dispensary permits. In
addition, a single entity may not hold more than one grower/processor permit,
nor more than five dispensary permits.

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  Table of Contents

In June 2021, Governor Wolf signed House Bill ("HB") 1024 into law expanding the
ability of patients to access medical cannabis and extending certain policies
that were temporarily enacted during the beginning of the COVID-19 pandemic.
Under HB 1024, the maximum number of clinical registrants was expanded from
eight to ten. Additionally, dispensaries are allowed to offer cannabis curbside
deliveries; patients can obtain a ninety day instead of the previous thirty-day
supply for cannabis; and the five-person cap on the number of patients that a
caregiver can serve was removed indefinitely. Patients can also now consult with
authorizing physicians via video conferencing. The law also expanded the pool of
eligible conditions to include cancer remission therapy and CNS-related
neuropathy as well as eliminated provisions that previously required chronic
pain patients to try conventional prescription pain medications prior to using
cannabis. Additionally, the law makes it easier for grower/processors to process
marijuana that failed tests for yeast and mold into products that are topical in
form. The law also expands the number of research facilities that are studying
patient response to medical marijuana.

In July 2022, Governor Wolf signed HB 311, which provides additional protections
under Pennsylvania law for financial institutions and insurers providing
services to, or for the benefit of, a "legitimate cannabis-related business." HB
311 also explicitly states that financial institutions and insurers are not
obligated to provide services to cannabis businesses within the Commonwealth.
Additionally, HB 311 requires cannabis businesses that are receiving financial
or insurance services from a provider within Pennsylvania to disclose any
suspension or revocation of cannabis-related permits, registrations, or
certifications to the financial institution and/or insurer within five business
days.

In October 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.

In Pennsylvania, the Company holds a medical marijuana grower/processor license
through its wholly owned subsidiary, Standard Farms PA, which operates 33,500
square feet of greenhouse. The Company is in compliance with Pennsylvania state
law and the related licensing framework.

Company Compliance Program


The Company is classified as having direct, indirect and ancillary involvement
in the U.S. marijuana industry and is in material compliance with applicable
licensing requirements and the regulatory framework enacted by each U.S. state
in which it operates. The Company is not subject to any citations or notices of
violation with applicable licensing requirements or the regulatory framework
enacted by each applicable U.S. state which may have an impact on its licenses,
business activities or operations.

The Company's General Counsel or any other individual appointed by the General
Counsel oversees, maintains, and implements the Company's compliance program and
personnel. In addition to the Company's internal legal and compliance
departments, the Company has state and local regulatory/compliance counsel
engaged in every jurisdiction in which it operates.

The Company's General Counsel or any other individual appointed by the General
Counsel oversees compliance training for all employees, such training includes,
but is not limited to, on the following topics:

• compliance with state and local laws;


 • 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


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                                       40

Table of Contents

• extensive ingredient and product testing, often beyond that required by law to

assure product safety and accuracy.

The Company's compliance program emphasizes security and inventory control to
ensure strict monitoring of cannabis and inventory from delivery by a licensed
distributor to sale or disposal. Only authorized and properly trained employees
are allowed to access the Company's computerized seed-to-sale system.

The Company's General Counsel or anyone appointed by the General Counsel
monitors all compliance notifications from the regulators and inspectors in each
market, timely resolving any issues identified. The Company keeps records of all
compliance notifications received from the state regulators or inspectors and
how and when the issue was resolved.

Further, the Company has created comprehensive standard operating procedures
that include detailed descriptions and instructions for receiving shipments of
inventory, inventory tracking, recordkeeping and record retention practices
related to inventory, as well as procedures for handling cash, performing
inventory and cash reconciliation, ensuring the accuracy of inventory tracking
and recordkeeping. The Company maintains accurate records of its inventory at
all licensed facilities. Adherence to the Company's standard operating
procedures is mandatory and ensures that the Company's operations are compliant
with the applicable state and local laws, regulations, ordinances, licenses,
rules and other requirements. The Company ensures adherence to standard
operating procedures by regularly conducting internal inspections and ensures
that any issues identified are resolved quickly and thoroughly.

