TPCO HOLDING CORP. Introduction
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read together with other information, including our unaudited interim condensed consolidated financial statements and the related notes to those statements included in Part I, Item 1 of this Quarterly Report (the "Interim Financial Statements"). Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report contains certain information that may constitute forward-looking information and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, and under Canadian securities laws (collectively, "Forward-Looking Statements") which are based upon the Company's current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as "expect", "likely", "may", "will", "should", "intend", "anticipate", "potential", "proposed", "estimate" and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions "may" or "will" happen, or by discussions of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. Forward-Looking Statements in this Quarterly Report include, but are not limited to, statements with respect to:
• the performance of the Company's business and operations;
• the Company's expectations regarding revenues, expenses, liquidity and
anticipated cash needs;
• the Company's ability to complete future strategic alliances and the expected
impact thereof;
• the Company's ability to source investment opportunities and complete future
acquisitions, including in respect of entities in the United States , the
ability to finance such acquisitions, and the expected impact thereof;
• expected future sources of financing;
• the expected future business strategy, competitive strengths, goals,
expansion and growth of the Company's business, including operations and
plans, new revenue streams and cultivation and licensing assets;
• the Company's ability to grow revenue and reach long-term profitability;
• the implementation and effectiveness of the Company's distribution platform;
• expectations with respect to future production costs;
• the expected methods to be used by the Company to distribute cannabis;
• the competitive conditions of the industry;
• laws and regulations and any amendments thereto applicable to the business
and the impact thereof;
• the competitive advantages and business strategies of the Company;
• the application for additional licenses and the grant of licenses or renewals
of existing licenses that have been applied for;
• the medical benefits, viability, safety, efficacy, dosing and social
acceptance of cannabis;
• the Company's future product offerings;
• the anticipated future gross margins of the Company's operations;
• the Company's ability to source and operate facilities in
• expansion into additional
• expectations of market size and growth in
which the Company operates or contemplates future operations;
• expectations for regulatory and/or competitive factors related to the
cannabis industry generally; and
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• general economic trends.
Certain of the Forward-Looking Statements contained herein concerning the cannabis industry and the general expectations of the Company concerning the cannabis industry are based on estimates prepared by the Company using data from publicly available governmental sources as well as from market research and industry analysis and on assumptions based on data and knowledge of the cannabis industry which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein or information presented herein which is based on such data, the cannabis industry involves risks and uncertainties that are subject to change based on various factors, which factors are described further below.
Forward-Looking Statements contained in this Quarterly Report reflect management's current beliefs, expectations and assumptions and are based on information currently available to management, management's historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. With respect to the Forward-Looking Statements contained in this Quarterly Report, the Company has made assumptions regarding, among other things
(i) its ability to generate cash flows from operations and obtain any necessary financing on acceptable terms; (ii) general economic, financial market, regulatory and political conditions in which the Company operates; (iii) the output from the Company's operations; (iv) consumer interest in the Company's products; (v) competition; (vi) anticipated and unanticipated costs; (vii) government regulation of the Company's activities and products and in the areas of taxation and environmental protection; (viii) the timely receipt of any required regulatory approvals; (ix) the Company's ability to obtain qualified staff, equipment and services in a timely and cost efficient manner; (x) the Company's ability to conduct operations in a safe, efficient and effective manner; (xi) the Company's ability to meet its future objectives and priorities; (xii) the Company's access to adequate capital to fund its future projects and plans; (xiii) the Company's ability to execute on its future projects and plans as anticipated; (xiv) industry growth rates; and (xv) currency exchange and interest rates.
Readers are cautioned that the above list of cautionary statements is not exhaustive. Known and unknown risks, many of which are beyond the control of the Company, could cause actual results to differ materially from the Forward-Looking Statements in this Quarterly Report. Such lists include, without limitation, those discussed under the heading "Risk Factors" in Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC onMarch 31, 2022 (our "2021 Form 10-K") and in the Company's periodic reports subsequently filed with theSEC and in the Company's filings on SEDAR at www.sedar.com. The purpose of Forward-Looking Statements is to provide the reader with a description of management's expectations, and such Forward-Looking Statements may not be appropriate for any other purpose. You should not place undue reliance on Forward-Looking Statements contained in this Quarterly Report. Although the Company believes that the expectations reflected in such Forward-Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Forward-Looking Statements contained herein are made as of the date of this Quarterly Report and are based on the beliefs, estimates, expectations and opinions of management on the date such Forward-Looking Statements are made. The Company undertakes no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements, except as required by applicable law. The Forward-Looking Statements contained in this Quarterly Report are expressly qualified in their entirety by this cautionary statement.
Results for First Quarter of 2021 Do Not Reflect Complete Quarterly Period
Our financial results for the quarterly period ended
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Part 1 - Business Overview
The Company is a consumer-focused cannabis company based inthe United States focused on the recreational and wellness markets. The Company's high quality integrated seed-to-sale operations inCalifornia are focused on building winning brands supported by its omni-channel ecosystem. The Company's platform was designed to create one of the most socially responsible and culturally impactful companies inthe United States , producing consistent, well-priced products and culturally relevant brands that are distributed to third-party retailers as well as direct-to-consumer via the Company's delivery service and strategically located storefront retail locations acrossCalifornia . A full portfolio of products and brands that appeal to a broad range of user groups, need-states and occasions, offered at all price points, and with various brand value propositions, are produced at low cost and high caliber of quality through integrated cultivation and manufacturing. The Company believes its delivery and storefront retail outlets will allow it to achieve high gross-margins on many of its products, forge one-on-one relationships between its brands and consumers and collect proprietary consumer data and insights. The Company's operational footprint spans cultivation, extraction, manufacturing, distribution, brands, retail and delivery. The management team and directors of the Company bring together deep expertise in cannabis, consumer packaged goods, investing and finance from start-ups to publicly traded companies. The Company aims to leverage the collective industry experience of its management and directors.
As at
1) Omni-channel retail (retail, pick up and, delivery): the Company
currently operates eleven omni-channel retail locations: three in
northern California , three in central California , five in southern
California and six consumer delivery hubs.
2) Wholesale: the Company directly sells first party (i.e. produced
in-house)
and selected third party products into 450 dispensaries across
California . Additional wholesale revenue comes from sales of sourced bulk
flower and oil produced
in-house.
Revenues from these two sales channels were as follows:
Three-months Three-months
ended ended
March 31, March 31,
2022 2021
Omni-channel retail $ 19,087,337 $ 9,698,133
Wholesale 14,143,854 30,219,255
$ 33,231,191 $ 39,917,388 As the Company continues to scale and integrate its business, it is incurring
operating losses. The Company's loss from operations for the three months ended
Through a combination of (i) professional leadership, including the addition ofTroy Datcher onSeptember 8, 2021 , (ii) omni-channel operations, (iii) technology and data driven practices, (iv) brand and product expertise, and (v) social justice and equity advocacy, the Company intends to set the example globally as the best-in-class cannabis operation. The Company is actively evaluating cost reductions and business optimization to reduce its cash burn in the near term.
