ITEM
1. BUSINESS.
Unless
the context indicates or suggests otherwise, references to “we,” “our,” “us,” the “Company,”
or “GSRX” refer to GSRX Industries Inc., a Nevada corporation, individually, or as the context requires, collectively
with its consolidated subsidiaries.
Organizational
History
GSRX
Industries Inc., formerly known as Green Spirit Industries Inc. and Cyberspace Vita, Inc. (“we”, “us”,
“our”, the “Company” or “Cyberspace”), was organized on November 7, 2006 in Nevada. We changed
our name effective June 22, 2018. Our initial business plan was related to the online sale of vitamins and supplements.
Effective May 5, 2008, we discontinued these operations. On May 11, 2017, the Company entered into an exchange agreement (the
“Exchange Agreement”), pursuant to which the Company acquired Project 1493, LLC, a limited liability company organized
under the laws of the Commonwealth of Puerto Rico (“1493”). Prior to the Exchange Agreement, we did not have any significant
assets or operations. As a result of the Exchange Agreement, 1493 became our wholly-owned subsidiary, and the business of 1493
became our business.
1493
was organized on March 24, 2011 under the name “Grey Finland Advisors, LLC.” 1493 filed a Certificate of Restoration
on March 17, 2017 and elected to change its name to “Project 1493, LLC.” 1493’s business plan relates to the
acquisition, development and operation of medical cannabis dispensaries. 1493 intends to continue its operations in Puerto Rico
and to expand the number of dispensaries in Puerto Rico. The Company also intends to expand its operations in California and may
potentially expand into other markets located within the U.S. and U.S. territories in the future. However, there can be no assurance
that we will expand into such other markets.
As
discussed below, we are in the process of expanding our business to include the extraction, manufacturing and delivery of cannabis
and hemp cannabinoid products. Our extraction and manufacturing business is being run through two recently entered-into limited
liability companies, which we refer to as Spirulinex, LLC and Sunset Connect, LLC. Our cannabinoid (“CBD”) business
is being run through our wholly-owned subsidiary Pure and Natural LLC.
Corporate
Structure
GSRX
is a holding company with the following subsidiaries:
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Project
1493, LLC, a Puerto Rico limited liability company (“1493”);
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Green Spirit Mendocino,
LLC, a California limited liability company (“Mendocino”);
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Sunset Connect Oakland,
LLC, a California limited liability company (“Sunset”);
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Green Spirit Essentials,
LLC, a California limited liability company (“GS Essentials”);
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Spirulinex, LLC,
a California limited liability company (“Spirulinex”);
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Point Arena Supply
Co., LLC, a California limited liability company (“PA Supply”);
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GSRX SUSPES, LLC.,
a California limited liability company (“SUSPES”);
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138 Main Street
PA, LLC, a California limited liability company (“138 Main”);
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511 Andalucia, LLC,
a Puerto Rico limited liability company (“511”);
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Ukiah Supply Co.,
LLC, a California limited liability company (“Ukiah”);
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Point Arena Distribution,
LLC, a California limited liability company (“PAD”);
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Point Arena Manufacturing,
LLC, a California limited liability company (“PAM”);
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Pure and Natural
LLC, a Texas limited liability company (“PaN”);
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Pure and Natural
One-TN, LLC, a Texas limited liability company (“PaN One”) and
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Pure and Natural-Lakeway
LLC, a Texas limited liability company (“PaNL”).
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Effective
June 22, 2018, we changed our name to GSRX Industries Inc. Our corporate headquarters is located at Building No. 3, P.R.
606, int. Jose Efron Ave. Dorado, Puerto Rico 00646 and our telephone number is (214) 808-8649. Our website addresses are as follows:
www.greenspiritrx.com,
www.spirulinex.com, getpureandnatural.com
and www.thegreenroomcollective.org. No information on
or through websites shall be deemed to be incorporated into this Annual Report on Form 10-K. Our common stock, par value $0.001
per share (the “Common Stock”), is quoted on the OTCQB tier of the OTC Markets, Inc. under the symbol “GSRX.”
Overview
of Business
We
operate in a rapidly evolving and highly regulated industry that, as has been estimated by some, will exceed $30 billion in revenue
by the year 2020. We have been and will continue to be aggressive in executing acquisitions and pursuing other opportunities that
we believe will benefit us in the long-term.
Through
our operating subsidiaries, we operate as a vertically integrated retail, production and cultivation company, with an emphasis
on providing the highest quality and unique medical and adult use cannabis products to the regulated cannabis industry.
We
are in the business of acquiring, developing and operating retail dispensaries, growing facilities, extraction and manufacturing
related to the cannabis industry in Puerto Rico and California. In Texas and Tennessee, we are developing and operating retail
stores selling hemp-based non-THC cannibidiol (“CBD”) products. In Puerto Rico, all of our medicinal cannabis dispensaries
operate under the name “Green Spirit RX” and our dispensary in California, located in Point Arena, Mendocino County,
operates under the name “The Green Room.” As of the date of this report, we are waiting on licenses to commence
operations of our ventures in San Francisco and Oakland. Once we commence operations, we plan to offer a broad selection of medical
and adult use products including flowers, concentrates and edibles.
Puerto
Rico Operations
We
are in the business of acquiring, developing and operating retail dispensaries, growing facilities, extraction and manufacturing
operations related to the cannabis industry in Puerto Rico and California. As of the date of this Form 10-K, we have acquired
all of the legal rights, permits, pre-qualified licenses, leasing contracts and assets pertaining to ten medical cannabis dispensaries
in Puerto Rico, five of which are in operation.
Location
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Status
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Date Opened
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Dorado
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Operating
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March 28, 2018
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Carolina
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Operating
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June 1, 2018
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Hato Rey
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Operating
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June 1, 2018
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San Juan
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Operating
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October 2, 2018
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Fajardo
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Operating
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December 28, 2018
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Isla Verde
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Permit pending
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N/A
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Bayamon
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Permit pending
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N/A
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Guaynabo
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Permit pending
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N/A
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Caguas
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Prequalification
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N/A
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Old San Juan
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Under Construction
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N/A
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Condado
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Under Construction
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N/A
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As of the date of this
report, the Isla Verde location has passed the final inspection but we are waiting for the Cannabis Board to grant the license
to open; construction has been completed on the Bayamón and Guaynabo locations and we are waiting for the permits of use
to apply for final inspection from the Cannabis Board; we are waiting for the Cannabis Board to grant the prequalification for
the Caguas location; and the Old San Juan and Condado locations are still under construction.
California
Operations
The
Green Room
On
March 7, 2018, Mendocino entered into an asset purchase agreement (the “Asset Purchase Agreement”) with a third-party
seller, pursuant to which Mendocino acquired all of the assets relating to a retail cannabis business in Point Arena, Mendocino
County, California for total cash consideration of $350,000.
On
March 26, 2018, Mendocino was granted the local permit to operate by the City of Point Arena. On April 2, 2018, Mendocino received
its State of California permit to operate its adult use and recreational cannabis dispensary.
As
of the date hereof, the retail dispensary was available for adult use sales in addition to medical cannabis. Featuring more than
15 strains grown locally and products only found in this location, many customers have made The Green Room a destination place.
Coupled with our current plans in establishing new cultivation and manufacturing operations through our other subsidiaries, we
intend to increase product offerings by producing unique product lines and branded items solely for purchase at The Green Room.
We believe that this will result in return-customers.
We
also assumed the prior owner’s delivery license, which allows delivery of The Green Room product through telephone or on-line
orders to any county in California that allows such product delivery. The delivery car is allowed to carry $3,000 of product at
retail price, but may make as many daily deliveries as necessary. Once the product is delivered, the driver must reload to continue
deliveries. The car contains GPS and a built in safe for security, and the sales proceeds are returned to the store’s safe
after each delivery to avoid having cash in the car.
Spirulinex
On
March 3, 2018, we entered into an operating agreement with Solunas Aqua Corp., a California corporation (“Solunas”),
relating to the formation of Spirulinex, LLC, a California limited liability company. Spirulinex was formed as a limited liability
company between GSRX and Solunas (the “Spirulinex”) for the purpose of carrying out the manufacturing of cannabis
and cannabinoid products for distribution in the State of California. As of the date of this report, Spirulinex had not received
the requisite license to operate.
On
April 13, 2018, Spirulinex entered into a lease agreement for a 4,500 square foot facility located in San Francisco, California
(the “Spirulinex Facility”). We believe that such facility would provide ample space to manufacture quality products
for sale to distributors and retailers throughout California, including to our dispensary in Point Arena
As
of December 31, 2018, the Spirulinex Facility was still under construction. There can be no assurance that construction will be
completed as expected.
Sunset
On
March 26, 2018, we entered into an operating agreement with Sunset Connect SF, Inc. (formerly Happy VA Corp.), a California corporation
(“Happy”), relating to the formation of Sunset Connect Oakland, LLC, a California limited liability company (“Sunset”).
Sunset was formed as a limited liability company between GSRX and Happy for the purpose of carrying out the growing of cannabis
for distribution in the State of California.
As
of the date of this report, Sunset had received the pertinent license to operate, but has not started construction of the growing
facility. In April 2019, we advised Sunset that we would no longer continue to fund the operations of Sunset.
On
May 3, 2018, Sunset entered into a sublease for a 25,000 square foot facility located in Oakland, California (the “Sunset
Facility”). We believe that such facility would provide ample space to grow and cultivate quality product for sale to distributors
and retailers in California, including our dispensary in Point Arena.
As
of December 31, 2018, the Sunset Facility was still under construction. There can be no assurance that construction will be completed
as expected.
GS
Essentials
On
March 26, 2018, we entered into an operating agreement with Sunset Connect SF, Inc. (formerly Happy VA Corp.), a California corporation
(“Happy”), relating to the formation of Sunset Connect Oakland, LLC, a California limited liability company (“Sunset”).
Sunset was formed as a limited liability company between GSRX and Happy for the purpose of carrying out the extraction of cannabis
oils for distribution in the State of California. We plan to have GS Essentials sublease space from Sunset. As noted above, Sunset
is currently in lease negotiations for a 25,000 square foot facility in Oakland, California. We expect that approximately 3,000
square feet will be allocated to GS Essentials’ extraction business.
Through
GS Essentials, we plan to run a mix of volatile and non-volatile closed loop extractions as well as an ethanol distillation process
to allow us to manufacture a broad spectrum of products, including topical applications, cartridges, oils, wax, shatter, crumble
and oral tinctures for sale in California.
Point
Arena Distribution and Manufacturing
On
February 27, 2019, Point Arena Manufacturing, LLC (“PAM”) and Point Arena Distribution, LLC (“PAD”) entered
into an operating lease for a 600 square foot building at 165 Main Street, Point Arena, California for five years beginning March
1, 2019 and ending February 28, 2024, for the purpose of manufacturing and distributing cannabis products. The lease has one (1)
five-year option.
PAM
will be manufacturing cannabis oil through the Type-6, non-volatile manufacturing process. The oil will then be self-distributed,
via PAD, to licensees to sell as-is, or infused with other approved products, such as food and ointments.
PAD
will be able to purchase and sell the cannabis products manufactured by PAM, arrange for testing of the products and conduct quality
assurance review of packaging and labeling. PAD may also arrange for transportation of the products between licensees. PAD will
be the sole distributor for PAM.
CBD
Operation
Pure
and Natural LLC
On
October 8, 2018, the Company formed Pure and Natural LLC (“PaN”) as a wholly-owned subsidiary of the Company, for
the purpose of selling its CBD products. Pure and Natural One-TN, LLC opened a retail kiosk in Governor’s Square Mall, Clarksville,
Tennessee on February 9, 2019 selling CBD products. As of the date of this report, architectural and design plans are currently
being prepared for retail stores in Nashville, Tennessee and Lakeway, Texas. We anticipate having the two stores open in the second
quarter of 2019.
