The cannabis industry is highly competitive.
We compete on quality, price, brand recognition, and distribution strength. Our cannabis products compete with other products for consumer
purchases, as well as shelf space in retail dispensaries and wholesaler attention. We compete with thousands of cannabis producing companies
from small “mom and pop” operations to multi-billion-dollar market cap multi-state operators. Our principal multi-state operator
competitors include but are not limited to Curaleaf Holdings, Inc., Harvest Health & Recreation, Inc., iAnthus Capital Holdings,
Inc., Green Thumb Industries Inc. and Cresco Labs Inc.
The principal components in the production
of our cannabis consumer packaged goods include cannabis grown internally or acquired through wholesale channels, other agricultural
products, and packaging materials (including glass, plastic and cardboard).
Due to the U.S. federal prohibition on
cannabis, Acreage must source cannabis within each individual state in which it operates. While there are opportunities for centralized
sourcing of some packaging materials, given each state’s unique regulatory requirements, multi-state operators do not currently
have access to nationwide packaging solutions.
Cannabis companies operate in a highly
regulated industry. We are subject to the laws and regulations in the states and localities in which we operate, and such laws
vary by state and locality. Where we produce products, we are subject to environmental laws and regulations, and may be required
to obtain additional permits and licenses to operate our facilities. Where we market and sell products, we may be subject to laws
and regulations on brand registration, packaging and labeling, distribution methods and relationships, pricing and price changes,
sales promotions, advertising and public relations. We are also subject to rules and regulations relating to changes in officers
or directors, ownership or control.
We comply in all material respects with
all applicable governmental laws and regulations in the states in which we operate (including the applicable licensing requirements),
with the exception of the U.S. federal prohibition of cannabis. We believe that the cost of administration and compliance with,
and liability under, such laws and regulations does not have, and is not expected to have, a material adverse impact on our financial
condition, results of operations or cash flows.
In certain regions, especially on the West
Coast, the cannabis industry can be subject to seasonality in some states that allow home grow. Because homegrown plants are typically
harvested in the late summer or early fall, there can be some deceleration in retail and wholesale sales trends during these months
as these private supplies are consumed.
As discussed above, we have developed a
“House of Brands” that we believe will be valued consumer brands and a key pillar of our business strategy. Accordingly,
we protect our brands and trademarks to the extent permissible under applicable law. We have applied for trademarks with the United
States Patent and Trademark Office which we believe are protectable under U.S. federal law and have applied for and received trademark
protection at the state level. We have also submitted trademark applications in the European Union and Canada.
We hold no patents. We also do not have
any patents pending.
We qualify as an “emerging growth company”
as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company,
we intend to avail ourselves of exemptions from various requirements that are applicable to other public companies that are not emerging
growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from
the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments
not previously approved.
Under the JOBS Act, emerging growth companies
can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected
to avail ourselves of this exemption from new or revised accounting standards. As a result, we will not be subject to the same new or
revised accounting standards as other public companies that are not emerging growth companies.
Circumstances could cause us to lose emerging
growth company status. We will qualify as an emerging growth company until the earliest of:
As of April 1, 2021, we had approximately
665 employees, 615 of whom were in field operations and 50 of whom were in corporate administration and management. We offer our employees
opportunities to grow and develop their careers and provide them with a wide array of company paid benefits and compensation packages
which we believe are competitive relative to our peers in the industry.
Employee safety and health in the workplace
is one of our core values. The COVID-19 pandemic has underscored for us the importance of keeping our employees safe and healthy.
In response to the pandemic, we have taken actions aligned with the World Health Organization and the Centers for Disease Control
and Prevention to protect our workforce so they can more safely and effectively perform their work.
The Company’s number and levels of
employees are continually aligned with the pace and growth of its business and management believes it has sufficient human capital
to operate its business successfully.
As part of our strategy to deliver on our
vision and mission, we may from time to time acquire entities or licenses to increase our existing presence in states where we or businesses
with which we have agreements already operate or to expand our footprint into new states. The consideration we issue in connection with
such acquisitions may include cash, equity in Acreage or High Street, notes payable or a mix of these forms of consideration. The following
transactions were completed or entered into in 2020:
In 2020, we completed the acquisition of CCF,
a vertically integrated medical cannabis operator in New Jersey with licenses to conduct growing, processing, wholesale, and dispensary
operations. On November 15, 2019, we entered into an agreement to acquire CCF, which closed on June 26, 2020. CCF operates
a medicinal cultivation and processing facility and medicinal dispensaries in Egg Harbor and Atlantic City. A third dispensary is planned
to be constructed in Monroe.
On June 19, 2019, the shareholders of the
Company and of Canopy Growth Corporation (“Canopy Growth”) separately approved the arrangement between the two companies,
and on June 21, 2019, the Supreme Court of British Columbia granted a final order approving the arrangement. Effective June 27, 2019,
the Articles of the Company were amended to provide Canopy Growth with the option (the “Canopy Growth Call Option”)
to acquire all of the issued and outstanding shares of the Company (each, an “Acreage Share”), with a requirement
to do so upon a change in federal laws in the United States to permit the general cultivation, distribution and possession of marijuana
(as defined in the relevant legislation) or to remove the regulation of such activities from the federal laws of the United States, subject
to the satisfaction of the conditions set out in the arrangement agreement entered into between Acreage and Canopy Growth on April 18,
2019, as amended on May 15, 2019 (the “Original Arrangement Agreement”).
The Amended Arrangement was approved by
our shareholders at our special meeting held on September 16, 2020 and a final order approving the Amended
Arrangement was obtained from the Court on September 18, 2020.
Following the satisfaction of various conditions
set forth in the Proposal Agreement, on September 23, 2020, we entered into the Amending Agreement with Canopy Growth and implemented
the Amended Plan of Arrangement effective at 12:01 a.m. (Vancouver time) (the “Amendment Time”) on September 23, 2020
(the “Amendment Date”).
Pursuant to the Amended Plan of Arrangement,
among other things, Canopy Growth made a cash payment of $37,500,024 (the “Aggregate Amendment Option Payment”), to
our shareholders and certain holders of securities convertible or exchangeable into our shares. Holders of our then outstanding Class
A subordinate voting shares (the “SVS”), Class B proportionate voting shares (the “PVS”), Class
C multiple voting shares (the “MVS”), and certain other parties, received approximately $0.30 per SVS, being their
pro rata portion (on an as-converted to SVS basis) of the Aggregate Amendment Option Payment, based on the number of our outstanding
shares and certain holders of securities convertible or exchangeable into our shares, as of the close of business on September 22,
2020, the record date for payment of the Aggregate Amendment Option Payment. The Aggregate Amendment Option Payment was distributed
to such holders of record on or about September 25, 2020.
Upon implementation of the Amended Plan
of Arrangement, our articles were amended to, among other things, create three new classes of shares in our authorized share structure,
being Fixed Shares, Floating Shares and Class F multiple voting shares (the “Fixed Multiple Shares”), and, in connection
with such amendment, we completed a capital reorganization (the “Capital Reorganization”) effective as of the Amendment
Time whereby: (i) each then outstanding SVS was exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share;
(ii) each then outstanding PVS was exchanged for 28 Fixed Shares and 12 Floating Shares; and (iii) each then
outstanding MVS was exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share.
At the Amendment Time, on the terms and subject
to the conditions of the Amended Plan of Arrangement, each option, restricted share unit, compensation option and warrant to acquire
SVS that was outstanding immediately prior to the Amendment Time was exchanged for a replacement option, restricted stock unit,
compensation option or warrant, as applicable, to acquire Fixed Shares (a “Fixed Share Replacement Security”)
and a replacement option, restricted stock unit, compensation option or warrant, as applicable, to acquire Floating Shares
(a “Floating Share Replacement Security”) in order to account for the Capital Reorganization.
As a condition to implementation of the Amended
Arrangement, an affiliate of Canopy Growth advanced the first tranche of $50,000,000 of a loan of up to $100,000,000 (the “Hempco
Loan”) to Universal Hemp, LLC, an affiliate of the Company that operates solely in the hemp industry in full compliance with
all applicable laws (“Universal Hemp”) pursuant to a secured debenture (the “Debenture”) bearing
interest at a rate of 6.1% per annum and maturing 10 years from the date thereof. All interest payments made pursuant to the Debenture
are payable in cash by Universal Hemp. The Debenture is not convertible and is not guaranteed by Acreage. A further $50,000,000 advance
will be made available upon satisfaction of specified conditions precedent. In accordance with the terms of the Debenture, the funds
cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless
and until such operations comply with all applicable laws of the United States. Refer to Note 10 to the consolidated financial
statements for the year ended December 31, 2020 for further discussion.
Pursuant to the Amended Plan of Arrangement,
upon the occurrence, or waiver (at the discretion of Canopy Growth), of a change in federal laws in the United States
to permit the general cultivation, distribution and possession of marijuana (as defined in the relevant legislation)
or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”
and the date on which the Triggering Event occurs, the “Triggering Event Date”), Canopy Growth, will, subject
to the satisfaction or waiver of certain closing conditions set out in the Arrangement Agreement: (i) acquire all of the issued
and outstanding Fixed Shares (following the mandatory conversion of the Fixed Multiple Shares into Fixed Shares) on the basis of
0.3048 (the “Fixed Exchange Ratio”) of a common share of Canopy Growth (each, a “Canopy Growth Share”)
for each Fixed Share held at the time of the acquisition of the Fixed Shares (the “Acquisition Time”), subject
to adjustment in accordance with the terms of the Amended Plan of Arrangement (the “Canopy Call Option”); and
(ii) have the right (but not the obligation) (the “Floating Call Option”), exercisable
for a period of 30 days following the Triggering Event Date to acquire all of the issued and outstanding Floating Shares.
Upon exercise of the Floating Call Option, Canopy Growth may acquire the Floating Shares for cash or for Canopy Growth Shares
or a combination thereof, in Canopy Growth’s sole discretion. If paid in cash, the price per Floating Share shall be
equal to the volume-weighted average trading price of the Floating Shares on the CSE (or other recognized stock exchange on which
the Floating Shares are primarily traded as determined by volume) for the 30 trading day period prior to the exercise (or
deemed exercise) of the Canopy Call Option, subject to a minimum amount of $6.41 (the “Floating Cash Consideration”).
If paid in Canopy Growth Shares, each Floating Share will be exchanged for a number of Canopy Growth Shares equal to (i) the
volume-weighted average trading price of the Floating Shares on the CSE (or other recognized stock exchange on which
the Floating Shares are primarily traded as determined by volume) for the 30 trading day period prior to the exercise (or
deemed exercise) of the Canopy Call Option, subject to a minimum amount of $6.41, divided by (ii) the volume-weighted
average trading price (expressed in US$) of the Canopy Growth Shares on the New York Stock Exchange (the “NYSE”)
(or such other recognized stock exchange on which the Canopy Growth Shares are primarily traded if not then traded on the NYSE)
for the 30 trading day period immediately prior to the exercise (or deemed exercise) of the Canopy Call Option (the “Floating
Ratio”). The Floating Ratio is subject to adjustment in accordance with the Amended Plan of Arrangement if Acreage
issues greater than the permitted number of Floating Shares prior to the Acquisition Date. No fractional Canopy Shares
will be issued pursuant to the Amended Plan of Arrangement. The Floating Call Option cannot be exercised unless
the Canopy Call Option is exercised (or deemed to be exercised). The closing of the acquisition of the Floating Shares pursuant
to the Floating Call Option, if exercised, will take place concurrently with the closing of the acquisition of the Fixed Shares
(the “Acquisition”) pursuant to the Canopy Call Option, if exercised. The Canopy Call Option and the Floating
Call Option will expire 10 years from the Amendment Time.
At the Acquisition Time, on the terms and
subject to the conditions of the Amended Plan of Arrangement, each Fixed Share Replacement Security will be exchanged for a replacement
option, restricted stock unit, compensation option or warrant, as applicable, to acquire from Canopy Growth such number of Canopy
Growth Shares as is equal to: (i) the number of Fixed Shares that were issuable upon exercise of such Fixed Share Replacement
Security immediately prior to the Acquisition Time, multiplied by (ii) the Fixed Exchange Ratio in effect immediately prior
to the Acquisition Time (provided that if the foregoing would result in the issuance of a fraction of a Canopy Growth Share, then
the number of Canopy Growth Shares to be issued will be rounded down to the nearest whole number).
In the event that the Floating Call
Option is exercised and Canopy Growth acquires the Floating Shares at the Acquisition Time, on the terms and subject to the conditions
of the Amended Plan of Arrangement, each Floating Share Replacement Security will be exchanged for a replacement option, restricted
stock unit, compensation option or warrant, as applicable, to acquire from Canopy Growth such number of Canopy Growth Shares as
is equal to: (i) the number of Floating Shares that were issuable upon exercise of such Floating Share Replacement Security
immediately prior to the Acquisition Time, multiplied by (ii) the Floating Ratio (provided that if the foregoing would result
in the issuance of a fraction of a Canopy Growth Share, then the number of Canopy Growth Shares to be issued will be rounded down
to the nearest whole number).
The Amending Agreement also provides that
Acreage may issue a maximum of 32,700,000 shares (or convertible securities in proportion to the foregoing), which will include (i) 3,700,000
Floating Shares which are to be issued solely in connection with the exercise of stock options granted to Acreage management (the “Option
Shares”); (ii) 8,700,000 Floating Shares other than the Option Shares; and (iii) 20,300,000 Fixed Shares, without a revision
to the Fixed Exchange Ratio. Notwithstanding the foregoing, the Amending Agreement provides that Acreage may not issue any equity securities,
without Canopy Growth’s prior consent, other than: (i) upon the exercise or conversion of convertible securities outstanding as
of the Amendment Date; (ii) contractual commitments existing as of the Amendment Date; (iii) the Option Shares; (iv) the issuance of
up to $3.0 million worth of Fixed Shares pursuant to an at-the-market offering to be completed no more than four times during any one-year
period; (v) the issuance of up to 500,000 Fixed Shares in connection with debt financing transactions that are otherwise in compliance
with the terms of the Arrangement Agreement, as amended by the Amending Agreement; or (vi) pursuant to one private placement or public
offering of securities during any one-year period for aggregate gross proceeds of up to $20.0 million, subject to specific limitations
as set out in the Amending Agreement.
For more information, please refer
to the Amending Agreement included as an exhibit to this Registration Statement.
Pursuant to the Amending Agreement, Acreage
agreed to submit an Approved Business Plan to Canopy Growth on a quarterly basis that complies with certain specified criteria,
including a business plan for the fiscal years ending December 31, 2020 through December 31, 2029 attached as a Schedule
to the Proposal Agreement (the “Initial Business Plan”). The Initial Business Plan contains annual
revenue and earnings targets for each of Acreage’s fiscal years ending on December 31, 2020 to December 31,
2029, as outlined below:
A number of factors may cause Acreage to fail to meet the Pro-Forma Net Revenue Targets or the Consolidated Adj. EBITDA Targets
set forth in the Initial Business Plan and outlined above. See “Risk Factors”.
In the event that Acreage has not satisfied:
(i) 90% of the Pro-Forma Net Revenue Target or the Consolidated Adj. EBITDA Target set forth in the Initial
Business Plan, measured on a quarterly basis, an Interim Failure to Perform will occur and the Austerity Measures shall
become applicable. The Austerity Measures include, among other things:
The Austerity Measures provide significant
restrictions on Acreage’s ability to take certain actions otherwise permitted by the Amended Arrangement Agreement; (ii)
80% of the Pro-Forma Net Revenue Target or the Consolidated Adj. EBITDA Target set forth in the Initial Business
Plan, as determined on an annual basis (commencing in respect of the fiscal year ending December 31, 2021), a Material
Failure to Perform will occur and (a) certain restrictive covenants applicable to Canopy Growth under the Amended
Arrangement Agreement will cease to apply in order to permit Canopy Growth to acquire, or conditionally acquire,
a competitor of the Company in the United States should it wish to do so, and (b) an event of default under the Debenture
will likely occur resulting in the Hempco Loan becoming immediately due and payable; and (iii) 60% of the Pro-Forma Net
Revenue Target or the Consolidated Adj. EBITDA Target set forth in the Initial Business Plan for the trailing 12 month
period ending on the date that is 30 days prior to the proposed Acquisition Time, a Failure to Perform shall occur and
a material adverse impact will be deemed to have occurred for purposes of Section 6.2(2)(h) of the Arrangement
Agreement and Canopy Growth will not be required to complete the Acquisition of the Fixed Shares pursuant to the
Canopy Call Option.
Our website is http://www.acreageholdings.com.
Our filings with the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, are accessible free of charge at http://investors.acreageholdings.com/docs as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains
reports, proxy and information statements, and other information regarding issuers, such as ourselves, that file electronically with
the SEC. The Internet address of the SEC’s site is http://www.sec.gov.
We also have adopted a Code of Conduct that
applies to all employees, directors and officers. A copy of the Code of Conduct is available without charge to any person desiring
a copy of the Code of Conduct. You may request a copy of the Code of Conduct by submitting written request to us at our principal offices
at 450 Lexington Ave, #3308, New York, New York 10163.
Our Board Mandate and the Charters of the
Board’s Audit Committee and Compensation and Corporate Governance Committee (which serves as the Board’s compensation and
nominating committee) are available on our website. All materials are accessible on our website at investors.acreageholdings.com. Amendments
to, and waivers granted to our directors and executive officers under our code of conduct or charters, if any, will be posted in this
area of our website. Copies of these materials are available in print to any shareholder who requests them. Shareholders should direct
such requests in writing to Investor Relations Department, Acreage Holdings, Inc., 450 Lexington Ave, #3308, New York, New York 10163,
or by emailing our Investor Relations team at investors@acreageholdings.com.
The information regarding our website and
its content is for your convenience only. The content of our website is not deemed to be incorporated by reference in this report
or filed with the SEC.
In accordance with the Canadian Securities
Administrators Staff Notice 51-352 (Revised) - Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”),
below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where the Company is currently involved,
through High Street , in the cannabis industry. High Street is, through its subsidiaries, engaged in, or has management, consulting services
or other agreements in place with license holders to assist in the manufacture, possession, sale or distribution of cannabis in the adult-use
or medical cannabis marketplace in California, Connecticut, Florida, Illinois, Maine, Massachusetts, Michigan, New Hampshire, New Jersey,
New York, Ohio, Oregon and Pennsylvania. In accordance with Staff Notice 51-352, the Company will evaluate, monitor and reassess this
disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings,
including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding cannabis
regulation. Any non-compliance, citations or notices of violation which may have an impact on the Company’s license, business activities
or operations will be promptly disclosed by the Company.
State laws that permit and regulate the production,
distribution and use of cannabis for adult-use or medical purposes are in direct conflict with the CSA, which makes cannabis distribution
and possession federally illegal. Although certain states and territories of the U.S. authorize medical or adult-use cannabis production
and distribution by licensed or registered entities, under U.S. federal law, the possession, cultivation, and transfer of cannabis and
any related drug paraphernalia is illegal and any such acts are criminal acts under any and all circumstances under the CSA. Although
the Company’s activities are believed to be compliant with applicable United States state and local law, strict compliance with
state and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law, nor may it
provide a defense to any federal proceeding which may be brought against the Company.
As of the date of this Prospectus, medical
use of cannabis is legal, with a doctor's recommendation, in thirty-six (36) states, four (4) out of five (5) permanently inhabited U.S.
territories, and the District of Columbia, with one (1) state pending enactment until a future date. Thirteen (13) other states have
laws that limit THC content, for the purpose of allowing access to products that are rich in cannabidiol (CBD), a non-psychoactive component
of cannabis. The recreational use of cannabis is legal in fourteen (14) states, the District of Columbia, the Northern Mariana Islands,
and Guam, with two (2) states pending enactment until a future date. Another sixteen (16) states and the U.S. Virgin Islands have decriminalized
its use.
The U.S. administration under President Obama
attempted to address the inconsistent treatment of cannabis under state and federal law in the Cole Memorandum which Deputy Attorney
General James Cole sent to all U.S. Attorneys in August 2013 that outlined certain priorities for the DOJ relating to the prosecution
of cannabis offenses. The Cole Memorandum held that enforcing federal cannabis laws and regulations in jurisdictions that have enacted
laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control
the cultivation, processing, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations was
not a priority for the DOJ. Instead, the Cole Memorandum directed U.S. Attorney’s Offices discretion not to investigate or prosecute
state law compliant participants in the medical cannabis industry who did not implicate certain identified federal government priorities,
including preventing interstate diversion or distribution of cannabis to minors.
On January 4, 2018, then U.S. Attorney General
Jeff Sessions formally issued the Sessions Memorandum, which rescinded the Cole Memorandum effective upon its issuance. The Sessions
Memorandum stated, in part, that current law reflects “Congress’ determination that cannabis is a dangerous drug and cannabis
activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress and to follow
well-established principles that govern all federal prosecutions when deciding whether to pursue prosecutions related to cannabis activities.
As a result, federal prosecutors could, and still can, use their prosecutorial discretion to decide to prosecute actors compliant with
their state laws. Although there have not been any identified prosecutions of state law compliant cannabis entities, there can be no
assurance that the federal government will not enforce federal laws relating to cannabis in the future. Jeff Sessions resigned as U.S.
Attorney General on November 7, 2018.
On February 14, 2019, William Barr was confirmed
as U.S. Attorney General. However, in a written response to questions from U.S. Senator Cory Booker made as a nominee, Attorney General
Barr stated “I do not intend to go after parties who have complied with state law in reliance on the Cole Memo.” Nonetheless,
there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that
local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until
the United States Congress amends the CSA with respect to cannabis (and as to the timing or scope of any such potential amendments there
can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law.