First Quarter Highlights
Operations
During the quarterly period ended
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To further improve operating results, the Company is evaluating options including: subleasing excess real estate, combining operations for lower performing locations, closing or disposing of non-core assets, a strategic review of its wholesale business, and general & administrative cost reductions.
The Company has also changed its mergers & acquisitions strategy going forward to be more opportunistic and selective rather than as a core function to achieve rapid growth.
Senior Leadership Changes
During the first quarter of 2022, the Company strengthened the senior management
team with the appointments of
On
Sale and Leaseback of Pullman Property
During the first quarter of 2022, the Company completed the sale and leaseback
of its property on
Social Equity
During the first quarter of 2022, the Company entered into a 50/50 agreement
with
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Table of Contents Results of OperationsTPCO Holding Corp.
Interim condensed consolidated statements of operations and comprehensive (loss)
income
(Unaudited, in
Three-months ended
March 31, 2022 March 31. 2021
Sales, net of discounts $ 33,231,191 $ 39,917,388
Cost of sales 25,046,809 32,874,268
Gross profit 8,184,382 7,043,120
Impairment loss - 58,030,387
Operating expenses 40,615,443 62,971,834
Loss from operations (32,431,061 ) (113,959,101 )
Other income (expense)
Interest expense (1,250,568 ) (1,173,872 )
Loss on disposal of assets (254,473 ) -
Change in fair value of investments 297,864 -
Change in fair value of contingent consideration 388,622 131,093,854
Other income 307,956 (110,249 )
(510,599 ) 129,809,733
(Loss) income before income taxes (32,941,660 ) 15,850,632
Income tax (recovery) expense (594,872 ) 3,210,622
(Loss) income and comprehensive (loss) income )
$ (33,536,532 $ 19,061,254
(Loss) income and comprehensive (loss) income )
attributable to controlling shareholders (33,691,877 19,061,254
(Loss) income and comprehensive (loss) income
attributable to non-controlling shareholders 155,345 -
)
(33,536,532 19,061,254
On
During 2021, the Company acquired (or acquired the right to operate, with
closing of the acquisition subject to satisfaction of certain closing
conditions) several higher margin omni-channel retail businesses as part of its
growth strategy including:
The lower sales revenue reported in Q1 2022 ($33,231,191 ) compared to Q1 2021 ($39,917,388 ) reflect the re-focus onto the higher gross margin omni-channel retail as opposed to higher revenue but lower margin wholesale business. This shift in business mix is evidenced by the significantly higher gross margin of 24.6% in Q1 2022 compared to 17.6% in Q1 2021. Gross profit realized in absolute dollars terms also increased to$8,184,382 in Q1 2022 from$7,043,120 in Q1 2021 on a lower revenue base reflecting the higher margin nature of the business. 31
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Sales Revenue
Revenue by sales channel for the three months ended
Three-months Three-months
ended ended
March 31, 2022 March 31, 2021
Omni-channel retail $ 19,087,337 $ 9,698,133
Wholesale 14,143,854 30,219,255
$ 33,231,191 $ 39,917,388 Our financial results for the quarterly period ended Q1 2021 did not include the
operating results from
Omni-channel retail (Retail, Pick up, Delivery)
As of
Revenues earned from omni-channel retail sales in the three months ended
The Company achieved this very strong omni-channel retail growth as the comparative period did not include the financial results contributed by Kase's Journey, Martian Delivery, Coastal and Calma all of which were acquired subsequent toMarch 31, 2021 . Further, the Company changed the product mix to increase sales of first party in-house branded product revenues at its acquired dispensaries which generates higher gross margins over third party product offerings.
During Q1 2022, the Company launched Limited Harvest, new exclusive Caliva strains available only through its retail and delivery locations: Moto OG 28% THC, Durban Poison 35% THC, Wedding Cake 36% THC, GMO 42% THC and Gush Mints 36% THC.
Calma and "Deli by Caliva" (Bellflower) were named among the best dispensaries
in the
Wholesale
The Company directly sells first party and selected third party products
into 450 dispensaries across
Revenues earned from the Wholesale sales channel in Q1 2022 totaled
During Q1 2022, in an effort to reduce costs in this sales channel, the Company consolidated its bulk wholesale business to one location to reduce operating costs. It has also no longer offered flower trimming services and is focusing primarily on distillate oil manufacturing and bulk flower sales going forward.
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Gross Profit
Gross Profit reflects our revenue less our cost of sales costs primarily consisting of labor, materials, consumable supplies, overhead, amortization on production equipment, shipping, packaging and other expenses required to produce cannabis products.
The Company's gross profit for Q1 2022 was
The increase in gross profit in both absolute dollars terms and as a percentage of revenue is due to the shift to higher margin omni-channel retail business from lower margin wholesale as described above.
Operating Expenses
Three-months ended
March 31, 2022 March 31, 2021
General and administrative
2,249,706 174,111
Sales and marketing 3,415,737 28,995,745
Salaries and benefits 10,705,503 7,817,117
Share based compensation expense 2,242,077 8,127,779
Lease expense 1,897,827 1,168,987
Depreciation 1,099,199 993,921
Amortization of intangible assets 5,374,512 6,333,342
$ 40,615,443 $ 62,971,834 Operating expenses primarily include salaries and benefits, professional fees, rent and facilities expenses, travel-related expenses, advertising and promotion expenses, licenses, fees and taxes, office supplies and pursuit expenses related to outside services, stock-based compensation and other general and administrative expenses.
The Company recorded operating expenses of
General and administrative costs increased to
The allowance for doubtful accounts of
Salaries and benefits totaled
Lease expense increased to
Share based compensation expense decreased to
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compensation expense was primarily attributable to significant number of RSUs granted in connection with the Qualifying Transaction, as well as the fact that the market price of our common shares was lower in Q1 2022 than it was in Q1 2021.
Depreciation of property, plant & equipment of
Non-Cash
Impairment
In accordance with Accounting Standard Codification (ASC) Topic 350, the Company is required to assess its goodwill and other indefinite-lived intangible assets for impairment annually or in between tests if events or changes in circumstances indicate the carrying value of its assets may not be recovered. Further, under ASC 360, the Company is required to assess definite lived-intangible assets and long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
In Q1 2022, the Company did not observe any triggers suggesting impairment and
thus an impairment test was not performed. In Q1 2021, the Company recorded
impairment of
Other Items Interest (expense)
In Q1 2022 the Company recorded interest expense of
Contingent consideration
In Q1 2022, the Company recorded a gain on the change in the fair value of contingent consideration of$388,622 compared to$131,093,854 in Q1 2021. The Company agreed to pay certain contingent consideration in connection with its Qualifying Transaction. This contingent consideration will be fair valued at each quarter-end and the gain or loss recorded in the statement of operations and comprehensive income (loss) will be inversely related to the movement in the price of the Company's common shares.