PaN
is selling CBD products to wholesale customers in Texas and retail sales online through its “getpureandnatural.com”
website.
PaN has entered into four
strategic agreements to assist in promoting and bringing brand awareness to the Pure and Natural name. PaN has entered into the
following agreements: (i) on February 20, 2019 PaN and BYB Extreme Fighting Series, LLC (“BYB”) entered into a sponsorship
agreement (“Agreement”) to sponsor three events of the BYB EXTREME Series. PaN will be the “Title Sponsor”
and the events will be promoted as the exclusive sponsor for “BYB Brawl For It All Presented by GetPureAndNatural.com”,
which includes having “GetPureAndNatural.com” on events and broadcasts, the triangle cage and mat, ring cards, advertisements,
BYB website, social media posts and will be the official CBD Products of DADA 5000 and BYB Fighting Series; (ii) on March 5, 2019
PaN and JCD3 Enterprises, Inc. (“JCD3”) entered into a sponsorship agreement to sponsor a Musical Artist’s (“Artist”)
2019 musical tour. The sponsorship terminates December 31, 2019. For consideration given, the Artist will make social media posts,
mention PaN in official “YouTube” videos, displays at concerts, make three (3) appearances at the PaN
store in Nashville and PaN will have exclusive sponsorship rights for Artist and Artist’s tour dates with respect
to its category of products and services; (iii) on March 4, 2019, PaN and Buzznog, LLC entered into a Preferred Partner and Advertising
Agreement allowing PaN to sell cannibidiol products on Buzznog’s website, mobile applications and platforms. PaN will pay
Buzznog 20% of the gross profit margin on all products sold using Buzznog’s sites. The agreement has a term of three years
from the moment of its coming into effect; and (iv) on February 27, 2019 PaN and Matt Sorum (“Sorum”) entered into
an Endorsement Licensing and Co-Branding Agreement, to develop, market, promote and sell a unique Matt Sorum Product Line for
dietary supplements derived from hemp containing 0% THC. The Agreement is for an initial three year term, beginning February 27,
2019 and ending February 26, 2022. The Agreement may be extended with the same terms unless either party provides a 60 day notice
prior to the initial term. Sorum will be compensated (i) a royalty of 20% of Net Gross Margin of the Licensed Products; (ii) 20%
of the Net Gross Margin of any Products sold in connection with any commercial made by Sorum; and (iii) 30% of Net Gross Margin
of Licensed Products. The Company further agrees to issue Matt Sorum certain shares of common stock as further consideration under
this Agreement. The Company agrees to issue Matt Sorum 2,000 shares of its restricted common stock for each $1,000,000 in gross
revenue derived directly from the sale of Licensed Products up to a maximum of 100,000 shares during the Term of this Agreement
(the “Compensation Shares”). The Compensation Shares shall be issued at the end of each year of this Agreement.
Business
Model
Medical
Cannabis Products:
We
operate as a service business specializing in the sale of medical cannabis, edibles and paraphernalia, including, oils, lotions,
THC pills, vaporizers, rigs, grinders, t-shirts, hats, logo items, and bongs and pipes with vaporizer attachments through our
strategically located licensed dispensaries.
In Puerto Rico, we have
entered into a long-term supply agreement (the “
Supply Agreement
”) to purchase our products from one of the
largest growers on the island who operates a state-of-the art facility, currently has over 36 strands of cannabis flower
available and is able to produce up to 2,000 pounds a week. Pursuant to the terms of the Supply Agreement, the supplier
agreed to sell products to us, upon the issuance by the Department of Health of Puerto Rico of the requisite operating permit
for each of the dispensaries, at up to a 20% discount to current wholesale market prices. We anticipate that based on such prices,
we will realize gross margins of approximately 75%. However, there can be no assurance that we will realize such margins. The
Company has also begun researching available locations to open its own flower growing facility in Puerto Rico in order to develop
new strains not currently found in Puerto Rico. In addition, the Company intends to continue the vertical chain with its own extraction
and manufacturing units.
In
California, we are currently operating one (1) dispensary in Point Arena. On March 6, 2019 we signed a lease to operate a dispensary
in Palm Springs, which is in the planning and permit phase; we received local permits for a manufacturing facility and distribution
business (from growers and manufacturers to retailers) in Point Arena and currently in the planning and state permit phases of
such businesses; and we are evaluating one (1) other dispensary to lease space and operate. Mendocino also holds a delivery license,
which enables the dispensary to pick up and deliver products in any county in California which allows a delivery service. Similar
to platforms such as “Uber Eats” or “Grub Hub”, a customer may place an order by telephone or the internet,
and a driver will deliver the requested product to the customer’s doorstep. The driver may carry a maximum of $3,000 of
product (retail value).
We
also intend to continue evaluating retail, extraction and manufacturing opportunities in multiple states and Puerto Rico. 1493
holds ten (10) pre-qualified locations in Puerto Rico, all of which are in various phases of development and construction. Currently,
we have one (1) dispensary in operation in California and five (5) in Puerto Rico. We are also reviewing several other possible
dispensaries in California and Puerto Rico to determine whether to continue pursuing those opportunities.
We
sell and keep inventory of the top five (5) selling brands, which will be determined by sales velocity. We use a state-of-art
CRM to track our customers, their buying habits and monthly spend. Customer Segments will be categorized by age, occupation and
medical condition.
Over
the next 12 months, we plan to continue identifying, purchasing and operating medical cannabis dispensaries in various states.
We expect to operate at least the six (6) current locations and to seek to add up to five (5) locations by the end of 2019. It
is anticipated that costs associated with purchasing or constructing the dispensary, licensing, stocking inventory and operating
these dispensaries will be approximately $1.25 million. Our current fixed overhead, which includes our ongoing leasing obligations,
is approximately $110,000 per month. We anticipate that fixed overhead will increase at such time as more dispensaries begin operations.
In addition, we expect that our fixed costs will continue to increase so long as we are successful in our plan of expansion. We
anticipate supporting our operations through the proceeds from the offerings previously conducted, from anticipated revenue once
the dispensaries become fully operational and, if necessary, through the sale of our securities in order to complete the development
of our dispensaries. However, there can be no assurance that we will be successful in raising sufficient revenues necessary to
support our operations, or that we will be successful in selling our securities.
We
anticipate earning revenue by selling medical cannabis, edibles, pills, creams, patches and oral drops, and paraphernalia such
as vaporizers. The average net profit for medical marijuana dispensaries is 20% in the U.S., according to a study conducted by
Marijuana Business Daily and the median annual revenue is $1,200,000. We aim to undercut our competition by acquiring our goods
at a lower than average cost which we anticipate will allow us, although no assurance can be given, to achieve 30% net margins,
50% higher than the industry average.
In
addition, we will focus on providing the best and most friendly customer service, and provide the highest quality brands and widest
variety possible in order to attract repeat business.
CBD
Products:
The
Company’s CBD products are made from “hemp,” which is defined as “the plant Cannabis sativa L. and any
part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts
of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight
basis.”
The
Company intends to produce and distribute its CBD products in various delivery forms including gels, tinctures, balms, pain creams,
face masks, vape pens and energy packs. The Company’s CBD operations will be completed through Pure and Natural, LLC (“PaN”)
via wholesale and online sales and through its subsidiaries operating retail stores and kiosks. PaN currently wholesales product
to customers in Texas; and sells its CBD products online through its website “getpureandnatural.com.” Two stores,
one in Nashville, Tennessee and one in Lakeway, Texas are currently in the architectural and design phase. We anticipate the two
stores will be open in the second quarter of 2019.
On
December 17, 2018, PaN entered into an operating lease for a 1,725 square foot CBD retail store at 3100 RR 620 South, Suite 200,
Lakeway, Texas for eighty six (86) months beginning May 18, 2019 and ending July 18, 2026. The lease has one five-year
option.
On
December 19, 2018, Pure and Natural, LLC entered into an operating lease for a kiosk in Governor’s Square Mall, in Clarksville,
Tennessee for fifteen (15) months beginning February 1, 2019 and ending April 30, 2020. We began operations at the kiosk
on February 9, 2019.
On
February 8, 2019, PaN entered into an operating lease for a 2,525 square foot CBD retail store at 2306 West End Avenue, Nashville,
Tennessee for five (5) years beginning February 1, 2019 and ending January 31, 2024. The lease has one five-year option.
Revenue
Streams:
We
anticipate that revenues will be generated from the following:
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Medical
Cannabis, up to 10 strains in each dispensary;
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Derivatives (oils,
lotions, edibles, THC pills);
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Paraphernalia (vaporizers,
grinders, rigs, bongs and pipes with vaporizer attachments);
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Clothing
(hats, t-shirts, logos); and
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CBD Products (softgels,
tinctures, balms, vape pens and cartridges, face masks, pain creams, pet treats);
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We
expect to realize, although no assurance can be given, approximately 30% net margins on THC edibles, approximately 40-45% net
margins on CBD edibles, 50% net margins on cannabis flower and paraphernalia and a range of approximately 20% to 60% net margins
on CBD products depending on the particular product sold and the distribution method in which it is sold.
Cost
Structure:
We
intend to price our cannabis and CBD products at below local market rates, however we intend to market certain items as “boutique”
items, such as gourmet style edibles or exotic strains and clothing and paraphernalia which we generally provide for a higher
margin.
Marketing
Our
marketing and sales strategy will be aimed at generating long-term, repeat customers, as well as attracting tourists who visit
the dispensaries who wish to purchase cannabis and cannabis products. In order to generate repeat customers, we intend to provide
the highest quality medical cannabis, at the lowest possible cost to ensure we build a loyal customer base. Further, we have built
what we believe are aesthetically pleasing dispensaries and have hired and trained all of our employees to provide excellent customer
service.
We
intend to leverage the Internet and social media platforms, including, Instagram, Facebook, Twitter, YouTube, Google+, LinkedIn,
the Yellow Pages online, texts (currently we send 175,000 texts per month), Leafly (similar to YELP for the cannabis industry)
and over 50 cannabis websites we have identified. Our marketing will focus on the wide variety of our cannabis products and their
high quality and low cost point relative to our competition. In California, in addition to the above, we intend to purchase billboards
in the vicinity of our dispensaries to gain further awareness of our locations.
We
also intend to utilize blogs, micro-ads, testimonial interviews, articles and deploy this media across all social media channels
and websites accessed by our customer targets.
The
Cannabis Industry
Market
Opportunity
The
legal cannabis markets in the United States are expanding rapidly. As of the date of this filing, thirty-three (33) states,
Washington D.C. and the territories of Guam and Puerto Rico have legalized the use of cannabis for medicinal purposes. Additionally,
ten (10) states, Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington and Washington
D.C. have legalized cannabis for adult recreational use.
We
believe the cannabis market will continue to rapidly expand as existing states broaden the definition of the approved uses
for cannabis (i.e. from medicinal to recreational use) and additional states legalize cannabis for at least some other purposes.