The Department of Justice under Mr. Barr did
not take a formal position on federal enforcement of laws relating to cannabis. Mr. Barr has stated publicly that his preference would
be to have a uniform federal rule against cannabis, but, absent such a uniform rule, his preference would be to permit the existing federal
approach of leaving it up to the states to make their own decisions.
President Biden has nominated Merrick Garland
to serve as Attorney General in his administration. It is not yet known whether the Department of Justice under President Biden and Attorney
General Garland, will re-adopt the Cole Memorandum or announce a substantive cannabis enforcement policy. If the Department of Justice
policy under Attorney General Garland, were to aggressively pursue financiers or owners of cannabis-related businesses, and United States
Attorneys followed such Department of Justice policies through pursuing prosecutions, then the Company could face (i) seizure of its
cash and other assets used to support or derived from its cannabis operations, (ii) the arrest of its employees, directors, officers,
managers and investors, and charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the
CSA by virtue of providing financial support to cannabis companies that service or provide goods to state-licensed or permitted cultivators,
processors, distributors, and/or retailers of cannabis, and/or (iii) the barring of its employees, directors, officers, managers and
investors who are not United States citizens from entry into the United States for life.
The Company believes it is still unclear what
prosecutorial effects will be created by the rescission of the Cole Memorandum. The sheer size of the cannabis industry, in addition
to participation by state and local governments and investors, suggests that a large-scale enforcement operation would more than likely
create unwanted political backlash for the DOJ. Regardless, cannabis remains a Schedule I controlled substance at the federal level,
and neither the Cole Memo nor its rescission has altered that fact. The federal government of the United States has always reserved the
right to enforce federal law in regard to the sale and disbursement of medical or adult-use cannabis, even if state law sanctioned such
sale and disbursement. The Company believes, from a purely legal perspective, that the criminal risk today remains similar to the risk
on January 3, 2018. It remains unclear whether the risk of enforcement has been altered. Additionally, under United States federal law,
it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale
of cannabis or any other Schedule I controlled substance. Canadian banks are likewise hesitant to deal with cannabis companies, due to
the uncertain legal and regulatory framework of the industry. Banks and other financial institutions, particularly those that are federally
chartered in the United States, could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses.
While Congress is considering legislation that may address these issues, there can be no assurance that such legislation passes.
Despite these laws, the U.S. Department of
the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a memorandum on February 14, 2014 (the
“FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses
in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the Cole Memorandum and
states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution
for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a Suspicious Activity Report
(“SAR”) in connection with all cannabis-related banking activities by any client of such financial institution, in
accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories - cannabis limited, cannabis
priority, and cannabis terminated - based on the financial institution’s belief that the business in question follows state law,
is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. On the same day
that the FinCEN Memorandum was published, the DOJ issued a memorandum (the “2014 Cole Memorandum”) directing prosecutors
to apply the enforcement priorities of the Cole Memorandum in determining whether to charge individuals or institutions with crimes related
to financial transactions involving the proceeds of cannabis-related conduct. The 2014 Cole Memorandum has been rescinded as of January
4, 2018, along with the Cole Memorandum, removing guidance that enforcement of applicable financial crimes against state-compliant actors
was not a DOJ priority.
However, former Attorney General Sessions’
revocation of the Cole Memorandum and the 2014 Cole Memorandum has not affected the status of the FinCEN Memorandum, nor has the Department
of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the
2014 Cole Memorandum and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum is a standalone document which explicitly lists
the eight enforcement priorities originally cited in the Cole Memorandum. As such, the FinCEN Memorandum remains intact, indicating that
the Department of the Treasury and FinCEN intend to continue abiding by its guidance. However, in the United States, it is difficult
for cannabis-based businesses to open and maintain a bank account with any bank or other financial institution.
Although the Cole Memorandum has been rescinded,
one legislative safeguard for the medical cannabis industry, appended to federal appropriations legislation, remains in place. Currently
referred to as the “Rohrabacher-Blumenauer Amendment”, this so-called “rider” provision has been appended to
the Consolidated Appropriations Acts for fiscal years 2015, 2016, 2017, 2018, and 2019. Under the terms of the Rohrabacher-Blumenauer
rider, the federal government is prohibited from using congressionally appropriated funds to enforce federal cannabis laws against regulated
medical cannabis actors operating in compliance with state and local law. On December 20, 2019, then President Donald Trump signed the
Consolidated Appropriations Act, 2020 which included the Rohrabacher-Blumenauer Amendment, which prohibits the funding of federal prosecutions
with respect to medical cannabis activities that are legal under state law. On December 27, 2020, the omnibus spending bill passed including
the Rohrabacher-Blumenauer Amendment, extending its application until September 30, 2021. There can be no assurances that the Rohrabacher-Blumenauer
Amendment will be included in future appropriations bills to prevent the federal government from using congressionally appropriated funds
to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law.
Despite the legal, regulatory, and political
obstacles the cannabis industry currently faces, the industry has continued to grow. It was anticipated that the federal government would
eventually repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated
cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or
tobacco.
Given current political trends, however, these
developments are considered unlikely in the near-term. As an industry best practice, despite the recent rescission of the Cole Memorandum,
the Company abides by the following to ensure compliance with the guidance provided by the Cole Memorandum:
In addition, the Company may (and frequently
does) conduct background checks to ensure that the principals and management of its operating subsidiaries are of good character, and
have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in
cultivation, manufacturing or distribution of cannabis. The Company will also conduct ongoing reviews of the activities of its cannabis
businesses, the premises on which they operate and the policies and procedures that are related to possession of cannabis or cannabis
products outside of the licensed premises, including the cases where such possession is permitted by regulation. See “Risk Factors.”
The Cole Memorandum and the Rohrabacher/Blumenauer
Amendment gave medical cannabis operators and investors in states with legal regimes greater certainty regarding federal enforcement
as to establish cannabis businesses in those states. Nonetheless, there is no guarantee that state laws legalizing and regulating the
sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability
of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to cannabis
(and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities
may enforce current U.S. federal law.
Despite the expanding market for legal cannabis,
traditional sources of financing, including bank lending or private equity capital, are lacking which can be attributable to the fact
that cannabis remains a Schedule I substance under the CSA. These traditional sources of financing are expected to remain scarce unless
and until the federal government legalizes cannabis cultivation and sales.
Pursuant to Staff Notice 51-352, issuers with
U.S. cannabis-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings
and other required disclosure documents. In accordance with the Staff Notice 51-352, below is a table of concordance that is intended
to assist readers in identifying those parts of this prospectus that address the disclosure expectations outlined in Staff Notice 51-352.
|
Industry
Involvement
|
Specific
Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties
|
Annual
Report Cross Reference
|
|
U.S.
Marijuana Issuers with indirect involvement in cultivation or distribution
|
Outline
the regulations for U.S. states in which the Company’s investee(s) operate.
|
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - California”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Maine”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Massachusetts”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - New Jersey”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Ohio”
|
|
Provide
reasonable assurance, through either positive or negative statements, that the investee’s business is in compliance with applicable
licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations
or notices of violation, of which the Company is aware, that may have an impact on the investee’s license, business activities
or operations.
|
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - California”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Maine”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Massachusetts”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - New Jersey”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Ohio”
|
|
U.S.
Marijuana Issuers with material ancillary involvement
|
Provide
reasonable assurance, through either positive or negative statements, that the applicable customer’s or investee’s business
is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.
|
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Maine”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Massachusetts”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - New Jersey”
“Regulatory Overview - The Regulatory
Landscape on a U.S. State Level - Ohio”
|
In accordance with Staff Notice 51-352, the
Company will evaluate, monitor and reassess the foregoing disclosure, and any related risks, on an ongoing basis and any supplements
or amendments hereto will be reflected in, and provided to, investors in public filings of the Company, including in the event of government
policy changes or the introduction of new or amended guidance, laws or regulations regarding cannabis regulation. Any non-compliance,
citations or notices of violation which may have a material impact on any subsidiary’s licenses, business activities or operations
will be promptly disclosed by the Company.
The following chart sets out, for each of
the subsidiaries and other entities through which the Company conducts its operations, the U.S. state(s) in which it operates, the nature
of its operations (adult-use/medicinal), whether such activities carried on are direct, indirect or ancillary in nature (as such terms
are defined in Staff Notice 51-352), the number of sales, cultivation and other licenses held by such entity and whether such entity
has any operational cultivation or processing facilities.
|
State
|
Entity
|
Adult-Use
/ Medicinal
|
Direct
/ Indirect / Ancillary
|
Dispensary
Licenses
|
Cultivation
/ Processing / Distribution License
|
Operational
Dispensaries
|
Operational
Cultivation / Processing Facilities
|
|
California
|
CWG
Botanicals, Inc.1, 2,4
|
Adult-Use
/ Medicinal
|
Ancillary
|
—
|
3
|
—
|
1
|
|
Kanna,
Inc.
|
Adult-Use
/ Medicinal
|
Direct
|
1
|
—
|
—
|
—
|
|
Gravenstein
Foods LLC3
|
Adult-Use
/ Medicinal
|
Direct
|
—
|
1
|
—
|
—
|
|
Connecticut
|
D&B
Wellness, LLC
|
Medicinal
|
Direct
|
1
|
—
|
1
|
—
|
|
Prime
Wellness of Connecticut, LLC
|
Medicinal
|
Direct
|
1
|
—
|
1
|
—
|
|
Thames
Valley Apothecary, LLC
|
Medicinal
|
Direct
|
1
|
—
|
1
|
—
|
|
Florida5
|
Acreage
Florida, Inc.
|
Medicinal
|
Direct
|
1
|
1
|
1
|
1
|
|
Illinois
|
In
Grown Farms LLC1
|
Adult-Use
/ Medicinal
|
Direct
|
—
|
1
|
—
|
1
|
|
NCC
LLC
|
Adult-Use
/ Medicinal
|
Direct
|
1
|
—
|
1
|
—
|
|
NCC
2 LLC
|
Adult-Use
|
Direct
|
1
|
—
|
1
|
—
|
|
Maine
|
Wellness
Connection of Maine1
|
Medicinal
|
Ancillary
|
3
|
1
|
3
|
1
|
|
NPG
LLC
|
Adult-Use
|
Direct
|
1
|
—
|
1
|
—
|
|
Massachusetts
|
The
Botanist, Inc.
|
Medicinal
|
Direct
|
3
|
1
|
2
|
1
|
|
Michigan
|
N/A
|
Medicinal
|
Direct
|
3
|
—
|
—
|
—
|
|
New
Hampshire1
|
Prime
Alternative Treatment Centers of NH, Inc.
|
Medicinal
|
Ancillary
|
2
|
1
|
1
|
1
|
|
New
Jersey
|
Compassionate
Care Foundation, Inc.
|
Medicinal
|
Direct
|
3
|
1
|
2
|
1
|
|
New
York
|
NYCANNA,
LLC
|
Medicinal
|
Direct
|
4
|
1
|
4
|
1
|
|
Ohio
|
Greenleaf
Apothecaries, LLC1
|
Medicinal
|
Ancillary
|
5
|
—
|
5
|
—
|
|
Greenleaf
Therapeutics, LLC1
|
Medicinal
|
Ancillary
|
—
|
1
|
—
|
—
|
|
Greenleaf
Gardens, LLC1
|
Medicinal
|
Ancillary
|
—
|
1
|
—
|
1
|
|
Oregon
|
High
Street Oregon, LLC
|
Adult-Use
|
Direct
|
2
|
1
|
2
|
—
|
|
22nd
& Burn, Inc.
|
Adult-Use
|
Direct
|
1
|
—
|
1
|
—
|
|
The
Firestation 23, Inc.
|
Adult-Use
|
Direct
|
1
|
—
|
1
|
—
|
|
East
11th, Inc.
|
Adult-Use
|
Direct
|
1
|
—
|
1
|
—
|
|
Gesundheit
Foods LLC4
|
Adult-Use
|
Direct
|
—
|
2
|
—
|
—
|
|
Pennsylvania
|
Prime
Wellness of Pennsylvania, LLC
|
Medicinal
|
Direct
|
—
|
1
|
—
|
1
|
Notes:
|
|
(1)
|
Acreage provides goods and/or services
including but not limited to financing, management, consulting and/or administrative services
with these license holders to assist in the operations of their cannabis businesses.
|
|
|
(2)
|
Separate grow/process licenses.
|
|
|
(3)
|
A distribution license has been issued
in this U.S. state.
|
|
|
(4)
|
Acreage has entered into an agreement
to acquire CWG. The acquisition remains subject to regulatory approval.
|
|
|
(5)
|
On February 25, 2020, we entered
into an agreement to sell all of our operations in Florida for an aggregate purchase price
of $60.0 million. The sale is expected to close during the second quarter of 2021 subject
to customary closing conditions including the procurement of all necessary approvals for
the transfer to the purchaser of the Florida license for the operation of the medical marijuana
businesses.
|
The above-noted licenses have been entered
into in the ordinary course of business. The Company is not substantially dependent on any one such license and, as such, does not consider
such licenses as material contracts.
State-Level Overview & Compliance Summary
While the Company and High Street are in compliance
with the rules, regulations and license requirements governing each state in which the subsidiaries and contractual parties operate,
there are significant risks associated with their business and the business of the subsidiaries and contractual parties. Further, the
rules and regulations as outlined below are not a full complement of all the rules that the subsidiaries are required to follow in each
applicable state.
Although each state has its own laws and regulations
regarding the operation of cannabis businesses, certain of the laws and regulations are consistent across jurisdictions. As a general
matter, to operate legally under state law, cannabis operators must obtain a license from the state and in certain states must also obtain
local approval. In those states where local approval is required, local authorization is a prerequisite to obtaining state licenses,
and local governments are permitted to prohibit or otherwise regulate the types and number of cannabis businesses allowed in their locality.
The license application and license renewal processes are unique to each state. However, each state’s application process requires
a comprehensive criminal history, regulatory history, financial and personal disclosures, coupled with stringent monitoring and continuous
reporting requirements designed to ensure only good actors are granted licenses and that licensees continue to operate in compliance
with the state regulatory program.
License applicants for each state must submit
standard operating procedures describing how the operator will, among other requirements, secure the facility, manage inventory, comply
with the state’s seed-to-sale tracking requirements, dispense cannabis, and handle waste, as applicable to the license sought.
Once the standard operating procedures are determined compliant and approved by the applicable state regulatory agency, the licensee
is required to abide by the processes described and seek regulatory agency approval before any changes to such procedures may be made.
Licensees are additionally required to train their employees on compliant operations and are only permitted to transact with other legal
and licensed businesses.
As a condition of each state’s licensure,
operators must consent to inspections of the commercial cannabis facility as well as the facility’s books and records to monitor
and enforce compliance with state law. Many localities have also enacted similar standards for inspections and have already commenced
both site-visits and compliance inspections for operators who have received state temporary or annual licensure.
To strengthen the communication and transparency
between High Street and its subsidiaries, High Street and its subsidiaries utilize a third-party enterprise compliance platform, which
facilitates a regulatory document control workflow for each state and can issue alerts for time sensitive information requests for events
such as license renewal or an impending inspection. The software features a robust auditing system that allows for both internal as well
as third-party compliance auditing, covering all state, municipal, facility and operational requirements. The third-party software facilitates
the implementation and maintenance of compliant operations and can track all required licensing maintenance criteria, which includes
countdown features and automatically generated reminders for initiating renewals and required reporting. Though the Company and High
Street strive to comply with all aspects of the required state regulations, they believe that the core to ensuring a comprehensive compliance
program is to weigh the risk of each regulation and ensure on a regular basis that the operators are properly controlling these risks.
Acreage monitors the applicable rules and
regulations of each state in which it has, indirectly through its subsidiaries, licenses, permits, or operations. Acreage maintains a
database and tracks each license or permit held by its subsidiaries, showing the renewal date, inspection schedules, and the results
of any regulatory inspection reports. Acreage enhances its compliance program through subscription to a web-based service that provides
access to cannabis-related state, county, municipal and federal rules and regulations which organizes the laws into distinct categories
(such as taxation, zoning, application and licensing, and packaging and labeling) and sorts them by license type (such as cultivation,
dispensary and testing). Acreage will also monitor any action taken by its subsidiaries in response to a change of governing regulations
or suggestions from regulators.
Acreage’s legal compliance team continually
monitors and reviews correspondence and changes to, and updates of, rules or regulatory policies impacting Acreage and the operation
of the businesses carried on by its subsidiaries in each U.S. state in which it has operations. Acreage has employed an experienced team
of legal and compliance professionals with expertise in regulatory and corporate compliance to oversee its activities. The team led by
the Company’s General Counsel, includes a former Assistant U.S. Attorney; a former SEC enforcement attorney and experienced compliance
professional; and three experienced corporate attorneys and one paralegal. Acreage has a Director of Operational Compliance who oversees
a team that focuses on state-by-state operational compliance issues. Acreage’s legal compliance team has implemented internal policies
and procedures at corporate and subsidiary levels designed to mitigate any lapses in its overall infrastructure and facilitate compliance
with relevant laws and regulations. Acreage strives to ensure its overall operations are in compliance with U.S. state law and the related
licensing framework (see “Regulatory Framework - The Regulatory Landscape on a U.S. State Level). Marijuana remains
a Schedule I controlled substance in the U.S. and therefore federally illegal. Acreage has not received any non-compliance citations
or notices of violation which may have a material impact on its licenses, business activities or operations.
Acreage is classified as having a “direct,”
“indirect” and “ancillary” involvement in the United States cannabis industry and it, each of its subsidiaries
and, to the best of its knowledge, each entity through which it has ancillary involvement in the United States cannabis industry, is
in compliance with applicable United States state law and related licensing requirements and the regulatory framework enacted by each
of the states in which it has operations. The Company is not subject to any citations or notices of violation with applicable licensing
requirements and the regulatory frameworks which may have a material impact on its licenses, business activities or operations. The Company
uses reasonable commercial efforts to ensure that its business is in compliance with applicable licensing requirements and the regulatory
frameworks enacted by each state, through the advice of its Director of Legal Compliance, and its Director of Compliance, who monitor
and review its business practices and changes to U.S. federal and state enforcement priorities and rules. The Company’s General
Counsel and his legal team work with external legal counsel to ensure that the Company is in on-going compliance with applicable state
law. These advisors have provided legal advice to the subsidiaries regarding, among other things, (a) compliance with applicable state
regulatory frameworks, and (b) potential exposure and implications arising from U.S. federal law. In addition, the Company has designated
individuals with responsibility for overseeing day-to-day compliance at each facility in which the Company maintains operational control.
The Company will continue to use reasonable
commercial efforts to ensure it is in compliance with applicable licensing requirements and the regulatory framework enacted in states
where it conducts business by continuous review of its licenses and affirmation certifications from management. The Company has engaged
state and local regulatory/compliance counsel engaged in jurisdictions in which it operates.
The Company has a commitment to training its
personnel on the relevant issues in order to facilitate its overall compliance effort. The Company’s training program includes,
among other items, the following topics:
|
|
•
|
importance of compliance with state
and local laws
|
|
|
•
|
security and safety policies and
procedures
|
|
|
•
|
cash management and control
|
|
|
•
|
transportation procedures
|
The Company’s training program emphasizes
security and inventory control to ensure strict monitoring of cannabis and inventory from delivery to sale or disposal. Only authorized,
properly trained employees are allowed to access the Company’s computerized seed- to-sale system. All of the Company’s facilities
are monitored 24-hours a day, seven days a week. Visitors to the facilities are only permitted in strict accordance with relevant state
laws and appropriately monitored and logged in.
The Company’s compliance team closely
monitors and promptly addresses all compliance notifications from the regulators and inspectors in each market, in an effort to resolve
any issues identified on a timely basis. The Company keeps records of all compliance notifications received from the state regulators
or inspectors and how and when the issue was resolved.
Further, the Company has created comprehensive
standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking,
recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and
ensuring the accuracy of inventory tracking and recordkeeping. The Company maintains records of its inventory at all licensed facilities.
Adherence to the Company’s standard operating procedures is mandatory and ensures that the Company’s operations are compliant
with the rules set forth by the applicable state and local laws, regulations, ordinances, licenses and other requirements. The Company
ensures adherence to standard operating procedures by regularly conducting internal inspections and is committed to ensuring any issues
identified are resolved quickly and thoroughly.
In order to comply with industry best practices,
despite the rescission of the Cole Memorandum, the Company continues to do the following to ensure compliance with the guidance provided
by the Cole Memorandum:
|
|
•
|
Ensure the operations are compliant
with all licensing requirements that are set forth with regards to cannabis operation by
the applicable state, county, municipality, town, township, borough, and other political/administrative
divisions. To this end, the Company uses its internal Legal Department including its Legal
Compliance team and retains appropriately experienced legal counsel to conduct the necessary
due diligence to ensure compliance of such operations with all applicable regulations;
|
|
|
•
|
The activities relating to cannabis
business adhere to the scope of the licensing obtained. For example, in Florida only medical
cannabis is permitted and therefore the products are only sold to patients who have the appropriate
recommendation in the state registry and have a valid state-issued medical identification
card;
|
|
|
•
|
The Company only works through licensed
operators, which must pass a range of requirements, adhere to strict business practice standards
and be subjected to strict regulatory oversight whereby sufficient checks and balances ensure
that no revenue is distributed to criminal enterprises, gangs and cartels; and
|
|
|
•
|
The Company conducts reviews of
products and product packaging to ensure that the products comply with applicable regulations
and contain necessary disclaimers about the contents of the products to prevent adverse public
health consequences from cannabis use and prevent impaired driving.
|
The Company will continue to monitor compliance
on an ongoing basis in accordance with its compliance program and standard operating procedures. While the Company’s operations
strive to be in compliance with all applicable state laws, regulations and licensing requirements, some of such activities remain illegal
under United States federal law. For the reasons described above and the risks further described in Risk Factors below, there are significant
risks associated with the business of the Company. See “Risk Factors”.