Net Income (loss) and Comprehensive Income (Loss)
In Q1 2022, the Company recorded net loss of
Management's Use of Non-GAAP Measures This MD&A contains certain financial performance measures, including "EBITDA" and "Adjusted EBITDA," that are not recognized under generally accepted accounting principles inthe United States ("GAAP") and do not have a standardized meaning prescribed by GAAP. As a result, these measures may not be comparable to similar measures presented by other companies. For a reconciliation of these measures to the most directly comparable financial information presented in the Interim Financial Statements in accordance with GAAP, see the section entitled "Reconciliation of Non-GAAP Measures" of this MD&A. EBITDA We believe EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time or non-recurring expenses. We define "EBITDA" as net income (loss) before (i) depreciation and amortization; (ii) income taxes; and (iii) interest expense and debt amortization.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure to assess the performance of the
Company as it provides more meaningful operating results by excluding the
effects of expenses that are not reflective of our underlying business
performance and other
one-time
or
non-recurring
expenses. We define "Adjusted EBITDA" as EBITDA adjusted to exclude
extraordinary items,
non-recurring
items and, other
non-cash
items, including, but not limited to (i) stock-based compensation expense,
(ii) fair value change in contingent consideration and investments measured at
Fair Value Through Profit and Loss
(iii) non-recurring
legal and professional fees, human-resources, inventory and collections-related
expenses, (iv) intangible and goodwill impairments and loss on disposal of
assets, and (v) transaction costs related to merger and acquisition activities
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Table of Contents Reconciliation of Non-GAAP Measures
A reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable measure determined under GAAP is set out below.
Three-months ended
March 31, 2022 March 31. 2021
Net (loss) income and comprehensive (loss) income $ (33,536,532 ) $ 19,061,254
Income taxes 594,872 (3,210,622 )
Depreciation and amortization 6,473,711 7,327,263
Interest expense 1,250,568 1,173,872
EBITDA (25,217,381 ) 24,351,767
Adjustments:
Share based compensation expense 2,242,077 8,127,779
Other non-recurring items:
Fair value change of contingent consideration (388,622 ) (131,093,854 )
Change in fair value of investments at fair value
through profit or loss (297,864 ) -
Provision for notes receivable 2,249,706 -
Impairment loss - 58,030,387
De-SPAC costs 2,178,536 2,618,240
Restructuring costs - 544,616
Sales and marketing expense - 27,247,039
Adjusted EBITDA $ (19,233,548 ) $ (10,174,026 )
EBITDA
The Company's EBITDA loss for Q1 2022 was
Adjusted EBITDA
The Company's Adjusted EBITDA loss for Q1 2022 was
The Company's management views Adjusted EBITDA as the best measure of its underlying operating performance.
Liquidity and Capital Resources
We manage liquidity risk by reviewing, on an ongoing basis, our sources of
liquidity and capital requirements. As at
Cash and restricted cash equivalents are predominately invested in liquid
securities issued by
In evaluating our capital requirements, including the impact, if any, on our business from the COVID-19 pandemic, and our ability to fund the execution of our strategy, we believe we have adequate available liquidity to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities and repay scheduled principal and interest payments on debt for at least the next twelve months. Our objective is to generate sufficient cash to fund our operating requirements and expansion plans. Since the closing of the Qualifying Transaction onJanuary 15, 2021 , we have incurred net operating losses. However, management is confident in the Company's ability to grow revenue and reach long term profitability. We also expect to have access to public capital markets through our listing on the NEO Exchange, and continue to review and pursue selected external financing sources to ensure adequate financial resources. These potential sources include, but are not limited to (i) obtaining financing from traditional or non-traditional investment capital organizations; (ii) obtaining funding from the sale of our common shares or other equity or debt instruments; and (iii) obtaining debt financing with lending terms that more closely match our business model and capital needs. There can be 35
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no assurance that we will gain adequate market acceptance for our products or be able to generate sufficient positive cash flow to achieve our business plans, that additional capital or other types of financing will be available when needed, or that these financings will be on terms favorable to the Company or at all.
We expect to continue funding operating losses as we ramp up our operations with our available cash. Therefore, we are subject to risks including, but not limited to, our inability to raise additional funds through debt and/or equity financing to support our continued development, including capital expenditure requirements, operating requirements and to meet our liabilities and commitments as they come due.
Off-Balance Sheet Arrangements As of the date hereof the Company does not have any off-balance sheet financing arrangements and has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets. Contractual Obligations
The Company leases real estate used for dispensaries, production plants, and corporate offices. Lease terms for real estate generally range from 1 to 16.5 years. Most leases include options to renew for varying terms at the Company's sole discretion. Lease terms for these assets generally range from 1 to 2 years. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities, or insurance and maintenance. Rent expense for leases with escalation clauses is accounted for on a straight-line basis over the lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table provides the components of lease cost:
Three-months ended
March 31, 2022 March 31, 2021
Operating lease costs $ 1,824,078 $ 1,118,088
Short term lease expense 73,749 50,899
Lease expense 1,897,827 1,168,987
Finance lease cost:
Depreciation and amortization of lease assets 393,534 456,556
Interest on lease liabilities 1,104,601 931,079
Finance lease cost 1,498,135 1,387,635
Total lease costs $ 3,395,962 $ 2,556,622 The following table provides the maturity of the Company's contractual
undiscounted lease liabilities as of
Operating Lease Finance Lease
Remainder of 2022 $ 5,884,559 $ 3,376,939
2023 6,294,684 4,625,156
2024 5,878,102 4,763,910
2025 5,690,149 4,906,828
2026 5,274,121 5,054,033
Thereafter 23,622,067 64,884,896
Total undiscounted lease liabilities 52,643,682 87,611,762
Interest on lease liabilities (20,141,069 ) (50,835,243 )
Total present value of minimum lease payments 32,502,613 36,776,519
Lease liability - current portion 3,538,466 45,945
Lease liability $ 28,964,147 $ 36,730,574
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On
The Roc Binding Heads of Terms became effective on
Pursuant to the terms of the Roc Binding Heads of Terms, the Company issued to
Roc Nation 2,376,425 common shares following consummation of the Qualifying
Transaction in settlement of the initial
The full amount of the
In addition, pursuant to the terms of the Roc Binding Heads of Terms the Company
is obligated to issue common shares with a value of
The Company recognized an expense of
The arrangement can be terminated by the counterparty in certain circumstances,
one of which is any change of control of the Company. In that case, the Company
is required to settle the agreement in a lump sum payment that consists of all
unpaid amounts. As at
Brand Strategy Agreement
On
The Brand Strategy Agreement (a) became effective as of consummation of the Qualifying Transaction and shall remain in effect for a period of ten (10) years therefrom (the "BSA Term"); provided, that either the Company orSC Branding, LLC are permitted to terminate the Brand Strategy Agreement without any further liability to either party at any time after the date that is six (6) years after the consummation of the Qualifying Transaction. The Company is committed to settle$21,500,000 in either cash or common shares at the option ofSC Branding, LLC over the remaining non-cancellable period of 5 years.