Despite the fact that the Federal Controlled Substances Act makes the use and possession of marijuana illegal on a national level,
recent guidance from the previous administration under President Obama suggested that it will continue to tolerate legalization
at the state level, especially when backed by strong and effective regulation. On August 29, 2013, United States Deputy Attorney
General James Cole issued the “Cole Memo” to United States Attorneys guiding them to prioritize enforcement of Federal
law away from the cannabis industry operating as permitted under state law, so long as certain requirements are met. On December
11, 2014, the DOJ issued another memorandum about its position and enforcement protocol with regard to Indian Country, stating
that the Eight Priorities in the Cole Memo would guide the United States Attorneys’ cannabis enforcement efforts in Indian
Country. On December 16, 2014, as a component of the federal spending bill, the Obama administration enacted regulations that
prohibit the DOJ from using funds to prosecute state-based legal medical cannabis programs. We believe it is significant that
in 2016, the Congressional Spending Bill specifically prevented the Justice Department from spending money to enforce the federal
ban on growing or selling cannabis in states where cannabis has been approved.
More
recently under the Trump administration, on January 4, 2018, the DOJ suspended the Cole Memo and replaced it with a new Memorandum
titled with the subject “Marijuana Enforcement” from then Attorney General Jeff Sessions (the “
Sessions Memo
”)
which provides that each U.S. Attorney has the discretion to determine which types of cannabis-related cases should be federally
prosecuted, thus ending the broad safe harbor provided under the Cole Memo.
We
continue to follow and monitor the actions and statements of the Trump administration, the DOJ and Congress’ positions on
federal law and cannabis policy. As the possession and use of cannabis is illegal under the CSA, we could be deemed to be aiding
and abetting illegal activities through the equipment we intend to sell in the U.S. and directly violating federal law by producing
Cannabis under State law. Under federal law, and more specifically the CSA, the possession, use, cultivation, and transfer of
cannabis is illegal. Our equipment could be used by persons or entities engaged in the business of possession, use, cultivation,
and/or transfer of cannabis.
As
a result, law enforcement authorities, in their attempt to regulate the illegal use of cannabis, could seek to bring an action
or actions against us, including, but not limited to, a claim of aiding and abetting another’s criminal activities or directly
violating the CSA. The federal aiding and abetting statute provides that anyone who “commits an offense against the United
States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal” (18 U.S.C.
§2(a).) Enforcement of federal law regarding cannabis would likely result in the Company being unable to proceed with our
business plans, could expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes
in banking, insurance or other business services may also affect our ability to operate our business.
Target
Markets
We
believe that not since the repeal of Prohibition in 1933, has a consumer product business opportunity of this magnitude been created
simply by changes in the law. According to an
IBISWorld
report, the cannabis industry is expected to achieve rapid growth
over the next five years. We believe the industry will continue to benefit from increasingly favorable attitudes towards medical
cannabis-based treatments and applications as acceptance and legitimacy of cannabis continues to grow.
Our
target markets are those where states or U.S. territories have legalized the production and use of cannabis, such as Puerto Rico
and California, and to add new markets in states that have recently legalized cannabis use.
Most
recently, Vermont legislatively legalized and voters in Michigan approved a ballot to legalize cannabis for adult recreational
use, bringing the total number of states with legalized recreational cannabis use to ten, in addition to the District of Columbia.
As
of the date of this filing, thirty-three (33) states, Washington D.C. and the territories of Guam and Puerto Rico have legalized
the use of cannabis for medicinal purposes. Additionally, ten (10) states, Alaska, California, Colorado, Maine, Massachusetts,
Michigan, Nevada, Oregon, Vermont, Washington and Washington D.C. have legalized cannabis for adult recreational use. While
it is difficult to estimate the amount of time it would take for a state to establish regulations relating to the sale of cannabis,
or for those businesses engaged in this activity to begin generating revenue from operations, we anticipate, but no assurance
can be given, that for new states legalizing the medical use of cannabis, revenues will begin to be realized beginning in 2019.
Continued
development of the regulated cannabis industry depends on continued legislative authorization at the state level. Progress, while
encouraging, is not assured and any number of factors could slow or halt progress in the cannabis industry.
Puerto
Rico – Market Opportunity
Puerto
Rico benefits from a large and growing tourism industry. Puerto Rico was recently chosen by The New York Times as its number one
place to visit in 2019. Importantly, patients who hold a license to buy medical marijuana in the 33 states where it is now legal
may use their patient license to purchase marijuana at Puerto Rico’s dispensaries.
The
Academic Sciences of Puerto Rico (ASPR), in collaboration with the Cannabis Doctors of Puerto Rico, conducted a certification
program for doctors to obtain the Health Department (HD) license and recommended medicinal cannabis to nearly 200,000 patients.
Accordingly, and considering that Puerto Rico is an island with a population of 3.5 million, the Company believes that
there is a potential market of 200,000 patients, or 6% of Puerto Rico’s current population. In addition, there is a potentially
very large market opportunity presented by the burgeoning tourist industry. If only 2% of the tourists visiting Puerto Rico purchase
medical marijuana, that would add another 200,000 patients on an annual basis or an average of approximately 18,000 patients per
month.
We
believe our initial locations present significant revenue potential and growth opportunity. We have strategically picked our initial
locations based on the following factors: population density, disposable income, and proximity to commercial and districts tourist
destinations.
California
– Market Opportunity
California
is the most populous state in the United States with a population of 39.3 million residents. California’s $2.67 trillion
economy is larger than any other state. If it were a country, it would be the fifth largest economy in the world. In 2016, Proposition
64 was passed allowing the use of medicinal cannabis, and effective January 1, 2018, it became legal for adult recreational use.
Proposition 64 legalized commercial cultivation and sale of cannabis in California for medical use as of the date of passage.
All cannabis activity is exclusively controlled through registration and permitting by local governments, and then the State issues
the final operating license.
According
to visitcalifornia.com, in 2017, California’s tourism experienced an eighth straight year of growth, setting a new record
for visitor spending at $132.4 billion. According to BDS Analytics, 2018 sales of cannabis products in California were approximately
$2.5 billion, making California the leading state in cannabis sales.
Medical
Cannabis Market
The
last five years have seen a dramatic shift in public opinion on medical marijuana, which is reflected in the direction of individual
states toward legalization. A
Quinnipiac University Poll
published on March 6, 2019 showed 93% of registered voters in
the United States support the use of medically prescribed cannabis. Thirty-three states and Washington, D.C., have enacted medical
cannabis laws. According to marijuanapolicyproject.com, as of December 3, 2018, there are approximately 2.6 million registered
medical marijuana patients within these states. The five states with the largest known current medical marijuana patient populations
are: Arizona, California, Colorado, Florida, Michigan and New York.
Cannabis
is used for medicinal purposes and has proven to be an effective treatment for pain relief, inflammation and a number of other
medical disorders. According to an
IBISWorld
report, new medical research and changing public opinion have boosted industry
growth.
Doctors
may prescribe ‘legalized’ medical cannabis in approved states where patients can receive a “recommendation”
from a state-approved and licensed physician for the treatment of certain conditions specified by the state. Medical cannabis
is being used to treat severe or chronic pain, inflammation, nausea and vomiting, neurologic symptoms (including muscle spasticity),
glaucoma, cancer, multiple sclerosis, post-traumatic stress disorder, anorexia, arthritis, Alzheimer’s, Crohn’s disease,
fibromyalgia, ADD, ADHD, Tourette’s syndrome, spinal cord injury and numerous other conditions. Cannabis oil has also been
proven effective in treating epileptic seizures in children.
Recreational
Cannabis Market
Ten
states have legalized recreational cannabis – Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon,
Vermont, Washington, plus Washington, D.C. In November 2012, Colorado voters legalized recreational marijuana use. This history-changing
legislation created a window of opportunity for the commercialization and state taxation of a plant group that has, until recently,
been virtually untouchable and set the wheels in motion for other states to follow. In July of 2014, Washington State launched
its recreational program, while Oregon and Alaska and the District of Columbia voted to introduce recreational programs commencing
in 2015. In November 2016, California, Maine, Massachusetts, and Nevada all passed ballot initiatives for the legalization of
recreational cannabis. In January 2018, Vermont passed a bill legalizing recreational marijuana use, becoming the first state
to legalize marijuana legislatively. In November 2018, Michigan passed a ballot initiative for the legalization of recreational
cannabis, which took effect in December 2018. A
Quinnipiac University Poll
published on March 6, 2019 showed that 60% of
registered voters in the United States support the legalization of marijuana.
Competition
We
face significant competition in all aspects of our business. Specifically, we face competition from a number of companies that
operate dispensaries, growing facilities and extraction facilities in the legal cannabis market within the United States and U.S.
territories.
While
such competition exists within the industry as a whole, there is limited competition in Puerto Rico. Currently, there are only
fifty-four dispensaries with approved licenses in Puerto Rico.
We
also anticipate additional competition from the unauthorized sale and purchase of cannabis through the “black market”
in Puerto Rico and California. Black market competition in Puerto Rico is estimated by the government at $200 million annually.
While we deem the “black market” to be a major competitor, we believe, although no assurance can be given, that we
can increase our market share by offering a greater variety of product at competitive prices and reduce risks for consumers.
Competitive
Strengths
The
Chief Scientist of Spirulinex, Sarah Rodriguez, is a leading researcher with experience in strain development and metabolic engineering
for terpene production, restructuring of carbon metabolic fluxes, cellular metabolic analysis, bio-separation, and fermentation
engineering. She holds a PhD from the University of California, Berkeley.
We
believe that consumers generally choose their dispensary based on several factors, including proximity to where they live and
work, price, quality, variety and the overall service experience. We believe that our advantage stems from our relationships with
our supplier. Our supplier, who operates a state-of-the art facility, has over 36 strands available and can produce up to 2,000
pounds a week. Our supplier, the largest in Puerto Rico in total production capacity, has agreed to sell products to us at reduced
prices which we believe will allow us to achieve 75% gross margins, all while maintaining a major price advantage over competitors.
We
also believe that we possess certain other competitive strengths and advantages in the industries in which we intend to operate:
Range
of Services
. We intend to leverage our breadth of services and resources to deliver comprehensive, integrated solutions to
companies in the cannabis industry—from operational, compliance and marketing consulting to products, security and financing
services.
Strategic
Alliances
. We are dedicated to growing our business through strategic acquisitions, partnerships and agreements that will
enable us to enter and expand into new markets. Our strategy is to pursue alliances with potential targets that have the ability
to generate positive cash flow, effectively meet customer needs and supply desirable products, services or technologies, among
other considerations. We anticipate that strategic alliances will play a significant role as more states pass legislation permitting
the cultivation and sale of hemp and cannabis.
Regulatory
Compliance
. The state laws regulating the cannabis industry are changing at a rapid pace. Currently, there are 33 U.S. states,
the District of Columbia and the territories of Guam and Puerto Rico that have created a legislative body to manage the medical
cannabis industry. Ten of those states also allow recreational use. We intend to take such steps necessary to ensure that all
aspects of our operations are in compliance with all laws, policies, guidance and regulations to which we are subject and providing
an opportunity to our customers and allies to use our services in order to ensure that they, too, are in full compliance are both
critical components of our business plan.
Industry
Knowledge
. We continue to create, share and leverage information and experiences with the purpose of creating awareness and
identifying opportunities to increase stockholder value. Our management team has business expertise, extensive knowledge of the
cannabis industry and closely monitors changes in legislation. We intend to work with partners who will enhance the breadth of
our industry knowledge.
Lending
Capabilities
. In February 2014, the Treasury Department issued guidelines for financial institutions dealing with cannabis-related
businesses. Nevertheless, many banks and traditional financial institutions refuse to provide financial services to cannabis-related
businesses. We plan to provide finance and leasing solutions to market participants using the FinCEN guidelines as a primary guide
for compliance with federal law.