The Regulatory Landscape on a U.S. State
Level
California
California Legislative History
In 1996, California voters passed Proposition
215, the Compassionate Use Act allowing physicians to legally recommend medical cannabis for patients who would benefit from cannabis.
The Compassionate Use Act legalized the use, possession and cultivation of medical cannabis for a set of qualifying conditions including
AIDS, anorexia, arthritis, cachexia, cancer and chronic pain. The law established a not-for-profit patient/caregiver system but there
was no state licensing authority to oversee the businesses that emerged as a result.
In September 2015, the California legislature
passed three bills, collectively known as the “Medical Marijuana Regulation and Safety Act”. The Medical Marijuana Regulation
and Safety Act established a licensing and regulatory framework for the medical cannabis businesses in California. Multiple agencies
oversee different aspects of the program and require businesses obtain a state license and local approval to operate.
In November 2016, voters in California passed
Proposition 64, the Adult Use of Marijuana Act (“AUMA”) creating an adult-use cannabis program for individuals 21
years of age or older. AUMA contained conflicting provisions with the Medical Marijuana Regulation and Safety Act. Consequently, in June
2017, the California State Legislature passed Senate Bill No. 94, known as the Medicinal and Adult-Use Cannabis Regulation and Safety
Act (“MAUCRSA”), which combined the Medical Marijuana Regulation and Safety Act and AUMA to provide a set of regulations
to govern medical and adult-use licensing regime for cannabis businesses. The three agencies that regulate cannabis at the state level
are: (a) the California Department of Food and Agriculture, via CalCannabis, which issues licenses to cannabis cultivators; (b) the California
Department of Public Health, via the Manufactured Cannabis Safety Branch, which issues licenses to cannabis manufacturers; and (c) the
California Department of Consumer Affairs, via the Bureau of Cannabis Control, which issues licenses to cannabis distributors, testing
laboratories, retailers, and micro-businesses. These agencies also oversee the various aspects of implementing and maintaining California’s
cannabis landscape, including the statewide track and trace system.
To legally operate a medical or adult-use
cannabis business in California, the operator must have both local approval and a state license. This requires license holders to operate
in cities with cannabis licensing and approval programs. Municipalities in California are authorized to determine the number of licenses
they will issue to cannabis operators, or can choose to outright ban the cultivation, manufacturing or the retail sale of cannabis. MAUCRSA
went into effect on January 1, 2018.
On May 18, 2018, the California Department
of Consumer Affairs, the California Department of Public Health and the California Department of Food and Agriculture proposed to re-adopt
their emergency cannabis regulations. The three licensing authorities proposed changes to the regulatory provisions to provide greater
clarity to licensees and to address issues that have arisen since the emergency regulations went into effect in December 2017. Highlighted
among the changes are that applicants may now complete one license application which will allow for both medical and adult-use cannabis
activity. These emergency cannabis regulations were officially readopted on June 4, 2018 and came into effect on June 6, 2018. On January
16, 2019, California’s three state cannabis licensing authorities announced that the Office of Administrative Law officially approved
state regulations for cannabis businesses. The final cannabis regulations took effect immediately and superseded the previous emergency
regulations.
California Licenses
Although vertical integration across multiple
license types is allowed under the state regulations, it is not required. CWG Botanicals, Inc. (“CWG”) holds three
licenses in California and has received local approval to operate under such licenses. HSRC NorCal, LLC (“HSRC”),
a subsidiary of the Company, has entered into a management or consulting services agreement with CWG but does not own or control CWG
at this time. CWG holds cultivation/grow, manufacturing and distribution licenses. The manufacturing license is denoted as a Type 7 which
provides CWG the authorization to manufacture cannabis products using volatile solvent as well as non-volatile extraction methods. Each
license issued gives CWG the ability to operate as a medical and adult-use provider. Gravenstein Foods LLC (“Gravenstein”),
a subsidiary of Form Factory, holds a temporary manufacturing license. The manufacturing license is denoted as a Type 6 which provides
Gravenstein the authorization to manufacture cannabis products using only non-volatile extraction methods. On July 15, 2019, Kanna, Inc.
(“Kanna”), a subsidiary of the Company, was awarded an Adult-Use and Medicinal - Retailer Provisional License, which
allows Kanna to open a dispensary and was awarded an Adult-Use and Medicinal - Retailer Provisional License, which allows Kanna to open
a dispensary.
California License Types
Once an operator obtains local approval, the
operator must obtain state licenses before conducting any commercial marijuana activity. There are 12 different license types that cover
all commercial activity. License types 1-3 authorize the cultivation of medical and/or adult-use marijuana plants. Type 4 licenses are
for nurseries that cultivate and sell clones and “teens” (immature marijuana plants that have established roots but require
further vegetation prior to being sent into the flowering period). Type 6 and 7 licenses authorize manufacturers to process marijuana
biomass into certain value-added products such as shatter or marijuana distillate oil with the use of volatile or non-volatile solvents,
depending on the license type. Type 8 licenses are held by testing facilities who test samples of marijuana products and generate “certificates
of analysis,” which include important information regarding the potency of products and whether products have passed or failed
certain threshold tests for pesticide and microbiological contamination. Type 9 licenses are issued to “non-storefront” retailers,
commonly called delivery services, who bring marijuana products directly to customers and patients at their residences or other chosen
delivery location. Type 10 licenses are issued to storefront retailers, or dispensaries, which are open to the public and sell marijuana
products onsite. Type 11 licenses are known as “Transport-Only” distribution licenses, and they allow the distributor to
transport marijuana and marijuana products between licensees, but not to retailers. Type 12 licenses are issued to distributors who move
marijuana and marijuana products to all license types, including retailers.
The below table lists the licenses issued
to CWG, Gravenstein, and Kanna, Inc.:
|
Subsidiary
|
License
Number
|
City
|
Expiration
Date
|
Description
|
|
CWG
Botanicals, Inc.
|
CCL18-0000104
|
Oakland
|
4/17/2021
|
Grow
|
|
CWG
Botanicals, Inc.
|
CDPH-
10002775
|
Oakland
|
4/24/2021
|
Manufacturing
|
|
CWG
Botanicals, Inc.
|
C11-0000434-LIC
|
Oakland
|
6/19/2021
|
Distribution
|
|
Gravenstein
Foods LLC
|
CDPH-10003051
|
Oakland
|
5/1/2021
|
Manufacturing
|
|
Kanna,
Inc.
|
C10-0000419-LIC
|
Oakland
|
7/14/2021
|
Retailer
|
In
September 2018, the Governor of California approved the Senate Bill 1459 (“SB-1459”). SB-1459 created a new scheme
of provisional licenses for cannabis operators. This provisional licensing scheme was essentially intended to replace the temporary licensing
scheme. SB-1459 was necessary because the three main state cannabis licensing agencies - the Bureau of Cannabis Control (“BCC”),
California Department of Public Health (“CDPH”), and California Department of Food and Agriculture (“CDFA”)
- and localities which issue permits to cannabis operators, were all backlogged with numerous applications and couldn’t process
all of the applications in time for applicants to get operational in 2018. The steps, per SB-1459 to obtain a provisional license are
as follows: (1) an applicant must hold or previously have held a temporary license for the same commercial cannabis activity for which
it seeks a provisional, and (2) the applicant must submit a completed annual license application and proof that California Environmental
Quality Act (“CEQA”) compliance is underway. Provisional licenses last for 12 months and can be issued through
the end of 2019. The measure was intended to give local agencies more time to do a CEQA review and contained a sunset date of January
1, 2020.
Despite
the efforts of SB 1459, a large backlog of cannabis applications has persisted. In a continuing effort to alleviate this problem the
Legislature followed up SB 1459 recently with the passage of SB 97/AB 97, the 2019 Cannabis Trailer Bill. The 2019 Cannabis Trailer Bill
extends the ability of state licensing agencies to issue provisional permits to qualified applicants from January 1, 2020 to January
1, 2022. In addition, the measure extended the provisions from SB 94 that provided a CEQA exemption for local governments from July 1,
2019 to July 1, 2021.
Currently CWG holds one provisional license
for distribution, one provisional license for manufacturing and one provisional license for cultivation. Gravenstein holds one provisional
manufacturing license. Kanna holds a provisional license for a dispensary. Gravenstein and Kanna are currently not operational. Those
license holders which have a provisional or annual license, must be compliant with METRC 30 days after receiving their licenses. An application
for renewal of a cultivation license shall be submitted to the state at least 30 calendar days prior to the expiration date of the current
license. A license holder that does not submit a completed license renewal application to the state within 30 calendar days after the
expiration of the current license forfeits their eligibility to apply for a license renewal and, instead, would be required to submit
a new license application. The license holders must ensure that no cannabis may be sold, delivered, transported or distributed by a producer
from or to a location outside of the state.
Retail Compliance in California
California requires that certain warnings,
images, and content information be printed on all marijuana packaging. BCC regulations also include certain requirements about tamper-evident
and child-resistant packaging. Distributors and retailers are responsible for confirming that products are properly labeled and packaged
before they are sold to a customer.
Consumers aged 21 and up may purchase marijuana
in California from a dispensary with an “adult-use” license. Some localities still only allow medicinal dispensaries. Consumers
aged 18 and up with a valid physician’s recommendation may purchase marijuana from a medicinal-only dispensary or an adult-use
dispensary. Consumers without valid physician’s recommendations may not purchase marijuana from a medicinal-only dispensary. All
marijuana businesses are prohibited from hiring employees under the age of 21.
California Record-keeping/Reporting
California has selected METRC as the T&T
system used to track commercial cannabis activity. CWG uses a third-party platform, QuantumLeap, which feeds data to METRC to meet all
reporting requirements.
Licensees are required to maintain records
for at least seven years from the date a record is created. These records include: (a) a cultivation plan, (b) all supporting documentation
for data or information input into the T&T system, (c) all unique identifiers (“UID”) assigned to product in inventory
and all unassigned UIDs, (d) financial records related to the licensed commercial cannabis activity, including bank statements, tax records,
sales invoices and receipts, and records of transport and transfer to other licensed facilities, (e) records related to employee training
for the T&T system, and (f) permits, licenses, and other local authorizations to conduct the licensee’s commercial cannabis
activity.
California Inventory/Storage
Each licensee is required to assign an account
manager to oversee the T&T system. The account manager is fully trained on the system and is accountable to record all commercial
cannabis activities accurately and completely. The licensee is expected to correct any data that is entered into the T&T system in
error within three business days of discovery of the error.
The licensee is required to report information
in the T&T system for each transfer of cannabis or non-manufactured cannabis products to, or cannabis or non-manufactured
cannabis products received from, other licensed operators. Licensees must use the T&T system for all inventory tracking activities
at a licensed premise, including, but not limited to, reconciling all on-premise and in-transit cannabis or non-manufactured cannabis
product inventories at least once every 14 business days. The licensee must store cannabis and cannabis products in a secure place with
locked doors.
California Security
A licensee is required to maintain an alarm
system capable of detecting and signaling the presence of a threat requiring urgent attention and to which law enforcement are expected
to respond. A licensee must also ensure a professionally qualified alarm company operator or one of its registered alarm agents installs,
maintains, monitors, and responds to the alarm system.
The manufacturing and cultivation of cannabis
must use a digital video surveillance system which runs 24 hours a day, seven days a week and effectively and clearly records images
of the area under surveillance. Each camera must be placed in a location that clearly records activity occurring within 20 feet of all
points of entry and exit on the licensed premises. The areas that will be recorded on the video surveillance system should include the
following: (a) areas where cannabis goods are weighed, packed, stored, loaded, and unloaded for transportation, prepared, or moved within
the premises, (b) limited-access areas, (c) security rooms, and (d) areas storing a surveillance-system storage device with at least
one camera recording the access points to the secured surveillance recording area. Surveillance recordings must be kept for a minimum
of 90 days.
California Transportation
Transporting cannabis goods between licensees
and a licensed facility may only be performed by persons holding a distributor license. The vehicle or trailer used must not contain
any markings or features on the exterior which may indicate or identify the contents or purpose. All cannabis products must be locked
in a box, container, or cage that is secured to the inside of the vehicle or trailer. When left unattended, vehicles must be locked and
secured. At a minimum, the vehicle must be equipped with an alarm system, motion detectors, pressure switches, duress, panic, and hold-up
alarms.
California Inspections
All licensees are subject to annual and random inspections of their
premises. Cultivators may be inspected by the California Department of Fish and Wildlife, the California Regional Water Quality Control
Boards, and the California Department of Food and Agriculture. Manufacturers are subject to inspection by the California Department of
Public Health, and Retailers, Distributors, Testing Laboratories, and Delivery services are subject to inspection by the Bureau of Cannabis
Control. Inspections can result in notices to correct, or notices of violation, fines, or other disciplinary action by the inspecting
agency.
Marijuana Taxes in California
Several types of taxes are imposed in California
for adult-use sale. As of January 1, 2020, the California Department of Tax and Fee Administration raised the tax rate on wholesale cannabis
from 60% to 80%. Cultivators have the choice of being taxed at $9.65, per dry-weight ounce of cannabis flowers or $1.35 per ounce of
wet-weight plants. Further, cultivators are required to pay $2.87 per ounce for fresh frozen biomass. California also imposes an excise
tax of 15%. Cities and counties apply their sales tax along with the state’s excise and many cities and counties have also authorized
the imposition of special cannabis business taxes which can range from 2% to 10% of gross receipts of the business. The Company has retained
legal counsel and/or other advisors in connection with California’s marijuana regulatory program. The Company has developed standard
operating procedures for licenses who are operational.
U.S. Attorney Statements in California
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in California.
Connecticut
Connecticut Legislative History
Connecticut’s Medical Marijuana Program
(the “CT Program”) was enacted on June 1, 2012 with the signing into law of Act 12-55, the Act Concerning the Palliative
Use of Marijuana (the “CT Act”). The CT Program protects patients and caregivers who hold valid medical cannabis
registration cards from prosecution for possession of cannabis obtained from licensed dispensaries. Patients are eligible for a medical
cannabis registration card if they have a qualifying debilitating medical condition, obtain a medical cannabis recommendation from a
CT Program registered physician, and register as a qualified patient through the CT Program. In August 2018, the list of qualifying debilitating
medical conditions was raised from 22 to 31 adding among other conditions, muscular dystrophy, chronic neuropathic pain and severe rheumatoid
arthritis to the list which already included, among others, cancer, HIV/AIDS, Parkinson’s disease, and Multiple Sclerosis. In 2019,
the list of qualifying conditions was expanded from 31 to 36 adding among other conditions, Tourette syndrome and intractable neuropathic
pain that is unresponsive to standard medical treatments. Caregivers may register with the CT Program if they are designated by a qualifying
patient, receive certification from a registered physician, and pass a criminal background check. The good standing of patients, caregivers,
and physicians under the CT Program is subject to timely reporting and annual renewal requirements.
In April 2014, Connecticut’s Department
of Consumer Protection (the “CT DCP”) initially approved six dispensary licenses. In January 2016, the CT DCP approved
three additional dispensaries and in December 2018 the CT DCP approved nine additional dispensaries bringing the total to 18. Connecticut
began accepting written certifications from physicians to qualify patients on October 1, 2012. As of May 24, 2020, there were approximately
41,203 patients certified to obtain cannabis through the CT Program.
Connecticut Licenses
The CT DCP is responsible for the CT Program
and is authorized to issue dispensary and producer/grower licenses. As of January 31, 2021, there were 50,034 patients with an approved
medical ID card, Currently, the CT DCP has issued 18 dispensary and four producer/grower licenses. Three of the 18 dispensary licenses
have been issued to our subsidiary.
The table below lists the licenses issued
to the Company’s indirect subsidiaries operating in Connecticut:
|
Subsidiary
|
License
number
|
City
|
Expiration
Date
|
Description
|
|
D&B
Wellness, LLC
|
MMDF.0000003
|
Bethel
|
5/13/2021
|
Dispensary
Facility
|
|
Prime
Wellness of Connecticut, LLC
|
MMDF.0000004
|
South
Windsor
|
4/10/2021
|
Dispensary
Facility
|
|
Thames
Valley Apothecary, LLC
|
MMDF.0000005
|
Uncasville
|
4/15/2021
|
Dispensary
Facility
|
Each license qualifies a dispensary to purchase
medical cannabis in good faith from licensed medical cannabis producers and to dispense cannabis to qualifying patients or primary caregivers
that are registered under the CT Program. Dispensary license holders are required to ensure that no cannabis is sold, delivered, transported,
or distributed to a location outside of Connecticut. Under the CT Program, dispensary licenses are renewed annually. Renewal applications
must be submitted 45 days prior to license expiration and any renewal submitted more than 30 days after expiration will not be renewed.
Connecticut Record-keeping/Reporting
Connecticut does not mandate use of any singular
unified T&T system by which all dispensary license holders submit data directly to the state. Acreage’s license holders, D&B
Wellness, LLC, d/b/a Compassionate Care Center of Connecticut, and Prime Wellness of Connecticut, LLC, use a third-party solution, THC
BioTrack, to push data to the state in order to meet all reporting requirements. Thames Valley Apothecary, LLC (“Thames Valley”)
uses Leaf Logix Technology as their third-party solution.
The CT Program provides strict guidelines
for reporting via the license holder’s third-party T&T system. Every cannabis sale must be documented at the point of sale
including recording the date and purchaser’s signature. At least once per day, all sales must be uploaded via the T&T system
to the Connecticut Prescription Monitoring Program which accumulates and tracks medical cannabis purchases across all Connecticut dispensaries.
The CT Program requires that records are kept for a minimum of three years.
Connecticut Inventory
Upon receipt of a cannabis product, each product
must be cataloged and entered in the dispensary’s T&T system. The information required by the CT Program includes the quantity
of product received, its lot number, expiration date, and strain. Only registered dispensary pharmacists may accept delivery of cannabis
and related products. A delivery receipt for cannabis and cannabis products must be signed by the accepting dispensary pharmacist and
be attached to the delivery manifest. Each delivery manifest must be kept on file for three years. Once per week, a count of cannabis
product stock is to be conducted by a dispensary pharmacist which includes tracking the producer’s name, type and quantity of cannabis,
and a summary of inventory findings. Any discrepancies must be rectified and documented. Any unrectified discrepancy must be disclosed
to the dispensary manager who, if necessary, will notify the CT DCP. Annual controlled substance inventories are required to be conducted
on a date specified by the dispensary manager and to be kept on file for three years.
Connecticut Storage/Security
The CT Program requires that dispensaries
adhere to strict cannabis storage and security guidelines to maintain control against diversion, theft, and loss of cannabis or cannabis
products. Each dispensary is required to (a) establish a security plan including approved safes for storage of all cannabis products,
(b) maintain daily supplies of product in locked cabinets, (c) install safes accessible only to the dispensary pharmacist or manager,
(d) utilize commercial grade motion detectors and video cameras in all areas that contain cannabis, and (e) install cameras directed
at all safes, vaults, dispensing and sale areas, or any other area where cannabis is stored or handled.
Furthermore, the CT Act prescribes that dispensaries
must retain and present all video upon request of the CT DCP. Specifically, dispensaries must (a) make the latest 24 hours of video readily
available for immediate viewing upon request of a state authorized representative, and (b) retain all videos for at least 30 calendar
days. Additionally, dispensaries must install strategically placed duress and panic alarms, both silent and audible, that trigger a law
enforcement response. Employees are also required to wear panic alarm buttons for an additional level of safety and security.
Connecticut Training & Education
All dispensary staff pharmacists must go through
a training program on cannabis and cannabis products. Such training must include covering the chemical components of cannabis and use
of ancillary cannabis delivery devices. Pharmacist training should prepare pharmacists how to best assess the needs of qualified patients
during required new-patient private consultations. During such consultations, pharmacists are required to educate new patients on their
qualified debilitating medical condition, allergies, medication profile, cannabis use, and cannabis delivery methods. Pharmacists have
sole responsibility to recommend products based on the patients’ individual needs.
Like dispensary staff pharmacists, dispensary
technicians and employees also must meet training guidelines as set forth by the CT Program. Dispensary technicians must be trained on
professional conduct, ethics, patient confidentiality, and developments in the field of medical cannabis use, among other pertinent topics
commensurate with the technician’s professional responsibilities. Dispensary employees, among other things, must be trained on
the proper use of security measures and controls, procedures for responding to an emergency, and patient confidentiality. A record of
all staff training and patient education must be maintained and made available for review at the request of the DPH.
Connecticut Inspections
For the purposes of supervision and enforcement
of the CT Program, the Connecticut Commissioner of Consumer Protection is authorized to (i) enter, at reasonable times, any place, including
a vehicle, in which marijuana is held, dispensed, sold, produced, delivered, transported, manufactured or otherwise disposed of, (ii)
inspect within reasonable limits and in a reasonable manner, such place and all pertinent equipment, finished and unfinished material,
containers and labeling, and all things in such place, including records, files, financial data, sales data, shipping data, pricing data,
employee data, research, papers, processes, controls and facilities, and (iii) inventory any stock of marijuana therein and obtain samples
of any marijuana or marijuana product, any labels or containers for marijuana, paraphernalia, and of any finished and unfinished material.
U.S. Attorney Statements in Connecticut
To the knowledge of management of the Company,
there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action in
Connecticut.