The Company is recognizing the cost associated with the arrangement over the same period it is receiving services.
During Q1 2022, the Company recognized an expense of
The Brand Strategy Agreement can be terminated in certain circumstances,
including a change in control of the Company or an involuntary
de-listing.
In these circumstances, the Company will be obligated to pay damages equal to
Mosaic.Ag
On
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Critical Accounting Estimates
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Estimates in our 2021 Form 10-K. There have been no material changes to our critical accounting estimates from the information provided in our 2021 Form 10-K.
Cash Flow
The table below highlights our cash flows for the periods indicated:
Three-months ended
March 31, 2022 March 31. 2021
Cash provided by (used in)
Operating activities
Net (loss) income )
$ (33,536,532 $ 19,061,254
Adjustments for items not involving cash
Impairment loss - 58,030,387
Change in fair value of investments )
(297,864 -
Interest expense 1,250,568 1,173,872
Interest income )
(26,932 -
Allowance for accounts receivable and notes
receivable 2,249,706 174,111
Loss on disposal of assets 254,473 -
Depreciation and amortization 6,473,711 7,327,263
Shares issued for long-term strategic contracts - 25,000,000
Stock compensation expense, net of settlement of
withholding tax 2,037,275 8,127,779
Non-cash marketing expense 1,363,636 1,075,758
Non-cash operating lease expense 1,824,078 1,118,088
Fair value change of contingent consideration )
(388,622 (131,093,854 )
Deferred income tax recovery )
(1,083,787 (3,405,622 )
Repayment of lease liabilities )
(1,614,967 (865,071 )
Net changes in non-cash working capital items )
(4,345,366 (38,931,471 )
Total operating ) )
activities (25,840,623 (53,207,506
Financing activities
Proceeds from notes receivable 186,106 -
Proceeds from private placement - 51,635,000
Redemption of Class A restricted voting shares - (264,318,686 )
Repayment of finance lease liabilities )
(1,116,504 (722,700 )
Repayment of consideration payable )
(383,333
Repayment of line of credit - (1,000,000 )
Total financing ) )
activities (1,313,731 $ (214,406,386
Investing activities
Advances for investments )
(150,000 -
Net cash paid in business combinations - (28,143,886 )
Proceeds from sale of property and equipment 5,769,040
Purchases of property and equipment )
(1,124,990 (532,208 )
Total investing )
activities 4,494,050 (28,676,094
Net change in cash during the period ) )
(22,660,304 (296,289,986
Cash
Beginning of year $ 174,892,298 $ 582,622,025
End of year $ 152,231,994 $ 286,332,039
Operating Activities
Cash used in operating activities in Q1 2022 totaled $25,840,623 as compared to
cash used in operating activities of $53,207,506 in Q1 2021. In the current
period, this represents an average operating cash burn rate during Q1 2022 of
$7,165,086 month excluding changes in
non-cash
working capital. In Q1 2021, the Company settled significant payables related to
its Qualifying Transaction which closed on January 15, 2021 . The Company is
evaluating a number of options to improve operating results, including:
subleasing excess real estate, combining operations for lower performing
locations, closing or disposing of
non-core
assets, a strategic review of its wholesale business, and general &
administrative cost reductions.
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Financing Activities
Cash used in financing activities totaled
Investing Activities
Cash provided by investing activities in the Q1 2022 totaled
Commitments and Contingencies
California Operating Licenses
The Company's primary activity is the cultivation and sale of adult use cannabis
pursuant to
The Company's operation is sanctioned by theState of California and local jurisdictions. Due to the uncertainty surrounding the Company's noncompliance with the CSA, the potential liability from any non-compliance cannot be reasonably estimated, and the Company may be subject to regulatory fines, penalties or restrictions in the future.
Effective
In
The Company's prior licenses obtained from the local jurisdictions it operated in have been continued by such jurisdictions and are necessary to obtain state licensing.
The Company has received annual licenses from its local jurisdiction in which it
actively operates. Although the Company believes it will continue to receive the
necessary licenses from the
Additional regulations relating to testing that came into effect onJuly 1, 2018 (Phase II testing requirements) required the clients to sell products that would be non-compliant prior to that date, causing a loss of margin due to discounts that had to be provided to ensure that such products were sold prior toJuly 1 . Due to the additional 39
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testing requirements effective
Other Legal Matters
From time to time in the normal course of business, the Company may be subject to legal matters such as threatened or pending claims or proceedings. We are not currently a party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims that could have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation or claim be resolved unfavorably.
The Company formed a wholly owned subsidiary to serve as its social equity fund
during the during 2021 with an initial commitment of
Share Capital and Capital Management
As of
The Company has an equity incentive plan (the "Equity Incentive Plan") that permits the grant of stock options, RSUs, deferred share units, performance share units and stock appreciation rights to non-employee directors and any employee, officer, consultant, independent contractor or advisor providing services to the Company or any affiliate. As ofMarch 31, 2022 , a total of 2,850,643 RSUs were outstanding under the Equity Incentive Plan.
Prior to closing of the Qualifying Transaction, Caliva maintained the
Prior to closing of the Qualifying Transaction, LCV maintained the Amended and Restated 2018 Equity Incentive Plan (the "LCV Equity Plan") which authorized LCV to grant to its employees, directors and consultants stock options and other equity-based awards. In connection with the Qualifying Transaction, LCV and the Company agreed that the Company would maintain the LCV Equity Plan and that outstanding awards thereunder will entitle the holder to receive common shares of the Company. There are currently 16,950 options to purchase up to 16,950 common shares under the LCV Equity Plan outstanding. No further awards will be granted under the LCV Equity Plan.
The Company manages its capital with the following objectives:
• To ensure sufficient financial flexibility to achieve the ongoing
business objectives including of future growth opportunities, and pursuit
of accretive acquisitions; and
• To maximize shareholder return through enhancing the share value.