Government
and Industry Regulation
Cannabis
is currently a Schedule I controlled substance under the CSA and is, therefore, illegal under federal law. Even in those states
in which the use of cannabis has been legalized pursuant to state law, its use, possession or cultivation remains a violation
of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical use in the United States,
a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (the “
DOJ
”)
defines Schedule I controlled substances as “the most dangerous drugs of all the drug schedules with potentially severe
psychological or physical dependence.” If the federal government decides to enforce the CSA in states or territories that
allow cannabis use recreationally and medicinally, persons that are charged with distributing, possessing with intent to distribute
or growing cannabis could be subject to fines and/or terms of imprisonment, the maximum being life imprisonment and a $50 million
fine.
Notwithstanding
the CSA, as of the date of this filing, 33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico
allow their residents to use medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Michigan,
Nevada, Oregon, Vermont and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state
and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level.
In
light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama
had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those
lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy
Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “
Cole Memo
”) to all United
States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. The Cole Memo
ultimately emphasizes the need for robust state regulation of marijuana. The memorandum “rests on its expectation that state
and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory
and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law
enforcement interests.” In addition, the Financial Crimes Enforcement Network (“
FinCEN
”) provided guidelines
(the “
FinCEN Guidelines
”) on February 14, 2014, regarding how financial institutions can provide services to
cannabis-related businesses consistent with their Bank Secrecy Act (“
BSA
”) obligations.
Additional
existing and pending legislation provides, or seeks to provide, protection to persons acting in violation of federal law but in
compliance with state laws regarding cannabis. The Rohrabacher-Farr Amendment to the Commerce, Justice, Science and Related Agencies
Appropriations Bill, which funds the DOJ, prohibits the DOJ from using funds to prevent states with medical cannabis laws from
implementing such laws. The Rohrabacher-Farr Amendment is effective through April 28, 2017, but as an amendment to an appropriations
bill, it must be renewed annually. As of the date of this Form 10-K, it has been renewed through September 30, 2019. The Compassionate
Access Compassionate Access, Research Expansion, and Respect States Act (the “
CARERS Act
”) has been introduced
in the U.S. Senate, which proposes to reclassify cannabis under the CSA to Schedule II, thereby changing the plant from a federally
criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has
been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense,
administer or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal
penalties of the CSA.
As
of the date of this filing, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 has been enacted. However,
the Rohrabacher-Farr Amendment has been renewed as part of an omnibus spending bill, in effect through September 30, 2019.
Furthermore,
on January 4, 2018, the now former U.S. Attorney General, Jeff Sessions, issued the Sessions Memo, stating that the Cole Memo
was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established
principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute
to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness
of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.”
Mr. Sessions went on to state in the memorandum that given the Justice Department’s well-established general principles,
“previous nationwide guidance specific to marijuana is unnecessary and is rescinded, effective immediately.”
In
response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado issued a statement on January 4, 2018, stating
that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in
the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to
our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this
approach in all of our work with our law enforcement partners throughout Colorado.”
The
current U.S. Attorney General, William Barr, has signaled that he might be taking a different approach towards interfering with
state medical marijuana laws than his predecessor Jeff Sessions. Mr. Barr was confirmed as the U.S. Attorney General on February
14, 2019. During his confirmation hearing on February 15, 2019, Mr. Barr addressed the conflict between federal and state cannabis
policies, stating that his approach would be “not to upset settled expectations and the reliant interests that have arisen
as a result of the Cole memorandum.” Mr. Barr went even further, stating that “to the extent that people are complying
with the state laws—distribution and production and so forth—[the DOJ is] not going to go after that.” Despite
the possibilities of a more relaxed approach, Mr. Barr voiced his desire for clarity and uniformity on the issue and preference
that the United States has a federal law that prohibits marijuana everywhere.
It
is unclear at this time whether the Trump administration will strongly enforce the federal laws applicable to cannabis or what
types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement
policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. We may be irreparably
harmed by a change in enforcement policies of the federal government depending on the nature of such change. As of the date of
this Form 10-K, we have provided products and services to state-approved cannabis cultivators and dispensary facilities, as well
as operating our own dispensary, manufacturing and extraction facilities. As a result, we could be deemed to be aiding and abetting
or directly engaging in illegal activities, a violation of federal law. We may be irreparably harmed by a change in enforcement
policies of the federal government.
The
Cole Memo
Because
of the discrepancy between the laws in some states, which permit the distribution and sale of medical and recreational cannabis,
from federal law that prohibits any such activities, DOJ Deputy Attorney General James M. Cole issued the Cole Memo concerning
cannabis enforcement under the CSA. The Cole Memo guidance applies to all of the DOJ’s federal enforcement activity, including
civil enforcement and criminal investigations and prosecutions, concerning cannabis in all states.
The
Cole Memo reiterates Congress’s determination that cannabis is a dangerous drug and that the illegal distribution and sale
of cannabis is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels.
The Cole Memo notes that the DOJ is committed to enforcement of the CSA consistent with those determinations. It also notes that
the DOJ is committed to using its investigative and prosecutorial resources to address the most significant threats in the most
effective, consistent, and rational way. In furtherance of those objectives, the Cole Memo provides guidance to DOJ attorneys
and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or
more of the following important priorities (the “
Enforcement Priorities
”) in preventing:
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the
distribution of cannabis to minors;
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revenue from the
sale of cannabis from going to criminal enterprises, gangs and cartels;
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the diversion of
cannabis from states where it is legal under state law in some form to other states;
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state-authorized
cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
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violence and the
use of firearms in the cultivation and distribution of cannabis;
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drugged driving
and the exacerbation of other adverse public health consequences associated with cannabis use;
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the growing of cannabis
on public lands and the attendant public safety and environmental dangers posed by cannabis production on public lands; and
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cannabis possession
or use on federal property.
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Although
the Sessions Memo has rescinded the Cole Memo and it is unclear at this time what the ultimate impact of that rescission will
have on our business, if any, we intend to continue to conduct rigorous due diligence to verify the legality of all activities
that we engage in and ensure that our activities do not interfere with any of the Enforcement Priorities set forth in the Cole
Memo.
FinCEN
FinCEN
provided guidance regarding how financial institutions can provide services to cannabis-related businesses consistent with their
BSA obligations. For purposes of the FinCEN guidelines, a “financial institution” includes any person doing business
in one or more of the following capacities:
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bank (except bank
credit card systems);
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broker or dealer
in securities;
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money services business;
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telegraph company;
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card club; and
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a person subject
to supervision by any state or federal bank supervisory authority.
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In
general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution
based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation
of the risks associated with offering a particular product or service, and its capacity to manage those risks effectively. Thorough
customer due diligence is a critical aspect of making this assessment.
In
assessing the risk of providing services to a cannabis-related business, a financial institution should conduct customer due diligence
that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii)
reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate
its cannabis-related business; (iii) requesting from state licensing and enforcement authorities available information about the
business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including
the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing
monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring
for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained
as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state
licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy
of information provided by state licensing authorities, where states make such information available.
As
part of its customer due diligence, a financial institution should consider whether a cannabis-related business implicates one
of the Cole Memo Enforcement Priorities or violates state law. This is a particularly important factor for a financial institution
to consider when assessing the risk of providing financial services to a cannabis-related business. Considering this factor also
enables the financial institution to provide information in BSA reports pertinent to law enforcement’s priorities. A financial
institution that decides to provide financial services to a cannabis-related business would be required to file suspicious activity
reports. It is unclear at this time what impact the Sessions Memo will have on customer due diligence by a financial institution.
While
we believe we do not qualify as a financial institution in the United States, we cannot be certain that we do not fall under the
scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines, as may be amended, as a basis for assessing our relationships
with potential tenants, clients and customers. As such, as we engage in financing activities, we intend to adhere to the guidance
of FinCEN in conducting and monitoring our financial transactions. Because this area of the law is uncertain and is expected to
evolve rapidly, we believe that FinCEN’s guidelines will help us best operate in a prudent, reasonable and acceptable manner.
There is no assurance, however, that our activities will not violate some aspect of the CSA. If we are found to violate the federal
statute or any other in connection with our activities, our company could face serious criminal and civil sanctions.
Moreover,
since the use of cannabis is illegal under federal law, we may have difficulty acquiring or maintaining bank accounts and insurance,
and our stockholders may find it difficult to deposit their stock with brokerage firms.
Licensing
and Local Regulations
Where
applicable, we will apply for additional state licenses that are necessary to conduct our business in compliance with local laws.
Local laws at the city, county and municipal levels add a layer of complexity to legalized cannabis. Despite a state’s adoption
of legislation legalizing cannabis, cities, counties and municipalities within the state may have the ability to otherwise restrict
cannabis activities, including but not limited to cultivation, retail or consumption.
Zoning
sets forth the approved use of land in any given city, county or municipality. Zoning is set by local governments or local voter
referendum, and may otherwise be restricted by state laws. For example, under certain state laws a seller of liquor may not be
allowed to operate within 1,000 feet of a school. There may be similar restrictions imposed on cannabis operators, which will
restrict where cannabis operations may be located and the manner and size to which they can grow and operate. Zoning can be subject
to change or withdrawal, and properties can be re-zoned. The zoning of our properties will have a direct impact on our business
operations.
Regulatory
Environment
The
regulatory status of the cannabis industry is shifting rapidly at the state level, with momentum toward a change at the federal
level through pressure on the U.S. Congress and the White House. Current federal regulations classify cannabis as a Schedule 1
substance, defined as “drugs with no currently accepted medical use and a high potential for abuse.” This drug classification
also includes heroin, LSD and ecstasy.
The
legal cannabis industry has evolved considerably over the past 3-5 years. We believe the industry has reached the tipping point
for legalization through pressure from citizens’ groups in individual states for the legalization of medical and/or recreational
marijuana. As reported by Pew Research Center in April 2015, nearly half (49%) of Americans say they have tried marijuana.
A
Quinnipiac University Poll
published on March 6, 2019 showed 93% of registered voters in the United States support the
use of medically prescribed cannabis and that 60% support the legalization of marijuana use.
Millennials (currently
18-34) have been in the forefront of legalization support: 85% favor legalizing marijuana use, by far the highest percentage
of any age group. 63% of voters ages 35-49 and 59% of voters ages 50-64 support the legalization of marijuana use. Voters over
65 years old are more divided on the topic, with 44% in support of the legalization of marijuana use.
Public
support has given rise to the passage of new marijuana laws and regulations in a number of states, as well as multiple legal reforms
on legislative dockets. Each state’s legal environment is unique, making it critical for businesses to know and understand
the regulatory landscape on a state-by-state basis.
Another
regulatory variable adding to the complexity of the legal cannabis market are the local laws at the municipality and county levels.
Even when a state enacts legislation legalizing cannabis, each level of local government has the right to exercise restrictions
on cannabis activities, such as retail, consumption, transportation and cultivation. Zoning is an area of particular concern,
which is set forth at the local level. This can restrict where businesses can be located and the manner and size in which they
operate. Understanding individual state’s laws and local regulations requires business operators and investors to account
for multiple levels of regulatory compliance, such as how marijuana may be sourced, processed, distributed, and to whom, where
and how it may be sold.
State
Legal Status
While
new state-level legalization efforts continue to expand the number of states involved in the cannabis industry, only a handful
of existing states have any meaningful full-scale operations for the cultivation and distribution of cannabis. This presents a
significant growth opportunity for investment over the next several years as the existing legalized states and new states’
markets come online.