Florida
Florida Legislative History
On June 16, 2014, the Florida state governor
signed Senate Bill 1030, also known as the Compassionate Medical Cannabis Act of 2014 (“CMCA”). The CMCA legalized
low THC for medical patients suffering from cancer or “a physical medical condition that chronically produces symptoms of seizures”,
such as epilepsy, “or severe and persistent muscle spasms”. The CMCA requires physician approval and determination that no
other satisfactory alternative treatment options exist for that patient. The CMCA also authorizes medical centers to conduct research
on low THC cannabis.
On November 8, 2016, Amendment 2 was added
to Florida’s state constitution. Amendment 2 protects qualifying patients, caregivers, physicians, and medical cannabis dispensaries
and their staff from criminal prosecution or civil sanctions under Florida law. Amendment 2 also expanded the definition of debilitating
diseases to include 12 conditions including HIV/AIDS, Crohn’s disease and post-traumatic stress disorder. Amendment 2 became effective
on January 3, 2017. Amendment 2 provides a regulatory framework that requires licensed producers, which are statutorily defined as Medical
Marijuana Treatment Centers (each, a “MMTC”), to cultivate, process and dispense medical cannabis in a vertically integrated
marketplace.
Florida Licenses
Licenses are issued by the Florida Department
of Health (“FDH”) and is overseen by the Office of Medical Marijuana Use (“OMMU”). Applicants are
required to provide comprehensive business plans with demonstrated knowledge and experience on execution, detailed facility plans, forecasted
performance and robust financial resources. Technical ability on plant and medical cannabis cultivation, infrastructure, processing,
dispensing and safety are also assessed.
License holders are permitted to maintain
one license. However, the one license allows the licensee to open one cultivation/processing site and an unlimited number of dispensaries.
Each licensee is required to cultivate, process and dispense medical cannabis. The license permits the sale of derivative products produced
from extracted cannabis plant oil as medical cannabis to qualified patients. As of December 25, 2020, there were 456,594 patients with
an approved medical ID card, 22 approved medical cannabis treatment centers and 301 approved retail dispensing locations . Licensed medical
cannabis treatment centers are authorized to cultivate, process and dispense medical cannabis.
On January 4, 2019, High Street completed
the acquisition of Acreage Florida, Inc. (“Acreage Florida”). Acreage Florida acquired a cultivation and production
facility in Sanderson, Florida, and has secured via lease agreements eight locations to build or remodel dispensaries in Hollywood, Spring
Hill, Daytona, Orange Park, St. Petersburg, North Miami Beach and two locations in Miami. Acreage Florida opened its first dispensary
in Spring Hill in March 2020.
The table below lists the licenses issued
to the subsidiaries:
|
Subsidiary
|
License
number
|
City
|
Expiration
Date
|
Description
|
|
Acreage
Florida, Inc. d/b/ The Botanist
|
MMTC-2018-0014
|
|
9/11/2021
|
Vertical
|
Under its license, Acreage Florida is permitted
to sell cannabis to those patients who are entered into Florida’s electronic medical marijuana use registry by a qualified physician
and possess a state-issued medical marijuana identification card. The physician determines patient eligibility as well as the routes
of administration (e.g. topical, oral, inhalation) and number of milligrams per day a patient is able to obtain under the program. The
physician may order a certification for up to three 70-day supply limits of marijuana, following which the certification expires and
a new certification must be issued by a physician. The number of milligrams dispensed, the category of cannabis (either low-THC or medical
cannabis) and whether a delivery device such as a vaporizer has been authorized is all recorded in the registry for each patient transaction.
On March 18, 2019, Governor Ron DeSantis signed SB 182 into law, repealing the ban on smoking medical cannabis. Patients and their doctors
now have greater access to administer medical cannabis and to decide for themselves which mode of administration is best for them. Effective
August 27, 2020 the OMMU amended the Florida Administrative code to allow the purchase of edibles. SB 182 also allows patients to receive
up to 2.5 ounces of whole flower cannabis every 35 days as recommended by their doctor and requires patients under the age of 18 to have
a terminal condition and to get a second opinion from a pediatrician before smoking medical cannabis.
Dispensaries may be located in any location
throughout the State of Florida as long as the local government has not issued a prohibition against MMTC dispensaries in their respective
municipality. Provided there is not a ban, the Company may locate a dispensary in a site zoned for a pharmacy so long as the location
is greater than 500 feet from a public or private elementary, middle, or secondary school.
On February 25, 2020, we entered into an agreement
to sell all of our operations in Florida for an aggregate purchase price of $60.0 million. The sale is expected to close during the second
quarter of 2021 subject to customary closing conditions including the procurement of all necessary approvals for the transfer to the
purchaser of the Florida license for the operation of the medical marijuana businesses.
Florida Reporting Requirements
Florida regulators require MMTCs to establish,
maintain, and control a computer software tracking system that traces cannabis from seed to sale and allows real-time, 24-hour access
by the OMMU to such data. The tracking system must allow for integration of other seed-to-sale systems and, at a minimum, include notification
of certain events, including when marijuana seeds are planted, when marijuana plants are harvested and destroyed and when cannabis is
transported, sold, stolen, diverted, or lost. Each medical marijuana treatment center shall use the seed-to-sale tracking system established
by the department or integrate its own seed-to-sale tracking system with the seed-to-sale tracking system established by the department.
Additionally, the OMMU also maintains a patient and physician registry and the licensee must comply with all requirements and regulations
relative to the provision of required data or proof of key events to said system in order to retain its license. Florida requires all
MMTCs to abide by representations made in their original application to the State of Florida. Any changes or expansions must be requested
via an amendment or variance process.
Florida Licensing Requirements
Licenses issued by the FDH may be renewed
biennially so long as the licensee continues to meet the requirements of the Florida Statute 381.986 and pays a renewal fee. License
holders can only own one license within the State of Florida. MMTCs can operate an unlimited number of dispensaries. Applicants must
demonstrate (and licensed MMTCs must maintain) that: (i) they have been registered to do business in the State of Florida for the previous
five years, (ii) they possess a valid certificate of registration issued by the Florida Department of Agriculture & Consumer Services,
(iii) they have the technical and technological ability to cultivate and produce cannabis, including, but not limited to, low-THC cannabis,
(iv) they have the ability to secure the premises, resources, and personnel necessary to operate as an MMTC, (v) they have the ability
to maintain accountability of all raw materials, finished products, and any by-products to prevent diversion or unlawful access to or
possession of these substances, (vi) they have an infrastructure reasonably located to dispense cannabis to registered qualified patients
statewide or regionally as determined by the OMMU, (vii) they have the financial ability to maintain operations for the duration of the
two-year approval cycle, including the provision of certified financial statements to the OMMU, (viii) all owners, officers, board members
and managers have passed a Level II background screening, inclusive of fingerprinting, and ensure that a medical director is employed
to supervise the activities of the MMTC, and (ix) they have a diversity plan and veterans plan accompanied by a contractual process for
establishing business relationships with veterans and minority contractors and/or employees. Upon approval of the application by the
OMMU, the applicant must post a performance bond of up to US$5 million, which may be reduced to US$2 million once the licensee has served
1,000 patients.
Florida Inventory Storage
OMMU regulators require that the MMTC license
holder establish, maintain, and control a computer software tracking system that traces cannabis from seed to sale and allows real-time,
24-hour access by the department to data from all MMTCs and cannabis testing laboratories. At a minimum, the T&T system will track
when cannabis seeds are planted, harvested and destroyed, and when cannabis is transported, sold, stolen, diverted, or lost. The OMMU
has not chosen a unified system. Therefore, the licensee can choose their own T&T system.
Florida Security
With respect to security requirements for
cultivation, processing and dispensing facilities, a MMTC must maintain a fully operational alarm system that secures all entry points
and perimeter windows, and is equipped with motion detectors, pressure switches, duress, panic and hold-up alarms. The MMTC must also
have a 24-hour video surveillance system with the following features: (a) cameras positioned for the clear identification of persons
and activities in controlled areas including growing, processing, storage, disposal and point-of-sale rooms, (b) cameras fixed on entrances
and exits to the premises, and (c) ability to record images clearly and accurately together with the time and date. Facilities may not
display products or dispense cannabis or cannabis delivery devices in the waiting area and may not dispense cannabis from its premises
between the hours of 9:00 p.m. and 7:00 a.m. However, it may perform all other operations and deliver cannabis to qualified patients
24 hours a day.
Cannabis must be stored in a secured, locked
room or a vault. A MMTC must have at least two employees, or two employees of a security agency, on the premises at all times where cultivation,
processing, or storing of cannabis occurs. A cannabis transportation manifest must be maintained in any vehicle transporting cannabis
or a cannabis delivery device. The manifest must be generated from the MMTC’s seed-to-sale tracking system. Further, a copy of
the transportation manifest must be provided to the MMTC when receiving a delivery. Each MMTC must retain copies of all cannabis transportation
manifests for at least three years. Cannabis and cannabis delivery devices must be locked in a separate compartment or container within
the vehicle and employees transporting cannabis or cannabis delivery devices must always have their employee identification on them.
Lastly, at least two people must be in a vehicle transporting cannabis, and at least one person must remain in the vehicle while the
cannabis is physically delivered.
Florida Transportation
When transporting cannabis to dispensaries
or to patients for delivery, a manifest must be prepared and transportation must be done using an approved vehicle. The cannabis must
be stored in a separate, locked area of the vehicle and at all times there must be two people in a delivery vehicle. During deliveries,
one person must remain with the vehicle. The delivery employees must at all times have identification badges. The manifest for all deliveries
must be generated by the State approved tracking software. The manifest must include the following information: (i) departure date and
time; (ii) name, address and license number of the originating MMTC; (iii) name and address of the receiving entity; (iv) the quantity,
form and delivery device of the cannabis; (v) arrival date and time; (vi) the make, model and license plate of the delivery vehicle;
and (vii) the name and signatures of the MMTC delivery employees. These manifests must be kept by the MMTC for inspection for at least
three years. During the delivery, a copy of the manifest is also provided to the recipient.
Florida Inspections
The OMMU may conduct announced or unannounced
inspections of MMTC’s to determine compliance with applicable laws and regulations. The OMMU is to inspect an MMTC upon receiving
a complaint or notice that the MMTC has dispensed cannabis containing mold, bacteria, or other contaminants that may cause an adverse
effect to humans or the environment. The OMMU is to conduct at least a biennial inspection of each MMTC to evaluate the MMTC’s
records, personnel, equipment, security, sanitation practices, and quality assurance practices.
U.S. Attorney Statements in Florida
To the knowledge of management of the Company,
there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action in
Florida.
Illinois
Illinois Legislative history
The Compassionate Use of Medical Cannabis
Pilot Program Act (the “IL Medical Act”) was signed into law in August 2013 and took effect on January 1, 2014.
The IL Medical Act provides medical cannabis access to registered patients who suffer from a list of over 50 medical conditions including
epilepsy, cancer, HIV/AIDS, Chronic pain, Crohn’s disease and post- traumatic stress disorder. As of December 30, 2020, approximately
150,000 patients have been registered under the IL Medical Act and are qualified to purchase cannabis and cannabis products from registered
dispensaries. On August 12, 2019, changes to the Compassionate Use of Medical Cannabis Program became effective.
On June 25, 2019, Illinois Gov. J.B. Pritzker
signed into law the Cannabis Regulation & Tax Act (the “IL Adult Use Act” and, together with the IL Medical Act,
the “IL Acts”), which permits persons 21 years of age or older to possess, use, and purchase limited amounts of cannabis
for personal use. The IL Adult Use Act went into effect on January 1, 2020.
Illinois Licenses
Oversight and implementation under the Acts
are divided among three Illinois state departments: the Department of Public Health (the “IL DPH”), the Department
of Agriculture (the “IL DA”), and the Department of Financial and Professional Regulation (the “IL DFPR”).
The IL DPH oversees the following IL Medical Act mandates: (a) establish and maintain a confidential registry of caregivers and qualifying
patients authorized to engage in the medical use of cannabis, (b) distribute educational materials about the health risks associated
with the abuse of cannabis and prescription medications, (c) adopt rules to administer the patient and caregiver registration program,
and (d) adopt rules establishing food handling requirements for cannabis-infused products that are prepared for human consumption.
It is the responsibility of the IL DA to enforce
the provisions of the IL Acts relating to the registration and oversight of cultivation centers and the responsibility of the IL DFPR
to enforce the provisions of the IL Acts relating to the registration and oversight of dispensing organizations. The IL DPH, IL DA and
IL DFPR may enter into inter-governmental agreements, as necessary, to carry out the provisions of the IL Acts.
Illinois has issued a limited amount of dispensary,
producer/grower, and processing licenses. As of December 31, 2020 there were 55 licensed dispensaries and 22 licensed cultivators. NCC
LLC (d/b/a Nature’s Care Company) (“NCC”), an indirect Subsidiary of the Company, was awarded both medical and
adult-use cannabis dispensary licenses and In Grown Farms, LLC 2 (“IGF”), an indirect Subsidiary of the Company, was
awarded both medical and adult-use cultivation/processing licenses as well as a license to process industrial Hemp.
Under the IL Adult Use Act, medical cannabis
operators have the ability to apply for “early approval” for adult-use licenses. Medical dispensaries are permitted
to apply for one adult-use license at its medical dispensary site and one additional early approval license at a secondary site.
NCC received an adult-use license on February 3, 2020 for its Rolling Meadows dispensary. On August 30, 2020, NCC received a second
license from the IL DFPR for a Registered Adult Use Dispensing Organization. NCC has opened a second adult only dispensary in Chicago.
The table below lists the licenses issued
to the subsidiaries:
|
Subsidiary
|
License
number
|
City
|
Expiration
|
Description
|
|
NCC
LLC
|
DISP.000024
|
Rolling
Meadows
|
1/22/2021
|
Medical
Cannabis Dispensary Facility
|
|
NCC
LCC
|
AUDO.000050
|
Rolling
Meadows
|
3/31/2021
|
Registered
Adult Use Dispensing Organization
|
|
IGF
|
1503060729
|
Freeport
|
3/9/2021
|
Medical Cannabis Cultivation/
Processing Facility
|
|
IGF
|
1503060729-EA
|
Freeport
|
3/31/2021
|
Early
Approval Adult Use Cultivation
|
|
NCC
LLC
|
AUDO.000064
|
Chicago
|
3/31/2021
|
Registered
Adult Use Dispensing Organization
|
|
IGF
|
1204-321
|
Freeport
|
12/31/2022
|
Industrial
Hemp Processor
|
Under the IL Medical Act, dispensary, grower,
and processing licenses are valid for one year. After the initial term, licensees are required to submit renewal applications. Pursuant
to the IL Act, registration renewal applications must be received 45 days prior to expiration and may be denied if the licensee has a
history of non-compliance and penalties.
Under the IL Adult Use Act, an early approval
adult-use dispensing license is valid until March 31, 2021. Renewal applications and required fees must be submitted to the IL DFPR 60
days prior to expiration.
Illinois Dispensing Limitations
Dispensing organizations may not dispense
more than 2.5 ounces of usable cannabis to qualifying patients, provisional patients, or designated caregivers during a period of 14
days, unless pre-approved by the IL DFPR.
Dispensing limitations for adult-use purchasers
are as follows:
|
|
•
|
Illinois
Residents: 30 grams of flower, 500 mg THC in cannabis infused products, and/or 5 grams of
cannabis concentrate.
|
|
|
|
|
|
|
•
|
Non-Illinois
Residents: 15 grams of flower, 250 mg THC in cannabis infused products, and/or 250 milligrams
of cannabis concentrate.
|
Illinois Record-keeping/Reporting
Illinois uses the BioTrack THC T&T system
to manage the flow of reported data between each licensee and the state. NCC also uses the T&T system to ensure all reporting requirements
are met. Information processed through the T&T system must be maintained in a secure location at the dispensing organization for
five years.
Licensees are mandated by the IL Acts to maintain
records electronically and make them available for inspection by the IL DFPR upon request. Records that must be maintained and made available,
as described in the IL Acts, include: (a) operating procedures, (b) inventory records, policies, and procedures, (c) security records,
and (d) staffing plans. All dispensing organization records, including business records such as monetary transactions and bank statements,
must be kept for a minimum of three years. Records of destruction and disposal of all cannabis not sold, including notification to the
IL DFPR and State Police, must be retained at the dispensary organization for a period of not less than five years.
Illinois Inventory/Storage
The IL Acts have similar requirements regarding
inventory tracking and storage. An organization’s agent-in-charge has primary oversight of the dispensing organization’s
cannabis inventory control system. Under the IL Acts, a dispensary’s inventory control system must be real-time, web-based, and
accessible by the IL DFPR 24 hours a day, seven days a week. The T&T system used by NCC complies with such requirements.
The inventory control system of a dispensing
organization must record all cannabis sales, waste, and acquisitions. Specifically, the inventory system must track and reconcile through
the T&T system each day’s cannabis beginning inventory, acquisitions, sales, disposal and ending inventory. Tracked information
must include (a) product descriptions including the quantity, strain, variety and batch number of each product received, (b) the name
and registry identification number of the permitted cultivation center providing the cannabis, (c) the name and registry identification
number of the permitted cultivation center agent delivering the cannabis, (d) the name and registry identification number of the dispensing
organization agent receiving the cannabis, and (e) the date of acquisition. Dispensary managers are tasked with conducting and documenting
monthly audits of the dispensing organization’s daily inventory according to generally accepted accounting principles.
The inventory control system of a cultivator
and processing organization must conduct a weekly inventory of cannabis stock, which includes at a minimum, the date of the inventory,
a summary of the inventory findings, the name, signature and title of the individuals who conducted the inventory and the agent-in-charge
who oversaw the inventory, and the product name and quantity of cannabis plants or cannabis-infused products at the facility. The record
of all cannabis sold must include the date of sale, the name of the dispensary facility to which the cannabis was sold and the batch
number, product name and quantity of cannabis sold.
In addition, the T&T permits NCC to set
up separate sales reports for (i) sales to qualifying patients and (ii) sales to purchasers, and NCC uses such software to generate separate
such reports as is required by the IL Adult Use Act.
Storage of cannabis and cannabis product inventory
is also regulated by the IL Acts. Inventory must be stored on the dispensary’s licensed premises in a restricted access area. Appropriate
storage temperatures, containers, and lighting are required to ensure the quality and purity of cannabis inventory is not adversely affected.
Illinois Security
Under the IL Acts, dispensaries must implement
security measures to deter and prevent entry into and theft from restricted access areas containing either cannabis or currency. Mandated
security measures include security systems, panic alarms, and locked doors or barriers between the facility’s entrance and limited
access areas. Admission to the limited access areas must be restricted to only purchasers, registered qualifying patients, designated
caregivers, principal officers, and agents conducting business with the dispensing organization. Visitors and persons conducting business
with the licensee in limited access areas must always wear identification badges and be escorted by a licensee’s agent authorized
to enter the restricted access area, and such persons must be pre-approved by the IL DFPR. A visitor’s log must be kept on-site
and be maintained for five years.
The IL Acts provide that 24-hour video surveillance
of both a licensee’s interior and exterior are required to be taken and kept for at least 90 days. Unless prohibited by law, video
of all interior dispensary areas, including all points of entry and exit, safes, sales areas, and storage areas must be kept. Unobstructed
video of the exterior perimeter, including the storefront, grow facility and the parking lot, must also be kept. Video surveillance cameras
are required to be angled to allow for facial recognition and the capture of clear and certain identification of any person entering
or exiting the dispensary area. Additionally, all video must be taken in lighting sufficient for clear viewing during all times of night
or day. The IL Acts also require all security equipment to be inspected and tested within regular 30-day intervals.
Illinois Transportation
Prior to transporting any cannabis or cannabis-infused
product, a cultivation facility must:
|
|
•
|
Complete
a shipping manifest using a form prescribed by the IL DA; and
|
|
|
•
|
Securely
transmit a copy of the manifest to the dispensary facility that will receive the products
and to the IL DA before the close of business the day prior to transport. The manifest must
be made available to the Illinois State Police upon request.
|
The cultivation facility shall maintain all
shipping manifests and make them available at the request of the IL DA.
Cannabis products that are being transported
shall:
|
|
•
|
Only
be transported in a locked, safe and secure storage compartment that is part of the motor
vehicle transporting the cannabis, or in a locked storage container that has a separate key
or combination pad; and
|
|
|
•
|
Not
be visible from outside the motor vehicle.
|
Any motor vehicle transporting cannabis is
required travel directly from the cultivation facility to the dispensary facility, or a testing laboratory, and must not make
any stops in between except to other dispensary facilities or laboratories, for refueling or in case of an emergency. A cultivation center
shall ensure that all delivery times and routes are randomized. A cultivation center shall staff all transport motor vehicles with a
minimum of two employees. At least one delivery team member shall remain with the motor vehicle at all times that the motor vehicle contains
cannabis. Each delivery team member shall have access to a secure form of communication with personnel at the cultivation center and
the ability to contact law enforcement through the 911 emergency system at all times that the motor vehicle contains cannabis. Each delivery
team member shall possess his or her department issued identification card at all times when transporting or delivering cannabis and
shall produce it for the IL DA or IL DA’s authorized representative or law enforcement official upon request.
Illinois Inspections
Dispensing organizations are subject to random
and unannounced dispensary inspections and cannabis testing by the IL DFPR and Illinois State Police. The IL DFPR and its authorized
representatives may enter any place, including a vehicle, in which cannabis is held, stored, dispensed, sold, produced, delivered, transported,
manufactured or disposed of and inspect in a reasonable manner, the place and all pertinent equipment, containers and labeling, and all
materials, data and processes, and inventory any stock of cannabis and obtain samples of any cannabis or cannabis product, any labels
or containers for cannabis, or paraphernalia.