In January 2018, U.S. Attorney General, Jeff Sessions rescinded the Cole
Memorandum. The rescission of the Cole Memorandum and other Obama-era
prosecutorial guidance did not create a change in federal law, as the Cole
Memorandum was never legally binding; however, the revocation removed the DOJ's
guidance to U.S. Attorneys that state-regulated cannabis industries operating
substantively in compliance with the Cole Memorandum's guidelines should not be
a prosecutorial priority. As an industry best practice, despite the rescission
of the Cole Memorandum, the Company continues to do the following to ensure
compliance with the guidance provided by the Cole Memorandum:

ensure the operations of its subsidiaries and business partners are compliant

with all licensing requirements that are set forth with regards to cannabis

operation by the applicable state, county, municipality, town, township,

• borough, and other political/administrative divisions. To this end, the Company

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 who hold the necessary documentation to

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

who meet the requisite age requirements;

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.



On November 7, 2018, Jeff Sessions resigned from his position as Attorney
General. The next Attorney General, William Barr, stated that he does not intend
"go after" parties who are involved in the cannabis business and are compliant
with state law in reliance on the Cole Memorandum. Under President Biden's
administration and his appointed Attorney General, Merrick Garland, DOJ rhetoric
around cannabis has largely returned to the Obama-era rhetoric even if a new
prosecutorial guidance memorandum has not been re-issued. During his Senate
confirmation, Merrick Garland told Senator Cory Booker (D-NJ) that, "It does not
seem to me useful the use of limited resources that we have to be pursuing
prosecutions in states that have legalized and are regulating the use of
marijuana, either medically or otherwise." Such statements are not official
declarations or policies of the DOJ and are not binding on the DOJ, on any U.S.
Attorney or on the U.S. federal courts, and substantial uncertainty regarding
U.S. federal enforcement remains. To date, there has been no new federal
cannabis memorandums issued by the Biden Administration or any published change
in federal enforcement policy. Regardless, the federal government of the U.S.
has always reserved the right to enforce federal law regarding the sale and
disbursement of medical or recreational marijuana, even if state law sanctioned
such sale and disbursement. Although the rescission of the Cole Memorandum does
not necessarily indicate that marijuana industry prosecutions are

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                                       41

  Table of Contents

now affirmatively a priority for the DOJ, there can be no assurance that the U.S. federal government will not enforce such laws in the future.

In the absence of a uniform federal policy, as had been established by the Cole
Memorandum, numerous U.S. Attorneys with state-legal marijuana programs within
their jurisdictions have announced enforcement priorities for their respective
offices. For instance, Andrew Lelling, former U.S. Attorney for the District of
Massachusetts through February 2021, stated that while his office would not
immunize any businesses from federal prosecution, he anticipated focusing the
office's marijuana enforcement efforts on: (1) overproduction; (2) targeted
sales to minors; and (3) organized crime and interstate transportation of drug
proceeds. Other U.S. Attorneys provided less assurance, promising to enforce
federal law, including the CSA in appropriate circumstances.

The Company will continue to monitor compliance on an ongoing basis in
accordance with its compliance program and standard operating procedures. While
the Company's operations are in full compliance with all applicable state laws,
regulations and licensing requirements, such activities remain illegal under
U.S. federal law. For the reasons described above and the risks further
described in 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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Financials (USD)
Sales 2022 175 M - -
Net income 2022 -39,7 M - -
Net Debt 2022 - - -
P/E ratio 2022 -0,52x
Yield 2022 -
Capitalization 25,5 M 25,5 M -
Capi. / Sales 2022 0,15x
Capi. / Sales 2023 0,13x
Nbr of Employees 400
Free-Float 98,6%
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Managers and Directors
Gary F. Santo President & Chief Executive Officer
Dana R. Arvidson Chief Financial Officer
Mark A. Scatterday Chairman
Tom Hayden Head-Information Technology
Oggie Fitzpatrick Head-Research & Development