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Medical
Cannabis Legalization - 33 states have legalized medical marijuana, plus Washington, D.C. and the U.S. territories of Guam
and Puerto Rico
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Recreational
Cannabis Legalization - 10 states (AK, CA, CO, ME, MA, MI, NV, OR, VT, WA) plus Washington, D.C. have passed laws
that allow for adult recreational use of marijuana
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Federal
Legal Status
Cannabis
is still classified as an illegal substance in the U.S. The Drug Enforcement Agency (“
DEA
”) and the Food and
Drug Administration (“
FDA
”) currently classify cannabis as a Schedule 1 drug under the Controlled Substances
Act. The classification makes cannabis illegal under federal law to cultivate, manufacture, distribute or possess cannabis, and
has created a discrepancy between state’s rights and federal law.
This
discrepancy has created a complicated environment for cannabis businesses in regards to restrictive banking regulations, interstate
trade, IRS tax code and federal bankruptcy laws, especially for companies that directly “touch the plant” such as
growers and distributors. For example, FinCEN provided guidance regarding how financial institutions can provide services to cannabis-related
businesses consistent with their BSA obligations. While we believe we do not qualify as a financial institution in the United
States, we cannot be certain that we do not fall under the scope of the FinCEN guidelines. We plan to use the FinCEN Guidelines,
as may be amended, as a basis for assessing our relationships with potential tenants, clients and customers. As such, as we engage
in financing activities, we intend to adhere to the guidance of FinCEN in conducting and monitoring our financial transactions.
Because this area of the law is uncertain but expected to evolve rapidly, we believe that FinCEN’s guidelines will help
us best operate in a prudent, reasonable and acceptable manner. There is no assurance, however, that our activities will not violate
some aspect of the CSA. If we are found to violate the federal statute or any other in connection with our activities, our company
could face serious criminal and civil sanctions.
Additionally,
because the possession or distribution of cannabis violates federal law, banks that provide services may face the threat of prosecution
or sanctions and thus we may have difficulty acquiring or maintaining bank accounts and insurance, and our stockholders may find
it difficult to deposit their stock with brokerage firms.
The
banking issues created by the federal laws have required the cannabis industry to focus on viable alternatives and have created
opportunities for new providers, from finance companies to security and software firms. The issue of interstate trade requires
companies that grow or distribute cannabis to duplicate efforts within each state they wish to legally operate and has limited
the development of ‘national’ brands. These laws do not directly affect companies operating in ancillary businesses.
In
February 2014, the White House and the Department of the Treasury gave a roadmap for conducting transactions with cannabis companies
operating within state regulations. The most sweeping federal reforms to date, however, have come from Congress in the federal
spending bill that passed both Houses in June 2015 and continued in June 2016. Congress voted to protect state medical marijuana
and hemp laws from federal interference and cut the DEA’s budget. As an example of increased support for the removal of
federal laws banning medical marijuana, the medical marijuana-protecting amendment passed the House 219-189 and became law last
year and was accepted by a larger 242-186 majority this year, with even more Republican members’ support.
Ancillary
Cannabis-Related Businesses
As
more states enact cannabis legislation, the demand for cannabis-related products and services grows. The rapid expansion of the
cannabis market combined with more sophisticated management teams and business models entering the market has spurred the development
of numerous cannabis-related niche markets. These ancillary markets that do not physically “touch the plant” include
infrastructure and support for the cannabis industry in such areas as social media, security, consulting, delivery systems, financial
services, software & high-tech, electronic hardware, infused products, extracts & oils, hemp production, ancillary cultivation
solutions, and retail.
As
mentioned, the federal government still classifies cannabis as a Schedule 1 substance, which leaves many traditional businesses
fearing reputational and legal risks of serving the cannabis industry. However, ancillary businesses that do cater to the legal
cannabis industry are well positioned to benefit from the growth in the industry.
The
CBD Industry
Market
Opportunity
According
to the Brightfield Group (“Brightfield”), the hemp-derived CBD market will reach sales of $22 billion by 2022, as
compared to $591 million in 2018. According to Brightfield, the main drivers of growth would be:
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Increased
investment.
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The popularity of
hemp CBD versus pharmaceutical products as wellness trends continue.
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The evolution of
distribution channels.
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The expansion of
the offering – driven by more product types and constant innovation.
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According
to Brightfield, 55% of CBD users purchase their CBD products at storefront dispensaries, 31% through local delivery services,
and 17% online. Most of the remainder of CBD products are sourced from friends, dealers and cooperatives (8-9% each). Among CBD
users, 80% use CBD products at least once a week, and about 41% use them every day. Approximately 4% of CBD consumers are occasional
users, turning to CBD products less than once a month. Over half of CBD users have bought 1-2 CBD products over the last two weeks,
and roughly 17% have bought 3 or more over the same time period. CBD users tend to enjoy having low or micro-doses of CBD (10
mg or less), once or twice per day.
According
to Brightfield, the demographic age of CBD users are as follows: the largest group (nearly one third) between ages 35 and 49,
and the 26-34 and 50-64 age, ranges each making up 20-25% of the market. Among CBD users, hemp-derived CBD users lean slightly
older, more likely to fall into the 50-64 age range, and less likely to fall into the 26-34 age range. In general, significantly
more CBD users are female (55%) than male (44%), with that figure being driven up by hemp-derived CBD users, 59% of whom were
female. CBD users reflect the general population in terms of income, but within their ranks, slightly more hemp-derived CBD users
fall into the lower-income groups (employed but making less than $40K). CBD users are generally well-educated - only 1.3% have
not (yet) received their high school diplomas, whereas 15.4% have a graduate or post-grad degree completed. Nearly half of CBD
users have a Bachelor’s Degree or beyond. CBD users are the most likely to be married – with 43% having spouses. At
least 37% are married among all respondents, and this is the most common status. Just over 30% of CBD users are single.
Target
Markets
Among
consumers that we believe will purchase our CBD products, Management will target customers with the following demographic profile
when implementing its marketing campaigns:
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a)
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Medical
practices such as orthopedic, podiatry and chiropractors;
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b)
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Retail locations
such as convenience stores, grocery stores and gas stations;
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c)
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Individuals with
inflammation, anxiety, stress, sleep disorders and aches and pains; and
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d)
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Pet owners.
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Distribution
of Products
Our
CBD products are currently available for sale at our various Pure and Natural locations and on our website GetPureandNatural.com.
We have started setting up display boxes in medical offices, convenience stores and gas stations in the Dallas and Nashville areas.
Competitive
Overview
Given
the rapid growth of the U.S. CBD oil industry, hundreds of companies have entered the market. Consequently, the market is becoming
highly competitive and we believe to compete in the market requires ensuring the quality and integrity of product offerings. Certain
of our competitors have substantially greater financial, distribution, and marketing resources, as well as greater brand awareness
than us, and there can be no assurance we will be able to successfully compete.
Competitive
Strengths
The
Company seeks to be a fully vertically integrated company that manages the production of its products at all stages from seed
to extraction to distribution. We believe a fully vertically integrated structure provides us a strong competitive advantage over
competitors not similarly situated.
The
Difference Between Hemp and Marijuana
Both
marijuana and hemp come from the same species of plant called “Cannabis Sativa L.” However, cultivators of the cannabis
plant have manipulated it over the years to encourage specific traits to become dominant. Cannabis plants contain unique compounds
called cannabinoids. Current research has revealed over 80 different cannabinoids thus far, but management believes THC is the
most well-known and is credited with causing the marijuana high.
While marijuana plants
contain high levels of THC, hemp contains very little of the psychoactive chemical. The foregoing is one of the differences which
distinguishes hemp from marijuana.
Hemp
was originally cultivated nearly 10,000 years ago in what is modern day Taiwan. Ancient cultivators of the cannabis plant recognized
that it was dioecious, meaning that it had dual characteristics. Cultivators grew one variety of the cannabis plant to be tall
and durable. This became what we now call industrial hemp. Upon discovering that the flower buds of the cannabis plant had psychoactive
effects, cultivators began separating the hemp plants from the flowering plants in order to isolate their “medicinal”
characteristics.
Scientifically,
we now know that industrial hemp plants tend to produce high levels of the cannabinoid CBD, while producing low amounts of THC.
Conversely, the marijuana plant produces high THC levels and low CBD levels. This chemical difference dictates the way we use
the cannabis plant for medicinal and dietary supplemental purposes.
Federal
Legislative Overview
Cannabidiol,
or CBD, that is derived from industrial hemp plants — like the CBD used in all products currently being produced or to be
produced by Bespoke Extracts — is deemed by the FDA to be a dietary supplement, not a medication or food product. Consequently,
in the U.S., no prescription is required to obtain CBD and it can be legally purchased and consumed in all 50 states (and in 40
countries around the world) unless a state adopts a specific law against its use.
In
December 2016, the Department of U.S. Drug Enforcement Administration (“DEA”) implemented a new rule that declared
CBD as a Schedule I drug, meaning it has “no currently accepted medical use in the United States, a lack of accepted safety
for use under medical supervision and a high potential for abuse.” While numerous industry insiders expressed concerns about
the DEA’s ruling, it is widely believed that the agency would struggle to make CBD illegal under current laws, thanks to
multiple protections put in place by Congress as part of the 2014 Farm Bill. Moreover, subsequent additions to the 2015 and 2016
Congressional Appropriations Act prohibit the DEA from going after the products produced under these programs. Moreover, the most
recent version of the legislation to legalize growing hemp was introduced in April 2018, with Senate Majority Speaker Mitch McConnell
as the primary sponsor, which quickly evolved into the Senate’s Agriculture Improvement Act of 2018 (2018 Farm Bill). On
December 3, 2018, House and Senate leaders announced that they had come to an agreement on the reconciled version of the 2018
Farm Bill, which – for the first time ever – includes a provision to lift the federal government’s longstanding
ban on the commercial production of industrial hemp. It also amends the Federal Controlled Substance Act of 1970 so that industrial
hemp containing no more than 0.3% delta-9 tetrahydrocannabinol (“THC”) is no longer classified as a Schedule I prohibited
substance. The 2018 Farm Bill was approved on December 12, 2018.
The
Company’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products.
Section 12619 of the 2018 Farm Bill removed “hemp,” as defined in the Agricultural Marketing Act of 1946 (the “1946
Agricultural Act”), from the classification of “marijuana,” which is generally prohibited as a Schedule I drug
under the Controlled Substances Act of 1970 (“CSA”). Under the 1946 Agricultural Act (as amended by the 2018 Farm
Bill), the term “hemp” means “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof
and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9
tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.” As a result of the passage of the
2018 Farm Bill, and since the Company believes that its CBD products contain parts of the cannabis plant with a THC concentration
of not more than 0.3 percent on a dry weight basis, the Company believes that its CBD products are not governed by the CSA and,
ergo, would not be subject to prosecution thereunder because the Company believes that its CBD products contain “hemp”
within the meaning of the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and do not contain any “marijuana”
as prohibited under the CSA (as amended by the 2018 Farm Bill); provided, however, there is a lack of legal protection for hemp-based
products that contain more than 0.3 percent THC and there is a risk that the Company would be subject to prosecution under the
CSA in the event that its CBD products are found to contain more than 0.3 percent THC. The Company’s CBD products contain
no trace of THC at all.