The IL DFPR may conduct an investigation of
an applicant, application, dispensing organization, principal officer, dispensary agent, third party vendor or any other party associated
with a dispensing organization for an alleged violation of the IL Acts or to determine qualifications to be granted a registration by
the IL DFPR. The IL DFPR may require an applicant or dispensing organization to produce documents, records or any other material pertinent
to the investigation of an application or alleged violations of the IL Act.
Cannabis cultivation centers are also subject
to random inspections by the IL DA.
Guarantee of Cannabis and Cannabis-Infused
Product Variety
The IL Adult Use Act requires that dispensing
organizations maintain inventory from any one supplier representing greater than 40% of the dispensing organization’s total Inventory.
NCC monitors inventory offered for sale on a weekly basis and ensure that no single cultivator’s products comprise more than 40%
of the inventory offered for sale at NCC. NCC produces a periodic inventory report from BioTrackTHC to determine the inventory percentages
of purchases by cultivator.
The IL Adult Use Act further requires that
a dispensing organization have a policy to prioritize serving patients and other medical program participants over purchasers.
U.S. Attorney Statements in Illinois
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in Illinois. See “Risk Factors - The Company’s Business Activities are Illegal
under U.S. Federal Law”.
Maine
Maine Legislative history
Maine has allowed qualified patients with
specific conditions to grow for their own usage and possess limited amounts of medical cannabis since November 1999, but the law lacked
any distribution mechanism. On November 3, 2009, Maine voters approved Question 5, which established dispensaries and caregivers are
able to grow and dispense up to 2.5 oz. of medical grade cannabis every two weeks to persons with one of 17 debilitating and chronic
medical conditions including HIV/AIDS, Crohn’s disease, cancer and post-traumatic stress disorder. The registered dispensaries
and caregivers were regulated by the Maine Department of Health and Human Services (“MDHHS”), but oversight was recently
shifted to the Maine Department of Administrative and Financial Services (“MDAFS”).
In November 2016, Maine approved cannabis legalization at the ballot.
On January 27, 2017, the legislature approved a moratorium on implementing parts of the law regarding retail sales and taxation until
at least February 2018, giving time to resolve issues and promulgate rules. The portion of the law that allows persons over 21 years
to grow six mature plants and possess, transport and gift up to 2.5 ounces became effective on January 30, 2017 (although this was limited
to three mature plants in the 2018 legislation). A 17-member special legislative committee was formed to address the complex issues surrounding
full implementation of the law. In April 2018, the Governor of Maine vetoed the bill to legalize cannabis for adult-use. However, in
May 2018, Maine lawmakers overrode the Governor’s veto clearing the way for adult-use. In February 2019, MDAFS created the Office
of Marijuana Policy (“OMP”) to oversee all aspects of adult-use marijuana. The adult-use regulations were adopted
in June 2019. Furthermore, a mandatory “opt-in” mechanism allows municipalities to control whether they want retail cannabis
establishments in their communities. The State of Maine first made adult-use applications available on December 5, 2019 and the first
conditional licenses were issued on March 13, 2020. The OMP intended to launch adult-use in spring 2020, before the COVID-19 pandemic
necessitated the postponement of these plans. The first active licenses were issued to adult-use establishments on Tuesday, September
8, 2020. Actively licensed adult-use marijuana stores were able to begin retail sales to the public on or after October 9, 2020.
Maine Registration Certificates
The Maine Medical Use of Marijuana Program
Rules and the enabling statute, the Maine Medical Use of Marijuana Act, govern the Maine Medical Use of Marijuana Program (“MMUMP”).
The MDHHS was originally responsible for administering the MMUMP to ensure qualifying patients’ access to safe cannabis for medical
use and was responsible for issuing dispensary registration certificates as well as caregiver certificates. The MMUMP through the MDHHS
issued eight dispensary registration certificates. However, the MMUMP was transferred to the MDAFS in May 2018, as part of LD 1719, which
implemented the adult-use program.
Northeast Patient Group d/b/a Wellness Connection
of Maine (“WCM”), a contractual party and debtor of the Company, holds four of the eight vertically integrated dispensary
certificates of registration. The South Portland location was converted to adult-use and is owned directly by a subsidiary of Acreage.
The table below lists the certificates issued
to WCM and our subsidiary:
|
MSA
Party
|
Certificate
of
Registration
|
City
|
Expiration
Date
|
Description
|
|
WCM
|
DSP107
|
Portland
|
4/11/2021
|
Dispensary
|
|
WCM
|
DSP103
|
Gardiner
|
12/22/2021
|
Dispensary
|
|
WCM
|
DSP108
|
Brewer
|
6/15/2021
|
Dispensary
|
|
WCM
|
DSP102
|
Auburn
|
Not
applicable
|
Cultivation
|
|
Subsidiary
|
License
number
|
City
|
Expiration
|
Description
|
|
NPG
LLC
|
AMS338
|
South
Portland
|
11/22/2021
|
Adult
Use Dispensary
|
The Maine vertically integrated dispensary
certificate of registration is valid for one year from the date of issuance. Each certificate of registration for dispensaries allows
cultivation, processing and dispensing. WCM cultivates and processes at one centralized location for its three operational dispensaries.
The cultivation facility and retail site of a dispensary must comply with all requirements and prohibitions of the Maine statutes and
regulations. Failure to comply may result in enforcement action including, but not limited to, termination of the registration certificate.
The dispensary must receive both state licensing and municipal approval. The South Portland dispensary location is an adult-use dispensary
and operates separately from our managed dispensaries in Maine.
The dispensary must submit an application
for the renewal of a current registration certificate with all required documentation and the required fees 60 days prior to the expiration
date. Failure to submit a timely, complete renewal packet may be grounds for denial of the renewal and may result in expiration of the
registration certificate to operate the dispensary. Once the application is received and validated, an inspection is scheduled which
is conditional for the renewal. The certificate of registration holders must ensure that no cannabis may be sold, delivered, transported
or distributed by a producer from or to a location outside of Maine.
Maine Record-keeping/Reporting
Maine does not yet have a unified, mandatory
T&T system, although one will be implemented through the development of the adult-use program. However, WCM tracks seed-to-sale via
an integrated platform. Required information is forwarded to the MMUMP through email. The operating documents of a registered dispensary
must include procedures to ensure accurate record keeping. Registered dispensaries must maintain at least the following: business records,
including records of assets and liabilities, tax returns, contracts, monetary transactions, checks, invoices and vouchers which the dispensary
keeps as its books of accounts. Business records also include the sales record that indicates the name of the qualifying patient or primary
caregiver to whom cannabis has been distributed, sold or donated, including the quantity and form. The registered dispensary must also
keep on file and available for MDHHS (now MDAFS) inspection upon request, a copy of each current patient’s registry identification,
a copy of the medical provider written certification and the MMUMP approved dispensary designation form. All business records must be
available upon request by the MDHHS (now MDAFS) and maintained and retained for six years.
Maine Inventory/Storage
All cultivation facilities for medical use
are restricted to cultivating in an enclosed, locked facility or area. Cannabis at a registered dispensary must be kept under double
lock and inventoried daily by two cardholders. Each patient’s transactions are recorded and controlled in the POS system to prevent
any patient to access more than the allowed limit. WCM monitors inventory daily and reports inventory supply monthly.
Maine Security
Cultivation of cannabis for medical use requires
implementation of appropriate security measures to discourage theft of cannabis, ensure safety and prevent unauthorized entrance to a
cultivation site in accordance with the MMUMP statute and rules. Requirements include but are not limited to an enclosed, locked facility
and enclosed outdoor areas must have durable locks to discourage theft and unauthorized entrance.
Registered dispensaries must implement appropriate
security measures to deter and prevent unauthorized entrance into areas containing cannabis and the theft of cannabis at the registered
dispensary and the grow location for the cultivation of cannabis. Security measures to protect the premises, the public, qualifying patients,
primary caregivers and principal officers, board members and employees of the registered dispensary must include, but are not limited
to (a) on-site parking, (b) exterior lighting sufficient to deter nuisance activity and facilitate surveillance, (c) devices or a series
of devices, including, but not limited to, a signal system interconnected with a radio frequency method such as cellular, private radio
signals, or other mechanical or electronic device to detect an unauthorized intrusion, and (d) interior electronic monitoring, video
cameras, and panic buttons. Electronic monitoring and video camera recordings must be maintained by the medical dispensary and cultivation
facility a minimum of 14 days. Electronic monitoring and video camera recordings must be maintained by the adult-use dispensary and facility
a minimum of 45 days.
Maine Inspections
Registered dispensaries, including all retail
and cultivation locations, are subject to inspection at least annually by the MDAFS in accordance with this rule and the statute. Submission
of an application for a dispensary registration certificate constitutes permission for entry and inspection of dispensary locations.
Failure to cooperate with required inspections may be grounds to revoke the dispensary's registration certificate. During an inspection,
the MDAFS may identify violations of this rule, the statute and the dispensary's policies and procedures. The dispensary shall receive
written notice of the nature of the violations. The dispensary shall notify the MDAFS in writing with a postmark date within ten business
days of the date of the notice of violations and identify the corrective actions taken and the date of the correction.
During an inspection, the MDAFS shall (1)
collect soil and plant samples, and samples of products containing marijuana prepared at the dispensary, (2) place the dispensary's registration
number on each sample container, (3) label the sample containers with the description and quantity of its content, (4) seal sample containers,
and (5) have dispensary and MDAFS staff initial each sample container.
U.S. Attorney Statements in Maine
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in Maine. See “Risk Factors - The Company’s Business Activities are Illegal under
U.S. Federal Law”.
Massachusetts
Massachusetts Legislative history
The Massachusetts Medical Use of Marijuana
Program (the “MA Program”) was formed pursuant to the Act for the Humanitarian Medical Use of Marijuana (the
“MA ACT”). The MA Program allows registered persons to purchase medical cannabis and applies to any patient,
personal caregiver, Medical Marijuana Treatment Center (“MTC”). To qualify for the program, patients must have a debilitating
condition as defined by the MA Program. Currently there are over nine conditions that allow a patient to acquire cannabis in Massachusetts,
including AIDS/HIV, ALS, cancer and Crohn’s disease. As of May 31, 2019, approximately 59,000 patients have been registered to
purchase medical cannabis products in Massachusetts. The MA Program is administrated by the Cannabis Control Commission (“CCC”).
In November 2016, Massachusetts voted affirmatively
on a ballot petition to legalize and regulate cannabis for adult-use. The Massachusetts legislature amended the law on December
28, 2016, delaying the date adult-use cannabis sales would begin by six months. The delay allowed the legislature to clarify how municipal
land-use regulations would treat the cultivation of cannabis and authorized a study of related issues. After further debate, the state
House of Representatives and state Senate approved H.3818 which became Chapter 55 of the Acts of 2017, An Act to Ensure Safe Access to
Marijuana, and established the CCC. The CCC consists of five commissioners and regulates the Massachusetts Recreational Marijuana Program
as well as the MA Program. Adult-use of cannabis in Massachusetts started in July 2018.
Massachusetts Licenses
Under the MA Program, MTCs are heavily regulated.
Vertically integrated MTCs grow, process, and dispense their own cannabis. As such, each MTC is required to have a retail facility as
well as cultivation and processing operations, although retail operations may be separate from grow and cultivation operations. A MTC’s
cultivation location may be in a different municipality or county than its retail facility. MTC’s are required to be Massachusetts
non-profit corporations.
The MA Program mandates a comprehensive application
process for MTCs. Each MTC applicant must submit a Certificate of Good Standing, comprehensive financial statements, a character competency
assessment, and employment and education histories of the senior partners and individuals responsible for the day-to-day security and
operation of the MTC. Municipalities may individually determine what local permits or licenses are required if an MTC wishes to establish
an operation within its boundaries.
The table below lists the licenses issued
to the subsidiaries and entities operating in Massachusetts with which the Company has a consulting services agreement:
|
Subsidiary
|
License
Number
|
City
|
Expiration
Date
|
Description
|
|
The
Botanist, Inc.
|
RMD-905
|
Sterling
|
5/17/2021
|
MTC
Cultivation/Processing
|
|
The
Botanist, Inc.
|
RMD-905
|
Worcester
|
5/17/2021
|
MTC
Dispensary
|
|
The
Botanist, Inc.
|
Provisional
|
Leominster
|
Not
applicable
|
RMD
Dispensary
|
|
The
Botanist, Inc.
|
RMD-1225
|
Shrewsbury
|
6/06/2021
|
RMD
Dispensary
|
Effective as of February 13, 2020, South Shore
Biopharma, LLC and MA RMD SVCS, LLC, subsidiaries of the Company, entered into termination and separation agreements with PCMV and Health
Circle, respectively. SSBP previously entered into a termination and separation agreement with Mass Medi Spa, Inc. Following termination,
PCMV and Health Circle still have notes outstanding to the Company for all amounts previously advanced by the Company. As of the date
hereof, notes payable of approximately $6 million and $4.3 million remain outstanding for PCMV and Health Circle, respectively. Our Shrewsbury
and Worcester locations presently operate as adult-use dispensaries.
Each Massachusetts dispensary, grower and
processor license is valid for one year and must be renewed no later than 60 calendar days prior to expiration. As in other states where
cannabis is legal, the CCC can deny or revoke licenses and renewals for multiple reasons, including (a) submission of materially inaccurate,
incomplete, or fraudulent information, (b) failure to comply with any applicable law or regulation, including laws relating to taxes,
child support, workers compensation and insurance coverage, (c) failure to submit or implement a plan of correction (d) attempting to
assign registration to another entity, (e) insufficient financial resources, (f) committing, permitting, aiding, or abetting of any illegal
practices in the operation of the MTC, (g) failure to cooperate or give information to relevant law enforcement related to any matter
arising out of conduct at an MTC, and (h) lack of responsible MTC operations, as evidenced by negligence, disorderly or unsanitary facilities
or permitting a person to use a registration card belonging to another person. Additionally, license holders must ensure that no cannabis
is sold, delivered, or distributed by a producer from or to a location outside of this state.
Massachusetts Dispensary Requirements (Medical)
A MTC is to follow its written and approved
operation procedures in the operation of its dispensary locations. Operating procedures shall include (i) security measures in compliance
with the MA Program; (ii) employee security policies including personal safety and crime prevention techniques; (iii) hours of operation
and after-hours contact information; (iv) a price list for marijuana; (v) storage protocols in compliance with state law; (vi) a description
of the various strains of marijuana that will be cultivated and dispensed, and the forms that will be dispensed; (vii) procedures to
ensure accurate recordkeeping including inventory protocols; (viii) plans for quality control; (ix) a staffing plan and staffing records;
(x) diversion identification and reporting protocols; and (xi) policies and procedures for the handling of cash on MTC premises including
storage, collection frequency and transport to financial institutions. The siting of dispensary locations is expressly subject to local/municipal
approvals pursuant to state law, and municipalities control the permitting application process that a MTC must comply with. More specifically,
a MTC is to comply with all local requirements regarding siting, provided however that if no local requirements exist, a MTC shall not
be sited within a radius of 500 feet of a school, daycare center, or any facility in which children commonly congregate. The 500-foot
distance under this section is measured in a straight line from the nearest point of the facility in question to the nearest point of
the proposed MTC. The MA Program requires that MTCs limit their inventory of seeds, plants, and useable marijuana to reflect the projected
needs of registered qualifying patients. A MTC may only dispense to a registered qualifying patient who has a current valid certification.
Massachusetts Record-keeping/Reporting
(Medical)
Massachusetts uses METRC as the T&T system.
Individual licensees, whether directly or through a third-party application programming interface (an “API”), are
required to push data to the state to meet all reporting requirements. Each of Health Circle, Inc., Mass Medi-Spa, Inc., Patient Centric
Martha’s Vineyard, Ltd. and The Botanist, Inc. use or will use METRC to capture and send all required data points for cultivation,
manufacturing, and retail as required by applicable law.
The MA Program requires that MTC records be
readily available for inspection by the Department of Health upon request. Among the records that are required to be maintained and made
available are: (a) operating procedures, (b) inventory records, and (c) seed-to-sale tracking records for all cannabis and cannabis infused
products.
Massachusetts Inventory/Storage (Medical)
Through the T&T system, MTCs are required
to record all actions related to each individual cannabis plant. This robust inventorying requirement includes tracking how each plant
is handled and processed from seed and cultivation, through growth, harvest and preparation of cannabis infused products, if any, to
final sale of finished products. This system must chronicle every step, ingredient, activity, transaction, and dispensary agent, registered
qualifying patient, or personal caregiver who handles, obtains, or possesses the product. To meet this tracking requirement, the inventory
tracking process is mandated to utilize unique plant and batch identification numbers. Besides capturing all processes associated with
each cannabis plant, MTCs must also establish and abide by inventory controls and procedures for conducting inventory reviews and comprehensive
inventories of cultivating, finished, and stored cannabis products. To ensure inventories are accurate, MTCs are not only required to
conduct monthly inventories but also to compare monthly inventories to the T&T system records.
The MA Program requires all cannabis and cannabis
infused products be securely stored. MTCs must ensure that all safes, vaults, and other equipment or areas used for the production, cultivation,
harvesting, processing, or storage of cannabis and cannabis infused products are securely locked and protected against unauthorized entry.
The MA Program also specifies that limited access areas, accessible only to authorized personnel, must be established in each dispensary.
Furthermore, only the minimum number of employees essential to business operations may be given access to the limited access areas.
Massachusetts Security (Medical)
Adequate security systems that prevent and
detect diversion, theft, or loss of cannabis are required of each MTC under the MA Program. Such security systems must utilize commercial
grade equipment and are required to include (a) a perimeter alarm on all entry and exit points and perimeter windows, (b) a failure notification
system that provides an audible, text, or visual notification of any failure in the surveillance system, and (c) a duress alarm, panic
alarm, or holdup alarm connected to local public safety or law enforcement authorities.
To ensure MTCs meet the rigorous security
standards laid out by the MA Program, use of surveillance cameras is mandated. MTCs must install video cameras in the following areas:
(a) all areas that may contain cannabis, (b) all points of entry and exit, and (c) in any parking lot. Video cameras must be appropriate
for the lighting conditions of the area under surveillance. Interior video cameras must be directed at all safes, vaults, sales areas,
and areas where cannabis is cultivated, harvested, processed, prepared, stored, handled, or dispensed. Video surveillance is required
to be operational 24 hours a day, seven days a week and all recordings must be retained for at least 90 calendar days.
Massachusetts Transportation (Medical)
The MA Program regulates the means and methods
by which cannabis is transported. A MTC transporting cannabis must ensure the product is in a secure, locked storage compartment. If
a cannabis establishment, pursuant to a cannabis transporter license is transporting cannabis products for more than one cannabis establishment
at a time, the cannabis products for each cannabis establishment must be kept in separate locked storage compartments during transportation
and separate manifests are required for each cannabis establishment. Vehicles transporting cannabis must be equipped with an approved
alarm system and functioning heating and air conditioning systems appropriate for maintaining correct temperatures for storage of cannabis
products. Additionally, cannabis products may not be visible from outside the vehicle and MTCs must ensure that all transportation times
and routes are randomized. Cannabis and cannabis infused products may not be transported outside Massachusetts.
Massachusetts CCC Inspections (Medical)
The CCC or its agents may inspect a MTC and
affiliated vehicles at any time without prior notice. A MTC shall immediately upon request make available to the CCC information that
may be relevant to a CCC inspection, and the CCC may direct a MTC to test marijuana for contaminants. Any violations found will be noted
in a deficiency statement that will be provided to the MTC, and the MTC shall thereafter submit a Plan of Correction to the CCC outlining
with particularity each deficiency and the timetable and steps to remediate the same. The CCC shall have the authority to suspend or
revoke a certificate of registration in accordance with 935 CMR 501.510 of the Regulation of adult-use cannabis in Massachusetts.
Regulation of the Adult Use Cannabis Market
in Massachusetts
Adult-use (recreational) marijuana has been
legal in Massachusetts since December 15, 2016, following a ballot initiative in November of that year. The CCC, a regulatory body created
in 2018, licenses adult-use cultivation, processing and dispensary facilities (collectively, “Marijuana Establishments”)
pursuant to 935 CMR 500.000 et seq. The first adult-use marijuana facilities in Massachusetts began operating in November 2018.
Massachusetts Licensing Requirements (Adult-Use)
Many of the same application requirements
exist for a Marijuana Establishment license as a MTC application, and each owner, officer or member must undergo background checks and
fingerprinting with the CCC. Applicants must submit the location and identification of each site, and must establish a property interest
in the same, and the applicant and the local municipality must have entered into a host agreement authorizing the location of the adult-use
Marijuana Establishment within the municipality, and said agreement must be included in the application. Applicants must include disclosure
of any regulatory actions against it by the Commonwealth of Massachusetts, as well as the civil and criminal history of the applicant
and its owners, officers, principals or members. The application must include the MTC applicant’s plans for separating medical
and adult-use operations, proposed timeline for achieving operations, liability insurance, business plan, and a detailed summary describing
and/or updating or modifying the MTC’s existing medical marijuana operating policies and procedures for adult-use including security,
prevention of diversion, storage, transportation, inventory procedures, quality control, dispensing procedures, personnel policies, record
keeping, maintenance of financial records and employee training protocols.
No person or entity may own more than 10%
or “control” more than three licenses in each Marijuana Establishment class (i.e., marijuana retailer, marijuana cultivator,
marijuana product manufacturer). Additionally, there is a 100,000 square foot cultivation canopy for adult-use licenses; however, there
is no canopy restriction for MTC license holders relative to their cultivation facility.
