Item 1. Description of Business
Our Company
Allied Corp. (“Allied”) is an international company with a mission to address medical issues by researching, creating and producing targeted cannabinoid health solutions including CBD, cannabis, and psilocybin-based products. Through the efforts of its Officers, Directors, and strategic partners over the past two decades, we have developed a variety of cannabinoid and psilocybin solutions for health and wellness applications, with an initial focus on Post Traumatic Stress Disorder, General Depression and Anxiety. We use what we consider to be an evidence-informed scientific approach to undertake its mission, through pharmaceutical research and development, plant-based production and development of unique therapeutic products.
We are targeting the cannabis and psilocybin markets, which are growing at 50% per year and projected to reach $20 billion of global revenues by 2024, according to BDS Analytics. We believe we have an opportunity to diversify revenue streams across consumer segments of the CBD, cannabis, and psilocybin product markets, including wellness, beauty, as well as food and beverages.
Historical Company Information
We were incorporated in the State of Nevada on February 3, 2013 under the name “Cosmo Ventures, Inc.” On July 1, 2019 the Company filed a Certificate of Amendment with Nevada changing the name to Allied Corp.
Effective July 25, 2019 the Company entered into a Stock Purchase and Reorganization Agreement with AM (Advanced Micro) Biosciences, Inc., a British Columbia Canada corporation. Upon completion of the closing effective September 10, 2019, AM (Advanced Micro) Biosciences became a wholly-owned operating subsidiary of the Company.
References in this Offering Circular to “Allied” or the “Company” may include references to the operations of our subsidiaries AM (Advanced Micro) Biosciences, Inc., Allied Corp Colombia S.A.S., Pacific Sun Fungi Inc., Allied US Products, LLC and Tactical Relief, LLC. All of these entities are 100% wholly owned subsidiaries of Allied.
The Company’s principal corporate office is located at 1405 St. Paul St., Suite 201, Kelowna, BC Canada V1Y 9N2. Our telephone number is (877) 255-4337. Our email is ir@allied.health.
Our Opportunity
We focus on the development of medicinal cannabis and psilocybin products for patients with conditions potentially suitable for treatment therewith. Such conditions include anxiety, insomnia, anorexia, chronic pain, epilepsy, chemotherapy-induced nausea and vomiting, post-traumatic stress disorder (PTSD), Parkinson’s disease, Tourette syndrome, irritable bowel syndrome (IBS) and spasticity associated with multiple sclerosis (MS) and spinal cord injury (SCI)1.
Our objective is to be a company that controls its own international vertically integrated supply chain or CBD, cannabis, and psilocybin products in order to maximize cash flow and profit margins. Our management team believes that having control over our supply chain should enable us to provide a consistent, rolling-harvest supply to the global cannabis community.
Given the average cost of production in North America being approximately $1.00 to $2.00 per gram, we believe our anticipated raw flower cash cost of $0.05 per gram based on historical production of ours and other companies in the same region of cannabis production afforded by our Colombian production and cultivation should provide us a competitive advantage.
In addition to what we consider our demonstrated ability to cultivate low-cost, high margin cannabis in Colombia primarily for use in proprietary cannabinoid drug and natural health products for international distribution, we have hemp derived CBD natural health products for sale in the United States, have received commercial approval for sale of medical cannabis being produced in Colombia for export to nations other than the United States, and have initiated human clinical phase I trial for our psilocybin-based pharma products ALID 11, ALID 12 and Psilonex™ which are protected under provisional patent and trademarks in the United States.
We intend for our clients to access superior cannabis-related products developed with a high level of quality control. The Company believes that is fortunate to have assembled a team of industry veterans and management professionals with the background and experience to enable the Company to build, manage and grow such systems.
Key Strategic Objectives
Scale cannabis production in Colombia
We believe our Bucaramanga, Colombia development and cultivation facility gives us a significant competitive advantage in our production and sales of cannabis:
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We are licensed to produce, extract, as well as both import and export psychoactive and non-psychoactive strains of cannabis.
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We were approved to export cannabis by the Colombian government in April 2021.
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We have constructed a one-hectare greenhouse, with another three to five additional hectares are anticipated in 2021, and ten to twenty hectares more planned for 2022.
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We are now deriving monthly revenue from our Colombian cannabis harvests.
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We completed our first harvest in July 2020 for the Colombian Ministry of Agriculture (“ICA”).
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We obtained commercial approval for production of non-psychoactive cannabis in October 2020, and commercial approval for production of psychoactive cannabis in February 2021.
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Each of our ten non-psychoactive CBD seed strains, and our ten THC seed strains submitted to ICA have been approved over a course of a process that began in October 2019.
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Lower production cost: Our anticipated cash cost of raw flower production is approximately $0.05 per gram based on historical production of ours and other companies based in the same region, as favorably compared to the North American production costs of as opposed to most production between $1.00 and $2.00 per gram that we have observed.
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Access to scalable land holdings in what we consider to be one of Colombia’s best suited climates for cannabis production in the order of 200 acres. Our Vice President of Colombia operations holds 8000 hectares of production land available to us upon the satisfaction of certain conditions.
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We have all Colombian commercial production approvals and has applied for psychoactive quota for the equivalent of 10,000 kgs of psychoactive flower for 2021 and 85,000 kgs of flower production in 2022, as applied for on April 29, 2021. Non psychoactive production and sales are limitless under current Colombian law.
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We have engaged what we consider to be one of Colombia’s leading agricultural genetics teams for cannabis production.
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Since we received cultivation approval from ICA, we have developed what we consider to be competitive advantages of Yield, Cannabinoid Potency, Quality, Cost, Frequency of Harvests, and, notably have:
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Yield-Continually increased our yields per hectare.
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Potency-Increased and replicated the THC and CBD yields of our plant/seed strains.
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Cost-Reduced our cash cost of raw flower production to as little as $0.05 per gram based on historical production of ours and other companies in the same region.
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Quality-Met or Exceeded European Pharmacopeia Standards.
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Frequency of Harvest-We currently harvest six to seven times per year in order maximize our production footprint. Consequently, each hectare at our Colombian cultivation site is expected to produce the equivalent of six to seven hectares of cannabis on a mono-crop yearly cycle. (See-Cannabis Production-Colombia).
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Establish United States Production of Cannabis if Federally legalized
Our wholly owned subsidiary, Allied US Products LLC, a Nevada limited liability company, entered into a contingent asset purchase agreement (the “ Contingent Asset Purchase Agreement”) which allows for the purchase of a Nevada State US-based cannabis license from a subsidiary of Fiore Cannabis, Ltd. upon on the occurrence or waiver of the changes in U.S. federal law to permit the general cultivation, distribution and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”). We will only conduct business activities related to growing or processing cannabis in jurisdictions, including the United States, when it is federally permissible to do so. While we have several arrangements with United States based companies that may themselves participate in the United States cannabis market, these relationships do not violate the federal laws of the United States respecting cannabis and in no manner involve us in any activities in the United States respecting cannabis. (See- Potential United States Production in the Event of Federal Cannabis Legalization).
Generate Revenues from Natural Health Products containing Hemp-based CBD.
With the launch of our health hemp-based CBD brands in the United States, we expect from product rollout and expanded distribution. We have conducted focus groups, brand creation and test marketing over the past year. We have now commercially launched three brands in the US: Tactical Relief™, Equilibrium Bio™, MaXXa ©. The Buds Pure Naturals brand is intended to be licensed to a Canadian License holder to sell into the Canadian market. (See-Our CBD Brands and Products).
Complete trials of ALID 11, 11 and Psilonex™ Prescription Medications
We expect to complete our clinical Phase 1 pharma trials in 2021, eventually leading to a drug indication for PTSD. We then plan to pursue a licensing deal with a larger developer, producer, and distributor of pharmaceuticals. (See-Pharmacologic Products).
Distribution
Our goal is to become a market leader in the cultivation and processing of medicinal-grade cannabis oil and high quality cannabis derived medical and well-being products for large channel distributors, including pharmacies, medical clinics, and cosmetic companies, by expanding our production capacity, creating sustainable and natural products, expanding our geographic footprint, continuing to explore strategic partnerships and pursuing accretive acquisitions to supplement our organic growth as set forth below.
Explore strategic partnerships.
Because we offer a variety of cannabis related products, including beauty and skincare products, foods and beverages, we believe that we can create a competitive advantage by partnering with national and multinational companies, across various product categories to jointly develop and market branded cannabis offerings.
Pursue accretive acquisitions.
We believe that our deal-making capabilities and experience will allow us to successfully identify, consummate and integrate acquisitions. The cannabis industry is highly fragmented and as it continues to evolve, we expect significant industry consolidation in existing and new markets. Our deal-making capabilities and experience may allow us to successfully identify, consummate and integrate acquisitions. As a public company, we could have greater ability to finance acquisitions, including through using our equity as consideration and accessing the capital markets.
Due to the competitive and dynamic nature of the emerging cannabis products market and rapid changes in the regulatory environment, we recognize the need to remain flexible, so we can react to opportunities and risks as they develop. We will continue to re-evaluate and re-prioritize our strategies to respond to these developments. We are actively fostering a culture of continued agility and exploration since the ability to pivot depending on market dynamics will deliver competitive advantage.
Our CBD Brands and Products
Over the past year we have developed, manufactured and test marketed all of our hemp derived CBD products for sale in the United States. Under the Farm Bill of December 2018, the use and sale of hemp derived CBD products in the United States is legal.
We have three hemp derived CBD product brands to market in the United States all with a catalog of products. We are selling these through e-commerce portal at www.alliedcorpbrands.com, and is also actively seeking physical retail store distribution throughout many states.
Our core hemp derived CBD brands are:
Tactical Relief™ Brand www.tacticalrelief.com
Tactical Relief™ is intended to be considered a patriotic brand under which health and wellness products are brought to market to serve veterans and first responders. The flagship product “Liberty” is a hemp derived CBD tincture for sale in the United States. Additional products include Tactical Hydration, a CBD infused electrolyte replacement drink and many others (described below). The Tactical Relief™. Novel formulations are created to help those living with PTSD across the United States. We signed a distribution Agreement with Hollister Biosciences for the manufacturing and distribution into California, Nevada and Arizona. We own the trademarks for Tactical Relief™ and we license them for distribution by Hollister Biosciences. On June 26, 2020 we signed a definitive agreement with Hollister Biosciences to bring to market a pipeline of products that are targeted towards helping veterans and first responders. These products will be brought to market under the brand Tactical Relief™, a veteran-founded hemp-based CBD oil brand we own.
Branded under Tactical Relief™, the first products to be manufactured will feature products recognized for their medicinal properties in the treatment of Post-Traumatic Stress Disorder (PTSD). Consistent with Hollister’s mission, the products will be crafted in small, artisanal batches for optimal quality and made from premium California-grown cannabis. We license the Tactical Relief hemp-based CBD product brand to Hollister for use in the State of California.
Under the terms of the Agreement with Hollister Biosciences, we will contribute the Tactical Relief™ brand support including use of trademark, artwork, logos and package design for a series of products. On an ongoing basis, we will be financially responsible for all marketing design and support. Hollister will be responsible for all aspects of production and procurement of underlying materials. Hollister will also be responsible for all costs associated with distribution and sales support. All production of cannabis products will take place under Hollister’s supervision and licenses. We and Hollister will further explore the development and marketing of additional hemp-based CBD products, as well as expanding into additional regions within the United States over the coming years. The new Tactical Relief™ products will be distributed exclusively by Hollister’s distribution partner, Indus Holdings Inc. An estimated 5% of net profits from all sales will be donated to charity. The remaining profit generated from the sale of the hemp-based CBD products will be shared 60:40 between us and Hollister.
We have contributed the veteran brand, artwork, logos, packaging design and marketing for all Tactical Relief™ products. Hollister has completed all aspects of production and procurement of underlying hemp-based CBD materials. We will be supporting the marketing and brand presence with veteran representation.
Some of the Tactical Relief ™ products currently offered under this brand:
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Tactical Relief ™ Tactical Hydration – a CBD infused electrolyte replacement drink with sodium citrated electrolyte replacement in three refreshing flavors.
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Tactical Relief ™ Liberty – A mint and vanilla flavored 1000mg CBD tincture fortified with specific terpene profile.
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Tactical Relief ™ FIZZ Tablets – 35mg CBD fizz tablets for adding to your water bottle.
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Tactical Relief ™ Battle Balm – CBD roll on activity rub for aches and pains.
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Tactical Relief ™ Quick Hit – CBD gummies.
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Equilibrium Bio™ Brand www.equilibriumbiomed.com
Equilibrium Bio is a lifestyle brand that is focused on everything athletic. From Crossfit workouts to Ironman races to general athletic consumers, Equilibrium Bio products have been formulated to assist the athlete along the competitive journey. Hydration and recovery are the primary areas of focus for Equilibrium Bio products. We built a sales and distribution infrastructure for this brand in 2020. We signed contracts with two major athletes (Camille Leblanc and Dave Lipson) who have 2,000,000 followers on Instagram to endorse the products. On December 10, 2020, we announced the completion of the first manufacturing run of Hydro Sport CBD-infused rehydration drinks from our latest brand, Equilibrium Bio. These drinks have also been produced for the Tactical Relief™ branding as Tactical Hydration electrolyte replacement and rehydration drink products.
The first Equilibrium Bio™ products known as Hydro Sport are available for purchase today on e-commerce platforms and have also been shipped to national retail buyers throughout the United States. The first manufactured batch encompasses six unique product SKUs (stock-keeping units). The CBD-infused drink pouches come in three flavors: Lemon Lime, Berry Fresh and Orange Burst. The all-natural flavoring and ingredients in the drinks include: Filtered Water, CBD 20 (mg), CBD, CBG, Sodium Citrate, Citric Acid, Sea Salt, Natural Flavor, Tripotassium Citrate, Vitamin B Complex, Ascorbic Acid (Vitamin C), Sucralose, Acesulfame Potassium and Beta Carotene for color.
Some of the Equilibrium Bio™ products that are currently offered:
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Equilibrium Bio™ - Hydrosport CBD Drink – a CBD infused electrolyte replacement drink with sodium citrate electrolyte replacement in three refreshing flavors.