The Company considers its capital to be total equity. The Company manages
capital through its financial and operational forecasting processes. The Company
reviews its working capital and forecasts its future cash flows based on
operating expenditures, and other investing and financing activities. Selected
information is provided to the Board of Directors of the Company. The Company's
capital management objectives, policies and processes have remained unchanged
during the three months ended
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Intellectual Property
The Company has a portfolio of industry leading products and brands. As part of
the Company's brand strategy, it strives to protect its proprietary products and
brand elements and its brand as
Additionally, the Company partners from time to time with other companies and pursues further IP protection through licensing and collaboration with those partners.
The Company seeks to protect its proprietary information, in part, by executing confidentiality agreements with third parties and partners and non-disclosure and invention assignment agreements with its employees and consultants. These agreements are designed to protect its proprietary information and ensure ownership of technologies that are developed through its relationship with the respective counterparty. The Company cannot guarantee, however, that these agreements will afford it adequate protection of its intellectual property and proprietary information rights.
Competitive Conditions
As the Company is vertically integrated it competes on multiple fronts, from
manufacturing to retail to delivery, and experience competition in each of these
areas. From a retail perspective, the Company competes with other licensed
retailers and delivery companies in the geographies where retail and delivery
services are located. These other retailers range from small local operators to
more significant operators with a presence throughout the
Specialized Knowledge, Skills, Resources & Equipment
Knowledge with respect to cultivating and growing cannabis is important in the medical cannabis industry. The nature of growing cannabis is not substantially different from the nature of growing other agricultural products. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are meticulously defined and controlled to produce consistent product and to avoid contamination.
The Company grows or procures the primary component of its finished products, namely cannabis. The Company's cultivation operations are dependent on a number of key inputs and their related costs including raw materials and supplies related to its growing operations, as well as electricity, water and other utilities.
Staff with suitable horticultural and quality assurance expertise are generally available on the open market. The Company also requires client care staff, which will grow as its business grows. Customer care staff are also generally available on the open market.
Equipment used is specialized but is readily available and not specific to the cultivation of cannabis. Subject to available funding, the Company does not anticipate any difficulty in obtaining equipment.
The Company anticipates an increased demand for skilled manpower, energy resources and equipment in connection with the Company's expected continued growth.
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Cannabis Industry Regulation
OnFebruary 8, 2018 , the Canadian Securities Administrators revised their previously released Staff Notice 51-352 - Issuers withU.S. Marijuana-Related Activities (" Staff Notice 51-352
"), which provides specific disclosure expectations for issuers that currently
have, or are in the process of developing, cannabis-related activities in
The Company derives a substantial portion of its revenues from state legalized:
(i) cannabis, and products containing cannabis, used by someone 21 or older that
is not a medical cannabis patient (where use may include inhalation,
consumption, or application) ("
Adult-Use
Cannabis
") and (ii) to a lesser extent, cannabis and products containing cannabis used
by medical cannabis patients in accordance with applicable state law, but for
which no drug approval has been granted by the United States Food and Drug
Administration (where use may include inhalation, consumption, or application)
("
Medical-Use
Cannabis
") ((i) and (ii) collectively "
Regulated Cannabis
"). The Regulated Cannabis industry is illegal under U.S. Federal Law. The
Parent Company is directly involved (through its licensed subsidiaries) in both
the
Adult-Use
Cannabis and
Medical-Use
Cannabis industry in the State of California which has legalized and regulated
such industries.
The United States federal government regulates certain drugs through the
Controlled Substances Act (21 U.S.C. §§
801-971)
(the "
CSA
") and through the Food, Drug & Cosmetic Act (21 U.S.C. §§
301-392)
(the "
FDCA
"). The CSA schedules controlled substances, including "marihuana" (defined as
all parts of the plant
cannabis sativa L.
containing more than 0.3 percent THC), based on their approved medical use and
potential for abuse. Marihuana (also referred to as cannabis) and THC ("except
for tetrahydrocannabinols in hemp") are each classified as Schedule I controlled
substances (21 U.S.C. § 812(c)). The Drug Enforcement Administration ("
DEA
"), an agency of the U.S. Department of Justice (the "
DOJ
") defines Schedule I drugs, substances or chemicals as "drugs with no currently
accepted medical use and a high potential for abuse." The United States Food and
Drug Administration (the "
FDA
"), which implements and enforces the FDCA, regulates, among other things, drugs
used for the diagnosis or treatment of diseases. The FDA has not approved
cannabis as a safe and effective treatment for any medical condition, and
regularly issues
cease-and-desist
letters to manufacturers of CBD products making health claims to consumers in
contravention of the FDCA. The FDA has approved drugs containing THC and CBD,
individual cannabinoids in the plant
cannabis sativa L.
, for a narrow segment of medical conditions.
State laws that permit and regulate the production, distribution and use of
Medical-Use
Cannabis or
Adult-Use
Cannabis are in direct conflict with the CSA, which makes cannabis and THC
distribution and possession federally illegal. Although certain states and
territories of the U.S. authorize Medical- Use Cannabis or
Adult-Use
Cannabis production and distribution by licensed or registered entities, under
U.S. federal law, the possession, cultivation, and/or transfer of cannabis and
THC is illegal and any such acts are criminal acts under any and all
circumstances under the CSA. Additionally, any manufacture, possession,
distribution and/or sale of cannabis accessories, in states without laws
expressly permitting such activity, are also federally illegal activity under
the CSA. Although the Company's activities are believed to be compliant with
applicable California state and local law, strict compliance with state and
local laws with respect to cannabis does not absolve the Company of liability
under United States federal law, nor does it provide a defense to any federal
proceeding which may be brought against the Company.