Massachusetts Dispensary Requirements (Adult-Use)
Marijuana retailers are subject to certain
operational requirements in addition to those imposed on marijuana establishments generally. Dispensaries must immediately inspect patrons’
identification to ensure that everyone who enters is at least twenty-one years of age. Dispensaries may not dispense more than one ounce
of marijuana or five grams of marijuana concentrate per transaction. Point-of-sale systems must be approved by the CCC, and retailers
must record sales data. Records must be retained and available for auditing by the CCC and Department of Revenue. Dispensaries must also
make patient education materials available to patrons. Such materials must include:
|
|
•
|
A
warning that marijuana has not been analyzed or approved by the FDA, that there is limited
information on side effects, that there may be health risks associated with using marijuana,
and that it should be kept away from children;
|
|
|
•
|
A
warning that when under the influence of marijuana, driving is prohibited by M.G.L. c. 90,
§ 24, and machinery should not be operated;
|
|
|
•
|
Information
to assist in the selection of marijuana, describing the potential differing effects of various
strains of marijuana, as well as various forms and routes of administration;
|
|
|
•
|
Materials
offered to consumers to enable them to track the strains used and their associated effects;
|
|
|
•
|
Information
describing proper dosage and titration for different routes of administration, with an emphasis
on using the smallest amount possible to achieve the desired effect;
|
|
|
•
|
A
discussion of tolerance, dependence, and withdrawal;
|
|
|
•
|
Facts
regarding substance abuse signs and symptoms, as well as referral information for substance
abuse treatment programs;
|
|
|
•
|
A
statement that consumers may not sell marijuana to any other individual;
|
|
|
•
|
Information
regarding penalties for possession or distribution of marijuana in violation of Massachusetts
law; and
|
|
|
•
|
Any
other information required by the CCC.
|
Massachusetts Security and Storage Requirements
(Adult-Use)
Each marijuana establishment must implement
sufficient safety measures to deter and prevent unauthorized entrance into areas containing marijuana and theft of marijuana at the establishment.
Security measures taken by the establishments to protect the premises, employees, consumers and general public shall include, but not
be limited to, the following:
|
|
•
|
Positively
identifying individuals seeking access to the premises of the Marijuana Establishment or
to whom or marijuana products are being transported pursuant to 935 CMR 500.105(14) to limit
access solely to individuals 21 years of age or older;
|
|
|
•
|
Adopting
procedures to prevent loitering and ensure that only individuals engaging in activity expressly
or by necessary implication permitted by these regulations and its enabling statute are allowed
to remain on the premises;
|
|
|
•
|
Disposing
of marijuana in accordance with 935 CMR 500.105(12) in excess of the quantity required for
normal, efficient operation as established within 935 CMR 500.105;
|
|
|
•
|
Securing
all entrances to the Marijuana Establishment to prevent unauthorized access;
|
|
|
•
|
Establishing
limited access areas pursuant to 935 CMR 500.110(4), which shall be accessible only to specifically
authorized personnel limited to include only the minimum number of employees essential for
efficient operation;
|
|
|
•
|
Storing
all finished marijuana products in a secure, locked safe or vault in such a manner as to
prevent diversion, theft and loss;
|
|
|
•
|
Keeping
all safes, vaults, and any other equipment or areas used for the production, cultivation,
harvesting, processing or storage of marijuana products securely locked and protected from
entry, except for the actual time required to remove or replace marijuana;
|
|
|
•
|
Keeping
all locks and security equipment in good working order;
|
|
|
•
|
Prohibiting
keys, if any, from being left in the locks or stored or placed in a location accessible to
persons other than specifically authorized personnel;
|
|
|
•
|
Prohibiting
accessibility of security measures, such as combination numbers, passwords or electronic
or biometric security systems, to persons other than specifically authorized personnel;
|
|
|
•
|
Ensuring
that the outside perimeter of the marijuana establishment is sufficiently lit to facilitate
surveillance, where applicable;
|
|
|
•
|
Ensuring
that all marijuana products are kept out of plain sight and are not visible from a public
place without the use of binoculars, optical aids or aircraft;
|
|
|
•
|
Developing
emergency policies and procedures for securing all product following any instance of diversion,
theft or loss of marijuana, and conduct an assessment to determine whether additional safeguards
are necessary;
|
|
|
•
|
Developing
sufficient additional safeguards as required by the CCC for marijuana establishments that
present special security concerns; and
|
|
|
•
|
Sharing
the marijuana establishment's security plan and procedures with law enforcement authorities
and fire services and periodically updating law enforcement authorities and fire services
if the plans or procedures are modified in a material way.
|
|
|
•
|
Marijuana
must be stored in special limited access areas, and alarm systems must meet certain technical
requirements, including the ability to record footage to be retained for at least 90 days.
|
Massachusetts Transportation Requirements
(Adult-Use)
Marijuana products may only be transported
between licensed marijuana establishments by registered marijuana establishment agents. A licensed marijuana transporter may contract
with a licensed marijuana establishment to transport that licensee's marijuana products to other licensed establishments. The originating
and receiving licensed establishments shall ensure that all transported marijuana products are linked to the seed-to-sale tracking program.
For the purposes of tracking, seeds and clones will be properly tracked and labeled in a form and manner determined by the CCC. Any marijuana
product that is undeliverable or is refused by the destination marijuana establishment shall be transported back to the originating establishment.
All vehicles transporting marijuana products shall be staffed with a minimum of two marijuana establishment agents. At least one agent
shall remain with the vehicle at all times that the vehicle contains marijuana or marijuana products. Prior to the products leaving a
marijuana establishment for the purpose of transporting marijuana products, the originating marijuana establishment must weigh, inventory,
and account for, on video, all marijuana products to be transported. Within eight hours after arrival at the destination marijuana establishment,
the destination establishment must re-weigh, re-inventory, and account for, on video, all marijuana products transported. When videotaping
the weighing, inventorying, and accounting of marijuana products before transportation or after receipt, the video must show each product
being weighed, the weight, and the manifest. Marijuana products must be packaged in sealed, labeled, and tamper or child-resistant packaging
prior to and during transportation. In the case of an emergency stop during the transportation of marijuana products, a log must be maintained
describing the reason for the stop, the duration, the location, and any activities of personnel exiting the vehicle. A marijuana establishment
or a marijuana transporter transporting marijuana products is required to ensure that all transportation times and routes are randomized.
An establishment or transporter transporting marijuana products shall ensure that all transport routes remain within Massachusetts. All
vehicles and transportation equipment used in the transportation of cannabis products or edibles requiring temperature control for safety
must be designed, maintained, and equipped as necessary to provide adequate temperature control to prevent the cannabis products or edibles
from becoming unsafe during transportation, consistent with applicable requirements pursuant to 21 CFR 1.908(c).
Vehicles used for transport must be owned
or leased by the marijuana establishment or transporter, and they must be properly registered, inspected, and insured in Massachusetts.
Marijuana may not be visible from outside the vehicle, and it must be transported in a secure, locked storage compartment. Each vehicle
must have a global positioning system, and any agent transporting marijuana must have access to a secure form of communication with the
originating location.
Massachusetts CCC Inspections
The CCC or its agents may inspect a marijuana
establishment and affiliated vehicles at any time without prior notice in order to determine compliance with all applicable laws and
regulations. All areas of a marijuana establishment, all marijuana establishment agents and activities, and all records are subject to
such inspection. Marijuana establishments must immediately upon request make available to the Commission all information that may be
relevant to a CCC inspection, or an investigation of any incident or complaint. A marijuana establishment must make all reasonable efforts
to facilitate the CCC's inspection, or investigation of any incident or complaint, including the taking of samples, photographs, video
or other recordings by the CCC or its agents, and to facilitate the CCC's interviews of marijuana establishment agents. During an inspection,
the CCC may direct a Marijuana Establishment to test marijuana for contaminants as specified by the CCC, including but not limited to
mold, mildew, heavy metals, plant-growth regulators, and the presence of pesticides not approved for use on marijuana by the Massachusetts
Department of Agricultural Resources.
Moreover, the CCC is authorized to conduct
a secret shopper program to ensure compliance with all applicable laws and regulations.
U.S. Attorney Statements in Massachusetts
On July 10, 2018, the U.S. Attorney for the
District of Massachusetts, Andrew Lelling, issued a statement regarding the legalization of adult-use marijuana in Massachusetts. Mr.
Lelling stated that since he has a constitutional obligation to enforce the laws passed by Congress, he would not immunize the residents
of Massachusetts from federal law enforcement. He did state, however, that his office’s resources would be primarily focused on
combating the opioid epidemic. He stated that considering those factors and the experiences of other states that have legalized adult-use
marijuana, his office’s enforcement efforts would focus on the areas of (i) overproduction, (ii) targeted sales to minors and (iii)
organized crime and interstate transportation of drug proceeds.
To the knowledge of management of the Company, other than as disclosed
in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement
action in Massachusetts. See “Risk Factors - The Company’s Business Activities are Illegal under U.S. Federal Law.”
Michigan
Michigan Legislative History
In 2008, the Michigan Compassionate Care Initiative
established a medical cannabis program for serious and terminally ill patients. This program, which was approved by the House but not
acted upon, defaulted to a public initiative on the November ballot. Proposal 1 was approved by 63% of voters on November 8, 2008. Proposal
1 was then written into law and approved by Michigan’s lawmakers in December 2008. The resulting Act became the Michigan Medical
Marihuana Act (“MMMA”).
In 2016, the Michigan legislature passed two
new acts and also amended the original MMMA. The first act, amended effective January 1, 2019, established a licensing and regulation
framework for medical marihuana growers, processors, secure transporters, provisioning centers, and safety compliance facilities. The
second act established a “seed-to-sale” system to track marihuana that is grown, processed, transferred, stored, or disposed
of under the Medical Marihuana Facilities Licensing Act.
The passage of the Michigan
Regulation and Taxation of Marihuana Act (“MRTMA”) by voter initiative on November 6, 2018, made Michigan the tenth
state to legalize the recreational use of marijuana. On December 1st, 2019, adult-use cannabis sales commenced. On
June 22, 2020, the Marijuana Regulatory Agency promulgated administrative rules governing medical and adult-use cannabis licensing.
The Marijuana Regulatory Agency is responsible
for the oversight of medical and adult-use cannabis in Michigan and consists of the Licensing Division, the Enforcement Division and
the Michigan Medical Marihuana Program Division. The MMMA provides access to state residents to cannabis and cannabis related products
under one of 11 debilitating conditions, including epilepsy, cancer, HIV/AIDS, cancer and post-traumatic stress disorder. In July 2018,
the Licensing Division approved 11 additional conditions to the list of aliments to qualify for medical cannabis. The additional 11 include
chronic pain, colitis and spinal cord injury.
Michigan Licenses
HSCP’s subsidiaries have secured real
estate assets in strategic locations, including in Detroit, Bay City, and Battle Creek. Kevin Michigan, LLC (“Kevin Michigan”),
which is not affiliated with any HSCP entity, has secured municipal approval for medical marijuana dispensaries in Detroit, Bay City,
and Battle Creek, and has a state operating license for its Detroit medical marijuana dispensary. HSCP’s subsidiaries lease real
estate to Kevin Michigan, provide consulting services to Kevin Michigan with respect to its Detroit facility, and sublicense certain
intellectual property to Kevin Michigan. We currently have no operations in Michigan.
U.S. Attorney Statements in Michigan
On November 8, 2018, United States Attorneys
Matthew Schneider and Andrew Birge for the Eastern and Western Districts of Michigan, respectively, issued a joint statement regarding
the legalization of adult-use marijuana in Michigan. They stated that since they had taken oaths to protect and defend the Constitution
and the laws of the United States, they would not immunize the residents of Michigan from federal law enforcement. They stated that they
would continue to the investigation and prosecution of marijuana crimes as they do with any other crime. They stated they would consider
the federal law enforcement priorities set by the DOJ, the seriousness of the crime, the deterrent effect of prosecution, and the cumulative
impact of the crime on a community, while also considering their ability to prosecute with limited resources. They stated that combating
illegal drugs was just one of many priorities, and that even within the area of drugs, they were focused on combating the opioid epidemic.
They stated that they have not focused on prosecution of low-level offenders, which they stated would not change (unless aggravating
factors were present). They did state that certain crimes involving marijuana could pose serious risks and harm to a community, including
interstate trafficking, involvement of other illegal drugs or activity, persons with criminal records, presence of firearms or violence,
criminal enterprises, gangs and cartels, bypassing local laws and regulations, potential for environmental contamination, risks to minors,
and cultivation on federal property.
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in Michigan. See “Risk Factors - The Company’s Business Activities are Illegal
under U.S. Federal Law”.
New Hampshire
New Hampshire Legislative history
New Hampshire’s Therapeutic Cannabis
Program (the “NH Program”) was enacted on July 23, 2013, when the New Hampshire governor signed House Bill 573 into law allowing
New Hampshire residents with qualifying medical conditions to use cannabis for medical purposes. Among the 18 qualifying medical conditions
included in HB 573 are cancer, HIV/AIDS, ALS and Crohn’s disease. On June 28, 2017, the New Hampshire governor signed HB 160 which
added post-traumatic stress disorder and other medical conditions to the law. On January 8, 2020 the New Hampshire House voted to add
insomnia and opioid use disorder to the list of qualifying conditions, though the opioid use disorder carries significant restrictions.
The New Hampshire legislature placed the responsibility for administering the NH Program within the New Hampshire Department of Health
and Human Services (the “DHHS”). The first New Hampshire dispensary began serving patients on April 30, 2016. On July
18, 2017, the governor of New Hampshire signed into law HB 640, a cannabis decriminalization bill. Under HB 640, effective September
16, 2017, penalties for non-registered and non-medical possession of three-quarters of an ounce or less of cannabis were reduced from
a criminal misdemeanor to a civil violation punishable only by a fine. As of June 2019, approximately 8,302 patients have been
registered to purchase medical cannabis products in New Hampshire.
New Hampshire Licenses
The DHHS oversees the issuance of licenses
and the rules and regulations for cannabis businesses, known as Alternative Treatment Centers (each, an “ATC”). ATCs
are not-for-profit entities registered under the New Hampshire Revised Statutes Annotated Section 126-X:7. ATCs are business entities
that acquire, possess, cultivate, manufacture, deliver, transfer, transport, sell, supply, and dispense cannabis and related materials
to qualified patients and other ATCs. ATCs are issued a notice of registration approval only after the DHHS has inspected and determined
that the ATC is in full compliance with all regulatory and statute requirements. DHHS has issued licenses to four qualifying ATCs and
in March 2018 lawmakers passed legislation calling for two additional dispensaries.
The table below lists the license issued to
Prime Alternative Treatment Centers of NH, Inc. (“PATC”), an entity that has a management services agreement with
Prime Alternative Treatment Center Consulting, LLC, a subsidiary of the Company; Prime Alternative Treatment Center Consulting, LLC does
not own or control PATC:
|
MSA
Party
|
License
Number
|
City
|
Expiration
Date
|
Description
|
|
Prime
Alternative Treatment Centers of NH, Inc.
|
ATC-001
|
Merrimack
|
6/30/2021
|
Grow
/ Manufacturing and Dispensary
|
ATC grower, processing, and dispensary licenses
are valid for one year and expire on June 30th of the following year. License holders are required to submit a renewal application at
least 120 days prior to the expiration of the current registration and include updates to the ATC’s original application as appropriate.
Additionally, ATCs must ensure that no cannabis is transported outside of the state. The cultivation and processing facility is located
in Peterborough, NH and the dispensary is located in Merrimack, NH.
New Hampshire Record-keeping/Reporting
New Hampshire selected BioTrackTHC as the
T&T system for commercial cannabis activity. PATC currently uses a BioTrackTHC that pushes the data to New Hampshire’s T&T
system to meet all reporting requirements.
Each ATC is required to maintain records in
accordance with the records retention schedule established by the DHHS. As part of the records retention schedule, ATCs must keep a record
of each transaction including the amount of cannabis dispensed, the amount paid, and the registry identification number of the qualifying
patient, designated caregiver, or ATC and the qualifying patient’s provider. ATC’s are required to submit annual reports
to the state that include (a) a description of efforts to educate qualifying patients and designated caregivers, (b) the annual financial
report of the ATC including expenditures, liabilities, monetary reserves, and revenues received for sales of cannabis by strain and by
type, (c) the total number of qualifying patients and designated caregivers served, and (d) reports on security issues including an aggregate
account of all reportable incidents. Additionally, ATCs must maintain current and accurate records for each qualifying patient and designated
caregiver registered with the ATC. The NH Program mandates all records be kept for a minimum of four years.
New Hampshire Inventory/Storage
Comprehensive inventory procedures and controls
are required to be established and followed under the NH Program. Regular inventory counts and reviews designed to enable timely detection
of any diversion, theft, or loss are specifically required by the NH Program. As part of the comprehensive inventory plan, ATCs must
reconcile daily all on-premises and in-transit cannabis and be able to present such inventory records for review upon request of the
state. In addition to daily inventories, monthly inventories are also mandated and must record all cannabis available for dispensing,
mature cannabis plants, and seedlings at each authorized location.
Comprehensive storage guidelines are detailed
under the NH Program. All cannabis and cannabis infused products, whether in the process of cultivation, processing, transport, testing,
or available for sale, must be securely stored to prevent diversion, theft or loss. Additionally, cannabis must only be accessible by
ATC agents who are specifically authorized to handle cannabis and to whom access is essential for efficient ATC operation. At the end
of each business day, any cannabis or cannabis infused products must be returned to a secure storage location. Similarly, after cultivation
and/or processing, all cannabis must be securely stored.
New Hampshire Security
Protecting dispensary facility patients, employees,
and safeguarding cannabis against theft are all goals of the NH Program. ATCs are required to have security systems designed to prevent
and detect diversion, theft, or loss of cannabis as well as unauthorized intrusion. Such security systems must include: (a) a perimeter
alarm at all entry points and perimeter windows, and (b) a duress, panic, and holdup alarm connected to local public safety or law enforcement
authorities or to an alarm monitoring company. Additionally, two agents must be present at the premises during all hours of operations.
Like dispensary facilities, security of cultivation
facilities is also highly regulated under the NH Program. All phases of cannabis cultivation are required to take place in specially
designated, secure, limited access areas that are monitored by surveillance camera systems. Surveillance cameras must cover all points
of facility entry and exit, the parking lot, the entrance to the video surveillance room, and any areas that may contain cannabis. Surveillance
video must be active 24 hours a day, seven days a week and all recordings must be retained for at least 90 calendar days. The NH Program
mandates that all security equipment be maintained in good working order and shall be inspected and tested at regular intervals of at
no more than 30 calendar days.
New Hampshire Transportation
ATCs must create transport manifests for each
transportation event, which must include pertinent information including departure date and time, identifying information and license
number of the originating ATC, identifying information of the destination entity, product type and quantity, estimated time of arrival
and name of employee transporting the product. The originating ATC must transmit a copy of the manifest to the destination entity prior
to transport. The manifest must be signed and dated upon departure and arrival.
All cannabis must be tracked as inventory
and must be transported in containers so as to not be visible or recognizable from outside the vehicle. The vehicle must not be marked
as transporting cannabis nor bear the name of the ATC. Vehicles must not remain unattended at any time.
New Hampshire Inspections
Alternative treatment centers shall be subject
to inspection by the DHHS at any time. During an inspection, the department may review the alternative treatment center's records, including
its confidential dispensing and data collection records, which shall track transactions and product effectiveness according to qualifying
patients' registry identification numbers to protect their confidentiality.
U.S. Attorney Statements in New Hampshire
To the knowledge of management of the Company, other than as disclosed
in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement
action in New Hampshire. See “Risk Factors - The Company’s Business Activities are Illegal under U.S. Federal Law”.
New Jersey
New Jersey Legislative history
On January 18, 2010, the governor of New Jersey
signed into law S.119, the Compassionate Use Medical Marijuana Act (the “NJ Act”), permitting the use of medical cannabis
for persons with debilitating conditions including cancer, HIV/AIDS, ALS, Crohn’s disease and any terminal illness. The law permits
the New Jersey Department of Health (“NJDH”) to create rules to add other illnesses to the permitted conditions. The
NJ Law does not permit patients to grow their own cannabis but rather mandates that cannabis must be acquired through ATCs licensed by
the State.
Caregivers for patients are permitted to collect
cannabis on behalf of the patient. Under the NJ Act, six ATCs received licenses from the State. The ATCs are non-profit entities and
have the exclusive right to produce and sell medical cannabis in New Jersey.
On March 27, 2018 through executive order
No. 6 (2018), Governor Phil Murphy expanded the medical cannabis program, announcing the 20-plus recommendations presented by the NJDH
on March 23, 2018. The NJDH’s recommendations and next steps included certain measures that took effect immediately (e.g. the addition
of debilitating conditions and the reduction of registration fees) and other recommendations (e.g. the home delivery model) that require
further regulatory or statutory enactment.
In February 2019, the NJDH amended the list
of debilitating conditions to include opioid use disorder, which had been accepted as petition by the review panel. The NJDH also
implemented measures to streamline the enrollment process for patients, allow physicians to opt out of being listed publicly, and
have started the permitting process for six new ATCs.
In the 2020 general election, New Jersey residents
voted two-to-one in favor of recreational cannabis legalization. The state has to pass legalization and decriminalization bills, which
will then get signed into law by Governor Phil Murphy. Once that happens, the state’s Cannabis Regulatory Commission (CRC) will
be fully appointed, and that five-person body must issue regulations within six (6) months of the effective date of the law for every
part of the industry — from growing to distribution.