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Equilibrium Bio™ Hydrosport Tincture – 1000mg CBD tincture fortified with specific terpene profile.
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Equilibrium Bio™ FIZZ Tablets – 35mg CBD fizz tab for adding to a water bottle.
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Equilibrium Bio™ Sport Rub – CBD post activity rub for aches and pains.
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Equilibrium Bio™ Quick Hit – CBD gummies with vitamin B12.
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On December 3, 2020, we announced an endorsement contract with elite athlete, David Lipson (“Lipson”), Founder of Thunder Bro Athletic Company. Lipson is a world-renowned athlete that founded an elite athlete training company called “Thundrbro”. As a professional baseball player and now a strength and conditioning leader, Lipson travels the world training trainers on how nutrition, training and athletic mind set impact sport performance and life. Lipson’s National reputation in the Unites States has several thousands of followers that adhere to his training programs and is well respected athlete within the trainer community. Lipson has trained entertainment celebrities, professional Major League Baseball and National Football League athletes and Crossfit Games champions.
Thundrbro is a training and lifestyle brand with an objective of providing quality products, information, and resources to help people live optimally. The Thundrbro mission is to make the world a better place through physical training, and mental toughness with a winning mindset.
MaXXa© Brand www.maxxabrand.com
MaXXa is a brand designed to be athletically sleek and focused on developing natural CBD infused cosmetics and beauty products. There are currently six unique products in the catalogue. These products are targeted with beauty and anti-aging in mind. There are MaXXa products focusing on anti-aging and cosmetics. MaXXa’s first shipment of products to Asia was completed on January 28, 2020. This shipment included a total of 120 total units encompassing 20 units for every six unique product SKUs (stock-keeping units). We then temporarily paused sales activities due to COVID. We intend to resume sales expansion efforts of MaXXa into the Asian marketplace following the decrease in restrictions due to COVID.
Some of the MaXXa™ products currently offered include:
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MaXXa™ Skin Structure - Skin Structure is a facial formula topically applied to improve skin’s radiance and youthfulness.
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MaXXa™ Eye Recover - Eye Recover is based on antioxidant power of low molecular weight hyaluronic acid. Ultra-hydrating eye serum helps the delicate eye skin ward off free radicals as well as helping to protect against sun damage.
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MaXXa™ Glossy Lip Recover - Glossy Lip Recover moisturizes and nourishes the lips and gives them a silky smoothness. Enriched with rich fruit extracts - beeswax as well as oils and butter - this lip gloss moisturizes, beautifies and revitalizes your lips.
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MaXXa™ Skin Designer – skin designer uplifts your skin with the power of CBD extracts and hyaluronic acid. This product stimulates cell regeneration while minimizing age spots.
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MaXXa™ Vitamin Absolute - Vitamin Absolute is a soothing, calming and all-around moisturizing facial oil.
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MaXXa™ Absolute Recover - this specialized formulation allows the infused bioactive compounds to be delivered directly to the desired areas of inflammation, pain and other skin ailments.
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Pharmacologic Products
Allied was organized because our founders believed veterans and first responders suffering from Post-Traumatic Stress Disorder (“PTSD”) could have their underlying symptoms better addressed with targeted cannabinoid pharmacologic solutions. We entered into an agreement to purchase all common shares of Pacific Sun Fungi Inc. on January 24, 2021 which was subsequently amended and the acquisition later closed in March 2021. The primary business plan for acquiring Pacific Sun Fungi Inc. is to develop psilocybin-based solutions, including both potential pharmaceutical and natural health products, for those suffering from PTSD. Accordingly, we have expanded our pharmacologic research to find better treatment options for those suffering from depression, anxiety and general mental health issues. Accordingly, we believe we are in a unique position to develop a full-scope, closed-loop therapy protocol, which contrasts with psilocybin therapies that support the patient for an episodic micro-dosing treatment regime following a specific dosing and wash out cycle. We believe our existing cannabinoid treatment solutions may alleviate the effects of the “treatment gaps” between psilocybin dosing periods, providing what we call the “Allied Full Scope Treatment”.
Our proprietary “Allied Full Scope Treatment” offers the patient continual therapy with treatment options both before and after the psilocybin treatment period. This is accomplished by offering our cannabinoid and natural health products combined with the psilocybin products and protocols under legally mandated licenses with physician supervision.
We are also in the process of applying for a Section 56 exemption in Canada for physicians to be able to prescribe our formulations to military veterans and first responders. Our objective is to be one of the first companies to come to market with a PTSD treatment regimen of internally-developed proprietary psilocybin products augmented by our natural health and cannabis-derived pharmacologic products.
Products in Development
Psilonex™
On March 25, 2021 we announced that we filed for trademark protection with the United States Patent Office for our pharmaceutical product Psilonex™. Psilonex™ is a proprietary formulation prescribed within a treatment path that involves both a pharmaceutical psilocybin-based formulation, followed by a daily cannabinoid maintenance period. Psilonex™ is intended to be prescribed by a physician, followed by the cannabinoid daily therapy that can be purchased by the consumer in regions where it is legal to do so as “Psilonex™ Daily,” Both of these products are currently being researched, developed and tested by our pharmaceutical development team.
The filed trademark protects our intellectual property for Psilonex™ covering: chemical preparations for pharmaceutical or medical purposes, namely, for treating depression, anxiety, and PTSD, and for improving mental health; nutraceuticals for the treatment of mental health disorders and conditions, including depression, anxiety, and PTSD; nutraceuticals for use as a dietary supplement; Nutraceuticals for use as a dietary supplement for improving mental health; pharmaceutical preparations and substances for the treatment of psychiatric diseases and disorders; pharmaceutical preparations for the treatment and prevention of mental health disorders; Pharmaceuticals, namely, psychotropics; dietary and nutritional supplements; fungal extracts sold as a component ingredient of nutritional supplements and vitamins, and; related websites.
ALID 10 and ALID 11
ALID 10 and ALID 11 target the treatment of Post-Traumatic Stress Disorder and related mental health conditions through the targeted function of the 5-HT2 receptor and physiological pathways. Following the completion of the pre-clinical research phase, we intend to bring ALID 10 and ALID 11 through human clinical trials through its relationships with the University of Haifa, Israel and MGC Pharma in Europe.
In 2020, we filed a United States provisional patent application entitled “Compositions and Methods for Modulating Endocannabinoid Systems Activity and Treating Mental Health Disorders”. The patent application covers ALID-10 and ALID-11, as well as other cannabis derived compounds designed for superior pharmaceutical properties for treatment of PTSD and other mental disorders.
In October 2019, we signed a Master Services Agreement with the University of Haifa, Israel. This academic research center gives us access to a proprietary pre-clinical animal model that is owned by Carmel. Carmel is the business unit that manages the University of Haifa center for Research in Israel. Specifically, we will use this proprietary animal model for the purposes of specialized pharmaceutical cannabinoid research and pharmaceutical product development. Through our agreement, we have access to the University of Haifa’s leading-edge facilities, proprietary animal model, pharmaceutical development, academic laboratory and associated scientists and investigators. This should enable us to conduct the pre-clinical phase of the development of a proprietary pharmaceutical product for ALID-10 and ALID-11.
In the second quarter of 2020, we expanded our ALID-10 and ALID-11 research activities, as well as entered into a manufacturing and sales agreement with MGC Pharmaceuticals of Australia (“MGC”). Under the terms of these agreements, MGC will manufacture our pharmaceutical products within their GMP (Good Manufacturing Practices) certified factory in Slovenia (which is in the European Union, or EU), which should enable us to have our pharmacological products produced under procedures and methods that meet those high-quality standards. In addition, the MGC sales and distribution agreement, should provide us a channel to sell our products following the completion of a PHASE I clinical trial. MGC currently has cannabis-based pharmaceutical products for sale in Europe, and. Moreover, we believe it has demonstrated a proven ability to commercialize cannabis based pharmaceutical products. We also announced the initiation of a pharmaceutical human clinical PHASE I research trial with MGC, but COVID-19 had an operational impact on the progression of this research trial. We intend to complete this trial as a part of the use of proceeds from this financing.
Under the terms of our agreements with MGC, it will provide what we consider to be a comprehensive suite of pharmaceutical services to advance our pharmaceutical products into human clinical PHASE 1. This trial is expected to test the efficacy and pharmacodynamics of our pipeline of proprietary cannabis derived drug candidates targeting PTSD. The scope of MGC Pharma’s services are to cover clinical research, Investigational Medicinal Product (IMP) registration, manufacturing of lab volumes for the research project, drug stability testing, GMP manufacturing and regulatory assistance for obtaining an IMP numbers that are needed in order for pharmaceutical products to be sold.
Psilocybin Development
Recent Regulatory Developments Suggest Increased Acceptance of Pharmacologic Psilocybin
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In 2018, the FDA recognized psilocybin therapies as a “breakthrough” therapy for PTSD and Major Depressive Disorder. (Food and Drug Administration, 2018).
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In 2019, Imperial College of London and John Hopkins open the first psychedelic research centers. MAPS clinics across the nation conduct research on psilocybin therapy. (Forbes.com, 2019).
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In 2020, Health Canada approves psilocybin for use with select patients with terminal illnesses, while the State of Oregon decriminalized psilocybin. (Health Canada, 2020 and Oregon State Health, 2020).
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Our Psilocybin Patent Applications
On October 20, 2020 we filed a new United States provisional patent application entitled “PSILOCYBIN COMPOSITIONS AND FORMULATIONS AND THEIR USE IN TREATING MENTAL HEALTH DISORDERS AND IMPROVING MENTAL HEALTH”. The provisional patent application covers a novel combination of psilocybin and proprietary mushroom formulation, as well as a novel treatment regimen targeting Post Traumatic Stress (PTSD), Depression and General Anxiety. Along with the novel treatment regimen, our formulation consists of novel micro-dose ratios of several medical mushroom compounds combined with additional natural health molecules.
Along with the proprietary functional mushroom formulation under provisional patent, a full scope treatment regime involving our specific CBD and terpene products is ready to add to the patent. This is the first full scope treatment of its kind that involves a specific psilocybin treatment regime that is bridged with a cannabinoid therapy approach. A full scope psilocybin and cannabinoid treatment approach to mental health.
In March 2021, we submitted a second provisional patent for our therapeutic formulation and treatment regimen involving a prescription drug followed by a prophylactic daily drug formulation. These two products together administered under a novel treatment regimen are intended to be tested through our clinical trial infrastructure in pursuit of a drug indication for general depression and anxiety.
The provisional patent submitted is entitled: COMPOSITIONS AND FORMULATIONS OF PSILOCYBIN AND CANNABINOIDS AND METHODS OF THEIR USE TOGETHER FOR TREATING MENTAL HEALTH DISORDERS AND IMPROVING MENTAL HEALTH.
This provisional patent contemplates the full scope treatment of general depression and anxiety with a proprietary prescription medication followed by a daily prophylactic dose of proprietary medicinal compositions. This includes a proprietary dosing and therapeutic regimen of psilocybin, additional functional mushrooms and cannabinoid therapeutics.
Among the various aspects of the present invention contemplated in the provisional patent submission are compositions, formulations, methods for modulating endocannabinoid system activity, for modulating neuro-steroid biosynthesis, and for modulating neurotransmission, and methods for treating mental health disorders and improving mental health, using synergistic combinations of psilocybin, cannabinoids, and other active agents, provided in distinct daily dosing regimens.
Pacific Sun Fungi
In March 2021, we completed the acquisition of Pacific Sun Fungi which is now a 100% wholly owned subsidiary. This acquisition further expands upon our provisional patent submissions for our functional mushroom formulation targeting major depression and anxiety. Pacific Sun performs psilocybin research and development, and holds several formulations that have been tested under physician supervision. In addition, Pacific Sun also has proprietary extraction knowledge and proprietary formulations for several specific disease targets and physician-led therapy protocols. We are in testing these products rigorously through the appropriate research protocols to determine their efficacy as treatments for specific disease targets.
We believe Pacific Sun has many products some of which have provisional patents or patent applications ready for clinical intake consisting of both novel functional mushroom formulations including psilocybin and additional medical mushrooms. We will be research, and intend to bring to market, a 100mg psilocybin formulation, a 250mg formulation, as well as other novel dosing technologies.
Cannabis Production
Colombia
We believe our Bucaramanga, Colombia development and cultivation facility gives us a significant competitive advantage in our production and sales of cannabis:
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We are licensed to produce, extract, as well as both import and export psychoactive and non-psychoactive strains of cannabis.
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We were approved to export cannabis by the Colombian government in April 2021.
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We have constructed a one-hectare greenhouse, with another three to five additional hectares are anticipated in 2021, and ten to twenty hectares more planned for 2022.
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The Company has received multiple purchase orders for Colombian cannabis and derived revenue beginning in May 2021 through the successful completion of revenue transactions.
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We completed our first harvest in July 2020 as part of the approval process for the Colombian Ministry of Agriculture (“ICA”).
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We obtained commercial approval for production of non-psychoactive cannabis in October 2020, and commercial approval for production of psychoactive cannabis in February 2021.
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Each of our ten non-psychoactive CBD seed strains, and our ten THC seed strains submitted to ICA have been approved over a course of a process that began in October 2019.
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Lower production cost: Our anticipated cash cost of raw flower production is approximately $0.05 per gram based on historical production of ours and other companies in the same region, as favorably compared to the North American production costs of as opposed to most production between $1.00 and $2.00 per gram that we have observed.
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Access to scalable land holdings in what we consider to be one of Colombia’s best suited climates for cannabis production in the order of 200 acres. Our Vice President of Colombia operations holds 8000 hectares of production land available to us upon the satisfaction of certain conditions.
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We have all Colombian commercial production approvals and has applied for psychoactive quota for the equivalent of 10,000 kgs of psychoactive flower for 2021 and 85,000 kgs of flower production in 2022, as applied for on April 29, 2021. Non psychoactive production and sales are limitless under current Colombian law.
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We have engaged what we consider to be one of Colombia’s leading agricultural genetics teams for cannabis production.