As of the filing of March 1, 2022 , 37 U.S. states, and the District of Columbia
and the territories of Guam , Puerto Rico , the U.S. Virgin Islands , and the
Northern Mariana Islands have legalized the cultivation and sale of
Medical-Use
Cannabis, with at least six of the remaining states expected to pass such
legalization measures within the next 12 months. In 18 U.S. states, the sale and
possession of both
Medical-Use
Cannabis and
Adult-Use
Cannabis has been legalized, though due to the time period between a state's
legalization of commercial cannabis activities and the completion of its
regulatory framework and marketplace launch, the purchase of
Adult-Use
Cannabis is currently possible in 12 states, with the remainder of the
currently-legal states to commence sales activities in 2022 or 2023. The
District of Columbia has legalized
Adult-Use
Cannabis but has not yet permitted the commercial sale of Adult Use Cannabis,
however,
Adult-Use
sales are expected to commence in 2022. Eleven states have also enacted
low-THC
/
high-CBD
only laws for medical cannabis patients. The sale and possession of both
Medical-Use
Cannabis and
Adult-Use
Cannabis is legal in the State of California , subject to applicable licensing
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requirements and compliance with applicable conditions. Included in the numbers above are ballot initiatives to legalize Adult-Use Cannabis which passed inNovember 2020 , withArizona commencing Adult-Use sales inJanuary 2021 ,New Jersey andMontana to commence Adult-Use sales in 2022,South Dakota to commence Adult-Use sales in 2023, andMississippi enacting Medical-Use cannabis legislation inJanuary 2022 , following a successful ballot initiative and subsequent invalidation on technical grounds by theMississippi State Supreme Court . Under PresidentBarack Obama , theU.S. administration attempted to address the inconsistencies between federal and state regulation of cannabis in a memorandum which then-Deputy Attorney GeneralJames Cole sent to allUnited States Attorneys onAugust 29, 2013 (the " 2013 Cole Memorandum ") outlining certain priorities for theDOJ relating to the prosecution of cannabis offenses. The 2013 Cole Memorandum noted that in jurisdictions that have enacted laws legalizing or decriminalizing Regulated Cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of Regulated Cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. TheDOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the 2013 Cole Memorandum. In light of limited investigative and prosecutorial resources, the 2013 Cole Memorandum concluded that theDOJ should be focused on addressing only the most significant threats related to cannabis, a non-exhaustive list of which was enumerated therein. OnJanuary 4, 2018 ,U.S. Attorney GeneralJeff Sessions formally issued a new memorandum (the " Sessions Memorandum "), which rescinded all "previous nationwide guidance specific to marijuana enforcement," including the 2013 Cole Memorandum. The Sessions Memorandum stated, in part, that current law reflects "Congress' determination that Cannabis is a dangerous drug and Cannabis activity is a serious crime", andMr. Sessions directed allU.S. Attorneys to enforce the laws enacted byCongress by following well-established principles when pursuing prosecutions related to cannabis activities. There can be no assurance that the federal government will not enforce federal laws relating to cannabis in the future. As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of State-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how activeU.S. federal prosecutors will be in relation to such activities. The Company believes it is still unclear what prosecutorial effects will be created by the rescission of the 2013 Cole Memorandum. The Company believes that the sheer size of the Regulated Cannabis industry, in addition to participation by state and local governments and investors, suggests that a large- scale enforcement operation would more than likely create unwanted political backlash for theDOJ and the Biden administration in certain states that heavily favor decriminalization and/or legalization. Regardless, cannabis and THC remain Schedule I controlled substances at the federal level, and neither the 2013 Cole Memorandum nor its rescission has altered that fact. The federal government ofthe United States has always reserved the right to enforce federal law in regard to the manufacture, distribution, sale and disbursement of Medical-Use Cannabis or Adult-Use Cannabis, even if state law permits such manufacture, distribution, sale and disbursement. The Company believes, from a purely legal perspective, that the criminal risk today remains similar to the risk onJanuary 3, 2018 . It remains unclear whether the risk of enforcement has been altered. Additionally, underUnited States federal law, it is a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of Regulated Cannabis or any other Schedule I controlled substance. Canadian banks are likewise hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions, particularly those that are federally chartered inthe United States , could be prosecuted and possibly convicted of money laundering for providing services to Regulated Cannabis businesses. WhileCongress is considering legislation that may address these issues, there can be no assurance that such legislation passes. Despite these laws, theU.S. Department of the Treasury's Financial Crimes Enforcement Network (" FinCEN ") issued a memorandum onFebruary 14, 2014 (the " FinCEN Memorandum ") outlining the pathways for financial institutions to bank state-sanctioned Regulated Cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the 2013 Cole Memorandum and stated that in some circumstances, it is possible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a Suspicious Activity Report (" SAR ") in connection with all cannabis-related banking activities by any client of such financial institution, in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories-cannabis limited, cannabis priority, and cannabis 43
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terminated-based on the financial institution's belief that the business in
question follows state law, is operating outside of compliance with state law,
or where the banking relationship has been terminated, respectively. On the same
day that the FinCEN Memorandum was published, the
However, former Attorney General Sessions' rescission of the 2013 Cole Memorandum and the 2014 Cole Memorandum has not affected the status of the FinCEN Memorandum, nor has theDepartment of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memorandum and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum is a standalone document which explicitly lists the eight enforcement priorities originally cited in the 2013 Cole Memorandum. As such, the FinCEN Memorandum remains intact, indicating that theDepartment of the Treasury and FinCEN intend to continue abiding by its guidance. However, FinCEN issued further guidance onDecember 3, 2019 , in which it acknowledged that the Agricultural Improvement Act of 2018 (the " Farm Bill ") removed hemp as a Schedule I controlled substance and authorized theUnited States Department of Agriculture ("USDA ") to issue regulations governing, among other things, domestic hemp production. The guidance states that because hemp is no longer a controlled substance under federal law, banks are not required to file SARs on these businesses solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. The guidance further notes that for hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants. FinCEN noted in itsDecember 2019 guidance that the 2014 SAR reporting structure for cannabis remains in place even with the passage of the Farm Bill and this additional guidance related to hemp. FinCEN confirmed this point in guidance issued onJune 29, 2020 , and clarified that, if proceeds from cannabis-related activities are kept separate, a SAR filing is only required for the cannabis-related part of a business that engages in both cannabis and hemp activity. Although the 2013 Cole Memorandum has been rescinded, one legislative safeguard for the Medical-Use Cannabis industry has historically remained in place:Congress adopted a so-called "rider" provision to the fiscal years 2015, 2016, 2017, and 2018, 2019 and 2020 and 2021. Consolidated Appropriations Acts (currently referred to as the " Rohrabacher/Blumenauer Amendment ") to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated Medical-Use Cannabis actors operating in compliance with state and local law. OnMarch 15, 2022 , the Rohrabacher/Blumenauer Amendment was renewed through the signing of the fiscal year 2022 omnibus bill, which extended the protections of the Amendment throughSeptember 30, 2022 . The Rohrabacher/Blumenauer Amendment may or may not be included in a subsequent omnibus appropriations package or a continuing budget resolution. Should the Rohrabacher/Blumenauer Amendment not be renewed upon expiration in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Company.
The
In recent years, certain temporary federal legislative enactments that protect the Medical-Use Cannabis and industry have also been in effect. For instance, cannabis businesses that are in strict compliance with state law receive a measure of protection from federal prosecution by operation of a temporary appropriations measures that has been enacted into law as an amendment (or " rider ") to federal spending bills passed byCongress and signed by Presidents Obama, Trump and Biden. First adopted in the Appropriations Act of 2015,Congress has included in successive budgets since a "rider" that prohibits theDOJ from expending any funds to enforce any law that interferes with a state's implementation of its own medical cannabis laws. The rider, discussed above, is known as the " Rohrbacher-Blumenauer " Amendment, and now known colloquially as the " Joyce- 44
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Amendment
" after its most recent sponsors. The rider was renewed on
Despite the legal, regulatory, and political obstacles the Regulated Cannabis industry currently faces, the industry has continued to grow. Under certain circumstances, the federal government may repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit Regulated Cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Until that happens, the Company faces the risk of federal enforcement and other risks associated with the Company's business.