New Jersey Licenses
The NJDH is responsible for administering
the NJ Act to ensure qualifying patients’ access to safe cannabis for medical use in New Jersey. The NJDH is responsible for issuing
permits to entities who will operate an ATC. New Jersey is a vertical state where the dispensary needs to be in the same location as
the growing and processing facilities. One of the recommendations in executive order No. 6 is to allow existing license holders to have
up to two additional dispensaries not attached to the growing facility. The NJDH has issued twelve permits. The NJDH previously accepted
applications for an additional six vertical permits. The NJDH is seeking new applicants to operate up to 24 additional Alternative Treatment
Centers (ATCs): Up to 8 in the northern region of the state, up to 8 in the central region, up to 7 in the southern region, and up to
1 “at-large” to be determined during the award process.
ATC permits expire annually on December 31.
A permit renewal application must be submitted at least 60 days prior to the expiration date. An ATC that seeks to renew its permit shall
submit to the permitting authority an application for renewal with all required documentation and the required fees. An ATC shall update
and ensure the correctness of all information submitted in previous applications for a permit or otherwise on file with the NJDH. Prior
to the issuance of any permit, every principal officer, owner, director and board member of an ATC must certify stating that he or she
submits to the jurisdiction of the courts of the State of New Jersey and agrees to comply with all the requirements of the laws of New
Jersey pertaining to New Jersey’s Medicinal Marijuana Program. Failure to provide correct and current up-to-date information is
grounds for denial of the application for renewal of the permit.
As of January 2021, approximately 101,496
patients were registered and have medical licenses allowing them to purchase cannabis products from an ATC.
Compassionate Care Foundation, Inc. (“CCF”)
is a vertically integrated medical cannabis operator in New Jersey with licenses to conduct growing, processing, wholesale, and dispensary
operations.in Egg Harbor, New Jersey. On October 4, 2013, the New Jersey Department of Health issued CCF a license to operate its facilities.
The license has been renewed without issue. On June 26, 2020 we closed on the purchase of CCF and it is currently a wholly-owned subsidiary.
The table below lists the permit issued to
CCF:
|
MSA
Party
|
Permit
Number
|
City
|
Expiration
Date
|
Description
|
|
CCF
|
10042013
|
Egg
Harbor
|
12/31/2021
|
Cultivate
and Dispense
|
|
CCF
|
10042013
|
Atlantic
City
|
12/31/2021
|
Dispense
|
New Jersey Record-keeping/Reporting
New Jersey does not have a unified T&T
system. All information is forwarded to the MMMP through email. The ATC collects and submits to the NJDH for each calendar year statistical
data on (a) the number of registered qualified patients and registered primary caregivers, (b) the debilitating medical conditions of
the qualified patients, (c) patient demographic data, (d) summary of the patient surveys and evaluation of services and (e) other information
as the NJDH may require. The ATC must retain records for at least two years.
New Jersey Inventory/Storage
The ATC will establish inventory controls
and procedures for the conduct of inventory reviews and comprehensive inventories of cultivating, stored, usable and unusable cannabis.
The ATC will conduct a monthly inventory of cultivating, stored, usable and unusable cannabis. Through a unified T&T system is not
currently in place, an ATC is required to have a T&T system for tracking inventory and dispensing cannabis products to patients.
CCF uses BioTrackTHC as its T&T system. An ATC is authorized to possess two ounces of usable cannabis per registered qualifying patient
plus an additional supply, not to exceed the amount needed to enable the alternative treatment center to meet the demand of newly registered
qualifying patients.
Per regulatory requirements an ATC, at a minimum,
must (a) establish inventory controls and procedures for the conduct of inventory reviews and comprehensive inventories of cultivating,
stored, usable and unusable cannabis, (b) conduct a monthly inventory of cultivating, stored, usable and unusable cannabis, (c) perform
a comprehensive inventory inspection at least once every year from the date of the previous comprehensive inventory, and (d) promptly
transcribe inventories taken by use of an oral recording device. If cannabis is disposed of, the ATC must maintain a written record of
the date, the quantity disposed of, the manner of disposal and the persons present during the disposal, with their signatures. ATCs must
keep disposal records for at least two years. Results of the inventory inspection should document the date of the inventory review, a
summary of the inventory findings and the name, signature and title of the individuals who conducted the inventory inspection.
An ATC shall limit access to medicinal cannabis
storage areas to the absolute minimum number of specifically authorized employees. In the event non-employee maintenance personnel, business
guests or visitors to be present in or pass through medical cannabis storage areas, the ATC must have a dedicated person who is specifically
authorized by policy or job description to supervise the activity. The ATC must ensure that the storage of usable cannabis prepared for
dispensing to patients is in a locked area with adequate security.
New Jersey Security
An ATC is required to implement effective
controls and procedures to guard against theft and diversion of cannabis including systems to protect against electronic records tampering.
At a minimum, every ATC must (a) install, maintain in good working order and operate a safety and security alarm system that provides
suitable protection 24 hours a day, seven days a week against theft and diversion, (b) immediately notify the state or local police agencies
of an unauthorized breach of security. An ATC must conduct maintenance inspections and tests of the security alarm system at intervals
not to exceed 30 days from the previous inspection.
A video surveillance system must be installed
and operated to clearly monitor all critical control activities of the ATC and must operate in good working order at all times. The ATC
must provide two monitors for remote viewing via telephone lines to the NJDH offices. This security system must be approved by State
of New Jersey’s Medicinal Marijuana Program prior to permit issuance. The original tapes or digital pictures produced by the system
must be stored in a safe place for a minimum of 30 days.
New Jersey Transportation
An ATC that is authorized by permit to cultivate
medicinal marijuana at one location and to dispense it at a second location shall transport only usable marijuana from the cultivation
site to the dispensing site according to a delivery plan submitted to the Department. Each vehicle must be staffed with at least two
registered ATC employees. At least one delivery team member shall remain with the vehicle at all times that the vehicle contains medicinal
marijuana. Each delivery team member shall have access to a secure form of communication with the ATC, such as a cellular telephone,
at all times that the vehicle contains medicinal marijuana. Each delivery team member must possess their ATC employee identification
card at all times and shall produce it to NJDH staff or law enforcement officials upon demand.
Each transport vehicle needs to be equipped
with a secure lockbox or locking cargo area, which shall be used for the sanitary and secure transport of medicinal marijuana. Each ATC
must maintain current commercial automobile liability insurance on each vehicle used for transport of medicinal marijuana in the amount
of one million dollars per incident. Each ATC must ensure that vehicles used to transport medicinal marijuana bear no markings that would
either identify or indicate that the vehicle is used to transport medicinal marijuana, and each trip must be completed in a timely and
efficient manner, without intervening stops or delays. Each ATC shall maintain a record of each transport of medicinal marijuana in a
transport logbook, which must include dates and times of trips, names of employees on the delivery team, relevant facts about the products
transported and the signatures of the delivery team.
ATCs must report any vehicle accidents, diversions,
losses, or other reportable events that occur during transport to the permitting authority in accordance with New Jersey law.
Home delivery is not permitted under New Jersey
law. An ATC may not deliver marijuana to the home or residence of a registered qualifying patient or primary caregiver.
New Jersey Inspections
An ATC is subject to onsite assessment by
the NJDH at any time. The NJDH may enter an ATC without notice to carry out an onsite assessment in accordance New Jersey laws and regulations.
All ATCs are required to provide the NJDH or the NJDH’s designee immediate access to any material and information so requested.
Submission of an application for an ATC permit constitutes permission for entry and onsite assessment of an ATC, and failure to cooperate
with an onsite assessment and or to provide the NJDH access to the premises or information may be grounds to revoke the permit of the
ATC and to refer the matter to state law enforcement agencies.
An onsite assessment may include (1) the review
of all ATC documents and records and conferences with qualifying patients and primary caregivers and other persons with information,
and the making and retaining of copies and/or extracts, (2) the use of any computer system at the ATC to examine electronic data, (3)
the reproduction and retention of any document and/or electronic data in the form of a printout or other output, (4) the examination
and collection of samples of any marijuana found at the ATC, and (5) the seizure and detention of any marijuana or thing believed to
contain marijuana found at the ATC.
U.S. Attorney Statements in New Jersey
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in New Jersey. See “Risk Factors - The Company’s Business Activities are Illegal
under U.S. Federal Law”.
New York
New York Legislative history
In
July 2014, the New York Legislature and Governor enacted the Compassionate Care Act (the “CCA”) to provide a comprehensive,
safe and effective medical cannabis program. The CCA bill which is part of the Title V-A in Article 33, Title 10, Chapter 13 of the Public
Health Law is scheduled to sunset in seven (7) years, in 2021. The CCA provides access to the program to those who suffer from one of
31 qualifying serious conditions including, debilitating or life-threatening conditions including cancer, HIV/AIDS, ALS and chronic pain.
Patients must also have one of the following associated or complicating conditions: cachexia or wasting syndrome, severe or chronic pain,
severe nausea, seizures, or severe or persistent muscle spasms.
Pursuant
to the CCA, only a limited number of product offerings are allowed including metered liquid or oil preparations, solid and semi-solid
preparations (e.g. capsules, chewable and effervescent tablets), metered ground plant preparations, and topical forms and transdermal
patches. Medical cannabis may not be incorporated into the food products unless approved by the Commissioner of Health and smoking of
cannabis flower is prohibited.
As
of March 30, 2021, New York passed an adult-use bill which created an Office of Cannabis Management to oversee New York’s recreational,
medical and agricultural cannabis markets. It sets a 9 percent sales tax on cannabis, an additional 4 percent tax split between the county
and municipalities, plus another tax based on THC content of $0.50 per milligram for flower, $0.80 per milligram for concentrated cannabis
and $0.30 per milligram for edibles. Forty percent of excess revenue from sales will be dedicated to reinvestment in communities disproportionately
affected by the state’s drug laws, 40% towards public education and 20% used toward drug treatment, prevention, and education.
Recreational use is for adults 21 or older. It is intended for cities, towns, and villages to have the ability to opt-out of having adult-use
dispensaries and consumption sites in their communities.
The legislation also allows
for limited home grow of three mature and three immature plants, includes equity programs to ensure broad opportunities for participation
in the new industry, ends penalties for possession of less than three ounces of cannabis, and calls for automatic expungement of records
for people with previous convictions for activities that are no longer criminalized. And it sets a new range of criminal penalties for
unlawful possession and sale of cannabis, as well as incorporates impairment by cannabis into the infraction of driving while ability
impaired.
New York Licenses
The New York Department of Health (“NYDOH”)
has issued licenses to ten registered organizations which hold vertically integrated licenses. Each registered organization has one cultivation/processing
license and four dispensary licenses.
As of September 1, 2020, there were 124,718
certified patients allowed to purchase cannabis products from a dispensary.
The table below lists the licenses approved
to be issued to NYCANNA, LLC (“NYCANNA”), an indirect subsidiary of the Company:
|
Subsidiary
|
License
number
|
City
|
Expiration
Date
|
Description
|
|
NYCANNA,
LLC
|
MM0601M
|
Dewitt
|
7/31/2021
|
Acquiring
possession, sale, transporting, distributing and dispensing medical marijuana
|
|
NYCANNA,
LLC
|
MM0602D
|
Jamaica
|
7/31/2021
|
Acquiring
possession, sale, transporting, distributing and dispensing medical marijuana
|
|
NYCANNA,
LLC
|
MM0603D
|
Farmingdale
|
7/31/2021
|
Acquiring
possession, sale, transporting, distributing and dispensing medical marijuana
|
|
NYCANNA,
LLC
|
MM0604D
|
Buffalo
|
7/31/2021
|
Acquiring
possession, sale, transporting, distributing and dispensing medical marijuana
|
|
NYCANNA,
LLC
|
MM0605D
|
Wallkill
|
7/31/2021
|
Acquiring
possession, sale, transporting, distributing and dispensing medical marijuana
|
The New York dispensary, growing and processing
licenses are valid for two years from the date of issuance and the license holders are required to submit a renewal application not be
more than six months nor less than four months prior to expiration. License holders must ensure that no cannabis is sold, delivered,
transported or distributed by a producer from or to a location outside of New York.
New York Record-keeping/Reporting
The NYDOH uses the BioTrack THC T&T system
used to track commercial cannabis activity. NYCANNA also uses BioTrack THC to push the data to the NYDOH to meet all reporting requirements.
Each month, each registered organization is required to file reports with the NYDOH which provides information showing all products dispensed
during the month. All other data shall be pulled from the T&T system. The data must include (a) documentation, including lot numbers
where applicable, of all materials used in the manufacturing of the approved medical cannabis product to allow tracking of the materials
including but not limited to soil, soil amendment, nutrients, hydroponic materials, fertilizers, growth promoters, pesticides, fungicides,
and herbicides, (b) cultivation, manufacturing, packaging and labeling production records, and (c) laboratory testing results. The records
are required to be maintained for a period of five years.
New York Inventory/Storage
A record of all approved medical cannabis
products that have been dispensed must be filed with the NYDOH electronically through BioTrack THC no later than 24 hours after the cannabis
was dispensed to the certified patient or designated caregiver. The information filed must include (a) a serial number for each approved
medical cannabis product dispensed to the certified patient or designated caregiver, (b) an identification number for the registered
organization’s dispensing facility, (c) the patient’s name, date of birth and gender, (d) the patient’s address, including
street, city, state and zip code, and (e) the patient’s registry identification card number.
All cannabis that is not part of a finished
product must be stored in a secure area or location within the registered organization accessible only to a minimum number of employees
essential for efficient operation and in such a manner as approved by the NYDOH in advance, to prevent diversion, theft or loss and against
physical, chemical and microbial contamination and deterioration. Cannabis must be returned to its secure location immediately after
completion of manufacture, distribution, transfer or analysis.
New York Security
All facilities operated by a registered organization,
including any manufacturing facility and dispensing facility, must have a security system to prevent and detect diversion, theft or loss
of cannabis and/or medical cannabis products, utilizing commercial grade equipment which include (a) a perimeter alarm, (b) a duress
alarm, (c) a panic alarm, and (d) a holdup alarm.
The manufacturing and dispensing facilities
must direct cameras at all approved safes, approved vaults, dispensing areas, cannabis sales areas and any other area where cannabis
is manufactured, stored, handled, dispensed or disposed of. The manufacturing and dispensing facilities must angle the cameras to allow
for the capture of clear and certain identification of any person entering or exiting the facilities. The surveillance cameras must record
24 hours, seven days a week. Recordings from all video cameras must be readily available for immediate viewing by a state authorized
representative upon request and must be retained for at least 90 days. A registered organization must test the security and surveillance
equipment no less than semi-annually at each manufacturing and dispensing facility that is operated under the registered organization’s
registration. Records of security tests must be maintained for five years.
New York Transportation
Cannabis products must be transported in a
locked storage compartment that is part of the vehicle transporting the cannabis and in a storage compartment that is not visible from
outside the vehicle. An employee of a registered organization, when transporting approved medical cannabis products must (a) travel directly
to his or her destination(s) and may not make any unnecessary stops in between, (b) ensure that all approved medical cannabis product
delivery times are randomized, (c) appoint each vehicle with a minimum of two employees where at least one transport team member remains
with the vehicle at all times, (d) possess a copy of the shipping manifest at all times when transporting or delivering approved medical
cannabis products, and (e) keep the manifest in a safe compartment for a minimum of five years.
New York Inspections
Medical marijuana facilities in New York must
make its books, records and manufacturing and dispensing facilities available to the department or its authorized representatives for
monitoring, on-site inspection, and audit purposes, including but not limited to periodic inspections and/or evaluations of facilities,
methods, procedures, materials, staff and equipment to assess compliance with requirements of New York law.
U.S. Attorney Statements in New York
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in New York. See “Risk Factors - The Company’s Business Activities are Illegal
under U.S. Federal Law”.
Ohio
Ohio Legislative History
Effective September 8, 2016, House Bill 523
legalized the use of medical cannabis for 21 debilitating conditions as prescribed by a licensed physician. On implementation, the Ohio
Medical Marijuana Control Program (“OMMCP”) will allow people with certain medical conditions including Alzheimer’s
disease, HIV/AIDS, ALS, cancer, and traumatic brain injury to legally purchase medical cannabis. On July 8, 2020 Ohio Medical Board added
Cachexia to the list of qualifying conditions. Though Ohio was required to implement a fully operational OMMCP by September 8, 2018 with
a controlled system for cultivation, laboratory-testing, physician/patient registration and dispensing, the timeline was delayed until
November 2018. Regulatory oversight is shared between three offices; (a) the Ohio Department of Commerce with respect to overseeing cultivators,
processors and testing laboratories; (b) the Ohio Board of Pharmacy with respect to overseeing retail dispensaries and the registration
of patients and caregivers, and (c) the State Medical Board of Ohio with respect to certifying physicians to recommend medical cannabis.
The OMMCP will permit limited product types including oils, tinctures, plant materials and edibles. Adult-use and the smoking of cannabis
flower are prohibited. As of December 31, 2020, there were approximately 160,000 registered patients allowed to purchase cannabis
products from a dispensary.
Ohio Licenses
Prior to September 8, 2018, the Ohio Board
of Pharmacy was permitted to issue up to 60 dispensary provisional licenses. After September 8, 2018, additional provisional licenses
are permitted to be issued if the population, the number of patients seeking to use medical cannabis products and the availability of
all forms of cannabis products support additional licenses. To be considered for approval of a provisional dispensary or a processing
license, the applicant must complete all mandated requirements. To obtain a certificate of operation for a medical cannabis dispensary
or processing facility, the prospective licensee must be capable of operating in accordance with Chapter 3796 of the Revised Code, the
Medical Marijuana Control Program. Dispensary Certificates of operation carry two-year terms, while certificates of operation for cultivators
and processors must be renewed annually.
A certificate of operation will expire on
the date identified on the certificate. A licensee will receive written or electronic notice 90 days before the expiration of its certificate
of operation. The licensee must submit the renewal information at least 45 days prior to the date the existing certificate expires. The
information required for the license renewal includes, but is not limited to, the following: (a) a roster that includes the dispensary’s
employees’ names, (b) the history of compliance with regulations, and (c) the number and severity of any violations. If a licensee’s
renewal application is not filed prior to the expiration date of the certificate of operation, the certificate of operation will be suspended
for a maximum of 30 days. After 30 days, if the dispensary has not successfully renewed the certificate of operation, including the payment
of all applicable fees, the certificate of operations will be deemed expired. The original implementation deadline of September 8, 2018
was missed by Ohio, as noted above. Starting in January 2019, Ohio patients were able to purchase medical cannabis.
Greenleaf Apothecaries, LLC (“GLA”)
has been issued five dispensary licenses and Greenleaf Therapeutics, LLC (“GLT”) has been issued one provisional processing
license. Greenleaf Gardens, LLC (“GLG”) has been issued one provisional grow license. The Company has entered into
a master service agreement with GLA, GLT and GLG. The table below lists the locations of the licenses.
The table below lists the licenses issued to GLA, GLT and GLG:
|
MSA
Party
|
License
Number
|
City
|
Expiration
Date
|
Description
|
|
GLA
|
MMD.0700044
|
Akron
|
7/31/2021
|
Dispensary
Facility
|
|
GLA
|
MMD.0700042
|
Cleveland
|
7/31/2021
|
Dispensary
Facility
|
|
GLA
|
MMD.0700004
|
Canton
|
7/31/2021
|
Dispensary
Facility
|
|
GLA
|
MMD.0700005
|
Wickliffe
|
7/31/2021
|
Dispensary
Facility
|
|
GLA
|
MMD.0700043
|
Columbus
|
7/31/2021
|
Dispensary
Facility
|
|
GLT
|
MMCPP00064
|
Middlefield
|
7/31/2021
|
Processing
|
|
GLG
|
MMCPC00143
|
Middlefield
|
11/12/2021
|
Cultivation
|
GLA currently has five operational dispensaries,
one in each of the cities set out in the table above. In October 2019, GLA entered into a settlement agreement with the
Ohio Board of Pharmacy that provides, among other provisions, that the process of closing the acquisition of GLA will be completed
18 months following the date the final dispensary became operational, which occurred on November 8, 2019. GLT and GLG also
became operational in 2020.
The Company is currently in discussions for
finalizing the purchases of GLA, GLT and GLG.
Ohio Record-keeping/Reporting
A holder of a processing license must maintain
the following records: (a) samples sent for testing, (b) disposal of products, (c) tracking of inventory, (d) form and types of medical
cannabis maintained at the processing facility on a daily basis, (e) production records, including extraction, refining, manufacturing,
packaging and labeling, (f) financial records, and (g) purchase invoices, bills of lading, manifests, sales records, copies of bills
of sale, and any supporting documents, including the items and/or services purchased, from whom the items were purchased, and the date
of purchase.
A holder of a dispensary license must maintain
the following records: (a) confidential storage and retrieval of patient information or other medical cannabis records, (b) records of
all medical cannabis received, dispensed, sold, destroyed, or used, (c) dispensary operating procedures, (d) a third-party vendor list,
(e) monetary transactions, and (f) journals and ledgers. All records relating to the purchase or return, dispensing, distribution, destruction,
and sale of medical cannabis must be maintained under appropriate supervision and control to restrict unauthorized access on the licensed
premises for a five-year period.
Ohio Inventory/Storage
Ohio has selected METRC as the T&T system.
Individual licensees, whether directly or through third-party APIs, are required to push data to the state to meet all reporting requirements.
A holder of a processing license must track and submit through the inventory tracking system any information the Ohio Department of Commerce
determines necessary for maintaining and tracking medical cannabis extracts and products.