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In the 2020 fiscal year, we activated our Colombian licenses that are required to produce, extract, import and export psychoactive and non-psychoactive cannabis. This has been a year-long process that began with the registration of our ten (10) novel strains with the national cultivar registry. Each strain was then germinated into plantlets in our cultivation center in Colombia. Following germination, the plants entered into five (5) months of field trials that included rigorous data collection, analysis and phenotyping of the strains while in the vegetation life cycle. During this time, the strains were provided with propriety nutrients, handled with standard operating procedures and guided towards the plant flowering phase. Proprietary nutrients and procedures were also adhered to during the flowering phase and detailed batch record audit data were diligently collected during every day of the plant life cycle. Following flowering, the plants were harvested and tested for cannabinoid profiles and quality assurance testing parameters. The harvested material was then sent to several accredited testing laboratories and tested its products by high performance liquid chromatography testing methods. Testing was carried in several labs for validation of the results regarding the accuracy of the cannabinoid profiles.
The lab results from the testing of the cannabis showed a higher cannabinoid profile from being grown in the Colombian climate when compared to the same strains grown in North American climate. The lab results, batch records and procedural archives were also submitted to the Colombian Institute of Agriculture and a day-long presentation was provided by our team. As a result of this process, we received approval for twenty novel strains (ten psychoactive, ten non-psychoactive) from the technical directorate of the ICA, representing a diverse range of chemotypes with novel cannabinoid profiles.
Our production approach is designed according to the European Pharmacopeia and Good Agricultural Collection Practices (GACP) standards. These standards meet South American, European, US and Canadian quality assurance standards for production of commercialization of cannabis.
In addition, in order to adhere to Canadian production regulations with respect to seed approval and strain-acclimatization, in Canada we have created research and development environments (under personal production licenses approved by the Canada Regulators) that mimic the micro-climates in Suesca, Ibague and Bucaramanga. We found Bucaramanga to have the best micro climate for production of our plant strains, and accordingly located our Colombian production there. We have stressed the strains with high temperatures and humidity levels to mimic the natural weather patterns in the areas in which we will be cultivating. This is designed to mitigate the acclimatization risk that we believe many peer companies are experiencing in Colombia.
Our Colombian Cultivation Results
On April 15, 2021 we shared an analysis of our Colombian production harvests. Over this period, we continued to harvest weekly, while adding to our inventory and expanding our analytic data set.
We have now cultivated several successive Colombian harvests with what we consider to be consistent results. The results showed increased production yield, higher cannabinoid percentages, high quality as measured by cannabinoid potency, as well and as low cost per gram production cost relative to North American production. Our lab results showed a higher cannabinoid profile from being grown in the Colombian climate when compared to similar genotypes of strains grown in North American climate. These lab results, batch records and procedural archives, were submitted to ICA during a day-long presentation by our team, which, in turn, resulted in the approval by the technical directorate of ICA for the ten THC (i.e., psychoactive) strains tested. We believe these THC strains represent a diverse range of chemotypes with novel psychoactive cannabinoid profiles.
In addition to the increase in grams produced per square meter, the cannabinoid percentages showed an increase when produced in Colombia when compared to North America. We have now cultivated several successive harvests with repeatable results. We believe these results suggest we have competitive advantages that we describe as Yield, Cannabinoid Potency, Quality, Cost, Frequency of Harvests.
Increased yield – Approaching One kilogram per Square Meter
We believe we have a proprietary approach to cultivation which fosters high yield production. Our first Colombian harvest yielded 424 grams per square meter of production space. The second harvest, 612 grams per square meter and third and fourth harvest resulted in yields of 684 grams and 893 grams per square meter respectively. The fifth and sixth harvest yielded 894 and 905 grams per square meter respectively. We believe this data shows that our team, is approaching its goal of one kilogram per square meter goal of production output.
Potency-Cannabinoid Production
In Colombia, per our internal testing we have achieved repeatable THC cannabinoid percentages of 29.08% in the psychoactive varieties and CBD percentages of 24.64%. With our continuous quality improvement program, these percentages have continued to increase. The data collected showed that these strain profiles showed a significant increase in cannabinoid content when comparing the output from our Colombian cultivation to our North American cultivation environments.
Cost of Production – Approximately $0.05 per Gram
Our cash cost of raw flower production is anticipated to be $0.05 cents per gram based on historical production of ours and other companies in the same region. This presents a potential increased margin advantage to multi-state operators within the United States if and when we are able to sell cannabis to the United States, and potentially for wholesale buyers internationally. We believe suggests we can reduce the cost of supply and improve margin for distributors in markets with costs of production between $1.00 - $2.00.
Quality – Meeting European Pharmacopeia (International) Standards
Our cultivation and production processes meet European Pharmacopeia standards and Good Agricultural Collection Practices (GACP) standards with zero pesticide use, as they were designed from inception. These standards meet South American, European, US and Canadian quality assurance standards for production of commercialization of cannabis. Every cannabis plant is counted and audited during every day of its life cycle. Data collected includes temperature, humidity, pest and disease management indicators. All harvested material is tested for physical identity, aflatoxins, foreign body count, total aerobic plate count, total yeast, e coli, salmonella, bile tolerant gram-negative bacteria, cannabinoids, cadmium, lead, arsenic, mercury, terpenes and pesticides. All product is analyzed and approved based upon meeting thresholds for each of the testing parameters.
Frequency of Harvests: We Have Maintained Consistent Production with Weekly Rolling Harvests
Given the advantages that the equatorial climate of Colombia offers, we have been harvesting weekly, suggesting we should be able to offer reliably consistent supplies in large volumes to multiple markets simultaneously.
Our Focused Cultivation and Cannabis Plant Development Approach
We received approval from the Colombian Ministry of Agriculture (“ICA”) for 20 out of 20 plant strains (10 CBD and 10 THC). ICA reported to us in February 2021 that we were the first company to do so. Our strains have both non-psychoactive and psychoactive varieties that have been legally cultivated both in North America and now in the South America. As a result, we have activated our Colombian licenses for production, extraction, importation and exportation of psychoactive and non-psychoactive cannabis.
This is the culmination of a year-long process that began with the registration of what, in our opinion, are our novel strains with the Colombian national cultivar registry. Each strain was then germinated into plantlets in our cultivation center in Colombia. Following germination, the plants were tested in field trials over five months of field trials that included data collection, analysis and phenotyping of the strains during the vegetation life cycle. These strains were given proprietary nutrients, handled with standard operating procedures guided towards the plant flowering phase, while detailed batch record audit data was collected every day of the plant life cycle. Following flowering, the plants were harvested and tested for cannabinoid profiles and quality assurance testing parameters. The harvested material was then sent to several (accredited testing laboratories and tested by liquid chromatography testing methods for validation of the accuracy of the cannabinoid profiles.
It should be noted that production is divided into two key types of products: (i) “non-psychoactive” means the strains and genetics with THC levels of less than 1% by weight (ii) “psychoactive” means the strains that have more than 1% THC by weight. Approval of psychoactive cultivation is much more complex than the non-psychoactive approvals in Colombia. In order for a Colombian licensed producer to gain approval to sell and export, the producer must first register their genetics, then go forth and cultivate a limited number of plants as a test harvest. Following the harvest, drying and extraction processing, the product is analyzed and presented to the Colombian Ministry of Agriculture; we have received the requisite approvals from the Colombian Government for each phase of its cannabis development and cultivation.
Our Path from Testing to Approved Cannabis Exports from Colombia
On April 20, 2021 we received clearance from the Colombian authorities to export our harvested non psychoactive cannabis-based products from our first harvest. This milestone was achieved after having undergone the testing and cultivation activities described immediately above herein, and having received the ICA and Colombian Ministry of Justice approvals and licenses described below. Moreover, on April 26, 2021, we received approval to export cannabis-based products to a second international market.
In October 2020 we were granted from ICA approval to begin the seed evaluation process for our ten non-psychoactive CBD strains. In addition, on April 29, 2021, the Ministry of Justice signed a resolution authorizing us to evaluate our Company’s proprietary strains in order that we could select our best pheno-typed THC psychoactive cannabis strains with the best commercial production characteristics. Along with our previous approval for non-psychoactive evaluation, our subsidiary Allied Colombia S.A.S. could then evaluate all twenty of our psychoactive and non-psychoactive strains.
On October 15, 2020, we received approval from the Colombian Institute of Agriculture (“ICA”) for the cultivation and commercialization of each of our ten proprietary CBD non-psychoactive strains submitted within seed evaluation process which commenced a year earlier. Such enabled us to process and sell our Colombian CBD non-psychoactive production.
On March 9, 2021, we announced that we received ICA approval for the commercialization of its our proprietary THC psychoactive cannabis strains, which was the culmination of the evaluation process for which permission was granted in late April 2020. Each of our ten psychoactive strains were approved and we have passed all of the ICA requirements to be able to cultivate the resultant plants. As a result, we have has applied for a psychoactive export quota for both 2021 and 2022 under the Colombian regulatory regime. These applications are for the oil equivalent of 10,000 kgs of flower and 85,000 kgs of flower for 2021 and 2022 respectively.
Following the first commercial harvest, and in anticipation of requisite ICA and Ministry of Justice approvals, we obtained signed sales off-take contracts with international buyers from Canada, the USA, Europe, and then applied for clearance to export.
Potential United States Production in the Event of Federal Cannabis Legalization
Our wholly owned subsidiary, Allied US Products LLC, a Nevada limited liability company, entered into a contingent asset purchase agreement (the “ Contingent Asset Purchase Agreement”) which allows for the purchase of a Nevada State US-based cannabis license from a subsidiary of Fiore Cannabis, Ltd. upon on the occurrence or waiver of the changes in U.S. federal law to permit the general cultivation, distribution and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”).
While we have begun to enter into arrangements with United States based companies that may themselves participate in the United States cannabis market, we do not hold any US assets, but rather have a call option to purchase that can be exercisable or exchangeable upon cannabis becoming legal or permissible in the United States under Federal law.
We will only conduct business activities related to growing or processing cannabis in jurisdictions, including the United States, when it is federally permissible to do so. We are not considered a United States Marijuana Issuer (as defined in the Canadian Securities Administrators Staff Notice 51-352 – Issuers with United States Marijuana-Related Activities (the “Staff Notice”)) nor do we have material ancillary involvement in the United States. cannabis industry in accordance with the Staff Notice. While we have several arrangements with United States based companies that may themselves participate in the United States cannabis market, these relationships do not violate the federal laws of the United States respecting cannabis and in no manner involve us in any activities in the United States respecting cannabis.
Regulatory Matters
Colombia
Our cultivation operations are in Colombia and are conducted by Allied Colombia S.A.S., a wholly-owned subsidiary. As a cultivator of cannabis, the Company is substantially dependent on the licenses for cultivation, production and other regulatory activities, granted to Allied Colombia by Colombian governmental and regulatory bodies.
The following table summarizes regulations applicable to the cultivation, fabrication, import, export and use of cannabis in Colombia.
Regulation:
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Regulates:
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Law 1787 of 2016
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Legalizes the use of Cannabis for medical and scientific purposes
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Decree 613 of 2017 modifies Decree 780 of 2016
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Regulates law 1787 establishing a licensing system and process. Defines psychoactive and non-psychoactive cannabis and the quota system for psychoactive cannabis in accordance with Single Convention of Narcotics of 1961 and amendments
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Resolution 577 of 2017 from the Ministry of Justice
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Regulates the evaluation and control of the following licenses:
a. Seed Use
b. Cultivation of psychoactive plants (High-THC cultivation license)
c. Cultivation of non-psychoactive plants (Low-THC cultivation license)
Creates requirement for security protocol
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Resolution 578 of 2017 from the Ministry of Justice
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Resolution 578 of 2017 from the Ministry of Justice Regulates the cost of the following licenses:
a. Seed Use
b. Cultivation of psychoactive plants (High-THC cultivation license)
c. Cultivation of non-psychoactive plants (Low-THC cultivation license)
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Resolution 579 of 2017 from the Ministry of Justice
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Establishes that growers that cultivate on a half a hectare area (5,000 square meters) or less are considered small and medium growers and, therefore, may access technical advice, priority allocation of quotas and purchase of their production by the processor and requires that 10 percent of the total production of the processor must come from small and medium producers.
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Resolution 2892 of 2017 from the Ministry of Health
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Regulates the evaluation and control of the Fabrication of Cannabis derivatives (High-THC Production License) Provides guidelines for appropriate security protocols for manufacturing cannabis derivatives including physical security, monitoring, detection, and incident reporting to authorities.
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Resolution 2891 of 2017 from the Ministry of Health
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Regulates the cost of the High-THC production License
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Resolution 1478 of 2006 from the Ministry of Health modified by Resolution 315 of 2020.
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Regulation of the control, monitoring and surveillance of the import, export, processing, synthesis, manufacture, distribution, dispensing, purchase, sale, destruction and use of controlled substances, medicines or products containing them and on those which are State Monopoly
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Decree 2200 of 2005 from the Ministry of Health
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Regulates pharmaceutical services including the Magistral Preparations
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Guidelines for the GEP certification for Magistral Preparations with Cannabis issued the 25 of October 2019 by INVIMA
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Establishes the requirements for labs to obtain the GEP certification for the fabrication of Magistral Preparations with Cannabis derivatives
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Licenses
The Ministries of Health, Justice and Agriculture issued Decree 613 of 2017 to define the licenses that can be granted with respect to permissible activities related to medical cannabis that include: (i) the production of cannabis derivatives; (ii) use of seeds for sowing; (iii) planting of psychoactive cannabis plants; and (iv) planting non-psychoactive cannabis plants.
Apart from a psychoactive cannabis license, Allied Colombia has obtained licenses in each of the above categories, necessary to carry out its operations. Licenses are not transferable, interchangeable, or assignable and are valid for five years and can be renewed for additional five-year periods upon request. Each of the Licenses is current and has not expired. None of the Licenses are subject to current, pending, or compromised regulatory action.