To the knowledge of management of the Company, there have not been any
statements or guidance made by federal authorities or prosecutors regarding the
risk of enforcement action in
The Company's objective is to capitalize on the opportunities presented as a result of the changing regulatory environment governing the cannabis industry inthe United States . Accordingly, there are a number of significant risks associated with the business of the Company. Unless and until theUnited States Congress amends the CSA with respect to Medical-Use Cannabis or Adult-Use Cannabis, there is a risk that federal authorities may enforce current federal law, and the business of the Company may be deemed to be producing, cultivating, extracting, or dispensing "marihuana" or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation ofU.S. federal law.
The Company has received and continues to receive legal input, in verbal and
written form (including opinions when required), regarding (a) compliance with
applicable state and local regulatory frameworks and (b) potential exposure and
implications arising from
The 2013 Cole Memorandum and the Rohrabacher/Blumenauer Amendment gave Medical-Use Cannabis operators and investors in states with legal regimes greater certainty regarding federal enforcement as to establish Regulated Cannabis businesses in those states. While the Sessions Memorandum has introduced some uncertainty regarding federal enforcement, the Regulated Cannabis industry continues to experience growth in legal Medical-Use Cannabis and Adult-Use Cannabis markets acrossthe United States .U.S. Attorney GeneralJeff Sessions resigned onNovember 7, 2018 . Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, even under aBiden Administration's DOJ or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until theUnited States Congress amends the CSA with respect to cannabis and THC (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce currentU.S. federal law.
Despite the expanding market for Regulated Cannabis, traditional sources of financing, including bank lending or private equity capital, are lacking which can be attributable to the fact that cannabis remains a Schedule I substance under the CSA. These traditional sources of financing are expected to remain scarce unless and until the federal government legalizes cannabis cultivation and sales.
Exposure to
The Company operates in
California Regulatory Landscape
In 1996,
In 2003, Senate Bill 420 was signed into law establishing
not-for-profit
medical cannabis collectives and dispensaries, and an optional identification
card system for
Medical-Use
Cannabis patients.
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InSeptember 2015 , theCalifornia legislature passed three bills collectively known as the Medical Cannabis Regulation and Safety Act (" MCRSA "). The MCRSA established a licensing and regulatory framework for Medical-Use Cannabis businesses inCalifornia . The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies, and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, inNovember 2016 , voters inCalifornia passed Proposition 64, the Adult Use of Marijuana Act (" AUMA "), creating an Adult-Use Cannabis program for adults 21 years of age or older. InJune 2017 , theCalifornia State Legislature passed Senate Bill No. 94, known as Medicinal and Adult-Use Cannabis Regulation and Safety Act (" MAUCRSA "), which amalgamated MCRSA and AUMA and provided for a set of regulations to govern a medical and adult-use licensing regime for cannabis businesses in theState of California . The four agencies that regulate cannabis at the state level are theBureau of Cannabis Control (" BCC "), CalCannabis at theCalifornia Department of Food and Agriculture (" CalCannabis "), and theManufactured Cannabis Safety Branch California Department of Public Health (" MCSB "), andCalifornia Department of Tax andFee Administration . MAUCRSA went into effect onJanuary 1, 2018 . MAUCRSA was then amended and restated inJuly 2021 through the annual budget trailer bill process to, among other things, consolidate the three state licensing agencies-BCC, CalCannabis and MCSB-into a single licensing authority known as theDepartment of Cannabis Control (" DCC "). Subsequent to the agency consolidation, the newly formed DCC consolidated the three separate sets of BCC, CalCannabis, and MCSB regulations into a single set of state regulations, which regulations went into effect as ofSeptember 27, 2021 . To legally operate a Medical-Use Cannabis or Adult-Use Cannabis business inCalifornia , the operator must generally have both a local and state license. This requires license holders to operate in cities with cannabis licensing programs. Therefore, counties and cities inCalifornia are allowed to determine the number of licenses they will issue to cannabis operators, or can choose to outright ban the siting of cannabis operations in their jurisdictions.
California Licensing Requirements
A storefront retailer license with an "M-designation" permits (i) the purchase of cannabis goods that are "For Medical Use Only" from licensed distributors (ii) the sale of such medicinal cannabis goods to medicinal cannabis patients inCalifornia who possesses a physician's recommendation. Only certified physicians may provide medicinal cannabis recommendations. A storefront retailer license with an "A-designation" permits the sale of cannabis and cannabis products to any individual age 21 years of age or older regardless of whether they possess a physician's recommendation. A storefront retailer license with both the M- and A-designations is permitted to do all of the above described in this paragraph. Where the local jurisdiction permits, a state storefront retailer license allows the retailer to engage in delivery of cannabis goods to retail customers. A non-storefront license permits the same delivery activity, but does not permit the licensee to operate a retail storefront.
A distribution license permits the license holder to engage in the procurement, sale, and transport of cannabis and cannabis products between licensees.
An
adult-use
or medicinal cultivation license permits cannabis cultivation which means any activity involving the planting, growing, harvesting, drying, curing, grading or trimming of cannabis. Such licenses further permit the production of a limited number of "non-manufactured cannabis products" and the sales of cannabis to certain licensed entities within theState of California for resale or manufacturing purposes.
An
adult-use
or medical manufacturing license permits the manufacturing of "manufactured
cannabis products". Manufacturing includes the compounding, blending,
extracting, infusion, packaging or repackaging, labeling or relabeling, or other
preparation of a cannabis product in the
Holders of cannabis licenses in
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California Reporting Requirements
TheState of California uses METRC as the state's track-and-trace system used to track commercial cannabis activity and movement across the distribution chain for all state-issued licensees. The system allows for other third-party system integration via application programming interface. Only licensees have access to METRC.
California Storage and Security
To ensure the safety and security of cannabis business premises and to maintain
adequate controls against the diversion, theft, and loss of cannabis or cannabis
products,
• limit access to dispensary premises to medical cannabis patients at
least 18 years and older, and adults 21 and over maintain a fully
operational security alarm system;
• contract for professionally-certified security guard services;
• maintain a video surveillance system that records continuously 24 hours a
day;
• ensure that the facility's outdoor premises have sufficient lighting;
• not dispense from its premises outside of permissible hours of operation;
• limit the amount of cannabis goods dispensed to individual customers to
prevent diversion;
• store cannabis and cannabis product only in areas per the premises
diagram submitted to the State of California during the licensing
process;
• store all cannabis and cannabis products in a secured, locked room or a
vault; report to local law enforcement within 24 hours after being
notified or becoming aware of the theft, diversion, or loss of cannabis;
and
• ensure the safe transport of cannabis and cannabis products between
licensed facilities, maintain a delivery manifest in any vehicle
transporting cannabis and cannabis products. Only vehicles registered
with the BCC that meet BCC distribution requirements are to be used to
transport cannabis and cannabis products.