A holder of a processing or cultivation license
must conduct weekly inventory of medical cannabis which includes (a) the date of the inventory, (b) net weight of plant material and
the net weight and volume of medical cannabis extract, (c) net weight and unit count of medical cannabis products prepared or packaged
for sale to a dispensary, and (d) a summary of the inventory findings. On an annual basis and as a condition for renewal of a processing
license, a holder of a processing license shall conduct a physical, manual inventory of plant material, medical cannabis extract, and
medical cannabis products on hand at the processor and compare the findings to an annual inventory report generated using the inventory
tracking system. A holder of a processing license must store plant material, medical cannabis extract, and medical cannabis product inventory
on the premises in a designated, enclosed, locked area and accessible only by authorized individuals.
A holder of a dispensary license must use
the METRC T&T system to push data to the Ohio Board of Pharmacy on a real-time basis. The following data must be transmitted: (a)
each transaction and each day’s beginning inventory, acquisitions, sales, disposal and ending inventory, (b) acquisitions of medical
cannabis from a licensed processor or cultivator holding a plant-only processor designation, (c) name and license number of the licensed
dispensary employee receiving the medical cannabis and, (d) other information deemed appropriate by the Ohio State Board of Pharmacy.
A dispensary’s designated representative shall conduct the inventory at least once a week. Records of each day’s beginning
inventory, acquisitions, sales, disposal and ending inventory shall be kept for a period of three years.
The dispensary licensee must restrict access
areas and keep stock of medical cannabis in secured area enclosed by a physical barrier with suitable locks and an alarm system capable
of detecting entry at a time when licensed dispensary employees are not present. Medical cannabis must be stored at appropriate temperatures
and under appropriate conditions to help ensure that its identity, strength, quality and purity are not adversely affected.
Ohio Security
All licensees must have a security system
that remains operational at all times and that uses commercial grade equipment to prevent and detect diversion, theft or loss of medical
cannabis, including (a) a perimeter alarm, (b) motion detectors, and (c) duress and panic alarms. A dispensary must also employ a holdup
alarm, which means a silent alarm signal generated by the manual activation of a device intended to signal a robbery in progress.
Video cameras at a dispensary must be positioned
at each point of egress and each point of sale. The cameras must capture the sale, the individuals and the computer monitors used for
the sale. Video surveillance recording must operate 24 hours a day, seven days a week. Recording from all video cameras during hours
of operation must be made available for immediate viewing by the Ohio State Board of Pharmacy upon request and must be retained for at
least six months.
Video cameras at a processing or cultivation
facility must be directed at all approved safes, approved vaults, cannabis sales areas, and any other area where plant material, medical
cannabis extract, or medical cannabis products are being processed, stored or handled. Video surveillance must take place 24 hours a
day, seven days a week. Recordings from all video cameras during hours of operation must be readily available for immediate viewing by
the Ohio regulatory bodies upon request and must be retained for at least six months.
Ohio Transportation
Medical marijuana entities must maintain a
transportation log containing the names and addresses of the medical marijuana entities sending and receiving the shipment, names
and registration numbers of the registered employees transporting the medical marijuana or the products containing medical marijuana,
the license plate number and vehicle type that will transport the shipment, the time of departure and estimated time of arrival,
the specific delivery route, which includes street names and distances; and the total weight of the shipment and a description of
each individual package that is part of the shipment, and the total number of individual packages. Copies of the log described
above must be transmitted to the recipient and to the Ohio Department of Commerce before the close of business the day prior to
the trip.
Vehicles transporting medical marijuana or
marijuana products must be insured as required by law, store the products in locked compartments, ensure that the products are not
visible from outside the vehicle, be staffed with two employees registered with the department (with one remaining with the vehicle
at all times) and have access to the 911 emergency system. Vehicles must not be marked with any marks or logos.
Trips must be direct, other than to refuel
the vehicle. Drivers must have their employee identification cards at all times and must ensure that delivery times and routes are
randomized. A copy of the transportation log must be carried during the trip.
Ohio Inspections
The submission of an application that results
in the issuance of a provisional license or certificate of operation for a cultivator or processor irrevocably gives the Ohio Department
of Commerce consent to conduct all inspections necessary to ensure compliance with the cultivator's application, state and local
law and regulators. An inspector conducting an inspection pursuant to this rule shall be accompanied by a “type 1” key
employee during the inspection. The inspector may review and make copies of records, enter any area of a facility, inspect vehicles,
equipment, premises, and question employees, among other actions.
Dispensaries in Ohio are subject to random
and unannounced dispensary inspections and medical marijuana testing by the Ohio Board of Pharmacy. The Ohio Board of Pharmacy and
its representatives may enter facilities and vehicles where medical marijuana is held and conduct inspections in a reasonable manner
each place and all pertinent equipment, containers and materials and data. The Ohio Board of Pharmacy may also obtain any medical
marijuana or related products from such facility.
U.S. Attorney Statements in Ohio
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in Ohio. See “Risk Factors - United States Regulatory Uncertainty”.
Oregon
Oregon Legislative History
Oregon has both a medical and adult-use cannabis
program. The Oregon Medical Marijuana Act (“OMM”) was established by Oregon Ballot Measure 67 in 1998 to allow for
the cultivation, possession and use of cannabis by patients upon doctor recommendation. The OMM removed criminal penalties for medical
cannabis for patients with debilitating medical conditions whose doctor verified the condition and determined medical cannabis may alleviate
the condition. Qualifying conditions include cancer, chronic pain, glaucoma and HIV/AIDS. The Oregon Medical Marijuana Program (“OMMP”)
administers the program within the Oregon Department of Human Services. Patients obtain permits through the Oregon Department of Human
Services.
In 2014, Measure 91 was approved which legalized
non-medical cultivation and uses of cannabis effective July 1, 2015. Oregon Governor Kate Brown signed an emergency bill declaring cannabis
sales legal to adult-use users from commercial dispensaries effective October 1, 2015. Effective January 1, 2017, cannabis was permitted
to be sold for adult-use only by businesses that obtained a recreational retailer license from the Oregon Liquor Control Commission (“OLCC”).
Medical cannabis dispensaries that did not obtain a retailer license were no longer permitted to sell cannabis for adult-use after 2016.
Holders of retailer licenses are permitted to sell cannabis for medical use to an OMMP patient 18 years of age or older whereas the minimum
age to purchase cannabis for adult-use is 21.
Oregon Licenses
Oregon does not limit the number of retailer,
grower or processing licenses The OLCC regulates all retailer, producer, processor and lab license holders who have been approved to
hold adult-use licenses and all producers and retailers if they sell both medical and adult-use cannabis. The Oregon Health Administration
regulates all growers and dispensaries who hold only medical licenses. To operate legally under state law, cannabis operators must obtain
a state license and local approval. Applicants for each license class are subject to the respective requirements and criteria of the
OLCC which include but are not limited to criminal background checks, zoning requirements, readiness inspection, and state registration.
The table below lists the licenses issued
to Acreage’s indirect subsidiaries operating in Oregon:
|
Subsidiary
|
License
Number
|
City
|
Expiration
Date
|
Description
|
|
East
11th Incorporated
|
1004151A29E
|
Eugene
|
See
below
|
Dispensary
Facility
|
|
22nd
and Burn Inc.
|
100400192AC
|
Portland
|
See
below
|
Dispensary
Facility
|
|
The
Firestation 23 Inc.
|
1003660E75D
|
Portland
|
See
below
|
Dispensary
Facility
|
|
HSCP
Oregon, LLC
|
1004152E8C9
|
Springfield
|
See
below
|
Dispensary
Facility
|
|
HSCP
Oregon, LLC
|
020-1003642197C
|
Medford
|
See
below
|
Producer
License
|
|
HSCP
Oregon, LLC
|
10026747951
|
Portland
|
See
below
|
Dispensary
Facility
|
|
Gesundheit
Foods LLC
|
1013975ABC8
|
Milwaukie
|
7/18/2021
|
Processor
|
|
Gesundheit
Foods LLC
|
1013984A526
|
Milwaukie
|
7/18/2021
|
Wholesaler
|
On January 14, 2020, each of East 11th Incorporated,
22nd and Burn Inc., The Firestation 23 Inc. and HSCP Oregon, LLC Dispensary in Springfield received a letter from the OLCC permitting
these entities to continue to operate while the OLCC reviews their renewal applications. On July 28, 2020, HSCP Oregon, LLC
received a letter from the OLLC permitting the producer to continue to operate while the OLCC reviews their renewal applications.
On March 10, 2020, HSCP Oregon, LLC received a letter from the OLLC permitting the dispensary in Portland to continue to operate while
the OLCC reviews their renewal applications.
The retailer, producer and processer licenses
are valid for one year and the licensees are required to submit a renewal application at least 20 days before the date of expiration.
The license holders must ensure that no cannabis is sold, delivered, transported or distributed by a producer from or to a location outside
of Oregon. On June 3, 2020, Gesundheit Foods LLC requested to temporarily close its wholesaler and processor operations under regulation
845-025-1160 (c). On July 14, 2020 HSCP Oregon, LLC requested to temporarily close its Medford location producer operations under regulation
845-025-1160 (c).
Oregon Record-keeping/Reporting
Oregon uses the METRC T&T system and allows
other third-party system integration via an API to track cannabis. The subsidiaries in Oregon use a third-party T&T system to push
the data to the state through an API to meet all reporting requirements. All cannabis products dispensed are documented at point of sale
via the T&T system. License holders must maintain the documentation from the T&T system in a secure locked location at each dispensing
or growing location for three years as required by the OLCC.
The OLCC requires all cannabis licensees to
have and maintain records that clearly reflect all financial transactions and the financial condition of the business. The following
records may be kept in either paper or electronic form and must be maintained for a three year period and be made available for inspection
if requested by the OLCC: (a) purchase invoices and supporting documents for items and services purchased for use in the production,
processing, research, testing and sale of cannabis items that include from whom the items were purchased and the date of purchase, (b)
bank statements for any accounts, (c) accounting and tax records, (d) documentation of all financial transactions, including contracts
and agreements for services performed or received, and (e) all employee records, including training.
Oregon Inventory/Storage
OLCC licensees must report the following to
Oregon’s Cannabis Tracking System (“CTS”) (a) a reconciliation of all on-premise and in-transit cannabis item inventories
each day, (b) all information for seeds, usable cannabis, CBD concentrates and extracts by weight, (c) the wet weight of all harvested
cannabis plants immediately after harvest, (d) all required information for CBD products by unit count, and (e) for retailer license
holders, the price before tax and amount of each item sold to consumers and the date of each transaction. The data must be transmitted
for each individual transaction before the retailer opens the next business day.
All cannabis items on a licensed retailer’s
premises must be held in a safe or vault. All usable cannabis, cut and drying mature cannabis plants, CBD concentrates, extracts or products
on the licensed premises of a licensee other than a retailer are to be kept in a locked, enclosed area within the licensed premises that
is secured with at a minimum, a steel door with a steel frame or equivalent, and a commercial grade, non-residential door lock.
All licensees must keep all video recordings
and archived required records not stored electronically in a locked storage area. Current records may be kept in a locked cupboard or
desk outside the locked storage area during hours when the licensed business is open.
Oregon Security
A licensed premise must have a fully operational
security alarm system, activated at all times when the licensed premises is closed for business. Among other features the security alarm
system for the licensed premises must (a) be able to detect unauthorized entry onto the licensed premises and unauthorized activity within
any limited access area where mature cannabis plants, usable cannabis, CBD concentrates, extracts or products are present, (b) be programmed
to notify the licensee, a licensee representative or other authorized personnel in the event of an unauthorized entry, and (c) either
have at least two operational “panic buttons” located inside the licensed premises that are linked with the alarm system
that immediately notifies a security company or law enforcement, or have operational panic buttons physically carried by all employees
present on the licensed premises that are linked with the alarm system that immediately notifies a security company or law enforcement.
A licensed premise must have a fully operational
video surveillance recording system. Among other requirements, a licensed premise must have cameras that continuously record, 24 hours
a day, seven days a week: (a) in all areas where mature cannabis plants, usable cannabis, CBD concentrates, extracts or products may
be present on the licensed premises; and (b) all points of ingress and egress to and from areas where mature cannabis plants, usable
cannabis, CBD concentrates, extracts or products are present. A licensee must keep all surveillance recordings for a minimum of 90 calendar
days and have the surveillance room or surveillance area with limited access.
Oregon Transportation
Licensed producers which transport cannabis
to licensed retailers must comply with the following: (a) a licensee must keep cannabis items in transit shielded from public view, (b)
the cannabis items must be of secured (locked-up) during transport, (c) the transport must be equipped with an alarm system, (d) the
transport must be temperature controlled if perishable cannabis items are being transported, (e) the transport must provide arrival date
and estimated time of arrival information, (f) all cannabis items must be packaged in shipping containers and labeled with a unique identifier,
and (g) the transport must provide a copy of the printed manifest and any printed receipts for cannabis items delivered to law enforcement
officers or other representatives of a government agency if requested to do so while in transit.
Oregon Inspections
All marijuana licensees may be subject to
safety inspections of licensed premises by state or local government officials to determine compliance with state or local health and
safety laws. The OLCC also may conduct an inspection at any time to ensure that a registrant, licensee or permittee is in compliance
with Oregon state laws. A licensee, licensee representative, or permittee must cooperate with the OLCC during an inspection. If licensee,
licensee representative or permittee fails to permit the OLCC to conduct an inspection the OLCC may seek an investigative subpoena to
inspect the premises and gather books, payrolls, accounts, papers, documents or records.
U.S. Attorney Statements in Oregon
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in Oregon. See “Risk Factors - The Company’s Business Activities are Illegal
under U.S. Federal Law”.
Pennsylvania
Pennsylvania Legislative History
The Pennsylvania
Medical Marijuana Program (the “PA Program”) was established by the Pennsylvania Medical Marijuana Act (the “PA
Act”) on April 17, 2016. The PA Program provides access to medical cannabis for qualified state residents who suffer from 23
specific medical conditions including epilepsy, chronic pain, HIV, AIDS, cancer, and post-traumatic stress
disorder. To qualify under the PA Program, medical cannabis patients must both register with the Pennsylvania Department of Health (the
“PADOH”) and obtain either an identification card or authorization letter from the PADOH. As of November 11, 2020,
more than 425,000 patients in Pennsylvania have registered to participate in the medical marijuana program, and more than 280,000
have active identification cards and are able to purchase medical marijuana at a dispensary. On February 15, 2018, dispensaries
licensed under the PA Program began selling medical cannabis to qualified patients. Pennsylvania currently allows sale of medical cannabis
to qualified patients in the following forms: pill, oil, topical forms including gels, creams, or ointments, tincture, and liquids. On
August 1, 2018, the Pennsylvania Health Secretary approved the sale of dry leaf cannabis.
Pennsylvania Permits
The PA Act allows
the PADOH to issue up to 25 grower/processor permits and 50 dispensary permits (each dispensary
permit allows the holder to open up to three separate dispensary sites). On June 29, 2017, the PADOH issued 12 cultivation/processing
permits and 27 dispensary permits. Permits are granted to applicants who demonstrate, among other things: (a) the ability to implement
and maintain effective security measures and controls to prevent diversion, (b) a clear criminal background free of illegal conduct,
(c) compliance with municipality zoning requirements, (d) well-defined standard operating procedures, and (e) a verified diversity plan.
Prior to awarding permits, the PA Program requires the PADOH to verify all applicant information including through interviews of principals,
operators, financial backers, and employees engaged and to be engaged in the permit applicant’s cannabis operations.
On July 31, 2018, the PADOH announced it issued
an additional 13 grower/processor permits and 23 dispensary permits.
The table below lists the permit issued to
Prime Wellness of Pennsylvania LLC (“PWPA”), an indirect Subsidiary of the Company.
|
Subsidiary
|
Permit
|
City
|
Expiration
Date
|
Description
|
|
Prime
Wellness of Pennsylvania LLC
|
GP-
1005-17
|
Sinking
Spring
|
6/20/2021
|
Grow/Processing
Facility
|
Dispensary, grower, and processing permits
are valid for one year from the date of issuance and permit holders are required to submit renewal applications in accordance with the
PA Act. The PADOH must renew a permit unless it determines the applicant is unlikely to maintain effective control against diversion
of medical cannabis and the applicant is unlikely to comply with all laws as prescribed under the PA Act. Additionally, permit holders
must ensure that no cannabis is sold, delivered, transported, or distributed outside of Pennsylvania.
Pennsylvania Record keeping/Reporting
The PA Act requires each licensed medical
cannabis grower/processor or dispensary to report information to the PADOH every three months including, but not limited to, (a) the
amount of medical cannabis sold by the grower/processor, (b) the total value and amounts of medical cannabis sold by the grower/processor,
(c) the amount of medical cannabis purchased by each dispensary, (d) the cost and amounts of medical cannabis sold to each dispensary,
and (e) the total amount and dollar value of medical cannabis sold by each dispensary.
To monitor reporting requirements under the
PA Act, the PADOH selected MJ Freeway as the T&T system to implement a seed-to-sale electronic tracking. PWPA also uses MJ Freeway
to push data and ensure compliance with all reporting requirements.
Pennsylvania Inventory/Storage
The PA Act requires each medical cannabis
grower/processor maintains inventory and storage data in an electronic format through MJ Freeway. The following information is tracked
to ensure a compliant cannabis business operation: (a) the number, weight, and type of seeds used, (b) the number of immature medical
cannabis plants, (c) the number of mature medical cannabis plants, (d) the number of medical cannabis products ready for sale, and (d)
the number of damaged, defective, expired, or contaminated seeds, immature medical cannabis plants, medical cannabis plants and medical
cannabis products awaiting disposal.
Robust physical inventory controls and procedures
are required of each medical cannabis grower/processor under the PA Act. The following procedures are mandated to ensure physical inventory
counts match electronic records: (a) monthly inventory counts of both medical cannabis plants in the process of growing and medical cannabis
products that are stored for future sale, (b) comprehensive inventory counts of seeds, immature medical cannabis plants and medical cannabis
plants, and (c) written or electronic records created and maintained for each inventory count conducted.
Additionally, each medical cannabis grower/processor
must separately store in locked, limited access areas all seeds, immature medical cannabis plants, medical cannabis plants and medical
cannabis that is expired, damaged, deteriorated, mislabeled or contaminated.
Pennsylvania Security
The PA Act mandates each medical cannabis
grower/processor must use security and surveillance systems including stringent video backup requirements to safeguard their medical
cannabis and related products. Security requirements include: (a) alarm systems that cover all facility entrances, exits, areas that
contain medical cannabis, safes, and the perimeter of the facility, and (b) professionally-monitored security and surveillance systems
that operate 24 hours a day, 7 days a week and record all activity in images capable of clearly revealing facial detail. All images captured
by each surveillance camera must be stored for a minimum of two (2) years in a format that may be easily accessed for investigative purposes.
Furthermore, all recordings must be kept in a locked cabinet, closet or other secure place to protect them from tampering or theft.
The PA Act also specifies requirements for
the alarm system. The alarm system must include: (a) a silent security alarm signal, (b) an audible security alarm signal generated by
the manual activation of a device intended to signal a life-threatening or emergency situation requiring law enforcement response, and
(c) an electrical, electronic, mechanical, or other device capable of being programmed to send a pre-recorded voice message requesting
dispatch, when activated, over a telephone line, radio, or other communication system to a law enforcement, public safety, or emergency
services agency.
Pennsylvania Transportation
A medical cannabis grower/processor must transport
and deliver medical cannabis to a medical cannabis organization or an approved laboratory within Pennsylvania in accordance with the
following: (a) deliveries must be made between 7:00 a.m. and 9:00 p.m., (b) a global positioning system must be used to ensure safe and
efficient delivery, (c) medical cannabis may not be visible from outside of the transport vehicle, (d) vehicles must be equipped with
a secure cargo area, (e) each transport vehicle must be staffed with at least two individuals and at least one delivery team member must
remain with the medical cannabis at all times, and (f) a printed or electronic transport manifest must accompany every delivery.
Pennsylvania Inspections
The PADOH may conduct announced or unannounced
inspections or investigations to determine the medical marijuana organization’s compliance with its license and Pennsylvania
laws and regulations. During an inspection or investigation, the PADOH may review the site, facility, vehicles, books, records,
papers, documents, data, and other physical or electronic information. The PADOH may also question employees, officers, investors
or similar persons and any other person or entity providing services to the medical marijuana organization.
The PADOH may also conduct an inspection of
a grower/processor facility’s equipment, instruments, tools and machinery that are used to grow, process and package medical
marijuana, including containers and labels. The PADOH and its authorized agents will have free access to review and, if necessary,
make copies of books, records, papers, documents, data, or other physical or electronic information that relates to the business
of the medical marijuana organization, including financial data, sales data, shipping data, pricing data and employee data.
The PADOH and its authorized agents have the
right to access any area within a site or facility and are permitted to collect test samples for testing at an approved laboratory.
Failure of a medical marijuana organization
to provide the PADOH and its authorized agents immediate access to any part of a medical marijuana organization’s site or
facility, requested material, physical or electronic information, or individual as part of an inspection or investigation may result
in the imposition of a civil monetary penalty, suspension or revocation of its permit, or an immediate cessation of operations pursuant
to a cease and desist order issued by the PADOH.
U.S. Attorney Statements in Pennsylvania
To the knowledge of management of the Company,
other than as disclosed in this Prospectus, there have not been any statements or guidance made by federal authorities or prosecutors
regarding the risk of enforcement action in Pennsylvania. See “Risk Factors - United States Regulatory Uncertainty”.