Strains Registration
Allied Colombia has varieties of cannabis in various stages of the registration process. Each strain, whether high or low in THC, must undergo an agronomic evaluation by the agricultural health entity - Instituto Colombiano Agropecuario (ICA). For the strains to be included in the National Registry of Cultivars, the following steps must be completed: (i) Genetic Stabilization; (ii) Agronomic Test; (iii) Phase 1 strain registry (legal document that allows the license to enter a strain in the registry); and (iv) Strain registration phase 2 (registration that allows the licensee to market any cannabis product derived from the specific strain in the registry). The harvest is also in the process of agronomic evaluation of additional strains. Based on the yields of each strain, as determined by agronomic testing, Allied Colombia may decide to register fewer strains than available. The decision to complete the registration process of a strain depends on several factors, such as biomass yields, cannabinoid profile, average cannabinoid content, resistance to pests among others as determined by agronomic tests, and the intended uses by the company.
Allied Colombia has twenty varieties of medicinal cannabis registered with the ICA and has the registration as a producer of selected seeds granted by the ICA. Upon receiving the ICA Permit, Allied Colombia commenced commercial cultivation.
In compliance with its international obligations, Colombia establishes an annual limit for the production volume of cannabis plants and derivatives, which is monitored by the International Narcotics Control Board. Based on this limit, the Colombian government established a quota system, in order to control the amount of psychoactive cannabis production per license. This means that for the Psychoactive Cannabis License, licensees must first apply for a specific crop or manufacturing quota, before beginning production.
According to publicly available information from ICA, as of December 2020, there are 650 companies with license for the production of Cannabis derivatives in Colombia. All companies are at different stages and many are not moving forward. Approximately 10% of these companies have passed their ICA seed evaluation and only a handful of companies have been cleared to export product. Allied Colombia is now one of the Colombian companies cleared to export to more than one international market.
Protection of Environment and Human Health and Safety
We are subject to various Colombian federal, state and local and regulations relating to the protection of the environment and human health and safety, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. Some of our operations include the use, generation and disposal of hazardous materials. We also plan to acquire ownership in new facilities and properties, some of which may have had a history of commercial or other operations. We may, in the future, incur liability under environmental statutes and regulations with respect to contamination of sites we own or operate, including contamination caused by prior owners or operators of such sites, abutters or other persons, and the off-site disposal of hazardous substances. Violations of these laws and regulations may result in substantial civil penalties or fines.
United States
The United States health care industry is subject to extensive regulation by federal, state and local governments. Government regulation affects our businesses in several ways, including requiring licensure or certification of facilities. Our ability to conduct our business and to operate profitability depends in part upon obtaining and maintaining all necessary licenses and other approvals; and complying with applicable healthcare laws and regulations.
Regulation of CBD (Medical Cannabidiol Product)
The United States Agricultural Improvement Act of 2018 (the “2018 Farm Act”) removed hemp, defined as cannabis with less than 0.3% of THC, from Schedule 1 status under the Controlled Substances Act (“CSA”), and Federally legalized the cultivation and sale of hemp, subject to compliance with certain federal requirements and state laws. THC is the psychoactive component of plants in the cannabis family generally identified as marihuana or marijuana. Our medical CBD products are Federally legal in the United States in that they contain less than 0.3% THC in compliance with the 2018 Farm Act guidelines and have no psychoactive effects on our patients and customers. However, there can be no assurance that the 2018 Farm Act will not be repealed or amended such that our products containing hemp-derived CBD would once again be deemed illegal under Federal law in the United States.
The 2018 Farm Act also shifted regulatory authority from the Drug Enforcement Administration to the Department of Agriculture. The 2018 Farm Act did not change the United States Food and Drug Administration’s (“FDA”) oversight authority over CBD products. The 2018 Farm Act delegated authority to regulate and limit the production of hemp and hemp derived products to the state governments. Although many states have adopted laws and regulations that allow for the production and sale of hemp and hemp derived products under certain circumstances, no assurance can be given that such laws of the several states will not be repealed or amended such that our intended products containing hemp-derived CBD would once again be deemed illegal, which in turn would render such intended products illegal in those states under federal law even if the federal law is unchanged. In the event of either repeal of Federal or State laws and regulations, or amendments thereto that are adverse to our intended medical CBD products, we may be restricted or limited with respect to those products that we may sell or distribute, which could adversely impact our intended business plan with respect to such intended products.
Additionally, the FDA has indicated its view that certain types of products containing CBD may not be permissible under the United States Federal Food, Drug and Cosmetic Act (“FDCA”). The FDA’s position is related to its approval of Epidiolex, a marijuana-derived prescription medicine to be available in the United States. The active ingredient in Epidiolex is CBD. On December 20, 2018, after the passage of the 2018 Farm Bill, FDA Commissioner Scott Gottlieb issued a statement in which he reiterated the FDA’s position that, among other things, the FDA requires a cannabis product (hemp-derived or otherwise) that is marketed with a claim of therapeutic benefit, or with any other disease claim, to be approved by the FDA for its intended use before it may be introduced into interstate commerce and that the FDCA prohibits introducing into interstate commerce food products containing added CBD, and marketing products containing CBD as a dietary supplement, regardless of whether the substances are hemp-derived. Although we believe our existing and planned CBD product offerings comply with applicable federal and state laws and regulations, legal proceedings alleging violations of such laws could have a material adverse effect on our business, financial condition and results of operations.
Marijuana (Cannabis)
Marijuana (Cannabis) in the United States, cannabis is regulated at the both the Federal and State levels. Notwithstanding the permissive regulatory environment of cannabis in some states, cannabis continues to be categorized as a Schedule I controlled substance under the Controlled Substances Act (“CSA”), making it illegal under Federal law in the United States to cultivate, distribute, or possess cannabis. Certain states may have enacted statutes and regulations take a permissive approach to medical and/or recreational use of cannabis, the CSA may still be enforced by U.S. Federal law enforcement officials against citizens and businesses of those states for activity that is legal under state law.
As a result of the conflicting views between state legislatures and the U.S. federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was first addressed in August 2013 when then Deputy Attorney General James Cole authored a memorandum (the “Cole Memorandum”), addressed to all U.S. district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several U.S. states have enacted laws relating to cannabis.
The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that 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, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the Department of Justice has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the Department of Justice should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. On January 4, 2018, then U.S. Attorney General Jeff Sessions issued a memorandum (the “Sessions Memorandum”) that rescinded the Cole Memorandum. The Sessions Memorandum rescinded previous nationwide guidance specific to the prosecutorial authority of U.S. attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well-established principles governing federal prosecution that are already in place. Those principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution and the cumulative impact of particular crimes on the community.
As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and therefore it is uncertain how active federal prosecutors will be in relation to such activities. Due to the ambiguity of the Sessions Memorandum, there can be no assurance that the federal government will not seek to prosecute cases involving cannabis businesses that are otherwise compliant with state law.
On January 15, 2019, U.S. Attorney General nominee William P. Barr suggested a different approach to cannabis regulation than Sessions (his predecessor) during his confirmation hearing before the Senate Judiciary Committee. Mr. Barr stated that his approach to cannabis regulation would be not to upset settled expectations that have arisen as a result of the Cole Memorandum, that it would be inappropriate to upset the current situation as there has been reliance on the Cole Memorandum and that he would not be targeting companies that have relied on the Cole Memorandum and are complying with state laws with respect to the distribution and production of cannabis. While he did not offer support for cannabis legalization, Mr. Barr did emphasize the need for the U.S. Congress to clarify federal laws to address the untenable current situation which has resulted in a backdoor nullification of federal law.
Additionally, under U.S. federal law it may, under certain circumstances, be a violation of federal money laundering statutes for financial institutions to accept any proceeds from cannabis sales or any other Schedule I controlled substances. Certain Canadian banks are similarly reluctant to transact business with U.S. cannabis companies, due to the uncertain legal and regulatory framework characterizing the industry at present. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to U.S. cannabis businesses. Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan or any other service could be found guilty of money laundering or conspiracy. Despite these laws, in February 2014, the Financial Crimes Enforcement Network (“FCEN”) of the U.S. Treasury Department issued a memorandum (the “FCEN Memo”) providing instructions to banks seeking to provide services to cannabis-related businesses. The FCEN Memo 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. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the CSA. It is unclear at this time whether the Biden administration will follow the guidelines of the FCEN Memo.
As previously discussed herein, we plan on expanding our activities to include cannabis and psilocybin product sales and distribution in the United States if and when such activities are legalized by the Federal Government of the United States.
If Federally legalized in the United States, we expect that our cannabis products will be specifically focused on cannabis for use (i) as a treatment aid; (ii) to provide relief for a large array of neurological and musculoskeletal system disorders; and (iii) as an alternative option for healthcare providers in place of prescribing opioids to patients. Offering our patients access to non-hallucinogenic and non-addictive natural remedies, under required clinical oversight policies and procedures as they relate to medicinal cannabis, combined with our existing clinic-based treatment protocols may allow us to provide a unique model that we do not believe is readily available in the United States.
Other Medical Practice Regulation
The United States healthcare industry is heavily regulated and closely scrutinized by federal, state and local governments. Comprehensive statutes and regulations govern the manner in which we may provide cannabis products, our contractual relationships with our providers, vendors and clients, our marketing activities, and other aspects of our planned operations in the event such activities become Federally legal in the United States, of which there can be no assurance. Of particular importance are:
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The Federal Anti-Kickback Statute that prohibits the knowing and willful offer, payment, solicitation or receipt of any bribe, kickback, rebate or other remuneration for referring an individual, in return for ordering, leasing, purchasing or recommending or arranging for, or to induce the referral of an individual or the ordering, purchasing or leasing of items or services covered, in whole or in part, by any federal healthcare program, such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act.
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The criminal healthcare fraud provisions of the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their implementing regulations (collectively, “HIPAA”), and related rules which prohibit knowingly and willfully executing a scheme or artifice to defraud any healthcare benefit program or falsifying, concealing or covering up a material fact or making any material false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent, to violate it to have committed a violation.
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Similar state law provisions pertaining to anti-kickback, and false claims issues.
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State laws that prohibit general business corporations, such as us, from practicing medicine, controlling physicians’ medical decisions, or engaging in certain practices such as splitting fees with physicians.
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Laws that regulate debt collection practices as applied to our debt collection practices.
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Failure to comply with these laws and other laws can result in civil and criminal penalties such as fines, damages, overpayment, recoupment, imprisonment, and loss of status. The risk of our being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Our failure to accurately anticipate the application of these laws and regulations to our business or any other failure to comply with applicable regulatory requirements could impose liability on us and negatively affect our business. Any action against us for violation of these laws or regulations could cause us to incur significant legal expenses, divert our management’s attention from business operations, and result in adverse publicity.
Packaging, Labeling and Advertising
The processing, formulation, manufacturing, packaging, labeling, advertising and distribution of our products are subject to federal laws and regulation by one or more federal agencies, including the FDA, the FTC, HHS, the USDA and the United States Environmental Protection Agency (the “EPA”). These activities are also regulated by various state, local and international laws and agencies of the states and localities in which our products are sold. Regulations may prevent or delay the introduction, or require the reformulation, of our products, which could result in lost sales and increased costs to the Company. A regulatory agency may not accept the evidence of safety for any new ingredients that we may want to market, or may determine that a particular product or product ingredient presents an unacceptable health risk. Regulatory agencies may also determine that a particular statement of nutritional support on our products, or a statement that we want to use on our products, is an unacceptable drug claim or an unauthorized version of a food “health claim,” or that particular claims are not adequately supported by available scientific evidence. Any such regulatory determination could prevent us from marketing particular products or using certain statements on those products, which could adversely affect our sales and results of operations.
Canada
On October 17, 2018 marijuana in Canada became Federally legal.
According to Canadian Federal law, adults are legally permitted to purchase, use, possess, and grow recreational cannabis. The legal age and cultivation laws vary depending on the province. The minimum legal age is 19 in Canada except in the provinces of Alberta and Quebec where it is 18.
The maximum amount one is allowed to possess from a recreational source is 30 grams in all Canadian provinces, but in most locations, one is allowed to have larger amounts at home. In British Columbia for example, a person may possess up to 1,000 grams of marijuana at home. There is no limit to home possession in Manitoba. Those with a prescription are authorized to possess up to a five-day amount of their prescribed amount of medical cannabis.
Peru
We have been authorized to export our cannabis products from Colombia to Peru. Medical marijuana possession is legal, although recreational possession is not. In October 2017, Peru’s Congress passed a bill to legalize medical marijuana allowing cannabis oil to be produced, imported and commercialized. Additionally, although the cultivation and sale of cannabis remains illegal, the possession of small amounts of cannabis for personal usage has been decriminalized in Peru. According to Article 299 of the Peruvian Penal Code, one may legally carry eight grams of marijuana or two grams of its derivatives, for “your own and immediate consumption”.
Ukraine
Cannabidiol (CBD) products are legal in Ukraine if their THC concentration is lower than 0.08 percent. It is currently illegal to process hemp for CBD extraction in Ukraine. There are some local food processors who use hemp seeds in different food products which are sometimes marked as CBD products, but there is no CBD production in Ukraine.
Item 1A. Risk Factors.
An investment in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider the risks described below. Our business, financial condition, results of operations and cash flows could be materially adversely affected by any of these risks, and the market or trading price of our securities could decline due to any of these risks. In addition, please read “Disclosure Regarding Forward-Looking Statements” in this Annual Report, where we describe additional uncertainties associated with our business and the forward-looking statements included or incorporated by reference in this Annual Report. Please note that additional risks not presently known to us or that we currently deem immaterial may also impair our business and operations. In this Section, the terms the “Company,” “we”, “our” and “us” refer to Allied Corp. as well as its subsidiaries AM (Advanced Micro) Biosciences, Inc., Allied Colombia S.A.S., Pacific Coast Fungi LLC, Allied U.S., Products, LLC and Tactical Relief LLC.