California Home Delivery Requirements
The
• All deliveries of cannabis goods must be performed by a delivery employee
(at least 21 years of age) who is directly employed by a licensed
retailer.
• All deliveries of cannabis goods must be made in person to a physical
address that is not on public land.
• Prior to providing cannabis goods to a delivery customer, a delivery
employee must confirm the identity and age of the delivery customer (as
is required if such customer was purchasing the product in the physical
dispensary) and ensure that all cannabis goods sold comply with the
regulatory requirements.
• A licensed cannabis entity is permitted to contract with a service that
provides a technology platform to facilitate the sale and delivery of
cannabis goods, in accordance with all of the
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following: (1) the licensed cannabis entity does not allow for delivery
of cannabis goods by the technology platform service provider; (2) the
licensed entity does not share in the profits of the sale of cannabis
goods with the technology platform service provider, or otherwise provide
for a percentage or portion of the cannabis goods sales to the technology
platform service provider; (3) the licensed cannabis entity does not
advertise or market cannabis goods in conjunction with the technology
platform service provider, outside of the technology platform, and
ensures that the technology platform service provider does not use the
licensed cannabis entity's license number or legal business name on any
advertisement or marketing that primarily promotes the services of the
technology platform; and (4) provides various disclosures to customers
about the source of the delivered cannabis goods.
Laws Applicable to Financial Services for Regulated Cannabis Industry
All banks are subject to federal law, whether the bank is a national bank or state-chartered bank. At a minimum, most banks maintain federal deposit insurance which requires adherence to federal law. Violation of federal law could subject a bank to loss of its charter. Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the Currency and Foreign Transactions Reporting Act of
1970 (31 U.S.C. § 5311 et seq ) (commonly known as the " Bank Secrecy Act "). For example, under the Bank Secrecy Act, banks must report to the federal government any suspected illegal activity, which would include any transaction associated with a Regulated Cannabis-related business. These reports must be filed even though the business is operating in compliance with applicable state and local laws. Therefore, financial institutions that conduct transactions with money generated by Regulated Cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA.
FinCEN issued guidance in
As a result, many banks are hesitant to offer any banking services to Regulated Cannabis-related businesses, including opening bank accounts. While the Company currently has bank accounts, its inability to maintain these accounts or the lack of access to bank accounts or other banking services in the future, would make it difficult for the Company to operate its business, increase its operating costs, and pose additional operational, logistical and security challenges. Furthermore, it remains unclear what impact the rescission of the 2013 Cole Memorandum and 2014 Cole Memorandum will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities.
Ongoing Compliance Overview The Company is subject to the general licensing and regulatory framework inCalifornia set out under the heading " United States Regulatory Environment -California ". The Company has developed a compliance program designed to achieve its strategic business goals while protecting the organization and operations. The Company's compliance program integrates external regulations with internal rules and procedures to effectively lay out expectations for employee duties and behaviors; this aligns the goals of its employees with those of the Company 48
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and helps the Company's operations run smoothly. The Company focuses on upholding policies and procedures that ensure the organization and its employees comply with applicable laws and regulations.
Employee Training
The Company is in process of training employees, and in completing development of and instituting a robust online training center for employees, in connection with its compliance program's objectives, relevant policies and procedures, and the basic components of the compliance program. Such training includes additional specialized training for various policies and procedures that are applicable to specific job functions and/or departments where needed to properly perform their jobs. Training is tracked, attested to, and documented. Training is tracked, attested to, and documented.
Inventory and Security Policies
Maintaining security and inventory control is important to the Company and it has adopted a number of policies, procedures, and practices in these areas:
Security: The Company has taken extensive security measures including implementing professionally vetted policies, procedures, and systems to provide comprehensive protection, not only for its physical plant and inventory, but also for its employees, customers, and the surrounding public. Every licensed facility has strict access controls, thorough video surveillance coverage, and burglar alarms linked directly to local police departments. These controls are supported by professionally certified on-site security personnel in certain instances. Inventory: The Company maintains inventory control and reporting systems that document the present location, amount, and a description of all cannabis and cannabis products at all facilities. The traceability of cannabis goods is maintained using theCalifornia's "Track-and-Trace" system, METRC, and the Company's integrated enterprise resource planning system (" ERP "). The Company conducts regular continuous cycle counts in addition to both quarterly and annual manual inventory reconciliations, in accordance with regulations and best practices.
Operational Compliance
Internal audits are conducted quarterly in the normal course. These audits allow us to identify and monitor the Company's strengths and weaknesses, highlighting continuous opportunities for improvement. These internal audits also provide us an opportunity to reinforce best practices and to institute changes in areas that are identified as opportunities for improvement. The information discovered and obtained during these internal audits is used to improve the compliance programs, when necessary, by revising policies, strengthening training, and establishing better reporting processes. The focus of the Company's internal compliance audit is to ensure it is compliant with both state and local laws and regulations and internal policies and procedures. Internal audits may be delayed or completed remotely by video from time to time as a result of COVID-19 precautions.
Big Data Analysis
The Company has invested in a highly scalable data architecture and platform built using leading technologies and tools. By extracting data from its ERP software and the California METRC track and trace system and subsequently organizing it in its data warehouse, the Company has enabled critical data and insights for its compliance efforts. The Company's data warehouse secures and stores all data and transactions at frequent intervals, allowing extensive access and analysis to information that is current. The Company has the ability to understand precise movement of inventory or dollars, past or present, required for review or due diligence as related to compliance requirements or inquiries. The Company is using this data infrastructure proactively to track, monitor and reconcile inventory levels and for ongoing reconciliation with METRC.
Ongoing Compliance
The Company prides itself on a robust internal compliance program encompassing
both the compliance measures described above as well as monitoring compliance
with
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changing landscape of state and local law while employing an external consultant
and two external law firms that assist in the monitoring, notification, and
interpretation of any changes. Additionally, the Company currently implements
and maintains standard operating procedures ("SOPs") that are designed for
monitoring compliance with
In addition to the internal compliance team and the consultants and law firms
described above, the Company also engages local regulatory compliance counsel
and consultants in the jurisdictions in which it operates. Such counsel
regularly provides legal advice to the Company regarding compliance with state
and local laws and regulation and the Company's legal and compliance exposures
under
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