Furthermore,
the 1946 Agricultural Act (as amended by the 2018 Farm Bill) provides additional regulations regarding the production of hemp-based
products and there is the risk that the Company’s CBD products may be found to be in violation of these regulations. Specifically,
the 1946 Agricultural Act (as amended by the 2018 Farm Bill) contains provisions relating to the shared state-federal jurisdiction
over hemp cultivation and production, whereby states and Indian tribes have been delegated the broad authority to regulate and
limit the production and sale of hemp and hemp products within their borders. Under the 1946 Agricultural Act (as amended by the
2018 Farm Bill), a plan under which a State or Indian tribe monitors and regulates the production of hemp shall only be required
to include “(i) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory
of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (ii) a procedure
for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels
of hemp produced in the State or territory of the Indian tribe; (iii) a procedure for the effective disposal of—(I) plants,
whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants; (iv) a procedure
to comply with enforcement procedures ; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of
hemp producers to verify that hemp is not produced in violation of applicable law; (vi) a procedure for submitting the information
, as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the
information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out
the practices and procedures described in clauses (i) through (vi).” Further, a hemp producer in a State or the territory
of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or
Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces
hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government,
as applicable; or (iii) producing Cannabis sativa L. with a delta-9 tetrahydrocannabinol concentration of more than 0.3 percent
on a dry weight basis.” A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall
be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of
agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable,
determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater
than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report
the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe,
as applicable.” In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production
of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor
and regulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain
relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal
description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation
or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory
of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced
in violation of applicable law; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement procedures;
(E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that hemp is not
produced in violation of this subtitle; and (F) such other practices or procedures as the Secretary considers to be appropriate.
The Secretary shall also establish a procedure to issue licenses to hemp producers. In the case of a State or Indian tribe for
which a State or Tribal plan is not approved under applicable law, it shall be unlawful to produce hemp in that State or the territory
of that Indian tribe without a license issued by the Secretary. A violation of a plan established by the Secretary shall be subject
to enforcement and the Secretary shall report the production of hemp without a license issued by the Secretary to the Attorney
General. In the event that the Company’s CBD products are found to be in violation of these regulations, the Company may
become subject to enforcement action as provided for in the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and may become
subject to prosecution thereunder.
Furthermore,
the Company’s CBD products are subject to the application of laws relating to health and safety of our products. Specifically,
the Company’s CBD products may be governed by the Federal Food Drug and Cosmetic Act (FD&C Act) as a drug. The FD&C
Act is intended to assure the consumer, in part, that drugs and devices are safe and effective for their intended uses and that
all labeling and packaging is truthful, informative, and not deceptive. The FD&C Act and FDA regulations define the term drug,
in part, by reference to its intended use, as “articles intended for use in the diagnosis, cure, mitigation, treatment,
or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the
body of man or other animals.” Therefore, almost any ingested or topical or injectable product that, through its label or
labeling (including internet websites, promotional pamphlets, and other marketing material), that is claimed to be beneficial
for such uses will be regulated by FDA as a drug. The definition also includes components of drugs, such as active pharmaceutical
ingredients. The FD&C Act defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled,
or sprayed on, introduced into, or otherwise applied to the human body...for cleansing, beautifying, promoting attractiveness,
or altering the appearance.” See FD&C Act, sec. 201(i). Among the products included in this definition are skin moisturizers,
perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, cleansing shampoos, permanent waves, hair colors,
and deodorants, as well as any substance intended for use as a component of a cosmetic product. Under the FD&C Act, cosmetic
products and ingredients, with the exception of color additives, do not require FDA approval before they go on the market. Drugs,
however, must generally either receive premarket approval by FDA through the New Drug Application (NDA) process or conform to
a “monograph” for a particular drug category, as established by FDA’s Over-the-Counter (OTC) Drug Review. These
monographs specify conditions whereby OTC drug ingredients are generally recognized as safe and effective, and not misbranded.
Certain OTC drugs may remain on the market without an NDA approval until a monograph for its class of drugs is finalized as a
regulation. However, once FDA has made a final determination on the status of an OTC drug category, such products must either
be the subject of an approved NDA (see FD&C Act, sec. 505(a) and (b), or comply with the appropriate monograph for an OTC
drug.
Additionally,
it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market
CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. In January of 2018,
the New York City Department of Health banned the sale of CBD-infused food products. As of the date hereof, legislators are calling
on the FDA to provide guidance on legal pathways for food products infused with CBD to be sold.
Employees
As
of April 16, 2019, we have five full-time employees, two part-time employees and nine full-time consultants/independent
contractors. None of our employees are covered by a collective bargaining agreement. We consider our relationship with our employees
to be good.
ITEM
1A. RISK FACTORS
Risks
Relating to Our Business
We
have a limited operating history and face many of the risks and difficulties frequently encountered by an early stage company.
Although
our management team has extensive knowledge of the cannabis industry and closely monitors changes in legislation, we also operate
in an evolving industry that may not develop as expected. Furthermore, our operations will likely continue to evolve under our
business plan as we continually assess new strategic opportunities for our business within our industry. Assessing the future
prospects of our business is challenging in light of both known and unknown risks and difficulties we may encounter. Growth prospects
in our industry can be affected by a wide variety of factors including:
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competition
from other similar companies;
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regulatory
limitations on the products we can offer and markets we can serve;
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other
changes in the regulation of medical and recreational cannabis use;
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Changes
in underlying consumer behavior;
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our
ability to access adequate financing on reasonable terms and our ability to raise additional capital in order to fund our
operations;
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challenges
with new products, services and markets; and
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fluctuations
in the credit markets and demand for credit.
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We
may not be able to successfully address these factors, which could negatively impact our growth, harm our business and cause our
operating results to be worse than expected.
We
may need to secure additional financing.
While
we have raised funds that we believe will be sufficient to fund our operations for the next twelve months, we anticipate that
we may require additional funds for our operations in the future. If we are not successful in securing additional financing when
needed, we may be unable to execute our business strategy, which could result in curtailment of our operations.
Our
ability to raise additional capital is uncertain and dependent on numerous factors beyond our control including, but not limited
to, economic conditions and availability or lack of availability of credit. We currently do not have any committed external source
of funds.
If
we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:
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continue
to expand our development, sales and marketing teams;
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acquire
complementary technologies, products or businesses;
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if
determined to be appropriate, expand our global operations;
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hire,
train and retain employees; and
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respond
to competitive pressures or unanticipated working capital requirements.
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To
the extent that we raise additional capital through the sale of equity or convertible debt securities, then-existing stockholders’
interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely
affect their rights as common stockholders. Debt financing and preferred equity financing, if available, may involve agreements
that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making
capital expenditures or declaring dividends.
Cannabis
remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current
and planned future operations unprofitable or even prohibit such operations.
We
operate in the cannabis industry, which is dependent on state laws and regulations pertaining to such industry; however, under
federal law, cannabis remains illegal.
The
United States federal government regulates drugs through the Controlled Substances Act (the “
CSA
”), which places
controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled
substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the
United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas
imposed by the United States Drug Enforcement Administration (the “
DEA
”). Because of this, doctors may not
prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.
Currently,
33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow the use of medical cannabis. Voters
in the states of Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont and Washington have approved
ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal
CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance,
the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis
use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has
the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of
cannabis preempts state laws that legalize its use.
In
light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama
had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those
lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior DOJ Deputy
Attorney General of the Obama administration, James M. Cole, issued a memorandum (the “
Cole Memo
”) to all United
States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. The Cole Memo
ultimately emphasizes the need for robust state regulation of marijuana. The memorandum “rests on its expectation that state
and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory
and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law
enforcement interests.” In addition, the Financial Crimes Enforcement Network (“
FinCEN
”) provided guidelines
(the “
FinCEN Guidelines
”) on February 14, 2014, regarding how financial institutions can provide services to
cannabis-related businesses consistent with their Bank Secrecy Act (“
BSA
”) obligations.
In
2014, the United States House of Representatives passed an amendment (the “
Rohrabacher-Farr Amendment
”) to
the Commerce, Justice, Science, and Related Agencies Appropriations Bill, which funds the United States Department of Justice
(the “
DOJ
”). The Rohrabacher-Farr Amendment prohibits the DOJ from using funds to prevent states with medical
cannabis laws from implementing such laws. In August 2016, a 9th Circuit federal appeals court ruled in United States v. McIntosh
that the Rohrabacher-Farr Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical
cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation
titled the Compassionate Access, Research Expansion, and Respect States Act (the “
CARERS Act
”) was introduced,
proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying
cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized
substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced
in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer
or deliver marijuana in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties
of the CSA.
Although
these developments have been met with a certain amount of optimism in the cannabis industry, neither the CARERS Act nor the Respect
State Marijuana Laws Act of 2017 have yet been adopted. In addition, the Rohrabacher-Farr Amendment, being an amendment to an
appropriations bill that must be renewed annually, has been renewed as part of an omnibus spending bill, in effect through September
30, 2019.
Furthermore,
on January 4, 2018, the now former U.S. Attorney General, Jeff Sessions, issued a written memorandum (the “
Sessions Memo
”)
to all U.S. Attorneys stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that
“prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal
prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities
set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact
of particular crimes on the community.” Mr. Sessions went on to state in the memorandum that given the Justice Department’s
well-established general principles, “previous nationwide guidance specific to marijuana is unnecessary and is rescinded,
effective immediately.”
In
response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business
operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office
in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular
on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent
with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement
partners throughout Colorado.”
The
current U.S. Attorney General, William Barr, has signaled that he will be taking a different approach towards interfering with
state medical marijuana laws than his predecessor Jeff Sessions. Mr. Barr was confirmed as the U.S. Attorney General on February
14, 2019. During his confirmation hearing on February 15, 2019, Mr. Barr addressed the conflict between federal and state cannabis
policies, stating that his approach would be “not to upset settled expectations and the reliant interests that have arisen
as a result of the Cole memorandum.” Mr. Barr went even further, stating that “to the extent that people are complying
with the state laws—distribution and production and so forth—[the DOJ is] not going to go after that.” Despite
the more relaxed approach, Mr. Barr voiced his desire for clarity and uniformity on the issue and preference that the United States
have a federal law that prohibits marijuana everywhere.
It
is unclear at this time whether the Trump administration will strongly enforce the federal laws applicable to cannabis or what
types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement
policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. While we do
not currently harvest, distribute or sell cannabis, we intend to do so in the future, and thus we may be irreparably harmed by
a change in enforcement policies of the federal government depending on the nature of such change. At such time, we could be deemed
to be aiding and abetting illegal activities, a violation of federal law.
Additionally,
as we are always assessing potential strategic acquisitions of new businesses, we may in the future also pursue opportunities
that include growing and distributing medical or recreational cannabis, should we determine that such activities are in the best
interest of the Company and our stockholders. Any such pursuit would involve additional risks with respect to the regulation of
cannabis.
Any
potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.
Continued
development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and
a number of factors could slow or halt progress in this area, even where there is public support for legislative action. Any delay
or halt in the passing or implementation of legislation legalizing cannabis use, or its sale and distribution, or the re-criminalization
or restriction of cannabis at the state level could negatively impact our business. Additionally, changes in applicable state
and local laws or regulations could restrict the products and services we offer or impose additional compliance costs on us or
our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result
in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations
or applications, and it is possible that regulations may be enacted in the future that will be materially adverse to our business.
The
cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.
We
are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational
cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in a growth in consumer demand.
However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry
may adversely affect our business operations.
Large,
well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example,
medical cannabis may adversely impact the existing market for the current “cannabis pill” sold by mainstream pharmaceutical
companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the
pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical or
any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental
impact on our business.
We
operate in a highly competitive industry.
The
markets for ancillary businesses in the medical cannabis and recreational cannabis industries are competitive and evolving. There
is no material aspect of our business that is protected by patents, copyrights, trademarks, or trade names, and we face strong
competition from larger companies that may offer similar products and services to ours. Many of our current and potential competitors
have longer operating histories, significantly greater financial, marketing and other resources and larger client bases than us,
and there can be no assurance that we will be able to successfully compete against these or other competitors.
Given
the rapid changes affecting the global, national, and regional economies generally and the medical cannabis and recreational cannabis
industries, in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will
depend on our ability to keep pace with any changes in our markets, particularly, legal and regulatory changes. Our success will
also depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive pressures.
Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition
and results of operations.
We
may be unable to obtain capital to fully execute our business plan.
Our
business plan involves the acquisition or opening of additional dispensaries with the goal of operating five (5) locations within
the next 12 months. We anticipate that we will need additional capital in the future to fully execute our business plan. However,
there can be no assurance that we will be able to obtain financing on agreeable terms, if at all, and any future sale of our equity
securities will dilute the ownership of our existing stockholders and could be at prices substantially below the price of the
shares of common stock sold in the past. If we are unable to obtain the necessary capital, we may need to delay the implementation
of, or curtail our business plan.
We
face risks associated with strategic acquisitions.
As
an important part of our business strategy, we intend to acquire additional dispensaries. These acquisitions involve a number
of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following,
any of which could adversely affect our results of operations:
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the
applicable restrictions on cannabis industry and its participants may limit the number of available suitable businesses and
dispensaries that we can acquire;
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any
acquired dispensary could under-perform relative to our expectations and the price that we paid for it, or not perform in
accordance with our anticipated timetable;
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we
may incur or assume significant debt in connection with our acquisitions;
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acquisitions
could cause our results of operations to differ from our own or the investment community’s expectations in any given
period, or over the long term; and
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acquisitions
could create demands on our management that we may be unable to effectively address, or for which we may incur additional
costs.
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Additionally,
following any business acquisition, we could experience difficulty in integrating personnel, operations, financial and other systems,
and in retaining key employees and customers.
Our
future success depends on our ability to grow and expand our customer base and operational territory.
Our
success and the planned growth and expansion of our business depend on our products and services achieving greater and broader
acceptance, resulting in a larger customer base, and on the expansion of our operations into new areas and markets. However, there
can be no assurance that customers will purchase our products, or that we will be able to continually expand our customer base.
Additionally, if we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our
business or implement our business strategy.
Operating
in new markets may expose us to new operational, regulatory or legal risks and subject us to increased compliance costs. We may
need to modify our existing business model and cost structure to comply with local regulatory or other requirements. Facilities
we open in new markets may take longer to reach expected revenue and profit levels on a consistent basis, may have higher construction,
occupancy or operating costs, and may present different competitive conditions, consumer preferences and spending patterns than
we anticipate.
Any
of the above could materially impair our ability to increase sales and revenue.
Conditions
in the economy, the markets we serve and the financial markets generally may adversely affect our business and results of operations.
Our
business is sensitive to general economic conditions. Slower economic growth, volatility in the credit markets, high levels of
unemployment, and other challenges that affect the economy adversely could affect us and our customers and suppliers. If growth
in the economy or in any of the markets we serve slows for a significant period, if there is a significant deterioration in the
economy or such markets or if improvements in the economy do not benefit the markets we serve, our business and results of operations
could be adversely affected.
We
depend on our management, certain key personnel and board of directors, as well as our ability to attract, retain and motivate
qualified personnel.
Our
future success depends largely upon the experience, skill, and contacts of our officers and directors, and the loss of the services
of these officers or directors may have a material adverse effect upon our business. Additionally, shortages in qualified personnel
could also limit our ability to successfully implement our growth plan. As we grow, we will need to attract and retain highly
skilled experts in the cannabis industry, as well as managerial, sales and marketing, security and finance personnel. There can
be no assurance, however, that we will be able to attract and retain such personnel.
Our
reputation and ability to do business may be negatively impacted by the improper conduct by our business partners, employees or
agents.
We
depend on third party suppliers to produce and timely deliver our inventory. Products purchased from our suppliers are resold
to our customers. These suppliers could fail to produce products to our specifications or quality standards and may not deliver
units on a timely basis. Any changes in our suppliers to resolve production issues could disrupt our ability to fulfill orders.
Any changes in our suppliers to resolve production issues could also disrupt our business due to delays in finding new suppliers.
Furthermore,
we cannot provide assurance that our internal controls and compliance systems will always protects us from acts committed by our
employees, agents or business partners in violation of U.S. federal or state laws. Any improper acts or allegations could damage
our reputation and subject us to civil or criminal investigations and related stockholder lawsuits, could lead to substantial
civil and criminal monetary and non-monetary penalties, and could cause us to incur significant legal and investigatory fees.
If
we do not effectively manage changes in our business, these changes could place a significant strain on our management and operations.
Our
ability to grow successfully requires that we have an effective planning and management process. The expansion and growth of our
business could place a significant strain on our management systems, infrastructure and other resources. To manage our growth
successfully, we must continue to improve and expand our systems and infrastructure in a timely and efficient manner. Our controls,
systems, procedures and resources may not be adequate to support a changing and growing company. If our management fails to respond
effectively to changes and growth in our business, including acquisitions, this could have a material adverse effect on the Company’s
business, financial condition, results of operations and future prospects.
Catastrophic
events may disrupt our business.
Our
inventory, dispensaries and overall operations are vulnerable to damage or interruption from fires, floods, power losses, telecommunications
failures, cyber-attacks, terrorist attacks, acts of war, human errors, break-ins and similar events. Additionally, we rely on
our third-party suppliers for our inventory. In the event of a catastrophic event, we may be unable to continue our operations
and may endure system interruptions, reputational harm, delays in our product development, and lengthy interruptions in our services,
breaches of data security and loss of critical data, all of which could have an adverse effect on our future operating results.
Puerto
Rico is susceptible to hurricanes and major storms, which could further deteriorate Puerto Rico’s economy and infrastructure.
Recent
hurricanes in Puerto Rico have significantly impacted government operations and infrastructure, causing a disruption in economic
activity. These adverse effects could delay completing construction of our Old San Juan location, as well as the issuance of the
requisite operating license from the Department of Health of Puerto Rico in order to commence operations. Our construction site
did not suffer any substantial damage. As of the date of this Form 10-K, we have completed construction on all of our dispensary
locations in Puerto Rico except for our Old San Juan and Condado locations and we anticipate commencing construction on both location
during the third quarter of 2019. However, there can be no assurance that we will complete construction, receive the requisite
operating licenses or even commence operations at the Old San Juan and Condado locations during such time.
Any
new or changes made to laws, regulations, rules or other industry standards affecting our business may have an adverse impact
on our financial results.
We
are subject to a number of foreign and domestic laws and regulations that affect companies conducting business within the cannabis
industry, many of which are still evolving and could be interpreted in ways that could harm our business. In the United States,
cannabis is currently classified as a Schedule I controlled substance under the CSA and is, therefore, illegal under federal law.
Even in those states in which the use of cannabis has been legalized pursuant to state laws, its use, possession or cultivation
remains a violation of federal law. A Schedule I controlled substance is defined as one that has no currently accepted medical
use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department
of Justice (the “DOJ”) defines Schedule I controlled substances as “the most dangerous drugs of all the drug
schedules with potentially severe psychological or physical dependence.”
Notwithstanding
the CSA, as of the date of this filing, 33 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico
allow their residents to use medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Michigan,
Nevada, Oregon, Vermont and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state
and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level.
Such
conflict between federal laws and state laws regarding cannabis has created a complicated environment for cannabis businesses
in regards to restrictive banking regulations, interstate trade, IRS tax code and federal bankruptcy laws, especially for companies
that directly “touch the plant” such as growers and distributors. For example, since the possession or distribution
of cannabis violates federal law, banks that provide services may face the threat of prosecution or sanctions. As a result of
being denied banking services or direct access to conventional loans, many of the companies that grow or distribute cannabis directly
are forced to transact business on a cash-only basis.
The
banking issues created by the federal laws have required the cannabis industry to focus on viable alternatives and have created
opportunities for new providers, from finance companies to security and software firms. The issue of interstate trade requires
companies that grow or distribute cannabis to duplicate efforts within each state they wish to legally operate and has limited
the development of ‘national’ brands. If we are unable to raise capital or conduct operations as a result of various
laws and regulations, we may be unable to finance our activities which would have an adverse impact on our operations and financial
results.
Laws
and regulations affecting the cannabis industry are constantly changing, and this may affect our consumer base in ways that we
are unable to predict.
Local,
state and federal medical cannabis laws and regulations are broad in scope and subject to evolving interpretations. We cannot
predict the nature of any future laws, regulations, interpretations or applications that may affect us, nor can we determine what
effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on the
vitality of the cannabis legalization movement or the unification or popularity of the community in favor of legalization, the
members of which community form our anticipated consumer base and underpin our business model.
The
Company’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products.
The
Company’s CBD products are subject to various state and federal laws regarding the production and sales of hemp-based products.
Section 12619 of the Agriculture Improvement Act of 2018 (“2018 Farm Bill”) removed “hemp,” as defined
in the Agricultural Marketing Act of 1946 (the “1946 Agricultural Act”), from the classification of “marijuana,”
which is generally prohibited as a Schedule I drug under the Controlled Substances Act of 1970 (“CSA”). Under the
1946 Agricultural Act (as amended by the 2018 Farm Bill), the term “hemp” means “the plant Cannabis sativa L.
and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and
salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a
dry weight basis.” As a result of the passage of the 2018 Farm Bill, and since the Company believes that its CBD products
contain parts of the cannabis plant with a delta-9 tetrahydrocannabinol (“THC”) concentration of not more than 0.3
percent on a dry weight basis, the Company believes that its CBD products are not governed by the CSA and, ergo, would not be
subject to prosecution thereunder because the Company believes that its CBD products contain “hemp” within the meaning
of the 1946 Agricultural Act (as amended by the 2018 Farm Bill) and do not contain any “marijuana” as prohibited under
the CSA (as amended by the 2018 Farm Bill); provided, however, there is a lack of legal protection for hemp-based products that
contain more than 0.3 percent THC and there is a risk that the Company would be subject to prosecution under the CSA in the event
that its CBD products are found to contain more than 0.3 percent THC.