Below is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
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We have a history of operating losses;
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Public health epidemics or outbreaks (such as the novel strain of coronavirus (COVID-19)) could adversely impact our business;
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We may not be able to obtain sufficient additional capital to continue our operations;
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We recently launched our cannabis products and have limited sales and marketing experience;
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The cannabis industry is heavily regulated in the United States, Canada and Colombia, and if we fail to comply with these laws and governmental regulations, we could incur penalties or be required to make significant changes to our operations or even face criminal or civil sanctions;
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There are conflicts in the United States between Federal and State regulations related to marijuana;
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There are also provincial variations in cannabis regulation in Canada that could restrict certain of our operations;
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Past and future cannabis reform legislation and other changes in the health care industry could adversely affect our business, financial condition and results of operations;
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We are subject to the Canada Health Act, Canada’s National Health Insurance Program and Food and Drugs Act and analogous provisions of applicable federal, provincial, state and local laws and could face substantial penalties if we fail to comply with such laws;
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Our products may not be accepted in the marketplace or achieve sales sufficient to provide sufficient profitability;
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In the United States in particular and also elsewhere we are required to rely on third parties to perform many necessary services for our products, including services related to cultivation, distribution, invoicing, storage and transportation of our products;
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We may be unable to consistently retain or hire third-party manufacturers, suppliers or other service providers to produce our products;
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We will depend on a limited number of customers for the majority of our revenue;
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There may be unanticipated delays in the development and introduction of our current and future products and/or our inability to control costs;
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Significant competition;
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Potential third party infringement claims;
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Risks associated with our current and potential acquisitions related to costs and integration into our product line;
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We are subject to significant regulatory requirements in the United States, Canada and Colombia;
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Our stock is subject to dilution through future sale of shares or conversion of existing convertible securities;
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A significant portion of our stock is held by our officers and directors;
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We depend on our management and key personnel for our success;
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The market price for our common stock has and may continue to be volatile;
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Adequate protection of confidential information;
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Potential litigation from competitors and claims from customers;
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Our ability to adequately protect the intellectual property used to produce our products; and
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Our ability to stay abreast of modified or new laws and regulations applying to our business.
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Risks Related to Our Operations
We have a history of operating losses and our management has concluded that factors raise substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating to its ability to continue as a going concern in their audit report for the years ended August 31, 2021 and 2020.
We are a relatively newly formed company focused on cultivating, processing and supplying natural, medicinal-grade cannabis well being products to large channel distributors, and have limited operating history. We have limited financial resources and minimal operating cash flow. In addition, we do not currently have significant revenues and for the year ended August 31, 2021, had a loss of $11,485,246, and at August 31, 2021 had an accumulated deficit of $19,393,812. There is no guarantee that we will ever become profitable. The costs for research, product development, machinery adaptation to create our product candidates and cannabis products and/or technologies, along with marketing and selling expenses, and the general and administrative expenses, will be principal causes of our costs and/or potential losses. We may never become profitable and if we do not become profitable your investment could be harmed or lost completely.
We anticipate that we will continue to report losses and negative cash flow for the foreseeable future. We have concluded that our historical recurring losses from operations and negative cash flows from operations as well as our dependence on private equity and other financings raise substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going concern in its audit report for the years ended August 31, 2021 and 2020.
The consolidated financial statements of the Company do not include any adjustments that might result from the outcome of this uncertainty. These adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities, including common stock issued in this offering, would be greatly impaired. Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional capital and financing, including funds to be raised in this offering. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional funding from other sources, we may be unable to continue in business even if this offering is successful. For further discussion about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Going Concern.”
We may need additional capital in the future in order to continue our operations.
We conducted a private placement of up to $5,250,000 of Units consisting of shares of common stock and warrants to fund acquisitions and operations in a transaction that is exempt from the registration requirements of the Securities Act pursuant to Regulation 506(c) of common stock. We obtained gross investment of $3,178,872 in that offering, which was closed on November 5, 2021. Not including that offering we have obtained approximately $7,961,892 in our private placements since the formation of the company, which we are using for acquisitions and operations. However, if in the future we do not turn profitable or generate cash from operations and additional capital is needed to support operations, economic and market conditions may make it difficult or impossible to raise additional funds through debt or equity financings. If funds are not sufficient to support operations, we may need to pursue a financing or reduce expenditures to meet our cash requirements. If we do obtain such financing, we cannot assure that the amount or the terms of such financing will be as attractive as we may desire, and your equity interest in the company may be diluted considerably. If we are unable to obtain such financing when needed, or if the amount of such financing is not sufficient, it may be necessary for us to take significant cost saving measures or generate funding in ways that may negatively affect our business in the future. To reduce expenses, we may be forced to make personnel reductions or curtail or discontinue development programs. To generate funds, it may be necessary to monetize future royalty streams, sell intellectual property, divest of technology platforms or liquidate assets. However, there is no assurance that, if required, we will be able to generate sufficient funds or reduce spending to provide the required liquidity. Long-term capital requirements will depend on numerous factors, including, but not limited to, the status of collaborative arrangements, the progress of research and development programs and the receipt of revenues from sales of products. Our ability to achieve and/or sustain profitable operations depends on a number of factors, many of which are beyond our control, including:
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our ability to successfully sell our cannabis products;
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Government legislation changes
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our ability to successfully develop and obtain necessary national, federal, provincial, and/or state regulatory approval(s) for our own product candidates such as hemp cigarettes;
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the success of our partners and distributors in selling our products;
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our ability to successfully sell future products if we choose not to partner the product;
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our ability to manufacture, or have manufactured, products efficiently, at the appropriate commercial scale, and with the required quality, and our ability to source and purchase from third party hemp cultivators that supplies required to produce our products;
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timing of our partners’ development, regulatory and commercialization plans;
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the demand for our products from current and future distribution and/or wholesale and/or retails partners;
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our ability to increase and continue to outsource our raw materials, quality cannabis, and our manufacturing capacity to allow for new product introductions;
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the level of product competition and of price competition;
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consumer acceptance of our current and future products;
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our ability to obtain reimbursement for our products from third-party payers;
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our ability to develop additional commercial applications for our products;
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our ability to attract the right personnel to execute our plans;
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our ability to develop, maintain or acquire patent positions;
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our ability to procure quality industrial hemp flowers and control these costs; and
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general economic conditions in the USA and the hemp industry.
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The Coronavirus (“COVID-19”) outbreak or similar pandemics could adversely affect our operations.
The Company’s operations could be significantly adversely affected by the effects of a widespread global outbreak of a contagious disease and other unforeseen events, including the outbreak a of respiratory illness caused by COVID-19 and the related economic repercussions. We cannot accurately predict the effects COVID-19 will have on our operations and the ability of others to meet their obligations with the Company, including uncertainties relating to the ultimate geographic spread of the virus, the severity of the disease, the duration of the outbreak, and the length of travel and quarantine restrictions imposed by governments of affected countries. We were required to postpone distribution of our MaXXa© product as a direct result of COVID-19. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could further affect the Company’s operations and ability to finance its operations. Agricultural activity has been declared as an essential activity in Colombia. We take safety precautions include the use of masks and gloves at our affiliated company in Colombia for the cultivation of our product.
We launched our cannabis products in 2019 in an initially limited fashion and as a company, we have limited sales and marketing experience.
We launched marketing for our cannabis products in 2019, and although we have hired highly qualified personnel with specialized expertise, as a company, we have limited experience commercializing cannabis products on our own. In order to commercialize the cannabis products business, we have to build our sales, marketing, distribution, managerial and other non-technical capabilities and make arrangements with third parties to perform these services when needed. We may have to hire sales representatives and district managers to fill sales territories. To the extent we are relying on third parties to commercialize our business, we may receive less revenues or incur more expenses than if we had commercialized the products ourselves. In addition, we may have limited control over the sales efforts of any third parties involved in our commercialization efforts. If we are unable to successfully implement our commercial plans and drive adoption by patients and physicians of our products through our sales, marketing and commercialization efforts, or if our partners fail to successfully commercialize our products, then we may not be able to generate sustainable revenues from product sales which will have a material adverse effect on our business and future product opportunities. Similarly, we may not be successful in establishing the necessary commercial infrastructure, including sales representatives, wholesale distributors, legal and regulatory affairs teams. The establishment and development of commercialization capabilities to market our products has been and will continue to be expensive and time-consuming. As we continue to develop these capabilities, we will have to compete with other hemp companies to recruit, hire, train and retain sales and marketing personnel. If we have underestimated the necessary sales and marketing capabilities or have not established the necessary infrastructure to support successful commercialization, or if our efforts to do so take more time and expense than anticipated, our ability to market and sell our products may be adversely affected.
Recent and future acquisitions and strategic investments could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute shareholder value, and harm our results of operations and financial condition.
We acquired Medicolombia S.A.S. (renamed Allied Colombia S.A.S.), and we may in the future seek to acquire or invest in, businesses, products, or technologies that we believe could complement our operations or expand our breadth, enhance our capabilities, or otherwise offer growth opportunities. Our diversity of product offerings may not be successful. While our growth strategy includes broadening our service and product offerings, implementing an aggressive marketing plan and employing product diversification, there can be no assurance that our systems, procedures and controls will be adequate to support our operations as they expand. We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of our planned growth and diversified product offerings, we may have to implement new operational and financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems. Additionally, the integration of our acquisitions and pursuit of potential future acquisitions may divert the attention of management and cause us to incur various expenses in identifying, investigating, and pursuing suitable acquisitions, whether or not they are consummated. Any acquisition, investment or business relationship may result in unforeseen operating difficulties and expenditures. In addition, we have limited experience in acquiring other businesses. Specifically, we may not successfully evaluate or utilize the acquired products, assets or personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. Moreover, the anticipated benefits of any acquisition, investment, or business relationship may not be realized, or we may be exposed to unknown risks or liabilities of our acquisitions.
We may not be able to find and identify desirable acquisition targets or we may not be successful in entering into an agreement with any one target. Acquisitions could also result in dilutive issuances of equity securities or the incurrence of debt, which could harm our results of operations. In addition, if an acquired business fails to meet our expectations, our business, results of operations, and financial condition may suffer. In some cases, minority shareholders may exist in certain of our non-wholly-owned acquisitions (for businesses we do not purchase as an 100% owned subsidiary) and may retain minority shareholder rights which could make a future change of control or corporate approvals for actions more difficult to achieve and/or more costly.
We also make strategic investments in early-stage companies developing products or technologies that we believe could complement our business or expand our breadth, enhance our technical capabilities, or otherwise offer growth opportunities. These investments may be in early-stage private companies for restricted stock. Such investments are generally illiquid and may never generate value. Further, the companies in which we invest may not succeed, and our investments would lose their value.
Certain conditions or events could disrupt the Company’s supply chains, disrupt operations, and increase operating expenses.
Conditions or events including, but not limited to, the following could disrupt the Company’s supply chains and in particular its ability to deliver its products, interrupt operations at its facilities, increase operating expenses, resulting in loss of sales, delayed performance of contractual obligations or require additional expenditures to be incurred: (i) extraordinary weather conditions or natural disasters such as hurricanes, tornadoes, floods, fires, extreme heat, earthquakes, etc.; (ii) a local, regional, national or international outbreak of a contagious disease, including the COVID-19 coronavirus, Middle East Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1 influenza virus, avian flu, or any other similar illness could result in a general or acute decline in economic activity; (iii) political instability, social and labor unrest, war or terrorism; or (iv) interruptions in the availability of basic commercial and social services and infrastructure including power and water shortages, and shipping and freight forwarding services including via air, sea, rail and road.
We will depend on a limited number of customers for the majority of our revenue, and the loss of any one of these customers could substantially reduce our revenue and impact our liquidity.
The loss of any significant customers or partners or reduction in our business activities could cause our revenues to decrease significantly and increase our continuing losses from operations. If our cannabis products are not successful and we cannot broaden our customer base, we will continue to depend on a few customers for the majority of our revenues. Additionally, if we are unable to negotiate favorable business terms with these customers in the future, our revenues and gross profits may be insufficient to allow us to achieve and/or sustain profitability or continue operations.
Demand for cannabis and derivative products could be adversely affected and significantly influenced by scientific research or findings, regulatory proceedings, litigation, media attention or other research findings.
Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of medicinal cannabis are mixed and evolving and can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of medicinal cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the medicinal cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity, could have a material adverse effect on the demand for medicinal cannabis and on our business, results of operations, financial condition and cash flows. Further, adverse publicity reports or other media attention regarding cannabis in general or associating the consumption of medicinal cannabis with illness or other negative effects or events, could have such a material adverse effect. Public opinion and support for medicinal cannabis use has traditionally been inconsistent and varies from jurisdiction to jurisdiction. Our ability to gain and increase market acceptance of our business may require substantial expenditures on investor relations, strategic relationships and marketing initiatives. There can be no assurance that such initiatives will be successful and their failure to materialize into significant demand may have an adverse effect on our financial condition.
Damage to the Company’s reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether such publicity is accurate or not.
The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views regarding the Company and its activities, whether true or not. Although the Company believes that it operates in a manner that is respectful to all stakeholders and that it takes pride in protecting its image and reputation, it does not ultimately have direct control over how it is perceived by others. Reputational loss may result in decreased ability to enter into new customer, distributor or supplier relationships, retain existing customers, distributors or suppliers, reduced investor confidence and access to capital, increased challenges in developing and maintaining community relations and an impediment to our overall ability to advance our projects, thereby having a material adverse effect on our financial performance, financial condition, cash flows and growth prospects.
We are subject to the inherent risks involved with product recalls.
Manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. If any of our products are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin, or at all. In addition, a product recall may require significant management attention. There can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if our products are subject to recall, our reputation could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for our products and could have a material adverse effect on our results of operations and financial condition. Additionally, product recalls may lead to increased scrutiny of our operations by regulatory agencies, requiring further management attention, potential loss of applicable licenses, and potential legal fees and other expenses.
The Company’s products could have unknown side effects.
If the products the Company sells are not perceived to have the effects intended by the end user, its business may suffer and the business may be subject to products liability or other legal actions. Many of the Company’s products contain innovative ingredients or combinations of ingredients. There is little long-term data available with respect to efficacy, unknown side effects and/or interaction with individual human biochemistry, or interaction with other drugs. Moreover, there is little long-term data available with respect to efficacy, unknown side effects and/or its interaction with individual animal biochemistry. As a result, the Company’s products could have certain side effects if not taken as directed or if taken by an end user that has certain known or unknown medical conditions.
The Company may be unable to anticipate changes in its potential client requirements that could make the Company’s existing products and services obsolete. The Company’s success will depend, in part, on its ability to continue to enhance its product and service offerings so as to address the increasing sophistication and varied needs of the market and respond to technological and regulatory changes and emerging industry standards and practices on a timely and cost-effective basis.
Research regarding the medical benefits, viability, safety, efficacy, use and social acceptance of cannabis remains in early stages.
There have been relatively few clinical trials on the benefits of cannabis. Although the Company believes that the articles, reports and studies support its beliefs regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, investors should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated herein or reach negative conclusions related to medical cannabis, which could have a material adverse effect on the demand for the Company’s products, which could result in a material adverse effect on our business, financial condition and results of operations or prospects.
The seasonal trends in our business create variability in our financial and operating results.
Our financial and operating results are subject to seasonal and quarterly variations in our net revenue and operating income and, as a result, our quarterly results may fluctuate and could be below expectations.
We anticipate that our business will realize a disproportionate amount of net revenue and earnings in the third and fourth quarter as a result of the holiday season. If we experience lower than expected net revenue during any third or fourth quarter, it may have disproportionately large effects on our operating results and financial condition for that year. Any factors that harm our third or fourth quarter operating results, including disruptions in our brands or our supply chains or unfavorable economic conditions, could have a disproportionate effect on our results of operations and our financial condition for our entire fiscal year.
The Company may not be able to maintain effective quality control systems.
The Company may not be able to maintain an effective quality control system. The Company ascribes its early successes, in part, on its commitment to product quality and its effective quality control system. The effectiveness of the Company’s quality control system and its ability to obtain or maintain regulatory certification with respect to its manufacturing, processing and testing facilities depend on a number of factors, including the design of its quality control procedures, training programs, and its ability to ensure that its employees adhere to the Company’s policies and procedures. The Company also depends on service providers such as toll manufacturers and contract laboratories to manufacture, process or test its products, that are subject to regulatory certification requirements.
We expect that regulatory agencies will periodically inspect our and our service providers’ facilities to evaluate compliance with applicable requirements. Failure to comply with these requirements may subject us or our service providers to possible regulatory enforcement actions. Any failure or deterioration of the Company’s or its service providers’ quality control systems, including loss of any required certification, may have a material adverse effect on the Company’s business, results of operations and financial condition.
Energy prices and supply may be subject to change or curtailment due to new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, imposition of restrictions on energy supply by government, worldwide price levels and market conditions.
The Company requires diesel and electric energy and other resources for its cultivation and harvest activities and for transportation of cannabis. the Company relies upon third parties for its supply of energy resources used in its operations. The prices for and availability of energy resources may be subject to change or curtailment, respectively, due to, among other things, new laws or regulations, imposition of new taxes or tariffs, interruptions in production by suppliers, imposition of restrictions on energy supply by government, worldwide price levels and market conditions. Although the Company attempts to mitigate the effects of fuel shortages, electricity outages and cost increases, the Company’s operations will continue to depend on external suppliers of fuel and electricity. If energy supply is cut for an extended period and the Company is unable to find replacement sources at comparable prices, or at all, the Company’s business, financial condition and results of operations could be materially and adversely affected.
There are risks associated with the regulatory regime and permitting requirements of our operations.
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all regulatory approvals, where necessary, for the sale of our products. We may not be able to obtain or maintain the necessary licenses, permits, quotas, authorizations or accreditations to operate our business, or may only be able to do so at great cost. We cannot predict the time required to secure all appropriate regulatory approvals for our products, or the extent of testing and documentation that may be required by local governmental authorities.
Our officers and directors must rely, to a great extent, on Colombian legal counsel and local consultants retained in order to keep abreast of material legal, regulatory and governmental developments as they pertain to and affect our business operations, and to assist us with governmental relations. We must rely, to some extent, on those members of management and the Board who have previous experience working and conducting business in Colombia in order to enhance our understanding of and appreciation for the local business culture and practices in Colombia.
We also rely on the advice of local experts and professionals in connection with any current and new regulations that develop in respect of banking, financing and tax matters in Colombia. Any developments or changes in such legal, regulatory or governmental requirements or in local business practices in Colombia are beyond our control and may adversely affect our business.
We will incur ongoing costs and obligations related to regulatory compliance. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. We may be required to compensate those suffering loss or damage by reason of our operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on our business, results of operations and financial condition.
The cannabinoid industry faces strong opposition and may face similar opposition in other jurisdictions in which we operate.
Many political and social organizations oppose hemp and cannabis and their legalization, and many people, even those who support legalization, oppose the sale of hemp and cannabis in their geographies. Our business will need support from local governments, industry participants, consumers and residents to be successful. Additionally, there are large, well-funded businesses that may have a strong opposition to the cannabis industry. For example, the pharmaceutical and alcohol industries have traditionally opposed cannabis legalization. Any efforts by these or other industries opposed to cannabis would make in halting or impeding the cannabis industry could have detrimental effects on our business.
We are subject to the risks inherent in an agricultural business.
Our business involves the growing of cannabis, which is an agricultural product. The occurrence of severe adverse weather conditions, especially droughts, fires, storms or floods is unpredictable and may have a potentially devastating impact on agricultural production and may otherwise adversely affect the supply of cannabis. Adverse weather conditions may be exacerbated by the effects of climate change and may result in the introduction and increased frequency of pests and diseases. The effects of severe adverse weather conditions may reduce our yields or require us to increase our level of investment to maintain yields. Additionally, higher than average temperatures and rainfall can contribute to an increased presence of insects and pests, which could negatively affect cannabis crops. Future droughts could reduce the yield and quality of our cannabis production, which could materially and adversely affect our business, financial condition and results of operations.
The occurrence and effects of plant disease, insects and pests can be unpredictable and devastating to agricultural production, potentially rendering all or a substantial portion of the affected harvests unsuitable for sale. Even when only a portion of the production is damaged, our results of operations could be adversely affected because all or a substantial portion of the production costs may have been incurred. Although some plant diseases are treatable, the cost of treatment can be high and such events could adversely affect our operating results and financial condition. Furthermore, if we fail to control a given plant disease and the production is threatened, we may be unable to adequately supply our customers, which could adversely affect our business, financial condition and results of operations. There can be no assurance that natural elements will not have a material adverse effect on production.
Our operations could be materially and adversely affected if the supply of cannabis seeds is ceased or delayed and we do not find replacement suppliers and obtain all necessary authorizations.
If for any reason the supply of cannabis seeds is ceased or delayed, we would have to seek alternate suppliers and obtain all necessary authorization for the new seeds. If replacement seeds cannot be obtained at comparable prices, or at all, or if the necessary authorizations are not obtained, our business, financial condition and results of operations would be materially and adversely affected.
Many of our competitors have greater resources that may enable them to compete more effectively than us in the cannabis industry.
The industry in which we operate is subject to intense and increasing competition. Some of our competitors have a longer operating history and greater capital resources and facilities, which may enable them to compete more effectively in this market. We expect to face additional competition from existing licensees and new market entrants who are granted licenses in Colombia, who are not yet active in the industry. If a significant number of new licenses are granted in the near term, we may experience increased competition for market share and may experience downward pricing pressure on our products as new entrants increase production. Such competition may cause us to encounter difficulties in generating revenues and market share, and in positioning our products in the market. If we are unable to successfully compete with existing companies and new entrants to the market, our lack of competitive advantage will have a negative effect on our business and financial condition.
The legalization of adult-use, recreational cannabis may reduce sales of medical cannabis.
Legalization of the sale to adults of recreational, non-medical cannabis in any country may increase competition in the medical cannabis market. We may not be able to achieve our business plan in a highly competitive market where recreational, adult-use cannabis is legal, or the market may experience a drop in the price of cannabis and cannabis products over time, decreasing our profit margins.
The Company is reliant on third party transportation services and importation services to deliver its products to customers.
The Company relies on third party transportation services and importation services to deliver its products to its customers. The Company is exposed to the inherent risks associated with relying on third party transportation service-providers, including logistical problems, delays, loss or theft of product and increased shipping and insurance costs. Any delay in transporting the product, breach of security or loss of product, could have a material adverse effect on the Company’s business, financial performance and results of operations. Further, any breach of security and loss of product during transport could affect the Company’s status as a licensed producer in Colombia.
The Company is dependent on suppliers to supply equipment, parts and components for the operation of its business.
The Company’s ability to compete and grow will be dependent upon having access, at a reasonable cost and in a timely manner, to equipment, parts and components. No assurances can be given that the Company will be successful in maintaining the required supply of equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by capital expenditure programs may be significantly greater than anticipated or available, in which circumstance there could be a materially adverse effect on the Company’s financial results.
We may not be able to establish and maintain bank accounts in certain countries.
There is a risk that banking institutions in countries where we operate will not open accounts for us or will not accept payments or deposits from proceeds related to the cannabis industry. Such risks could increase our costs or prevent us from expanding into certain jurisdictions.
The Company may be subject to cyber-security and privacy risks that could disrupt its operations and expose the Company to financial losses, contractual losses, liability, reputational damage and additional expense.
The Company may be subject to risks related to our information technology systems, including cyber-attacks, malware, ransomware and phishing attacks that could target our intellectual property, trade secrets, financial information, personal information of our employees, customers and patients, including sensitive personal health information. The occurrence of such an attack could disrupt our operations and expose the Company to financial losses, contractual damages, liability under labor and privacy laws, reputational damage and additional expenses. We have implemented security measures to protect our data and information technology systems; however, such measures may not be effective in preventing cyber-attacks. We may be required to allocate additional resources to implement additional preventative measures including significant investments in information technology systems. A serious cyber-security breach could have a material adverse effect on our business, financial condition and results of operations.
The Company may collect and store certain personal information about customers and is responsible for protecting such information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. In addition, theft of data is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such privacy breach or theft could have a material adverse effect on the Company’s business, financial condition and results of operations. If the Company were found to be in violation of privacy or security rules or other laws protecting the confidentiality of information, the Company could be subject to sanctions and civil or criminal penalties, which could increase its liabilities, harm its reputation and have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company may incur significant costs to defend its intellectual property and other proprietary rights.
The ownership and protection of trademarks, patents, trade secrets and intellectual property rights are significant aspects of the Company’s future success. Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products and technology. Policing the unauthorized use of the Company’s current or future trademarks, patents, trade secrets or intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others.
In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent protected rights. Such claims, regardless of their merit, may result in the expenditure of significant financial and managerial resources, legal fees, injunctions, temporary restraining orders and/or require the payment of damages. As well, the Company may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. Such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favorable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.
Risks Related to Operations in Colombia
We are reliant on certain licenses and authorizations to operate in Colombia.
Our ability to grow, store and sell cannabis in Colombia is dependent on our ability to sustain and/or obtain the necessary licenses and authorizations by certain authorities in Colombia. To date, we have received the licenses we need to operate our facilities in Colombia. The effects of the compliance regime, any delays in obtaining, or failure to obtain or keep the regulatory approvals may significantly delay or impair the development of markets, products and sales initiatives and could have a material adverse effect on our business, results of operations and financial condition.
The licenses and authorizations are subject to ongoing compliance and reporting requirements and our ability to obtain, sustain or renew any such licenses and authorizations on acceptable terms is subject to changes in regulations and policies and to the discretion of the applicable authorities or other governmental agencies in Colombia and potentially in other foreign jurisdictions. Failure to comply with the requirements of the licenses or authorizations or any failure to maintain the licenses or authorizations would have a material adverse effect on our business, financial condition and operating results.
Although we believe that we will meet the requirements to obtain, sustain or renew the necessary licenses and authorizations, there can be no guarantee that the applicable authorities will issue these licenses or authorizations. Should the authorities fail to issue the necessary licenses or authorizations, we may be curtailed or prohibited from the production and/or distribution of cannabis or from proceeding with the development of our operations as currently proposed and our business, results of operations and financial condition may be materially adversely affected.
Restrictions or regulations concerning changes in corporate structure may discourage transactions that otherwise could involve payment of a premium over prevailing market process for our securities.
Colombian cannabis licenses are granted on a non-transferable, non-exchangeable and non-assignable basis. Any breach of this restriction may result in the revocation of the license. While there are no specific regulations or restrictions regarding the effects of a change in control, modification of the corporate structure, issuance of shares, or any changes in holders or final beneficiaries on the cannabis licenses, these restrictions may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Our cultivation operations are located in Colombia, which may make it more difficult for investors to understand and predict how changing market and economic conditions will affect our financial results.
Our cultivation operations are located in Colombia and, consequently, are subject to the economic, political and tax conditions prevalent in that country. The economic conditions in Colombia are subject to different growth expectations, market weaknesses and business practices than economic conditions in other markets. We may not be able to predict how changing market conditions in Colombia will affect our financial results.
As of the date of this Offering Circular, Colombia’s long-term foreign currency sovereign credit ratings were affirmed “Baa2” by Moody’s, “BBB-” by S&P and “BBB” by Fitch, three of the main rating agencies worldwide. The Colombian economy is expected to experience a modest recovery in growth in 2019, along with a decrease in the current account deficit and a marginal increase in debt in the coming three years. The stable outlook reflects their expectation that Colombia’s established political institutions and track record of consensus on key economic policies will contribute to economic stability and continuity over the coming two to three years.
Colombia’s economy, like most Latin-American countries, continues to suffer from the effects of lower commodity prices, mainly oil, reflected in its elevated level of external debt. Even though the country has taken measures to stabilize the economy, it is uncertain how these measures will be perceived and if the intended goal of increasing investor’s confidence will be achieved.
Economic and political conditions in Colombia may have an adverse effect on our financial condition and results of operations.
Our cultivation operations are located in Colombia. Consequently, our financial condition and results of operations depend significantly on macroeconomic and political conditions prevailing in Colombia. Decreases in the growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, adversely affect our financial condition and results of operations in the future. The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and regulatory policy. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia. We cannot predict what policies the Colombian government will adopt and whether those policies would have a negative effect on the Colombian economy or on our business and financial performance in the future.