Furthermore,
the 1946 Agricultural Act (as amended by the 2018 Farm Bill) provides additional regulations regarding the production of hemp-based
products and there is the risk that the Company’s CBD products may be found to be in violation of these regulations. Specifically,
the 1946 Agricultural Act (as amended by the 2018 Farm Bill) contains provisions relating to the shared state-federal jurisdiction
over hemp cultivation and production, whereby states and Indian tribes have been delegated the broad authority to regulate and
limit the production and sale of hemp and hemp products within their borders. Under the 1946 Agricultural Act (as amended by the
2018 Farm Bill), a plan under which a State or Indian tribe monitors and regulates the production of hemp shall only be required
to include “(i) a practice to maintain relevant information regarding land on which hemp is produced in the State or territory
of the Indian tribe, including a legal description of the land, for a period of not less than 3 calendar years; (ii) a procedure
for testing, using post-decarboxylation or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels
of hemp produced in the State or territory of the Indian tribe; (iii) a procedure for the effective disposal of—(I) plants,
whether growing or not, that are produced in violation of this subtitle; and (II) products derived from those plants; (iv) a procedure
to comply with enforcement procedures ; (v) a procedure for conducting annual inspections of, at a minimum, a random sample of
hemp producers to verify that hemp is not produced in violation of applicable law; (vi) a procedure for submitting the information
, as applicable, to the Secretary of Agriculture (the “Secretary”) not more than 30 days after the date on which the
information is received; and (vii) a certification that the State or Indian tribe has the resources and personnel to carry out
the practices and procedures described in clauses (i) through (vi).” Further, a hemp producer in a State or the territory
of an Indian tribe for which a State or Tribal plan is approved shall be determined to have negligently violated the State or
Tribal plan, including by negligently— “(i) failing to provide a legal description of land on which the producer produces
hemp; (ii) failing to obtain a license or other required authorization from the State department of agriculture or Tribal government,
as applicable; or (iii) producing Cannabis sativa L. with a delta-9 tetrahydrocannabinol concentration of more than 0.3 percent
on a dry weight basis.” A hemp producer that negligently violates a State or Tribal plan 3 times in a 5-year period shall
be ineligible to produce hemp for a period of 5 years beginning on the date of the third violation. If the State department of
agriculture or Tribal government in a State or the territory of an Indian tribe for which a State or Tribal plan, as applicable,
determines that a hemp producer in the State or territory has violated the State or Tribal plan with a culpable mental state greater
than negligence— “(i) the State department of agriculture or Tribal government, as applicable, shall immediately report
the hemp producer to —(I) the Attorney General; and (II) the chief law enforcement officer of the State or Indian tribe,
as applicable.” In the case of a State or Indian tribe for which a State or Tribal plan is not approved, the production
of hemp in that State or the territory of that Indian tribe shall be subject to a plan established by the Secretary to monitor
and regulate that production. A plan established by the Secretary under shall include— “(A) a practice to maintain
relevant information regarding land on which hemp is produced in the State or territory of the Indian tribe, including a legal
description of the land, for a period of not less than 3 calendar years; (B) a procedure for testing, using post-decarboxylation
or other similarly reliable methods, delta-9 tetrahydrocannabinol concentration levels of hemp produced in the State or territory
of the Indian tribe; (C) a procedure for the effective disposal of—(i) plants, whether growing or not, that are produced
in violation of [applicable law]; and (ii) products derived from those plants; (D) a procedure to comply with the enforcement
procedures; (E) a procedure for conducting annual inspections of, at a minimum, a random sample of hemp producers to verify that
hemp is not produced in violation of this subtitle; and (F) such other practices or procedures as the Secretary considers to be
appropriate. The Secretary shall also establish a procedure to issue licenses to hemp producers. In the case of a State or Indian
tribe for which a State or Tribal plan is not approved under applicable law, it shall be unlawful to produce hemp in that State
or the territory of that Indian tribe without a license issued by the Secretary. A violation of a plan established by the Secretary
shall be subject to enforcement and the Secretary shall report the production of hemp without a license issued by the Secretary
to the Attorney General. In the event that the Company’s CBD products are found to be in violation of these regulations,
the Company may become subject to enforcement action as provided for in the 1946 Agricultural Act (as amended by the 2018 Farm
Bill) and may become subject to prosecution thereunder.
Laws
and regulations affecting the hemp industry are constantly changing, which could detrimentally affect our proposed operations
in the event that the Company’s CBD products become subject to such regulation.
Local,
state and federal laws and regulations relating to hemp-based products are broad in scope and subject to evolving interpretations,
which could require us to incur substantial costs associated with compliance or alter certain aspects of our business plan in
the event that the Company’s CBD products become subject to such regulation. In addition, violations of these laws, or allegations
of such violations, could disrupt certain aspects of our business plan and result in a material adverse effect on certain aspects
of our planned operations in the event that the Company’s CBD products become subject to such regulation. We cannot predict
the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental
regulations or administrative policies and procedures, when and if promulgated, could have on our business in the event that the
Company’s CBD products become subject to such regulation.
The
Company’s CBD products may become subject to the application of laws relating to health and safety of our products.
The
Company’s CBD products are subject to the application of laws relating to health and safety of our products. Specifically,
the Company’s CBD products may be governed by the Federal Food Drug and Cosmetic Act (FD&C Act) as a drug. The FD&C
Act is intended to assure the consumer, in part, that drugs and devices are safe and effective for their intended uses and that
all labeling and packaging is truthful, informative, and not deceptive. The FD&C Act and FDA regulations define the term drug,
in part, by reference to its intended use, as “articles intended for use in the diagnosis, cure, mitigation, treatment,
or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the
body of man or other animals.” Therefore, almost any ingested or topical or injectable product that, through its label or
labeling (including internet websites, promotional pamphlets, and other marketing material), that is claimed to be beneficial
for such uses will be regulated by FDA as a drug. The definition also includes components of drugs, such as active pharmaceutical
ingredients. The FD&C Act defines cosmetics by their intended use, as “articles intended to be rubbed, poured, sprinkled,
or sprayed on, introduced into, or otherwise applied to the human body...for cleansing, beautifying, promoting attractiveness,
or altering the appearance.” See FD&C Act, sec. 201(i). Among the products included in this definition are skin moisturizers,
perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, cleansing shampoos, permanent waves, hair colors,
and deodorants, as well as any substance intended for use as a component of a cosmetic product. Under the FD&C Act, cosmetic
products and ingredients, with the exception of color additives, do not require FDA approval before they go on the market. Drugs,
however, must generally either receive premarket approval by FDA through the New Drug Application (NDA) process or conform to
a “monograph” for a particular drug category, as established by FDA’s Over-the-Counter (OTC) Drug Review. These
monographs specify conditions whereby OTC drug ingredients are generally recognized as safe and effective, and not misbranded.
Certain OTC drugs may remain on the market without an NDA approval until a monograph for its class of drugs is finalized as a
regulation. However, once FDA has made a final determination on the status of an OTC drug category, such products must either
be the subject of an approved NDA (see FD&C Act, sec. 505(a) and (b), or comply with the appropriate monograph for an OTC
drug.
Additionally,
it’s unlawful under the FD&C Act to introduce food containing added CBD or THC into interstate commerce, or to market
CBD or THC products as, or in, dietary supplements, regardless of whether the substances are hemp-derived. In January of 2018,
the New York City Department of Health banned the sale of CBD-infused food products. As of the date hereof, legislators are calling
on the FDA to provide guidance on legal pathways for food products infused with CBD to be sold. Therefore, until the FDA provides
guidance, restaurants may become hesitant to purchase CBD additives and CBD-infused food products.
The
Company may face significant competition from companies that serve its industries.
The
CBD products industry is subject to intense competition. The Company will be competing for customers with competitors who have
greater financial and marketing resources, which would allow them to expand and improve their marketing efforts in ways that could
affect the Company’s ability to effectively compete in this market. If the Company is unable to compete successfully, its
financial performance may be adversely affected.
The
Company is subject to the potential factors of market changes
.
The
business of the Company will be significantly impacted by the performance of the CBD products industry and may experience more
volatility and be exposed to greater risk than a more diversified business.
Negative
press from having a hemp or cannabis-related line of business could have a material adverse effect on our business, financial
condition, and results of operations.
There
is a misconception that hemp and marijuana, which both belong to the cannabis family, are the same thing, but industrial hemp
is roughly defined as a cannabis plant with not more than 0.3 percent THC content on a dry-weight basis. Any hemp oil or hemp
derivative we use will comport with this definition of less than 0.3% THC. Despite this, we may still receive negative attention
from the press, business clients, or partners, grounded in these broad misconceptions, and this in turn can materially adversely
affect our business.
Risks
Related to Our Common Stock
There
is not an active liquid trading market for the Company’s common stock.
The
Company’s common stock is quoted on the OTCQB Market under the symbol “GSRX”. There is a significant risk that
if an active trading market develops for the Company’s stock, the Company’s stock price may fluctuate dramatically
in response to any of the following factors, some of which are beyond our control:
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variations
in our quarterly operating results;
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announcements
that our revenue or income are below analysts’ expectations;
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general
economic slowdowns;
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sales
of large blocks of the Company’s common stock; and
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announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments.
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Our
common stock may be subject to the “penny stock” rules of the Securities and Exchange Commission, which may make it
more difficult for stockholders to sell our common stock.
The
SEC has adopted Rule 15g-9 which establishes the definition of a “penny stock,” for the purposes relevant to us, as
any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. For any transaction involving
a penny stock, unless exempt, the rules require that a broker or dealer approve a person’s account for transactions in penny
stocks, and the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity
and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information
and investment experience objectives of the person, and make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form sets forth the basis on which the broker or dealer made the suitability determination,
and that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of the Company’s common stock if and when such shares are eligible for sale and
may cause a decline in the market value of its stock.
Because
we became a public by means of a reverse acquisition, we may not be able to attract the attention of brokerage firms.
Because
we became public through a “reverse acquisition”, securities analysts of brokerage firms may not provide coverage
of us since there is little incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given
that brokerage firms will want to conduct any secondary offerings on behalf of the Company in the future.
Applicable
regulatory requirements, including those contained in and issued under the Sarbanes-Oxley Act of 2002, may make it difficult for
the Company to retain or attract qualified officers and directors, which could adversely affect the management of its business
and its ability to obtain or retain listing of its common stock.
We
may be unable to attract and retain those qualified officers, directors and members of board committees required to provide for
effective management because of the rules and regulations that govern publicly held companies, including, but not limited to,
certifications by principal executive officers. The enactment of the Sarbanes-Oxley Act has resulted in the issuance of a series
of related rules and regulations and the strengthening of existing rules and regulations by the SEC, as well as the adoption of
new and more stringent rules by the stock exchanges. The perceived increased personal risk associated with these changes may deter
qualified individuals from accepting roles as directors and executive officers.
Further,
some of these changes heighten the requirements for board or committee membership, particularly with respect to an individual’s
independence from the corporation and level of experience in finance and accounting matters. We may have difficulty attracting
and retaining directors with the requisite qualifications. If we are unable to attract and retain qualified officers and directors,
the management of its business and its ability to obtain or retain listing of our shares of common stock on any stock exchange
(assuming we elect to seek and are successful in obtaining such listing) could be adversely affected.
Voting
power is highly concentrated in one stockholder.
Peach
Management LLC currently beneficially owns one thousand (1,000) shares of Series A Preferred Stock which entitles it to 51% of
the voting power. In addition, pursuant to the Certificate of Designation for of the Series A Preferred Stock, the Company is
prohibited from designating any other class or series of preferred stock without first obtaining prior approval from the holder
of the Series A Preferred Stock. Such concentrated control of the Company may adversely affect the price of our common stock.
A stockholder that acquires common stock will not have an effective voice in the management of the Company.
We
do not intend to pay dividends for the foreseeable future.
We
have paid no dividends on our common stock to date and we do not anticipate paying any cash dividends to holders of our common
stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of
the business, we currently anticipate that we will retain any earnings to finance our future expansion and for the implementation
of our business plan. A lack of a dividend can further affect the market value of our stock, and could significantly affect the
value of any investment in our Company.
Our
stockholders may experience significant dilution.
We
have a significant number of warrants to purchase our common stock outstanding, the exercise of which would be dilutive to stockholders.
In certain instances, the exercise prices are subject to adjustment if we issue or sell shares of our common stock or equity-based
instruments at a price per share less than the exercise price then in effect. In such case, both the issuance and the adjustment
would be dilutive to stockholders.
We
may from time to time finance our future operations or acquisitions through the issuance of equity securities, which securities
may also have rights and preferences senior to the rights and preferences of our common stock. We may also grant options to purchase
shares of our common stock to our directors, employees and consultants, the exercise of which would also result in dilution to
our stockholders.
Our
articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders,
which could adversely affect the rights of the holders of our common stock.
Our
Board of Directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our Board of
Directors has the authority to issue, upon obtaining prior consent from the holder of Series A Preferred Stock, up to 9,999,000
shares of our preferred stock without further stockholder approval. As a result, our Board of Directors could authorize the issuance
of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares,
together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the
issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common
stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.
Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of
preferred stock, we may issue such shares in the future.
As
an issuer of “penny stock”, the protection provided by the federal securities laws relating to forward looking statements
does not apply to us.
Although
federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under
the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit
of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained
a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary
to make the statements not misleading. Such an action could hurt our financial condition.