We cannot assure you whether current stability in the Colombian economy will be sustained. If the condition of the Colombian economy were to deteriorate, we would likely be adversely affected.
Colombia could experience substantial inflation in the future resulting in the Company’s costs in the Colombian peso increasing significantly.
Colombia has in the past experienced double-digit rates of inflation. If Colombia experiences substantial inflation in the future, the Company’s costs in Colombian peso terms will increase significantly, subject to movements in applicable exchange rates. Inflationary pressures may also curtail the Company’s ability to access global financial markets in the longer term and its ability to fund planned capital expenditures, and could materially adversely affect the Company’s business, financial condition and results of operations. The Colombian government’s response to inflation or other significant macro-economic pressures may include the introduction of policies or other measures that could increase the Company’s costs, reduce operating margins and materially adversely affect its business, financial condition and results of operations.
Colombia has experienced and continues to experience internal security issues that have had or could have a negative effect on the Colombian economy and our financial condition.
Colombia is subject to sustained internal security issues, primarily due to the activities of guerrilla groups, such as dissidents from the former Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia), or “FARC,” the National Liberation Army (Ejército de Liberación Nacional), or “ELN,” paramilitary groups, drug cartels and criminal gangs (Bacrim). In remote regions of the country with minimal governmental presence, these groups have exerted influence over the local population and funded their activities by protecting and rendering services to drug traffickers and participating in drug trafficking activities. Even though the Colombian government’s policies have reduced guerilla presence and criminal activity, particularly in the form of terrorist attacks, homicides, kidnappings and extortion, such activity persists in Colombia, and possible escalation of such activity and the effects associated with them have had and may have in the future a negative effect on the Colombian economy and on us, including on our employees, results of operations and financial condition. The Colombian government commenced peace talks with the FARC in August 2012, and peace negotiations with the ELN began in November 2016. The Colombian government and the FARC signed a peace deal on September 26, 2016, which was amended after voters rejected it in the referendum held on October 2, 2016. The new agreement was signed on November 24, 2016 and was ratified by the Colombian Congress on November 30, 2016 and is being implemented after four years of negotiations. Pursuant to the peace agreements negotiated between the FARC and the Colombian government in 2016, the FARC occupies five seats in the Colombian Senate and five seats in the Colombian House of Representatives. The new deal clarifies protection to private property, is expected to increase the government’s presence in rural areas and bans former rebels from running for office in certain newly created congressional districts in post-conflict zones. As a result, during the transition process, Colombia may experience an increase in internal security issues, drug-related crime and guerilla and paramilitary activities, which may have a negative effect on the Colombian economy. Our business or financial condition could be adversely affected by rapidly changing economic or social conditions, including the Colombian government’s response to implementation of the agreement with FARC and ongoing peace negotiations, if any, which may result in legislation that increases the tax burden of Colombian companies.
Despite efforts by the Colombian government, drug-related crime, guerrilla paramilitary activity and criminal bands continue to exist in Colombia, and allegations have surfaced regarding members of the Colombian congress and other government officials having ties to guerilla and paramilitary groups. Although the Colombian government and ELN have been in talks since February 2017 to end a five-decade war, the Colombian government has suspended the negotiations after a series of rebel attacks. On January 17, 2019, a car with explosives burst through the gates at a police academy in Bogotá resulting in 21 people dead and many injured. The Colombian Defense Minister confirmed that the terrorist attack was perpetrated by the ELN. Any possible escalation in the violence associated with this terrorist attack and/or these activities may have a negative effect on the Colombian economy. In addition, the current administration has not honored the peace protocols to be applied in the event of a suspension of peace negotiations entered into by the prior administration, on the grounds that these protocols are only binding to the administration that agreed to them. This situation could result in escalated violence by the ELN and may have a negative effect on the credibility of the Colombian government which could in turn have a negative effect on the Colombian economy. Any terrorist activity in Colombia generally may disrupt supply chains and discourage qualified individuals from being involved with our operations.
Political and economic instability in the region may affect the Colombian economy and, consequently, our results of operations and financial condition.
Some of Colombia’s neighboring countries, particularly Venezuela, have experienced and continue to experience periods of political and economic instability. According to figures from the United Nations, more than two million Venezuelans have emigrated amid food and medicine shortages and profound political divisions in their country. Approximately half of those migrants have opted to live in Colombia, and many have arrived with only what they could carry. Providing migrants with access to healthcare, utilities and education may have a negative effect on Colombia’s economy if the Colombian government is not able to respond adequately to legalize migrants, generate programs to help them find formal jobs, and increase tax revenue and consumption.
Moreover, diplomatic relations with Venezuela and Ecuador have from time to time been tense and affected by events surrounding the Colombian military forces’ confrontations with guerilla groups, particularly on Colombia’s borders with each of Venezuela and Ecuador. More recently, the Colombian government joined an international campaign against Nicolás Maduro asking him to relinquish power, which has further increased diplomatic tensions with Venezuela.
On November 19, 2012, the International Court of Justice placed a sizeable area of the Caribbean Sea within Nicaragua’s exclusive economic zone, which until then had been deemed by Colombia as part of its own exclusive economic zone. A worsening of diplomatic relations between Colombia and Nicaragua involving the disputed waters could result in the Nicaraguan government taking measures, or a reaction among the Nicaraguan public, which would be detrimental to Colombian-owned interests in that country.
Further economic and political instability in Colombia’s neighboring countries or any future deterioration in relations with Venezuela, Ecuador, Nicaragua and other countries in the region may result in the closing of borders, the imposition of trade barriers and a breakdown of diplomatic ties, or a negative effect on Colombia’s trade balance, economy and general security situation, which may adversely affect our results of operations and financial condition.
Finally, political conditions such as changes in the United States policies related to immigration and remittances could affect the regions in which we operate. Economic conditions in the United States and the region generally may be affected by the new United States-Mexico-Canada Agreement. This could have an indirect effect on the Colombian economy and other countries in which we may operate.
Any additional taxes resulting from changes to tax regulations or the interpretation thereof in Colombia or other countries where we operate, could adversely affect our consolidated results.
Uncertainty relating to tax legislation poses a constant risk to us. Colombian national authorities have levied new taxes in recent years. Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting stated expenses and deductions, and eliminating incentives and non-taxed income.
Additional tax regulations could be implemented that could require us to make additional tax payments, negatively affecting our financial condition, results of operation, and cash flow. In addition, either national or local taxing authorities may not interpret tax regulations in the same way that we do. Differing interpretations could result in future tax litigation and associated costs.
Risks Related to Our Regulatory Framework
United States Federal regulation and enforcement may adversely affect the implementation of medical Cannabis and/or Cannabis adult use laws and regulations may negatively impact our revenues and profits.
Legislation in the United States continues to evolve throughout 2021 relative to laws regulating marijuana. Subsequent to the 2020 elections, there are currently 37 states in the United States, plus the District of Columbia that have laws and/or regulations that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. An additional fifteen states have laws and/or regulations that allow cannabis use by adults for non-medical purposes. More states are considering permitting cannabis use. Congress recently presented legislation which would decriminalize marijuana use federally and relegate legalization to state law.
Around the world there are countries who are enacting medical and/or adult use cannabis regulations almost weekly. Conversely, currently under the Controlled Substance Act (the “CSA”), the policy and regulations of the Federal government and its agencies is that cannabis has no medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited. Until Congress amends the CSA with respect to medical marijuana or there is an outcome of the current lawsuit against the un-constitutional application of cannabis in the CSA, there is a risk that federal authorities may enforce current federal law, and we may be deemed to be facilitating the selling or distribution of drug paraphernalia in violation of federal law. Active enforcement of the current federal regulatory position on cannabis may thus indirectly and adversely affect revenues and profits of the Company. The risk of strict enforcement of the CSA in light of congressional activity, judicial holdings and stated federal policy remains uncertain.
The DOJ (Department of Justice) has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our revenue and profits.
There are conflicts in the United States between Federal and State regulations related to marijuana.
Federal regulation and enforcement may adversely affect the implementation of adult use/medical Cannabis laws and regulations may negatively impact our revenues and profits. As of the date of this Annual Report, 37 states and the District of Columbia allow its citizens to use medical marijuana. The state laws are in conflict with the federal Controlled Substances Act, which makes marijuana use and possession illegal on a national level. Both the Obama and Trump administrations effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by state designated laws allowing the use and distribution of medical cannabis. The Biden administration has followed the same principles. In May 2017, Congress unveiled their new budget bill and as such, lawmakers included a provision, known as the Rohrabacher-Farr amendment, that allows states to carry on with crafting their own medical marijuana policies without fear of federal intervention. This bill was passed and as a result, no federal monies have been approved or appropriated to be used to enforce federal law in these cannabis program participating states.
In 2020, the Democrats through President Biden called for decriminalizing and rescheduling marijuana through executive action, with support for legalizing medical marijuana and expunging past criminal convictions for cannabis-related offenses all on the table.
Investors should understand that there is no guarantee that current or future administrations will not attempt to change this again in the future. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to the Company and its shareholders. While we will not harvest, distribute, or sell cannabis directly, we may be irreparably harmed by a change in enforcement by the Federal or state governments.
Cannabis remains illegal under United States federal law. It is a schedule-I controlled substance. Even in those jurisdictions in which the use of medical marijuana has been legalized at the state level, its prescription is a violation of federal law. The United States Supreme Court has ruled in United States v. Oakland Cannabis Buyers’ Coop. and Gonzales v. Raich that it is the federal government that has the right to regulate and criminalize cannabis, even for medical purposes. Therefore, federal law criminalizing the use of marijuana trumps state laws that legalize its use for medicinal purposes. At present, the states are standing tall against the federal government, maintaining existing laws and passing new ones in this area. A change in the federal attitude towards enforcement could have a negative effect on the industry, potentially ending it entirely. While we are not insulated from economic risk if such a change were to occur, we believe that by virtue of the fact that we do not sell, or produce Cannabis or Cannabis related products, our shareholders and we should be insulated from federal prosecution or harassment. However, the growers and sellers of adult use and medical cannabis are our primary customers, and if this industry were unable to operate, we would lose substantially all of our potential clients, which would have a negative impact on our business, operations, and financial condition.
Laws and regulations affecting the Cannabis industry are constantly changing, which could detrimentally affect our proposed operations. Local, state, and federal Cannabis laws and regulations are broad in scope and subject to evolving interpretations, which could require us to incur substantial costs associated with compliance or alter our business plan. In addition, violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. In addition, it is possible that regulations may be enacted in the future that will be directly applicable to our business. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmental regulations or administrative policies and procedures, when and if promulgated, could have on our business.
Any failure on our part to comply with applicable regulations could prevent us from being able to carry on our business, and there may be additional costs associated with any such failure.
Our business activities are heavily regulated in all jurisdictions where we do business. Our operations are subject to various laws, regulations and guidelines by governmental authorities relating to the cultivation, processing, manufacture, marketing, management, distribution, transportation, storage, sale, packaging, labelling, pricing and disposal of cannabis and cannabis products. In addition, we are subject to laws and regulations relating to employee health and safety, insurance coverage and the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services.
Any failure by us to comply with the applicable regulatory requirements could
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require extensive changes to our operations;
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result in regulatory or agency proceedings or investigations;
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result in the revocation of our licenses and permits, increased compliance costs;
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result in damage awards, civil or criminal fines or penalties;
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result in restrictions on our operations;
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harm our reputation; or
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give rise to material liabilities.
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There can be no assurance that any future regulatory or agency proceedings, investigations or audits will not result in substantial costs, a diversion of management’s attention and resources or other adverse consequences to our business.
Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by governmental authorities and obtaining all necessary regulatory approvals for the cultivation, processing, production, storage, distribution, transportation, sale, import and export, as applicable, of our products. Any failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions, including:
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the revocation or imposition of additional conditions on licenses to operate our business;
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the suspension or expulsion from a particular market or jurisdiction or of our key personnel;
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the imposition of additional or more stringent inspection, testing and reporting requirements;
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product recalls or seizures; and
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the imposition of fines and censures.
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In addition, changes in regulations, government or judicial interpretation of regulations, or more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities or a revocation of our licenses and other permits. Furthermore, governmental authorities may change their administration, application or enforcement procedures at any time, which may adversely affect our ongoing regulatory compliance costs. There is no assurance that we will be able to comply or continue to comply with applicable regulations.
The legal cannabis market is a relatively new industry. As a result, the size of our target market is difficult to quantify, and investors will be reliant on their own estimates on the accuracy of market data.
Because the cannabis industry is in a nascent stage, there is a lack of information about comparable companies available for potential investors to review in deciding about whether to invest in us and, few, if any, established companies whose business model we can follow or upon whose success we can build. Accordingly, investors should rely on their own estimates regarding the potential size, economics and risks of the cannabis market in deciding whether to invest in our Common Shares. We are an early-stage company that has not generated net income. There can be no assurance that our growth estimates are accurate or that the cannabis market will be large enough for our business to grow as projected.
Although we are committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets or products, if any, will be commercially viable or successfully produced and marketed. We must rely largely on our own market research to forecast sales and design products as detailed forecasts and consumer research are not generally obtainable from reliable third-party sources in Canada and in other international jurisdictions.
In addition, there is no assurance that the industry and market will continue to exist and grow as currently estimated or anticipated or function and evolve in the manner consistent with management’s expectations and assumptions. We could also be subject to other events or circumstances that that adversely affect the cannabis industry, such as the imposition of further restrictions on sales and marketing or further restrictions on sales in certain areas and markets.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar international anti-bribery and anti-kickback laws with respect to our activities outside the United States.
We anticipate distributing our products to locations in Canada and United States as well as operate our business in Canada and United States. The U.S. Foreign Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations, generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure you that we will be successful in preventing our agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.
Risks Related to Financials and Accounting
Assumptions, estimates and judgments related to critical accounting matters could significantly affect our reported financial results or financial condition.
The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the notes to our financial statements, the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that are not readily apparent from other sources. Our operating results may be adversely affected if the assumptions change or if actual circumstances differ from those in the assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our Common Shares. Significant assumptions and estimates used in preparing the financial statements include those related to the credit quality of accounts receivable, income tax credits receivable, share based payments, impairment of non-financial assets, fair value of biological assets, as well as revenue and cost recognition.
There are tax risks the Company may be subject to in carrying on business in multiple jurisdictions.
We and our subsidiaries will operate and, accordingly, will be subject to income tax and other forms of taxation in multiple jurisdictions. We may be subject to income taxes and non-income taxes in a variety of jurisdictions and our tax structure may be subject to review by both domestic and foreign taxation authorities. Those tax authorities may disagree with our interpretation and/or application of relevant tax rules. A challenge by a tax authority in these circumstances might require us to incur costs in connection with litigation against the relevant tax authority or reaching a settlement with the tax authority and, if the tax authority’s challenge is successful, could result in additional taxes (perhaps together with interest and penalties) being assessed on us, and as a result an increase in the amount of tax payable by us. In addition, we may be subject to different taxes imposed by the Colombian government, and changes within such tax, legal and regulatory framework may have an adverse effect on our financial results.
Taxation laws and rates which determine taxation expenses may vary significantly in different jurisdictions, and legislation governing taxation laws and rates are also subject to change. Therefore, our earnings may be affected by changes in the proportion of earnings taxed in different jurisdictions, changes in taxation rates, changes in estimates of liabilities and changes in the amount of other forms of taxation. The determination of our provision for income taxes and other tax liabilities will require significant judgment (including based on external advice) as to the interpretation and application of these rules. We may have exposure to greater than anticipated tax liabilities or expenses.
Additionally, dividends and other intra-group payments made by our subsidiaries or international branches may expose the recipients of such payments to taxes in their jurisdictions of organization and operation and such dividends and other intra-group payments may also be subject to withholding taxes imposed by the jurisdiction in which the entity making the payment is organized or tax resident. Unless such withholding taxes are fully creditable or refundable, dividends and other intra-group payments may increase the amount of tax paid by us. Although the Company and its subsidiaries arrange themselves and their affairs with a view to minimizing the incurrence of such taxes, there can be no assurance that we will succeed.
Restrictions on Deduction of Certain Expenses for U.S. Federal Income Tax Purposes
Section 280E of the Internal Revenue Code of 1986, as amended (the “Code”), prohibits businesses from deducting certain expenses associated with trafficking controlled substances for United States federal income tax purposes. The IRS has invoked Code Section 280E in tax audits against various cannabis businesses in the U.S. that are permitted under applicable state laws. Section 280E of the Code prohibits cannabis businesses that are deemed to be trafficking in controlled substances from deducting certain ordinary and necessary business expenses, forcing them to pay higher effective federal tax rates than similar companies in other industries. The effective tax rate on a cannabis business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.
Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly and the bulk of operating costs and general administrative costs are not permitted to be deducted. While there are currently several pending cases before various administrative bodies and federal courts challenging these restrictions, there is no guarantee that these authorities will issue an interpretation of Code Section 280E favorable to cannabis businesses.
Failure to develop our internal controls over financial reporting as we grow could have an adverse effect on our operations.
As our Company matures we will need to continue to develop and improve our current internal control systems and procedures to manage our growth. We are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish appropriate controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, financial condition or results of operations. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting, disclosure of management’s assessment of our internal controls over financial reporting or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse effect on the price of our Common Shares.
Risks Related to Our Common Shares
We will need, but may be unable to, obtain additional funding on satisfactory terms, which could dilute our shareholders or impose burdensome financial restrictions on our business.
In the future, we hope to rely on revenues generated from operations to fund all of the cash requirements of our activities. However, there can be no assurance that we will be able to generate any significant cash from our operating activities in the future. Future financings may not be available on a timely basis, in sufficient amounts or on terms acceptable to us, if at all. Any debt financing or other financing of securities senior to the Common Shares will likely include financial and other covenants that will restrict our flexibility. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition and results of operations because we could lose our existing sources of funding and impair our ability to secure new sources of funding. There can be no assurance that we will be able to generate any investor interest in our securities. If we do not obtain additional financing, our business may never commence, in which case you would likely lose the entirety of your investment in the Company.
Holders of our Common Shares are subject to dilution resulting from the issuance of equity-based compensation by us.
We intend to award warrants or restricted stock units to management to incentivize their performance and retention. Any additional equity grants and any exercise of existing warrants or restricted stock units will cause our shareholders to be diluted and may negatively affect the price of the Common Shares.
Ownership of our Common Shares may be considered unlawful in some jurisdictions and holders of our Common Shares may consequently be subject to liability in such jurisdictions.
Cannabis-related financial transactions, including investment in the securities of cannabis companies and receipt of any associated benefits, such as dividends, are currently subject to anti-money laundering and a variety of other laws that vary by jurisdiction, many of which are unsettled and still developing. While the interpretation of these laws is unclear, in some jurisdictions, financial benefit directly or indirectly arising from conduct that would be considered unlawful in such jurisdiction may be viewed to be within the purview of these laws, and persons receiving any such benefit, including investors in an applicable jurisdiction, may be subject to liability under such laws. Each prospective investor should therefore contact his, her or its own legal advisor regarding the ownership of our Common Shares and any related potential liability.
Our executive officers and directors and their respective affiliates may continue to exercise significant control over our Company after this offering, which will limit your ability to influence corporate matters and could delay or prevent a change in corporate control.
As of the date of this 10K, our executive officers and directors currently represent beneficial ownership, in the aggregate, of approximately 30.2% of our outstanding Common Shares. As a result, these shareholders may be able to influence our management and affairs and control the outcome of matters submitted to our shareholders for approval, including the election of directors and any sale, merger, consolidation, or sale of all or substantially all of our assets. These shareholders may have interests, with respect to their Common Shares, that are different from other shareholders, and the concentration of voting power among one or more of these shareholders may have an adverse effect on the price of our Common Shares. In addition, this concentration of ownership might adversely affect the market price of our Common Shares by:
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delaying, deferring or preventing a change of control of the Company;
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impeding a merger, consolidation, takeover or other business combination involving the Company; or
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discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company.
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The Company’s directors and officers may have a conflicts of interest in conducting their duties.
We may be subject to various potential conflicts of interest because of the fact that some of our officers and directors may be engaged in a range of business activities. In addition, our executive officers and directors may devote time to their outside business interests, so long as such activities do not materially or adversely interfere with their duties to the Company. In some cases, our executive officers and directors may have fiduciary obligations associated with these business interests that interfere with their ability to devote time to our business and affairs and that could adversely affect our operations. These business interests could require significant time and attention of our executive officers and directors.
The regulated nature of our business may impede or discourage a takeover, which could reduce the market price of our Common Shares.
We require and hold various government licenses to operate our business. These licensing requirements could impede a merger, amalgamation, takeover or other business combination involving us or discourage a potential acquiror from making a tender offer for our Common Shares, which, under certain circumstances, could reduce the market price of our Common Shares.
We do not intend to pay dividends on our Common Shares in the near future, and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our Common Shares.
We have never declared or paid any cash dividend on our Common Shares and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in the Common Shares will depend upon any future appreciation in their value. There is no guarantee that the Common Shares will appreciate in value or even maintain the price at which you purchased them.
Future issuances of debt securities, which would rank senior to our Common Shares upon our bankruptcy or liquidation, and future issuances of preferred stock, which could rank senior to our Common Shares for the purposes of dividends and liquidating distributions, may adversely affect the level of return you may be able to achieve from an investment in our Common Shares.
In the future, we may attempt to increase our capital resources by offering debt securities. Upon bankruptcy or liquidation, holders of our debt securities, and lenders with respect to other borrowings we may make, would receive distributions of our available assets prior to any distributions being made to holders of our Common Shares. Moreover, if we issue preferred stock, the holders of such preferred stock could be entitled to preferences over holders of Common Shares in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred stock in any future offering, or borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any such future offerings or borrowings. Holders of our Common Shares must bear the risk that any future offerings we conduct or borrowings we make may adversely affect the level of return, if any, they may be able to achieve from an investment in our Common Shares.
General Risk Factors
The Company may become involved in legal proceedings from time to time, which could adversely affect the Company.
From time to time, we may be a party to legal and regulatory proceedings, including matters involving governmental agencies, entities with whom it does business and other proceedings arising in the ordinary course of business. We will evaluate our exposure to these legal and regulatory proceedings and establish reserves for the estimated liabilities in accordance with generally accepted accounting principles. Assessing and predicting the outcome of these matters involves substantial uncertainties. Unexpected outcomes in these legal proceedings, or changes in management’s evaluations or predictions and accompanying changes in established reserves, could have an adverse impact on our financial results.
Our participation in the cannabis industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by third parties, other companies and/or various governmental authorities against us. Litigation, complaints, and enforcement actions involving us could consume considerable amounts of financial and other corporate resources, which could have an adverse effect on our future cash flows, earnings, results of operations and financial condition.
The Company’s success will depend, in part, on its ability to continue to enhance its product and service offerings to respond to technological and regulatory changes and emerging industry standards and practices.
Rapidly changing markets, technology, emerging industry and regulatory standards and frequent introduction of new products characterize the Company’s business. The introduction of new products embodying new technologies and regulatory developments may render the Company’s equipment obsolete and its products and services less competitive or less marketable. The process of developing the Company’s products and services is complex and requires significant continuing costs, development efforts, third-party commitments and regulatory approvals. The Company may not be successful in developing or effectively commercializing such new products and services, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of developing such products and services, may have a material adverse effect on the Company’s business, financial condition and operating results.
We are dependent upon our management and key employees, and the loss of any member of our management team or key employees could have a material adverse effect on our operations.
The Company’s success is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management and key employees. The loss of any member of our management team or key employees could have a material adverse effect on our business and results of operations. While employment agreements and incentive programs are customarily used as primary methods of retaining the services of key employees, these agreements and incentive programs cannot assure the continued services of such employees. Any loss of the services of such individuals, or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s business, operating results or financial condition. We do not currently maintain key-person insurance on the lives of any of our key employees. Competition for qualified technical, sales and marketing staff, as well as officers and directors can be intense, and no assurance can be provided that the Company will be able to attract or retain key employees in the future, which may adversely affect the Company’s operations.
Our inability to retain and acquire skilled personnel could impair our business and operations.
The loss of any member of our management team could have a material adverse effect on our business and results of operations. In addition, the inability to hire or the increased costs of hiring new personnel, including members of executive management, could have a material adverse effect on our business and operating results. The expansion of marketing and sales of our products will require us to find, hire and retain additional capable employees who can understand, explain, market and sell our products. There is intense competition for capable personnel in all of these areas and we may not be successful in attracting, training, integrating, motivating, or retaining new personnel, vendors, or subcontractors for these required functions. New employees often require significant training and, in many cases, take a significant amount of time before they achieve full productivity. As a result, we may incur significant costs to attract and retain employees, including significant expenditures related to salaries and benefits and compensation expenses issued in connection to equity awards, and we may lose new employees to our competitors or other companies before we realize the benefit of our investment in recruiting and training them. In addition, as we move into new jurisdictions, we will need to attract and recruit skilled employees in those new areas.
We will need to grow the size of our organization, and we may experience difficulties in managing any growth we may achieve.
As our development and commercialization plans and strategies develop, we expect to need additional research, development, managerial, operational, sales, marketing, financial, accounting, legal and other resources. Future growth would impose significant added responsibilities on members of management. In order to manage growth and changes in strategy effectively, the Company must: (a) maintain adequate systems to meet customer demand; (b) expand sales and marketing, distribution capabilities, and administrative functions; (c) expand the skills and capabilities of its current management team; and (d) attract and retain qualified employees. Our management may not be able to accommodate those added responsibilities, and our failure to do so could prevent us from effectively managing future growth and successfully growing our Company.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about us, our share price and trading volume could decline.
The trading market for our Common Shares will depend, in part, on the research and reports that securities or industry analysts publish about us or our operations. We do not have any control over these analysts and their research and reports. Securities and industry analysts do not currently, and may never, publish research on our business. If no security or industry analysts commence coverage of our Company, the trading price for our Common Shares would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our shares or publish inaccurate or unfavorable research about our business, our share price would likely decline. In addition, if our operating results fail to meet the forecast of analysts, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our shares could decrease, which might cause our share price and trading volume to decline.
We expect to incur significant ongoing costs and obligations related to our investment in infrastructure, growth, regulatory compliance and operations.
We expect to incur significant ongoing costs and obligations related to our investment in infrastructure and growth and regulatory compliance, which could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, future changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on our business, results of operations and financial condition. Our efforts to grow our business may be costlier than we expect, and we may not be able to generate sufficient revenue to offset such higher operating expenses. We may incur significant losses in the future for a number of reasons, including unforeseen expenses, difficulties, complications and delays, and other unknown events.
There is no assurance that the Company’s insurance coverage will be sufficient to cover all claims to which the Company may become subject.
Our production is, in general, subject to different risks and hazards, including adverse weather conditions, fires, plant diseases and pest infestations, other natural phenomena, industrial accidents, labor disputes, changes in the legal and regulatory framework applicable to us and environmental contingencies.
We currently maintain insurance coverage over our production and facilities. We may not be able to maintain insurance of the type and amount desired at a reasonable cost. If we were to incur significant liability for which we were not fully insured, it could have an adverse effect on our business, financial condition and results of operations.
We do not currently maintain key-person insurance on the lives of any of our key employees.
We may be unable to implement our business strategy, which could have negative financial and reputational effects on our business.
The growth and expansion of our business is heavily dependent upon the successful implementation of our business strategy as described under the heading “Our Business.” There can be no assurance that we will be successful in the implementation of our business strategy. A failure to do so could have negative financial and reputational effects on us. Future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis.
The Company could be subject to a security breach that could result in significant damage or theft of products and equipment.
Breaches of security at our facilities may occur and could result in damage to or theft of products and equipment. A security breach at our facilities could result in a significant loss of inventory or work in process, expose us to liability under applicable regulations and increase expenses relating to the investigation of the breach and implementation of additional preventative security measures, any of which could have an adverse effect on our business, financial condition and results of operations.